<PAGE>
TO OUR SHAREHOLDERS:
- --------------------------------------------------------------------------------
CGM Fixed Income Fund increased 3.9% during the fourth quarter of 1998 while
the Merrill Lynch Master Bond Index rose 0.4%. For the year just ended, CGM
Fixed Income Fund declined -1.2% while the Merrill Lynch Master Bond Index
returned 8.9%, all on a total return basis.
THE YEAR IN REVIEW AND ECONOMIC OUTLOOK
Last year unfolded much as expected with growth in the U.S. economy, healthy
gains in productivity and employment, and moderate increases in corporate
profits. The market climbed during the first half of the year, but fell
precipitously in the third quarter in response to turmoil and falling markets
abroad. The Federal Reserve Board reduced interest rates on three occasions
over a fairly short period of time and, almost overnight, confidence was
restored to the markets. In the fourth quarter, the S&P 500 Index recovered
21% to end the year near 1998 highs.
The one exceptional event of 1998 in the equity market was a huge jump in the
market price of large capitalization company stocks which drove the leading
averages to new highs. Though the S&P 500 Index was up 28.6% for the year, the
average stock in the Index was up only 5% on an equal weighted basis.
In the bond market, long U.S. Treasuries provided the best overall returns
during 1998. Other markets, both domestic and foreign, experienced a severe
drop in liquidity and dramatic increases in risk premiums. However, as the
aftershocks of the second wave of Asian economic crisis and the Russian
collapse diminish, we believe the bond market seems to be recovering from its
period of heightened risk aversion.
We believe the outlook for 1999 is for more of the same with moderate growth,
low inflation, and, perhaps, low interest rates. Casting a shadow over
otherwise rosy economic forecasts, however, are commodity prices which are
falling across the board. Price pressures are squeezing profit margins to the
downside and corporations are being forced to reduce costs as excess capacity
grows. Weaker foreign markets for U.S. exports were a drag on the U.S. economy
in 1998 and may continue to be in the new year although there are signs that
Japan, the second largest economy in the world, is taking steps to resume
economic growth. Additionally, the new Euro currency could bolster trade and
invigorate the European economy.
From a large capitalization company perspective, the securities markets begin
1999 with generous valuations. However, as we learned in 1998, the securities
market is segmented and many smaller and mid-size companies, which have not
participated in the rising market, represent good value at current prices. We
believe the year ahead should prove to be a positive one for bonds given the
current low inflationary environment and a reasonable demand for higher
yielding securities.
PORTFOLIO STRATEGY
CGM Fixed Income Fund underperformed its peers during 1998 on account of the
Fund's real estate investment trust (REIT) exposure and some foreign
vulnerability. The REITs offered strong dividend yields though growth
potential was battered in the markets throughout the year. On the value side
of the portfolio, performance from lower-grade corporate bonds was muted vis-
a-vis 30-year Treasuries on account of widening quality spreads. However,
given a falling interest rate environment, the bonds in the CGM Fixed Income
Fund portfolio generally turned in strong performances.
<PAGE>
CGM Fixed Income Fund's three largest sector positions are in REITs, telephone
and insurance companies. In addition, the Fund was 7.7% invested in U.S.
Government Securities at year end. The Fund's three largest portfolio holdings
are Conseco Financing Trust, Liberty Property Limited Partnership Trust and
Leucadia National Corp.
/s/ Robert L. Kemp
Robert L. Kemp
President
/s/ Janice H. Saul
Janice H. Saul
Portfolio Manager
/s/ G. Kenneth Heebner
G. Kenneth Heebner
Portfolio Manager
January 8, 1999
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
CGM FIXED INCOME FUND AND THE MERRILL LYNCH MASTER BOND INDEX
assuming reinvestment of dividends and capital gains
------------------------------------
CGM Fixed Income Fund
Average Annual Total Returns
------------------------------------
1 year 5 year Life of Fund*
-1.2% 6.7% 9.0%
*(Annualized from 3/17/92 - 12/31/98)
------------------------------------
Past peformance is no indication
of future results
------------------------------------
CGM Merrill Lynch
Fixed Income Fund Master Bond Index
----------------- -----------------
3/17/1992 10,000 10,000
1992 10,920 10,970
1993 12,984 12,067
1994 11,945 11,729
1995 15,206 13,899
1996 17,548 14,399
1997 18,197 15,796
1998 17,979 17,202
CGM FIXED INCOME FUND PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
G. Kenneth Heebner has managed CGM Fixed Income Fund with Janice Saul since June
1993. In 1990, Mr. Heebner founded Capital Growth Management Limited Partnership
with Robert L. Kemp. Prior to establishing the new company, Mr. Heebner managed
mutual fund portfolios at Loomis, Sayles and Company. He currently is
responsible for managing CGM Fixed Income Fund's investments convertible into
equity securities. In addition to co-managing CGM Fixed Income Fund, Mr. Heebner
manages CGM Capital Development Fund, CGM Mutual Fund, CGM Realty Fund, CGM
Focus Fund and two other mutual funds.
