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Previous: FIRST VARIABLE RATE FUND FOR GOVERNMENT INCOME /MD/, 485APOS, 1998-08-26 |
Next: MERRILL LYNCH BASIC VALUE FUND INC, NSAR-B, 1998-08-26 |
<PAGE> 1
LOGO
The Gateway Trust
P. O. Box 5211
Cincinnati, OH 45201-5211
(800) 354-6339
Gateway Fund
Semi-Annual Report
1998
<PAGE> 2
- --------------------------------------------------------------------------------
GATEWAY FUND
Highlights at June 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------------
Past One Three Five Ten Since Inception Dividends Price
Quarter Year Years Years Years on 12/7/77 Year to Per Share
------- ---- ----- ----- ----- ---------- ------- ---------
Date
----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GATEWAY FUND 3.22% 14.43% 11.75% 10.20% 11.35% 10.55% $0.06 $20.19
S&P 500 3.30 30.16 30.24 23.08 18.56
Lehman Gov't./
Corp. Bond 2.61 11.29 7.86 6.87 9.10
U. S. Inflation (CPI) 0.76 1.65 2.23 2.45 3.28
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
-----------------------------------------------------
Past One Three Five Ten Since Inception
Quarter Year Years Years Years on 12/7/77
------- ---- ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
GATEWAY FUND 3.22% 14.43% 39.55% 62.49% 193.09% 687.30%
S&P 500 3.30 30.16 120.90 182.41 448.89
Lehman Gov't./
Corp. Bond 2.61 11.29 25.49 39.43 138.99
U. S. Inflation (CPI) 0.76 1.65 6.85 12.84 38.09
</TABLE>
Performance data throughout this report represents past performance. The average
annual total return figures assume the reinvestment of dividends. Your
investment return and principal value of an investment will fluctuate so that
your shares, when redeemed, may be worth more or less than the original cost.
This report must be preceded or accompanied by a current prospectus.
1
<PAGE> 3
- --------------------------------------------------------------------------------
GATEWAY FUND
Letter from the Chairman
- --------------------------------------------------------------------------------
Dear Shareholder:
The first half of 1998 witnessed excellent conditions for the Gateway Fund.
Financial markets responded favorably to low inflation rates, stable interest
rates, and robust economic growth. Large capitalization blue chip stocks set
successive new highs. Your fund's portfolio benefited from these conditions
while its hedging strategy continued to control its risk exposure.
The Fund's hedging strategy provides both current cash flow and risk reduction.
Since the bond market shares these characteristics, many investors have utilized
the Gateway Fund as an alternative to similarly low-risk bond funds. In the
past, such perceptions have been handsomely rewarded.
As the Gateway Fund fulfilled the objectives of its investors, its assets grew
dramatically. This growth has served to further reduce the expense ratio from
1.07% as of December 31, 1997, to 1.00% as of June 30, 1998. Your management
continues to focus on expense reduction.
The financial environment in the United States remains favorable, but conditions
throughout the world are less sanguine. Consequently, your management team will
continue to focus on the most efficient use of hedging techniques to maximize
your returns while protecting the Fund's underlying assets.
Cordially,
Walter G. Sall
Chairman
2
<PAGE> 4
- --------------------------------------------------------------------------------
GATEWAY FUND
Portfolio Manager's Report
- --------------------------------------------------------------------------------
The Gateway Fund's total return for the twelve months ended June 30, 1998, was
14.43%. This compares to a total return of 11.29% for the Lehman
Government/Corporate Bond Index and 30.16% for the Standard and Poor's 500 Stock
Index over the same period.
As we have described in earlier reports, the Gateway Fund's objective is to
produce a risk/reward profile that is dramatically different from all other
mutual funds. The Fund's lower risk profile does not provide the opportunity to
perform like other stock funds during a strong market environment. However,
during moderate or weak periods, the Gateway Fund has continued to produce
consistent results. The table below compares the Gateway Fund's performance
during the first six months of 1998 to both the S&P 500 and the Russell 2000
Index, an unmanaged index of 2,000 small capitalization stocks. The table
highlights the Fund's consistency of results compared against the peaks and
valleys of the overall stock market.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
GATEWAY FUND S&P RUSSELL
500 2000
- -------------------------------------------------------------------------
<S> <C> <C> <C>
January 1998 1.59% 1.11% (1.55%)
February 1998 1.46 7.21 7.44
March 1998 0.98 5.12 4.12
April 1998 1.02 1.01 0.50
May 1998 0.66 (1.72) (5.39)
June 1998 1.51 4.06 0.21
- -------------------------------------------------------------------------
</TABLE>
Because of its steady track record, the Fund is often compared to bond mutual
funds that exhibit similar levels of risk. Historically, the Gateway Fund has
outperformed the average bond fund by a substantial amount. Thus far in 1998,
this superior performance over the bond market has continued. The following
tables show analyses of the Fund's different portfolio components.
3
<PAGE> 5
- --------------------------------------------------------------------------------
GATEWAY FUND
Portfolio Manager's Report
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
GATEWAY FUND
1998
- ------------------------------------- --------------------- ----------------------
FIRST QUARTER SECOND QUARTER
- ------------------------------------- --------------------- ----------------------
<S> <C> <C>
CONTRIBUTION OF STOCKS
Performance of Stocks 15.05% 4.85%
Dividends Earned 0.34 0.33
INTEREST EARNED 0.06 0.06
CONTRIBUTIONS OF OPTIONS
Effect of Call Options (9.20) 0.06
Effect of Put Options (1.82) (1.78)
EFFECT OF FEES
Fund Expenses (0.26) (0.24)
Brokerage Commissions (0.08) (0.06)
- ------------------------------------- --------------------- ----------------------
TOTAL RETURN 4.09% 3.22%
- ------------------------------------- --------------------- ----------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
GATEWAY FUND
---------------------------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997
--------------------------- -------- -------- ------- ------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONTRIBUTION OF STOCKS
Performance of Stocks 24.81% (5.74%) 24.18% 2.87% 8.27% (0.19%) 33.02% 21.61% 26.54%
Dividends Earned 4.01 3.63 3.25 2.90 2.51 2.80 2.53 2.17 1.78
INTEREST EARNED 0.12 0.29 0.33 0.19 0.07 0.03 0.17 0.17 0.23
CONTRIBUTIONS OF OPTIONS
Effect of Call Options (7.68) 8.85 (7.66) 4.24 1.48 4.19 (21.48) (9.91) (12.09)
Effect of Put 0.00 4.94 (0.72) (3.58) (3.68) 0.00 (1.91) (2.21) (2.79)
Options
EFFECT OF FEES
Fund Expenses (1.50) (1.33) (1.22) (1.11) (1.11) (1.21) (1.19) (1.14) (1.07)
Brokerage Commissions (0.31) (0.32) (0.36) (0.36) (0.14) (0.05) (0.10) (0.16) (0.25)
--------------------------- -------- -------- ------- ------- -------- -------- -------- ------- --------
TOTAL RETURN 19.45% 10.32% 17.80% 5.15% 7.40% 5.57% 11.04% 10.53% 12.35%
--------------------------- -------- -------- ------- ------- -------- -------- -------- ------- --------
</TABLE>
4
<PAGE> 6
- --------------------------------------------------------------------------------
GATEWAY FUND
Portfolio Manager's Report
- --------------------------------------------------------------------------------
STOCKS: The performance of stocks over the past few years, particularly of large
multinational corporations, has rewritten the record books. The tables on page 4
show the outstanding contribution stocks have made to the Fund over these past
several years. The Fund's portfolio is indexed to the S&P 100 Index, a
diversified mix of large blue chip companies.
DIVIDENDS: In earlier reports, we have discussed the decline in dividend yields
in today's market. This is not due to corporations cutting their dividend
payments: Rather, it is a result of underlying stock prices rising at a quicker
pace. This trend has continued during 1998.
INTEREST EARNED: Cash balances remain low in the portfolio since our strategy
requires the Fund to remain fully invested. Consequently, a minimal amount of
interest is earned.
EFFECT OF CALL OPTIONS: We often describe this component as the "rent" we charge
others to use the Fund's assets (i.e., its stock portfolio). In order to
determine the amount of cash flow received from rent during the second quarter
(or any positive stock period), simply add "Performance of Stocks" to "Effect of
Call Options" in the tables shown on page 4. For this past quarter, a total of
4.91% in net cash flow from call options was earned by the Fund.
EFFECT OF PUT OPTIONS: Buying put options on the Fund's portfolio of stocks is
analogous to purchasing a homeowner's insurance policy on your house. These
options serve as a measure of protection from a significant decline in the stock
market in a short period of time. Any time this "insurance" is not necessary, it
is a cost equal to the total amount paid in premiums. In the Fund's case, this
amounted to 1.78% in the second quarter.
FUND EXPENSES: With assets in the Fund recently increasing, we are pleased to
report that the expense ratio continues to decline, as it has over the past few
quarters.
5
<PAGE> 7
- --------------------------------------------------------------------------------
GATEWAY FUND
Portfolio Manager's Report
- --------------------------------------------------------------------------------
BROKERAGE COMMISSIONS: Many mutual fund investors may not realize that brokerage
commissions are not included in the total expense ratio. However they are a cost
and therefore should be considered in determining the total expense structure of
a fund. Since the Gateway Fund is a "buy and hold" investor in its stock
portfolio, the Fund's commission costs are quite low in comparison to most
equity funds.
As always, the entire staff at Gateway thanks you for your support. We remain
committed to providing excellent service to our shareholders.
