<PAGE>
TO OUR SHAREHOLDERS:
- --------------------------------------------------------------------------------
CGM Fixed Income Fund grew +2.2% during the third quarter of 1996 compared to
an increase of +1.8% in the Merrill Lynch Master Bond Index. CGM Fixed Income
Fund returned +10.5% over the first nine months of the year and the Merrill
Lynch Master Bond Index, +0.5%.
"Robust" and "low inflation" continue to be the catchwords for the economy in
the second half of 1996. In an economy with few excesses, one danger lies in
the tightening labor market. Despite the media's preoccupation with corporate
restructurings and massive layoffs at large corporations over the past five
years, the economy has added approximately 1.5 million new jobs each year
since 1991. The unemployment rate is a low 5.2%. The shortage of qualified job
applicants is now a potential barrier to continued economic growth. Companies
are already competing for qualified employees, bidding up compensation. Over
time, wages not offset by higher levels of productivity will exert pressure on
prices, to drive inflation higher. Nevertheless, the Federal Reserve Board's
position continues to be one of "wait and see" as reflected by its recent
decision to look for further signs of overheating before raising interest
rates. In recent weeks, we have been getting mixed signals on business
activity.
The third quarter began with a sharp sell-off in both the stock and bond
markets. Exceptionally strong employment numbers were reported in early July
frightening bond investors and shortly thereafter, two prominent
technology companies, Hewlett-Packard and Motorola, reported disappointing
earnings which triggered selling in the equity market. Leading averages fell
roughly 10% but individual issues, technology stocks in particular, fell as
much as 50% off their highs in some cases. As the quarter progressed, the bond
market stabilized with long-term rates trading in the 6.75% to 7.25% range and
currently back at 6.75%. The equity market gradually recovered its losses and
has reached record highs. One could make the case the equity market is selling
on a somewhat generous basis relative to historical norms in response to the
strong economy. While the market overall is hardly cheap, sectors such as
financial services, real estate, oil services, and consumer goods continue to
offer reasonable prospects for the coming year.
CGM Fixed Income Fund was rewarded by a continued narrowing of the quality
spread in most of the Fund's debt holdings and credit improvement in several
of the lower investment grade issues in the third quarter. Low investment
grade and high yield securities turned in the best performances for the
period, which was to the Fund's advantage since the portfolio had adopted a
somewhat defensive maturity posture and was positioned in the two best
performing sectors of the fixed income market. Selective exposure to the
equity market through the Fund's convertible holdings also added to the
quarter's performance. CGM Fixed Income Fund is 18.7% invested in U.S.
Treasury bills and holds important positions in real estate investment trusts
and the transportation industry. The Fund's three largest holdings are Felcor
Suite Hotels, Inc., Pacific Gulf Properties, Inc. and Overseas Shipholding
Group.
/s/ Robert L. Kemp
Robert L. Kemp
President
October 8, 1996
- ------------------------------------------------------------------------------
INVESTMENT PERFORMANCE
(unaudited)
Total Return for Periods Ended September 30, 1996
CGM FIXED THE FUND'S AVERAGE
INCOME FUND ANNUAL TOTAL RETURN
----------- -------------------
3 Years .................................... +33.0% +10.0%
1 Year ..................................... +14.1 +14.1
3 Months ................................... +2.2 --
The Fund's average annual total return from inception (March 17, 1992) through
September 30, 1996 is +12.1%. The adviser has agreed to limit the Fund's total
operating expenses to 0.85% of its average net assets annually through
December 31, 1997. Otherwise the total return since inception, and for the
three-year, one-year and three-month periods ended September 30, 1996, would
have been lower.
The performance data contained in the report represent past performance, which
is no guarantee of future results. The investment return and the principal
value of an investment in the Fund will fluctuate so that investors' shares,
when redeemed, may be worth more or less than their original cost.
<PAGE>
INVESTMENTS AS OF SEPTEMBER 30, 1996
(unaudited)
BONDS, NOTES & BILLS -- 75.3% OF TOTAL NET ASSETS
FACE
AMOUNT VALUE(A)
------ --------
AUTO AND RELATED -- 2.6%
Poindexter JB, Inc., 12.50%, 5/15/04 ........... $1,000,000 $ 980,000
-----------
BASIC MATERIALS -- 2.8%
USX Marathon Group, 9.125%, 1/15/13 ............ 1,000,000 1,079,590
-----------
BROKERS/INVESTMENT SERVICES -- 2.8%
Lehman Brothers Holdings, Inc., 8.50%, 5/01/07 . 1,000,000 1,050,790
-----------
CHEMICALS -- SPECIALTY -- 1.9%
Polymer Group, Inc., 12.25%, 7/15/02 ........... 667,000 727,030
-----------
ENERGY -- 4.1%
Mariner Energy, Inc., 10.50%, 8/01/06 .......... 500,000 517,500