Janice H. Saul brings to her role as co-manager of CGM Fixed Income Fund more
than a decade of investment experience. She joined Capital Growth Management in
June 1993. Prior to that, she was at Loomis, Sayles and Company where she ran
private accounts for nine years and managed a long-term municipal bond fund from
May 1991 until May 1993. Ms. Saul was associate portfolio manager of CGM Fixed
Income Fund from June through November 1993 and was named co-manager of the
portfolio in December 1993. Ms. Saul is responsible for managing CGM Fixed
Income Fund's debt securities and also manages CGM American Tax Free Fund.
<PAGE>
INVESTMENT PERFORMANCE
(unaudited)
- -------------------------------------------------------------------------------
Total Return for Periods Ended December 31, 1998
CGM FIXED
INCOME FUND
-----------
5 Years ......................................................... +38.3%
1 Year .......................................................... - 1.2
3 Months ........................................................ + 3.9
The Fund's average annual total returns for the five year period ended
December 31, 1998 and for the period from inception (March 17, 1992) through
December 31, 1998 are +6.7% and +9.0%, respectively. The adviser has agreed to
limit the Fund's total operating expenses to 0.85% of its average net assets
annually through December 31, 1999. Otherwise the total return for each period
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.
BOARD OF TRUSTEES
PETER O. BROWN
NICHOLAS J. GRANT
G. KENNETH HEEBNER
ROBERT L. KEMP
ROBERT B. KITTREDGE
LAURENS MACLURE
JAMES VAN DYKE QUEREAU, JR.
J. BAUR WHITTLESEY
OFFICERS
ROBERT L. KEMP, President
G. KENNETH HEEBNER, Vice President
LESLIE A. LAKE, Vice President and Secretary
KATHLEEN S. HAUGHTON, Vice President
MARTHA I. MAGUIRE, Vice President
JANICE H. SAUL, Vice President
W. DUGAL THOMAS, Vice President
MARY L. STONE, Assistant Vice President
FRANK N. STRAUSS, Treasurer
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 02266-8511
<PAGE>
<TABLE>
CGM FIXED INCOME FUND
- ---------------------------------------------------------------------------------------------
INVESTMENTS AS OF DECEMBER 31, 1998
BONDS, NOTES AND BILLS -- 61.8% OF TOTAL NET ASSETS
<CAPTION>
FACE
AMOUNT VALUE(a)
------ --------
<S> <C> <C>
ENERGY -- 1.0%
Mitchell Energy & Development Corp., 8.00%, 7/15/99 ....... $ 300,000 $ 302,934
Mitchell Energy & Development Corp., 9.25%, 1/15/02 ....... 55,000 58,540
-----------
361,474
-----------
FINANCE -- 5.3%
APP International Finance Co., 11.75%, 10/01/05 ........... 2,750,000 1,815,000
-----------
FOOD -- 3.0%
Conagra Inc., 7.00%, 10/01/28 ............................. 1,000,000 1,026,740
-----------
INDUSTRIAL -- 4.8%
Pohang Iron & Steel Limited, 7.125%, 11/01/06 ............. 2,000,000 1,647,680
-----------
INSURANCE -- 5.8%
Leucadia National Corp., 7.75%, 8/15/13 ................... 2,000,000 1,975,360
-----------
MACHINERY -- 2.9%
Case Corporation, 6.25%, 12/01/03(c) ...................... 1,000,000 988,361
-----------
MEDIA -- 5.2%
Innova Sa De Real, 12.875%, 4/01/07 ....................... 2,750,000 1,787,500
-----------
METALS AND MINING -- 4.8%
Freeport McMoran Cooper, 7.50%, 11/15/06 .................. 1,065,000 668,011
Normandy Finance LTD, 7.625%, 7/15/08(c) .................. 1,000,000 998,294
-----------
1,666,305
-----------
REAL ESTATE INVESTMENT TRUSTS -- 11.6%
Liberty Property Limited Partnership, 8.70%, 7/01/01
(Convertible)(b) ........................................ 1,700,000 2,040,000
Pacific Gulf Properties, Inc., 8.375%, 2/15/01 (Convertible) 1,850,000 1,942,500
-----------
3,982,500
-----------
TELEPHONE -- 6.4%
Econophone, Inc., 13.50%, 7/15/07 ......................... 1,000,000 1,070,000
Worldcom, Inc., 7.75%, 4/01/07 ............................ 1,000,000 1,129,650
-----------
2,199,650
-----------
U.S. GOVERNMENT -- 7.7%
United States Treasury Bills, 4.170%, 3/18/99 ............. 250,000 247,790
United States Treasury Bonds, 6.125%, 11/15/27 ............ 1,000,000 1,119,370
United States Treasury Notes, 4.750%, 11/15/08 ............ 1,250,000 1,259,762
-----------
2,626,922
-----------
UTILITIES -- 3.3%