AB
J. Patrick Rogers, CFA
Portfolio Manager
6
<PAGE> 8
- --------------------------------------------------------------------------------
GATEWAY FUND
Portfolio of Investments - June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER DURABLES 3.79%
60,000 Chrysler Corporation $ 3,382,500
112,800 Ford Motor Company 6,648,150
63,000 General Motors Corporation 4,209,188
-------------
14,239,838
CONSUMER STAPLES 11.47%
12,300 Avon Products, Inc. 952,866
27,500 Colgate-Palmolive Company 2,420,859
34,000 Heinz (H. J.) Company 1,908,250
138,700 PepsiCo, Inc. 5,712,706
9,800 Ralston Purina Company 1,144,763
229,600 The Coca-Cola Company 19,623,625
124,700 The Procter & Gamble Company 11,355,494
-------------
43,118,563
-------------
ENERGY 9.46%
89,200 Amoco Corporation 3,710,163
29,800 Atlantic Richfield Co. 2,326,263
15,800 Baker Hughes Incorporated 546,088
227,500 Exxon Corporation 16,230,703
24,500 Halliburton Company 1,091,016
72,700 Mobil Corporation 5,568,366
34,200 Occidental Petroleum Corporation 921,263
46,400 Schlumberger Limited 3,168,250
9,900 The Coastal Corporation 690,834
39,400 Williams 1,329,750
-------------
35,582,696
-------------
FINANCE 11.33%
42,900 American Express Company 4,890,600
23,600 American General Corporation 1,679,288
65,100 American International Group, Inc. 9,500,531
63,500 BankAmerica Corporation 5,488,781
20,000 CIGNA Corporation 1,370,625
42,000 Citicorp 6,268,500
26,700 First Chicago NBD Corporation 2,365,453
32,200 Merrill Lynch & Co., Inc. 2,970,450
89,100 NationsBank Corporation 6,816,150
11,000 The Hartford Financial Services Group, Inc. 1,257,781
-------------
42,608,159
-------------
</TABLE>
See accompanying notes to financial statements
7
<PAGE> 9
- --------------------------------------------------------------------------------
GATEWAY FUND
Portfolio of Investments - June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH 10.71%
26,100 Baxter International Inc. $ 1,404,506
92,600 Bristol-Myers Squibb Company 10,649,000
59,850 Columbia/HCA Healthcare Corporation 1,745,002
125,000 Johnson & Johnson 9,218,750
6,800 Mallinckrodt Inc. 202,088
111,200 Merck & Co., Inc. 14,866,050
47,200 Pharmacia & Upjohn, Inc. 2,177,100
-------------
40,262,496
-------------
INDUSTRIAL CYCLICALS 10.88%
18,247 Allegheny Teledyne Incorporated 416,260
15,700 Aluminum Company of America 1,034,238
11,900 Bethlehem Steel Corporation * 148,378
5,200 Boise Cascade Corporation 169,975
9,200 Brunswick Corporation 227,413
8,900 Champion International Corporation 437,769
104,900 DuPont (E. I.) de Nemours and Company 7,831,441
30,000 Eastman Kodak Company 2,190,000
7,600 Fluor Corporation 387,125
11,800 General Dynamics Corporation 548,700
96,300 Hewlett-Packard Company 5,765,963
19,600 Homestake Mining Company 202,738
10,000 International Flavors & Fragrances Inc. 435,000
28,600 International Paper Company 1,228,906
37,600 Minnesota Mining and Manufacturing 3,090,250
55,700 Monsanto Company 3,110,497
4,100 Polaroid Corporation 145,934
18,300 Rockwell International Corporation 879,544
8,800 The Black & Decker Corporation 535,700
93,952 The Boeing Company 4,186,736
20,900 The Dow Chemical Company 2,020,769
21,300 United Technologies Corporation 1,970,250
18,500 Weyerhaeuser Company 853,313
30,500 Xerox Corporation 3,103,375
-------------
40,920,274
-------------
</TABLE>
See accompanying notes to financial statements
8
<PAGE> 10
- --------------------------------------------------------------------------------
GATEWAY FUND
Portfolio of Investments - June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
RETAIL 5.07%
45,400 Kmart Corporation * $ 872,531
36,400 Sears, Roebuck and Co. 2,222,675
9,400 Tandy Corporation 498,788
23,500 The Limited, Inc. 778,438
21,500 The May Department Stores Company 1,408,922
25,900 Toys "R" Us, Inc. * 610,269
208,900 Wal-Mart Stores, Inc. 12,690,675
------------
19,082,298
------------
SERVICES 4.13%
14,700 Burlington Northern Santa Fe Corporation 1,443,356
7,000 Delta Air Lines, Inc. 903,656
13,700 FDX Corp. Holding Co. * 859,247
9,400 Harrah's Entertainment, Inc. * 217,963
63,900 McDonald's Corporation 4,407,103
35,200 Norfolk Southern Corporation 1,048,300
63,400 The Walt Disney Company 6,662,944
------------
15,542,569
------------
TECHNOLOGY 25.60%
20,400 AMP Incorporated 701,250
6,800 Ceridian Corporation * 399,288
95,150 Cisco Systems, Inc. * 8,762,720
14,500 Computer Sciences Corporation 928,453
303,000 General Electric Company 27,573,111
7,400 Harris Corporation 329,994
11,700 Honeywell Inc. 977,681
157,700 Intel Corporation 11,684,584
87,700 International Business Machines Corporation 10,077,278
229,100 Microsoft Corporation 24,835,872
15,300 National Semiconductor Corporation * 202,247
48,400 Northern Telecom Limited 2,745,188
90,525 Oracle Corporation * 2,220,691
31,500 Raytheon Co. Class B 1,861,453
4,650 Tektronix, Inc. 164,494
36,300 Texas Instruments Incorporated 2,116,744
23,400 Unisys Corporation * 658,856
------------
96,239,904
------------
</TABLE>
See accompanying notes to financial statements
9
<PAGE> 11
- --------------------------------------------------------------------------------
GATEWAY FUND
Portfolio of Investments - June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES 7.35%
17,700 American Electric Power Company, Inc. $ 802,584
102,300 Ameritech Corporation 4,558,744
151,000 AT&T Corp. 8,625,875
144,336 Bell Atlantic Corporation 6,580,820
22,900 Entergy Corporation 659,091
67,400 MCI Communications Corporation 3,915,519
64,900 Southern Company 1,792,863
20,200 Unicom Corporation 708,263
-------------
27,643,759
-------------
TOTAL COMMON STOCKS 99.79% 375,240,556
(cost $277,416,921) -------------
PUT OPTIONS 0.88%
500 on S&P 100 Stock Index expiring September 18, 1998 at 500 275,000
2,585 on S&P 100 Stock Index expiring August 21, 1998 at 490 565,500
760 on S&P 500 Stock Index expiring September 18, 1998 at 1025 798,000
675 on S&P 500 Stock Index expiring December 18, 1998 at 1025 1,670,594
-------------
(cost $5,915,883) 3,309,094
-------------
REPURCHASE AGREEMENT 4.29%
5.2% repurchase agreeemnt dated June 30, 1998 with
Star Bank, N.A., due July 1, 1998 (repurchase proceeds
$16,109,327) collateralized by 6.875% GNMA pool #8359,
maturity January 20, 2024 with face value $17,080,000
and market value $17,400,250 16,107,000
-------------
TOTAL INVESTMENTS AND REPURCHASE AGREEMENT 104.96% 394,656,650
-------------
</TABLE>
See accompanying notes to financial statements
10
<PAGE> 12
- --------------------------------------------------------------------------------
GATEWAY FUND
Portfolio of Investments - June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Contracts Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CALL OPTIONS OUTSTANDING ON THE S&P 100 STOCK INDEX **
(662) expiring July 17, 1998 at 525 $ (2,176,300)
(571) expiring July 17, 1998 at 530 (1,613,100)
(1,364) expiring July 17, 1998 at 535 (3,239,325)
(859) expiring July 17, 1998 at 540 (1,675,100)
(687) expiring July 17, 1998 at 545 (1,064,900)
(956) expiring August 21, 1998 at 520 (4,170,600)
(485) expiring August 21, 1998 at 525 (1,903,600)
(540) expiring August 21, 1998 at 530 (1,883,300)
(643) expiring August 21, 1998 at 540 (1,736,100)
------------
TOTAL CALL OPTIONS OUTSTANDING (5.18%) (19,462,325)
(premiums received $13,955,973) ------------
OTHER ASSETS AND LIABILITIES, NET 0.22% 823,303
------------
NET ASSETS 100% $376,017,628
============
</TABLE>
* Denotes a non-income producing security.
** The aggregate value of investments that covers
outstanding call options is $375,240,556.
See accompanying notes to financial statements
11
<PAGE> 13
- --------------------------------------------------------------------------------
GATEWAY FUND
Statement of Assets and Liabilities - June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Common stocks, at value (original cost $277,416,921) $375,240,556
Put options at value (original cost $5,915,883) 3,309,094
Repurchase agreement 16,107,000
Receivable for fund shares sold 1,138,106
Dividend and interest receivable 379,141
Cash 614
Other assets 55,119
--------------
396,229,630
--------------
LIABILITIES:
Call options outstanding at value
(premiums received $13,955,973) 19,462,325
Payable for fund shares redeemed 150,850
Dividends payable to shareholders 557,129
Other accrued expenses and liabilities 41,698
--------------
20,212,002
--------------
NET ASSETS $376,017,628
==============
NET ASSETS CONSIST OF:
Paid-in capital applicable to 18,619,853 shares outstanding
(unlimited number of shares authorized, no par value) $311,450,080
Accumulated realized loss, net (25,142,946)
Unrealized appreciation, net 89,710,494
--------------
$376,017,628
==============
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE $20.19
======
</TABLE>
See accompanying notes to financial statements
12
<PAGE> 14
- --------------------------------------------------------------------------------
GATEWAY FUND
Statement of Operations - For the Six Months Ended June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income $ 2,091,579
Interest income 368,623
2,460,202
EXPENSES:
Investment advisory and management fees 1,015,806
Transfer agent, accounting, and administrative fees 332,948
Reports to shareholders 54,445
Professional fees 32,082
Registration fees 20,720
Custodian fees 15,297
Trustees' fees 13,775
Insurance expense 12,590
Other expenses 35,196
1,532,859
NET INVESTMENT INCOME 927,343
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) on investments:
Securities 773,753
Call options expired and closed (18,395,007)
Put options expired and closed (9,188,143)
------------
Net realized loss on investments (26,809,397)
Increase (decrease) in unrealized appreciation of investments:
Securities 54,522,547
Call options (5,264,372)
Put options (1,398,085)
------------
Increase in unrealized appreciation of investments 47,860,090
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 21,050,693
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 21,978,036
============
</TABLE>
See accompanying notes to financial statements
13
<PAGE> 15
- --------------------------------------------------------------------------------
GATEWAY FUND
Statements of Changes in Net Assets (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31, 1997
---------------- -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 927,343 $ 1,998,702
Net realized (loss) gain on investments (26,809,397) 49,028,920
Increase (decrease) in unrealized appreciation of investments 47,860,090 (25,233,764)
------------- -------------
Net increase in net assets resulting from operations 21,978,036 25,793,858
------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (1,028,060) (2,061,865)
From net realized gain on investments -- (20,835,710)
------------- -------------
Decrease in net assets from dividends and distributions (1,028,060) (22,897,575)
------------- -------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 148,548,999 146,834,992
Net asset value of shares issued in reinvestment of
dividends and distributions 981,772 21,418,015
Payments for shares redeemed (49,921,297) (110,053,937)
------------- -------------
Net increase in net assets from fund shares transactions 99,609,474 58,199,070
------------- -------------
NET INCREASE IN NET ASSETS 120,559,450 61,095,353
NET ASSETS:
Beginning of period 255,458,178 194,362,825
------------- -------------
End of period, including undistributed net investment
income of $0 and $1,130, respectively $ 376,017,628 $ 255,458,178
============= =============
FUND SHARE TRANSACTIONS:
Shares sold 7,617,740 7,585,872
Shares issued in reinvestment of dividends and distributions 49,307 1,135,132
Less shares redeemed (2,604,233) (5,688,892)
------------- -------------
NET INCREASE IN SHARES OUTSTANDING 5,062,814 3,032,112
============= =============
</TABLE>
See accompanying notes to financial statements
14
<PAGE> 16
- --------------------------------------------------------------------------------
GATEWAY FUND
Financial Highlights - Per share data for a share outstanding throughout each
period (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended December 31,
June 30, 1997 1996 1995 (1) 1994 1993
-------- ---- ---- -------- ---- ----
1998
----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 18.85 $ 18.48 $ 16.91 $ 15.48 $ 15.85 $ 15.51
----------- ----------- ----------- ----------- ----------- -----------
Net investment income 0.06 0.18 0.21 0.24 0.26 0.26
Net gains on securities 1.34 2.09 1.56 1.46 0.61 0.88
----------- ----------- ----------- ----------- ----------- -----------
Total from investment operations 1.40 2.27 1.77 1.70 0.87 1.14
----------- ----------- ----------- ----------- ----------- -----------
Dividends from net investment income (0.06) (0.18) (0.20) (0.24) (0.27) (0.26)
Distributions from capital gains -- (1.72) -- -- (0.86) (0.47)
Distributions in excess of realized
capital gains -- -- -- (0.03) (0.11) (0.07)
----------- ----------- ----------- ----------- ----------- -----------
Total distributions (0.06) (1.90) (0.20) (0.27) (1.24) (0.80)
----------- ----------- ----------- ----------- ----------- -----------
Net asset value, end of period $ 20.19 $ 18.85 $ 18.48 $ 16.91 $ 15.48 $ 15.85
=========== =========== =========== =========== =========== ===========
TOTAL RETURN 7.43%(2) 12.35% 10.53% 11.04% 5.57% 7.40%
Net assets, end of period (thousands) $ 376,018 $ 255,458 $ 194,363 $ 176,220 $ 164,651 $ 207,176
Ratio of expenses to average net assets 1.00%(3) 1.07% 1.14% 1.19% 1.21% 1.11%
Ratio of net investment income to 0.61%(3) 0.90% 1.18% 1.51% 1.54% 1.58%
average net assets
Portfolio turnover rate 1%(2) 82% 17% 5% 4% 17%
</TABLE>
(1) On December 15, 1995, Gateway Investment Advisers, L.P. became investment
adviser to the Fund.
