SEMI-ANNUAL REPORT
================================================================================
[Stock photography]
Smith Barney
Special
Equities Fund
-------------------
June 30, 1996
[Logo] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- ----------------------------------
Smith Barney Special Equities Fund
- ----------------------------------
Dear Shareholder:
We are pleased to provide you with the semi-annual report for the Smith Barney
Special Equities Fund for the period ended June 30, 1996. In this report, we
have summarized the period's prevailing economic and market conditions. In
addition, a detailed summary of performance and current holdings can be found in
the appropriate sections that follow in the semi-annual report.
Market and Economic Overview
The first six months of 1996 was characterized by a choppy market, peaking in
February and essentially trading sideways through June. As we entered 1996, the
outlook from many investment professionals was less-than-enthusiastic after the
equity market's stellar performance in 1995. For the most part, investors
constantly focused on changing perceptions of economic growth, fears of
accelerating inflation and rising interest rates. Consequently, as long bond
yields rose above the psychological 7% level in May, growth stocks, and
small-caps in particular, reacted somewhat negatively as investors became
skittish.
In the first few weeks of the year, the equity markets weakened on heightened
concerns over inflationary growth. The market quickly rebounded, setting record
highs in most major indices, as investor sentiment improved on
stronger-than-expected corporate profit growth. The markets continued to rally
in the second quarter, despite some signs of inflation as evidenced by strong
increases in newly created jobs, higher levels of consumer spending, and the
subsequent rise in long bond yields. The rally slowed in mid-May as a less
bullish outlook unfolded, due, in part, to some key reported earnings of
weaker-than-expected proportions coupled with fears of a Federal Reserve
interest rate hike. Despite this, major stock market averages managed to
register reasonable gains. The Dow Jones Industrial Average and the Standard &
Poor's 500-Stock Price Index finished the first half of 1996 up 10.50% and
10.09%, respectively. The NASDAQ Composite Index and the Russell 2000 Index rose
12.63% and 10.36%, respectively.
Both retail and technology stocks began to falter in May as retail sales
softened, owing to a slowing economy, and weakening semiconductor chip pricing
and order rates. The sell-off in technology stocks negatively impacted the
markets, especially the small-capitalization stock universe, as a "classic"
summer slowdown took hold. Small-capitalization stocks have underperformed
large-capitalization stocks for the better part of the first half of 1996. As
the year progresses, we expect to see a better relative performance from small
cap stocks than we have seen so far this year.
Fund's Performance and Investment Strategy
Because the Smith Barney Special Equities Fund invests in small, emerging growth
companies, its holdings are generally not affected by broad economic and market
conditions. However, the Fund slightly underperformed relative to market indices
1
<PAGE>
due to its high concentration in technology stocks, which declined sharply
between May and June in response to a slowing in overall personal computer
sales, declining product prices and softer earnings. The Special Equities Fund
(Class A shares) returned 8.05% for the six-month period ending June 30, 1996.
The annual 1-year total return for the Special Equities Fund was 48.04% for
Class A shares.
Despite the recent volatility in the small and mid-cap markets the Special
Equities Fund's strategy continues to be based on a long-term perspective. We do
not focus on short-term price fluctuations as long as the Fund believes the
company's fundamentals and growth can remain intact. We believe that the
small-cap universe offers the greatest potential return to long-term investors
over a full market cycle. In that regard, we remain committed to owning high
quality stocks capable of delivering reasonably stable, well-above average
growth over a multi-year period. After the first six months of 1996, the Special
Equities Fund's top-five holdings were:
o Starbucks Corp., a specialty coffee roaster and retailer
o Callaway Golf Company, a high-quality golf club designer and manufacturer
o Shiva Corp., a developer of remote access networking products
o Boston Chicken, a retail food franchise specializing in homestyle meals
o Ascend Communications, a company that develops network access products
Outlook
For the balance of the year, we expect some choppiness in small-capitalization
stocks, reflecting a continued focus on earnings. However, we remain optimistic
about the prospects for continued strength in small-cap stocks over the next
several years.
Although select recent data suggests that the U.S. economy is growing at a rapid
pace, we believe that growth will moderate, interest rates will likely decline
and inflation will remain contained. Given all of these factors, we expect
earnings growth for large-capitalization companies to slow, and earnings growth
for small-cap companies should, on a relative basis, outperform gains registered
by larger companies.
In closing we would like to thank you for your investment in the Smith Barney
Special Equities Fund. We look forward to continuing to help you achieve your
financial goals.
Sincerely,
/s/Heath B. McLendon /s/George V. Novello
Heath B. McLendon George V. Novello
Chairman and Investment Officer
Chief Executive Officer
July 22, 1996
2
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
----------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
=================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/96 $30.44 $32.89 $0.00 $0.00 $0.00 8.05%+
- -----------------------------------------------------------------------------------------------------------------
12/31/95 19.10 30.44 0.00 0.76 0.00 63.48
- -----------------------------------------------------------------------------------------------------------------
12/31/94 20.23 19.10 0.00 0.00 0.00 (5.59)
- -----------------------------------------------------------------------------------------------------------------
12/31/93 15.47 20.23 0.00 0.33 0.00 32.90
- -----------------------------------------------------------------------------------------------------------------
Inception* - 12/31/92 14.13 15.47 0.00 0.00 0.00 9.48+
=================================================================================================================
Total $0.00 $1.09 $0.00
=================================================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<CAPTION>
Net Asset Value
----------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
=================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/96 $29.76 $32.04 $0.00 $0.00 $0.00 7.66%+
- -----------------------------------------------------------------------------------------------------------------
12/31/95 18.82 29.76 0.00 0.76 0.00 62.30
- -----------------------------------------------------------------------------------------------------------------
12/31/94 20.08 18.82 0.00 0.00 0.00 (6.27)
- -----------------------------------------------------------------------------------------------------------------
12/31/93 15.47 20.08 0.00 0.33 0.00 31.93
- -----------------------------------------------------------------------------------------------------------------
12/31/92 14.18 15.47 0.00 0.00 0.00 9.10
- -----------------------------------------------------------------------------------------------------------------
12/31/91 9.82 14.18 0.00 0.00 0.03 44.76
- -----------------------------------------------------------------------------------------------------------------
12/31/90 13.77 9.82 0.29 0.23 0.02 (24.71)
- -----------------------------------------------------------------------------------------------------------------
12/31/89 12.04 13.77 0.27 0.00 0.24 18.60
- -----------------------------------------------------------------------------------------------------------------
12/31/88 11.48 12.04 0.55 0.30 0.00 12.60
- -----------------------------------------------------------------------------------------------------------------
12/31/87 13.02 11.48 0.00 0.14 0.00 (10.91)
- -----------------------------------------------------------------------------------------------------------------
12/31/86 13.15 13.02 0.05 1.00 0.00 7.05
=================================================================================================================
Total $1.16 $2.76 $0.29
=================================================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------
<CAPTION>
Net Asset Value
----------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
=================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/96 $29.77 $32.05 $0.00 $0.00 $0.00 7.69%+
- -----------------------------------------------------------------------------------------------------------------
12/31/95 18.82 29.77 0.00 0.76 0.00 62.35
- -----------------------------------------------------------------------------------------------------------------
12/31/94 20.08 18.82 0.00 0.00 0.00 (6.27)
- -----------------------------------------------------------------------------------------------------------------
Inception* - 12/31/93 22.62 20.08 0.00 0.33 0.00 (9.77)+
=================================================================================================================
Total $0.00 $1.09 $0.00
=================================================================================================================
</TABLE>
3
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
----------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
=================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Inception* - 6/30/96 $28.99 $32.93 $0.00 $0.00 $0.00 13.59%+
=================================================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class Z Shares
- --------------------------------------------------------------------------------
<CAPTION>
Net Asset Value
----------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
=================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/96 $30.46 $32.97 $0.00 $0.00 $0.00 8.24%
- -----------------------------------------------------------------------------------------------------------------
Inception* - 12/31/95 26.49 30.46 0.00 0.76 0.00 17.95
=================================================================================================================
Total $0.00 $0.76 $0.00
=================================================================================================================
</TABLE>
It is the Funds' policy to distribute dividends and capital gains, if any,
annually.
- --------------------------------------------------------------------------------
Average Annual Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
-----------------------------------------------
Class A Class B Class C Class Y Class Z
================================================================================
Six Months Ended 6/30/96+ 8.05% 7.66% 7.69% N/A 8.24%
- --------------------------------------------------------------------------------
Year Ended 6/30/96 48.04 46.94 46.98 N/A N/A
- --------------------------------------------------------------------------------
Five Years Ended 6/30/96 N/A 25.09 N/A N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/96 N/A 10.53 N/A N/A N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/96 27.59 12.12 15.56 13.59%+ 27.67+
================================================================================
With Sales Charge(2)
-----------------------------------------------
Class A Class B Class C Class Y Class Z
================================================================================
Six Months Ended 6/30/96+ 2.65% 2.66% 6.69% N/A 8.24%
- --------------------------------------------------------------------------------
Year Ended 6/30/96 40.64 41.94 45.98 N/A N/A
- --------------------------------------------------------------------------------
Five Years Ended 6/30/96 N/A 25.01 N/A N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/96 N/A 10.53 N/A N/A N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/96 25.81 12.12 15.56 13.59%+ 27.67+
================================================================================
4
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 6/30/96) 142.67%
- --------------------------------------------------------------------------------
Class B (6/30/86 through 6/30/96) 172.20
- --------------------------------------------------------------------------------
Class C (Inception* through 6/30/96) 47.81
- --------------------------------------------------------------------------------
Class Y (Inception* through 6/30/96) 13.59+
- --------------------------------------------------------------------------------
Class Z (Inception* through 6/30/96) 27.67
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect deduction of the applicable
sales charges with respect to Class A shares or the applicable contingent
deferred sales charges ("CDSC") with respect to Class B and C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00%; Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed within one
year from initial purchase and declines thereafter by 1.00% per year until
no CDSCis incurred. Class C shares reflect the deduction of a 1.00% CDSC,
which applies if shares are redeemed within the first year of purchase.
* Inception dates for Class A, B, C, Y and Z shares are November 6, 1992,
December 13, 1982, October 18, 1993, January 31, 1996 and October 2, 1995,
respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
5
<PAGE>
Smith Barney Special Equities Fund
- ----------------------------------
Historical Performance (unaudited)
- ----------------------------------
Growth of $10,000 Invested in Class B Shares of the
Smith Barney Special Equities Fund vs.
Standard & Poor's 500 Index+
- --------------------------------------------------------------------------------
June 1986 -- June 1996
[The following table was represented as a line graph in the printed material.]
Smith Barney Standard & Poor's
Special Equities Fund 500 Index
--------------------- -----------------
6/30/86 $10,000 $10,000
12/86 8,905 9,821
12/87 7,933 10,337
12/88 8,933 12,049
12/89 10,595 15,861
12/90 7,978 15,368
12/91 11,548 20,041
12/92 12,599 21,567
12/93 16,621 23,735
12/94 15,578 24,047
12/95 25,283 33,072
6/96 27,220 36,409
+ Hypothetical illustration of $10,000 invested in Class B shares on June 30,
1986, assuming reinvestment of dividends and capital gains, if any, at net
asset value through June 30, 1996. The Standard & Poor's 500 Index is
composed of widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange and the over-the-counter market. Figures
for the index include reinvestment of dividends. The index is unmanaged and
is not subject to the same management and trading expenses as a mutual
fund. The performance of the Fund's other classes may be greater or less
than the Class B shares' performance indicated on this chart, depending on
whether greater or lesser sales charges and fees were incurred by
shareholders investing in the other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
6
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) June 30, 1996
- --------------------------------------------------------------------------------
Portfolio Breakdown
[The following table was represented as a pie graph in the printed material.]
Repurchase Agreements 11.9%
Other Common Stocks 13.0%
Retail 17.0%
Communications 11.3%
Office Products 4.3%
Technology 5.1%
Software 12.4%
Broadcast, Radio and Television 4.5%
Healthcare 8.9%
Restaurant 11.6%
Top Ten Common Stock Holdings
Percentage of
Total Investments
================================================================================
Starbucks Corp. 4.4%
Callaway Golf Co. 4.2
Shiva Corp. 4.0
Boston Market Inc. 3.9
Ascend Communications Inc. 3.7
PETsMART Inc. 3.6
Adtran Inc. 3.2
Peoplesoft Inc. 3.1
Oakley Inc. 3.0
Sunglass Hut International Inc. 2.9
================================================================================
7
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited)
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 88.1%
Advertising -- 0.8%
150,000 CKS Group Inc.+ $ 4,837,500
- --------------------------------------------------------------------------------
Broadcast, Radio & Television -- 4.5%
150,000 American Radio Systems Corp.+ 6,450,000
250,000 Chancellor Broadcasting Corp.+ 7,812,500
125,000 Emmis Broadcasting Corp.+ 6,250,000
145,000 Evergreen Media Corp.+ 6,198,750
- --------------------------------------------------------------------------------
26,711,250
- --------------------------------------------------------------------------------
Business Services -- 3.4%
200,000 Corestaff Inc.+ 8,950,000
130,000 Employee Solutions Inc.+ 4,095,000
50,000 May & Speh Inc.+ 787,500
178,500 Whittman-Hart Inc.+ 6,426,000
- --------------------------------------------------------------------------------
20,258,500
- --------------------------------------------------------------------------------
Communications -- 11.3%
270,000 Adtran Inc.+ 19,136,250
100,000 America Online Inc.+ 4,375,000
400,000 Ascend Communications Inc.+ 22,500,000
300,000 Aspect Telecommunications Corp.+ 14,850,000
150,000 Excel Communications Inc.+ 4,050,000
100,000 Premiere Technologies Inc.+ 3,150,000
- --------------------------------------------------------------------------------
68,061,250
- --------------------------------------------------------------------------------
Entertainment & Leisure -- 4.4%
750,000 Callaway Golf Co. 24,937,500
65,000 Penske Motorsports Inc.+ 1,722,500
- --------------------------------------------------------------------------------
26,660,000
- --------------------------------------------------------------------------------
Financial Services -- 0.9%
250,000 The Money Store Inc. 5,531,250
- --------------------------------------------------------------------------------
Food Processing -- 0.7%
235,000 Unimark Group Inc.+ 3,906,875
- --------------------------------------------------------------------------------
Healthcare -- 8.9%
200,000 CNS Inc.+4,850,000
100,000 HCIA Inc.+ 6,300,000
100,000 Henry Schein Inc.+ 3,825,000
125,000 Occusystems Inc.+ 4,671,875
337,500 Phycor Inc.+ 12,825,000
175,000 Physicians Sales & Service Inc.+ 4,243,750
130,000 Safeskin Corp.+ 5,395,000
35,000 Sunrise Assisted Living Inc.+ 840,000
250,000 Target Therapeutics Inc.+ 10,250,000
- --------------------------------------------------------------------------------
53,200,625
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
8
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) June 30, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Jewelry -- 0.3%
70,000 Marks Brothers Jewelers+ $ 1,592,500
- --------------------------------------------------------------------------------
Lodging -- 0.1%
20,000 Suburban Lodges of America Inc.+ 462,500
- --------------------------------------------------------------------------------
Office Products -- 4.3%
200,000 Corporate Express Inc.+ 8,000,000
155,000 Micro Warehouse Inc.+ 3,100,000
150,000 Officemax Inc.+ 3,581,250
360,000 Viking Office Products Inc.+ 11,295,000
- --------------------------------------------------------------------------------
25,976,250
- --------------------------------------------------------------------------------
Oil & Gas -- 0.1%
50,000 Saba Petroleum Co.+ 650,000
- --------------------------------------------------------------------------------
Restaurant -- 11.6%
725,000 Boston Market Inc.+ 23,562,500
50,000 Landry's Seafood Restaurants Inc.+ 1,237,500
400,000 Manhattan Bagel Co.+ 5,900,000
475,000 Planet Hollywood International Inc.+ 12,825,000
925,000 Starbucks Corp.+ 26,131,250
- --------------------------------------------------------------------------------
69,656,250
- --------------------------------------------------------------------------------
Retail -- 17.0%
475,000 Baby Superstore Inc.+ 7,837,500
130,000 Cost Plus Inc.+ 3,607,500
50,000 Eagle Hardware & Garden Inc.+ 762,500
57,500 Friedman's Inc., Class A Shares+ 1,466,250
25,000 Garden Botanika Inc.+ 550,000
300,000 Global DirectMail Corp.+ 11,850,000
360,000 The Mens Wearhouse Inc.+ 11,610,000
150,000 MSC Industrial Direct Co.+ 4,837,500
400,000 Oakley Inc.+ 18,200,000
110,000 Party City Corp.+ 1,952,500
450,000 PETsMART Inc.+ 21,487,500
725,000 Sunglass Hut International Inc.+ 17,671,875
- --------------------------------------------------------------------------------
101,833,125
- --------------------------------------------------------------------------------
Software -- 12.4%
400,000 BAAN Company NV+ 13,600,000
20,000 Check Point Software Technologies Ltd.+ 480,000
120,000 Edify Corp.+ 3,180,000
135,000 Excite Inc.+ 1,130,625
100,000 Individual Inc.+ 1,650,000
35,000 Infoseek Corp.+ 350,000
125,000 I2 Technologies Inc.+ 5,343,750
150,000 Macromedia Inc.+ 3,281,250
22,500 Open Market Inc.+ 548,438
See Notes to Financial Statements.
9
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) June 30, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Software -- 12.4% (continued)
260,000 Peoplesoft Inc.+ $ 18,525,000
100,000 Sapient Corp.+ 4,225,000
200,000 Sterling Commerce Inc.+ 7,425,000
150,000 Sykes Enterprises Inc.+ 7,387,500
20,000 Verilink Corp.+ 510,000
125,000 Xylan Corp.+ 5,812,500
55,000 Yahoo! Inc.+ 1,155,000
- --------------------------------------------------------------------------------
74,604,063
- --------------------------------------------------------------------------------
Technology -- 5.1%
225,000 Remec Inc.+ 3,993,750
300,000 Shiva Corp.+ 24,000,000
100,000 Verity Inc.+ 2,875,000
- --------------------------------------------------------------------------------
30,868,750
- --------------------------------------------------------------------------------
Textiles -- 1.9%
100,000 Designer Holdings Ltd.+ 2,662,500
225,000 Mossimo Inc.+ 8,971,875
- --------------------------------------------------------------------------------
11,634,375
- --------------------------------------------------------------------------------
Wholesale -- 0.4%
75,000 Barnett Inc.+ 2,156,250
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $382,419,897) 528,601,313
================================================================================
WARRANT -- 0.0%
696 Jan Bell Marketing Inc., Expires 12/16/98
(Cost -- $0) 43
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
REPURCHASE AGREEMENTS -- 11.9%
$37,260,000 Chase Manhattan Bank, 5.328% due 7/1/96;
Proceeds at maturity -- $37,276,542;
(Fully Collateralized by U.S. Treasury Notes,
5.75% due 9/30/97;
Market value -- $38,005,200) 37,260,000
34,204,000 Morgan Stanley & Co. Inc., 5.304% due 7/1/96;
Proceeds at maturity -- $34,219,118; (Fully
Collateralized by U.S. Treasury Notes,6.875%
due 3/31/00; Market value-- $34,888,080) 34,204,000
- --------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost -- $71,464,000) 71,464,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $453,883,897*) $600,065,356
================================================================================
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
10
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) June 30, 1996
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $453,883,897) $ 600,065,356
Cash 963
Receivable for securities sold 347,500
Receivable for Fund shares sold 3,798,566
Interest receivable 31,660
- --------------------------------------------------------------------------------
Total Assets 604,244,045
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 532,000
Investment advisory fees payable 262,790
Distribution fees payable 171,560
Administration fees payable 95,548
Accrued expenses 157,999
- --------------------------------------------------------------------------------
Total Liabilities 1,219,897
- --------------------------------------------------------------------------------
Total Net Assets $ 603,024,148
================================================================================
NET ASSETS:
Par value of capital shares $ 18,594
Capital paid in excess of par value 438,189,036
Accumulated net investment loss (2,027,394)
Accumulated net realized gain on security transactions 20,662,453
Net unrealized appreciation of investments 146,181,459
- --------------------------------------------------------------------------------
Total Net Assets $ 603,024,148
================================================================================
Shares Outstanding:
Class A 6,850,155
----------------------------------------------------------------------------
Class B 9,274,894
----------------------------------------------------------------------------
Class C 830,244
----------------------------------------------------------------------------
Class Y 1,294,674
----------------------------------------------------------------------------
Class Z 344,403
----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $32.89
----------------------------------------------------------------------------
Class B* $32.04
----------------------------------------------------------------------------
Class C** $32.05
----------------------------------------------------------------------------
Class Y (and redemption price) $32.93
----------------------------------------------------------------------------
Class Z (and redemption price) $32.97
----------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $34.62
================================================================================
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed within one year from initial purchase. (See Note 2.)
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase. See Notes to Financial
Statements.
See Notes to Financial Statements.
11
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1996
INVESTMENT INCOME:
Interest $ 1,456,660
Dividends 97,375
- --------------------------------------------------------------------------------
Total Investment Income 1,554,035
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 1,479,653
Investment advisory fees (Note 2) 1,272,539
Administration fees (Note 2) 462,741
Shareholder and system servicing fees 249,487
Registration fees 46,998
Shareholder communications 29,917
Audit and legal 15,457
Custody 12,465
Directors' fees 9,972
Other 2,200
- --------------------------------------------------------------------------------
Total Expenses 3,581,429
- --------------------------------------------------------------------------------
Net Investment Loss (2,027,394)
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 140,698,544
Cost of securities sold 125,345,417
- --------------------------------------------------------------------------------
Net Realized Gain 15,353,127
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 129,925,308
End of period 146,181,459
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 16,256,151
- --------------------------------------------------------------------------------
Net Gain on Investments 31,609,278
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 29,581,884
================================================================================
See Notes to Financial Statements.
12
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1996 (unaudited)
and the Year Ended December 31, 1995
1996 1995
================================================================================
OPERATIONS:
Net investment loss $ (2,027,394) $ (3,195,629)
Net realized gain 15,353,127 21,960,199
Increase in net unrealized appreciation 16,256,151 98,030,043
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 29,581,884 116,794,613
- --------------------------------------------------------------------------------
DISTRIBUTION TO
SHAREHOLDERS FROM:
Net realized gains -- (7,592,812)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions To Shareholders -- (7,592,812)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 352,555,529 237,931,179
Net asset value of shares issued for
reinvestment of dividends -- 7,348,955
Cost of shares reacquired (124,291,470) (205,804,360)
- --------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 228,264,059 39,475,774
- --------------------------------------------------------------------------------
Increase in Net Assets 257,845,943 148,677,575
NET ASSETS:
Beginning of period 345,178,205 196,500,630
- --------------------------------------------------------------------------------
End of period* $ 603,024,148 $ 345,178,205
================================================================================
* Includes accumulated net investment loss of: $ (2,027,394) --
================================================================================
See Notes to Financial Statements.
13
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Special Equities Fund ("Portfolio"), a separate investment
fund of the Smith Barney Investment Funds Inc. ("Fund"), a Maryland corporation,
is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Fund consists of the
Portfolio and four other separate investment portfolios: Smith Barney Government
Securities Fund, Smith Barney Managed Growth Fund, Smith Barney Investment Grade
Bond Fund and Smith Barney Growth Opportunity Fund. The financial statements and
financial highlights for the other portfolios are presented in separate
semi-annual reports.