Mitchell Energy & Development Corp., 9.25%,
1/15/02 ...................................... 1,000,000 1,049,170
-----------
1,566,670
-----------
HOTELS AND RESTAURANTS -- 2.3%
Flagstar Corp., 10.75%, 9/15/01 ................ 1,000,000 887,500
-----------
INSURANCE -- 4.0%
Conseco, Inc., 8.125, 2/15/03 .................. 1,500,000 1,531,005
-----------
LEISURE -- 2.6%
Royal Caribbean Cruises, 7.25%, 8/15/06 ........ 1,000,000 979,580
-----------
MEDIA -- 2.7%
K III Communications Corp., 10.625%, 5/01/02 ... 1,000,000 1,040,000
-----------
PAPER -- 2.5%
Stone Container Corp., 8.875%, 7/15/00
(Convertible) .................................. 650,000 957,125
-----------
PLASTICS -- 5.2%
Berry Plastics Corp., 12.25%, 4/15/04 .......... 1,000,000 1,070,000
Geon Co., 6.875%, 12/15/05 ..................... 1,000,000 930,310
-----------
2,000,310
-----------
<PAGE>
INVESTMENTS AS OF SEPTEMBER 30, 1996 (CONTINUED)
(unaudited)
BONDS, NOTES & BILLS -- (CONTINUED)
FACE
AMOUNT VALUE(A)
------ --------
REAL ESTATE INVESTMENT TRUSTS -- 8.4%
Camden Property Trust, 7.33%, 4/01/01
(Convertible) ................................ $1,250,000 $ 1,337,500
Pacific Gulf Properties, Inc., 8.375%, 2/15/01
(Convertible) ................................ 1,850,000 1,859,250
-----------
3,196,750
-----------
TELEPHONE -- 4.5%
360 Communications, 7.50%, 3/01/06 ............. 1,750,000 1,701,122
-----------
TRANSPORTATION -- 7.4%
Moran Transportation Co., 11.75%, 7/15/04 ...... 1,000,000 1,048,750
Overseas Shipholding Group, 8.00%, 12/01/03 .... 750,000 750,593
Overseas Shipholding Group, 8.75%, 12/01/13 .... 1,000,000 1,015,550
-----------
2,814,893
-----------
U.S. GOVERNMENT -- 18.7%
United States Treasury Bills, 4.967%, 11/21/96 . 7,200,000 7,148,709
-----------
UTILITIES -- 2.8%
Great Lakes Power, Inc., 9.00%, 8/01/04 ........ 1,000,000 1,057,770
-----------
TOTAL BONDS, NOTES & BILLS (Identified Cost $28,403,160) ...... 28,718,844
-----------
PREFERRED STOCKS -- 22.4%
SHARES
------
Avalon Properties, Inc., $2.25 ................. 61,000 1,509,750
DLJ Capital Trust, $2.105 ...................... 40,000 1,000,000
Felcor Suite Hotels, Inc., $1.95 (Convertible) . 118,000 3,068,000
MCI Capital, $2.00 ............................. 60,000 1,485,000
Rouse Capital, $2.313 .......................... 59,225 1,488,028
-----------
TOTAL PREFERRED STOCKS (Identified Cost $8,402,056) ........... 8,550,778
-----------
COMMON STOCK WARRANTS -- 0%
BPC Holdings Corp., Exp. 4/15/04 (Identified
Cost $0) ..................................... 1,000 10,000
-----------
<PAGE>
INVESTMENTS AS OF SEPTEMBER 30, 1996 (CONTINUED)
(unaudited)
FACE
AMOUNT VALUE(A)
------ --------
SHORT TERM INVESTMENT -- 0.9%
American Express Credit Corp., 5.35%, 10/01/96
(Cost $350,000) .............................. $350,000 $ 350,000
-----------
TOTAL INVESTMENTS -- 98.6% (Identified Cost $37,155,216) ....... 37,629,622
Cash and Receivables ..................................... 646,015
Liabilities .............................................. (110,010)
-----------
TOTAL NET ASSETS -- 100% ....................................... $38,165,627
===========
(a) Security valuation -- Corporate debt securities are valued on the basis of
valuations furnished by a pricing service authorized by the Board of
Trustees, which determines valuations for normal, institutional-size
trading units of such securities using market information, transactions
for comparable securities and various relationships between securities
which are generally recognized by institutional traders. United States
Government debt securities are valued at the current closing bid, as last
reported by a pricing service approved by the Board of Trustees. Equity
securities are valued on the basis of valuations furnished by a pricing
service, authorized by the Board of Trustees, which provides the last
reported sale price for securities listed on a national 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,
reported bid price. Short-term investments having a maturity of sixty days
or less are stated at amortized cost, which approximates value.
<PAGE>
- --------------------------------------------------------------------------------
TELEPHONE NUMBERS
- --------------------------------------------------------------------------------
For information about:
[] Account Procedures and Status [] New Account Procedures
[] Redemptions [] Prospectuses
[] Exchanges [] Performance
Call 800-343-5678 Call 800-345-4048
------------------------------------
MAILING ADDRESSES
------------------------------------
FOR EXISTING ACCOUNTS FOR NEW ACCOUNT APPLICATIONS ONLY
CGM Shareholder Services The CGM Funds
c/o Boston Financial Data Services P.O. Box 449
P.O. Box 8511 Boston, MA 02117-0449
Boston, MA 02266-8511
- --------------------------------------------------------------------------------
<PAGE>
INVESTMENT ADVISER
CAPITAL GROWTH MANAGEMENT
LIMITED PARTNERSHIP
Boston, Massachusetts 02110
TRANSFER AND DIVIDEND PAYING
AGENT AND CUSTODIAN OF ASSETS
STATE STREET BANK AND
TRUST COMPANY
Boston, Massachusetts 02102
SHAREHOLDER SERVICING AGENT
FOR STATE STREET BANK AND
TRUST COMPANY
BOSTON FINANCIAL DATA SERVICES, INC.