Great Lakes Power, Inc., 9.00%, 8/01/04 ................... $1,000,000 $ 1,133,470
-----------
TOTAL BONDS, NOTES AND BILLS (Identified Cost $22,126,845) .. 21,210,962
-----------
PREFERRED STOCKS -- 35.9%
SHARES
------
Avalonbay Communities, Inc., $2.25 ........................ 61,000 1,544,063
Conseco Financing Trust, $2.29 ............................ 82,100 2,093,550
DLJ Capital Trust, $2.105 ................................. 40,000 1,027,500
Duquesne Capital LP, $2.094 ............................... 10,000 260,000
Felcor Suite Hotels, Inc., $1.95 (Convertible) ............ 65,000 1,235,000
Mediaone Finance Trust Ill, $2.26 ......................... 40,000 1,025,000
Placer Dome, Inc., $2.156 ................................. 50,000 1,221,875
Rouse Capital, $2.313 ..................................... 59,225 1,502,834
UDS Capital, $2.08 ........................................ 20,000 503,750
Vornado Realty Trust, $3.25 (Convertible) ................. 39,000 1,891,500
-----------
TOTAL PREFERRED STOCKS (Identified Cost $13,259,925) ........ 12,305,072
-----------
COMMON STOCK WARRANTS -- 0%
Econophone, Inc. Exp. 7/15/07 (Identified Cost $0)(c) ..... 1,000 10,000
-----------
FACE
AMOUNT
------
SHORT-TERM INVESTMENT -- 0.4%
American Express Credit Corporation, 4.85% 1/04/99 (cost
$145,000) ............................................... $ 145,000 145,000
-----------
TOTAL INVESTMENTS -- 98.1% (Identified Cost $35,531,770)(d) ................. 33,671,034
Cash and Receivables .................................................... 790,915
Liabilities ............................................................. (148,145)
-----------
TOTAL NET ASSETS -- 100.0% .................................................. $34,313,804
===========
(a) See Note 1A.
(b) Variable or floating rate security. Rate disclosed is as of December 31, 1998.
(c) Securities exempt from registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from registration, normally to qualified
institutional buyers. At period end the value of the securities amounted to $1,996,655,
5.8% of net assets.
(d) Federal Tax Information: At December 31, 1998 the net unrealized depreciation of
investments based on cost of $35,532,621 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 .................................... $ 677,644
Aggregate gross unrealized depreciation for all investments in which there
is an excess of tax cost over value ..................................... (2,539,231)
-----------
Net unrealized depreciation ............................................... $(1,861,587)
===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
CGM FIXED INCOME FUND
- -------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
ASSETS
Investments at value (Identified cost -- $35,531,770) ....... $33,671,034
Cash ........................................................ 74,275
Receivable for:
Shares of the Fund sold ...................... $ 40,211
Dividends and interest ....................... 676,429 716,640
--------- -----------
34,461,949
-----------
LIABILITIES
Payable for:
Shares of the Fund redeemed .................. 28,756
Distributions declared ....................... 54,417 83,173
---------
Accrued expenses:
Management fees .............................. 15,015
Trustees' fees ............................... 6,030
Accounting and Administration ................ 750
Other expenses ............................... 43,177 64,972
--------- -----------
148,145
-----------
NET ASSETS ................................................... $34,313,804
===========
Net Assets consist of:
Capital paid-in ............................................ $37,819,025
Undistributed net investment income ........................ 34,042
Accumulated net realized loss .............................. (1,678,527)
Unrealized depreciation on investments -- net .............. (1,860,736)
-----------
NET ASSETS ................................................... $34,313,804
===========
Shares of beneficial interest outstanding, no par value .... 3,338,870
===========
Net asset value per share* .................................. $10.28
===========
* Shares of the Fund are sold and redeemed at net asset value
($34,313,804 / 3,338,870).