The significant accounting policies consistently followed by the Portfolio
are: (a) security transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing price on such
markets; securities traded in the over-the-counter market and listed securities
for which no sales price were reported are valued at the bid price, or in the
absence of a recent bid price, at the bid equivalent obtained from one or more
of the major market makers; securities that have a maturity of more than 60 days
are valued at prices based on market quotations for securities of similar type,
yield and maturity; (c) securities maturing within 60 days are valued at cost
plus accreted discount, or minus amortized premium, which approximates market
value; (d) dividend income is recorded on ex-dividend date and interest income
is recorded on the accrual basis; (e) dividends and distributions to
shareholders are recorded on the ex-dividend date; (f) gains or losses on the
sale of securities are calculated using the specific identification method; (g)
direct expenses are charged to each portfolio and each class; management fees
and general portfolio expenses are allocated on the basis of relative net
assets; (h) the Portfolio intends to comply with the applicable provisions of
the Internal Revenue Code of 1986, as amended, pertaining to regulated
investment companies and to make distributions of taxable income sufficient to
relieve it from substantially all Federal income and excise taxes; (i) the
character of income and gains to be distributed are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. At December 31, 1995, reclassifications were made to the Portfolio's
capital accounts to reflect permanent book/tax differences and income and gains
available for distributions under income tax regulations. Net investment income,
net realized gains and net assets were not affected by this change; and (j)
estimates and assumptions are required to be made regarding assets, liabilities
and changes in net assets resulting from operations when financial statements
are prepared. Changes in economic environment, financial markets and any other
parameters used in determining these estimates could cause actual results to
differ.
14
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT AND OTHER
TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment advisor to the Fund. The
Portfolio pays SBMFM an investment advisory fee calculated at an annual rate of
0.55% of the average daily net assets. This fee is calculated daily and paid
monthly.
SBMFM also acts as the Fund's administrator for which the Portfolio pays a
fee calculated at an annual rate of 0.20% of the average daily net assets. This
fee is calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares and primary broker for its portfolio agency transactions. For the
six months ended June 30, 1996, SB received brokerage commissions of $4,500 and
sales charges of approximately $1.4 million on sales of the Portfolio's Class A
shares.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B
shares, which applies if redemption occurs less than one year from initial
purchase and declines thereafter by 1.00% per year until no CDSC is incurred.
Class C shares have a 1.00% CDSC, which applies if redemption occurs within the
first year of purchase. In addition, Class A shares, in certain instances, also
have a 1.00% CDSC, which applies if redemption occurs within the first year of
purchase. This CDSC only applies to those purchases of Class A shares, which
when combined with current holdings of Class A shares, equal or exceed $500,000
in the aggregate. These purchases do not incur an initial sales charge. For the
six months ended June 30, 1996, CDSCs paid to SB were approximately:
Class A Class B Class C
================================================================================
CDSCs $20,000 $162,000 $6,000
================================================================================
Pursuant to a Distribution Plan, the Portfolio pays a service fee with
respect to its Class A, B and C shares calculated at an annual rate of 0.25% of
the average daily net assets of each respective class. The Portfolio also pays a
distribution fee
15
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
with respect to its Class B and C shares calculated at an annual rate of 0.75%
of the average daily net assets for each class, respectively. For the six months
ended June 30, 1996, total Distribution Plan fees incurred by the Portfolio
were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $240,001 $1,151,923 $87,729
================================================================================
All officers and one Director of the Fund are employees of SB.
3. INVESTMENTS
During the six months ended June 30, 1996, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $327,336,747
- --------------------------------------------------------------------------------
Sales 140,698,544
================================================================================
At June 30, 1996, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were as follows:
================================================================================
Gross unrealized appreciation $168,662,510
Gross unrealized depreciation (22,481,051)
- --------------------------------------------------------------------------------
Net unrealized appreciation $146,181,459
================================================================================
4. REPURCHASE AGREEMENTS
The Portfolio purchases (and its custodian takes possession of) U.S.
Government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day), at an agreed-upon higher repurchase price. The Portfolio requires
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
5. CAPITAL SHARES
At June 30, 1996, the Fund had ten billion shares of capital stock
authorized with a par value of $0.001 per share. The Portfolio has the ability
to issue multiple classes of shares. Each share of a class represents an
identical interest and has the same rights, except that each class bears certain
direct expenses, including those specifically related to the distribution of its
shares.
16
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
At June 30, 1996, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y Class Z
==============================================================================================
<S> <C> <C> <C> <C> <C>
Total Paid-in Capital $150,701,520 $210,102,340 $24,161,120 $42,847,586 $10,395,064
==============================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1996 December 31, 1995*
-------------------------- ----------------------------
Shares Amount Shares Amount
=================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 4,604,217 $ 147,241,398 6,906,656 $ 158,758,785
Shares issued on reinvestment -- -- 116,734 3,420,305
Shares redeemed (2,988,561) (95,412,625) (7,078,890) (159,234,258)
- -------------------------------------------------------------------------------------------------
Net Increase (Decrease) 1,615,656 $ (51,828,773 (55,500) $ 2,944,832
=================================================================================================
Class B
Shares sold 4,390,568 $ 138,400,535 2,715,135 $ 66,677,618
Shares issued on reinvestment -- -- 128,647 3,689,606
Shares redeemed (864,110) (26,521,826) (2,085,066) (45,134,660)
- -------------------------------------------------------------------------------------------------
Net Increase 3,526,458 $ 111,878,709 758,716 $ 25,232,564
=================================================================================================
Class C
Shares sold 589,155 $ 18,628,111 296,498 $ 7,602,541
Shares issued on reinvestment -- -- 5,282 151,484
Shares redeemed (75,320) (2,339,889) (66,546) (1,429,942)
- -------------------------------------------------------------------------------------------------
Net Increase 513,835 $ 16,288,222 235,234 $ 6,324,083
=================================================================================================
Class Y**
Shares sold 1,294,770 $ 42,850,616 -- --
Shares issued on reinvestment -- -- -- --
Shares redeemed (96) (3,030) -- --
- -------------------------------------------------------------------------------------------------
Net Increase 1,294,674 $ 42,847,586
=================================================================================================
Class Z
Shares sold 168,707 $ (5,434,869 173,310 $ 4,892,235
Shares issued on reinvestment -- -- 2,986 87,560
Shares redeemed (421) (14,100) (179) (5,500)
- -------------------------------------------------------------------------------------------------
Net Increase 168,286 $ (5,420,769 176,117 $ 4,974,295
=================================================================================================
</TABLE>
* For Class Z shares, transactions are for the period from October 2, 1995
(inception date) to December 31, 1995.
** For Class Y shares, transactions are for the period from January 31, 1996
(inception date) to June 30, 1996.
17
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class A Shares 1996(1) 1995 1994(2) 1993(2) 1992(3)
==============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $30.44 $19.10 $20.23 $15.47 $14.13
- --------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.08) (0.27) (0.13) (0.08) (0.01)
Net realized and unrealized gain (loss) 2.53 12.37 (1.00) 5.17 1.35
- --------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.45 12.10 (1.13) 5.09 1.34
- --------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net realized gains -- (0.76) -- (0.33) --
- --------------------------------------------------------------------------------------------------------------
Total Distributions -- (0.76) -- (0.33) --
- --------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $32.89 $30.44 $19.10 $20.23 $15.47
- --------------------------------------------------------------------------------------------------------------
Total Return 8.05%++ 63.48% (5.59)% 32.90% 9.48%++
- --------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $225,276 $159,316 $101,052 $50,121 $195
- --------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.15%+ 1.43% 1.49% 1.67% 1.51%+
Net investment loss (0.52)+ (1.05) (0.94) (0.46) (0.97)+
- --------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 33% 113% 123% 112% 211%
==============================================================================================================
Average commissions per share
paid on equity transactions (4) $0.06 $0.06 -- -- --
==============================================================================================================
<CAPTION>
Class B Shares 1996(1) 1995 1994(2) 1993(2) 1992 1991
==============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $29.76 $18.82 $20.08 $15.47 $14.18 $9.82
- --------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.19) (0.37) (0.27) (0.20) (0.26) (0.07)
Net realized and unrealized gain (loss) 2.47 12.07 (0.99) 5.14 1.55 4.46
- --------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.28 11.70 (1.26) 4.94 1.29 4.39
- --------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net realized gains -- (0.76) -- (0.33) -- --
Capital -- -- -- -- -- (0.03)
- --------------------------------------------------------------------------------------------------------------
Total Distributions -- (0.76) -- (0.33) -- (0.03)
- --------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $32.04 $29.76 $18.82 $20.08 $15.47 $14.18
- --------------------------------------------------------------------------------------------------------------
Total Return 7.66%++ 62.30% (6.27)% 31.93% 9.10% 44.76%
- --------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $297,149 $171,081 $93,920 $138,401 $78,130 $81,618
- --------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.94%+ 2.04% 2.21% 2.34% 2.32% 2.31%
Net investment loss (1.30)+ (1.61) (1.66) (1.13) (1.77) (0.74)
- --------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 33% 113% 123% 112% 211% 379%
==============================================================================================================
Average commissions per share
paid on equity transactions (4) $0.06 $0.06 -- -- -- --
==============================================================================================================
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
(2) The per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since use of the undistributed method did not accord with results of
operations.
(3) For the period from November 6, 1992 (inception date) to December 31, 1992.
(4) As of October 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
18
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class C Shares 1996(1) 1995 1994(2) 1993(2)(3)
=====================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $29.77 $18.82 $20.08 $22.62
- -----------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.19) (0.42) (0.25) (0.16)
Net realized and unrealized gain (loss) 2.47 12.13 (1.01) (2.05)
- -----------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.28 11.71 (1.26) (2.21)
- -----------------------------------------------------------------------------------------------------
Less Distributions From:
Net realized gains -- (0.76) -- (0.33)
- -----------------------------------------------------------------------------------------------------
Total Distributions -- (0.76) -- (0.33)
- -----------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $32.05 $29.77 $18.82 $20.08
- -----------------------------------------------------------------------------------------------------
Total Return 7.69%++ 62.35% (6.27)% (9.77)%++
- -----------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $26,605 $9,417 $1,528 $185
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.95%+ 2.25% 2.15% 2.19%+
Net investment loss (1.30)+ (1.79) (1.60) (0.98)+
- -----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 33% 113% 123% 112%
=====================================================================================================
Average commissions per share
paid on equity transactions (4) $0.06 $0.06 -- --
=====================================================================================================
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
(2) The per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since use of the undistributed method did not accord with results of
operations.
(3) For the period from October 18, 1993 (inception date) to December 31, 1993.
(4) As of October 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
19
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
Class Y Shares Class Z Shares
-------------- ----------------------
1996(1) 1996(2) 1995(3)
================================================================================
Net Asset Value, Beginning of Period $28.99 $30.46 $26.49
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.01) (0.02) (0.06)
Net realized and unrealized gain 3.95 2.53 4.79
- --------------------------------------------------------------------------------
Total Income From Operations 3.94 2.51 4.73
- --------------------------------------------------------------------------------
Less Distributions From:
Net realized gains -- -- (0.76)
- --------------------------------------------------------------------------------
Total Distributions -- -- (0.76)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $32.93 $32.97 $30.46
- --------------------------------------------------------------------------------
Total Return++ 13.59% 8.24% 17.95%
- --------------------------------------------------------------------------------
Net Assets, End of Period (000s) $42,638 $11,356 $5,364
- --------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 0.83% 0.80% 1.10%
Net investment loss (0.09) (0.12) (0.86)
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 33% 33% 113%
================================================================================
Average commissions per share
paid on equity transactions $0.06 $0.06 $0.06
================================================================================
(1) For the period from January 31, 1996 (inception date) to June 30, 1996
(unaudited).
(2) For the six months ended June 30, 1996 (unaudited).
(3) For the period from October 2, 1995 (inception date) to December 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
20
<PAGE>
Smith Barney SMITH BARNEY
Special Equities ------------
Fund
A Member of TravelersGroup [Logo]
Directors
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Frank G. Hubbard
Heath B. McLendon, Chairman
Ken Miller
John F. White
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
George V. Novello
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank, N.A.
Shareholder
Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for
the general information of the
shareholders of Smith Barney
Special Equities Fund. It is not authorized
for distribution to prospective investors
unless accompanied or preceded by a cur-
rent Prospectus for the Fund, which con-
tains information concerning the Fund's
investment policies and expenses as well
as other pertinent information.
Smith Barney
Special Equities Fund
388 Greenwich Street
New York, New York 10013
FD0405 8/96
Semi-Annual Report
[PHOTO] Hourglass
Smith Barney
Growth
Opportunity
Fund
--------------------------------
June 30, 1996
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
Smith Barney Growth Opportunity Fund
Dear Shareholder:
We are pleased to provide you with the semi-annual report for the Smith Barney
Growth Opportunity Fund for the period ended June 30, 1996. In this report, we
outline our investment philosophy and current portfolio strategy. A more
detailed summary of performance and current holdings can be found in the
appropriate sections that follow in the semi-annual report.
Fund Performance Update
For the six months ended June 30, 1996, the Smith Barney Growth Opportunity Fund
had a total return of 7.69% for its Class A shares versus the 10.36% total
return from the Russell 2000 Index over the same time period. The Russell 2000
Index is an unmanaged index made up of 2,000 of the largest capitalized
U.S.-based companies whose common stock trade on either the New York, American
or NASDAQ stock exchanges.
Fund's Investment Approach
The Smith Barney Growth Opportunity Fund employs a varied and eclectic
investment approach that combines the philosophy of a Warren Buffett (who
currently owns roughly 30 stocks of outstanding companies) and a Peter Lynch
(who owned 1,500 stocks and believed the universe of investment opportunities is
more expansive). As of June 30, 1996, the Fund owns roughly 160 stocks spread
across a number of companies and industries and the size of its investment
universe lies somewhere in between Buffet's and Lynch's. Both of these renowned
investors said, "never time the market." Instead, Buffet and Lynch advise you to
look for good companies at good prices and own them for the long term.
The Smith Barney Growth Opportunity Fund does not make investment decisions
based on market timing or predictions about the market. The Fund takes an
opportunistic approach utilizing the strengths of different traditional
disciplines such as value, growth, large capitalization stock and small
capitalization stock investing. The Fund's investment management team is
comprised of long-term investors who emphasize strong, hands-on research. They
visit hundreds of companies each year and meet regularly with their management
to understand a company's business and industry, identify outstanding management
teams and target promising long-term investment opportunities. Because of our
eclectic investment approach, the Smith Barney Growth Opportunity Fund defies
easy categorization.
1
<PAGE>
Although we never predict the market, we still monitor market conditions closely
to look for warning signs that may lead us to make changes in the portfolio. For
example, if interest rates are going down, we invest in financial stocks because
the cost of money is their most important variable. If the economy is doing well
and interest rates are rising, we would invest in cyclical companies whose
fortunes are tied to the economy. Conversely, when interest rates are going
down, we would generally not invest in cyclical companies.
Another distinguishing feature of the Fund's investment approach is that it
looks for long-term investment opportunities based on themes versus how much is
invested in a particular sector such as technology or consumer goods. The Smith
Barney Growth Opportunity Fund invests in many companies where management owns a
significant amount of stock and tries to identify companies that may be
beneficiaries of a significant change in governmental regulations such as cable
companies or media companies.
Market Update and Outlook
Last year, we predicted that the U.S. economy would improve and that interest
rates would rise. At that time, our expectations were contrary to popular
belief. So far in 1996, interest rates are up and the U.S. economy is stronger,
just as we had earlier predicted. Because of our expectations for higher
interest rates and a stronger economy, we shifted the Fund's emphasis out of
financial services company stocks and into economically sensitive stocks such as
supermarkets.
We remain bullish on the market for the next six months. In our view, the most
important factor influencing the economy is interest rates. We do not foresee
interest rates rising additionally in the near future, since the second half of
the year may see the economy slowing. Moreover, historically, the stock market
has risen in every Presidential election year over the last 50 years.
Portfolio Update
During the period covered by this report, the Smith Barney Growth Opportunity
Fund's largest areas of exposure were:
1) Restructuring corporations (i.e., cyclical or industrial companies
where there is the likelihood of a major corporate event taking place
such as the sale of a division);
2) Companies that stand to benefit from an improving economy or higher
inflation such as supermarkets and food service organizations;
3) Media industry stocks, as strong opportunities arise from government
deregulation of the industry;
2
<PAGE>
4) Companies where the management or employees carry a significant
ownership stake.
In closing, thank you for investing in the Smith Barney Growth Opportunity Fund
and we look forward to continuing to help you achieve your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Harvey Eisen
- --------------------------- ---------------------------
Heath B. McLendon Harvey Eisen
Chairman and Vice President and
Chief Executive Officer Investment Officer
July 16, 1996
3
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Historical Performance -- Class A Shares
================================================================================
<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/30/96 $14.31 $15.41 $0.00 $0.00 7.69%
- ------------------------------------------------------------------------------------------------
Inception* - 12/31/95 13.36 14.31 0.02 0.93 14.61
- ------------------------------------------------------------------------------------------------
Total $0.02 $0.93
- ------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
Historical Performance -- Class B Shares
================================================================================
<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/30/96 $14.27 $15.32 $0.00 $0.00 7.36%
- ------------------------------------------------------------------------------------------------
Inception* - 12/31/95 13.36 14.27 0.00 0.93 14.15
- ------------------------------------------------------------------------------------------------
Total $0.00 $0.93
- ------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
Historical Performance -- Class C Shares
================================================================================
<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/30/96 $14.29 $15.35 $0.00 $0.00 7.42%
- ------------------------------------------------------------------------------------------------
Inception* - 12/31/95 14.05 14.29 0.00 0.93 8.69
- ------------------------------------------------------------------------------------------------
Total $0.00 $0.93
- ------------------------------------------------------------------------------------------------
</TABLE>
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
4
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Average Annual Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
-------------------------------
Class A++ Class B++ Class C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Six Months Ended 6/30/96+ 7.69% 7.36% 7.42%
- --------------------------------------------------------------------------------
Year Ended 6/30/96 23.42 22.55 N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/96 17.79 17.79 16.75
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
With Sales Charge(2)
-------------------------------
Class A++ Class B++ Class C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Six Months Ended 6/30/96+ 2.32% 2.36% 6.42%
- --------------------------------------------------------------------------------
Year Ended 6/30/96 17.28 17.55 N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/96 15.04 16.09 15.75
- --------------------------------------------------------------------------------
</TABLE>
================================================================================
Cumulative Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
- --------------------------------------------------------------------------------
<S> <C>
Class A (May 3, 1994 through 6/30/96)++ 42.54%
- --------------------------------------------------------------------------------
Class B (May 3, 1994 through 6/30/96)++ 41.11
- --------------------------------------------------------------------------------
Class C (Inception* through 6/30/96) 16.75
- --------------------------------------------------------------------------------
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect deduction of the applicable
sales charges with respect to Class A shares or the applicable contingent
deferred sales charges ("CDSC") with respect to Class B and C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00%; and Class B shares reflect
the deduction of a 5.00% CDSC, which applies if shares are redeemed within
one year from initial purchase and declines thereafter by 1.00% per year
until no CDSC is incurred. Class C shares reflect the deduction of a 1.00%
CDSC, which applies if shares are redeemed within the first year of
purchase.
* Inception date for Class A and B shares is July 3, 1995. Inception date for
Class C shares is August 8, 1995.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
++ Performance calculations include the historical return information related
to the Common Sense II Aggressive Opportunity Fund of the Common Sense
Trust which was the predecessor fund, for the period from May 3, 1994
through June 30, 1995.
5
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Class A Shares of
the Smith Barney Growth Opportunity Fund
vs. Russell 2000 Index+
- --------------------------------------------------------------------------------
May 1994 -- June 1996
[The original document contained a performance graph, which is represented by
the table below.]
Period Smith Barney Growth Opportunity Fund Russell 2000
5/2/94 9448 10000
6/94 9536 9552
12/94 9552 10027
6/95 10911 11474
12/95 12506 12880
6/96 13467 14215
+ Hypothetical illustration of $10,000 invested in Class A shares on May 3,
1994 (inception of Common Sense II Aggressive Opportunity Fund of the
Common Sense Trust ("Common Sense") which was the predecessor Fund),
assuming deduction of the maximum 5.00% sales charge at the time of
investment and reinvestment of dividends and capital gains, if any, at net
asset value through June 30, 1996. (Performance calculations include the
historical return information related to Common Sense for the period from
May 3, 1994 through June 30, 1995). The Russell 2000 Index is comprised of
2,000 of the largest capitalized U.S. domiciled companies whose common
stock is traded on either the New York, American or NASDAQ stock exchanges.
The index is unmanaged and it is not subject to the same management and
trading expenses as a mutual fund. The performance of the Fund's other
classes may be greater or less than the Class A shares' performance
indicated on this chart, depending on whether greater or lesser sales
charges and fees were incurred by shareholders investing in other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
6
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Portfolio Highlights (unaudited) June 30, 1996
================================================================================
Portfolio Breakdown
[The original document contained a pie chart, reproduced as the table below.]