P.O. Box 8511
Boston, Massachusetts 02266
This report has been prepared for the shareholders of the Fund and is not
authorized for distribution to current or prospective investors in the Fund
unless it is accompanied or preceded by a prospectus.
FQR3 Printed in U.S.A.
CGM
FIXED INCOME FUND
18th Quarterly Report
September 30, 1996
A No-Load Fund
[Fencer Logo] Investment Adviser
CAPITAL GROWTH MANAGEMENT
Limited Partnership
<PAGE>
TO OUR SHAREHOLDERS:
- --------------------------------------------------------------------------------
CGM Mutual Fund increased +3.7% during the third quarter of 1996 compared to a
rise of +3.1% in the Standard and Poor's 500 Index and an increase of +1.8% in
the Merrill Lynch Master Bond Index. Returns for the first nine months of the
year were +9.6% for CGM Mutual Fund; +13.5% for the S&P 500 Index; and +0.5%
for the Merrill Lynch Master Bond Index.
"Robust" and "low inflation" continue to be the catchwords for the economy in
the second half of 1996. In an economy with few excesses, one danger lies in
the tightening labor market. Despite the media's preoccupation with corporate
restructurings and massive layoffs at large corporations over the past five
years, the economy has added approximately 1.5 million new jobs each year
since 1991. The unemployment rate is a low 5.2%. The shortage of qualified job
applicants is now a potential barrier to continued economic growth. Companies
are already competing for qualified employees, bidding up compensation. Over
time, wages not offset by higher levels of productivity will exert pressure on
prices, to drive inflation higher. Nevertheless, the Federal Reserve Board's
position continues to be one of "wait and see" as reflected by its recent
decision to look for further signs of overheating before raising interest
rates. In recent weeks, we have been getting mixed signals on business
activity.
The third quarter began with a sharp sell-off in both the stock and bond
markets. Exceptionally strong employment numbers were reported in early July
frightening bond investors and shortly thereafter, two prominent technology
companies, Hewlett-Packard and Motorola, reported disappointing earnings which
triggered selling in the equity market. Leading averages fell roughly 10% but
individual issues, technology stocks in particular, fell as much as 50% off
their highs in some cases. As the quarter progressed, the bond market
stabilized with long-term rates trading in the 6.75% to 7.25% range and
currently back at 6.75%. The equity market gradually recovered its losses and
has reached record highs. One could make the case the equity market is selling
on a somewhat generous basis relative to historical norms in response to the
strong economy. While the market overall is hardly cheap, sectors such as
financial services, real estate, oil services, and consumer goods continue to
offer reasonable prospects for the coming year.
CGM Mutual Fund was 26% invested in corporate bonds and treasury bills at
September 30. In addition to the fixed income holdings, the next two largest
industry positions are in money center banks and food retailers/wholesalers.
The Fund's three largest holdings are Citicorp, Philip Morris Companies, Inc.
and Intel Corporation.
/s/ Robert L. Kemp
Robert L. Kemp
President
October 8, 1996
- ------------------------------------------------------------------------------
INVESTMENT PERFORMANCE
(unaudited)
Total Return for Periods Ended September 30, 1996
THE FUND'S AVERAGE
CGM MUTUAL FUND ANNUAL TOTAL RETURN
---------------- --------------------
10 Years ............................. +238.4% +13.0%
5 Years .............................. + 72.5 +11.5
1 Year ............................... + 11.0 +11.0
3 Months ............................. + 3.7 --
The percentage figures for the Fund are based upon the beginning net asset
values of $23.43, $27.67, $30.33 and $30.96, respectively, and the September
30, 1996 net asset value of $31.90 per share assuming the reinvestment of
income dividends, capital gains and paid-in capital distributions during such
respective periods.
The performance data contained in this report represent past performance,
which is no guarantee of future results. The investment return on, and the
principal value of, an investment in the Fund will fluctuate so that
investors' shares, when redeemed, may be worth more or less than their
original cost.
