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SEMIANNUAL REPORT AND PERFORMANCE UPDATE
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GROWTH FUND
OF ISRAEL
JUNE 30, 1996
<PAGE>
July 25, 1996
DEAR SHAREHOLDER,
New England Funds welcomes the opportunity to present you with the 1996
Semiannual Report for New England Growth Fund of Israel, containing your
portfolio managers' commentary and complete financial information.
ECONOMIC GROWTH IN THE FIRST HALF OF 1996
Moderate growth with low inflation was the economic story during the first
half of 1996. U.S. Gross Domestic Product (GDP), a bellwether of economic
growth, remained strong at 2.3% through June, just shy of what most economists
consider optimal growth. As a result, the Federal Reserve Board opted not to
tinker with interest rates through the first half of the year, save for a
quarter-point hike in short-term rates in late January. The relatively calm
economic waters had a stimulating effect on the domestic equity market, boosting
stocks 537 points to 5,654 at the end of June, as measured by the Dow Jones
Industrial Average. Bond yields did not fare as well, rising to 7.00% at the end
of June from 6.65% earlier in the year. Money market yields remained stable,
falling back only slightly during the past six months.
THE BENEFITS OF MAINTAINING A LONG-TERM FOCUS
But the market volatility of the first three weeks in July claimed 5.5% of
the Dow Jones Industrial Average's first-half gains. Again, we are reminded that
no bull market lasts forever. Long-term financial goals are key in times like
these and it's important to anticipate this type of market volatility and remain
committed to your financial plan.
It's also a good idea to ask your financial representative for help. A
financial representative can guide you through volatile markets and help you
meet your long-term financial goals. A recent study by Dalbar, Inc., a mutual
fund monitoring and analytical service, shows that, on average, mutual fund
investors who bought and held shares, with the assistance of a financial
representative, enjoyed the benefits of a long-term commitment. Consequently,
they benefitted from higher returns than direct investors and others who bought
and sold, although this does not occur in every case.
CELEBRATING THE BIRTHDAYS OF THREE NEW ENGLAND FUNDS
During the past two months, we've celebrated the birthdays of three of our
most popular funds: New England Growth Opportunities Fund; New England Strategic
Income Fund and New England Star Advisers Fund. Demonstrating the remarkable
scope and breadth of our funds, the Growth Opportunities Fund celebrated its
65th birthday in May while the fast-growing Strategic Income and Star Advisers
Funds mark their first and second birthdays, respectively. We're proud of all of
our funds, but take special pride in recognizing that, whether six months or
65-years-old, all New England Funds are designed to help investors achieve their
goals.
NEW ENGLAND FUNDS: THE PLACE "WHERE THE BEST MINDS MEET"(TM)
The longevity of our more seasoned funds and the potential for growth of our
newer ones illustrates the ongoing progress of New England Funds. Our unique
multiple-adviser approach brings together some of the best minds in the
investment business. The ability to attract top-notch investment advisers and
our multiple-adviser approach to fund management are the cornerstones of New
England Funds' investment philosophy and the essence of our corporate logo,
Where The Best Minds Meet(TM).
OUTLOOK FOR THE REST OF 1996
Going forward, we anticipate that the economy will continue to grow
moderately and that inflationary pressures will not be excessive. While we
estimate the GDP may rise somewhat from its current level of 2.3%, the Federal
Reserve should be reluctant to tighten the money supply by raising short-term
interest rates. We also believe that the equity markets will continue to be
volatile through the rest of the year.
We believe that you will find your portfolio manager commentary
informative. If you have any questions or comments, please contact your
financial representative or New England Funds directly at 800-225-5478.
Sincerely,
/s/ Henry L.P. Schmelzer
Henry L.P. Schmelzer, President
<PAGE>
GROWTH FUND OF ISRAEL
INVESTMENT RESULTS THROUGH JUNE 30, 1996
Putting Performance into Perspective
The graph comparing your Fund's performance to a benchmark index provides you
with a general sense of how your Fund performed. To put this information in
context, it may be helpful to understand the special differences between the
two. Your Fund's total return for the period shown appears with and without
sales charges and includes Fund expenses and management fees. A securities index
measures the performance of a theoretical portfolio. Unlike a fund, the index is
unmanaged; there are no expenses that affect the results. In addition, few
investors could purchase all of the securities necessary to match the index.
And, if they could, they would incur transaction costs and other expenses.
<PAGE>
GROWTH FUND OF ISRAEL
A $10,000 INVESTMENT COMPARED TO MISHTANIM INDEX(4)
CLASS A SHARES, INCEPTION 3/15/96
[A Chart in the form of a line graph appears here, illustrating the growth of a
$10,000 investment in Class A Shares compared to Mishtanim Index (4).]