<TABLE>
<CAPTION>
Sector Percentage
<S> <C>
Other Common Stocks, Preferred
Convertible Stocks and
Convertible Bonds 38.2
Financial Services 9.8
Repurchase Agreement 7.3
Broadcast Radio & Television 5.6
Retail 5.6
Telecommunications 5.5
Pharmaceuticals 5.1
Commercial Services 4.5
Electrical Equipment 4.5
Entertainment 3.7
Medical 3.6
Manufacturing 3.5
Machinery 3.1
</TABLE>
<TABLE>
Top Ten Common Stock Holdings
<CAPTION>
Percentage of
Total Investments
- --------------------------------------------------------------------------------
<S> <C>
Ideon Group Inc. 3.2%
Thermo Electron Corp. 2.7
Jacor Communications Inc. 2.6
Allergan Inc. 2.3
Reebok International Ltd. 1.7
Data Broadcasting Corp. 1.6
Honeywell Inc. 1.6
Comsat Corp. 1.5
Quality Food Centers Inc. 1.5
Foremost Corporation of America Co. 1.4
- --------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Schedule of Investments (unaudited) June 30, 1996
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 91.8%
Advertising -- 0.4%
<S> <C> <C>
24,500 Advo Inc. $ 254,188
10,400 True Communications 231,400
- --------------------------------------------------------------------------------
485,588
- --------------------------------------------------------------------------------
Aerospace/Defense -- 1.8%
20,000 Allied Signal Inc. 1,142,500
7,000 Alliant Techsystems Inc.+ 329,875
8,000 Rockwell International Corp. 458,000
- --------------------------------------------------------------------------------
1,930,375
- --------------------------------------------------------------------------------
Apparel -- 1.7%
55,000 Reebok International Ltd. 1,849,375
- --------------------------------------------------------------------------------
Auto Parts Replacement -- 0.3%
15,000 Federal Mogul Corp. 275,625
- --------------------------------------------------------------------------------
Automated Design Systems -- 0.2%
5,000 PPG Industries Inc. 243,750
- --------------------------------------------------------------------------------
Beverages -- 0.2%
8,500 Glacier Water Services Inc.+ 166,813
- --------------------------------------------------------------------------------
Biotechnology -- 1.7%
68,000 Cell Genesys Inc.+ 518,500
50,000 CN Matritech Inc. 525,000
7,500 Neurex Corp.+ 164,063
13,000 Regeneron Pharmaceutical Inc. 225,875
40,000 Targeted Genetics Corp. 190,000
10,000 Thermedics Inc. 250,000
- --------------------------------------------------------------------------------
1,873,438
- --------------------------------------------------------------------------------
Broadcast Radio & Television -- 5.6%
23,500 Cablevision Systems Corp.+ 1,086,875
93,000 Jacor Communications Inc.+ 2,871,375
25,000 New World Communications Group Inc.+ 365,625
75,000 Tele-Communications Inc. 1,359,375
15,000 Tele-Communications Liberty Media, Class A Shares+ 397,500
- --------------------------------------------------------------------------------
6,080,750
- --------------------------------------------------------------------------------
Brokerage -- 0.9%
35,000 A.G. Edwards Inc. 949,375
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Schedule of Investments (unaudited)(continued) June 30, 1996
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Building Materials -- 0.6%
58,300 Giant Group Ltd. $ 459,112
53,000 Metalclad Corp. 162,312
- --------------------------------------------------------------------------------
621,424
- --------------------------------------------------------------------------------
Cable/Cellular -- 0.2%
10,000 Palmer Wireless Inc. 200,000
- --------------------------------------------------------------------------------
Chemicals -- 1.8%
14,000 Hercules Inc. 773,500
15,000 Monsanto Co. 487,500
10,000 W.R. Grace & Co. 708,750
- --------------------------------------------------------------------------------
1,969,750
- --------------------------------------------------------------------------------
Closed End Funds -- 0.6%
33,000 Central Fund Canada 156,750
32,500 New Age Media Funds Inc. 495,625
- --------------------------------------------------------------------------------
652,375
- --------------------------------------------------------------------------------
Commercial Services -- 4.5%
50,000 American Banknote Corp. 187,500
5,000 Applied Bioscience International Inc. 52,500
260,000 Ideon Group Inc. 3,510,000
65,000 Sotheby's Holdings Inc. 942,500
15,000 Vallen Corp.+ 262,500
- --------------------------------------------------------------------------------
4,955,000
- --------------------------------------------------------------------------------
Communications-Equipment & Software -- 0.4%
30,000 California Microwave Inc. 457,500
- --------------------------------------------------------------------------------
Computers -- 2.6%
7,000 Auspex Systems Inc.+ 105,000
15,000 Bay Networks Inc. 386,250
12,000 Crosscomm Corp.+ 123,000
12,500 Key Tronic Corp.+ 81,250
12,000 Microkey Communications Systems Inc.+ 36,904
90,000 Multi-Corp Inc.+ 652,500
15,000 Stac Inc.+ 168,750
7,500 Standard Microsystems Co.+ 114,375
31,290 Storage Technology Corp.+ 1,196,842
- --------------------------------------------------------------------------------
2,864,871
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Schedule of Investments (unaudited)(continued) June 30, 1996
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Computer Software -- 0.9%
28,000 Banyan Systems Inc.+ $ 203,000
30,000 Broadway & Seymour Inc. 360,000
62,000 Interleaf Inc.+ 403,000
- --------------------------------------------------------------------------------
966,000
- --------------------------------------------------------------------------------
Construction -- 0.7%
65,000 Falcon Building Products Inc. 780,000
- --------------------------------------------------------------------------------
Consumer Services -- 0.2%
20,000 Metromedia International Group Inc. 245,000
- --------------------------------------------------------------------------------
Cosmetics -- 0.2%
17,500 Herbalife International Inc. 258,125
- --------------------------------------------------------------------------------
Drug Stores -- 0.3%
15,000 Revco Drug Stores 358,125
- --------------------------------------------------------------------------------
Distribution/Wholesale -- 0.7%
108,000 Handleman Co. 742,500
- --------------------------------------------------------------------------------
Education -- 0.2%
20,000 Childtime Learning Centers 215,000
- --------------------------------------------------------------------------------
Electrical Equipment -- 4.5%
52,000 American Superconductor Corp.+ 741,000
50,000 Anixter International Inc.+ 743,750
32,500 Honeywell Inc. 1,771,250
30,000 Molex Inc. 881,250
10,000 Park Electrochemical Corp. 200,000
30,000 Westinghouse Electric Corp. 562,500
- --------------------------------------------------------------------------------
4,899,750
- --------------------------------------------------------------------------------
Electronics -- 2.7%
15,000 ADT Ltd. 283,125
10,000 Franklin Electric Publishers Inc.+ 200,000
65,400 Kollmorgen Corp. 964,650
20,000 Logicon Inc. 597,500
30,000 Teradyne Inc. 517,500
8,000 Texas Instruments Inc. 399,000
- --------------------------------------------------------------------------------
2,961,775
- --------------------------------------------------------------------------------
Electronics/Defense -- 0.3%
25,000 Loral Space & Communications 340,625
- --------------------------------------------------------------------------------
Energy -- 0.4%
22,000 Lufkin Industries Inc. 451,000
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Schedule of Investments (unaudited)(continued) June 30, 1996
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Entertainment -- 3.7%
103,000 American Classic Voyager Co. $ 759,625
5,000 Carnival Corp. 144,375
67,000 Cinar Films Inc.+ 1,457,250
32,550 Gaylord Entertainment Co. 919,537
12,500 Hollywood Park Inc.+ 120,313
10,000 Walt Disney Co. 628,750
- --------------------------------------------------------------------------------
4,029,850
- --------------------------------------------------------------------------------
Environmental Control -- 0.4%
30,000 Calgon Carbon Corp. 405,000
- --------------------------------------------------------------------------------
Financial Services -- 9.8%
19,000 Alexander & Alexander Services Inc. 375,250
20,000 Banca Quadrum, S.A.+ 102,500
78,200 Capsure Holdings Corp.+ 1,397,825
184,500 Data Broadcasting Corp.+ 1,775,812
9,000 Dauphin Deposit Corp. 256,500
30,000 Equitable Companies Inc. 746,250
27,500 Foremost Corporation of America Co. 1,560,625
25,000 Mercantile Bancorp Inc. 1,112,500
12,500 Oppenheimer Capital, L.P. 364,063
18,500 Roosevelt Financial Group Inc. 356,125
22,500 Salomon Inc. 990,000
22,500 Union Planters Corp. 683,437
40,000 United Asset Management Corp. 980,000
- --------------------------------------------------------------------------------
10,700,887
- --------------------------------------------------------------------------------
Food and Beverage -- 2.9%
17,000 EPL Technologies Inc. 116,875
12,500 General Mills Inc. 681,250
64,100 Quality Food Centers Inc. 1,650,575
15,706 Smith's Food & Drug Centers 374,981
25,000 Triarc Co. 287,500
- --------------------------------------------------------------------------------
3,111,181
- --------------------------------------------------------------------------------
Holding Companies/Diversified -- 1.7%
50,000 Canadian Pacific Ltd. 1,100,000
105,000 Worldcorp Inc.+ 708,750
- --------------------------------------------------------------------------------
1,808,750
- --------------------------------------------------------------------------------
Industrials -- 0.1%
10,000 Hanson PLC 142,500
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Schedule of Investments (unaudited)(continued) June 30, 1996
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Leisure Time -- 0.9%
90,000 Bell Sports Corp.+ $ 652,500
12,400 WMS Industries Inc. 305,350
- --------------------------------------------------------------------------------
957,850
- --------------------------------------------------------------------------------
Lodging -- 0.7%
50,000 National Lodging Corp. 800,000
- --------------------------------------------------------------------------------
Machinery -- 3.1%
15,000 Goulds Pumps Inc. 384,375
71,250 Thermo Electron Corp. 2,965,781
- --------------------------------------------------------------------------------
3,350,156
- --------------------------------------------------------------------------------
Manufacturing -- 3.5%
20,000 Central Sprinkler Corp. 460,000
10,000 Cyrk International Inc. 136,250
15,000 John H Harland Co. 369,375
30,000 Leggett & Platt Inc. 832,500
32,365 Mark IV Industries Inc. 732,258
25,000 Outboard Marine Corp. 453,125
34,500 Pall Corp. 832,312
- --------------------------------------------------------------------------------
3,815,820
- --------------------------------------------------------------------------------
Medical -- 3.6%
20,000 Beckman Instruments 760,000
34,000 Beverly Enterprises Inc.+ 408,000
5,000 Community Psychiatric Centers 47,500
20,000 Cephalon Inc. 395,000
28,500 Coram Healthcare Corp.+ 117,562
14,000 Datascope Corp. 248,500
5,000 Dentsply International Inc. 212,500
15,000 Hillenbrand Industries 558,750
23,698 Ramsay Managed Care Inc.+ 39,990
35,420 Steris Corp. 1,133,440
- --------------------------------------------------------------------------------
3,921,242
- --------------------------------------------------------------------------------
Mining -- 1.1%
475,000 Campbell Resources Inc.+ 593,750
15,000 Golden Star Resources, Ltd. 217,500
29,000 Uranium Resources Inc. 427,750
- --------------------------------------------------------------------------------
1,239,000
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Schedule of Investments (unaudited)(continued) June 30, 1996
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Oil/Gas -- 2.3%
25,000 American Exploration Co. $ 312,500
15,000 Ashland Inc. 594,375
10,500 Box Energy Corp.+ 95,812
10,000 Penzoil Co. 462,500
20,500 Triton Energy Ltd. 996,812
- --------------------------------------------------------------------------------
2,461,999
- --------------------------------------------------------------------------------
Paper and Forest Products -- 0.1%
15,000 Repap Enterprises Inc.+ 57,187
- --------------------------------------------------------------------------------
Pharmaceuticals -- 5.1%
63,000 Allergan Inc. 2,472,750
30,000 Columbia Laboratories Inc. 446,250
58,000 FoxMeyer Health Corp.+ 862,750
45,000 Imclone Systems Inc.+ 410,625
36,500 Ivax Corp. 579,438
35,000 Perrigo Co.+ 393,750
10,000 Teva Pharmaceutical Industries Ltd. 378,750
- --------------------------------------------------------------------------------
5,544,313
- --------------------------------------------------------------------------------
Publishing -- 1.2%
60,000 Big Flower Press Holdings Inc.+ 847,500
35,000 Golden Books Family Entertainment 420,000
- --------------------------------------------------------------------------------
1,267,500
- --------------------------------------------------------------------------------
Real Estate -- 2.6%
50,000 Ambassador Apartments 843,750
15,000 Excel Realty Trust Inc. 307,500
50,000 Manufactured Home Communities Inc. 962,500
20,000 Starwood Lodging Trust 727,500
- --------------------------------------------------------------------------------
2,841,250
- --------------------------------------------------------------------------------
Restaurants -- 0.2%
65,700 Sizzler International Inc. 205,313
- --------------------------------------------------------------------------------
Retail -- 5.6%
35,200 Arbor Drugs Inc. 734,800
5,000 Egghead Inc. 55,626
35,000 Giant Foods Inc. 1,255,625
22,100 Intertan Inc.+ 127,075
35,000 Lillian Vernon Corp. 446,250
10,000 J. C. Penny Corp. 525,000
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Schedule of Investments (unaudited)(continued) June 30, 1996
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Retail -- 5.6% (continued)
7,500 Neiman Marcus Group Inc. $ 202,500
40,000 Payless Shoesource Inc. 1,270,000
61,622 Right Start Inc.+ 369,732
56,500 Shopko Stores Inc. 911,062
5,000 Tambrands, Inc. 204,375
- --------------------------------------------------------------------------------
6,102,045
- --------------------------------------------------------------------------------
Telecommunications -- 5.5%
55,000 ARC International Corp. 195,939
15,000 Alltel Corp. 461,250
20,000 Antec Corp.+ 317,500
5,000 Associated Group Inc. 151,250
4,000 Cellular Communications International Inc.+ 135,000
34,000 Commnet Cellular Inc.+ 1,020,000
65,000 Comsat Corp. 1,690,000
15,000 Datron Systems Inc. 183,750
55,000 General DataComm Industries Inc. 742,500
15,000 Mcleod Inc., Class A Shares 360,000
4,100 Memotec Communications Inc.+ 16,812
15,000 Performance Systems International Inc.+ 172,500
14,000 Symmetricom Inc.+ 189,000
3,500 Tandycrafts Inc.+ 22,313
22,000 U.S. Order Inc.+ 335,500
- --------------------------------------------------------------------------------
5,993,314
- --------------------------------------------------------------------------------
Textiles -- 0.7%
10,000 Unifi Inc. 281,250
21,000 Westpoint Stevens Inc.+ 501,375
- --------------------------------------------------------------------------------
782,625
- --------------------------------------------------------------------------------
Transportation -- 2.4%
30,000 Kansas City Southern Industries 1,286,250
50,000 Kirby Exploration 843,750
2,500 Tranz Rail Holdings 34,688
10,000 Xtra Corp. 442,500
- --------------------------------------------------------------------------------
2,607,188
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $92,634,096) $99,938,879
================================================================================
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Schedule of Investments (unaudited)(continued) June 30, 1996
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
CONVERTIBLE PREFERRED STOCK -- 0.1%
Entertainment -- 0.1%
7,500 Hollywood Park Inc., Convertible 7.000%
(Cost -- $76,875) $ 73,125
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
CONVERTIBLE BOND -- 0.8%
Transportation -- 0.8%
$ 1,000,000 Worldcorp Inc., 7.000% due 5/15/04
(Cost -- $798,321) 862,500
================================================================================
REPURCHASE AGREEMENT -- 7.3%
7,975,000 Chase Manhattan Bank, 5.325% due 7/1/96; Proceeds at
maturity -- $8,097,269; (Fully collateralized by
U.S. Treasury Notes, 6.125% due 5/31/97;
Market value -- $8,137,755) (Cost -- $7,975,000) 7,975,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $101,484,292*) $108,849,504
================================================================================
</TABLE>
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
15
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Statement of Assets and Liabilities (unaudited) June 30, 1996
================================================================================
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments, at value (Cost-- $101,484,292) $108,849,504
Cash 770
Receivable for securities sold 449,295
Dividends and interest receivable 86,761
Receivable for Fund shares sold 250
Other assets 187,982
- --------------------------------------------------------------------------------
Total Assets 109,574,562
- --------------------------------------------------------------------------------
LIABILITIES:
Management fees payable 166,668
Payable for securities purchased 104,965
Distribution fees payable 26,351
Accrued expenses 47,343
- --------------------------------------------------------------------------------
Total Liabilities 345,327
- --------------------------------------------------------------------------------
Total Net Assets $109,229,235
================================================================================
NET ASSETS:
Par value of capital shares $ 7,103
Capital paid in excess of par value 90,300,270
Undistributed net investment income 163,704
Accumulated net realized gain from security transactions 11,392,946
Net unrealized appreciation of investments 7,365,212
- --------------------------------------------------------------------------------
Total Net Assets $109,229,235
================================================================================
Shares Outstanding:
Class A 4,424,810
- --------------------------------------------------------------------------------
Class B 2,659,245
- --------------------------------------------------------------------------------
Class C 19,369
- --------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $ 15.41
- --------------------------------------------------------------------------------
Class B * $ 15.32
- --------------------------------------------------------------------------------
Class C ** $ 15.35
- --------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $ 16.22
================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed within one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
16
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Statement of Operations (unaudited)
================================================================================
For the Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Dividends $ 876,544
Interest 250,679
- --------------------------------------------------------------------------------
Total Investment Income 1,127,223
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 503,709
Distribution fees (Note 2) 266,292
Shareholder and systems servicing fees 55,920
Registration fees 46,956
Shareholder communications 45,755
Audit and legal 25,617
Custody 12,662
Directors' fees 5,083
Other 961
- --------------------------------------------------------------------------------
Total Expenses 962,955
- --------------------------------------------------------------------------------
Net Investment Income 164,268
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 64,957,827
Cost of securities sold 53,344,203
- --------------------------------------------------------------------------------
Net Realized Gain 11,613,624
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
(Depreciation) of Investments:
Beginning of period 11,738,040
End of period 7,365,212
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (4,372,828)
- --------------------------------------------------------------------------------
Net Gain on Investments 7,240,796
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 7,405,064
================================================================================
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Statements of Changes in Net Assets
================================================================================
For the Six Months Ended June 30, 1996 (unaudited) and the Year Ended December
31, 1995
<TABLE>
<CAPTION>
1996 1995(a)
================================================================================
OPERATIONS:
<S> <C> <C>
Net investment income $ 164,268 $ 80,689
Net realized gain 11,613,624 5,045,316
Increase (decrease) in net unrealized
appreciation (4,372,828) 5,383,267
- --------------------------------------------------------------------------------
Increase in Net Assets
From Operations 7,405,064 10,509,272
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income -- (81,128)
Net realized gains -- (5,272,265)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distribution to Shareholders -- (5,353,393)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 13,888,710 13,173,276
Net asset value of shares issued in
connection with the transfer of net assets
of the Common Sense II Aggressive
Opportunity Fund (Note 6) -- 68,038,812
Net asset value of shares issued for
reinvestment of dividends -- 5,353,317
Cost of shares reacquired (2,530,946) (1,254,877)
- --------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 11,357,764 85,310,528
- --------------------------------------------------------------------------------
Increase in Net Assets 18,762,828 90,466,407
NET ASSETS:
Beginning of period 90,466,407 --
- --------------------------------------------------------------------------------
End of period* $ 109,229,235 $ 90,466,407
================================================================================
* Includes undistributed (overdistributed)
net investment income of: $ 163,704 $ (564)
================================================================================
</TABLE>
(a) For the period from July 3, 1995 (commencement of operations) to December
31, 1995.
See Notes to Financial Statements.
18
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Notes to Financial Statements (unaudited)
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Growth Opportunity Fund ("Portfolio"), a separate
investment fund of the Smith Barney Investment Funds Inc. ("Fund"), a Maryland
corporation, is registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end management investment company. The Fund consists of
the Portfolio and four other separate investment portfolios: Smith Barney
Investment Grade Bond Fund, Smith Barney Special Equities Fund, Smith Barney
Managed Growth Fund and Smith Barney Government Securities Fund. The financial
statements and financial highlights for the other portfolios are presented in
separate semi-annual reports.
The significant accounting policies consistently followed by the Portfolio
are: (a) security transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing price on such
markets; securities traded in the over-the-counter market and listed securities
for which no sales price were reported are valued at bid price, or in the
absence of a recent bid price, at the bid equivalent obtained from one or more
of the major market makers; (c) securities that have a maturity of more than 60
days are valued at prices based on market quotations for securities of similar
type, yield and maturity; (d) securities maturing within 60 days are valued at
cost plus accreted discount, or minus amortized premium, which approximates
market value; (e) dividend income is recorded on ex-dividend date and interest
income is recorded on the accrual basis; (f) dividends and distributions to
shareholders are recorded on the ex-dividend date; (g) gains or losses on the
sale of securities are calculated using the specific identification method; (h)
the accounting records are maintained in U.S. dollars. All assets and
liabilities denominated in foreign currencies are translated into U.S. dollars
on the date of valuation. Purchases and sales of securities and income and
expenses are translated at the rate of exchange quoted on the respective date
that such transactions are recorded. Differences between income and expense
amounts recorded and collected or paid are adjusted when reported by the
custodian bank; (i) direct expenses are charged to each class; management fees
and general portfolio expenses are allocated on the basis of relative net
assets; (j) the Portfolio intends to comply with the applicable provisions of
the Internal Revenue Code of 1986, as amended, pertaining to regulated
investment companies and to make distributions of taxable income
19
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
sufficient to relieve it from substantially all Federal income and excise taxes;
(k) the character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. At December 31, 1995, reclassifications are made to the
Fund's capital accounts to reflect permanent book/tax differences and income and
gains available for distributions under income tax regulations. Accordingly, a
portion of accumulated net investment income amounting to $6,146 has been
reclassified to paid-in capital. Net investment income, net realized gains and
net assets were not affected by this change; and (l) estimates and assumptions
are required to be made regarding assets, liabilities and changes in net assets
resulting from operations when financial statements are prepared. Changes in the
economic environment, financial markets and any other parameters used in
determining these estimates could cause actual results to differ.
2. MANAGEMENT AGREEMENT AND OTHER TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment manager of the Fund. The
Portfolio pays SBMFM a management fee calculated at an annual rate of 1.00% of
the average daily net assets. This fee is calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares and primary broker for its portfolio agency transactions. For the
six months ended June 30, 1996, SB received brokerage commissions of $8,640 and
sales charges of approximately $16,000 on sales of the Portfolio's Class A
shares.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B
shares, which applies if redemption occurs less than one year from initial
purchase and declines thereafter by 1.00% per year until no CDSC is incurred.
Class C shares have a 1.00% CDSC, which applies if redemption occurs within the
first year of purchase. For the six months ended June 30, 1996, CDSCs paid to SB
for Class B shares were approximately $1,000.
Pursuant to a Distribution Plan, the Portfolio pays a service fee with
respect to Class A, B and C shares calculated at the annual rate of 0.25% of the
average daily net assets for each respective class. The Portfolio also pays a
service fee with respect to Class B and C shares calculated at the
20
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
annual rate of 0.75% of the average daily net assets of each class,
respectively. For the six months ended June 30, 1996, total Distribution Plan
fees incurred by the Portfolio were:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Distribution Plan Fees $79,139 $186,074 $1,079
================================================================================
</TABLE>
All officers and one Director of the Fund are employees of SB.
3. INVESTMENTS
During the six months ended June 30, 1996, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
<CAPTION>
================================================================================
<S> <C>
Purchases $75,074,281
- --------------------------------------------------------------------------------
Sales 64,957,827
================================================================================
</TABLE>
At June 30, 1996, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were approximately
as follows:
<TABLE>
<CAPTION>
================================================================================
<S> <C>
Gross unrealized appreciation $ 13,325,558
Gross unrealized depreciation (5,960,346)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 7,365,212
================================================================================
</TABLE>
4. REPURCHASE AGREEMENTS
The Portfolio purchases (and its custodian takes possession of) U.S.
Government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day), at an agreed-upon higher repurchase price. The Portfolio requires
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
5. CAPITAL SHARES
At June 30, 1996, the Fund had ten billion shares of capital stock
authorized with a par value of $0.001 per share. The Portfolio has the ability
to issue multiple classes of shares. Each share of a class represents an
identical interest and has the same rights, except that each class bears certain
direct expenses, including those specifically related to the distribution of its
shares.
21
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
At June 30, 1996, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Total Paid-in Capital $55,744,370 $34,280,429 $282,574
================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
------------------- ---------------------
June 30, 1996 December 31, 1995
Shares Amount Shares Amount
===========================================================================================
Class A*
<S> <C> <C> <C> <C>
Shares sold 493,538 $ 7,289,727 461,030 $ 6,505,850
Net asset value of shares
issued in connection
with the transfer of net
assets of the Common
Sense II Aggressive
Opportunity Fund (Note 6) -- -- 3,386,185 45,262,249
Shares issued on
reinvestment -- -- 255,366 3,469,508
Shares redeemed (100,892) (1,525,682) (70,417) (992,400)
- --------------------------------------------------------------------------------------------
Net Increase 392,646 $ 5,764,045 4,032,164 $ 54,245,207
============================================================================================
Class B*
Shares sold 435,172 $ 6,389,127 465,703 $ 6,582,175
Net asset value of shares
issued in connection
with the transfer of net
assets of the Common
Sense II Aggressive
Opportunity Fund (Note 6) -- -- 1,704,119 22,776,563
Shares issued on
reinvestment -- -- 139,162 1,882,868
Shares redeemed (66,273) (991,792) (18,638) (262,477)
- --------------------------------------------------------------------------------------------
Net Increase 368,899 $ 5,397,335 2,290,346 $ 30,979,129
============================================================================================
Class C**
Shares sold 14,132 $ 209,856 6,090 $ 85,251
Shares issued on
reinvestment -- -- 70 941
Shares redeemed (923) (13,472) -- --
- --------------------------------------------------------------------------------------------
Net Increase 13,209 $ 196,384 6,160 $ 86,192
============================================================================================
</TABLE>
* Transactions are for the period from July 3, 1995 (inception date) to
December 31, 1995.
** Transactions are for the period from August 8, 1995 (inception date) to
December 31, 1995.