See accompanying notes to financial statements
<PAGE>
CGM FIXED INCOME FUND
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
INVESTMENT INCOME
Income
Dividends ................................................... $ 1,036,459
Interest .................................................... 2,193,756
-----------
3,230,215
-----------
Expenses
Management fees ............................................. 249,622
Trustees' fees .............................................. 22,900
Accounting and Administration ............................... 9,000
Custodian ................................................... 51,650
Transfer agent .............................................. 65,400
Audit and tax services ...................................... 29,820
Legal ....................................................... 17,325
Printing .................................................... 19,620
Registration ................................................ 19,526
Miscellaneous ............................................... 591
-----------
485,454
Less expenses assumed by the investment adviser ............... (159,025)
-----------
Net investment income ......................................... 2,903,786
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Realized gain on investments -- net .......................... 223,226
Unrealized depreciation -- net ............................... (3,493,873)
-----------
Net loss on investments ...................................... (3,270,647)
-----------
NET CHANGE IN ASSETS FROM OPERATIONS .......................... $ (366,861)
===========
See accompanying notes to financial statements
<PAGE>
CGM FIXED INCOME FUND
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997
------------ ------------
FROM OPERATIONS
Net investment income ......................... $ 2,903,786 $ 2,959,630
Net realized gain (loss) from investments ..... 223,226 (1,898,931)
Unrealized appreciation (depreciation) ........ (3,493,873) 443,618
------------ ------------
Change in net assets from operations ........ (366,861) 1,504,317
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income ......................... (2,913,392) (2,948,479)
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares .................. 8,714,215 13,309,381
Net asset value of shares issued in connection
with reinvestment of:
Dividends from net investment income ........ 2,316,649 2,366,900
------------ ------------
11,030,864 15,676,281
Cost of shares redeemed ....................... (17,368,670) (10,946,077)
------------ ------------
Change in net assets derived from capital
share transactions ........................ (6,337,806) 4,730,204
------------ ------------
Total change in net assets .................... (9,618,059) 3,286,042
NET ASSETS
Beginning of period ........................... 43,931,863 40,645,821
------------ ------------
End of period (including undistributed net
investment income of $34,042 and $43,648,
respectively) ............................... $ 34,313,804 $ 43,931,863
============ ============
NUMBER OF SHARES OF THE FUND:
Issued from sale of shares .................... 804,960 1,146,799
Issued in connection with reinvestment of:
Dividends from net investment income ........ 216,050 205,039
------------ ------------
1,021,010 1,351,838
Redeemed .................................... (1,590,658) (945,927)
------------ ------------
Net change .................................. (569,648) 405,911
============ ============
See accompanying notes to financial statements
<PAGE>
CGM FIXED INCOME FUND
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
For a share of the Fund outstanding
throughout each period:
Net asset value at the beginning of
period ................................ $11.24 $11.60 $11.41 $ 9.57 $11.17
------ ------ ------ ------ ------
Net investment income(a) ................ 0.83 0.78 0.77 0.70 0.73
Dividends from net investment income .... (0.83) (0.78) (0.77) (0.70) (0.73)
Net realized and unrealized gain (loss)
on investments ........................ (0.96) (0.36) 0.95 1.84 (1.60)
Distribution from net realized gain ..... -- -- (0.76) -- --
------ ------ ------ ------ ------
Net increase (decrease) in net asset
value ................................. (0.96) (0.36) 0.19 1.84 (1.60)
------ ------ ------ ------ ------
Net asset value at the end of period .... $10.28 $11.24 $11.60 $11.41 $ 9.57
====== ====== ====== ====== ======
Total Return (%)(b) ..................... -1.2 3.7 15.4 27.3 -8.0
Ratios:
Operating expenses to average net assets(%) 0.85 0.85 0.85 0.85 0.85
Operating expenses to average net assets
before expense limitation (%) ......... 1.26 1.26 1.26 1.53 1.46
Net investment income to average net
assets (%) ............................ 7.56 6.81 6.53 6.46 7.00
Portfolio turnover (%) .................. 52 147 149 148 129
Net assets at end of period (in
thousands) ............................ $34,314 $43,932 $40,646 $31,793 $28,672
(a) Net of reimbursement which
amounted to ......................... $ 0.05 $ 0.05 $ 0.05 $ 0.07 $ 0.06
(b) The total return would have been lower had certain expenses not been reimbursed during the period.
</TABLE>
See accompanying notes to financial statements
<PAGE>
CGM FIXED INCOME
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 1998
1. The Fund is a diversified series of CGM Trust which is organized as a
Massachusetts business trust under the laws of Massachusetts pursuant to an
Agreement and Declaration of Trust. The Trust is registered under the
Investment Company Act of 1940 as an open-end management investment company.
The Trust has four other funds whose financial statements are not presented
herein. The Fund commenced operations on March 17, 1992. The investment
objective of the Fund is to maximize total return by investing in debt
securities and preferred stock that provide current income, capital
appreciation or a combination of both income and appreciation.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. 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 -- Corporate debt securities are generally 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, the
last reported bid price. Short-term investments having a maturity of sixty
days or less are stated at amortized cost, which approximates value. Other
assets and securities which are not readily marketable will be valued in
good faith at fair value using methods determined by the Board of
Trustees.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed) and dividend income is recorded on the ex-dividend date.
Interest income is recorded on the accrual basis. Interest income is
increased by the accretion of discount. Premium is amortized against
interest income with a corresponding decrease in the cost basis. Net gain
or loss on securities sold is determined on the identified cost basis.
Dividend income received by the Fund from its investment in REITs may
consist of ordinary income, capital gains and return of capital. The
portion derived from capital gains and return of capital will result in a
reduction of the Fund's dividend income and an increase in realized and
unrealized gain on investments.
C. FEDERAL INCOME TAXES -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies, and to distribute to its shareholders all of its
taxable income and net realized capital gains within the prescribed time
period. Accordingly, no provision for federal income tax has been made. At
December 31, 1998 there were capital loss carryovers available to offset
future realized gains of approximately $1,678,000 expiring in the year
2005.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions
are recorded by the Fund on the ex-dividend date. The classification of
income and capital gains distributions is determined in accordance
with income tax regulations. Permanent book and tax differences relating
to shareholder distributions may result in reclassifications to paid-in
capital. Undistributed net investment income, accumulated net investment
loss, or distributions in excess of net investment income may include
temporary book and tax differences which will reverse in a subsequent
period. Any taxable income or gain remaining at fiscal year end is
distributed in the following year.