Growth Fund of Israel - Net Asset Value(1)
Date Amount
- ---- ------
Jun-96 $ 9,960
May-96 $10,296
Apr-96 $10,408
Mar-96 $ 9,960
15-Mar-96 $10,000
Growth Fund of Israel - With Maximum Sales Charge(2)
Date Amount
- ---- ------
Jun-96 $ 9,387
May-96 $ 9,704
Apr-96 $ 9,810
Mar-96 $ 9,387
15-Mar-96 $ 9,425
Mishtanim Index(4)
Date Amount
- ---- ------
Jun-96 $ 9,504
May-96 $ 9,856
Apr-96 $10,078
Mar-96 $ 9,514
15-Mar-96 $10,000
These illustrations represent past performance of Class A shares and cannot
predict future results. Investment return and principal value may vary,
resulting in a gain or loss on the sale of shares. Class B share performance
will be greater or less than that shown based on differences in inception
date, fees and sales charges. All Index and Fund performance assumes
reinvested distributions.
<PAGE>
GROWTH FUND OF ISRAEL
AVERAGE ANNUAL TOTAL RETURNS 6/30/96
CLASS A (INCEPTION 3/15/96) SINCE INCEPTION
Net Asset Value(1) -0.60%
With Max. Sales Charge(2) -6.32
Mishtanim Index(4) -4.96
CLASS B (INCEPTION 3/15/96) SINCE INCEPTION
Net Asset Value(1) -0.70%
With Max. Sales Charge(2) -4.70
Mishtanim Index(4) -4.96
CLASS C (INCEPTION 3/15/96) SINCE INCEPTION
Net Asset Value(1) -0.60%
Mishtanim Index(4) -4.96
These returns represent past performance. Investment return and principal
value will fluctuate so that shares, upon redemption, may be worth more or
less than original cost. Class Y shares are available only to certain
institutional investors. Share price and return may vary.
NOTES TO CHARTS AND PERFORMANCE UPDATE
1 Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at the time of purchase.
2 Maximum Sales Charge performance assumes reinvestment of all distributions and
reflects the maximum sales charge of 4.5% at the time of purchase of Class A
shares.
3 Contingent Deferred Sales Charge (CDSC) performance assumes a maximum 4% sales
charge is applied to a redemption of Class B shares. The sales charge will
decrease over time, declining to zero five years after the purchase of shares.
4 The Mishtanim Index comprises 100 of the most liquid Israeli securities traded
on the Tel Aviv Stock Exchange. These issues have the highest average daily
turnover, and collectively account for approximately 73% of total turnover and
market value TASE shares.
<PAGE>
GROWTH FUND OF ISRAEL
GROWTH FUND OF ISRAEL
Portfolio Managers: Adam Schor, David Herro
Oakmark/Harris Associates, L.P.
With growing privatization, the opening of neighboring and overseas markets and
a major influx of capital, the investment climate in Israel remains very healthy
in 1996 despite a changing economic and political picture.
The presidential election in late May, while important politically, had only a
temporary effect on the Israeli stock market. Overall, the market as measured by
the Mishtanim Index(4), was down slightly for the six-month period.
Currency fluctuation was problematic for U.S. investors in Israel. The weakening
of the shekel dampened returns when converted to U.S. dollars. However, we
expect the long-term impact on your Fund to be offset by the value that a weak
shekel provides to our investment in Israeli companies that rely on exports.
How Your Fund Performed
For the period ending June 30, 1996, the Fund generated a -0.60% total return
for Class A shares. This decrease compares favorably with the Israeli stock
market index -- the Mishtanim -- which was down -5.8% in U.S. dollar terms for
the same period.
How We Managed Your Fund
During the period, we acquired shares of a number of well-managed, growing
Israeli companies. All, in our opinion, were reasonably valued given their
tremendous growth potential and strong fundamentals.
Twenty-five percent of the portfolio is currently invested in high-tech
companies. Some of our biggest and best technology holdings include Scitex, a
leading manufacturer of electronic prepress equipment for the printing industry;
Orbotech, a worldwide manufacturer of computerized inspection equipment for
printed circuit boards; and Nice Systems, which makes digital telephone
recording systems for the burgeoning needs of Wall Street trading firms, direct
marketers and air traffic controllers around the globe.
We are also finding opportunities for growth in sectors that may be unexpected
for Israel -- telecommunications, agri-chemicals and paper products. Our largest
telecommunications position is in Bezek, which has benefited from privatization
in a rapidly growing industry. Mahkteshim, a maker of generic pesticides and
herbicides, is another favorite. The company is benefiting from growing export
opportunities in the United States and South America. The Fund also profited
from an investment in America Israel Paper Mills, a large manufacturer of
consumer paper products. We believe this company, often overlooked by foreign
and Israeli investors, would have a 50% higher price if it were valued like its
U.S. counterparts.
Throughout the period, we have remained 94% invested in equities and maintained
a low cash level of only 6%.
Investment Outlook
Israel should enjoy a very healthy investment climate for the balance of 1996.
Good opportunities are likely to be plentiful given the growing privatization of
the telecommunications, shipping and airline industries. Israeli companies are
positioned to take advantage of the potential benefits of the peace process, as
new markets open up and foreign investors take notice.
For the balance of the year, we will keep a watchful eye on government spending.
We hope the new administration is prepared to tighten spending in order to gain
some control over inflation and allow for potentially lower interest rates.
However, it is just too soon to tell.