22
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
6. TRANSFER OF NET ASSETS
On June 30, 1995, the Portfolio acquired the assets and certain liabilities
of the Common Sense II Aggressive Opportunity Fund of the Common Sense Trust
("Common Sense") pursuant to a plan of reorganization approved by Common Sense
shareholders on June 23, 1995. Total shares issue by the Portfolio and the total
net assets of Common Sense and the Portfolio on the date of transfer were:
<TABLE>
<CAPTION>
Total Net
Shares Assets of Total Net
Issued by Acquired Assets of
Acquired Fund the Portfolio Fund the Portfolio
================================================================================
<S> <C> <C> <C>
Common Sense 5,090,304 $68,038,812 $0
================================================================================
</TABLE>
The total net assets of Common Sense before acquisition included unrealized
appreciation of $6,354,773. Total net assets of the Portfolio after the merger
were $68,038,812. The transaction was structured for tax purposes to qualify as
a tax-free reorganization under the Internal Revenue Code, as amended.
23
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Financial Highlights
================================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class A Shares Class B Shares
1996(1) 1995(2) 1996(1) 1995(2)
==================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 14.31 $ 13.36 $ 14.27 $ 13.36
- --------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (loss) 0.04 0.03 (0.01) (0.02)
Net realized and unrealized gain 1.06 1.87 1.06 1.86
- --------------------------------------------------------------------------------------------------
Total Income From Operations 1.10 1.90 1.05 1.84
- --------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- (0.02) -- --
Net realized gains -- (0.93) -- (0.93)
- --------------------------------------------------------------------------------------------------
Total Distributions -- (0.95) -- (0.93)
- --------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 15.41 $ 14.31 $ 15.32 $ 14.27
- --------------------------------------------------------------------------------------------------
Total Return++ 7.69% 14.61% 7.36% 14.15%
- --------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 68,200 $ 57,693 $ 40,732 $ 32,685
- --------------------------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 1.63% 1.72% 2.37% 2.46%
Net investment income (loss) 0.60 0.46 (0.14) (0.27)
- --------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 69% 51% 69% 51%
==================================================================================================
Average commissions per share
paid on equity security transactions $ 0.06 $ 0.06 $ 0.06 $ 0.06
==================================================================================================
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
(2) For the period from August 8, 1995 (inception date) to December 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
24
<PAGE>
Smith Barney Growth Opportunity Fund
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class C Shares 1996(1) 1995(2)
================================================================================
<S> <C> <C>
Net Asset Value, Beginning of Period $ 14.29 $ 14.05
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income (loss) (0.01) 0.01
Net realized and unrealized gain 1.07 1.16
- --------------------------------------------------------------------------------
Total Income From Operations 1.06 1.17
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- --
Net realized gains -- (0.93)
- --------------------------------------------------------------------------------
Total Distributions -- (0.93)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $ 15.35 $ 14.29
- --------------------------------------------------------------------------------
Total Return++ 7.42% 8.69%
- --------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 297 $ 88
- --------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 2.39% 2.29%
Net investment income (0.05) 0.13
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 69% 51%
================================================================================
Average commissions per share paid on
equity security transactions $ 0.06 $ 0.06
================================================================================
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
(2) For the period from August 8, 1995 (inception date) to December 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
25
<PAGE>
[LOGO] Smith Barney
[LOGO] A Member of the Travelers Group
Smith Barney
Growth Opportunity
Fund
Directors
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Frank J. Hubbard
Heath B. McLendon, Chairman
Ken Miller
John F. White
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Harvey Eisen
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
PFS Distributors, Inc.
Custodian
PNC Bank, N.A.
Shareholder
Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Growth Opportunity Fund. It is not authorized for distribution to
prospective investors unless accompanied or preceded by a current Prospectus for
the Fund, which contains information concerning the Fund's investment policies
and expenses as well as other pertinent information.
Smith Barney
Growth Opportunity
Fund
388 Greenwich Street
New York, New York 10013
<PAGE>
SEMI-ANNUAL REPORT
Smith Barney
Government
Securities
Fund
------------------
June 30, 1996
[LOGO] Smith Barney Mutual Funds
Investing for your future
Every day
<PAGE>
Smith Barney Government Securities Fund
Dear Shareholder:
We are pleased to provide you with the semi-annual report for the Smith Barney
Government Securities Fund for the period ended June 30, 1996. In this report,
we summarize the period's prevailing economic and market conditions and outline
our portfolio strategy. A more detailed summary of performance can be found in
the appropriate sections that follow in the semi-annual report.
Fund Performance Update
For the six months ended June 30, 1996, the Smith Barney Government Securities
Fund had a total return of -3.40% for Class A shares, which was slightly below
its Lipper Analytical Services, Inc. peer group average total return of -2.62%.
(Lipper is an independent fund tracking organization.) The Fund's reduced
exposure to mortgage-backed securities had a negative affect on performance
because these types of securities tend to perform better in a period of rising
interest rates. The Fund distributed dividends totaling $0.30 per share for
Class A shares over the past six months.
Market Update and Outlook
Since January 1996, volatility in the bond market has increased, and both short-
and long-term interest rates have risen. One of the main reasons why volatility
in the bond market has increased was greater-than-expected U.S. economic growth.
For example, economic data released by the U.S. government between February and
the end of May of this year has indicated strong U.S. economic growth as
evidenced by increased job creation and higher consumer spending. In addition,
new as well as existing home sales have also shown continued momentum, with the
Northeast region of the U.S. the newest region of the country to exhibit growth.
During the first half of 1996, the annual rate of inflation in the U.S. was
approximately 2.9% and economic activity, as measured by Gross Domestic Product
(GDP), grew at an annual rate of roughly 3.1%. Moreover, over the past six
months, retail sales were sporadically stronger and the annual rate of
unemployment in the U.S. held steady at 5.5%.
Increasing investor concerns about the possible re-emergence of inflation
resulting from higher U.S. economic growth has led to an increase in yields,
especially from U.S. Treasury securities with longer-term maturities. The chart
on the next page shows how yields have increased since our last report.
1
<PAGE>
Yields from U.S. Treasuries: 12/31/95 6/30/96
-------- -------
3-Month U.S. Treasury Bill 5.07% 5.15%
5-Year U.S. Treasury Bill 5.37 6.46
10-Year U.S. Treasury Note 5.57 6.71
30-Year U.S. Treasury Bond 5.95 6.89
Other factors that have worked to increase bond market volatility include
concerns surrounding Russia's recent national Presidential election, the ongoing
wait for the Federal Reserve Board to raise interest rates in the near term and
greater participation by trading-oriented investors attracted to recent market
opportunities.
Fund's Investment Strategy
Although there will continue to be some near-term bond market volatility as
investors sift through confusing U.S. economic data, we remain positive about
the bond market's long-term prospects. We expect the U.S. economy will weaken
modestly and inflation fears will disappear. Most investors should therefore
remain patient despite the bond market's recent volatility. In our view,
long-term U.S. Treasury yields at or above 7.00% represent good value and we
anticipate that yields from the 30-Year U.S. Treasury bond will decline and
eventually settle in the 6.25% to 6.50% range. Therefore, we have slowly become
more aggressive in the Smith Barney Government Securities Fund.
As interest rates rose, we reduced the Fund's weighting in mortgage-backed
securities and increased its positions in longer-maturity Treasury strips, which
are zero coupon bonds created by separating a Treasury bond's interest payments
from its principal amount due at maturity. While mortgage-backed securities
yielding 7% to 8% may seem attractive on the surface, because of our
expectations for lower interest rates, we believe these types of bonds will
underperform because of prepayment fears. In an environment of declining
interest rates, homeowners tend to prepay their mortgages, thus reducing the
value of mortgage-backed securities.
As we stated earlier, the Fund's reduced exposure in mortgage-backed securities
adversely affected its performance because these types of securities tend to
perform better in periods of rising interest rates. However, the Fund should
benefit from its lower weighting in mortgage-backed securities and higher
weighting in U.S. Treasuries if interest rates fall, which we expect in the
coming months.
2
<PAGE>
In closing, thank you for investing in the Smith Barney Government Securities
Fund. We look forward to continuing to help you achieve your financial goals.
Sincerely,
/s/Heath B. McLendon /s/ James E. Conroy
- ---------------------- ----------------------
Heath B. McLendon James E. Conroy
Chairman and Vice President and
Chief Executive Officer Investment Officer
July 12, 1996
3
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
--------------------
Period Beginning End Income Capital Gain Return Total
Ended of Period of Period Dividends Distributions of Capital Returns(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
6/30/96 $ 9.77 $ 9.14 $0.30 $0.00 $0.00 (3.40)%+
- --------------------------------------------------------------------------------
12/31/95 9.17 9.77 0.69 0.00 0.00 14.50
- --------------------------------------------------------------------------------
12/31/94 10.01 9.17 0.49 0.00 0.07 (2.76)
- --------------------------------------------------------------------------------
12/31/93 9.69 10.01 0.72 0.00 0.00 10.87
- --------------------------------------------------------------------------------
Inception* -
12/31/92 9.56 9.69 0.08 0.00 0.02 2.41+
- --------------------------------------------------------------------------------
Total $2.28 $0.00 $0.09
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
--------------------
Period Beginning End Income Capital Gain Return Total
Ended of Period of Period Dividends Distributions of Capital Returns(1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
6/30/96 $ 9.81 $ 9.19 $0.28 $0.00 $0.00 (3.54)%+
- --------------------------------------------------------------------------------
12/31/95 9.17 9.81 0.60 0.00 0.00 13.87
- --------------------------------------------------------------------------------
12/31/94 10.01 9.17 0.45 0.00 0.07 (3.25)
- --------------------------------------------------------------------------------
12/31/93 9.68 10.01 0.67 0.00 0.00 10.45
- --------------------------------------------------------------------------------
12/31/92 9.81 9.68 0.53 0.00 0.11 5.45
- --------------------------------------------------------------------------------
12/31/91 9.11 9.81 0.63 0.00 0.08 16.28
- --------------------------------------------------------------------------------
12/31/90 9.25 9.11 0.68 0.00 0.06 6.99
- --------------------------------------------------------------------------------
12/31/89 8.75 9.25 0.70 0.00 0.03 14.58
- --------------------------------------------------------------------------------
12/31/88 8.90 8.75 0.74 0.00 0.00 6.75
- --------------------------------------------------------------------------------
12/31/87 10.41 8.90 0.51 0.45 0.00 (5.27)
- --------------------------------------------------------------------------------
12/31/86 10.20 10.41 0.84 0.29 0.00 13.62
- --------------------------------------------------------------------------------
Total $6.63 $0.74 $0.35
- --------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------
Net Asset Value
--------------------
Period Beginning End Income Capital Gain Return Total
Ended of Period of Period Dividends Distributions of Capital Returns(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
6/30/96 $ 9.81 $ 9.18 $0.28 $0.00 $0.00 (3.62)%+
- --------------------------------------------------------------------------------
12/31/95 9.17 9.81 0.61 0.00 0.00 13.93
- --------------------------------------------------------------------------------
12/31/94 10.01 9.17 0.45 0.00 0.07 (3.25)
- --------------------------------------------------------------------------------
Inception* -
12/31/93 9.90 10.01 0.61 0.00 0.00 7.36+
- --------------------------------------------------------------------------------
Total $1.95 $0.00 $0.07
- --------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
--------------------
Period Beginning End Income Capital Gain Return Total
Ended of Period of Period Dividends Distributions of Capital Returns(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Inception* -
6/30/96 $9.71 $9.15 $0.31 $0.00 $0.00 (3.10)%+
- --------------------------------------------------------------------------------
</TABLE>
It is the Fund's policy to distribute dividends monthly and
capital gains, if any, annually.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
------------------------------------------
<S> <C> <C> <C> <C>
Class A Class B Class C Class Y
- --------------------------------------------------------------------------------
Six Months Ended 6/30/96+ (3.40)% (3.54)% (3.62)% N/A
- --------------------------------------------------------------------------------
Year Ended 6/30/96 2.23 1.78 1.75 N/A
- --------------------------------------------------------------------------------
Five Years Ended 6/30/96 N/A 6.96 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/96 N/A 6.26 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/96 5.65 7.94 4.02 (3.10)%+
- --------------------------------------------------------------------------------
<CAPTION>
With Sales Charge(2)
------------------------------------------
<S> <C> <C> <C> <C>
Class A Class B Class C Class Y
- --------------------------------------------------------------------------------
Six Months Ended 6/30/96+ (7.75)% (7.75)% (4.55)% N/A
- --------------------------------------------------------------------------------
Year Ended 6/30/96 (2.34) (2.72) 0.75 N/A
- --------------------------------------------------------------------------------
Five Years Ended 6/30/96 N/A 6.80 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/96 N/A 6.26 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/96 4.33 7.94 4.02 (3.10)%+
- --------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge(1)
- --------------------------------------------------------------------------------
<S> <C>
Class A (Inception* through 6/30/96) 22.22%
- --------------------------------------------------------------------------------
Class B (6/30/86 through 6/30/96) 83.46
- --------------------------------------------------------------------------------
Class C (Inception* through 6/30/96) 14.37
- --------------------------------------------------------------------------------
Class Y (Inception* through 6/30/96) (3.10)+
- --------------------------------------------------------------------------------
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect deduction of the applicable sales
charges with respect to Class A shares or the applicable contingent deferred
sales charges ("CDSC") with respect to Class B and C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction of
the maximum initial sales charge of 4.50% and Class B shares reflect the
deduction of a 4.50% CDSC, which applies if shares are redeemed within one year
from initial purchase. This CDSC declines by 0.50% the first year after purchase
and thereafter by 1.00% per year until no CDSC is incurred. Class C shares
reflect the deduction of a 1.00% CDSC, which applies if shares are redeemed
within the first year of purchase.
* Inception dates for Class A, B, C and Y shares are November 6, 1992, March
20, 1984, February 4, 1993, and February 7, 1996, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
6
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class B Shares of
the Smith Barney Government Securities Fund
vs. Lehman Brothers Government Bond Index
and Lipper General U.S. Government Peer Group Average+
- --------------------------------------------------------------------------------
June 1986 -- June 1996
[The following was represented by a graph in the printed document]
<TABLE>
<CAPTION>
Smith Barney Lehman Brothers Lipper Genenral
Government Securities Government Bind U.S. Government
Fund Index Peer Group Average
- -------------------- ----------------- ------------------
<S> <C> <C> <C>
6/86 10,000 10,000 10,000
12/86 10,274 10,474 10,583
12/87 9,731 10,704 10,647
12/88 10,387 11,457 11,356
12/89 11,902 13,086 12,772
12/90 12,734 14,226 13,805
12/91 14,808 16,404 15,812
12/92 15,614 17,590 16,827
12/93 17,247 19,465 18,397
12/94 16,698 18,806 17,570
12/95 19,014 22,255 20,650
6/96 18,342 21,857 20,109
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class B shares on June 30,
1986, assuming reinvestment of dividends and capital gains, if any, at net
asset value through June 30, 1996. The Lehman Brothers Government Bond
Index is a broad-based index of all public debt obligations of the U.S.
government and its agencies and has an average maturity of approximately
nine years. The Lipper General U.S. Government Peer Group Average is
composed of the Fund's peer group of 192 mutual funds investing in U.S.
government securities as of June 30, 1996. The index is unmanaged and is
not subject to the same management and trading expenses as a mutual fund.
The performance of the Fund's other classes may be greater or less than the
Class B shares' performance indicated on this chart, depending on whether
greater or lesser sales charges and fees were incurred by shareholders
investing in other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
7
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) June 30, 1996
- --------------------------------------------------------------------------------
Portfolio Breakdown
[The following was represented by a pie-graph in the printed document]
Mortgage Backed Securities 36.9%
U.S. Treasury Obligations 30.8%
Repurchase Agreements 32.3%
U.S. Treasury Securities are debt obligations of the United States Government.
They are secured by the full faith and credit of the Federal Government, and
include such instruments as Treasury notes, bills and bonds.
Mortgage-Backed Securities are debt securities by the U.S. Government agencies
such as the Federal Home Loan Mortgage Corporation (FHLMC), Federal National
Mortgage Association (FNMA) and Government National Mortgage Association (GNMA).
They represent thousands of individual home mortgages that are pooled to form
securities. As homeowners pay interest and principal each month, these payments
are passed on to investors. Mortgage-backed securities are backed by the full
faith and credit of the issuing agency.
8
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE-BACKED SECURITIES -- 36.9%
$ 855 FNMA 30 Year, 8.000% due 6/1/07 $ 873
115,368,000 FNMA 15 Year TBA, 7.500% due 9/1/10 115,800,630
172,694 GNMA 30 Year, 11.000% due 10/15/10* 193,255
37,280 GNMA 30 Year, 10.000%,due 3/15/16 40,682
63,276 GNMA 30 Year, 10.500% due 3/15/16 69,782
173,447,763 GNMA 30 Year, 9.000% due 12/15/17+ 184,395,786
371,981 GNMA 30 Year, 9.500% due 5/15/20* 397,786
- --------------------------------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES
(Cost-- $291,263,362) 300,898,794
================================================================================
<CAPTION>
<S> <C> <C>
U. S. TREASURY OBLIGATIONS -- 30.8%
147,255,000 U.S. Treasury Notes, 6.875% due 5/15/06+ 148,864,497
89,600,000 U.S. Treasury Strips, zero coupon due 5/15/09 37,046,016
231,000,000 U.S. Treasury Strips, zero coupon due 2/15/19 46,528,020
102,000,000 FNMA Principal Strips, zero coupon due 10/9/19 18,425,280
- --------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost-- $258,609,051) 250,863,813
================================================================================
TOTAL INVESTMENTS
(Cost-- $549,872,413) 551,762,607
================================================================================
<CAPTION>
REPURCHASE AGREEMENTS -- 32.3%
<S> <C> <C>
37,701,000 Chase Manhattan Bank, 5.325% due 7/1/96;
Proceeds at maturity -- $37,717,731;
(Fully collateralized by U.S. Treasury Notes,
6.125% due 5/31/97; Market value -- $38,470,408) 37,701,000
225,000,000 Morgan Stanley Group, Inc., 5.390% due 7/2/96;
Proceeds at maturity -- $225,269,500; (Fully
collateralized by the following:
FHLMC Series 1458, 6.250% due 4/15/03;
Market value -- $19,997,861;
FHLMC Series 1509, 6.500% due 10/15/00;
Market value -- $20,113,489;
FHLMC Series 1604, 5.250% due 7/15/04;
Market value -- $39,058,167;
FHLMC Series 1694, 6.500% due 9/15/23;
Market value -- $18,695,056;
FNMA Series 1994-013, 6.000% due 4/25/08;
Market value -- $19,132,667;
FNMA Pool 302598, 7.646% due 12/1/24;
Market value -- $20,979,743;
</TABLE>
See Notes to Finanacial Statement
9
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENTS -- 32.3% (continued)
FNMA Pool 304087, 6.225% due 12/1/24;
Market value -- $27,911,279;
FNMA Pool 328050, 7.167% due 8/1/25;
Market value -- $21,358,487;
FNMA Pool 328051, 6.136% due 8/1/25;
Market value -- $34,420,156;
FHLMC Pool 845967, 7.077% due 9/1/20;
Market value -- $7,832,608;
Total Market value-- $229,499,513) $225,000,000
- --------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost-- $262,701,000) 262,701,000
================================================================================
TOTAL INVESTMENTS AND REPURCHASE
AGREEMENTS -- 100%
(Cost-- $812,573,413**) $814,463,607
================================================================================
</TABLE>
* Date shown represents the last in range of maturity dates of mortgage
certificates owned.
+ Security have been partially segregated by custodian.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
10
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Schedule of Statement of Assets and Liabilities (unaudited) June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at value (Cost-- $549,872,413) $551,762,607
Repurchase agreements (Cost-- $262,701,000) 262,701,000
Cash 123
Interest receivable 3,236,349
Receivable for Fund shares sold 638,333
Receivable from broker 112,500
Other assets 47,464
- --------------------------------------------------------------------------------
Total Assets 818,498,376
- --------------------------------------------------------------------------------
LIABILITIES:
Reverse repurchase agreements (Note 6) 147,623,138
Payable for securities purchased 115,108,845
Dividends payable 2,962,340
Investment advisory fees payable 158,353
Distribution fees payable 99,845
Interest payable 97,185
Administration fees payable 90,488
Accrued expenses 309,303
- --------------------------------------------------------------------------------
Total Liabilities 266,449,497
- --------------------------------------------------------------------------------
Total Net Assets $ 552,048,879
================================================================================
NET ASSETS:
Par value of capital shares $ 60,286
Capital paid in excess of par value 782,992,567
Overdistributed net investment income (1,738,806)
Accumulated net realized loss on security transactions, (231,345,987)
futures contracts and options
Net unrealized appreciation of investments and futures contracts 2,080,819
- --------------------------------------------------------------------------------
Total Net Assets $552,048,879
================================================================================
Shares Outstanding
- --------------------------------------------------------------------------------
Class A 43,776,552
- --------------------------------------------------------------------------------
Class B 14,507,705
- --------------------------------------------------------------------------------
Class C 121,547
- --------------------------------------------------------------------------------
Class Y 1,879,909
- --------------------------------------------------------------------------------
Net Asset Value
Class A (and redemption price) $9.14
- --------------------------------------------------------------------------------
Class B* $9.19
- --------------------------------------------------------------------------------
Class C** $9.18
- --------------------------------------------------------------------------------
Class Y (and redemption price) $9.15
- --------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% if net asset value per share) $9.57
================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 4.50% CDSC if shares
are redeemed within one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
11
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1996
INVESTMENT INCOME:
Interest $ 23,074,933
Less: Interest expense (Note 6) (2,869,913)
- --------------------------------------------------------------------------------
Total Investment Income 20,205,020
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 1,068,831
Investment advisory fees (Note 2) 1,001,914
Administration fees (Note 2) 572,522
Shareholder and system servicing fees 257,021
Shareholder communications 44,754
Registration fees 34,809
Directors' fees 25,858
Custody 19,394
Audit and legal 14,669
Other 50,064
- --------------------------------------------------------------------------------
Total Expenses 3,089,836
- --------------------------------------------------------------------------------
Net Investment Income 17,115,184
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FUTURES CONTRACTS AND OPTIONS (NOTES 3, 7 AND 8):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) (13,051,202)
Futures contracts 315,385
Options purchased (896,391)
- --------------------------------------------------------------------------------
Net Realized Loss (13,632,208)
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation)
of Investments and Futures Contracts:
Beginning of period 25,599,781
End of period 2,080,819
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (23,518,962)
- --------------------------------------------------------------------------------
Net Loss on Investments, Futures Contracts and Options (37,151,170)
- --------------------------------------------------------------------------------
Decrease in Net Assets From Operations $(20,035,986)
================================================================================
See Notes to Financial Statements.
12
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1996 (unaudited)
and the Year Ended December 31, 1995
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 17,115,184 $ 42,959,653
Net realized gain (loss) (13,632,208) 12,784,089
Increase (decrease) in net unrealized
appreciation (23,518,962) 29,027,947
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets
From Operations (20,035,986) 84,771,689
- --------------------------------------------------------------------------------
DISTRIBUTION TO
SHAREHOLDERS FROM:
Net investment income (17,908,620) (43,905,023)
- --------------------------------------------------------------------------------
Decrease In Net Assets From
Distributions To Shareholders (17,908,620) (43,905,023)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 10):
Net proceeds from sale of shares 34,718,674 25,672,666
Net asset value of shares issued for
reinvestment of dividends 9,929,386 29,237,388
Cost of shares reacquired (66,131,965) (140,055,055)
- --------------------------------------------------------------------------------
Decrease In Net Assets From Fund
Share Transactions (21,483,905) (85,145,001)
- --------------------------------------------------------------------------------
Decrease In Net Assets (59,428,511) (44,278,335)
NET ASSETS:
Beginning of period 611,477,390 655,755,725
- --------------------------------------------------------------------------------
End of period* $552,048,879 $611,477,390
================================================================================
* Includes overdistributed net investment
income of: $(1,738,806) $(945,370)
================================================================================
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Government Securities Fund ("Portfolio"), a separate
investment fund of the Smith Barney Investment Funds Inc. ("Fund"), a Maryland
corporation, is registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end management investment company. The Fund consists of
the Portfolio and four other separate investment portfolios: Smith Barney
Investment Grade Bond Fund, Smith Barney Special Equities Fund, Smith Barney
Managed Growth Fund and Smith Barney Growth Opportunity Fund. The financial
statements and financial highlights for the other portfolios are presented in
separate semi-annual reports.