2. PURCHASES AND SALES OF SECURITIES -- For the year ended December 31, 1998,
purchases and sales of securities other than United States government
obligations and short-term investments aggregated $14,326,170 and $17,546,068,
respectively. Purchases and sales of United States government obligations
aggregated $9,840,580 and $12,887,950, respectively.
3. A. MANAGEMENT FEES -- During the year ended December 31, 1998, the Fund
incurred management fees of $249,622 paid or payable to the Fund's
investment adviser, Capital Growth Management Limited Partnership
(CGM), certain officers and directors of which are also officers and
trustees of the Fund. The management agreement provides for a fee at
the annual rate of 0.65% on the first $200 million of the Fund's
average daily net assets, 0.55% of the next $300 million and 0.40% of
such assets in excess of $500 million. For the year ended December 31,
1998, CGM waived a portion of its fee. See Note 4.
B. OTHER EXPENSES -- CGM performs certain administrative, accounting and
other services for the Fund. The expenses of those services, which are
paid to CGM by the Fund, include the following: (i) expenses for
personnel performing bookkeeping, accounting 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 year
ended December 31, 1998 these expenses amounted to $9,000 and are
shown separately in the financial statements as Accounting and
Administration.
C. TRUSTEES FEES AND EXPENSES -- The Fund does not pay any compensation
directly to its officers or to any trustees who are directors,
officers or employees of CGM, or any affiliate of CGM, other than
registered investment companies. Each other trustee is compensated by
the CGM Funds with an annual fee of $37,000 plus travel expenses for
each meeting attended. Of this amount, the Fund is responsible for
$3,000 plus an annual variable fee calculated based on the proportion
of the Fund's average net assets to the aggregate average net assets
of the CGM Funds, which for 1998 was $329. In addition, the Chairman
of the Independent Trustees Committee receives an annual retainer of
$1,000.
4. EXPENSE LIMITATION -- Until December 31, 1999, and, thereafter, until
further notice to the Fund, CGM has voluntarily agreed to reduce its
management fee and, if necessary, to assume expenses of the Fund in order to
limit the Fund's expenses to an annual rate of 0.85% of average daily net
assets. As a result of the Fund's expenses exceeding the voluntary expense
limitation, CGM waived $159,025 of its management fee. The Fund incurred
operating expenses of $326,429, representing 0.85% of the average daily net
assets.
<PAGE>
CGM FIXED INCOME
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of CGM Fixed Income Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of CGM Fixed Income
Fund at December 31, 1998, and the results of its operations, the changes in
its net assets and the financial highlights for the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and the financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1998 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 8, 1999
<PAGE>
CGM FIXED INCOME FUND
7th Annual Report
December 31, 1998
A No-Load Fund
[graphic omitted]
Investment Adviser
CAPITAL GROWTH MANAGEMENT
Limited Partnership
INVESTMENT ADVISER
CAPITAL GROWTH MANAGEMENT
LIMITED PARTNERSHIP
Boston, Massachusetts 02110
- -------------------------------------------------------------------------------
TELEPHONE NUMBERS
For information about:
[ ] Account Procedures and Status
[ ] Redemptions
[ ] Exchanges
Call 800-343-5678
[ ] New Account Procedures
[ ] Prospectuses
[ ] Performance
Call 800-345-4048
- -------------------------------------------------------------------------------
MAILING ADDRESSES
FOR EXISTING ACCOUNTS
Boston Financial Data Services
P.O. Box 8511
Boston, MA 02266-8511
FOR NEW ACCOUNT APPLICATIONS ONLY
The CGM Funds
P.O. Box 449
Boston, MA 02117-0449
- -------------------------------------------------------------------------------
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.
FAR98 Printed in U.S.A.
<PAGE>
TO OUR SHAREHOLDERS
- --------------------------------------------------------------------------------
CGM Mutual Fund increased 19.3% during the fourth quarter of 1998 while the
unmanaged Standard and Poor's 500 Index grew 21.4% and the Merrill Lynch
Master Bond Index rose 0.4%. For the year just ended, CGM Mutual Fund posted a
total return of 8.2% while the unmanaged S&P 500 and the Merrill Lynch Master
Bond indices returned 28.6% and 8.9%, respectively.
THE YEAR IN REVIEW AND ECONOMIC OUTLOOK
Last year unfolded much as expected with growth in the U.S. economy, healthy
gains in productivity and employment, and moderate increases in corporate
profits. The market climbed during the first half of the year, but fell
precipitously in the third quarter in response to turmoil and falling markets
abroad. The Federal Reserve Board reduced interest rates on three occasions
over a fairly short period of time and, almost overnight, confidence was
restored to the markets. In the fourth quarter, the S&P 500 Index recovered
21% to end the year near 1998 highs.
The one exceptional event of 1998 was a huge jump in the market price of large
capitalization company stocks which drove the leading averages to new highs.
Though the S&P 500 Index was up 28.6% for the year, the average stock in the
Index was up only 5% on an equal weighted basis.