We remain optimistic about long-term corporate profitability and earnings
growth, the most important determinants of the Fund's performance. By continuing
to focus on well-managed, growing Israeli companies that are trading at an
acceptable discount, we will pursue our goal of capital appreciation for our
shareholders.
YOUR FUND'S THREE LARGEST INVESTMENTS 6/30/96
PERCENTAGE
COMPANY OF ASSETS
-------------------------------------------------
1. BEZEQ 4.31%
Telephone company of Israel
2. ELITE INDUSTRIES, LTD. 4.29%
Food & beverage company
3. ISRAEL PETROCHEM 4.10%
Chemical company
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NEW ENGLAND FUNDS
WHERE THE BEST MINDS MEET(TM)
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PORTFOLIO COMPOSITION, FINANCIAL STATEMENTS AND HIGHLIGHTS
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GROWTH FUND
OF ISRAEL
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JUNE 30, 1996
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PORTFOLIO COMPOSITION
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COMMON STOCK--94.3% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (a)
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BANKS--8.9%
<C> <S> <C>
3,565 First International Bank of Israel, Ltd. (c) .............. $ 395,449
13,600 Investment Company of Bank Hapoalim, Ltd. (c) ............. 400,114
5,900 Israel General Bank, Ltd. (c) ............................. 167,108
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962,671
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BROADCASTING--4.1%
26,500 Matav Cable Systems Media, Ltd. (ADR) (c) (d) ............. 440,563
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BUSINESS SERVICES--2.7%
10,800 Tadiran, Ltd. (ADR) (d) ................................... 291,600
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CHEMICALS--11.5%
479,000 Israel Chemical, Ltd. (c) ................................. 400,382
95,100 Israel Petrochemical Enterprises, Ltd. (c) ................ 445,329
73,780 Makhteshim Chemical Works, Ltd. (c) ....................... 402,807
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1,248,518
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COMPUTER SOFTWARE & SERVICES--7.4%
20,700 Nice Systems, Ltd. (ADR) (c) (d) .......................... 393,300
23,500 Scitex Corp., Ltd. (ADR) (d) .............................. 405,375
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798,675
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DRUGS & HEALTH CARE--7.4%
53,750 Agis Industries, Ltd. (c) ................................. 374,289
11,400 Teva Pharmaceutical Industries, Ltd. (ADR) (d) ............ 431,775
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806,064
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ELECTRIC--5.7%
8,280 Elco Holdings, Ltd. (c) ................................... 326,034
29,800 Tower Semi Conductor, Ltd. (ADR) (c)(d) ................... 290,550
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616,584
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ELECTRONICS--6.1%
2,570 Clal Electric Industries, Ltd. (c) ........................ 261,792
30,750 Orbotech, Ltd. (ADR) (d) .................................. 399,750
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661,542
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FOOD & BEVERAGES--4.3%
124,548 Elite Industries, Ltd. (c) ................................ 465,575
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INDUSTRIAL MACHINERY--2.4%
116,920 Ytong, Ltd. (c) ........................................... 263,035
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INSURANCE--3.3%
67,200 Clal Insurance Co., Ltd. (c) .............................. 354,563
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INVESTMENT COMPANIES--6.8%
360 Africa Israel Investor, Ltd. (c) .......................... 337,320
50 Africa Israel Investor, Ltd. (c) .......................... 42,154
61,500 Osem Investment, Ltd. (c) ................................. 360,033
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739,507
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MISCELLANEOUS--8.9%
6,735 Elbit, Ltd. (c) ........................................... $ 399,052
24,500 Koor Industries, Ltd. (ADR) (d) ........................... 422,625
20,500 The Blue Square Chain Investments & Properities, Ltd. (c) . 142,306
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963,983
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PAPER--4.6%
3,750 American Israeli Paper Mills, Ltd. (ADR) (d) .............. 158,438
8,400 American Israeli Paper Mills, Ltd. (c) .................... 345,219
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503,657
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RETAIL--3.2%
16,725 Super-Sol, Ltd. (c) ....................................... 353,760
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TELECOMMUNICATION--7.0%
176,900 Bezeq (c) ................................................. 467,233
18,500 Tadiran Telecommunications, Ltd. (ADR) (c) (d) ............ 296,000
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763,233
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Total Common Stock (Identified Cost $10,354,811) .......... 10,233,530
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SHORT TERM INVESTMENT--6.9%
FACE
AMOUNT
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$750,000 United States Treasury Bills, 4.200% 7/05/96 .............. 749,679
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Total Short Term Investment (Identified Cost $749,679) .... 749,679
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Total Investments--101.2% (Identified Cost $11,104,490) ... 10,983,209
Other assets less liabilities (e) ......................... (133,072)
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Total Net Assets--100% .................................... $10,850,137
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<FN>
(a) See Note 1a.
(b) Federal Tax Information: At June 30, 1996 the net unrealized depreciation
on investments
based on cost of $11,104,490 for federal income tax purposes was as
follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost................ $ 380,707
Aggregate gross unrealized depreciation for all investments in (501,988)
which there is an excess of tax cost over value. .............. ---------
Net unrealized depreciation. .................................. $(121,281)
=========
(c) Non-income producing security.