(2) Not annualized.
(3) Annualized.
See accompanying notes to financial statements
15
<PAGE> 17
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Gateway Trust (the Trust) is a family of three no-load diversified mutual
funds. The financial statements of Gateway Fund (the Fund) are included in this
report. The investment objective of the Gateway Fund is to achieve a high total
return at a reduced level of risk. The Fund attempts to achieve its investment
objective primarily by investing in the 100 stocks in the S&P 100 Stock Index
and by selling call options on that Index. The financial statements of Gateway
Small Cap Index Fund and Cincinnati Fund are included in separate reports. The
Trust is registered under the Investment Company Act of 1940.
The following is a summary of the Fund's significant accounting policies.
INVESTMENTS VALUATION -- The Fund normally values common stocks and option
contracts (both purchased and written) at the average of the closing bid and
asked quotations. Other securities for which market quotations are not readily
available are valued at fair value as determined in good faith under procedures
adopted by the board of trustees.
INVESTMENT TRANSACTIONS, INVESTMENT INCOME, AND EXPENSES -- Investment
transactions are recorded on the trade date. Dividend income is recorded on the
ex-dividend date, and interest income is accrued daily. Capital gains and losses
are calculated on an identified cost basis. Expenses that cannot be directly
associated with a specific Trust fund are allocated under policies approved by
the board of trustees.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS TO SHAREHOLDERS -- Dividends from net
investment income are recorded on the ex-dividend date and are declared and paid
quarterly. Net realized capital gains, if any, are distributed to shareholders
annually.
FEDERAL INCOME TAXES -- The Fund intends to comply with the provisions of
Subchapter M of the Internal Revenue Code applicable to regulated investment
companies and distribute substantially all of its taxable income to the
shareholders. Based on this policy, the Fund makes no provision for income
taxes. The cost of common stock for tax purposes is $277,438,800 at June 30,
1998; gross unrealized appreciation is $100,330,594 and depreciation is
$2,528,838.
Tax regulations require the Fund to assume that open option contracts are closed
each year end and include the resulting calculated capital gain or loss in the
determination of federal taxable income.
REPURCHASE AGREEMENTS -- The Fund requires the custodian to hold sufficient
collateral to secure repurchase agreements. To reduce the chance of loss in its
repurchase transactions, the Fund enters into repurchase agreements only with
banks that have more than $1 billion in assets and are creditworthy in the
judgment of Gateway Investment Advisers, L.P. (the Adviser).
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
16
<PAGE> 18
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH AFFILIATES
The Fund pays the Adviser a monthly investment advisory and management fee
computed at an annual rate of 0.90% of the first $50 million of the average
daily net assets of the Fund, 0.70% of the next $50 million, and 0.60% of all
such assets over $100 million.
If total expenses for any fiscal year (excluding taxes, interest, brokerage
commissions, and expenses of an extraordinary nature) exceed 1.50% of the
average daily net assets, the Adviser has agreed to reduce its fee as necessary
to limit the Fund's expenses to that level.
The Adviser provides shareholder, transfer, dividend disbursing, accounting, and
administrative services to the Fund. The Fund compensates the Adviser for these
services at a fixed rate of $4,000 per month, plus the greater of $2,500 per
month or an annual rate of 0.20% of the Fund's average net assets.
Each trustee of the Trust who is not affiliated with the Adviser receives an
annual retainer of $3,000, a $500 base fee plus $100 per fund for each meeting
attended, and $200 per fund ($1,000 per fund for the committee chairman) for
each committee meeting attended. The annual retainer and base fee are allocated
among the funds based on the number of shareholders in each fund.
At June 30, 1998, the Adviser held in a fiduciary capacity 3% of the outstanding
shares of the Fund.
3. SECURITIES TRANSACTIONS
For the six months ended June 30, 1998, purchases of investment securities
(excluding short-term investments) totaled $73,967,187 and proceeds from sales
totaled $2,689,039.
The Fund may write (sell) call options on stock indexes for cash (that is, "the
option premium") to enhance earnings on the portfolio securities. However, using
these contracts limits the opportunity to participate in appreciation of the
underlying portfolio beyond certain upper limits set by the contracts. The Fund
may also buy put options on stock indexes. The purchase of put options involves
the risk of loss of all or part of the cash paid for the put options. The
liability recorded upon receipt of written option premiums increases to offset
rises and decreases to offset declines in the market value of the hedged
portfolio. Similarly, the value of purchased put options increases to offset
declines and decreases to offset rises in portfolio value. For the six months
ended June 30, 1998, transactions in written options were as follows:
<TABLE>
<CAPTION>
Number of Contracts Premiums
------------------- --------
<S> <C> <C>
Outstanding at December 31, 1997 5,410 $13,140,520
Options written 32,027 56,392,654
Options exercised (30,670) (55,577,201)
------- ------------
Outstanding at June 30, 1998 6,767 $13,955,973
======== ===========
</TABLE>
17
<PAGE> 19
- --------------------------------------------------------------------------------
THE GATEWAY TRUST
- --------------------------------------------------------------------------------
Investment Adviser:
Gateway Investment Advisers, L.P.
Shareholder Servicing:
Gateway Investment Advisers, L.P.
Auditors:
Arthur Andersen LLP
Cincinnati, OH
Custodian:
Star Bank, N.A.
Cincinnati, OH
Trustees:
James M. Anderson
Stefen F. Brueckner
Kenneth A. Drucker
Beverly J. Fertig
R. S. Harrison
Walter G. Sall
William H. Schneebeck
18
<PAGE> 20
Affordability
$1,000 Minimum Initial Investment
$500 Minimum Initial IRA Investment
$100 Minimum Additional Investment
No Annual Account Charges
No-Fee IRA Accounts
Convenience
Free Telephone Exchanges Between Gateway Funds
Automatic Investment Program
Systematic Withdrawal Program
Telephone Redemptions
Flexibility
Available for numerous investment options:
Individuals
IRAs
Trusts
Pension Plans
Gifts to Minors
<PAGE> 21
LOGO
The Gateway Trust
P. O. Box 5211
Cincinnati, OH 45201-5211
(800) 354-6339
Gateway Small Cap Index Fund
LOGO
Semi-Annual Report 1998
<PAGE> 22
- --------------------------------------------------------------------------------
Gateway Small Cap Index Fund
Highlights at June 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
--------------------------------------------------
Past One Three Five Ten Since Inception Dividends Price
Quarter Year Years Years Years on 6/16/93 Year to Date Per Share
------- ---- ----- ----- ----- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GATEWAY SMALL CAP
INDEX FUND (6.01%) 16.44% 17.38% 12.49% n/a 12.59% $0.00 $14.24
Wilshire Small Cap Index (5.71) 20.06 21.72 17.42 n/a
Russell 2000 (4.66) 16.50 18.85 16.05 13.57
U. S. Inflation (CPI) 0.76 1.65 2.23 2.45 3.28
<CAPTION>
CUMULATIVE TOTAL RETURN
--------------------------------------------------
Past One Three Five Ten Since Inception
Quarter Year Years Years Years on 6/16/93
------- ---- ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
GATEWAY SMALL CAP
INDEX FUND (6.01%) 16.44% 61.71% 80.11% n/a 81.91%
Wilshire Small Cap Index (5.71) 20.06 80.35 123.25 n/a
Russell 2000 (4.66) 16.50 67.88 110.49 256.97
U. S. Inflation (CPI) 0.76 1.65 6.85 12.84 38.09
</TABLE>
Performance data throughout this report represents past performance. The average
annual total return figures assume the reinvestment of dividends. Your
investment return and principal value of an investment will fluctuate so that
your shares, when redeemed, may be worth more or less than the original cost.
This report must be preceded or accompanied by a current prospectus.
1
<PAGE> 23
- --------------------------------------------------------------------------------
Gateway Small Cap Index Fund
Letter from the Chairman
- --------------------------------------------------------------------------------
Dear Shareholder:
In the first half of 1998, the United States economy continued to deliver
extraordinary results. As the first quarter unfolded, investors eagerly sought
small capitalization companies, recognizing the leverage they have in a growing
economy. As the second quarter progressed, however, small cap stocks were
buffeted by high winds from Asia and by a slowing domestic economy. This
combination of factors resulted in a lot of volatility during the first half
accompanied by a competitive return.
Small capitalization stocks have traditionally been the first to feel the winds
of economic change. These companies exploit new technologies and develop new
fields. As such, they have historically provided higher overall growth than
their more mature brethren. They also tend to be more leveraged and more exposed
to business and financial risks. Consequently, they display greater volatility
as a result of every change in the economic climate. The first six months of
1998 is illustrative of the behavior of this subset of stocks.