We believe the outlook for 1999 is for more of the same with moderate growth,
low inflation, and, perhaps, low interest rates. Casting a shadow over
otherwise rosy economic forecasts, however, are commodity prices which are
falling across the board. Price pressures are squeezing profit margins to the
downside and corporations are being forced to reduce costs as excess capacity
grows. Weaker foreign markets for U.S. exports were a drag on the U.S. economy
in 1998 and may continue to be in the new year although there are signs that
Japan, the second largest economy in the world, is taking steps to resume
economic growth. Additionally, the new Euro currency could bolster trade and
invigorate the European economy.
From a large capitalization company perspective, the securities markets begin
1999 with generous valuations. However, as we learned in 1998, the securities
market is segmented and many smaller and mid-size companies, which have not
participated in the rising market, represent good value at current prices. We
expect the market to broaden to include those companies in which many of our
assets are invested today.
PORTFOLIO STRATEGY
CGM Mutual Fund underperformed its peer group primarily on account of its
major concentration (25%) in real estate investment trusts (REITs). Our REIT
holdings declined about 20% on a total return basis over the year while market
indices showed significant appreciation. Despite volatility during the year
which reflected uncertainties in foreign bond markets, our holdings in Asian
bonds closed the year with a return only slightly below that of broad bond
market indices.
We believe the sharp price declines in REITs are not justified by
fundamentals. Favorable supply and demand relationships in the regions and
property types served by our REITs should support rising rents and occupancies
for these companies. We anticipate strong performance in 1999 for these stocks
as they climb back from currently depressed valuation levels.
<PAGE>
CGM Mutual Fund is approximately 26% invested in corporate bonds with the
balance of portfolio holdings in company stocks we believe are selling at
reasonable price-to-earning relationships. The Fund's three largest industry
positions in the equity portfolio are in REITs, regional banks and electronic
components. The three largest equity holdings are Philip Morris Companies,
Chase Manhattan Corporation and Firstar Corporation.
/s/ Robert L. Kemp
Robert L. Kemp
President
/s/ Kenneth Heebner
Kenneth Heebner
Portfolio Manager
January 8, 1999
<PAGE>
COMPARISONS OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
CGM MUTUAL FUND, THE UNMANAGED S&P 500 INDEX, AND THE MERRILL
LYNCH MASTER BOND INDEX
assuming reinvestment of dividends and capital gains
------------------------------------
CGM Mutual Fund
Average Annual Total Returns
------------------------------------
1 year 5 year 10 year
8.2% 10.2% 13.8%
------------------------------------
Past performance is no indication
of future results
------------------------------------
CGM Unmanaged Merrill Lynch
Mutual Fund S&P 500 Index Master Bond Index
----------------- ------------- -----------------
10,000 10,000 10,000
1989 12,170 13,160 11,420
1990 12,304 12,752 12,459
1991 17,336 16,629 14,440
1992 18,394 17,892 15,538
1993 22,404 19,700 17,092
1994 20,230 19,956 16,613
1995 25,146 27,439 19,686
1996 31,106 33,750 20,395
1997 33,657 45,023 22,373
1998 36,427 57,899 24,365
CGM MUTUAL FUND
PORTFOLIO MANAGER
- ------------------------------------------------------------------------------
G. Kenneth Heebner has managed CGM Mutual Fund since 1981. In 1990, Mr.
Heebner founded Capital Growth Management Limited Partnership with Robert L.
Kemp. Prior to establishing the new company, Mr. Heebner was at Loomis,
Sayles and Company where he managed the Fund, then known as Loomis-Sayles
Mutual Fund. In addition to CGM Mutual Fund, Mr. Heebner currently manages CGM
Capital Development Fund, CGM Realty Fund and CGM Focus Fund as well as two
other mutual funds. He also co-manages CGM Fixed Income Fund with Janice Saul.
INVESTMENT PERFORMANCE
(unaudited)
- -------------------------------------------------------------------------------
Total Return for Periods Ended December 31, 1998
CGM
MUTUAL FUND
-----------
10 Years ........................................................ +263.8%
5 Years ........................................................ + 62.5
1 Year ......................................................... + 8.2
3 Months ....................................................... + 19.3
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.