(d) An American Depository Receipt (ADR) is a certificate issued by a U.S.
bank representing the right to receive securities of the foreign issuer
described. The values of ADRs are significantly influenced by trading on
exchanges not located in the United States or Canada.
(e) Including deposits in foreign denominated currencies with a value of
$24,227 and a cost of $24,197.
</TABLE>
See accompanying notes to financial statements.
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STATEMENTS OF ASSETS & LIABILITIES
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June 30, 1996
(unaudited)
ASSETS
Investments at value ............................. $10,983,209
Cash ............................................. 49,180
Foreign cash at value ............................ 24,227
Receivable for:
Fund shares sold ............................... 156,437
Due from investment adviser .................... 30,308
Prepaid registration expense ..................... 28,793
Unamortized organization expense ................. 79,713
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11,351,867
LIABILITIES
Payable for:
Securities purchased ........................... $471,433
Fund shares redeemed ........................... 2,501
Accrued expenses:
Deferred trustees' fees ........................ 200
Accounting and administrative .................. 4,452
Other expenses ................................. 23,144
--------
501,730
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NET ASSETS ......................................... $10,850,137
===========
Net Assets consist of:
Capital paid in ................................ $10,961,587
Undistributed net investment income (loss) ..... (30,210)
Accumulated net realized gains ................. 39,051
Unrealized depreciation on investments and
foreign currency ............................. (120,291)
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NET ASSETS ......................................... $10,850,137
===========
Computation of net asset value and offering price:
Net asset value and redemption price of Class A
shares ($9,249,813 divided by 744,344 shares of
beneficial interest) ........................... $12.43
======
Offering price per share (100/94.25 of $12.43) ..... $13.19*
======
Net asset value and offering price of Class B shares
($1,450,632 divided by 116,937 shares of
beneficial interest) ............................. $12.41**
======
Net asset value and offering price of Class C shares
($149,692 divided by 12,046 shares of beneficial
interest) ........................................ $12.43
======
Identified cost of investments ..................... $11,104,490
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*Based upon single purchases of less than $50,000. Reduced sales charges
apply for purchases in excess of this amount.
**Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements.
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STATEMENT OF OPERATIONS
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For the Period March 15, 1996 (a) through June 30, 1996
(unaudited)
INVESTMENT INCOME
Dividends ...................................... $ 31,783 (b)
Interest ....................................... 21,426
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53,209
Expenses
Management fees .............................. $ 30,308
Service fees--A .............................. 6,222
Service and distribution fees--B ............. 2,470
Service and distribution fees--C ............. 185
Trustees' fees and expenses .................. 3,141
Accounting and administrative ................ 13,237
Custodian .................................... 17,060
Transfer agent ............................... 21,956
Audit and tax services ....................... 3,000
Legal ........................................ 1,388
Printing ..................................... 581
Registration ................................. 9,640
Amortization of organization expenses ........ 4,200
Miscellaneous ................................ 339
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Total expenses ................................. 113,727
Less expenses waived by the investment adviser . (30,308) 83,419
---------- ---------
Net investment income (loss) ................... (30,210)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FORWARD CURRENCY CONTRACTS AND FOREIGN CURRENCY TRANSACTIONS
Realized gain (loss) on:
Investments--net ............................. 50,339
Foreign currency transactions--net ........... (11,288)
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Total realized gain on investments and foreign
currency transactions ...................... 39,051
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Unrealized appreciation (depreciation) on:
Investments--net ............................. (121,252)
Foreign currency transactions--net ........... 961
----------
Total unrealized depreciation on investments
and foreign currency transactions .......... (120,291)
----------
Net loss on investment transactions ............ (81,240)
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NET DECREASE IN NET ASSETS FROM OPERATIONS ....... $(111,450)
=========
(a) Commencement of Operations.
(b) Net of foreign taxes of: $10,095.
See accompanying notes to financial statements.
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STATEMENT OF CHANGES IN NET ASSETS
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(unaudited)
FOR THE
PERIOD
MARCH 15, 1996(a)
THROUGH
JUNE 30, 1996
-------------
FROM OPERATIONS
Net investment income (loss) ............................... $ (30,210)
Net realized gain on investments and foreign currency
transactions ............................................. 39,051
Unrealized depreciation on investments, and foreign currency
transactions ............................................. (120,291)
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Decrease in net assets from operations ..................... (111,450)
Increase in net assets derived from capital share
transactions ............................................. 10,961,587
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Total increase in net assets ............................... 10,850,137
NET ASSETS
Beginning of the period .................................... 0
-----------
End of the period .......................................... $10,850,137
===========
UNDISTRIBUTED NET INVESTMENT INCOME (LOSS)
Beginning of the period .................................... $ 0
===========
End of the period .......................................... $ (30,210)
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(a) Commencement of Operations.
See accompanying notes to financial statements.