Your Fund continues to emphasize the stocks in the Wilshire Small Cap Index.
Portfolio manager Patrick Rogers utilizes hedging techniques to alter the risk
profile of this normally volatile list of stocks.
Please review Patrick's report on the opposite page.
As we move into the second half of 1998, many small capitalization stocks are
attractively priced. Our representation in the group and the judicious use of
hedging techniques offers the possibility of a favorable risk/reward profile in
the coming months.
Cordially,
Walter G. Sall
Chairman
2
<PAGE> 24
- --------------------------------------------------------------------------------
Gateway Small Cap Index Fund
Portfolio Manager's Report
- --------------------------------------------------------------------------------
For the six months ending June 30, 1998, the Gateway Small Cap Index Fund
produced a total return of 5.64%. This seemingly mild performance was actually
the result of a strong first quarter performance of 12.39%, and a disappointing
second quarter decline of 6.01%. This compares to 17.71% for the Standard &
Poor's 500 Stock Index over the past six months. The S&P 500 Stock Index is
commonly recognized as the standard of performance for large capitalization
stocks. Smaller capitalization stocks, as represented by the Russell 2000 Index,
delivered a total return of 4.93% in the first half of 1998.
The last calendar year in which small and middle capitalization stocks
outperformed the blue chips was in 1991. Even though the Asian economic turmoil
has hurt the near-term earnings potential of U.S. multinational corporations,
investor interest remains predominantly with large, blue chip stocks.
The Gateway Small Cap Index Fund invests in the 250 stocks represented in the
Wilshire Small Cap Index. As the name suggests, the stocks in this index are the
smaller, younger companies which typically are experiencing higher growth rates.
The weighted average market capitali-zation for this portfolio is $1.1 billion.
The Fund is broadly diversified among twenty-three industry groups. The largest
industry group in the portfolio remains Finance, Insurance, and Real Estate at
17.01%. A list of the top ten holdings follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------
Gateway Small Cap Index Fund
Top Ten Holdings
---------------------------------------------------------------
As A Percentage
Stocks Of Net Assets
---------------------------------- ----------------------------
<S> <C>
Pixar Animation Studios 1.14%
Centex Corporation 0.98%
Vitesse Semiconductor Corp. 0.96%
Northeast Utilities System 0.95%
Excite, Inc. 0.93%
HON Industries, Inc. 0.90%
Ross Stores, Inc. 0.89%
Flowers Industries, Inc. 0.88%
Magna Group, Inc. 0.87%
Reliance Group Holdings, Inc. 0.86%
---------------------------------- ----------------------------
</TABLE>
3
<PAGE> 25
- --------------------------------------------------------------------------------
Gateway Small Cap Index Fund
Portfolio Manager's Report
- --------------------------------------------------------------------------------
The following table describes the performance of the different components for
the Fund. As discussed in prior reports, the "Effect of Put Options" shows the
effect of owning put options over a given time period. We purchase index put
options for the Fund as a way to protect the portfolio should a significant
decline occur in the market in a short period of time. If a decline does not
occur, the cost of put options reduces the total return of the Fund. Since small
capitalization stocks produced a decline in the second quarter, the put options
held in the Fund produced a slight gain.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Gateway Small Cap Index Fund
1998
- --------------------------------------- -------------------- ---------------------
First Quarter Second Quarter
- --------------------------------------- -------------------- ---------------------
<S> <C> <C>
Contribution of Stocks
Performance of Stocks 13.09% (5.90%)
Dividends Earned 0.22 0.21
Interest Earned 0.04 0.04
Contributions of Options
Effect of Put Options (0.57) 0.10
Effect of Fees
Fund Expenses (0.37) (0.38)
Brokerage Commissions (0.02) (0.08)
- --------------------------------------- -------------------- ---------------------
Total Return 12.39% (6.01%)
- --------------------------------------- -------------------- ---------------------
</TABLE>
Our shorter-term view of the market suggests the recent market volatility will
continue, possibly heighten. The portfolio continues to be hedged with index put
options in the event the market does experience weakness.
On behalf of the entire staff at Gateway, we appreciate your support and we will
continue to work hard to retain your trust and confidence.
J. Patrick Rogers, CFA
Portfolio Manager
4
<PAGE> 26
- --------------------------------------------------------------------------------
Gateway Small Cap Index Fund
Portfolio of Investments - June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE & EQUIPMENT 1.82%
1,700 B/E Aerospace, Inc. * $ 49,831
2,700 Cordant Technologies Inc.
124,791
1,700 Kaman Corporation
32,353
2,700 Teleflex Incorporated 102,516
-------
309,491
-------
APPAREL 2.27%
1,300 Brown Group, Inc. 25,716
1,600 Kellwood Company 57,250
2,900 Nautica Enterprises, Inc.* 77,938
1,800 The Gymboree Corporation * 27,281
3,500 The Stride Rite Corporation 52,719
4,400 WestPoint Stevens Inc. * 145,475
-------
386,379
-------
AUTOMOBILES & PARTS 1.36%
1,800 Arvin Industries, Inc. 65,475
2,300 Breed Technologies, Inc. 35,363
1,800 CLARCOR 38,025
2,100 Superior Industries International, Inc. 59,128
1,200 The Standard Products Co. 33,750
-------
231,741
-------
BUILDING MATERIALS & CONSTRUCTION 3.46%
4,400 Centex Corporation 166,238
2,900 Kaufman and Broad Home Corporation 92,075
3,800 Lennar Corporation 112,338
3,200 Pulte Corporation 95,700
1,700 Southdown, Inc. 121,816
-------
588,167
-------
BUSINESS SERVICES & SUPPLIES 2.83%
3,000 AMRESCO, Inc. * 87,188
3,600 APAC TeleServices, Inc. * 21,038
2,500 Coventry Health Care, Inc. * 36,875
2,127 Information Resources, Inc. * 39,416
3,000 Pittston Brink's Group 111,281
2,500 Rollins, Inc. 51,328
4,100 Sotheby's Holdings, Inc. 92,122
1,500 The Profit Recovery Group International, Inc. * 42,047
-------
481,295
-------
</TABLE>
See accompanying notes to financial statements
5
<PAGE> 27
- --------------------------------------------------------------------------------
Gateway Small Cap Index Fund
Portfolio of Investments - June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CHEMICALS 1.76%
2,600 AgriBio Tech, Inc. $ 71,744
5,200 Airgas, Inc. * 75,075
700 Chemed Corporation 23,844
6,100 Ethyl Corporation 37,553
1,000 Fuller (H. B.) Company 55,469
3,300 Lawter International, Inc. 35,888
---------
299,573
---------
COMPUTER SOFTWARE & PERIPHERALS 8.06%
3,000 American Management Systems, Incorporated * 89,813
800 Arbor Software Corporation 25,325
1,500 Broderbund Software, Inc. * 34,219
2,400 Cerner Corporation * 68,175
4,000 CHS Electronics, Inc. * 71,250
4,000 Electronics for Imaging Inc. * 84,250
1,500 ENVOY Corporation * 71,297
1,700 Excite, Inc. * 159,003
1,400 Hyperion Software Corporation * 39,944
900 Infoseek Corporation * 32,372
2,800 Macromedia, Inc. * 52,413
2,300 Open Market, Inc. 43,269
3,700 PSINet Inc. * 47,869
6,500 Rational Software Corporation * 99,328
3,700 S3 Incorporated * 18,847
1,900 Shared Medical Systems Corporation 139,472
2,524 Structural Dynamics Research Corporation * 58,131
5,900 Sybase, Inc.* 41,116
4,100 Symantec Corporation * 106,856
3,500 System Software Associates, Inc. * 25,047
1,800 Vantive Corporation * 37,069
1,700 Xircom Inc. * 26,563
---------
1,371,628
---------
ELECTRONICS & COMPUTERS 7.63%
3,700 Aspect Telecommunications Corporation 101,519
2,600 Baldor Electric Company 63,456
5,000 Cirrus Logic, Inc. * 55,781
6,600 Cypress Semiconductor Corporation * 54,656
3,400 Digital Microwave Corporation * 24,756
2,900 DSP Communications, Inc. * 39,966
4,500 Glenayre Technologies Inc. * 48,656
</TABLE>
See accompanying notes to financial statements
6
<PAGE> 28
- --------------------------------------------------------------------------------
Gateway Small Cap Index Fund
Portfolio of Investments - June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
ELECTRONICS & COMPUTERS (Continued)
<S> <C> <C>
1,500 Hutchinson Technology Incorporated *
$ 41,250
6,000 Integrated Device Technology, Inc. *
42,844
3,000 Kemet Corporation *
39,469
2,800 Lam Research Corporation*
53,463
1,700 Lattice Semiconductor Corporation *
48,291
2,300 Level One Communications, Inc. *
54,122
2,500 Novellus Systems Inc. *
89,297
1,300 Oak Industries Inc. *
46,028
7,600 Paging Network, Inc. *
106,163
3,100 Sequent Computer Systems, Inc. *
37,878
2,200 Shiva Corp. *
18,356
1,300 Smart Modular Technologies Inc. *
19,134
5,300 Vitesse Semiconductor Corp. *
163,969
3,400 VLSI Technology, Inc. *
57,056
3,100 Xylan Corporation * 92,322
---------
1,298,432
---------
ENERGY 4.95%
2,300 Barrett Resources Corporation *
86,322
2,200 Benton Oil and Gas Co.
23,306
1,900 Forcenergy Inc. *
33,784
9,000 Harken Energy Corporation *
43,875
3,800 Marine Drilling Companies, Inc. *
60,681
2,300 ONEOK, Inc.
91,569
5,600 Parker Drilling Company *
39,900
2,700 Pogo Producing Company
67,669
3,500 Pride International, Inc. *
59,063
2,600 Quaker State Corporation
42,656
4,700 Seagull Energy Corporation *
78,725
2,000 Southwest Gas Corporation
49,063
1,210 Swift Energy Company *
19,398
2,000 Tesoro Petroleum Corporation *
31,750
1,500 Trico Marine Services, Inc.
20,531
4,700 Varco International, Inc. * 93,266
---------
841,558
---------
</TABLE>
See accompanying notes to financial statements
7
<PAGE> 29
- --------------------------------------------------------------------------------
Gateway Small Cap Index Fund
Portfolio of Investments - June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE, INSURANCE, & REAL ESTATE 17.01%
3,800 20th Century Industries
$ 109,250
1,900 Advanta Corporation
41,563
2,200 Americredit Corp. *
78,444
2,900 Arcadia Financial Ltd. *
21,750
1,900 Astoria Financial Corporation
101,769
2,100 Bank United Corp. 100,669
7,800 Catellus Development Corporation *
137,963
3,400 City National Corporation
125,269
3,400 Credit Acceptance Corporation *
29,006
2,900 E Trade Group Inc. *
66,428
2,516 First Union Corp.