The significant accounting policies consistently followed by the Portfolio
are: (a) security transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing price on such
markets; securities traded in the over-the-counter market and listed securities
for which no sales price was reported and U.S. Government and Government Agency
obligations are valued at bid price, or in the absence of a recent bid price, at
the bid equivalent obtained from one or more of the major market makers; (c)
securities that have a maturity of more than 60 days are valued at prices based
on market quotations for securities of similar type, yield and maturity; (d)
securities maturing within 60 days are valued at cost plus accreted discount, or
minus amortized premium, as applicable; (e) dividend income is recorded on
ex-dividend date and interest income, adjusted for accretion of original issue
discount, is recorded on the accrual basis; (f) gains or losses on the sale of
securities are calculated using the specific identification method; (g)
dividends and distributions to shareholders are recorded on the ex-dividend
date; (h) direct expenses are charged to each portfolio and each class;
management fees and general portfolio expenses are allocated on the basis of the
relative net assets; (i) the Portfolio intends to comply with the applicable
provisions of the Internal Revenue Code of 1986, as amended, pertaining to
regulated investment companies and to make distributions of taxable income
sufficient to relieve it from substantially all Federal income and excise taxes;
(j) the character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. At December 31, 1995, reclassifications are made to the
Fund's capital accounts to reflect permanent book/tax differences and income and
gains available for distributions under
14
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
income tax regulations. Accordingly, a portion of accumulated net realized
losses amounting to $391,564,060 has been reclassified to paid-in capital. Net
investment income, net realized gains and net assets were not affected by this
change; and (k) estimates and assumptions are required to be made regarding
assets, liabilities and changes in net assets resulting from operations when
financial statements are prepared. Changes in the economic environment,
financial markets and any other parameters used in determining these estimates
could cause actual results to differ.
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT AND OTHER
TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment adviser to the Fund. The
Portfolio pays SBMFM an advisory fee calculated at the following annual rates of
average daily net assets: 0.35% up to $2 billion, 0.30% of the next $2 billion,
0.25% of the next $2 billion, 0.20% of the next $2 billion and then 0.15% of the
remaining average daily net assets. This fee is calculated daily and paid
monthly.
SBMFM acts as the Fund's administrator for which the Portfolio pays a fee
calculated at an annual rate of 0.20% of the average daily net assets. This fee
is calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares. For the six months ended June 30, 1996, SB received sales charges
of approximately $40,000 on sales of the Portfolio's Class A shares.
There is a contingent deferred sales charge ("CDSC") of 4.50% on Class B
shares, which applies if redemption occurs less than one year from initial
purchase. This CDSC declines by 0.50% the first year after purchase and
thereafter by 1.00% per year until no CDSC is incurred. Class C shares have a
1.00% CDSC, which applies if redemption occurs within the first year of
purchase. For the six months ended June 30, 1996, CDSCs paid to SB for Class B
shares were approximately $181,000.
Pursuant to a Distribution Plan, the Portfolio pays a service fee with
respect to Class A, B and C shares calculated at the annual rate of 0.25% of the
average daily net assets for each respective class. The Portfolio also pays a
distribution fee with respect to Class B and C
15
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
shares calculated at the annual rate of 0.50% and 0.45% of the average daily net
assets for each class, respectively. For the six months ended June 30, 1996,
total Distribution Plan fees incurred were:
<TABLE>
<S> <C> <C> <C>
Class A Class B Class C
- --------------------------------------------------------------------------------
Distribution Plan Fees $527,941 $537,024 $3,866
- --------------------------------------------------------------------------------
</TABLE>
All officers and one Director of the Fund are employees of SB.
3. INVESTMENTS
During the six months ended June 30, 1996, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
Purchases $1,179,950,933
- --------------------------------------------------------------------------------
Sales 1,201,699,026
- --------------------------------------------------------------------------------
At June 30, 1996, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were approximately
as follows:
- --------------------------------------------------------------------------------
Gross unrealized appreciation $11,236,579
Gross unrealized depreciation (9,346,385)
- --------------------------------------------------------------------------------
Net unrealized appreciation $1,890,194
- --------------------------------------------------------------------------------
</TABLE>
4. CAPITAL LOSS CARRYFORWARD
At December 31, 1995, the Portfolio had, for Federal tax purposes,
approximately $217,714,000 of unused capital loss carryforwards available to
offset future capital gains. To the extent that these carryforward losses are
used to offset capital gains, it is probable that the gains so offset will not
be distributed. The amount and expiration of the carryforwards are indicated
below. Expiration occurs on December 31 of the year indicated:
<TABLE>
<S> <C> <C> <C>
1996 2002 2003
- --------------------------------------------------------------------------------
Capital Loss Carryforward $148,463,000 $69,056,000 $195,000
- --------------------------------------------------------------------------------
</TABLE>
5. REPURCHASE AGREEMENTS
The Portfolio purchases (and its custodian takes possession of) U.S.
Government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date
16
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
(generally, the next business day) at an agreed-upon higher repurchase price.
The Portfolio requires continual maintenance of the market value of the
collateral in amounts at least equal to the repurchase price.
6. REVERSE REPURCHASE AGREEMENT
The Portfolio may enter into reverse repurchase agreement transactions for
leveraging purposes. A reverse repurchase agreement involves a sale by the
Portfolio of securities that it holds with an agreement by the Portfolio to
repurchase the same securities at an agreed upon price and date. A reverse
repurchase agreement involves the risk that the market value of the securities
sold by the Portfolio may decline below the repurchase price of the securities.
The Portfolio will establish a segregated account with its custodian, in which
the Portfolio will maintain cash, U.S. government securities or other liquid
high grade debt obligations equal in value to its obligations with respect to
reverse repurchase agreements.
At June 30, 1996, the Portfolio had the following open reverse repurchase
agreements:
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
$147,623,138 Reverse Repurchase Agreement with Morgan Stanley
Group, Inc., dated 6/24/96 bearing 4.74% to be
repurchased at $147,778,634 on 7/2/96,
collateralized by U.S. Treasury Notes, 6.875%
due 5/15/06 $147,623,138
- --------------------------------------------------------------------------------
<CAPTION>
During the six months ended June 30, 1996, the maximum and average amount of
reverse repurchase agreements outstanding were as follows:
- --------------------------------------------------------------------------------
<S> <C>
Maximum amount outstanding $189,901,250
- --------------------------------------------------------------------------------
Average amount outstanding $145,887,688
- --------------------------------------------------------------------------------
</TABLE>
Interest rates earned on reverse repurchase agreements ranged from 1.375% to
5.40% during the year. Total market value of the collateral for the reverse
repurchase agreement is $148,864,497.
Interest expense for the six months ended June 30, 1996 on borrowings by the
Portfolio under reverse repurchase agreements totalled $2,869,913.
17
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
7. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. The initial margin is segregated by the custodian and is
noted in the schedule of investments. During the period the futures contract is
open, changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets due from or liabilities due to broker,
depending upon whether unrealized gains or losses are incurred. When the
contract is closed, the Portfolio records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transactions and
the Portfolio's basis in the contract. The Portfolio enters into such contracts
to hedge a portion of its portfolio. The Portfolio bears the market risk that
arises from changes in the value of the financial instruments and securities
indices (futures contracts) and the credit risk should a counterparty fail to
perform under such contracts.
<TABLE>
<CAPTION>
At June 30, 1996, the Portfolio had the following open futures contracts:
Futures Expiration # of Basis Market Unrealized
contracts sold Month/Year Contracts Value Value Gain
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. 20 Year
Treasury Bond 9/96 100 $10,762,500 $10,953,125 $190,625
- --------------------------------------------------------------------------------
</TABLE>
8. OPTIONS CONTRACTS
Premiums paid when put or call options are purchased by the Portfolio
represent investments, which are marked-to-market daily. When a purchased option
expires, the Portfolio will realize a loss in the amount of the premium paid.
When the Portfolio enters into closing sales transaction, the Portfolio will
realize a gain or loss depending on whether the sales proceeds from the closing
sales transaction are greater or less than the premium paid for the option. When
the Portfolio exercises a put option, it will realize a gain or loss from the
sale of the underlying security and the proceeds from such sale will be
decreased by the premium originally paid. When the Portfolio exercises a call
option, the cost of the security which the Portfolio purchases upon exercise
will be increased by the premium originally paid.
18
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
When a Portfolio writes a covered call or put option, an amount equal to the
premium received by the Portfolio is recorded as a liability, the value of which
is marked-to-market daily. When a written option expires, the Portfolio realizes
a gain equal to the amount of the premium received. When the Portfolio enters
into a closing purchase transaction, the Portfolio realizes a gain (or loss if
the cost of the closing purchase transaction exceeds the premium received when
the option was written) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a call option is exercised the cost of the security sold will be reduced by
the premium originally received. When a put option is exercised, the amount of
the premium received will reduce the cost of the security which the Portfolio
purchased upon exercise. When written index options are exercised, settlement is
made in cash. The risk associated with purchasing options is limited to the
premium originally paid. The Portfolio enters into options for hedging
purchases. The risk in writing a call option is that the Portfolio gives up the
opportunity to participate in any increase in the price of the underlying
security beyond the exercise price. The risk in writing a put option is that the
Fund is exposed to the risk of a loss if the market price of the underlying
security declines.
At June 30, 1996, the Portfolio had no open options contracts.
9. SECURITIES TRADED ON A WHEN-ISSUED OR
TO-BE-ANNOUNCED BASIS
The Portfolio may trade securities on a "to-be-announced" ("TBA") basis. In
a TBA transaction, the Portfolio commits to purchasing or selling securities for
which specific information is not yet known at the time of the trade,
particularly the face amount and maturity date. Securities purchased on a TBA
basis are not settled until they are delivered to the Portfolio, normally 15 to
45 days later. These transactions are subject to market fluctuations and their
current value is determined in the same manner as for other portfolio
securities.
As of June 30, 1996, the Portfolio held one TBA security with a cost of
$114,725,479.
10. CAPITAL SHARES
At June 30, 1996, the Fund had ten billion shares of capital stock
authorized with a par value of $0.001 per share. The Portfolio has the
19
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
ability to issue multiple classes of shares. Each share of a class represents an
identical interest and has the same rights, except that each class bears certain
direct expenses, including those specifically related to the distribution of its
shares.
At June 30, 1996, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
Total Paid-in Capital $114,873,357 $650,020,458 $776,879 $17,382,159
- --------------------------------------------------------------------------------
<CAPTION>
Transactions in shares of each class were as follows:
Six Months Ended Year Ended
June 30, 1996 December 31, 1995
--------------------- --------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------
Class A
<S> <C> <C> <C> <C>
Shares sold 909,892 $ 8,682,227 695,391 $ 6,717,062
Shares issued on
reinvestment 793,318 7,443,589 2,271,693 21,769,239
Shares redeemed (4,242,945) (39,897,899) (9,230,741) (87,994,409)
- --------------------------------------------------------------------------------
Net Decrease (2,539,735) $(23,772,083) (6,263,657) $(59,508,108)
- --------------------------------------------------------------------------------
Class B
Shares sold 882,589 $ 8,331,673 1,925,940 $ 18,365,201
Shares issued on
reinvestment 260,855 2,461,090 774,634 7,419,294
Shares redeemed (2,751,496) (26,041,479) (5,409,406) (51,757,610)
- --------------------------------------------------------------------------------
Net Decrease (1,608,052) $(15,248,716) (2,708,832) $(25,973,115)
================================================================================
Class C
Shares sold 33,768 322,615 62,023 $ 590,403
Shares issued on
reinvestment 2,623 24,707 5,077 48,855
Shares redeemed (20,535) (192,587) (31,879) (303,036)
- --------------------------------------------------------------------------------
Net Increase 15,856 $ 154,735 35,221 $ 336,222
================================================================================
Class Y
Shares sold 1,879,909 $ 17,382,159 -- --
Shares issued on
reinvestment -- -- -- --
Shares redeemed -- -- -- --
- --------------------------------------------------------------------------------
Net Increase 1,879,909 $17,382,159 -- --
================================================================================
</TABLE>
20
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For a share of each class of capital stock outstanding throughout each period:
- --------------------------------------------------------------------------------
Class A Shares 1996(1) 1995 1994 1993(2) 1992(3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $9.77 $9.17 $10.01 $9.69 $9.56
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (4) 0.29 0.67 0.52 0.81 0.10
Net realized and unrealized gain (loss) (0.62) 0.62 (0.80) 0.23 0.13
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.33) 1.29 (0.28) 1.04 0.23
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.30) (0.69) (0.49) (0.72) (0.08)
Capital -- -- (0.07) -- (0.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.30) (0.69) (0.56) (0.72) (0.10)
Net Asset Value, End of Period $9.14 $9.77 $9.17 $10.01 $9.69
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (3.40)%++ 14.50% (2.76)% 10.87% 2.41%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $400,407 $453,378 $482,404 $7,067 $275
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (4)(5) 0.96%+ 0.94% 1.00% 0.92% 0.68%+
Net investment income 6.12+ 6.70 6.18 7.76 6.24+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 204% 294% 276% 540% 426%
====================================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since use of the undistributed method does not accord with results of
operations.
(3) For the period from November 6, 1992 (inception date) to December 31, 1992.
(4) The Investment adviser waived a portion of its fees for the year ended
December 31, 1993. If such fees were not waived, the per share decrease of
net investment income would have been $0.10 and the expense ratio would
have been 1.12%.
(5) For the years ended December 31, 1994 and December 31, 1993 and the period
ended December 31, 1992, the expense ratios were calculated excluding
interest expense. The expense ratios including interest expense would have
been 1.26%, 1.07% and 1.01% (annualized), respectively.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
21
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class B Shares 1996(1) 1995 1994 1993(2) 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $9.81 $9.17 $10.01 $9.68 $9.81 $9.11
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (3) 0.26 0.59 0.46 0.73 0.53 0.70
Net realized and
unrealized gain (loss) (0.60) 0.65 (0.78) 0.27 (0.02) 0.71
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations (0.34) 1.24 (0.32) 1.00 0.51 1.41
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.28) (0.60) (0.45) (0.67) (0.53) (0.63)
- ------------------------------------------------------------------------------------------------------------------------------------
Capital -- -- (0.07) -- (0.11) (0.08)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.28) (0.60) (0.52) (0.67) (0.64) (0.71)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $9.19 $9.81 $9.17 $10.01 $9.68 $ 9.81
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (3.54)%++ 13.87% (3.25)% 10.45% 5.45% 16.28%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $133,326 $158,459 $172,705 $851,350 $1,046,921 $1,285,937
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (3)(4) 1.47%+ 1.45% 1.48% 1.40% 1.45% 1.40%
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 5.61+ 6.19 5.69 7.28 5.47 6.80
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 204% 294% 276% 540% 426% 326%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since use of the undistributed method does not accord with results of
operations.
(3) The Investment adviser waived a portion of its fees for the year ended
December 31, 1993. If such fees were not waived, the per share decrease of
net investment income would have been $0.01 and the expense ratio would
have been 1.61%.
(4) For the years ended December 31, 1994, December 31, 1993 and December 31,
1992, the expense ratios were calculated excluding interest expense. The
expense ratios including interest expense would have been 1.74%, 1.55% and
1.71%, respectively.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
22
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class C Shares 1996(1) 1995 1994 1993(2)(3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.81 $ 9.17 $ 10.01 $ 9.90
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (4) 0.26 0.60 0.49 0.68
Net realized and unrealized gain (loss) (0.61) 0.65 (0.81) 0.04
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.35) 1.25 (0.32) 0.72
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.28) (0.61) (0.45) (0.61)
Capital -- -- (0.07) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.28) (0.61) (0.52) (0.61)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ $9.18 $ 9.81 $ 9.17 $ 10.01
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (3.62)%++ 13.93% (3.25)% 7.36%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 1,116 $ 1,039 $ 646 $ 213
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (4)(5) 1.40%+ 1.37% 1.47% 1.40%+
Net investment income 5.70+ 6.27 5.71 7.28+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 204% 294% 276% 540%
====================================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since use of the undistributed method does not accord with results of
operations.
(3) For the period from February 4, 1993 (inception date) to December 31, 1993.
(4) The Investment adviser waived a portion of its fees for the year ended
December 31, 1993. If such fees were not waived, the per share decrease of
net investment income would have been $0.13 and the expense ratio would
have been 1.61%.
(5) For the year ended December 31, 1994 and the period ended December 31,
1993, the expense ratios were calculated excluding interest expense. The
expense ratios including interest expense would have been 1.72% and 1.55%
(annualized), respectively.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
<PAGE>
Smith Barney Government Securities Fund
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class Y Shares 1996(1)
- --------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period $9.71
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.29
Net realized and unrealized loss (0.54)
- --------------------------------------------------------------------------------
Total Loss From Operations (0.25)
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.31)
- --------------------------------------------------------------------------------
Total Distributions (0.31)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $9.15
- --------------------------------------------------------------------------------
Total Return++ (3.10)%
- --------------------------------------------------------------------------------
Net Assets, End of Period (000s) $17,200
- --------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 0.53%
Net investment income 6.62
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 204%
================================================================================
</TABLE>
(1) For the period from February 7, 1996 (inception date) to June 30, 1996
(unaudited).
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
24
<PAGE>
Smith Barney
Government
Securities
Fund
Directors
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Frank J. Hubbard
Heath B. McLendon, Chairman
Ken Miller
John F. White
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
James E. Conroy
Vice President and
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Smith Barney
- ------------
A Member of TravelersGroup[LOGO]
Investment Adviser
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank, N.A.
Shareholder
Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Government Securities Fund. It is not authorized for distribution
to prospective investors unless accompanied or preceded by an effective
Prospectus for the Fund, which contains information concerning the Fund's
investment policies and expenses as well as other pertinent information.
Smith Barney
Government
Securities
Fund
388 Greenwich Street
New York, New York 10013
FD0408 8/96
SEMI-Annual Report
[GRAPHIC APPEARS HERE]
Smith Barney
Managed Growth
Fund
----------------------
June 30, 1996
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
Smith Barney Managed Growth Fund
Dear Shareholder:
We are pleased to provide you with the semi-annual report for the Smith Barney
Managed Growth Fund for the period ending June 30, 1996. For your convenience,
we have outlined the investment philosophy of the Fund and its current portfolio
strategy. A detailed summary of performance and current holdings for the Fund
can be found in the appropriate sections that follow in the semi-annual report.
Fund Performance Update
For the six months ended June 30, 1996, the Class A shares of the Smith Barney
Managed Growth Fund had a total return of 8.89% versus the 10.09% total return
from the Standard & Poor's 500 Stock Price Index ("S&P 500"), a capitalization-
weighted measure of 500 widely held common stocks and a widely-used stock market
benchmark.
When the Smith Barney Managed Growth Fund commenced operations on June 30, 1995,
the stock market was reaching new highs and heading higher. At that time, it was
difficult for us to find solid companies which met our investment criteria and
were trading at or near their 52-week lows. Therefore, we retained a relatively
large cash position of 20% or higher through the balance of 1995. During 1996,
both volatility and sector rotation in the stock market have increased markedly,
especially since the beginning of July. This has created more buying
opportunities for the Fund. In response to these more favorable market
conditions, we have added several new positions and increased many of our
existing holdings. Cash reserves were reduced to approximately 9% of net assets
as of July 22, 1996.
Fund's Investment Approach
We are contrarian investors by nature. We do not rely on technical analysis and
do not attempt to time the market. We apply a disciplined valuation process for
each company we analyze. Our primary consideration is the price of a company's
shares. Second, we look for companies with a good franchise or a sustainable
competitive advantage where it's unlikely competitors will make any inroads.
Whereas most value investors look for companies with low price/earnings ratios
(P/Es), the Smith Barney Managed Growth Fund employs other yardsticks such as
price-to-free cash flow, market-cap-to-sales, private market value or price-to-
book earnings in evaluating a company's comparative worth. These criteria are
generally more important considerations for us.
1
We look to buy companies that, for one reason or another, have fallen out of
favor and are trading at or near their 52-week price lows. We favor companies
with good franchises or ones that generate a lot of free cash flow. Then we try
to look back where the downside price support protection has been historically
and where these companies have bottomed out in prior troughs. Our approach is to
evaluate companies as businesses as opposed to stock plays. Typically, our
turnover rate is lower than many other funds and we generally own a company for
at least two years.
In our view, many out-of-favor companies can offer upside potential without
undue risk. There are many good companies in the market whose stock prices have
been beaten down for no good reason. In addition, out-of-favor companies can
often provide some degree of downside protection. Although no one can predict
when a market downturn will occur, it has been our experience that many good
companies who have already experienced a significant decrease in their stock
price tend to hold up better in difficult markets.
The Smith Barney Managed Growth Fund employs a disciplined sell process. We
determine a specific target price for each company when we buy it. When a mature
company hits the specific price target, the holding is sold. However, for young
companies, we are generally more flexible due to their more dynamic, long-term
growth potential.
In our disciplined sell process, we also employ a "ten percent rule." We monitor
the performance of the last purchase of each company relative to the S&P 500. If
it underperforms the index by ten percent, it is time to reevaluate that company
and either sell its stock or buy more.
Portfolio Update
In a period marked by increasing stock market volatility, the Smith Barney
Managed Growth Fund has generally performed satisfactorily. For example, from
March through the middle of May when interest rates began a significant move
upwards, the Fund outperformed the broad stock market averages primarily for two
reasons. One, the Fund had very little exposure to interest-rate sensitive
companies such as banks, electric utilities and insurance companies that
underperformed during this time. Second, the out-of-favor companies in cyclical
industries that the Fund bought aggressively last fall have generally performed
well.
However, from late June through the middle of July, smaller companies, which
currently comprise about 70% of the Smith Barney Managed Growth Fund, have begun
to underperform. (The average weighted market capitalization of a typical
company the Fund owns is $1 billion versus the $33 billion average weight market
capitalization of the companies that make up the S&P 500.) In our view, many
good smaller companies that have been adversely affected by speculation should
appreciate handsomely over time.
2
As we stated at the beginning of our letter, sector rotation in the stock market
has increased. Certain sectors such as technology and financial services that
were very difficult for us to buy when the Fund started last year have become
more attractive. Since the beginning of July, the Fund has purchased some select
companies in the health care sector and we have begun to look more closely at
new opportunities in the technology sector. In addition, we plan on adding more
interest-rate sensitive companies in the near term, assuming they meet our
strict investment criteria. The Fund has also recently sold some of its consumer
cyclical stocks as they reached our sell targets.
The Smith Barney Managed Growth Fund has benefited from several companies which
were taken over in the first half of 1996. For example, Helene Curtis, the first
company purchased by the Fund, was up 121% this year when it was acquired by
Unilever in March. Duracraft was up 73% when it was acquired by Honeywell, Inc.
in March. Quantum Heath Resources was up 66% this year when the Fund sold its
position in response to a tender offer from Olsten Corp. Lastly, Brenco Inc., a
company that makes tapered roller bearings for railroad cars, is currently in
the process of being acquired by Varlen and is up approximately 55%.