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FINANCIAL HIGHLIGHTS
(unaudited)
CLASS A CLASS B CLASS C
------------------ ------------------ ------------------
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
MARCH 15, 1996(a) MARCH 15, 1996(a) MARCH 15, 1996(a)
THROUGH THROUGH THROUGH
JUNE 30, 1996 JUNE 30, 1996 JUNE 30, 1996
------------------ ------------------ ------------------
Net Asset Value,
Beginning of Period .. $12.50 $12.50 $12.50
------ ------ ------
Income From Investment
Operations
Net Investment Income
(Loss) ............... (0.03) (0.05) (0.05)
Net Realized and
Unrealized Gain (Loss)
on Investments ....... (0.04) (0.04) (0.02)
------ ------ ------
Total From Investment
Operations ........... (0.07) (0.08) (0.06)
------ ------ ------
Net Asset Value, End of
Period ............... $12.43 $12.41 $12.43
====== ====== ======
Total Return (%) (b) ... (0.6) (0.7) (0.6)
Ratio of Operating
Expenses to Average
Net Assets (%) (e) ... 2.95(c) 3.70(c) 3.70(c)
Ratio of Net Investment
Income (Loss) to
Average Net Assets (%) (0.78)(c) (1.53)(c) (1.53)(c)
Portfolio Turnover Rate (%) 7(c) 7(c) 7(c)
Average Commission Rate (d) 0.0086 0.0086 0.0086
Net Assets, End of
Period (000) ......... $9,250 $1,451 $150
(a) Commencement of operations.
(b) A sales charge in the case of Class A Shares and a contingent deferred
sales charge in the case of Class B Shares are not reflected in total
return calculations. Not annualized.
(c) Computed on an annualized basis.
(d) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect mark-
ups, mark-downs, or spreads on shares traded on a principal basis.
(e) The ratio of
operating expenses
to average net
assets without
giving effect to the
waiver of management
fee described in
note 3a to
the Financial
Statements would
have been (%) ...... 4.05(c) 4.80(c) 4.80(c)
See accompanying notes to financial statements.
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
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1. The Fund is a series of New England Funds Trust II, a Massachusetts
business trust (the "Trust"), and is registered under the Investment Company
Act of 1940, as amended, (the "1940 Act") as an open-end management investment
company. The Declaration of Trust permits the Trustees to issue an unlimited
number of shares of the Trust in multiple series (each such series of shares a
"Fund").
The Fund offers Class A, Class B, and Class C shares. The Fund commenced its
public offering of Class A, Class B and Class C shares on March 15, 1996.
Class A shares are sold with a maximum front end sales charge of 5.75%. Class
B shares do not pay a front end sales charge, but pay a higher ongoing
distribution fee than Class A shares for eight years (at which point they
automatically convert to Class A shares), and are subject to a contingent
deferred sales charge if those shares are redeemed within five years of
purchase. Class C shares do not pay front end or contingent deferred sales
charges and do not convert to any other class of shares, but they do pay a
higher ongoing distribution fee than Class A shares. Expenses of the Fund are
borne pro-rata by the holders of each class of shares, except that each class
bears expenses unique to that class (including the Rule 12b-1 service and
distribution fees applicable to such class), and votes as a class only with
respect to its own Rule 12b-1 plan. Shares of each class would receive their
pro-rata share of the net assets of the Fund, if the Fund were liquidated. In
addition, the Trustees approve separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
A. SECURITY VALUATION. Equity securities are valued on the basis of
valuations furnished by a pricing service, authorized by the Board of
Trustees, which service provides the last reported sale price for securities
listed on an applicable securities exchange or on the NASDAQ national market
system, or, if no sale was reported and in the case of over-the-counter
securities not so listed, the last reported bid price. Short-term obligations
with a remaining maturity of less than sixty days are stated at amortized
cost, which approximates market value. All other securities and assets are
valued at their fair value as determined in good faith by New England Funds
Management L.P. under the supervision of the Fund's trustees.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions
are accounted for on the trade date (the date the buy or sell is executed).
Dividend income is recorded on the ex-dividend date or when the Fund learns of
the dividend, and interest income is recorded on the accrual basis. In
determining net gain or loss on securities sold, the cost of securities has
been determined on the identified cost basis.
C. FOREIGN CURRENCY TRANSLATION. The books and records of the Fund are
maintained in U.S. dollars. The value of securities, currencies and other
assets and liabilities denominated in currencies other than U.S. dollars are
translated into U.S. dollars based upon foreign exchange rates prevailing at
the end of the period. Purchases and sales of investment securities, income
and expenses are translated on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations
are included with the net realized and unrealized gain or loss from
investments.
Reported net realized foreign exchange gains or losses arise from: sales of
foreign currency, currency gains or losses realized between the trade and
settlement dates on securities transactions, the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received
or paid. Net unrealized foreign exchange gains and losses arise from changes
in the value of assets and liabilities at period end, resulting from changes
in the exchange rate.