146,317
2,700 Firstplus Financial Group Inc. *
97,538
2,000 Foremost Corporation of America
48,250
4,300 Golden State Bancorp Inc. *
127,925
2,900 Imperial Credit Industries, Inc. *
67,425
1,800 John Alden Financial Corporation
39,656
1,300 Life Re Corporation
107,738
1,800 Long Island Bancorp, Inc.
109,238
2,600 Magna Group, Inc.
147,389
4,000 Mid Atlantic Medical Services, Inc. *
46,125
1,300 NAC Re Corporation
69,388
700 Nationwide Financial Services
35,634
5,800 Oxford Health Plans, Inc. *
88,994
1,400 Provident Bankshares Corporation
41,344
8,400 Reliance Group Holdings, Inc.
146,738
2,200 Riggs National Corporation
64,281
4,500 Rollins Truck Leasing Corp.
56,391
3,200 Roslyn Bancorp, Inc.
71,600
2,500 St. Paul Bancorp Inc.
56,484
1,400 The Liberty Corporation
70,394
2,100 United Companies Financial Corporation
32,878
2,100 UST Corp.
55,388
3,872 Valley National Bancorp
112,409
3,830 Washington Federal, Inc.
106,043
3,100 Westamerica Bancorp
99,975
1,300 Zenith National Insurance Corp. 36,684
---------
2,894,337
---------
</TABLE>
See accompanying notes to financial statements
8
<PAGE> 30
- --------------------------------------------------------------------------------
Gateway Small Cap Index Fund
Portfolio of Investments - June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
FOOD, BEVERAGE & TOBACCO 1.99%
4,600 Chiquita Brands International
$ 65,119
2,000 Dreyer's Grand Ice Cream, Inc.
40,375
7,300 Flowers Industries, Inc.
149,422
1,400 International Multifoods Corporation
38,544
2,400 Ralcorp Holdings Inc. * 45,450
---------
338,910
---------
HEALTH 6.23%
2,100 Acuson Corporation *
38,391
2,800 Advanced Tissue Sciences, Inc. *
12,600
2,300 Agouron Pharmaceuticals, Inc. *
69,934
1,000 ATL Ultrasound, Inc. *
45,375
2,100 Ballard Medical Products
37,931
2,100 Beckman Coulter Inc.
122,063
1,616 Block Drug Company Inc.
61,156
2,100 Cephalon, Inc. *
16,538
4,000 DENTSPLY International Inc. 99,500
1,000 Diagnostic Products Corporation
28,844
3,100 FPA Medical Management, Inc. *
3,536
2,200 Gilead Sciences, Inc. *
70,538
1,900 Haemonetics Corporation *
30,519
3,100 Integrated Health Services, Inc.
116,347
4,100 NBTY, Inc. *
74,953
5,600 Perrigo Company *
56,175
4,700 PhyCor, Inc. *
77,697
2,000 Sepracor, Inc. *
82,938
2,400 Vivus, Inc. * 14,438
---------
1,059,473
---------
MACHINERY & RELATED PRODUCTS 2.03%
2,900 Cincinnati Milacron Inc.
70,688
1,700 Gerber Scientific, Inc.
38,622
2,200 Kennametal Inc.
91,919
1,700 Kulicke and Soffa Industries *
28,794
600 NACCO Industries, Inc.
77,550
2,400 Silicon Valley Group, Inc. * 38,250
---------
345,823
---------
</TABLE>
See accompanying notes to financial statements
9
<PAGE> 31
- --------------------------------------------------------------------------------
Gateway Small Cap Index Fund
Portfolio of Investments - June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
MINING & METALS 0.90%
3,600 Donaldson Company, Inc.
$ 84,600
10,200 Echo Bay Mines
22,631
4,100 Hecla Mining Company *
21,781
1,200 Zoltek Companies, Inc. * 24,113
-------
153,125
-------
MISCELLANEOUS 3.03%
1,700 Avid Technology, Inc. *
57,003
3,300 Aztar Corporation *
22,584
5,500 Callaway Golf Company
108,109
3,100 Grand Casinos, Inc. *
52,120
3,100 Kimball International, Inc.
55,606
3,000 P COM, Inc. *
27,516
8,500 PETsMART, Inc. *
84,867
4,400 Playtex Products Inc. *
70,125
2,600 Station Casinos, Inc. * 38,350
-------
516,280
-------
OTHER CONSUMER DURABLES 3.41%
2,312 Albany International Corp. 55,548
1,000 Bassett Furniture Industries, Inc. 28,688
3,000 GenCorp Inc. 75,750
4,500 HON Industries, Inc. 152,721
1,300 La-Z-Boy Incorporated 73,491
3,850 Mohawk Industries, Inc. * 121,997
500 NCH Corporation 32,047
1,600 Russ Berrie and Company, Inc. 39,950
-------
580,192
-------
OTHER INDUSTRIAL CYCLICALS 3.76%
2,100 ACX Technologies, Inc. * 45,675
2,900 Asarco Incorporated 64,525
1,200 Brush Wellman Inc. 24,713
2,200 Carlisle Companies Incorporated 94,875
7,900 Corporate Express Inc. 99,984
3,600 Data General Corporation * 53,775
600 MAXXAM Inc. * 34,163
3,200 OMI Corp. * 25,700
2,700 Overseas Shipholding Group, Inc. 55,350
2,050 Shorewood Packaging Corp. * 32,544
2,100 The Standard Register Company 74,419
1,200 The West Company, Incorporated 34,088
-------
639,811
-------
</TABLE>
10
See accompanying notes to financial statements
<PAGE> 32
- --------------------------------------------------------------------------------
Gateway Small Cap Index Fund
Portfolio of Investments - June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
PAPER & FOREST PRODUCTS 1.83%
1,700 Chesapeake Corporation
$ 66,247
3,900 Gaylord Container Corporation *
29,981
2,800 Pentair, Inc.
119,088
4,163 Wausau-Mosinee Paper Corporation 95,359
--------------
310,675
--------------
PRECISION INSTRUMENTS 0.18%
1,600 Credence Systems Corporation * 30,450
--------------
RETAIL 3.08%
7,800 Charming Shoppes, Inc. *
36,928
2,100 Eagle Hardware & Garden, Inc. *
48,628
1,300 Enesco Group Inc.
39,975
2,800 Fleming Companies, Inc.
49,350
2,300 Lands' End, Inc.
72,666
2,500 Micro Warehouse, Inc. *
38,750
3,500 Ross Stores, Inc. 150,938
4,000 Sunglass Hut International Inc.
44,125
1,700 The Dress Barn, Inc. * 42,394
--------------
523,754
--------------
SERVICES 10.48%
3,600 Airborne Freight Corporation
125,775
1,400 Alaska Air Group, Inc. *
76,388
2,300 Applebees International Inc.
51,534
1,900 Arnold Industries, Inc.
28,263
2,200 Banta Corporation
67,513
2,900 Calgon Carbon Corporation
28,819
2,424 Chris-Craft Industries, Inc. *
132,638
7,000 Extended Stay America, Inc. *
80,281
1,200 Gibson Greetings, Inc. *
30,038
2,200 Houghton Mifflin Company
69,988
2,700 Hunt (J. B.) Transport Services, Inc.
96,356
2,200 Landrys Seafood Restaurants Inc. *
39,806
3,000 Lone Star Steakhouse & Saloon, Inc. *
41,344
1,700 Luby's Cafeterias, Inc.
29,856
320 Marina Transport Corporation *
1,310
1,000 New England Business Service, Inc.
32,250
2,100 Papa John's International, Inc. *
82,884
3,200 Pixar Animation Studios *
193,200
1,633 Pulitzer Publishing Company
145,847
1,900 Rainforest Cafe, Inc. *
26,422
</TABLE>
See accompanying notes to financial statements 11
<PAGE> 33
- --------------------------------------------------------------------------------
Gateway Small Cap Index Fund
Portfolio of Investments - June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
SERVICES (Continued)
<S> <C> <C>
2,600 Ruby Tuesday, Inc. $ 40,544
1,500 Sbarro, Inc. 40,734
1,800 TCA Cable TV, Inc. 108,225
3,200 Wallace Computer Services, Inc. 75,900
2,800 World Color Press, Inc. * 97,913
2,100 Yellow Corporation * 39,113
------------
1,782,941
------------
STEEL & IRON 1.12%
4,400 AK Steel Corporation 78,650
2,200 Birmingham Steel Corporation 27,294
1,700 Carpenter Technology Corporation 85,425
------------
191,369
------------
UTILITIES 6.40%
3,700 Brightpoint, Inc. * 53,534
1,300 Central Hudson Gas & Electric Corporation 59,597
1,000 CILCORP Inc. 48,063
1,500 Eastern Utilities Associates 39,375
2,450 MDU Resources Group, Inc. 87,205
9,600 Northeast Utilities System * 162,000
2,367 NTL Inc. * 126,561
1,000 Orange and Rockland Utilities, Inc. 53,781
3,100 Public Service Company of New Mexico 70,234
2,300 Sierra Pacific Resources 83,447
4,100 SkyTel Communications Inc. * 96,082
1,750 Southern Indiana Gas & Electric Co. 56,109
2,400 UGI Corporation 59,700
2,380 UniSource Energy Corporation * 37,634
2,900 Vanguard Cellular Systems, Inc. * 54,738
------------
1,088,060
------------
TOTAL COMMON STOCKS 95.59% 16,263,464
(cost $13,920,671) ------------
</TABLE>
12
See accompanying notes to financial statements
<PAGE> 34
- --------------------------------------------------------------------------------
Gateway Small Cap Index Fund
Portfolio of Investments - June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Contracts Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
68 PUT OPTION ON RUSSELL 2000 STOCK INDEX 0.15%
expiring September 18, 1998 at 420 $ 25,500
(cost $53,788)
REPURCHASE AGREEMENT 4.20%
5.2% repurchase agreement dated June 30, 1998 with
Star Bank, N.A., due July 1, 1998 (repurchase proceeds
$715,103) collateralized by 6.875% GNMA Pool #8359,
maturity January 20, 2024 with face value $760,000 and
market value $774,250 715,000
-----------
TOTAL INVESTMENTS AND REPURCHASE AGREEMENT 99.94% 17,003,964
OTHER ASSETS AND LIABILITIES, NET 0.06% 10,155
-----------
NET ASSETS 100.00% $17,014,119
===========
<FN>
* Denotes a non-income producing security.