<PAGE>
INVESTMENTS AS OF SEPTEMBER 30, 1996
(unaudited)
COMMON STOCKS -- 74.4% OF TOTAL NET ASSETS
SHARES VALUE(A)
------ --------
AEROSPACE -- 5.5%
Boeing Company ............................ 670,000 $ 63,315,000
--------------
BANKS -- MONEY CENTER -- 11.9%
Chase Manhattan Corporation ............... 652,000 52,241,500
Citicorp .................................. 927,500 84,054,688
--------------
136,296,188
--------------
COMPUTER SOFTWARE AND SERVICES -- 4.7%
Dell Computer Corporation ................. 691,300 53,748,575
--------------
ELECTRONIC COMPONENTS -- 5.8%
Intel Corporation ......................... 692,000 66,042,750
--------------
FOOD -- RETAILERS/WHOLESALERS -- 11.3%
Heinz H.J. Company ........................ 610,000 20,587,500
Hershey Foods Corporation ................. 805,000 40,451,250
Philip Morris Companies, Inc. ............. 755,000 67,761,250
--------------
128,800,000
--------------
HOTELS AND RESTAURANTS -- 4.6%
Hilton Hotels Corporation ................. 1,844,000 52,323,500
--------------
INSURANCE -- 5.5%
American International Group, Inc. ........ 622,000 62,666,500
--------------
MISCELLANEOUS -- 4.8%
NIKE, Inc. ................................ 449,000 54,553,500
--------------
OIL -- MAJOR INTEGRATED -- 0.3%
Texaco, Inc. .............................. 40,000 3,680,000
--------------
OIL -- SERVICE -- 8.8%
Halliburton Company ....................... 850,000 43,881,250
Schlumberger LTD .......................... 670,000 56,615,000
--------------
100,496,250
--------------
REAL ESTATE INVESTMENT TRUSTS -- 11.2%
Crescent Real Estate Equities ............. 500,000 20,562,500
Felcor Suite Hotels, Inc. ................. 1,768,500 57,034,125
RFS Hotel Investments, Inc. ............... 480,000 7,500,000
Starwood Lodging Trust .................... 1,040,000 43,550,000
--------------
128,646,625
--------------
TOTAL COMMON STOCKS (Identified Cost $717,235,030) ........ 850,568,888
--------------
<PAGE>
INVESTMENTS AS OF SEPTEMBER 30, 1996 (CONTINUED)
(unaudited)
FACE
BONDS AND BILLS -- 25.9% AMOUNT VALUE(A)
------ --------
INDUSTRIAL BONDS -- 4.4%
Kaiser Aluminum & Chemical Corporation,
12.75%, 2/01/03 ......................... $ 20,000,000 $ 21,700,000
Rohr, Inc., 11.625%, 5/15/03 .............. 5,000,000 5,487,500
Stone Container Corporation, 9.875%,
2/01/01 ................................. 23,000,000 23,115,000
--------------
50,302,500
--------------
UNITED STATES TREASURY -- 21.5%
United States Treasury Bills, 4.939%,
11/14/96 ................................ 200,000,000 198,772,889
United States Treasury Bills, 4.881%,
12/19/96 ................................ 48,000,000 47,484,960
--------------
246,257,849
--------------
TOTAL BONDS AND BILLS (Identified Cost $296,764,435) . 296,560,349
--------------
SHORT-TERM INVESTMENT -- 1.9%
American Express Credit Corp., 5.35%,
10/01/96 (Cost $21,740,000) ............. 21,740,000 21,740,000
--------------
TOTAL INVESTMENTS -- 102.2% (Identified Cost
$1,035,739,465) ....................................... 1,168,869,237
Cash and Receivables .................................... 44,097,750
Liabilities ............................................. (69,712,491)
--------------
TOTAL NET ASSETS -- 100% ................................ $1,143,254,496
==============
(a) Security valuation -- Equity securities are valued on the basis of
valuations furnished by a pricing service, authorized by the Board of
Trustees, which provides the last reported sale price for securities
listed on a national 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. Corporate debt
securities (other than short-term notes having a maturity of less than
sixty days) are valued on the basis of valuations furnished by a pricing
service, authorized by the Board of Trustees, which service determines
valuations for normal, institutional-size trading units of such securities
using market information, transactions for comparable securities and
various relationships between securities which are generally recognized by
institutional traders. U.S. Government debt securities are valued at the
current closing bid, as last reported by a pricing service approved by the
Board of Trustees. Short-term notes having a maturity of less than sixty
days are stated at amortized cost, which approximates value.
<PAGE>
- --------------------------------------------------------------------------------
TELEPHONE NUMBERS
- --------------------------------------------------------------------------------
For information about:
[] Account Procedures and Status [] New Account Procedures
[] Redemptions [] Prospectuses
[] Exchanges [] Performance
Call 800-343-5678 Call 800-345-4048
------------------------------------
MAILING ADDRESSES
------------------------------------
FOR EXISTING ACCOUNTS FOR NEW ACCOUNT APPLICATIONS ONLY
CGM Shareholder Services The CGM Funds
c/o Boston Financial Data Services P.O. Box 449
P.O. Box 8511 Boston, MA 02117-0449
Boston, MA 02266-8511
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
25 YEAR INVESTMENT RECORD
DECEMBER 31, 1970 -- SEPTEMBER 30, 1996 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
IF YOU HAD PURCHASED ONE SHARE OF THE FUND ON DECEMBER 31, 1970
- ----------------------------------------------------------------------------------------------------------------------------------
-- AND HAD TAKEN ALL DIVIDENDS OR -- HAD REINVESTED ALL DIVIDENDS AND CAPITAL
AND DISTRIBUTIONS IN CASH GAINS DISTRIBUTIONS IN ADDITIONAL SHARES
---------------------------------------- ----------------------------------------------------------------------
During the Year
You Would Have Received Which Would Represent
--------------------------- -------------------------------------------
The Value of A Cumulative
The Net Your Original Change
Asset Value Per Share Per Share Investment An Expressed
On of Your Capital Gains Income At Each Annual As An Index With
December Share Would Distributions Dividends Year End Total Return December 31,
31 Have Been of of Would Have Been of 1970 = 100.0
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1970 $13.89 100.0
1971 15.37 $0.35 $0.41 $16.21 + 16.7 116.7
1972 16.20 0.35 0.42 17.98 + 10.9 129.4
1973 14.20 0.42 0.42 16.63 - 7.5 119.7
1974 10.27 -- 0.46 12.51 - 24.8 90.0
1975 12.44 -- 0.43 15.70 + 25.5 113.0
1976 13.96 -- 0.43 18.20 + 15.9 131.0
1977 12.88 -- 0.52 17.45 - 4.1 125.6
1978 12.83 -- 0.65 18.31 + 4.9 131.8
1979 13.81 -- 0.72 20.82 + 13.7 149.9
1980 14.85 -- 0.88 23.90 + 14.8 172.1
1981 13.90 -- 0.97 23.92 + 0.1 172.3
1982 18.16 -- 1.09 33.73 + 41.0 242.9
1983 18.81 -- 1.09 37.07 + 9.9 266.9
1984 17.01 1.86 0.95 39.41 + 6.3 283.7
1985 21.53 -- 1.08 53.01 + 34.5 381.6
1986 22.86 2.75 0.94 66.32 + 25.1 477.4
1987 20.40 4.52 1.06 75.41 + 13.7 542.8
1988 19.94 -- 1.10 77.82 + 3.2 560.2
1989 22.34 0.95 0.93 94.71 + 21.7 681.8
1990 21.64 -- 0.93* 95.75 + 1.1 689.3
1991 26.80 2.64 0.97 134.91 + 40.9 971.2
1992 26.02 1.42 0.93 143.14 + 6.1 1030.4
1993 28.88 1.93 0.86 174.34 + 21.8 1255.0
1994 25.05 -- 1.04 157.43 - 9.7 1133.3
1995 29.43 0.89 0.77 195.69 + 24.3 1408.7
1996(9/30) 31.90 -- 0.34 214.48 + 9.6** 1543.9
------ ------ -------
Totals $18.08 $20.39 +1443.9
- -----------------------------------------------------------------------------------------------------------------------------------
*Includes $0.05 per share distributed from paid-in capital.