FORWARD FOREIGN CURRENCY CONTRACTS. The Fund may use foreign currency
contracts to facilitate transactions in foreign securities and to manage the
Fund's currency exposure. Contracts to buy generally are used to acquire
exposure to foreign currencies, while contracts to sell are used to hedge the
Fund's investments against currency fluctuation. Also, a contract to buy or
sell can offset a previous contract. These contracts involve market risk in
excess of the unrealized gain or loss reflected in the Fund's Statement of
Assets and Liabilities. The U.S. dollar value of the currencies the Fund has
committed to buy or sell (if any) is shown in the portfolio composition under
the caption "Forward Currency Contracts Outstanding." This amount represents
the aggregate exposure to each currency the Fund has acquired or hedged
through currency contracts outstanding at period end. Losses may arise from
changes in the value of the foreign currency or if the counterparties do not
perform under the contracts' terms.
All contracts are "marked-to-market" daily at the applicable translation rates
and any gains or losses are recorded for financial statement purposes as
unrealized until settlement date. Risks may arise upon entering into these
contracts from the potential inability of counterparties to meet the terms of
their contracts and from unanticipated movements in the value of a foreign
currency relative to the U.S. dollar.
D. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains, at least annually. Accordingly, no provision for federal income tax has
been made.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The timing and characterization of
certain income and capital gains distributions are determined in accordance
with federal tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for organization costs and foreign currency transactions for book
and tax purposes. Permanent book and tax basis differences will result in
reclassification to capital accounts.
F. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives
delivery of the underlying securities collateralizing repurchase agreements.
It is the Fund's policy that the market value of the collateral be at least
equal to 100% of the repurchase price. Harris Associates, L.P. is responsible
for determining that the value of the collateral is at all times at least
equal to the repurchase price. Repurchase agreements could involve certain
risks in the event of default or insolvency of the other party including
possible delays or restrictions upon the portfolio's ability to dispose of the
underlying securities.
G. ORGANIZATION EXPENSE. Costs incurred in fiscal 1996 in connection with
the Fund's organization and registration, amounting to approximately $83,913
in the aggregate, were paid by the Fund and are being amortized by the Fund
over 60 months.
2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for
the Fund for the period June 30, 1996 were $10,507,874 and $203,438,
respectively.
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. The Fund pays
management fees to its investment adviser, New England Funds Management L.P.
("NEFM") at the annual rate of 1.10% of the Fund's average daily net assets.
NEFM pays the Fund's investment subadviser, Harris Associates, L.P. ("Harris
Associates"), a fee at the annual rate of 0.70% of the first $50 million of
the Fund's average daily net assets, and 0.60% of such assets in excess of $50
million. NEFM pays the Fund's special economic and market subadviser, Batchua
Securities and Investments, Ltd. ("Batchua Securities"), a fee at the annual
rate of 0.10% of the Fund's average daily assets. Certain officers and
directors of NEFM and Harris Associates are also officers or trustees of the
Fund. NEFM and Harris Associates are wholly owned subsidiaries of New England
Investment Companies, L.P. which is a subsidiary of New England Mutual Life
Insurance Company. Fees earned by NEFM and those paid by NEFM to Harris
Associates and Batchua Securities during the period ended June 30, 1996, are
as follows:
FEES EARNED
BY NEFM FEES PAID
----------- ---------
$30,308(a) -- NEFM
-- $19,287 Harris Associates
-- 2,755 Batchua Securities
----------- ---------
$30,308(a) $22,042
=========== =========
(a) NEFM has agreed to waive its management fees from the commencement of
operations of the Fund until further notice.
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds, L.P. ("New
England Funds"), the Fund's distributor, is a wholly owned subsidiary of New
England Investment Companies, L.P. and performs certain accounting and
administrative services for the Fund. The Fund reimburses New England Funds
for all or part of New England Funds' expenses of providing these services
which include the following: (i) expenses for personnel performing
bookkeeping, accounting, internal auditing and financial reporting functions
and clerical functions relating to the Fund, (ii) expenses for services
required in connection with the preparation of registration statements and
prospectuses, shareholder reports and notices, proxy solicitation material
furnished to shareholders of the Fund or regulatory authorities and reports
and questionnaires for SEC compliance, and (iii) registration, filing and
other fees in connection with requirements of regulatory authorities. For the
period ended June 30, 1996, these expenses amounted to $13,237 and are shown
separately in the financial statements as Accounting and administrative.
C. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder
servicing agent for the Fund. For the period ended June 30, 1996, the Fund
paid New England Funds $17,999 as compensation for its services in that
capacity.
D. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act,
the Trust has adopted a Service Plan relating to the Fund's Class A shares
(the "Class A Plan") and Service and Distribution Plans relating to the Fund's
Class B and Class C shares (the "Class B and Class C Plans").
Under the Class A Plan, the Fund pays New England Funds a monthly service fee
at the annual rate of up to 0.25% of the average daily net assets attributable
to the Fund's Class A shares, as reimbursement for expenses (including certain
payments to securities dealers, who may be affiliated with New England Funds)
incurred by the New England Funds in providing personal services to investors
in Class A shares and/or the maintenance of shareholder accounts. For the
period ended June 30, 1996, the Fund paid New England Funds $6,222 in fees
under the Class A Plan.