</TABLE>
See accompanying notes to financial statements 13
<PAGE> 35
- --------------------------------------------------------------------------------
Gateway Small Cap Index Fund
Statement of Assets and Liabilities - June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Common stocks, at value (original cost $13,920,671) $16,263,464
Put option at value (original cost $53,788)
25,500
Repurchase agreement 715,000
Dividend and interest receivable
8,843
Cash
214
Other assets 11,160
-----------
17,024,181
-----------
LIABILITIES:
Payable for fund shares redeemed
125
Other accrued expenses and liabilities 9,937
-----------
10,062
-----------
NET ASSETS $17,014,119
===========
NET ASSETS CONSIST OF:
Paid-in capital applicable to 1,195,023 shares outstanding
(unlimited number of shares authorized, no par value)
13,517,184
Accumulated realized gain, net
1,182,430
Unrealized appreciation, net 2,314,505
-----------
$17,014,119
===========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE $14.24
======
</TABLE>
14
See accompanying notes to financial statements
<PAGE> 36
- --------------------------------------------------------------------------------
Gateway Small Cap Index Fund
Statement of Operations - For the Six Months Ended June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Dividend income $ 74,562
Interest income 13,258
----------
87,820
----------
EXPENSES:
Investment advisory and management fees
77,000
Transfer agent, accounting, and administrative fees
40,904
Registration fees
9,314
Reports to shareholders
8,949
Custodian fees
6,897
Professional fees
6,729
Trustees' fees
3,465
Other expenses 2,374
----------
155,632
Fees waived under contract (27,299)
----------
Net operating expenses 128,333
----------
NET INVESTMENT LOSS (40,513)
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized gain (loss) on
investments:
Securities
1,315,148
Put options expired and closed (144,404)
----------
1,170,744
----------
Decrease in unrealized appreciation of investments:
Securities
(171,343)
Put options (28,288)
----------
(199,631)
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 971,113
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 930,600
==========
</TABLE>
See accompanying notes to financial statements 15
<PAGE> 37
- --------------------------------------------------------------------------------
Gateway Small Cap Index Fund
Statements of Changes in Net Assets (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31, 1997
------------- -----------------
FROM OPERATIONS:
<S> <C> <C>
Net investment loss $ (40,513) $ (24,710)
Net realized gain on investments 1,170,744 1,155,643
(Decrease) increase in unrealized appreciation of investments (199,631) 1,138,250
------------ ------------
Net increase in net assets resulting from operations 930,600 2,269,183
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
From net realized gain on investments -- (1,171,153)
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 2,026,214 5,882,790
Net asset value of shares issued in reinvestment of
dividends and distributions -- 1,038,765
Payments for shares redeemed (1,753,796) (3,129,370)
------------ ------------
Net increase in net assets from fund shares transactions 272,418 3,792,185
------------ ------------
NET INCREASE IN NET ASSETS 1,203,018 4,890,215
NET ASSETS:
Beginning of period 15,811,101 10,920,886
------------ ------------
End of period $ 17,014,119 $ 15,811,101
============ ============
FUND SHARE TRANSACTIONS:
Shares sold 146,377 425,462
Shares issued in reinvestment of dividends and distributions -- 77,073
Less shares redeemed (124,678) (234,446)
------------ ------------
NET INCREASE IN SHARES OUTSTANDING 21,699 268,089
============ ============
</TABLE>
16
See accompanying notes to financial statements
<PAGE> 38
- --------------------------------------------------------------------------------
Gateway Small Cap Index Fund
Financial Highlights - Per share data for a share outstanding throughout each
period (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months From June 16 to
Ended Year Ended December 31, December 31,
June 30, 1998 1997 1996 1995(3) 1994 1993
------------- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of $ 13.48 $ 12.06 $ 11.05 $ 9.63 $ 10.35 $ 10.00
period ---------- ---------- ---------- --------- --------- ----------
Net investment income (loss) (0.03) (0.02) 0.01 0.03 (0.02) 0.04
Net gains (losses) on securities 0.79 2.51 1.87 2.07 (0.60) 0.61
---------- ---------- ---------- --------- --------- ----------
Total from investment 0.76 2.49 1.88 2.10 (0.62) 0.65
operations ---------- ---------- ---------- --------- --------- ----------
Dividends from net
investment income -- -- (0.01) (0.07) -- (0.04)
Distributions from capital gains -- (1.07) (0.86) (0.61) (0.10) (0.26)
---------- ---------- ---------- --------- --------- ----------
Total distributions -- (1.07) (0.87) (0.68) (0.10) (0.30)
---------- ---------- ---------- --------- --------- ----------
Net asset value, end of period $ 14.24 $ 13.48 $ 12.06 $ 11.05 $ 9.63 $ 10.35
========== ========== ========== ========= ========= ==========
TOTAL RETURN 5.64%(1) 20.64% 17.04% 21.81% (5.99%) 6.50%(1)
Net assets, end of period $ 17,014 $ 15,811 $ 10,921 $ 9,418 $ 9,657 $ 13,002
(thousands)
Ratio of net expenses to average
net assets 1.50%(4) 1.50% 1.50% 1.68% 2.00% 1.92%(2)(4)
Ratio of net investment income
(loss) to average net assets (0.47%)(4) (0.19%) 0.03% 0.09% (0.14%) 0.98%(2)(4)
Portfolio turnover rate 20%(1) 32% 20% 20% 39% 3%(1)
<FN>
(1) Not annualized.
(2) The ratio of net expenses to average net assets would have increased and
the ratio of net investment income to average net assets would have
decreased by 0.08% in 1993 had the Adviser not voluntarily reimbursed
expenses. Ratios are annualized in periods less than one year.
(3) On December 15, 1995, Gateway Investment Advisers, L.P. became investment
adviser to the Fund.
(4) Annualized.
</TABLE>
See accompanying notes to financial statements 17
<PAGE> 39
- --------------------------------------------------------------------------------
Notes to Financial Statements
June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Gateway Trust (the Trust) is a family of three no-load diversified mutual
funds. The financial statements of Gateway Small Cap Index Fund (the Fund) are
included in this report. The primary investment objective of the Fund is
long-term growth of capital. The Fund attempts to achieve its investment
objective primarily by investing in the 250 stocks included in the Wilshire
Small Cap Index, and by purchasing put or call options on an index. The
financial statements of Gateway Fund and the Cincinnati Fund are included in
separate reports. The Trust is registered under the Investment Company Act of
1940.
The following is a summary of the Fund's significant accounting policies.
INVESTMENTS VALUATION -- The Fund normally values common stocks and option
contracts at the average of the closing bid and asked quotations. Other
securities for which market quotations are not readily available are valued at
fair value as determined in good faith under procedures adopted by the board of
trustees.
INVESTMENT TRANSACTIONS, INVESTMENT INCOME, AND EXPENSES -- Investment
transactions are recorded on the trade date. Dividend income is recorded on the
ex-dividend date, and interest income is accrued daily. Capital gains and losses
are calculated on an identified cost basis. Expenses that cannot be directly
associated with a specific Trust fund are allocated under policies approved by
the board of trustees.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from
net investment income and net realized capital gains are recorded on the
ex-dividend date and are declared and paid to shareholders annually.
FEDERAL INCOME TAXES -- The Fund intends to comply with the provisions of
Subchapter M of the Internal Revenue Code applicable to regulated investment
companies and distribute substantially all taxable income to the shareholders.
Based on this policy, the Fund makes no provision for income taxes. The cost of
investments is the same for financial reporting and tax purposes.
At June 30, 1998, gross unrealized appreciation of common stocks totaled
$3,887,267 and gross unrealized depreciation totaled $1,544,474, based on the
cost of investments.
REPURCHASE AGREEMENTS -- The Fund requires the custodian to hold sufficient
collateral to secure repurchase agreements. To reduce the chance of loss in its
repurchase transactions, the Fund enters into repurchase agreements only with
banks that have more than $1 billion in assets and are creditworthy in the
judgment of Gateway Investment Advisers, L.P. (the Adviser).
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATION OF CAPITAL ACCOUNTS -- During the six-month period ended June
30, 1998, the Fund reclassified $40,513 from undistributed net investment income
to paid-in capital. This reclassification, which had no impact on total net
assets, is due to tax regulations not permitting the carryforward of net
investment losses to future periods.
18
<PAGE> 40
- --------------------------------------------------------------------------------
Notes to Financial Statements
June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH AFFILIATES
The Fund pays the Adviser a monthly investment advisory and management fee
computed at an annual rate of 0.90% of the first $50 million of the average
daily net assets of the Fund, 0.70% of the next $50 million, and 0.60% of all
such assets over $100 million.
If total expenses for any fiscal year (excluding taxes, interest, brokerage
commissions, and expenses of an extraordinary nature) exceed 2.00% of the Fund's
average daily net assets, the advisory contract requires the Adviser to waive
some or all of its advisory fee as necessary to limit the Fund's expenses to the
stated level. For purposes of the 1998 contract renewal, the Adviser committed
to waive some or all of its advisory fee if the Fund's expense ratio exceeded
1.50%. Any waiver, however, would not exceed the aggregate advisory fee paid by
the Fund for the applicable year. As a result, for the six-month period ended
June 30, 1998, the Adviser waived advisory fees of $27,299.
The Adviser provides shareholder, transfer, dividend disbursing, accounting, and
administrative services to the Fund. The Fund compensates the Adviser for these
services at a fixed rate of $4,000 per month, plus the greater of $2,500 per
month or an annual rate of 0.20% of the Fund's average net assets.
Each trustee of the Trust who is not affiliated with the Adviser receives an
annual retainer of $3,000, a $500 base fee plus $100 per fund for each meeting
attended, and $200 per fund ($1,000 per fund for the committee chairman) for
each committee meeting attended. The annual retainer and base fee are allocated
among the funds based on the number of shareholders in each fund.
At June 30, 1998, the Adviser held in a fiduciary capacity, 41% of the Fund's
outstanding shares.
3. SECURITIES TRANSACTIONS
For the six months ended June 30, 1998, purchases of investment securities
(excluding short-term investments) totaled $3,270,489, and proceeds from sales
totaled $3,662,662.
The Fund may buy put or call options on stock indexes. The purchase of options
involves the risk of loss of all or part of the cash paid for the options. The
value of purchased puts increases to offset declines and decreases to offset
rises in the portfolio value. The value of purchased calls increases
proportionately to the value of the underlying index.
19
<PAGE> 41
- --------------------------------------------------------------------------------
THE GATEWAY TRUST
- --------------------------------------------------------------------------------
Investment Adviser:
Gateway Investment Advisers, L.P.
Shareholder Servicing:
Gateway Investment Advisers, L.P.
Auditors:
Arthur Andersen LLP
Cincinnati, OH
Custodian:
Star Bank, N.A.