The following tables show the Smith Barney Managed Growth Fund's current sector
weightings and largest industry weightings as of July 22, 1996 versus the S&P
500 Stock Price Index.
Fund's Sector Weightings:
Percentage of Percentage of
Sector Portfolio Value S&P 500
- --------------------------------------------------------------------------------
Consumer Cyclical 19.0% 12.6%
Health Care 17.5 10.5
Technology 11.6 15.4
Capital Goods 10.5 6.8
Consumer Staples 9.8 13.5
Basic Materials 8.8 5.6
Energy 6.0 9.3
Transportation 3.1 1.6
Interest Sensitive 2.6 14.0
Utilities 1.5 8.9
Miscellaneous 0.5 1.9
Cash 9.0 N/M*
*Not Material
3
Fund's Largest Industry Weightings:
Percentage of Percentage of
Industry Portfolio Value S&P 500
- ----------------------------------------------------------------
Health Care Services 10.0% 1.0%
Publishing 5.0 0.9
Pharmaceutical 5.6 8.4
Chemicals 4.2 3.0
Furniture & Appliances 4.4 0.2
Computer Systems 3.6 3.1
Oil - Domestic 3.7 1.4
Foods 3.3 3.0
Machinery 3.2 0.8
Electrical Equipment 3.1 3.8
Market Outlook
The recent volatility in the stock market has reminded many investors that
markets can go down as well as up. Although market turbulence has lately opened
up more investment opportunities for the Fund, we remain committed to our
disciplined, contrarian approach to investing. We will therefore not attempt to
forecast where the market may be heading. The most we can say about the future
is that it will provide us with new investment opportunities.
In closing, thank you for investing in the Smith Barney Managed Growth Fund. We
look forward to continuing to help you achieve your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Douglas Johnson
Heath B. McLendon Douglas Johnson
Chairman and Vice President
Chief Executive Officer and Investment Officer
July 22, 1996
4
Smith Barney Managed Growth Fund
================================================================================
Historical Performance -- Class A Shares
================================================================================
Net Asset Value
----------------------
Beginning End Income Total
Period Ended of Period of Period Dividends Returns(1)+
================================================================================
6/30/96 $ 12.03 $ 13.10 $0.00 8.89%
- --------------------------------------------------------------------------------
Inception* - 12/31/95 12.00 12.03 0.15 1.53
================================================================================
Total $0.15
================================================================================
Historical Performance -- Class B Shares
Net Asset Value
---------------------
Beginning End Income Total
Period Ended of Period of Period Dividends Returns(1)+
================================================================================
6/30/96 $ 12.02 $ 13.05 $0.00 8.57%
- --------------------------------------------------------------------------------
Inception* - 12/31/95 12.00 12.02 0.11 1.16
================================================================================
Total $0.11
================================================================================
Historical Performance -- Class C Shares
Net Asset Value
----------------------
Beginning End Income Total
Period Ended of Period of Period Dividends Returns(1)+
================================================================================
6/30/96 $ 12.03 $ 13.05 $0.00 8.48%
- --------------------------------------------------------------------------------
Inception* - 12/31/95 12.00 12.03 0.11 1.16
================================================================================
Total $0.11
================================================================================
Historical Performance -- Class Y Shares
Net Asset Value
----------------------
Beginning End Income Total
Period Ended of Period of Period Dividends Returns(1)+
================================================================================
Inception* - 6/30/96 $ 12.11 $ 13.12 $0.00 8.34%
================================================================================
5
Smith Barney Managed Growth Fund
===============================================================================
Historical Performance -- Class Z Shares
================================================================================
Net Asset Value
---------------------
Beginning End Income Total
Period Ended of Period of Period Dividends Returns(1)+
================================================================================
6/30/96 $ 12.03 $ 13.12 $0.00 9.06%
- --------------------------------------------------------------------------------
Inception* - 12/31/95 11.83 12.03 0.16 3.06
================================================================================
Total $0.16
================================================================================
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
================================================================================
Average Annual Total Return
Without Sales Charge(1)
-----------------------------------------------
Class A Class B Class C Class Y Class Z
================================================================================
Six Months Ended 6/30/96+ 8.89% 8.57% 8.48% N/A 9.06%
- --------------------------------------------------------------------------------
Year Ended 6/30/96 10.56 9.74 9.74 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/96 10.53 9.71 9.68 8.34%+ 12.39
================================================================================
With Sales Charge(2)
-----------------------------------------------
Class A Class B Class C Class Y Class Z
================================================================================
Six Months Ended 6/30/96+ 3.48% 4.57 7.48% N/A 9.06%
- --------------------------------------------------------------------------------
Year Ended 6/30/96 5.05 4.74 8.74 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/96 5.02 5.70 9.68 8.34%+ 12.39
================================================================================
6
Smith Barney Managed Growth Fund
===============================================================================
Cumulative Total Return
================================================================================
Without Sales Charge(1)
================================================================================
[S] [C]
Class A (Inception* - 6/30/96) 10.56%
- --------------------------------------------------------------------------------
Class B (Inception* - 6/30/96) 9.74
- --------------------------------------------------------------------------------
Class C (Inception* - 6/30/96) 9.74
- --------------------------------------------------------------------------------
Class Y (Inception* - 6/30/96) 8.34+
- --------------------------------------------------------------------------------
Class Z (Inception* - 6/30/96) 12.39
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00%; Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed within one
year from initial purchase and declines thereafter by 1.00% per year until
no CDSC is incurred. Class C shares reflect the deduction of a 1.00% CDSC,
which applies if shares are redeemed within the first year of purchase.
* Inception date for Class A, B, and C shares is June 30, 1995. Inception
date for Class Y and Z shares is January 30, 1996 and October 2, 1995,
respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
7
Smith Barney Managed Growth Fund
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Class A Shares of
the Smith Barney Managed Growth Fund
vs. Standard & Poor's 500 Index+
- --------------------------------------------------------------------------------
June 1995 -- June 1996
[GRAPHIC APPEARS HERE]
Smith Barney
Managed Growth Fund S&P 500 Index
------------------- -------------
6/30/95 9,501 10,000
9/95 9,414 10,794
12/95 9,670 11,443
3/96 10,160 12,057
6/30/96 10,505 12,597
+ Hypothetical illustration of $10,000 invested in Class A shares at
inception on June 30, 1995, assuming deduction of the maximum 5.00% sales
charge at the time of investment and reinvestment of dividends and capital
gains, if any, at net asset value through June 30, 1996. The Standard &
Poor's 500 Index is composed of widely held common stocks listed on the New
York Stock Exchange, American Stock Exchange and over-the-counter market.
Figures for the index include reinvestment of dividends. The index is
unmanaged and it is not subject to the same management and trading expenses
of a mutual fund. The performance of the Fund's other classes may be
greater or less than the Class A shares' performance indicated on this
chart, depending on whether greater or lesser sales charges and fees were
incurred by shareholders investing in other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
8
Smith Barney Managed Growth Fund
================================================================================
Portfolio Highlights (unaudited) June 30, 1996
================================================================================
Portfolio Breakdown
Healthcare 5.8%
Publishing/Printing 5.0%
Pharmaceutical 4.8%
Chemicals 4.5%
Computer Systems 3.8%
Household Furniture and Appliances 3.7%
Oil 3.3%
Food 3.3%
Machinery 3.0%
Electric 2.9%
Other Common Stock 42.6%
U.S. Government Agency Obligations 13.5%
Repurchase Agreement 3.8%
Percentage of
Top Ten Holdings Total Investments
==========================================================================
Forest Labs Inc., Class A Shares 2.5%
Dean Foods Co. 2.3
Readers Digest Association Inc. 2.0
NCH Corp. 1.9
A. Schulman Inc. 1.9
Pennzoil Co. 1.7
Value Health Inc. 1.6
Lincoln Electric Co., Class A Shares 1.5
Worthington Industries Inc. 1.5
UST Inc. 1.5
==========================================================================
9
Smith Barney Managed Growth Fund
================================================================================
Schedule of Investments (unaudited) June 30, 1996
================================================================================
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 82.7%
Auto Related -- 0.8%
515,000 Stant Corp. $ 5,922,500
- --------------------------------------------------------------------------------
Beverages -- 0.9%
771,000 Pepsi-Cola Puerto Rico Bottling Co. 6,457,125
- --------------------------------------------------------------------------------
Building & Construction -- 1.4%
450,000 Cameron Ashley Building Products Inc.+ 5,175,000
425,000 Giant Cement Holdings Inc.+ 5,365,625
- --------------------------------------------------------------------------------
10,540,625
- --------------------------------------------------------------------------------
Chemicals -- 4.5%
575,000 A. Schulman Inc. 14,087,500
139,600 Crompton & Knowles Corp.+ 2,338,300
228,300 NCH Corp. 14,668,275
144,000 Penwest Ltd. 2,592,000
- --------------------------------------------------------------------------------
33,686,075
- --------------------------------------------------------------------------------
Closed End Mutual Fund -- 0.5%
175,000 Swiss Helvetia Fund 3,718,750
- --------------------------------------------------------------------------------
Communications Equipment -- 0.8%
113,500 California Microwave+ 1,730,875
200,000 Network Equipment Technology Inc.+ 4,250,000
- --------------------------------------------------------------------------------
5,980,875
- --------------------------------------------------------------------------------
Computer Software -- 2.0%
715,000 Intersolv+ 6,613,750
400,000 Mentor Graphics Corp.+ 6,500,000
225,000 Santa Cruz Operations Inc.+ 1,631,250
- --------------------------------------------------------------------------------
14,745,000
- --------------------------------------------------------------------------------
Computer Systems -- 3.8%
95,000 Applied Voice Technology Inc.+ 1,092,500
293,200 ECC International Corp. 2,675,450
260,000 Network Computing Device Inc.+ 1,332,500
575,000 Read Rite Corp.+ 8,121,875
690,000 Sequent Computer Systems Inc.+ 9,315,000
40,000 Sequoia Systems, Inc.+ 120,000
200,000 Stratus Computer Inc.+ 5,800,000
- --------------------------------------------------------------------------------
28,457,325
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
10
Smith Barney Managed Growth Fund
================================================================================
Schedule of Investments (unaudited) (continued) June 30, 1996
================================================================================
SHARES SECURITY VALUE
================================================================================
Distributor-Consumer Products -- 1.7%
255,500 Amway Asia Pacific Ltd. $ 7,728,875
400,000 Swiss Army Brands Inc.+ 5,300,000
- --------------------------------------------------------------------------------
13,028,875
- --------------------------------------------------------------------------------
Electric -- 2.9%
575,000 Cherry Corp., Class A Shares+ 6,181,250
10,000 Cherry Corp., Class B Shares+ 107,500
382,500 Lincoln Electric Co., Class A Shares 11,570,625
480,000 Union Switch & Signal Inc.+ 4,080,000
- --------------------------------------------------------------------------------
21,939,375
- --------------------------------------------------------------------------------
Electronics -- 1.4%
168,000 AVX Corp. 3,108,000
266,700 Watkins-Johnson Co. 7,300,913
- --------------------------------------------------------------------------------
10,408,913
- --------------------------------------------------------------------------------
Environmental Control -- 1.9%
305,000 Fluor Daniel / GTI Inc.+ 3,355,000
450,000 Safety-Kleen Corp. 7,875,000
122,000 Wellman, Inc. 2,851,750
- --------------------------------------------------------------------------------
14,081,750
- --------------------------------------------------------------------------------
Financial Services -- 2.6%
320,000 First Savings Bank of Washington Bancorp. Inc. 5,000,000
950,000 Phoenix Duff & Phelps Corp.+ 7,125,000
425,000 SPS Transaction Services Corp.+ 7,650,000
- --------------------------------------------------------------------------------
19,775,000
- --------------------------------------------------------------------------------
Food -- 3.3%
693,500 Dean Foods Co. 17,164,125
93,000 Golden Enterprises Inc. 732,375
420,000 Lance Inc. 6,930,000
- --------------------------------------------------------------------------------
24,826,500
- --------------------------------------------------------------------------------
Healthcare -- 5.8%
425,000 Humana Inc.+ 7,596,875
500,000 Mid-Atlantic Medical Services Inc.+ 7,125,000
405,000 Neuromedical Systems Inc.+ 6,075,000
504,500 Value Health Inc.+ 11,918,813
350,020 Wellpoint Health Networks Inc.+ 10,937,500
- --------------------------------------------------------------------------------
43,653,188
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
11
Smith Barney Managed Growth Fund
================================================================================
Schedule of Investments (unaudited) (continued) June 30, 1996
================================================================================
SHARES SECURITY VALUE
================================================================================
Household Furniture & Appliances -- 3.7%
354,700 Ethan Allen Interiors Inc.+ $ 8,778,825
250,000 Flex Steel Industries Inc.+ 2,937,500
425,000 Singer Co. NV 8,606,250
525,000 Sunbeam Corp. 7,743,750
- --------------------------------------------------------------------------------
28,066,325
- --------------------------------------------------------------------------------
Household Products -- 1.2%
610,000 Armor All Products Corp. 9,073,750
- --------------------------------------------------------------------------------
Houseware -- 0.6%
800,000 Ekco Group Inc. 4,200,000
- --------------------------------------------------------------------------------
Iron/Steel -- 1.5%
535,000 Worthington Industries Inc. 11,168,125
- --------------------------------------------------------------------------------
Machinery -- 3.0%
435,000 Brenco Inc. 7,014,375
220,000 Lawson Products Inc. 5,555,000
445,000 Stewart & Stevenson Services Inc. 10,123,750
- --------------------------------------------------------------------------------
22,693,125
- --------------------------------------------------------------------------------
Manufactured Housing -- 0.4%
120,000 Skyline Corp. 3,000,000
- --------------------------------------------------------------------------------
Manufacturing -- 0.9%
12,000 Amtrol Inc. 288,000
10,000 Lesco Inc. 180,000
355,000 Watts Industries Inc. 6,611,875
- --------------------------------------------------------------------------------
7,079,875
- --------------------------------------------------------------------------------
Medical Supply -- 1.7%
302,600 West Company Inc. 9,078,000
230,000 York Group Inc. 3,967,500
- --------------------------------------------------------------------------------
13,045,500
- --------------------------------------------------------------------------------
Metal Fabricators -- 1.5%
409,600 Century Aluminum Co.+ 6,451,200
150,000 Trinity Industries Inc. 5,100,000
- --------------------------------------------------------------------------------
11,551,200
- --------------------------------------------------------------------------------
Mining -- 1.0%
300,000 Ashland Coal Inc. 7,800,000
- --------------------------------------------------------------------------------
12
Smith Barney Managed Growth Fund
================================================================================
Schedule of Investments (unaudited) (continued) June 30, 1996
================================================================================
SHARES SECURITY VALUE
================================================================================
Office Equipment & Supplies -- 0.3%
171,300 Hunt Manufacturing Co. $ 2,548,088
- --------------------------------------------------------------------------------
Oil -- 3.3%
300,000 Holly Corp. 7,500,000
282,200 Pennzoil Co. 13,051,750
356,000 Wiser Oil Co. 4,494,500
- --------------------------------------------------------------------------------
25,046,250
- --------------------------------------------------------------------------------
Oil Services -- 1.3%
310,000 J. Ray McDermott, S.A. + 7,750,000
126,000 Offshore Logistics Inc.+ 1,748,250
51,500 RPC Inc.+ 592,250
- --------------------------------------------------------------------------------
10,090,500
- --------------------------------------------------------------------------------
Paper & Forest Products -- 2.0%
400,000 Crown Vantage Inc.+ 5,800,000
422,000 Louisiana Pacific Corp. 9,336,750
- --------------------------------------------------------------------------------
15,136,750
- --------------------------------------------------------------------------------
Pharmaceutical -- 4.8%
480,000 Forest Labs Inc., Class A Shares+ 18,540,000
600,000 Mylan Laboratories 10,350,000
650,000 Perrigo Co.+ 7,312,500
- --------------------------------------------------------------------------------
36,202,500
- --------------------------------------------------------------------------------
Photography/Imaging -- 0.9%
390,000 Scitex Corp. 6,727,500
- --------------------------------------------------------------------------------
Publishing/Printing -- 5.0%
125,000 Houghton Mifflin Co. 6,218,750
370,000 McClatchy Newspapers Inc., Class A Shares 10,221,250
350,000 Readers Digest Association Inc. 14,875,000
338,800 Torstar Corp., Class B Shares 6,276,371
- --------------------------------------------------------------------------------
37,591,371
- --------------------------------------------------------------------------------
Retail-General Merchandising -- 0.5%
240,000 Strawbridge & Clothier, Class A Shares 3,900,000
- --------------------------------------------------------------------------------
Retail-Specialty -- 1.9%
230,000 Blair Corp. 5,433,750
1,050,000 TBC Corp.+ 9,056,250
- --------------------------------------------------------------------------------
14,490,000
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
13
Smith Barney Managed Growth Fund
================================================================================
Schedule of Investments (unaudited) (continued) June 30, 1996
================================================================================
SHARES SECURITY VALUE
================================================================================
Semiconductors -- 1.3%
228,500 Alpha Industries Inc.+ $ 2,027,938
492,000 Bell Microproducts Inc.+ 3,751,500
335,000 Quality Semiconductor Inc.+ 2,219,375
100,000 Triquint Semiconductor Inc.+ 2,075,000
- --------------------------------------------------------------------------------
10,073,813
- --------------------------------------------------------------------------------
Shoes -- 1.1%
1,020,000 Stride Rite Corp. 8,415,000
- --------------------------------------------------------------------------------
Specialized Services -- 1.2%
400,000 Rollins Inc. 9,400,000
- --------------------------------------------------------------------------------
Telephone -- 1.5%
342,900 Century Telephone Enterprises Inc. 10,929,938
- --------------------------------------------------------------------------------
Textile -- 2.5%
365,000 Haggar Corp. 4,927,500
513,000 Norton McNaughton Inc.+ 3,719,250
360,000 Russell Corp. 9,945,000
- --------------------------------------------------------------------------------
18,591,750
- --------------------------------------------------------------------------------
Tobacco -- 1.5%
320,000 UST Inc. 10,960,000
- --------------------------------------------------------------------------------
Transportation -- 1.8%
250,000 Airborne Freight Corp. 6,500,000
87,100 Pittston Burlington Group 1,883,538
174,200 Pittston Services Group 5,073,575
- --------------------------------------------------------------------------------
13,457,113
- --------------------------------------------------------------------------------
Trucking -- 2.0%
315,000 Builders Transport Inc.+ 2,559,373
450,000 Frozen Foods Express Industries, Inc. 5,062,500
570,000 Yellow Corp.+ 7,552,500
- --------------------------------------------------------------------------------
15,174,373
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $597,941,332) 623,634,722
================================================================================
See Notes to Financial Statements.
14
Smith Barney Managed Growth Fund
================================================================================
Schedule of Investments (unaudited) (continued) June 30, 1996
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 13.5%
$20,000,000 Federal Home Loan Bank, 5.250% due 7/1/96 $20,000,000
12,080,000 Federal Home Loan Bank, 5.400% due 7/1/96 12,080,000
20,000,000 Federal Home Loan Bank, 5.270% due 7/3/96 19,994,144
50,000,000 Federal Home Loan Bank, 5.250% due 7/5/96 49,970,833
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost -- $102,044,978) 102,044,977
================================================================================
REPURCHASE AGREEMENT -- 3.8%
28,364,000 Chase Bank, 5.330% due 7/1/96;
Proceeds at maturity -- $28,376,593;
(Fully collateralized by U.S. Treasury Notes, 5.750%
due 9/30/97; Market value -- $28,943,247)
(Cost --$28,364,000) 28,364,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $728,350,310*) $754,043,699
================================================================================
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
15
Smith Barney Managed Growth Fund
================================================================================
Statement of Assets and Liabilities (unaudited) June 30, 1996
================================================================================
ASSETS:
Investments, at value (Cost-- $728,350,310) $754,043,699
Cash 159
Receivable for Fund shares sold 3,955,071
Dividends and interest receivable 375,898
Other assets 299,248
- --------------------------------------------------------------------------------
Total Assets 758,674,075
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 6,076,372
Management fees payable 465,219
Distribution fees payable 238,979
Accrued expenses 20,619
- --------------------------------------------------------------------------------
Total Liabilities 6,801,189
- --------------------------------------------------------------------------------
Total Net Assets $751,872,886
================================================================================
NET ASSETS:
Par value of capital shares $ 57,555
Capital paid in excess of par value 699,645,283
Undistributed net investment income 1,847,564
Accumulated net realized gain on security transactions 24,629,095
Net unrealized appreciation of investments 25,693,389
- --------------------------------------------------------------------------------
Total Net Assets $751,872,886
================================================================================
Shares Outstanding:
Class A 16,038,771
------------------------------------------------------------------------------
Class B 33,482,652
------------------------------------------------------------------------------
Class C 4,554,216
------------------------------------------------------------------------------
Class Y 2,193,809
------------------------------------------------------------------------------
Class Z 1,285,258
------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $13.10
------------------------------------------------------------------------------
Class B * $13.05
------------------------------------------------------------------------------
Class C ** $13.05
------------------------------------------------------------------------------
Class Y (and redemption price) $13.12
------------------------------------------------------------------------------
Class Z (and redemption price) $13.12
------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $13.79
================================================================================
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed within one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
16
Smith Barney Managed Growth Fund
================================================================================
Statement of Operations (unaudited)
================================================================================
For the Six Months Ended June 30, 1996
INVESTMENT INCOME:
Interest $3,699,795
Dividends 3,625,660
- --------------------------------------------------------------------------------
Total Investment Income 7,325,455
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 2,711,342
Distribution fees (Note 2) 2,365,445
Shareholder and system servicing fees 236,653
Registration fees 90,951
Shareholder communications 41,730
Custody 19,045
Directors' fees 17,978
Audit and legal 11,463
Other 43,007
- --------------------------------------------------------------------------------
Total Expenses 5,537,614
- --------------------------------------------------------------------------------
Net Investment Income 1,787,841
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 103,125,031
Cost of securities sold 67,532,241
- --------------------------------------------------------------------------------
Net Realized Gain 35,592,790
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 13,057,452
End of period 25,693,389
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 12,635,937
- --------------------------------------------------------------------------------
Net Gain on Investments 48,228,727
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $50,016,568
================================================================================
See Notes to Financial Statements.
17
Smith Barney Managed Growth Fund
================================================================================
Statement of Changes in Net Assets
================================================================================
For the Six Months Ended June 30, 1996 (unaudited) and the Period Ended
December 31, 1995
<TABLE>
<CAPTION>
1996 1995(a)
================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 1,787,841 $5,290,575
Net realized gain (loss) 35,592,790 (10,963,695)
Increase in net unrealized appreciation 12,635,937 13,057,452
Increase in Net Assets From Operations 50,016,568 7,384,332
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (5,230,852)
Decrease in Net Assets From
Distributions to Shareholders -- (5,230,852)
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares 238,003,615 521,385,582
Net asset value of shares issued
for reinvestment of dividends -- 5,090,062
Cost of shares reacquired (49,203,840) (15,572,581)
Increase in Net Assets From
Fund Share Transactions 188,799,775 510,903,063
Increase in Net Assets 238,816,343 513,056,543
NET ASSETS:
Beginning of period 513,056,543 --
End of period* $751,872,886 $513,056,543
</TABLE>
* Includes undistributed net investment income of: $1,847,564 $59,723
(a) For the period from June 30, 1995 (commencement of operations) to December
31, 1995.
See Notes to Financial Statements.
18
Smith Barney Managed Growth Fund
================================================================================
Notes to Financial Statements (unaudited)
================================================================================
1. Significant Accounting Policies
The Smith Barney Managed Growth Fund ("Portfolio"), a separate investment
fund of the Smith Barney Investment Funds Inc. ("Fund"), a Maryland corporation,
is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Fund consists of the
Portfolio and four other separate investment portfolios: Smith Barney Government
Securities Fund, Smith Barney Special Equities Fund, Smith Barney Investment
Grade Bond Fund and Smith Barney Growth Opportunity Fund. The financial
statements and financial highlights for the other portfolios are presented in
separate semi-annual reports.