Under the Class B and Class C Plans, the Fund pays New England Funds monthly
service fees at the annual rate of up to 0.25% of the average daily net assets
attributable to the Fund's Class B and Class C shares, as compensation for
services provided and expenses (including certain payments to securities
dealers, who may be affiliated with New England Funds) incurred by New England
Funds in providing personal services to investors in Class B shares and/or the
maintenance of shareholder accounts. For the period ended June 30, 1996 the
Fund paid New England Funds $618 and $46 in service fees under the Class B and
Class C Plans, respectively.
Also under the Class B and Class C Plan, the Fund pays New England Funds
monthly distribution fees at the annual rate of up to 0.75% of the average
daily net assets attributable to the Fund's Class B and Class C shares, as
compensation for services provided and expenses (including certain payments to
securities dealers, who may be affiliated with New England Funds) incurred by
New England Funds in connection with the marketing or sale of Class B and
Class C shares. For the period ended June 30, 1996, the Fund paid New England
Funds $1,852 and $139 in distribution fees under the Class B and Class C
plans, respectively.
Commissions (including contingent deferred sales charges) on Fund shares paid
to New England Funds by investors in shares of the Fund during the period
ended June 30, 1996 amounted to $118,806.
E. TRUSTEES FEES AND EXPENSES. The Fund does not pay any compensation
directly to its officers or trustees who are directors, officers or employees
of Harris Associates, New England Funds, New England Investment Companies or
their affiliates, other than registered investment companies. Each other
trustee is compensated by the Fund as follows:
Annual Retainer $714
Meeting Fee $114/meeting
Committee Meeting Fee $68/meeting
A deferred compensation plan is available to the trustees on a voluntary
basis. Each participating trustee will receive an amount equal to the value
that such deferred compensation would have had, had it been invested in the
Fund on the normal payment date.
5. CAPITAL SHARE TRANSACTIONS. At June 30, 1996 there was an unlimited
number of shares of beneficial interest authorized, divided into three
classes, Class A, Class B, and Class C capital stock. Transactions in capital
shares were as follows:
FOR THE PERIOD
MARCH 15, 1996 (a)
THROUGH JUNE 30, 1996
-----------------------
SHARES AMOUNT
CLASS A --------- -----------
Shares sold ....................................... 748,714 $ 9,384,349
Shares repurchased ................................ (4,370) (55,431)
-------- -----------
Net increase ...................................... 744,344 9,328,918
-------- -----------
FOR THE PERIOD
MARCH 15, 1996 (a)
THROUGH JUNE 30, 1996
-----------------------
SHARES AMOUNT
CLASS B --------- -----------
Shares sold ....................................... 119,044 1,508,362
Shares repurchased ................................ (2,107) (27,073)
-------- -----------
Net increase ...................................... 116,937 1,481,289
-------- -----------
FOR THE PERIOD
MARCH 15, 1996 (a)
THROUGH JUNE 30, 1996
-----------------------
SHARES AMOUNT
CLASS C --------- -----------
Shares sold ....................................... 12,087 151,880
Shares repurchased ................................ (41) (500)
-------- -----------
Net increase ...................................... 12,046 151,380
-------- -----------
Increase derived from capital shares transactions . 873,327 $10,961,587
======== ===========
(a) Commencement of operations.
6. CONCENTRATION OF CREDIT. The Fund primarily invest in Israeli equity
securities. Investments in Israeli and other foreign securities present risks
not typically associated with investments in comparable securities of U.S.
issuers. The Israeli securities market is substantially smaller, less liquid
and more volatile than the major securities markets in the United States.
Other risks include those resulting from future adverse political or economic
developments and the possible imposition of currency exchange blockages or
other Israeli governmental laws or restrictions.
<PAGE>
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REGULAR INVESTING PAYS
- --------------------------------------------------------------------------------
FIVE GOOD REASONS TO INVEST REGULARLY
1. It's an easy way to build assets
2. It's convenient and effortless
3. It requires a low minimum to get started
4. It can help you reach important long-term goals like
retirememt or college funding
5. It can help you benefit from the ups and downs of the market
With Investment Builder, New England Funds' automatic investment program, you
can invest as little as $50 a month in your New England Fund automatically --
without even writing a check. And, as you can see from the chart below, your
monthly investments can really add up over time.
THE POWER OF MONTHLY INVESTING
[A line graph appears here, illustrating the hypothetical accumulation of
monthly investments at an 8% annual rate of return. The data points of the
graph are as follows:]
Monthly investments of $50
Years Growth of Monthly Investments
0 $0
5 $3,661
10 $9,040
15 $16,943
20 $28,555
25 $45,618
Monthly investments of $100
Years Growth of Monthly Investments
0 $0
5 $7,322
10 $18,079
15 $33,886
20 $57,111
25 $91,236
Monthly investments of $200
Years Growth of Monthly Investments
0 $0
5 $14,643
10 $36,158
15 $67,772
20 $114,222
25 $182,472
Monthly investments of $500
Years Growth of Monthly Investments
0 $0
5 $36,608
10 $90,396
15 $169,429
20 $285,555
25 $456,181
For illustrative purposes only. These figures represent hypothetical
accumulation at an 8% annual rate of return, and are not indicative of future
performance of any New England Fund. The value of a New England Fund will
fluctuate with changing market conditions.