**Total return for the nine months ended September 30, 1996.
Shares were first offered on November 5, 1929; the net asset value per share, adjusted for stock splits and dividends, was $8.33.
- -----------------------------------------------------------------------------------------------------------------------------------
The performance data contained in this report represent past performance, which is no guarantee of future results. The
investment return on, and the principal value of, an investment in the Fund will fluctuate so that investors' shares, when
redeemed, may be worth more or less than their original cost.
</TABLE>
<PAGE>
INVESTMENT ADVISER
CAPITAL GROWTH MANAGEMENT
LIMITED PARTNERSHIP
Boston, Massachusetts 02110
TRANSFER AND DIVIDEND PAYING
AGENT AND CUSTODIAN OF ASSETS
STATE STREET BANK AND TRUST COMPANY
Boston, Massachusetts 02102
SHAREHOLDER SERVICING AGENT
FOR STATE STREET BANK AND
TRUST COMPANY
BOSTON FINANCIAL DATA SERVICES, INC.
P.O. Box 8511
Boston, Massachusetts 02266
This report has been prepared for the shareholders of the Fund and is not
authorized for distribution to current or prospective investors in the Fund
unless it is accompanied or preceded by a prospectus.
MQR3 Printed in U.S.A.
CGM
MUTUAL FUND
266th Quarterly Report
September 30, 1996
A No-Load Fund
[Fencer Logo] Investment Adviser
CAPITAL GROWTH MANAGEMENT
Limited Partnership
<PAGE>
TO OUR SHAREHOLDERS:
- --------------------------------------------------------------------------------
CGM American Tax Free Fund increased +2.4% during the third quarter of 1996
compared to the Lehman Municipal Bond Index which rose +2.3% over the same
period. Over the first nine months of the year, CGM American Tax Free Fund
increased +0.2% while the Lehman Municipal Bond Index increased +1.8%.
"Robust" and "low inflation" continue to be the catchwords for the economy in
the second half of 1996. In an economy with few excesses, one danger lies in the
tightening labor market. Despite the media's preoccupation with corporate
restructurings and massive layoffs at large corporations over the past five
years, the economy has added approximately 1.5 million new jobs each year since
1991. The unemployment rate is a low 5.2%. The shortage of qualified job
applicants is now a potential barrier to continued economic growth. Companies
are already competing for qualified employees, bidding up compensation. Over
time, wages not offset by higher levels of productivity will exert pressure on
prices, to drive inflation higher. Nevertheless, the Federal Reserve Board's
position continues to be one of "wait and see" as reflected by its recent
decision to look for further signs of overheating before raising interest rates.
In recent weeks, we have been getting mixed signals on business activity.
The third quarter began with a sharp sell-off in both the stock and bond
markets. Exceptionally strong employment numbers were reported in early July
frightening bond investors and shortly thereafter, two prominent technology
companies. Hewlett-Packard and Motorola, reported disappointing earnings which
triggered selling in the equity market. Leading averages fell roughly 10% but
individual issues, technology stocks in particular, fell as much as 50% off
their highs in some cases. As the quarter progressed, the bond market
stabilized with long-term rates trading in the 6.75% to 7.25% range and
currently back at 6.75%. The equity market gradually recovered its losses and
has reached record highs. In the third quarter, the municipal bond market
traded within a fairly narrow range generally tracking interest rates in an
environment marked both by relatively few new issues and limited demand.
CGM American Tax Free Fund has been structured to throw off a high income
component with a defensive maturity posture and, as a result, tracked the bond
market throughout the third quarter. At present, the Fund is positioned for an
eventual rise in interest rates with particular attention paid to well-
structured issues with good resale attributes in high tax states where supply
and demand are the strongest. CGM American Tax Free Fund's largest sector
positions are in industrial and pollution control and housing. The Fund's
three largest holdings are Hodge, Louisiana (Stone Container), Howard County,
Maryland Multifamily Housing (Avalon Corp.) and Dade County, Florida Water and
Sewer Systems.