The significant accounting policies consistently followed by the Portfolio
are: (a) security transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing price on such
markets; securities traded in the over-the-counter market and listed securities
for which no sales price were reported are valued at bid price, or in the
absence of a recent bid price, at the bid equivalent obtained from one or more
of the major market makers; (c) securities that have a maturity of more than 60
days are valued at prices based on market quotations for securities of similar
type, yield and maturity; (d) securities maturing within 60 days are valued at
cost plus accreted discount, or minus amortized premium, as applicable; (e)
dividend income is recorded on ex-dividend date and interest income is recorded
on the accrual basis; (f) gains or losses on the sale of securities are
calculated using the specific identification method; (g) direct expenses are
charged to each portfolio and each class; management fees and general portfolio
expenses are allocated on the basis of relative net assets; (h) dividends and
distributions to shareholders are recorded on the ex-dividend date; (i) the
Portfolio intends to comply with the applicable provisions of the Internal
Revenue Code of 1986, as amended, pertaining to regulated investment companies
and to make distributions of taxable income sufficient to relieve it from
substantially all Federal income and excise taxes; (j) the character of income
and gains to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles. At
December 31, 1995, reclassifications were made to the Portfolio's capital
accounts to reflect permanent book/tax differences and income and gains
available for distributions under income tax regulations. Net investment income,
net realized gains and net assets were not affected by this change; and (k)
estimates and assumptions are required to be made regarding assets, liabilities
and changes in net assets
19
Smith Barney Managed Growth Fund
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
resulting from operations when financial statements are prepared. Changes in the
economic environment, financial markets and any other parameters used in
determining these estimates could cause actual results to differ.
2. Management Agreement and Other Transactions
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment manager to the Fund. The
Portfolio pays SBMFM a management fee calculated at an annual rate of 0.85% of
the average daily net assets. This fee is calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares and primary broker for its portfolio agency transactions. For the
six months ended June 30, 1996 SB received brokerage commissions of $96,282 and
sales charges of approximately $1.2 million on sales of the Portfolio's Class A
shares.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B
shares, which applies if redemption occurs within one year from initial purchase
and declines thereafter by 1.00% per year until no CDSC is incurred. Class C
shares have a 1.00% CDSC, which applies if redemption occurs within the first
year of purchase. In addition, Class A shares, in certain instances, have a
1.00% CDSC, which applies if redemption occurs within the first year of
purchase. This CDSC only applies to those purchases of Class A shares, which
when combined with current holdings of Class A shares, equal or exceed $500,000
in the aggregate. These purchases do not incur an initial sales charge.
For the six months ended June 30, 1996, CDSCs paid to SB were:
Class A Class B Class C
================================================================================
CDSCs $10,000 $488,000 $16,000
Pursuant to a Distribution Plan, the Portfolio pays a service fee with
respect to Class A, B and C shares calculated at the annual rate of 0.25% of the
average daily net assets for each respective class. The Portfolio also pays a
distribution fee with respect to Class B and C shares calculated at the annual
rate of 0.75% of the average daily net assets of each class, respectively. For
the six months ended June 30, 1996, total Distribution Plan fees incurred were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $264,296 $1,865,298 $235,851
All officers and one Director of the Fund are employees of SB.
20
Smith Barney Managed Growth Fund
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
3. Investments
During the six months ended June 30, 1996, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $271,587,275
- --------------------------------------------------------------------------------
Sales 103,125,031
At June 30, 1996, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were approximately
as follows:
================================================================================
Gross unrealized appreciation $51,178,935
Gross unrealized depreciation (25,485,546)
- --------------------------------------------------------------------------------
Net unrealized appreciation $25,693,389
4. Capital Loss Carryforward
At December 31, 1995, the Portfolio had, for Federal tax purposes,
approximately $10,877,000 of unused capital loss carryforwards available to
offset future capital gains through December 31, 2003. To the extent that these
carryforward losses are used to offset capital gains, it is probable that the
gains so offset will not be distributed.
5. Repurchase Agreements
The Portfolio purchases (and its custodian takes possession of) U.S.
Government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day), at an agreed-upon higher repurchase price. The Portfolio requires
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
6. Capital Shares
At June 30, 1996, the Fund had ten billion shares of capital stock
authorized with a par value of $0.001 per share. The Portfolio has the ability
to issue multiple classes of shares. Each share of a class represents an
identical interest and has the same rights, except that each class bears certain
direct expenses, including those specifically related to the distribution of its
shares.
21
Smith Barney Managed Growth Fund
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
At June 30, 1996, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y Class Z
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Total Paid-in Capital $193,873,684 $406,748,299 $55,025,409 $28,501,194 $15,554,252
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Period Ended
June 30, 1996 December 31, 1995*
---------------- ------------------
Shares Amount Shares Amount
====================================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 3,923,564 $58,696,486 13,774,175 $164,959,840
Shares issued on reinvestment -- -- 162,519 1,955,093
Shares redeemed (1,230,465) (24,723,314) (591,022) (7,014,421)
Net Increase 2,693,099 $33,973,172 13,345,672 $159,900,512
Class B
Shares sold 9,547,411 $126,353,072 25,291,425 $302,851,281
Shares issued on reinvestment -- -- 219,534 2,640,980
Shares redeemed (1,012,961) (18,463,147) (562,757) (6,633,887)
Net Increase 8,534,450 $107,889,925 24,948,202 $298,858,374
Class C
Shares sold 1,204,714 $18,534,312 3,667,471 $43,872,257
Shares issued on reinvestment -- -- 31,113 374,292
Shares redeemed (186,601) (5,835,979) (162,481) (1,919,473)
Net Increase 1,018,113 $12,698,333 3,536,103 $42,327,076
Class Y**
Shares sold 2,193,809 $28,501,194 -- --
Shares issued on reinvestment -- -- -- --
Shares redeemed -- -- -- --
Net Increase 2,193,809 $28,501,194 -- --
Class Z
Shares sold 465,091 $5,918,551 824,984 $9,702,204
Shares issued on reinvestment -- -- 9,950 119,697
Shares redeemed (14,360) (181,400) (407) (4,800)
Net Increase 450,731 $5,737,151 834,527 $9,817,101
</TABLE>
* For Class A, B and C shares, transactions are for the period from June 30,
1995 (inception date) to December 31, 1995. For Class Z shares,
transactions are for the period from October 2, 1995 (inception date) to
December 31, 1995.
** Transactions are for the period from January 30, 1996 (inception date) to
June 30, 1996.
22
Smith Barney Managed Growth Fund
================================================================================
Financial Highlights
================================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class A Class B
---------------------- ----------------------
1996(1) 1995(2) 1996(1) 1995(2)
=====================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $12.03 $12.00 $12.02 $12.00
- -----------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.07 0.16 0.02 0.11
Net realized and unrealized gain 1.00 0.02 1.01 0.02
- -----------------------------------------------------------------------------------------------------
Total Income From Operations 1.07 0.18 1.03 0.13
- -----------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- (0.15) -- (0.11)
- -----------------------------------------------------------------------------------------------------
Total Distributions -- (0.15) -- (0.11)
- -----------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $13.10 $12.03 $13.05 $12.02
- -----------------------------------------------------------------------------------------------------
Total Return++ 8.89% 1.53% 8.57% 1.16%
- -----------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $210,028 $160,487 $436,786 $300,000
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 1.23% 1.19% 2.00% 1.94%
Net investment income 1.06 2.74 0.30 1.99
- -----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 20% 6% 20% 6%
=====================================================================================================
Average commissions per share
paid on equity transactions $0.06 $0.06 $0.06 $0.06
=====================================================================================================
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
(2) For the period from June 30, 1995 (inception date) to December 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
23
Smith Barney Managed Growth Fund
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class C Class Y
---------------------- -------
1996(1) 1995(2) 1996(3)
====================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $12.03 $12.00 $12.11
- ------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.02 0.11 0.07
Net realized and unrealized gain 1.00 0.03 0.94
- ------------------------------------------------------------------------------------
Total Income From Operations 1.02 0.14 1.01
- ------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- (0.11) --
- ------------------------------------------------------------------------------------
Total Distributions -- (0.11) --
- ------------------------------------------------------------------------------------
Net Asset Value, End of Period $13.05 $12.03 $13.12
- ------------------------------------------------------------------------------------
Total Return++ 8.48% 1.16% 8.34%
- ------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $59,419 $42,530 $28,777
- ------------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 2.01% 1.91% 0.92%
Net investment income 0.29 2.02 1.38
- ------------------------------------------------------------------------------------
Portfolio Turnover Rate 20% 6% 20%
====================================================================================
Average commissions per share
paid on equity transactions $0.06 $0.06 $0.06
====================================================================================
<CAPTION>
Class Z Shares 1996(1) 1995(4)
====================================================================================
<S> <C> <C>
Net Asset Value, Beginning of Period $12.03 $11.83
- ------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.09 0.04
Net realized and unrealized gain 1.00 0.32
- ------------------------------------------------------------------------------------
Total Income From Operations 1.09 0.36
- ------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- (0.16)
- ------------------------------------------------------------------------------------
Total Distributions -- (0.16)
- ------------------------------------------------------------------------------------
Net Asset Value, End of Period $13.12 $12.03
- ------------------------------------------------------------------------------------
Total Return++ 9.06% 3.06%
- ------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $16,863 $10,040
- ------------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 0.92% 0.90%
Net investment income 1.37 2.30
- ------------------------------------------------------------------------------------
Portfolio Turnover Rate 20% 6%
====================================================================================
Average commissions per share
paid on equity transactions $0.06 $0.06
====================================================================================
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
(2) For the period from June 30, 1995 (inception date) to December 31, 1995.
(3) For the period from January 30, 1996 (inception date) to June 30, 1996
(unaudited).
(4) For the period from October 2, 1995 (inception date) to December 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
24
Smith Barney
Managed Growth
Fund
Directors
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Frank G. Hubbard
Heath B. McLendon, Chairman
Ken Miller
John F. White
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Douglas Johnson
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
SMITH BARNEY
------------
A Member of TravelersGroup [LOGO]
Investment Adviser
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank, N.A.
Shareholder
Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Managed Growth Fund. It is not authorized for distribution to
prospective investors unless accompanied or preceded by a current Prospectus for
the Fund, which contains information concerning the Fund's investment policies
and expenses as well as other pertinent information.
Smith Barney
Managed Growth
Fund
388 Greenwich Street
New York, New York 10013
FD01005 8/96
SEMI-ANNUAL REPORT
===========================================================================
[Stock Photography]
Smith Barney
Investment
Grade Bond
Fund
----------------------------------------
June 30, 1996
[Logo] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- ---------------------------------------
Smith Barney Investment Grade Bond Fund
- ---------------------------------------
Dear Shareholder:
We are pleased to provide you with the semi-annual report for the Smith Barney
Investment Grade Bond Fund for the period ended June 30, 1996. In this report,
we have summarized the period's prevailing economic and market conditions. In
addition, a more detailed summary of the Fund's performance and current holdings
can be found in the appropriate sections that follow in the semi-annual report.
Market and Economic Overview
The past year has seen a turnaround in the U.S. economy. The period from June
1995 through January 1996 was characterized by low inflation, somewhat weaker
economic growth and a strong rally in the bond market. All signs pointed to a
weaker economy, which is generally positive for the bond market, and there was a
general consensus that the Federal Reserve would probably lower interest rates.
However, economic data released by the U.S. government in late February and
early March indicated that the U.S. economy was growing at a stronger rate than
previously expected. The strength in the U.S. economy became even more apparent
as the end of the second quarter drew to a close, with the most recent
employment report released by the U.S. Government indicating that non-farm
payrolls rose by 239,000 in June after having risen 365,000 in May. Moreover,
the report showed that the unemployment rate fell to 5.3% in June, the lowest
level since 1990. As a result of the increased number of newly created jobs,
consumer spending also rose, posting annualized growth rates of more than 3% in
the first two quarters of 1996. With stronger-than-expected real growth in the
U.S. economy, the Federal Reserve Board shifted its monetary policy from the
accommodative stance taken in 1995 to a neutral policy in the first half of
1996. Indeed, at the present time there is a growing consensus that the Federal
Reserve Board will ultimately raise short-term interest rates in an effort to
moderate the rate of economic growth.
The strength in the U.S. economy has heightened concerns over inflation, which
had a negative impact on the fixed-income markets during the first half of 1996.
The yield on the 30-year U.S. Government bond rose 100 basis points (1%), from
6% at the end of 1995, to approximately 7% at the end of June 1996. The fear of
the possible reemergence of inflation continues to hang over the bond market.
Pessimists point out that expected increases in hourly wages will immediately
cause higher prices at both the wholesale and retail levels.
1
<PAGE>
We strongly disagree with this viewpoint for the following reasons:
o Real wages have actually been declining over the past several years,
and therefore any U.S. economic rebound does not necessarily mean that
wages will rise.
o Corporations remain constrained by global competitive forces and are
therefore unwilling or simply unable to pass along substantial price
increases to consumers.
o Technological advances continue in virtually all industries. Because
of that trend, labor, in our view, will continue to become a smaller
fraction of the cost of production.
o The Federal Reserve Board has established an impressive track record
in recent years in keeping inflation contained.
o Lastly, efforts to reduce the U.S. budget deficits have helped to
encourage flows into the U.S. capital markets.
Fund Performance and Outlook
As we previously stated, we believe that current inflationary fears are
unjustified and that U.S. economic growth will moderate later this year. Despite
the volatility in the bond market over the past six months, the Investment Grade
Bond Fund has stayed true to its investment strategy. We continue to remain
bullish on the long-term prospects for bonds, and believe that interest rates
will decline as they have done over the past decade. The Fund continues to
invest almost exclusively in corporate bonds and has remained broadly
diversified across many sectors. During the period covered by this report, the
Fund's average weighted maturity has remained consistent at 33 years. The
Investment Grade Bond Fund generated a six-month return of -7.49% for the period
ended June 30, 1996, underperforming its peer group average return of -2.32%, as
reported by Lipper Analytical Services Inc., a major fund tracking organization.
Because approximately two-thirds of the Investment Grade Bond Fund's portfolio
is invested in lower-rated investment grade bonds (BBB/Baa and A), and maintains
a long maturity structure, the Fund is more sensitive to interest rate
fluctuations and market volatility than other corporate-bond funds. Therefore
the Smith Barney Investment Grade Bond Fund may underperform relative to other
investment grade bond funds during periods of market declines, such as the past
six months. However, it is important to point out that due to our bullish stance
on interest rates, and the Fund's diversification across issues, industries and
maturities, the Investment Grade Bond Fund has performed well for investors over
the long-term. This is evidenced by the Fund's total return of 35.29% in 1995,
and its 3-year annual rate of return of 6.25% versus its Lipper peer group
average return of 4.50% for the same 3-year time period.
2
<PAGE>
We would like to thank you for your investment in the Smith Barney Investment
Grade Bond Fund. In closing, we remain optimistic about the long-term prospects
for the U.S. bond market, and look forward to continuing to help you achieve
your financial goals.
Sincerely,
/s/Heath B. McLendon /s/George E. Mueller, Jr.
Heath B. McLendon George E. Mueller, Jr.
Chairman and Vice President
Chief Executive Officer and Investment Officer
July 18, 1996
3
<PAGE>
Smith Barney Investment Grade Bond Fund
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- -----------------------------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
=====================================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/96 $13.25 $11.87 $0.40 $0.00 $0.00 (7.49)%+
- -----------------------------------------------------------------------------------------------------
12/31/95 10.67 13.25 0.89 0.16 0.00 35.29
- -----------------------------------------------------------------------------------------------------
12/31/94 13.01 10.67 0.86 0.31 0.03 (8.95)
- -----------------------------------------------------------------------------------------------------
12/31/93 11.89 13.01 0.89 0.14 0.00 18.45
- -----------------------------------------------------------------------------------------------------
Inception*-12/31/92 11.67 11.89 0.14 0.00 0.01 3.25+
=====================================================================================================
Total $3.18 $0.61 $0.04
=====================================================================================================
- -----------------------------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- -----------------------------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
- -----------------------------------------------------------------------------------------------------
6/30/96 $13.25 $11.87 $0.37 $0.00 $0.00 (7.66)%+
- -----------------------------------------------------------------------------------------------------
12/31/95 10.67 13.25 0.83 0.16 0.00 34.63
- -----------------------------------------------------------------------------------------------------
12/31/94 13.01 10.67 0.80 0.31 0.03 (9.41)
- -----------------------------------------------------------------------------------------------------
12/31/93 11.89 13.01 0.83 0.14 0.00 18.06
- -----------------------------------------------------------------------------------------------------
12/31/92 11.80 11.89 0.83 0.00 0.03 8.36
- -----------------------------------------------------------------------------------------------------
12/31/91 10.43 11.80 0.87 0.00 0.00 22.50
- -----------------------------------------------------------------------------------------------------
12/31/90 11.01 10.43 0.87 0.00 0.00 2.98
- -----------------------------------------------------------------------------------------------------
12/31/89 10.33 11.01 0.87 0.00 0.00 15.57
- -----------------------------------------------------------------------------------------------------
12/31/88 10.55 10.33 0.88 0.00 0.00 6.43
- -----------------------------------------------------------------------------------------------------
12/31/87 12.91 10.55 1.12 0.89 0.00 (2.83)
- -----------------------------------------------------------------------------------------------------
12/31/86 12.00 12.91 1.10 0.25 0.00 19.54
=====================================================================================================
Total $9.37 $1.75 $0.06
=====================================================================================================
- -----------------------------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- -----------------------------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
- -----------------------------------------------------------------------------------------------------
6/30/96 $13.26 $11.88 $0.37 $0.00 $0.00 (7.71)%+
- -----------------------------------------------------------------------------------------------------
12/31/95 10.67 13.26 0.83 0.16 0.00 34.74
- -----------------------------------------------------------------------------------------------------
12/31/94 13.01 10.67 0.80 0.31 0.03 (9.41)
- -----------------------------------------------------------------------------------------------------
Inception*-12/31/93 12.56 13.01 0.69 0.14 0.00 10.38+
=====================================================================================================
Total $2.69 $0.61 $0.03
=====================================================================================================
- -----------------------------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- -----------------------------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
=====================================================================================================
Inception*-6/30/96 $13.03 $11.87 $0.35 $0.00 $0.00 (7.93)%+
=====================================================================================================
</TABLE>
It is the Funds' policy to distribute dividends monthly and capital gains, if
any, annually.
4
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
-------------------------------------------------
Class A Class B Class C Class Y
================================================================================
Six Months 6/30/96+ (7.49)% (7.66)% (7.71)% N/A
- --------------------------------------------------------------------------------
Year Ended 6/30/96 2.91 2.48 2.51 N/A
- --------------------------------------------------------------------------------
Five Years Ended 6/30/96 N/A 10.49 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/96 N/A 8.64 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/96 9.52 11.81 6.74 (7.93)%+
================================================================================
With Sales Charge(2)
-------------------------------------------------
Class A Class B Class C Class Y
================================================================================
Six Months 6/30/96+ (11.63)% (11.70)% (8.60)% N/A
- --------------------------------------------------------------------------------
Year Ended 6/30/96 (1.73) (2.02) 1.51 N/A
- --------------------------------------------------------------------------------
Five Years Ended 6/30/96 N/A 10.49 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/96 N/A 7.87 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/96 8.15 11.26 6.74 (7.93)%+
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 6/30/96) 39.38%
- --------------------------------------------------------------------------------
Class B (6/30/86 through 6/30/96) 129.03
- --------------------------------------------------------------------------------
Class C (Inception* through 6/30/96) 24.34
- --------------------------------------------------------------------------------
Class Y (Inception* through 6/30/96) (7.93)
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charge with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 4.50% and Class B shares reflect the
deduction of a 4.50% CDSC, which applies if shares are redeemed within one
year from initial purchase. This CDSCdeclines by 0.50% the first year after
purchase and thereafter by 1.00% per year until no CDSCis incurred. Class C
shares reflect the deduction of a 1.00% CDSC, which applies if shares are
redeemed within the first year of purchase.
* Inception dates for Class A, B, C and Y shares are November 6, 1992,
January 4, 1982, February 26, 1993 and February 7, 1996, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
5
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class B Shares of the
Smith Barney Investment Grade Bond Fund vs.
Lehman Brothers Long-Term Corporate Bond Index and
Lipper Corporate Debt A-Rated Average
- --------------------------------------------------------------------------------
[The table below was represented as a line graph in the printed material.]
June 1986 -- June 1996
Investment Fund Lehman Bros Lipper
--------------- ----------- ------
6/86 10000 10000 10000
12/86 10544 11089 10706
12/87 9544 11782 10864
12/88 10157 12777 12004
12/89 11739 14738 13839
12/90 12088 15765 14736
12/91 14808 17447 17828
12/92 16046 20386 19493
12/93 18944 23673 22153
12/94 17158 22770 20877
12/95 23099 27088 26707
6/96 21328 29615 25588
+ Hypothetical illustration of $10,000 invested in Class B shares on June 30,
1986, assuming reinvestment of dividends and capital gains, if any, at net
asset value through June 30, 1996. The Lehman Brothers Long-Term Corporate
Bond Index is comprised of all publicly issued, fixed rate,
non-convertible, dollar-denominated investment-grade corporate debt from a
diverse range of industries with an average maturity of approximately 23
years. The index is unmanaged and is not subject to the same management and
trading expenses as a mutual fund. The Lipper Corporate Debt A-Rated
Average is composed of the Fund's peer group of 122 mutual funds as of June
30, 1996. The performance of the Fund's other classes may be greater or
less than the Class B shares' performance indicated on this chart,
depending on whether greater or lesser sales charges and fees were incurred
by shareholders investing in the other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
6
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) June 30, 1996
- --------------------------------------------------------------------------------
[The table below was represented as pie graph in the printed material.]