This program cannot assure a profit nor protect against a loss in a declining
market. It does, however, ensure that you buy more shares when the price is low
and fewer shares when the price is high.
You can start an Investment Builder program with your current New England Fund
account, or with any of our other funds. To open an Investment Builder account
today, call your financial representative or New England Funds at
1-800-225-5478.
<PAGE>
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SAVING FOR RETIREMENT
- -------------------------------------------------------------------------------
AN EARLY START CAN MAKE A BIG DIFFERENCE
With today's lengthening life spans, you may be retired for 20 years or more
after you complete your working career. Living these retirement years the way
you've dreamed of will require considerable financial resources. While it's
never too late to start a retirement savings program, it's certainly never too
early: The sooner you begin, the longer the time your money has to grow.
The chart below illustrates this point dramatically. One investor starts at age
30, saves for just 10 years, then leaves the investment to grow. The second
investor starts 10 years later but saves much longer -- for 25 years, in fact.
Can you guess which investor accumulates the greater retirement nest egg? For
the answer, look at the chart.
[A chart in the form of a line graph appears here, comparing the growth of
investments made for 10 years by an investor who begins investing at age 30 to
the growth of investments made for twenty-five years by an investor who begins
investing at age 40. A hypothetical appreciation of 10% is assumed. The data
points from the graph are as follows:]
Investor A - Begins at age 30 for 10 years:
Age Growth of Investments
30 $2,000
35 $15,431
40 $35,062
45 $90,943
55 $146,464
60 $235,882
65 $379,890
Investor B - Begins investing at age 40 for 25 years:
Age Growth of Investments
40 $2,000
45 $15,431
50 $37,062
55 $71,899
60 $128,005
65 $216,364
Assumes 10% hypothetical appreciation. For illustrative purposes only and not
indicative of future performance of any New England Fund.
Investor A invested $20,000, less than half of investor B's commitment -- and
for less than half the time. Yet investor A wound up with a much greater
retirement nest egg. The reason? It's all thanks to an early start.
New England Funds has prepared a number of informative retirement planning
guides. Call your financial representative or New England Funds today, and ask
for the guide that best fits your personal needs.
- --------------------------------------------------------------------------------
INFORMATION ON CALL
- --------------------------------------------------------------------------------
You Can Call New England Funds Day or Night
Do you like to keep on top of your New England Funds but can't always call us
during regular business hours? With Tele#Facts, New England Funds' 24-hours a
day automated telephone system, you can call us any time that's convenient for
you -- day or night!
By calling 1-800-346-5984 from any Touch-Tone(R) telephone, you can:
o Check the current value of your New England Fund account
o Find out the current yield and total return on any New England Fund
o Buy, sell or exchange fund shares
Just remember to have these four items with you before calling:
1. YOUR PERSONAL IDENTIFICATION NUMBER which is the last four digits of your
Social Security number
2. THE FUND NUMBER -- two- or three-digit number listed on the Tele#Facts
wallet card
3. FUNCTION NUMBER -- listed on the Tele#Facts wallet card
4. ACCOUNT NUMBER -- listed on all your statements
You can get the information you need to use Tele#Facts from the back of your
statement. If you need another Tele#Facts wallet card or have questions about
getting started, please call us at 1-800-225-5478.
So go ahead and give Tele#Facts a try. We think you'll enjoy this easy-to-use
and convenient service from New England Funds!
<PAGE>
NEW ENGLAND FUNDS
STOCK FUNDS
Growth Fund
Star Advisers Fund
Capital Growth Fund
Value Fund
Growth Opportunities Fund
Balanced Fund
INTERNATIONAL STOCK FUNDS
Growth Fund of Israel
International Equity Fund
Star Worldwide Fund
BOND FUNDS
High Income Fund
Strategic Income Fund
Government Securities Fund
Bond Income Fund
Limited Term U.S. Government Fund
Adjustable Rate U.S. Government Fund
TAX EXEMPT FUNDS
Municipal Income Fund
Massachusetts Tax Free Income Fund
Intermediate Term Tax Free Fund of California
Intermediate Term Tax Free Fund of New York
MONEY MARKET FUNDS
Cash Management Trust
- Money Market Series
- U.S. Government Series
Tax Exempt Money Market Trust
To learn more, and for a free prospectus,
contact your financial representative.
VISIT OUR WORLD WIDE WEB SITE AT http://www.mutualfunds.com
New England Funds, L.P.
399 Boylston Street
Boston, MA 02116
Toll Free 800-225-5478
This material is authorized for distribution to prospective investors when it is
preceded or accompanied by the Funds current prospectus, which contains
information about distribution charges, management and other items of interest.
Investors are advised to read the prospectus carefully before investing.
<PAGE>
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FIRST CLASS
U.S. POSTAGE PAID
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PERMIT NO. 770
[LOGO] Sailboat (R)
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
- ----------------------
399 Boylston Street
Boston, Massachusetts
02116
- ----------------------
GI58-0896
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