/s/ Robert L. Kemp
Robert L. Kemp
President
October 8, 1996
- ------------------------------------------------------------------------------
INVESTMENT PERFORMANCE
(unaudited)
Total Return for Periods Ended September 30, 1996
CGM AMERICAN
TAX FREE LIPPER GENERAL MUNICIPAL
FUND DEBT FUND AVERAGE
------------ ------------------------
1 Year ............................... +5.6% +5.6%
3 Months ............................. +2.4 +2.3
The Fund's average annual total return since inception (November 10, 1993)
through September 30, 1996 is +3.9%. The adviser has agreed to absorb the
Fund's total operating expenses through December 31, 1997. Otherwise, the
Fund's total return since inception, and for the one-year, and three-month
periods ended September 30, 1996 would have been lower.
Lipper Analytical Services, Inc. is an independent mutual fund ranking
service. The performance data contained in the report represent past
performance. The investment return and the principal value of an investment in
the Fund will fluctuate so that investors' shares, when redeemed, may be worth
more or less than their original cost.
<PAGE>
INVESTMENTS AS OF SEPTEMBER 30, 1996
(unaudited)
MUNICIPAL BONDS -- 97.0% OF TOTAL NET ASSETS
FACE
AMOUNT VALUE(A)
------ --------
CALIFORNIA -- 10.6%
California Housing Finance Agency, 6.00%,
8/01/15 ...................................... $ 250,000 $ 251,025
Los Angeles Regional Airport, 6.875%, 11/15/12 . 500,000 525,775
San Jose Redevelopment Tax Allocation,
5.00%, 8/01/20 ............................... 500,000 454,040
-----------
1,230,840
-----------
FLORIDA -- 20.2%
Dade County Water & Sewer Systems, 6.25%,
10/01/11 ..................................... 500,000 541,690
Gainesville Utility Systems, 5.75%, 10/01/09 ... 500,000 521,890
Orlando & Orange County Expressway,
5.95%, 7/01/23 ............................... 500,000 500,220
Polk County Industrial Development Authority
Revenue Bonds (IMC Fertilizer),
7.525%, 1/01/15 .............................. 250,000 262,815
Volusia County Educational Facilities Authority,
6.125%, 10/15/16 ............................. 500,000 506,140
-----------
2,332,755
-----------
KENTUCKY -- 4.5%
Kenton County Airport Revenue Bonds (Delta
Airlines), 6.75%, 2/01/02 .................... 500,000 524,245
-----------
LOUISIANA -- 9.3%
Hodge Utility Revenue Bonds (Stone Container),
9.00%, 3/01/10 ............................... 1,000,000 1,081,790
-----------
MARYLAND -- 7.0%
Howard County Multifamily, Chase Glen
Apartments, 7.00%, 7/01/24 ................... 750,000 805,418
-----------
MASSACHUSETTS -- 2.5%
University of Massachusetts Building Authority,
6.625%, 5/01/08 .............................. 260,000 287,612
-----------
MICHIGAN -- 4.1%
Michigan State Housing Development,
7.05%, 10/01/12 .............................. 450,000 475,209
-----------
MINNESOTA -- 4.5%
Ramsey & Washington Counties (Resource Recovery
Revenue), 6.75%, 12/01/06 .................... 500,000 526,265
-----------
MISSOURI -- 2.1%
Missouri State Environment Improvement,
5.50%, 12/01/13 .............................. 250,000 247,245
-----------
<PAGE>
INVESTMENTS AS OF SEPTEMBER 30, 1996 (CONTINUED)
(unaudited)
MUNICIPAL BONDS -- (CONTINUED)
FACE
AMOUNT VALUE(A)
------ --------
NEW YORK -- 8.6%
New York General Obligation Bonds,
6.125%, 8/01/06 .............................. $ 350,000 $ 374,913
New York General Obligation Bonds, Series B,
8.25%, 6/01/05 ............................... 100,000 115,819
New York State Dormitory Authority Revenue
Bonds, 5.75%, 7/01/13 ........................ 250,000 246,803
New York State Dormitory Authority Revenue
Bonds, 5.875%, 5/15/11 ....................... 250,000 253,042
-----------
990,577
-----------
OHIO -- 4.3%
Cleveland Waterworks Revenue, 5.75%, 1/01/21 ... 500,000 500,355
-----------
PUERTO RICO -- 2.3%
Puerto Rico Electric Power Authority,
6.125%, 7/01/09 .............................. 250,000 261,585
-----------
TEXAS -- 2.4%
Alliance Airport Authority Special Facilities
Revenue Bonds (American Airlines Inc.
Project), 7.00%, 12/01/11 .................... 250,000 273,325
-----------
VIRGINIA -- 14.6%
Fairfax County Industrial Development Authority,
5.50%, 8/15/09 ............................... 500,000 500,395
Hopewell Industrial Development Authority (Stone
Container), 8.25%, 6/01/16 ................... 175,000 189,467
Richmond Virginia, 5.50%, 1/15/12 .............. 500,000 496,890
Virginia State Housing Development Authority,
6.10%, 11/01/15 .............................. 500,000 501,165
-----------
1,687,917
-----------
TOTAL MUNICIPAL BONDS (Identified Cost $10,986,495) ...... 11,225,138
-----------
<PAGE>
INVESTMENTS AS OF SEPTEMBER 30, 1996 (CONTINUED)
(unaudited)
FACE
AMOUNT VALUE(A)
------ --------
SHORT TERM INVESTMENT -- 1.7%
American Express Credit Corp., 5.35%, 10/01/96
(Cost $195,000) .............................. $ 195,000 $ 195,000
-----------
TOTAL INVESTMENTS -- 98.7% (Identified Cost $11,181,495) ....... 11,420,138
Cash and Receivables ..................................... 220,070
Liabilities .............................................. (65,958)
-----------
TOTAL NET ASSETS -- 100.0% ..................................... $11,574,250
===========
(a) Security Valuation--Debt securities are valued on the basis of valuations
furnished by a pricing service authorized by the Board of Trustees, which
determines valuations for normal, institutional-size trading units of such
securities using market information, transactions for comparable
securities and various relationships between securities which are
generally recognized by institutional traders. Short-term investments
having a maturity of sixty days or less are stated at amortized cost,
which approximates value.