Portfolio Breakdown
Other U.S. Corporate
Bonds and Notes 31.4%
Aerospace &
Defense 7.4%
Airlines 9.6%
Automotive 8.2%
Foods 10.9%
Media Groups 9.7%
Yankee Bonds 9.6%
U.S. Government
Agencies and
Obligations 1.8%
Entertainment 5.7%
Beverages (Alcoholic) 5.7%
Top Ten Bond Holdings
Percentage of
Total Investments
- --------------------------------------------------------------------------------
Hershey Foods Corp. 4.5%
General Motors Corp. 4.3
Time Warner, Inc. 4.2
Ford Motor Co. 3.9
Boeing Co. 3.6
Walt Disney Co. 3.5
Seagrams Ltd. 3.5
Ralston Purina Co. 3.5
Hydro Quebec, Series HH 3.4
Loral Corp. 3.4
- --------------------------------------------------------------------------------
7
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
==================================================================================================
<C> <C> <S> <C>
CORPORATE BONDS AND NOTES -- 88.6%
Aerospace & Defense -- 7.4%
$18,500,000 AA Boeing Co., Debentures, 6.875% due 10/15/43 $ 16,858,125
2,000,000 BBB+ Lockheed Martin, Debentures, 7.750% due 5/1/26 1,995,000
17,500,000 BBB Loral Co., Debentures, 7.000% due 9/15/23 15,946,875
- --------------------------------------------------------------------------------------------------
34,800,000
- --------------------------------------------------------------------------------------------------
Airlines -- 9.6%
AMR Corp., Debentures:
12,500,000 BB+ 9.000% due 9/15/16 13,562,500
4,500,000 BB+ 9.880% due 6/15/20 5,304,375
Delta Air Lines, Inc., Debentures:
10,735,000 BB 9.000% due 5/15/16 11,580,381
5,000,000 BB 9.750% due 5/15/21 5,756,250
7,650,000 BB United Airlines, Inc., Debentures, 9.750% due 8/15/21 8,721,000
- --------------------------------------------------------------------------------------------------
44,924,506
- --------------------------------------------------------------------------------------------------
Automotive -- 8.2%
18,400,000 A+ Ford Motor Co., Debentures, 7.750% due 6/15/43 18,285,000
21,000,000 A- General Motors Corp., Notes, 9.400% due 7/15/21 19,976,250
- --------------------------------------------------------------------------------------------------
38,261,250
- --------------------------------------------------------------------------------------------------
Banking -- 0.4%
2,000,000 A- NationsBank Corp., Debentures, 7.250% due 10/15/25 1,882,500
- --------------------------------------------------------------------------------------------------
Beverages-Soft Drinks -- 2.3%
12,000,000 AA- Coca Cola Enterprises Inc., Debentures, 6.750% due 9/15/23 10,890,000
- --------------------------------------------------------------------------------------------------
Beverages-Alcoholic -- 5.7%
18,300,000 N/R Seagrams Ltd., Debentures, 6.875% due 9/1/23 16,470,000
11,000,000 AAA Anheuser Busch Co., Debentures, 7.000% due 12/1/25 10,188,750
- --------------------------------------------------------------------------------------------------
26,658,750
- --------------------------------------------------------------------------------------------------
Chemicals -- 0.3%
1,500,000 AAA Lyondell Petrochemicals Co., Debentures, 7.550% due 2/15/26 1,393,125
- --------------------------------------------------------------------------------------------------
Consumer Products -- 1.1%
6,000,000 BBB+ Fruit of the Loom, Inc., Debentures, 7.375% due 11/15/23 5,325,000
- --------------------------------------------------------------------------------------------------
Electronics/Computers -- 2.5%
11,000,000 A IBM Corp., Debentures, 7.000% due 10/30/45 10,051,250
2,000,000 A Johnson Controls Inc., Debentures, 6.950% due 12/1/45 1,810,000
- --------------------------------------------------------------------------------------------------
11,861,250
- --------------------------------------------------------------------------------------------------
Entertainment -- 5.7%
12,000,000 AA- Paramount Communications, Inc., Sr. Debentures,
7.500% due 7/15/23 10,365,000
17,000,000 A Walt Disney Corp., Sr. Debentures, 7.550% due 7/15/93 16,532,500
- --------------------------------------------------------------------------------------------------
26,897,500
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
==================================================================================================
<C> <C> <S> <C>
Foods -- 10.9%
$16,750,000 BBB+ Borden Inc., Notes, 7.875% due 2/15/23 $ 13,776,875
18,645,000 AA- Hershey Foods Corp., Debentures, 8.800% due 2/15/21 21,162,075
16,000,000 A- Ralston Purina Co., Debentures, 8.125% due 2/1/23 16,260,000
- --------------------------------------------------------------------------------------------------
51,198,950
- --------------------------------------------------------------------------------------------------
HealthCare -- 1.1%
5,500,000 A- Columbia/ HCA HealthCare, Debentures, 7.500% due 11/15/95 5,218,125
- --------------------------------------------------------------------------------------------------
Insurance -- 2.1%
10,000,000 AAA American General Corp., Debentures, 7.500% due 7/15/25 9,725,000
- --------------------------------------------------------------------------------------------------
Manufacturing-Diversified Industries -- 3.0%
14,000,000 A American Brands, Debentures, 7.875% due 1/15/23 14,227,500
- --------------------------------------------------------------------------------------------------
Media Group -- 9.7%
17,500,000 A CBS Inc., Notes, 7.125% due 11/1/23 14,153,125
10,500,000 BBB+ Harcourt General Cinema, Debentures, 8.875% due 6/1/22 11,405,625
19,000,000 BBB- Time Warner Inc., Debentures, 9.150% due 2/1/23 19,807,500
- --------------------------------------------------------------------------------------------------
45,366,250
- --------------------------------------------------------------------------------------------------
Metals & Mining -- 2.2%
10,000,000 BBB Asarco Inc., Debentures, 8.500% due 5/1/25 10,350,000
- --------------------------------------------------------------------------------------------------
Oil & Gas -- 2.2%
Burlington Resources, Inc., Debentures:
6,500,000 A- 8.200% due 3/15/25 6,841,250
4,000,000 AAA 6.875% due 2/15/26 3,595,000
- --------------------------------------------------------------------------------------------------
10,436,250
- --------------------------------------------------------------------------------------------------
Paper & Forest Products -- 1.5%
Georgia-Pacific Corp., Debentures:
500,000 BBB- 9.625% due 3/15/22 540,625
7,000,000 BBB- 7.375% due 12/1/25 6,422,500
- --------------------------------------------------------------------------------------------------
6,963,125
- --------------------------------------------------------------------------------------------------
Publishing -- 2.9%
15,000,000 AAA News America Holdings Inc., Notes, 7.750% due 12/1/45 13,425,000
- --------------------------------------------------------------------------------------------------
Retail Stores -- 2.1%
10,000,000 BBB- Woolworth Corp., Debentures, 8.500% due 1/15/22 9,650,000
- --------------------------------------------------------------------------------------------------
Super National Entity -- 5.3%
International Bank for Reconstruction and Development:
110,000,000 Aaa* Zero coupon due 3/1/26 13,612,500
70,000,000 Aaa* Zero coupon due 3/1/28 7,437,500
42,860,000 Aaa* Zero coupon due 7/15/29 4,018,125
- --------------------------------------------------------------------------------------------------
25,068,125
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
==================================================================================================
<C> <C> <S> <C>
Telecommunications -- 2.4%
$12,000,000 AAA Bellsouth Telecommunications Corp., Debentures,
7.000% due 12/1/95 $ 11,070,000
- --------------------------------------------------------------------------------------------------
TOTAL U. S. CORPORATE BONDS AND NOTES
(Cost -- $414,895,105) 415,592,206
==================================================================================================
U. S. GOVERNMENT AGENCIES AND OBLIGATIONS -- 1.8%
4,000,000 Aaa* U.S. Treasury Bonds, 6.875% due 8/15/25 3,962,240
Financing Corp., Strips, Series 19:
2,400,000 NR 9.000% due 12/6/18 451,344
21,400,000 NR 9.000% due 6/6/19 3,859,918
- --------------------------------------------------------------------------------------------------
TOTAL U. S. GOVERNMENT AGENCIES AND
OBLIGATIONS (Cost -- $7,933,459) 8,273,502
==================================================================================================
YANKEE BONDS -- 9.6.%
2,000,000 AAA British Columbia, Province of Canada, Debentures,
6.500% due 1/15/26 1,800,000
Hydro-Quebec Debentures:
1,600,000 A+ Series HE, 8.625% due 6/15/29 1,730,000
15,000,000 A+ Series HH, 8.500% due 12/1/29 15,993,750
1,000,000 A Series HI, 9.375% due 4/15/30 1,167,500
5,000,000 BBB+ Newfoundland, Province of Canada, Debentures,
7.320% due 10/13/23 4,718,750
6,500,000 A- Nova Scotia Power Corp., 8.250% due 7/30/22 6,881,875
Nova Scotia, Province of Canada:
3,000,000 A- 9.125% due 5/1/21 3,457,500
8,500,000 A- 8.750% due 4/1/22 9,466,875
- --------------------------------------------------------------------------------------------------
TOTAL YANKEE BONDS
(Cost -- $42,482,206) 45,216,250
==================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $465,310,770**) $469,081,958
==================================================================================================
</TABLE>
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 11 for definition of ratings.
See Notes to Financial Statements.
10
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Bond Ratings
- --------------------------------------------------------------------------------
All ratings are by Standard & Poor's Corporation ("Standard &Poor's"), except
those identified by an asterisk (*) are rated by Moody's Investors Services
("Moody's"). The definitions of the applicable rating symbols are set forth
below:
Standard & Poor's -- Ratings from "AA" to "BBB" may be modified by the addition
of a plus (+) or a minus (-) sign to show relative standings within the major
rating categories.
AAA --Debt rated "AAA"' has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA --Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issue only in small
degree.
A --Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB --Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB, B --Debt rated "BB" and "B" is regarded, on balance, as predominantly
and CCC speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB
represents a lower degree of speculation than B, and CCC the highest
degree of speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Moody's --Numerical modifiers 1, 2, and 3 may be applied to each generic
rating from "Aa" to "Baa," where 1 is the highest and 3 the lowest
rating within its generic category.
Aaa --Bonds that are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa --Bonds that are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A --Bonds that are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment some time in the future.
Baa --Bonds that are rated "Baa" are considered as medium grade
obligations,i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
NR --Indicates that the bond is not rated by Standard & Poor's or Moody's.
11
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) June 30, 1996
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost--$465,310,770) $ 469,081,958
Receivable for Fund shares sold 489,525
Interest receivable 9,460,738
- --------------------------------------------------------------------------------
Total Assets 479,032,221
- --------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 2,567,578
Investment advisory fees payable 208,342
Distribution fees payable 113,496
Payable to bank 74,549
Administration fees payable 42,509
Accrued expenses 168,140
- --------------------------------------------------------------------------------
Total Liabilities 3,174,614
- --------------------------------------------------------------------------------
Total Net Assets $ 475,857,607
================================================================================
NET ASSETS:
Par value of capital shares $ 400,927
Capital paid in excess of par value 474,205,331
Overdistributed net investment income (2,159,670)
Accumulated net realized loss on security transactions (360,169)
Net unrealized appreciation of investments 3,771,188
- --------------------------------------------------------------------------------
Total Net Assets $ 475,857,607
================================================================================
Shares Outstanding:
Class A 17,142,048
----------------------------------------------------------------------------
Class B 21,772,370
----------------------------------------------------------------------------
Class C 499,173
----------------------------------------------------------------------------
Class Y 679,127
----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $ 11.87
----------------------------------------------------------------------------
Class B* $ 11.87
----------------------------------------------------------------------------
Class C** $ 11.88
----------------------------------------------------------------------------
Class Y (and redemption price) $ 11.87
----------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% of net asset value per share) $ 12.43
================================================================================
* Redemption price is NAV of Class B shares reduced by a 4.50% CDSC if shares
are redeemed within one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
12
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1996
INVESTMENT INCOME:
Interest $ 18,460,512
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 1,286,126
Investment advisory fees (Note 2) 1,097,872
Administration fees (Note 2) 487,943
Shareholder and system servicing fees 137,322
Custody 35,872
Directors' fees 29,972
Shareholder communications 27,583
Registration fees 24,930
Audit and legal 21,000
Other 46,847
- --------------------------------------------------------------------------------
Total Expenses 3,195,467
- --------------------------------------------------------------------------------
Net Investment Income 15,265,045
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 80,197,417
Cost of securities sold 78,896,712
- --------------------------------------------------------------------------------
Net Realized Gain 1,300,705
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation)
of Investments:
Beginning of period 60,111,981
End of period 3,771,188
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (56,340,793)
- --------------------------------------------------------------------------------
Net Loss on Investments (55,040,088)
- --------------------------------------------------------------------------------
Decrease in Net Assets From Operations $(39,775,043)
================================================================================
See Notes to Financial Statements.
13
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1996 (unaudited)
and the Year Ended December, 1995
<TABLE>
<CAPTION>
1996 1995
====================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 15,265,045 $ 30,379,334
Net realized gain 1,300,705 5,326,832
Increase in net unrealized appreciation (depreciation) (56,340,793) 101,641,373
- ----------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations (39,775,043) 137,347,539
- ----------------------------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (15,316,622) (32,487,427)
Net realized gains -- (6,128,106)
- ----------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions To Shareholders (15,316,622) (38,615,533)
- ----------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 61,544,961 87,249,088
Net asset value of shares issued for reinvestment of dividends 10,782,442 25,423,076
Cost of shares reacquired (60,053,210) (96,181,787)
- ----------------------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 12,274,193 16,490,377
- ----------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (42,817,472) 115,222,383
NET ASSETS:
Beginning of period 518,675,079 403,452,696
- ----------------------------------------------------------------------------------------------------
End of period* $ 475,857,607 $ 518,675,079
====================================================================================================
* Includes overdistributed net investment income of: $ (2,159,670) $ (2,108,093)
====================================================================================================
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Investment Grade Bond Fund ("Portfolio"), a separate
investment fund of the Smith Barney Investment Funds Inc. ("Fund"), a Maryland
corporation, is registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end management investment company. The Fund consists of
the Portfolio and four other separate investment portfolios: Smith Barney
Government Securities Fund, Smith Barney Special Equities Fund, Smith Barney
Managed Growth Fund, and Smith Barney Growth Opportunity Fund. The financial
statements and financial highlights for the other portfolios are presented in
separate semi-annual reports.
The significant accounting policies consistently followed by the Portfolio
are: (a) security transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing price on such
markets; securities traded in the over-the-counter market and listed securities
for which no sales price were reported are valued at bid price, or in the
absence of a recent bid price, at the bid equivalent obtained from one or more
of the major market makers; (c) securities that have a maturity of more than 60
days are valued at prices based on market quotations for securities of similar
type, yield and maturity; (d) securities maturing within 60 days are valued at
cost plus accreted discount, or minus amortized premium, as applicable; (e)
dividend income is recorded on ex-dividend date and interest income is recorded
on the accrual basis; (f) gains or losses on the sale of securities are
calculated using the specific identification method; (g) dividends and
distributions to shareholders are recorded on the ex-dividend date; (h) direct
expenses are charged to each portfolio and each class; management fees and
general portfolio expenses are allocated on the basis of relative net assets;
(i) the Portfolio intends to comply with the applicable provisions of the
Internal Revenue Code of 1986, as amended, pertaining to regulated investment
companies and to make distributions of taxable income sufficient to relieve it
from substantially all Federal income and excise taxes; and (j) estimates and
assumptions are required to be made regarding assets, liabilities and changes in
net assets resulting from operations when financial statements are prepared.
Changes in the economic environment, financial markets and any other parameters
used in determining these estimates could cause actual results to differ.
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT
AND OTHER TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment adviser to the Fund. The
15
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Portfolio pays SBMFM an advisory fee calculated at an annual rate of 0.45% of
the average daily net assets up to $500 million and 0.42% of the average daily
net assets thereafter. This fee is calculated daily and paid monthly.
SBMFM also acts as the Fund's administrator for which the Portfolio pays a
fee calculated at an annual rate of 0.20% of the average daily net assets up to
$500 million and 0.18% of the average daily net assets thereafter. This fee is
calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares. For the six months ended June 30, 1996, SB received sales charges
of approximately $129,000 on sales of the Portfolio's Class A shares.
There is a contingent deferred sales charge ("CDSC") of 4.50% on Class B
shares, which applies if redemption occurs within one year from initial
purchase. This CDSC declines by 0.50% the first year after purchase and
thereafter by 1.00% per year until no CDSC is incurred. Class C shares have a
1.00% CDSC, which applies if redemption occurs within the first year of
purchase. For the six months ended June 30, 1996, CDSCs paid to SB were
approximately:
Class B Class C
================================================================================
CDSCs $217,000 $1,000
================================================================================
Pursuant to a Distribution Plan, the Portfolio pays a service fee with
respect to Class A, B and C shares calculated at the annual rate of 0.25% of the
average daily net assets for each respective class. The Portfolio also pays a
distribution fee with respect to Class B and C shares calculated at the annual
rate of 0.50% and 0.45% of the average daily net assets for each class,
respectively. For the six months ended June 30, 1996, total Distribution Plan
fees incurred were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $264,114 $1,004,720 $17,292
================================================================================
All officers and one Director of the Fund are employees of SB.
16
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
3. INVESTMENTS
During the six months ended June 30, 1996, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $95,440,583
================================================================================
Sales 80,197,417
================================================================================
At June 30, 1996, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were approximately
as follows:
================================================================================
Gross unrealized appreciation $ 19,864,337
- --------------------------------------------------------------------------------
Gross unrealized depreciation (16,093,149)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 3,771,188
================================================================================
4. REPURCHASE AGREEMENTS
The Portfolio purchases (and its custodian takes possession of) U.S.
Government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day), at an agreed-upon higher repurchase price. The Portfolio requires
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
5. CAPITAL SHARES
At June 30, 1996, the Fund had ten billion shares of capital stock
authorized with a par value of $0.001 per share. The Portfolio has the ability
to issue multiple classes of shares. Each share of a class represents an
identical interest and has the same rights, except that each class bears certain
direct expenses, including those specifically related to the distribution of its
shares.
At June 30, 1996, total paid-in capital amounted to the following for each
class:
Class A Class B Class C Class Y
================================================================================
Total Paid-in Capital $192,150,425 $268,281,270 $6,067,663 $8,106,900
================================================================================
17
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1996 December 31, 1995
---------------------- ----------------------
Shares Amount Shares Amount
=============================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 1,379,150 $ 17,190,434 1,607,785 $ 19,821,590
Shares issued on reinvestment 423,618 5,254,163 1,002,331 12,111,574
Shares redeemed (1,745,299) (21,183,279) (2,523,526) (30,346,445)
- ---------------------------------------------------------------------------------------------
Net Increase 57,469 $ 1,261,318 86,590 $ 1,586,719
=============================================================================================
Class B
Shares sold 2,679,832 $ 33,149,801 5,310,407 $ 63,978,854
Shares issued on reinvestment 436,903 5,423,454 1,087,231 13,196,188
Shares redeemed (3,121,093) (38,321,719) (5,346,794) (64,605,561)
- ---------------------------------------------------------------------------------------------
Net Increase (Decrease) (4,358) $ 251,536 1,050,844 $ 12,569,481
=============================================================================================
Class C
Shares sold 251,666 $ 3,097,812 283,140 $ 3,448,644
Shares issued on reinvestment 8,533 104,825 9,409 115,314
Shares redeemed (45,273) (548,199) (101,992) (1,229,781)
- ---------------------------------------------------------------------------------------------
Net Increase 214,926 $ 2,654,438 190,557 $ 2,334,177
=============================================================================================
Class Y
Shares sold 679,128 $ 8,106,914 -- --
Shares issued on reinvestment -- -- -- --
Shares redeemed (1) (13) -- --
- ---------------------------------------------------------------------------------------------
Net Increase 679,127 $ 8,106,901 -- --
=============================================================================================
</TABLE>
18
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class A Shares 1996(1) 1995(2) 1994(2) 1993(2) 1992(3)
====================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 13.25 $ 10.67 $ 13.01 $ 11.89 $ 11.67
- --------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.40 0.83 0.74 0.88 0.14
Net realized and unrealized gain (loss) (1.38) 2.80 (1.88) 1.27 0.23
- --------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.98) 3.63 (1.14) 2.15 0.37
- --------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.40) (0.89) (0.86) (0.88) (0.14)
Overdistribution of net investment income -- -- -- (0.01) .--
Net realized gains -- (0.16) (0.31) (0.14) --
Capital -- -- (0.03) -- (0.01)
- --------------------------------------------------------------------------------------------------------------------
Total Distributions (0.40) (1.05) (1.20) (1.03) (0.15)
- --------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 11.87 $ 13.25 $ 10.67 $ 13.01 $ 11.89
- --------------------------------------------------------------------------------------------------------------------
Total Return (7.49)%++ 35.29% (8.95)% 18.45% 3.25%++
- --------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 203,434 $ 226,373 $ 181,334 $ 10,136 $ 933
- --------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 1.05%+ 1.11% 1.11% 1.11% 1.03%+
Net investment income 6.62+ 7.02 7.35 6.67 7.53+
- --------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 20% 49% 18% 65% 47%
====================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since use of the undistributed method does not accord with results of
operations.
(3) For the period from November 6, 1992 (inception date) to December 31, 1992.
(4) For the year ended December 31, 1992, the expense ratio excludes interest
expense. The expense ratio including interest expense would have been 1.04%
(annualized).
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
19
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class B Shares 1996(1) 1995(2) 1994(2) 1993(2) 1992 1991
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 13.25 $ 10.67 $ 13.01 $ 11.89 $ 11.80 $ 10.43
- --------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.37 0.77 0.82 0.80 0.83 0.86
Net realized and unrealized gain (loss) (1.38) 2.80 (2.02) 1.29 0.12 1.38
- --------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (1.01) 3.57 (1.20) 2.09 0.95 2.24
- --------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.37) (0.83) (0.80) (0.82) (0.83) (0.87)
Overdistribution of investment net income -- -- -- (0.01) -- --
Net realized gains -- (0.16) (0.31) (0.14) -- --
Capital -- -- (0.03) -- (0.03) --
- --------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.37) (0.99) (1.14) (0.97) (0.86) (0.87)
- --------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 11.87 $ 13.25 $ 10.67 $ 13.01 $ 11.89 $ 11.80
- --------------------------------------------------------------------------------------------------------------------------------
Total Return (7.66)%++ 34.63% (9.41)% 18.06% 8.36% 22.50%
- --------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 258,433 $ 288,533 $ 221,120 $ 476,088 $ 431,783 $ 413,878
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.55%+ 1.61% 1.57% 1.58% 1.57% 1.53%
Net investment income 6.11+ 6.51 6.89 6.20 6.99 7.90
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 20% 49% 18% 65% 47% 82%
================================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since use of the undistributed method does not accord with results of
operations.
(3) For the year ended December 31, 1992, the expense ratio excludes interest
expense. The expense ratio including interest expense was 1.58%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
20
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class C Shares 1996(1) 1995(2) 1994(2) 1993(2)(3)
======================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 13.26 $ 10.67 $ 13.01 $ 12.56
- ------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.36 0.78 0.75 0.63
Net realized and unrealized gain (loss) (1.37) 2.80 (1.95) 0.65
- ------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (1.01) 3.58 (1.20) 1.28
- ------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.37) (0.83) (0.80) (0.68)
Overdistribution of net investment income -- -- -- (0.01)
Net realized gains -- (0.16) (0.31) (0.14)
Capital -- -- (0.03) --
- ------------------------------------------------------------------------------------------------------
Total Distributions (0.37) (0.99) (1.14) (0.83)
- ------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 11.88 $ 13.26 $ 10.67 $ 13.01
- ------------------------------------------------------------------------------------------------------
Total Return (7.71)%++ 34.74% (9.41)% 10.38%++
- ------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 5,928 $ 3,769 $ 999 $ 208
- ------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.47%+ 1.56% 1.57% 1.61%+
Net investment income 6.27+ 6.55 6.89 6.17+
- ------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 20% 49% 18% 65%
======================================================================================================
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since use of the undistributed method does not accord with results of
operations.
(3) For the period from February 26, 1993 (inception date) to December 31,
1993.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
21
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
Class Y Shares 1996(1)
================================================================================
Net Asset Value, Beginning of Period $ 13.03
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.30
Net realized and unrealized loss (1.11)
- --------------------------------------------------------------------------------
Total Loss From Operations (0.81)
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.35)
- --------------------------------------------------------------------------------
Total Distributions (0.35)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $ 11.87
- --------------------------------------------------------------------------------
Total Return++ (7.93)%
- --------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 8,062
- --------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 0.71%
Net investment income 7.26
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 20%
================================================================================
(1) For the period from February 7, 1996 (inception date) to June 30, 1996
(unaudited).
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
22
<PAGE>
Smith Barney SMITH BARNEY
Investment ------------
Grade Bond A Member of the TravelersGroup [Logo]
Fund
Directors
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Frank G. Hubbard
Heath B. McLendon, Chairman
Ken Miller
John F. White
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
George E. Mueller Jr.
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
PFS Distributors, Inc.
Custodian
PNC Bank, N.A.
Shareholder
Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for
the general information of the
shareholders of Smith Barney
Investment Grade Bond Fund. It is not
authorized for distribution to prospective
investors unless accompanied or preceded
by a current Prospectus for the Fund,
which contains information concerning
the Fund's investment policies and
expenses as well as other pertinent infor-
mation.
Smith Barney
Investment
Grade Bond
Fund
388 Greenwich Street
New York, New York 10013
FD0317 8/96