Cincinnati, OH
Trustees:
James M. Anderson
Stefen F. Brueckner
Kenneth A. Drucker
Beverly J. Fertig
R. S. Harrison
Walter G. Sall
William H. Schneebeck
20
<PAGE> 42
Affordability
$1,000 Minimum Initial Investment
$500 Minimum Initial IRA Investment
$100 Minimum Additional Investment
No Annual Account Charges
No-Fee IRA Accounts
Convenience
Free Telephone Exchanges Between Gateway Funds
Automatic Investment Program
Systematic Withdrawal Program
Telephone Redemptions
Flexibility
Available for numerous investment options:
Individuals
IRAs
Trusts
Pension Plans
Gifts to Minors
<PAGE> 43
Cincinnati(R) Fund
P. O. Box 5211
Cincinnati, OH 45201-5211
(800) 354-5525
Cincinnati(R) Fund
Semi-Annual Report 1998
<PAGE> 44
<TABLE>
<CAPTION>
CINCINNATI FUND(R)
Highlights at June 30, 1998
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------------------------------
Past One Three Five Ten Since Inception Price
Quarter Year Years Years Years on 11/7/94 Per Share
------- ---- ----- ----- ----- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CINCINNATI FUND(R) (1.77%) 26.12% 24.49% N/A N/A 24.89% $20.56
S&P 500 3.30 30.16 30.24 23.08 18.56
Lehman Gov't./
Corp. Bond 2.61 11.29 7.86 6.87 9.10
U. S. Inflation (CPI) 0.76 1.65 2.23 2.45 3.28
<CAPTION>
CUMULATIVE TOTAL RETURN
---------------------------------------------------------
Past One Three Five Ten Since Inception
Quarter Year Years Years Years on 11/7/94
------- ---- ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
CINCINNATI FUND(R) (1.77%) 26.12% 92.95% N/A N/A 124.78%
S&P 500 3.30 30.16 120.90 182.41 448.89
Lehman Gov't./
Corp. Bond 2.61 11.29 25.49 39.43 138.99
U. S. Inflation (CPI) 0.76 1.65 6.85 12.84 38.09
</TABLE>
Performance data throughout this report represents past performance.
The average annual total return figures assume the reinvestment
of dividends. Your investment return and principal value of an
investment will fluctuate so that your shares, when redeemed,
may be worth more or less than the original cost.
This report must be preceded by or accompanied by a prospectus.
- --------------------------------------------------------------------------------
1 CINCINNATI FUND
<PAGE> 45
CINCINNATI FUND(R)
Letter from the Chairman
Dear Shareholder:
The Cincinnati business community continued to increase sales and
profits in the first half of 1998. This resulted in a further advance in the
prices of the public companies represented in the Cincinnati Fund(R). The Fund's
diversified list of companies that conduct business in the Greater Cincinnati
Area is a representation of the hard work, good management, and economic value
that our region is known for.
Shareholders in the Cincinnati Fund continue to increase -- from
approximately 2,500 at year-end 1997 to over 3,250 at June 30, 1998. As the
Fund's shareholder base and assets continue to grow, expenses will continue to
fall, a benefit to all shareholders.
I am very pleased to announce that Patrick Rogers, portfolio manager of
the Cincinnati Fund, earned the distinction as one of "The Best Fund Managers"
as of June 30, 1998, in the July 20, 1998, issue of Barron's. The Fund is the
only Cincinnati-based mutual fund whose portfolio manager earned this ranking.
Again, we are pleased to be able to deliver the benefits that derive
from our business community to you, our valued shareholders.
Cordially,
Walter G. Sall
Chairman
- --------------------------------------------------------------------------------
CINCINNATI FUND 2
<PAGE> 46
CINCINNATI FUND(R)
Portfolio Manager's Report - June 30, 1998
For the six months ended June 30, 1998, the Cincinnati Fund(R)
delivered a total return of 8.32%. Over the trailing twelve months, the Fund's
performance was 26.12%, with an annualized return since inception of 24.89%.
Top Holdings
Although minor changes may take place in the Fund's top holdings, we
consistently want to maintain exposure to those corporations that have a
significant presence in the Greater Cincinnati Area.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Top Ten Holdings
As of June 30, 1998
- --------------------------------------------- ---------------------------------------
Stocks As a Percentage of Net Assets
- --------------------------------------------- ---------------------------------------
<S> <C>
The Procter & Gamble Co. 5.46%
The Kroger Co. 4.85%
Cinergy Corp. 4.70%
General Electric Company 4.47%
Federated Department Stores, Inc. 4.39%
Cincinnati Bell Inc. 4.19%
Fifth Third Bancorp 3.88%
The E.W. Scripps Company 3.56%
Delta Air Lines, Inc. 3.53%
Comair Holdings, Inc. 3.50%
- --------------------------------------------- ---------------------------------------
</TABLE>
Industry Groups
As you know from our earlier reports, the highest industry group
weighting in the Cincinnati Fund has been the Finance sector. Our locally
managed banks and insurance companies have earned the highest respect within
their industries. However, we have modestly reduced the weighting of local bank
stocks since the end of 1997. This is not a result of a change in our confidence
in their management teams, but rather a reflection of their high market
valuation. The local banks have been taking advantage of their rich stock prices
by making significant acquisitions. At the end of the quarter, Star Bank
announced a planned merger with Firstar, a bank holding company located in
Milwaukee. We will report more on this major announcement as it develops.
- --------------------------------------------------------------------------------
3 CINCINNATI FUND
<PAGE> 47
CINCINNATI FUND(R)
Portfolio Manager's Report - June 30, 1998
PIE CHART
Energy 1.16%
Technology 10.29%
Finance 20.38%
Industrial Cyclicals 8.65%
Consumer Staples 8.85%
Services 14.95%
Consumer Durables 6.06%
Retail 11.92%
Health 4.96%
Utilities 10.65%
As a percentage of net assets
Top Performing Stocks
The Fund's best percentage performers during the first six months of
1998 are shown below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Top Ten Performers
January 1, 1998 to June 30, 1998
- --------------------------------------------- ----------------------------------
<S> <C>
Pomeroy Computer Resources, Inc. 47%
Cintas Corporation 31%
Mercantile Stores Company, Inc. 31%
Comair Holdings, Inc. 28%
Federated Department Stores, Inc. 25%
Meridian Diagnostics, Inc. 23%
Omnicare, Inc. 23%
Multi-Color Corporation 18%
The Kroger Co. 17%
Fifth Third Bancorp 16%
</TABLE>
- --------------------------------------------------------------------------------
CINCINNATI FUND 4
<PAGE> 48
CINCINNATI FUND(R)
Portfolio Manager's Report - June 30, 1998
Since we started the Cincinnati Fund in November 1994, three names
always seem to make the list of the best performers over a given time period --
Comair Holdings, Kroger Co., and Fifth Third Bancorp. The characteristics of
these "hometown" companies are precisely why the Cincinnati Fund has been
successful; they are well managed, they use technology effectively, and they
have a motivated workforce. All three companies also have earned a great amount
of respect from their peers. From a portfolio perspective, it is terrific that
the three operate in different industries, thus achieving a measure of
diversification.
As always, we thank you for your support.
J. Patrick Rogers, CFA
Portfolio Manager
- --------------------------------------------------------------------------------
5 CINCINNATI FUND
<PAGE> 49
CINCINNATI FUND(R)
Portfolio of Investments - June 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Shares Common Stocks Value
------ ------------- -----
<S> <C> <C>
CONSUMER DURABLES 6.06%
12,100 Cintas Corporation $ 615,966
9,500 Ford Motor Company
559,906
6,600 General Motors Corporation 440,963
--------------
1,616,835
--------------
CONSUMER STAPLES 8.85%
26,000 Chiquita Brands International
368,063
7,300 Heinz (H. J.) Company
409,713
2,300 Sara Lee Corporation
128,656
16,000 The Procter & Gamble Company 1,457,000
--------------
2,363,432
--------------
ENERGY 1.16%
6,000 Ashland, Inc. 309,563
--------------
FINANCE 20.38%
2,500 American Annuity Group, Inc.
60,547
8,800 American Financial Group, Inc.
381,700
2,376 Banc One Corporation
132,536
15,429 Cincinnati Financial Corporation
594,981
19,000 Duke Realty Investments, Inc.
445,906
16,449 Fifth Third Bancorp
1,034,713
1,694 First Financial Bancorp
43,885
2,116 Huntington Bancshares Incorporated
71,018
23,400 McDonald & Company Investments, Inc.
766,350
4,500 Ohio Casualty Corporation
198,844
1,800 PNC Bank Corp.
96,863
17,925 Provident Financial Group, Inc.
818,948
10,300 Star Banc Corporation
657,913
6,000 The Midland Company 136,313
--------------
5,440,517
--------------
</TABLE>
See accompanying notes to financial statements
- --------------------------------------------------------------------------------
CINCINNATI FUND 6
<PAGE> 50
CINCINNATI FUND(R)
Portfolio of Investments - June 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Shares Common Stocks Value
------ ------------- -----
HEALTH 4.96%
<S> <C> <C>
5,500 Duramed Pharmaceuticals, Inc. * $ 30,766
8,600 Johnson & Johnson
634,250
34,522 Meridian Diagnostics, Inc.
430,446
6,000 Omnicare, Inc. 228,563
--------------
1,324,025
--------------
INDUSTRIAL CYCLICALS 8.65%
24,000 AK Steel Corporation
429,000
14,700 Chemed Corporation
500,719
27,500 Cincinnati Milacron Inc.
670,313
21,000 LSI Industries Inc.
427,875
4,300 Multi-Color Corporation *
31,041
23,500 NS Group, Inc. *
238,672
1,500 Zaring National Corp. * 13,313
--------------
2,310,933
--------------
RETAIL 11.92%
21,800 Federated Department Stores, Inc. *
1,172,431
5,500 Mercantile Stores Company, Inc.
433,813
4,000 Nine West Group Inc. *
107,250
30,200 The Kroger Co. *
1,293,896
3,400 Winn-Dixie Stores, Inc. 173,931
--------------
3,181,321
--------------
SERVICES 14.95%
30,288 Comair Holdings, Inc.
934,180
7,300 Delta Air Lines, Inc.
942,384
9,390 Frisch's Restaurants, Inc.
106,811
2,400 Gannett Co., Inc.
170,550
12,800 Gibson Greetings, Inc. *
320,400
4,000 Harte-Hanks, Inc.
103,375
6,500 Jacor Communications, Inc. *
383,906
3,000 Loewen Group Inc.
80,813
17,300 The E.W. Scripps Company 949,878
--------------
3,992,297
--------------
</TABLE>
See accompanying notes to financial statements
- --------------------------------------------------------------------------------
7 CINCINNATI FUND
<PAGE> 51
CINCINNATI FUND(R)
Portfolio of Investments - June 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Shares Common Stocks Value
------ ------------- -----
TECHNOLOGY 10.29%
<S> <C> <C>
13,100 General Electric Company $ 1,192,100
4,000 Interlott Technologies Inc. *
43,500
5,000 LanVision Systems, Inc. *
21,719
20,000 Medplus Inc *
122,500
34,425 Pomeroy Computer Resources, Inc. *
892,898
20,600 Structural Dynamics Research Corporation * 474,444
------------
2,747,161
UTILITIES 10.65%
8,300 AT&T Corp.