<TABLE>
<CAPTION>
CGM MUTUAL FUND
----------------------------------------------------------------------------------------------------------------------------------
25 YEAR INVESTMENT RECORD
DECEMBER 31, 1973 -- DECEMBER 31, 1998 (UNAUDITED)
----------------------------------------------------------------------------------------------------------------------------------
IF YOU HAD PURCHASED ONE SHARE OF THE FUND ON DECEMBER 31, 1973
----------------------------------------------------------------------------------------------------------------------------------
-- 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 1973 = 100.0
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1973 $14.20 100.0
1974 10.27 -- $ 0.46 $10.68 - 24.8% 75.2
1975 12.44 -- 0.43 13.40 + 25.5 94.4
1976 13.96 -- 0.43 15.53 + 15.9 109.4
1977 12.88 -- 0.52 14.89 - 4.1 104.9
1978 12.83 -- 0.65 15.62 + 4.9 110.0
1979 13.81 -- 0.72 17.76 + 13.7 125.1
1980 14.85 -- 0.88 20.39 + 14.8 143.6
1981 13.90 -- 0.97 20.41 + 0.1 143.7
1982 18.16 -- 1.09 28.78 + 41.0 202.6
1983 18.81 -- 1.09 31.63 + 9.9 222.7
1984 17.01 $ 1.86 0.95 33.62 + 6.3 236.7
1985 21.53 -- 1.08 45.22 + 34.5 318.4
1986 22.86 2.75 0.94 56.57 + 25.1 398.3
1987 20.40 4.52 1.06 64.32 + 13.7 452.9
1988 19.94 -- 1.10 66.38 + 3.2 467.4
1989 22.34 0.95 0.93 80.78 + 21.7 568.8
1990 21.64 -- 0.93* 81.67 + 1.1 575.1
1991 26.80 2.64 0.97 115.07 + 40.9 810.3
1992 26.02 1.42 0.93 122.09 + 6.1 859.7
1993 28.88 1.93 0.86 148.71 + 21.8 1047.1
1994 25.05 -- 1.04 134.29 - 9.7 945.5
1995 29.43 0.89 0.77 166.92 + 24.3 1175.3
1996 31.42 4.15 0.74 206.48 + 23.7 1453.8
1997 25.52 7.81 0.67 223.41 + 8.2 1573.0
1998 26.36 0.25 0.98 241.73 + 8.2 1702.0
------ ------ -------
Totals $29.17 $21.19 +1602.0
----------------------------------------------------------------------------------------------------------------------------------
* Includes $0.05 per share distributed from paid-in capital.
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>
CGM MUTUAL FUND
- --------------------------------------------------------------------------------
INVESTMENTS AS OF DECEMBER 31, 1998
COMMON STOCKS -- 72.7% OF TOTAL NET ASSETS
SHARES VALUE(A)
------ --------
AUTO AND RELATED -- 5.2%
Volkswagen A G Sponsored ADR(b) ................ 3,100,000 $ 48,437,500
-------------
BANKS -- MONEY CENTER -- 6.9%
Chase Manhattan Corporation .................... 960,000 65,340,000
-------------
BANKS -- REGIONAL -- 8.4%
First Union Corporation ........................ 329,000 20,007,313
Firstar Corporation ............................ 635,000 59,213,750
-------------
79,221,063
-------------
BEVERAGES AND TOBACCO -- 7.2%
Philip Morris Companies, Inc. .................. 1,260,000 67,410,000
-------------
ELECTRONIC COMPONENTS -- 8.1%
Intel Corporation .............................. 420,000 49,796,250
Micron Technology, Inc.(c) ..................... 420,000 21,236,250
Texas Instruments, Inc. ........................ 60,000 5,133,750
-------------
76,166,250
-------------
ELECTRONIC AND COMMUNICATION EQUIPMENT -- 5.2%
Nokia Corporation ADR(b) ....................... 405,000 48,777,187
-------------
OFFICE EQUIPMENT AND SUPPLY -- 4.8%
International Business Machines Corporation .... 245,000 45,263,750
-------------
REAL ESTATE INVESTMENT TRUSTS -- 25.1%
Apartment Investment & Management Company ...... 1,450,000 53,921,875
Boston Properties, Inc. ........................ 1,900,000 57,950,000
Crescent Real Estate Equity .................... 710,000 16,330,000
Developers Diversified Realty .................. 300,000 5,325,000
Equity Office Properties Trust ................. 2,160,000 51,840,000
Vornado Realty Trust ........................... 1,515,000 51,131,250
-------------
236,498,125
-------------
STEEL -- 1.8%
Pohang Iron & Steel Limited ADR(b)(d) .......... 1,001,800 16,905,375
-------------
TOTAL COMMON STOCKS (Identified Cost $639,082,388) 684,019,250
-------------
BONDS -- 26.1%
FACE
AMOUNT
------
BANK AND INSURANCE -- 17.1%
Korea Development Bank, 6.625%, 11/21/03(d) .... $33,850,000 $ 30,258,515
Korea Development Bank, 7.25%, 5/15/06(d) ...... 70,000,000 61,862,500
Korea Development Bank, 7.375%, 9/17/04(d) ..... 75,620,000 69,019,130
-------------
161,140,145
-------------
FINANCE -- 6.8%
APP International Finance, 11.75%, 10/01/05 .... 46,750,000 30,855,000
Export Import Bank Korea, 6.375%, 2/15/06(d) ... 39,398,000 33,537,942
-------------
64,392,942
-------------
INDUSTRIAL -- 2.2%
Pohang Iron & Steel Limited, 7.125%, 11/01/06(d) 9,000,000 7,414,560
Pohang Iron & Steel Limited, 7.375%, 5/15/05(d) . 15,000,000 12,876,300
-------------
20,290,860
-------------
TOTAL BONDS (Identified Cost $246,343,186) ....... 245,823,947
-------------
SHORT-TERM INVESTMENT -- 0.7%
American Express Credit Corporation, 4.85%,
1/04/99 (Cost $6,610,000) .................. 6,610,000 6,610,000
-------------
TOTAL INVESTMENTS -- 99.5% (Identified
Cost $892,035,574)(e) ...................................... 936,453,197
Cash and Receivables ..................................... 32,353,671
Liabilities .............................................. (27,877,268)
-------------
TOTAL NET ASSETS -- 100% ..................................... $ 940,929,600
=============
(a) See Note 1A.