<PAGE>
- --------------------------------------------------------------------------------
TELEPHONE NUMBERS
- --------------------------------------------------------------------------------
For information about:
[] Account Procedures and Status [] New Account Procedures
[] Redemptions [] Prospectuses
[] Exchanges [] Performance
Call 800-343-5678 Call 800-345-4048
------------------------------------
MAILING ADDRESSES
------------------------------------
FOR EXISTING ACCOUNTS FOR NEW ACCOUNT APPLICATIONS ONLY
CGM Shareholder Services The CGM Funds
c/o Boston Financial Data Services P.O. Box 449
P.O. Box 8511 Boston, MA 02117-0449
Boston, MA 02266-8511
- --------------------------------------------------------------------------------
<PAGE>
INVESTMENT ADVISER
CAPITAL GROWTH MANAGEMENT
LIMITED PARTNERSHIP
Boston, Massachusetts 02110
TRANSFER AND DIVIDEND PAYING
AGENT AND CUSTODIAN OF ASSETS
STATE STREET BANK AND TRUST COMPANY
Boston, Massachusetts 02102
SHAREHOLDER SERVICING AGENT
FOR STATE STREET BANK AND
TRUST COMPANY
BOSTON FINANCIAL DATA SERVICES, INC.
P.O. Box 8511
Boston, Massachusetts 02266
This report has been prepared for the shareholders of the Fund and is not
authorized for distribution to current or prospective investors in the Fund
unless it is accompanied or preceded by a prospectus.
AQR3 Printed in U.S.A.
CGM
AMERICAN
TAX FREE FUND
12th Quarterly Report
September 30, 1996
A No-Load Fund
[Fencer Logo] Investment Adviser
CAPITAL GROWTH MANAGEMENT
Limited Partnership
<PAGE>
TO OUR SHAREHOLDERS:
- --------------------------------------------------------------------------------
CGM Realty Fund increased +9.0% during the third quarter of 1996 compared to the
National Association of Real Estate Investment Trust's (NAREIT) equity REIT
index which rose 6.5%. Over the first nine months of the year, CGM Realty Fund
increased 18.1% compared to the NAREIT Equity REIT Index which grew 13.8%.
"Robust" and "low inflation" continue to be the catchwords for the economy in
the second half of 1996. In an economy with few excesses, one danger lies in the
tightening labor market. Despite the media's preoccupation with corporate
restructurings and massive layoffs at large corporations over the past five
years, the economy has added approximately 1.5 million new jobs each year since
1991. The unemployment rate is a low 5.2%. The shortage of qualified job
applicants is now a potential barrier to continued economic growth. Companies
are already competing for qualified employees, bidding up compensation. Over
time, wages not offset by higher levels of productivity will exert pressure on
prices, to drive inflation higher. Nevertheless, the Federal Reserve Board's
position continues to be one of "wait and see" as reflected by its recent
decision to look for further signs of overheating before raising interest rates.
In recent weeks, we have been getting mixed signals on business activity.
The third quarter began with a sharp sell-off in both the stock and bond
markets. Exceptionally strong employment numbers were reported in early July
frightening bond investors and shortly thereafter, two prominent technology
companies, Hewlett-Packard and Motorola, reported disappointing earnings which
triggered selling in the equity market. Leading averages fell roughly 10% but
individual issues, technology stocks in particular, fell as much as 50% off
their highs in some cases. As the quarter progressed, the bond market
stabilized with long-term rates trading in the 6.75% to 7.25% range and
currently back at 6.75%. The equity market gradually recovered its losses and
has reached record highs. One could make the case the equity market is selling
on a somewhat generous basis relative to historical norms in response to the
strong economy. While the market overall is hardly cheap, sectors such as
financial services, real estate, oil services, and consumer goods continue to
offer reasonable prospects for the coming year.
CGM Realty Fund's largest industry weighting is in hotels because of the
increase in room rates, occupancy levels, and cash flow hotel companies are
currently enjoying. The Fund also holds significant investments in apartment
communities in California on account of the strong rental growth in a number
of regions in that state. CGM Realty Fund is 49% invested in hotel REITs; 26%
invested in apartment REITs; 18% in office and industrial REITs; and 6% in
retail REITs. The Fund's largest holdings are Felcor Suite Hotels, Inc.,
Pacific Gulf Properties, Inc. and RFS Hotel Investments, Inc.
/s/ Robert L. Kemp
Robert L. Kemp
President
October 8, 1996
<PAGE>
INVESTMENT PERFORMANCE
(unaudited)
Total Return for Periods Ended September 30, 1996
NAREIT
CGM REALTY FUND EQUITY REIT INDEX
---------------- ------------------
1 Year ................................. +24.4% +18.5%
3 Months ............................... + 9.0 + 6.5
The Fund's average annual total return since inception (May 13, 1994) through
September 30, 1996 is +15.8%. The adviser has agreed to limit the Fund's total
operating expenses to 1.00% of its average net assets through December 31,
1997. Otherwise, the Fund's total return since inception and for the one-year,
and three-month periods ended September 30, 1996 would have been lower.