474,138
39,000 Cincinnati Bell Inc.
1,117,594
35,900 Cinergy Corp. 1,253,134
------------
2,844,866
------------
TOTAL COMMON STOCKS 97.87%
(cost $19,378,315) 26,130,950
REPURCHASE AGREEMENT 1.97%
5.2% repurchase agreement dated June 30, 1998
with Star Bank, N.A., due July 1, 1998 (repurchase
proceeds $526,076) collateralized by 6.875% GNMA
Pool #8359, maturity January 20, 2024 with face value
$560,000 and market value $570,500 526,000
-----------
TOTAL INVESTMENTS AND REPURCHASE AGREEMENT 99.84%
26,656,950
OTHER ASSETS AND LIABILITIES, NET 0.16% 43,798
-----------
NET ASSETS 100.00% $26,700,748
===========
<FN>
* Denotes a non-income producing security.
</TABLE>
See accompanying notes to financial statements
- --------------------------------------------------------------------------------
CINCINNATI FUND 8
<PAGE> 52
CINCINNATI FUND(R)
Statement of Assets and Liabilities - June 30, 1998 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Common stocks, at value (original cost $19,378,315) $26,130,950
Repurchase agreement
526,000
Receivable for fund shares sold
21,130
Dividend and interest receivable
20,241
Cash
941
Other assets 15,000
-----------
26,714,262
===========
LIABILITIES:
Payable for fund shares redeemed
1,400
Other accrued expenses and liabilities 12,114
-----------
13,514
-----------
NET ASSETS $26,700,748
===========
NET ASSETS CONSIST OF:
Paid-in capital applicable to 1,298,391 shares outstanding
(unlimited number of shares authorized, no par value) $19,869,477
Undistributed net investment income
32,842
Accumulated realized gain, net
45,794
Unrealized appreciation, net 6,752,635
-----------
$26,700,748
===========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE $20.56
======
</TABLE>
See accompanying notes to financial statements
- --------------------------------------------------------------------------------
9 CINCINNATI FUND
<PAGE> 53
CINCINNATI FUND(R)
Statement of Operations
For the Six Months Ended June 30, 1998 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income $ 157,398
Interest income 32,301
-----------
189,699
-----------
EXPENSES:
Investment advisory and management fees
56,599
Transfer agent, accounting, and administrative fees
47,307
Reports to shareholders
27,759
Professional fees
9,227
Trustees' fees
5,561
Custodian fees
4,846
Registration fees
2,018
Other expenses 4,669
-----------
157,986
-----------
NET INVESTMENT INCOME 31,713
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gains
36,917
Increase in unrealized appreciation of investments 1,609,575
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 1,646,492
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,678,205
============
</TABLE>
See accompanying notes to financial statements
- --------------------------------------------------------------------------------
CINCINNATI FUND 10
<PAGE> 54
CINCINNATI FUND(R)
Statements of Changes in Net Assets (unaudited)
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 31,713 $ 65,236
Net realized gain on investments
36,917 729,143
Change in unrealized appreciation of investments 1,609,575 2,718,060
------------ ------------
Net increase in net assets resulting from operations 1,678,205 3,512,439
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income --
(64,107)
From net realized gain on investments -- (722,095)
------------ ------------
Decrease in net assets from dividends and distributions -- (786,202)
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold
8,673,752 6,204,650
Net asset value of shares issued in reinvestment of
dividends and distributions -- 582,605
Payments for shares redeemed (1,178,475) (970,114)
------------ ------------
Net increase in net assets from fund shares transactions 7,495,277 5,817,141
------------ ------------
NET INCREASE IN NET ASSETS
9,173,482 8,543,378
NET ASSETS:
Beginning of period 17,527,266 8,983,888
------------ ------------
End of period $ 26,700,748 $ 17,527,266
============ ============
FUND SHARE TRANSACTIONS:
Shares sold 434,107
365,881
Shares issued in reinvestment of dividends and distributions --
30,743
Less shares redeemed (59,045) (56,771)
------------ ------------
NET INCREASE IN SHARES OUTSTANDING 375,062 339,853
============ ============
</TABLE>
See accompanying notes to financial statements
- --------------------------------------------------------------------------------
11 CINCINNATI FUND
<PAGE> 55
CINCINNATI FUND(R)
Financial Highlights
Per share data for a share outstanding throughout each period (unaudited)
<TABLE>
<CAPTION>
Six Months For the Period From
Ended Year Ended December 31, November 7, 1994 to
June 30, 1998 1997 1996 1995(4) December 31, 1994
------------- ---- ---- -------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 18.98 $ 15.40 $ 13.12 $ 9.91 $ 10.00
-------- -------- -------- ------- -------
Net investment income 0.03 0.07 0.02 0.04 0.03
Net gains (losses) on securities 1.55 4.39 2.60 3.46 (0.12)
--------- ------- -------- ------- --------
Total from investment operations 1.58 4.46 2.62 3.50 (0.09)
--------- ------- -------- ------- -------
Dividends from net investment income -- (0.07) (0.02) (0.07) --
Distributions from capital gains -- (0.81) (0.32) (0.22) --
--------- ------- -------- ------- -------
Total distributions -- (0.88) (0.34) (0.29) --
--------- ------- -------- ------- -------
Net asset value, end of period $20.56 $18.98 $15.40 $13.12 $ 9.91
======= ======= ======== ======= =======
TOTAL RETURN 8.32%(2) 28.98% 19.98% 35.31% (0.90%)(2)
Net assets, end of period (thousands) $26,701 $17,527 $8,984 $5,877 $3,225
Ratio of net expenses to average
net assets (1) 1.39%(3) 1.69% 2.00% 1.98% 1.96%(3)
Ratio of net investment income to
average net assets (1) 0.28%(3) 0.50% 0.13% 0.46% 2.24%(3)
Portfolio turnover rate 1%(2) 17% 10% 9% 0%(2)
<FN>
(1) The ratio of net expenses to average net assets would have increased and the ratio
of net investment income to average net assets would have decreased by 0.01% in 1997,
0.02% in 1995, and 0.04% in 1994 had the Adviser not voluntarily waived fees or
reimbursed expenses. Ratios are annualized in periods less than one year.
(2) Not annualized.
(3) Annualized.
(4) On December 15, 1995, Gateway Investment Advisers, L.P. became
investment adviser to the Fund.
</TABLE>
See accompanying notes to financial statements
- --------------------------------------------------------------------------------
CINCINNATI FUND 12
<PAGE> 56
CINCINNATI FUND(R)
Notes to Financial Statements - June 30, 1998 (unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
The Gateway Trust (the Trust) is a family of three no-load diversified mutual
funds. The financial statements of the Cincinnati Fund (the Fund) are included
in this report. The investment objective of the Cincinnati Fund is to achieve
capital appreciation through investment in the common stock of companies with
an important presence in the Greater Cincinnati Area. The financial statements
of Gateway Fund and Gateway Small Cap Index Fund are included in separate
reports. The Trust is registered under the Investment Company Act of 1940.
The following is a summary of the Fund's significant accounting policies.
INVESTMENTS VALUATION -- The Fund normally values common stocks at the average
of the closing bid and asked quotations. Other securities for which market
quotations are not readily available are valued at fair value as determined in
good faith under procedures adopted by the board of trustees.
INVESTMENT TRANSACTIONS, INVESTMENT INCOME, AND EXPENSES -- Investment
transactions are re-corded on the trade date. Dividend income is recorded on
the ex-dividend date, and interest income is accrued daily. Capital gains and
losses are calculated on an identified cost basis. Expenses that cannot be
directly associated with a specific Trust fund are allocated under policies
approved by the board of trustees.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS TO SHAREHOLDERS -- Distributions
from net investment income and net realized capital gains are recorded on the
ex-dividend date and are declared and paid to shareholders annually.
FEDERAL INCOME TAXES -- The Fund intends to comply with the provisions of
Subchapter M of the Internal Revenue Code applicable to regulated investment
companies and distribute substantially all of its taxable income to
shareholders. Based on this policy, the Fund makes no provision for income
taxes. The cost of investments is the same for financial reporting and tax
purposes.
At June 30, 1998, gross unrealized appreciation of common stocks totaled
$7,081,514 and gross unrealized depreciation totaled $328,879, based on the
cost of investments.
REPURCHASE AGREEMENTS -- The Fund requires the custodian to hold sufficient
collateral to secure repurchase agreements. To reduce the chance of loss in
its repurchase transactions, the Fund enters into repurchase agreements only
with banks that have more than $1 billion in assets and are creditworthy in
the judgment of Gateway Investment Advisers, L.P. (the Adviser).
- --------------------------------------------------------------------------------
13 CINCINNATI FUND
<PAGE> 57
CINCINNATI FUND(R)
Notes to Financial Statements - June 30, 1998 (unaudited)
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
2. TRANSACTIONS WITH AFFILIATES
The Fund pays the Adviser a monthly investment advisory and management fee
computed at an annual rate of 0.50% of its average daily net assets.
If total expenses for any fiscal year (excluding taxes, interest, brokerage
commissions, and expenses of an extraordinary nature) exceed 2.00% of average
daily net assets, the advisory contract requires the Adviser to reduce its fee
as necessary to limit the Fund's expenses to this level.
The Adviser provides shareholder, transfer, dividend disbursing, accounting,
and administrative services to the Fund. The Fund compensates the Adviser for
these services at a fixed rate of $4,000 per month, plus the greater of $2,500
per month or an annual rate of 0.20% of the Fund's average net assets.
Each trustee of the Trust who is not affiliated with the Adviser receives an
annual retainer of $3,000, a $500 base fee plus $100 per fund for each meeting
attended, and $200 per fund ($1,000 for the committee chairman) for each
committee meeting attended. The annual retainer and base fee are allocated
among the funds based on the number of shareholders in each fund.
At June 30, 1998, the Adviser held in a fiduciary capacity 6% of the
outstanding shares of the Fund.
3. SECURITIES TRANSACTIONS
For the six months ended June 30, 1998, purchases of investment securities
(excluding short-term investments) totaled $7,456,326, and proceeds from sales
totaled $232,787.
- --------------------------------------------------------------------------------
CINCINNATI FUND 14
<PAGE> 58
Morningstar Awards
(4 LARGE STARS UNDER THIS HEADING)
Morningstar Rating. Overall rating among 2,545 domestic
equity funds as of 6/30/98.
To
Cincinnati Fund(R)
Morningstar proprietary ratings reflect historical risk-adjusted performance as
of June 30, 1998. The ratings are subject to change every month. Past
performance is no guarantee of future results. Morningstar ratings are
calculated from the fund's three-, five,- and ten-year average annual returns in
excess of 90-day Treasury bill returns with appropriate fee adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The top 10% of the funds in a category receive five stars and the next 22.5%
receive four stars. The Cincinnati Fund received four stars for the three-year
period ended June 30, 1998 and was rated among 2,545 funds.
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