The performance data contained in the report represent past performance, which
is no guarantee of future results. The investment return and the principal
value of an investment in the Fund will fluctuate so that investors' shares,
when redeemed, may be worth more or less than their original cost.
<PAGE>
INVESTMENTS AS OF SEPTEMBER 30, 1996
(unaudited)
REAL ESTATE INVESTMENT TRUSTS -- 99.5% OF TOTAL NET ASSETS
SHARES VALUE(A)
------ --------
APARTMENTS -- 26.1%
Ambassador Apartments, Inc. ...................... 72,000 $ 1,287,000
Bay Apartment Community, Inc. .................... 166,000 4,731,000
Essex Property Trust ............................. 198,200 4,930,225
Home Properties New York, Inc. ................... 242,000 4,930,750
Mid-America Apartment Communities, Inc. .......... 17,000 427,125
Pacific Gulf Properties, Inc. .................... 271,000 5,047,375
Walden Residential Properties, Inc. .............. 230,000 4,858,750
------------
26,212,225
------------
HOTELS -- 49.4%
Equity Inns, Inc. ................................ 187,000 2,337,500
Felcor Suite Hotels, Inc. ........................ 412,500 13,303,125
Innkeepers USA Trust ............................. 430,000 4,837,500
Jameson Inns, Inc. ............................... 475,000 4,868,750
Patriot American Hospitality ..................... 147,600 4,963,050
RFS Hotel Investments, Inc. ...................... 318,000 4,968,750
Starwood Lodging Trust ........................... 117,000 4,899,375
Sunstone Hotel Investments, Inc. ................. 488,200 4,943,025
Winston Hotels ................................... 343,000 4,501,875
------------
49,622,950
------------
OFFICE AND INDUSTRIAL -- 17.6%
Beacon Properties Corporation..................... 131,300 3,807,700
Cali Realty Corporation........................... 174,400 4,730,600
Crescent Real Estate Equities..................... 114,500 4,708,812
Reckson Associates Realty Corporation ............ 121,400 4,506,975
------------
17,754,087
------------
<PAGE>
INVESTMENTS AS OF SEPTEMBER 30, 1996 (CONTINUED)
(unaudited)
REAL ESTATE INVESTMENT TRUSTS -- (CONTINUED)
SHARES VALUE(A)
------ --------
REGIONAL MALLS AND SHOPPING CENTERS -- 6.4%
Developers Diversified Realty Corporation......... 41,000 $ 1,317,125
General Growth Properties, Inc.................... 41,000 1,019,875
Macerich Company.................................. 182,500 4,083,438
------------
6,420,438
------------
TOTAL REAL ESTATE INVESTMENT TRUSTS (Identified Cost
$87,027,329) ................................................ 100,009,700
------------
FACE
AMOUNT
------
SHORT-TERM INVESTMENT -- 1.3%
American Express Credit Corp., 5.35%, 10/01/96
(Cost $1,320,000) ............................ $1,320,000 1,320,000
------------
TOTAL INVESTMENTS -- 100.8% (Identified Cost $88,347,329) .... 101,329,700
Cash and Receivables ....................................... 1,763,437
Liabilities ................................................ (2,581,441)
------------
TOTAL NET ASSETS -- 100.0% ................................. $100,511,696
============
(a) Security valuation -- Equity securities are valued on the basis of
valuations furnished by a pricing service, authorized by the Board of
Trustees, which provides the last reported sale price for securities
listed on a national 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 notes
having a maturity of less than sixty days are stated at amortized cost,
which approximates value.
<PAGE>
- --------------------------------------------------------------------------------
TELEPHONE NUMBERS
- --------------------------------------------------------------------------------
For information about:
[] Account Procedures and Status [] New Account Procedures
[] Redemptions [] Prospectuses
[] Exchanges [] Performance
Call 800-343-5678 Call 800-345-4048
------------------------------------
MAILING ADDRESSES
------------------------------------
FOR EXISTING ACCOUNTS FOR NEW ACCOUNT APPLICATIONS ONLY
CGM Shareholder Services The CGM Funds
c/o Boston Financial Data Services P.O. Box 449
P.O. Box 8511 Boston, MA 02117-0449
Boston, MA 02266-8511
- --------------------------------------------------------------------------------
<PAGE>
INVESTMENT ADVISER
CAPITAL GROWTH MANAGEMENT
LIMITED PARTNERSHIP
Boston, Massachusetts 02110
TRANSFER AND DIVIDEND PAYING
AGENT AND CUSTODIAN OF ASSETS
STATE STREET BANK AND TRUST COMPANY
Boston, Massachusetts 02102
SHAREHOLDER SERVICING AGENT
FOR STATE STREET BANK AND
TRUST COMPANY
BOSTON FINANCIAL DATA SERVICES, INC.
P.O. Box 8511
Boston, Massachusetts 02266
This report has been prepared for the shareholders of the Fund and is not
authorized for distribution to current or prospective investors in the Fund
unless it is accompanied or preceded by a prospectus.
RQR3 Printed in U.S.A.
CGM
REALTY FUND
10th Quarterly Report
September 30, 1996
A No-Load Fund
[Fencer Logo] Investment Adviser
CAPITAL GROWTH MANAGEMENT
Limited Partnership