(b) 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.
(c) Non-income producing security
(d) The Fund has greater than 10% of its assets at December 31, 1998 invested in
Korea.
(e) Federal Tax Information: At December 31, 1998, the net unrealized
appreciation on investments based on cost of $892,408,824 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 ........... $ 94,322,453
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value ........... (50,278,080)
-------------
Net unrealized appreciation ................................. $ 44,044,373
=============
See accompanying notes to financial statements
<PAGE>
CGM MUTUAL FUND
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
ASSETS
Investments at value (Identified cost -- $892,035,574) ...... $936,453,197
Cash ........................................................ 2,497
Receivable for:
Securities sold ............................ $23,615,943
Shares of the Fund sold .................... 635,780
Dividends and interest ..................... 6,853,308
Foreign Tax Reclaims ....................... 1,246,143 32,351,174
----------- ------------
968,806,868
------------
LIABILITIES
Payable for:
Securities purchased 19,191,289
Shares of the Fund redeemed .............. 5,515,667
Distributions declared ................... 2,272,127 26,979,083
-----------
Accrued expenses:
Management fees .......................... 679,297
Trustees' fees ........................... 20,745
Accounting and Administration ............ 7,000
Other expenses ........................... 191,143 898,185
----------- ------------
27,877,268
------------
NET ASSETS .................................................... $940,929,600
============
Net Assets consist of:
Capital paid-in ........................................... $895,796,723
Undistributed net investment income ....................... 737,701
Accumulated net realized loss ............................. (22,447)
Unrealized appreciation on investments -- net ............. 44,417,623
------------
NET ASSETS .................................................... $940,929,600
============
Shares of beneficial interest outstanding, no par value .... 35,696,303
============
Net asset value per share* .................................. $26.36
======
* Shares of the Fund are sold and redeemed at net asset value
($940,929,600 / 35,696,303).
See accompanying notes to financial statements
<PAGE>
CGM MUTUAL FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
INVESTMENT INCOME
Income
Dividends (net of withholding tax of $1,042,572) ......... $24,542,209
Interest ................................................. 22,934,733
-----------
47,476,942
-----------
Expenses
Management fees .......................................... 8,746,758
Trustees' fees ........................................... 80,917
Accounting and Administration ............................ 84,000
Custodian ................................................ 165,290
Transfer agent ........................................... 1,313,946
Audit and tax services ................................... 35,402
Legal .................................................... 17,715
Printing ................................................. 84,725
Registration ............................................. 52,217
Miscellaneous ............................................ 7,996
-----------
10,588,966
-----------
Net investment income ...................................... 36,887,976
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain on investments -- net ...................... 8,861,923
Unrealized appreciation -- net ........................... 34,118,144
-----------
Net gain on investments .................................. 42,980,067
-----------
NET CHANGE IN ASSETS FROM OPERATIONS ......................... $79,868,043
===========
See accompanying notes to financial statements
<PAGE>
CGM MUTUAL FUND
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997
------------- -------------
<S> <C> <C>
OPERATIONS
Net investment income .............................. $ 36,887,976 $ 24,502,838
Net realized gain from investments ................. 8,861,923 283,265,656
Unrealized appreciation (depreciation) ............. 34,118,144 (206,585,566)
-------------- --------------
Change in net assets from operations ............. 79,868,043 101,182,928
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ......................... (36,150,275) (25,043,123)
From net realized gain on investments .............. (9,194,452) (283,113,674)
-------------- --------------
(45,344,727) (308,156,797)
-------------- --------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares ....................... 44,291,949 88,236,330
Net asset value of shares issued in connection with
reinvestment of:
Dividends from net investment income ............. 32,073,979 22,656,786
Distributions from net realized gain ............. 8,389,398 263,206,166
-------------- --------------
84,755,326 374,099,282
Cost of shares redeemed ............................ (370,503,481) (191,493,864)
-------------- --------------
Change in net assets derived from capital share
transactions ................................... (285,748,155) 182,605,418
-------------- --------------
Total change in net assets ......................... (251,224,839) (24,368,451)
NET ASSETS
Beginning of period ................................ 1,192,154,439 1,216,522,890
-------------- --------------
End of the period (including undistributed net
investment income of $737,701 and $0, respectively) $ 940,929,600 $1,192,154,439
============== ==============
NUMBER OF SHARES OF THE FUND:
Issued from sale of shares ......................... 1,699,743 2,627,268
Issued in connection with reinvestment of:
Dividends from net investment income ............. 1,233,492 709,138
Distributions from net realized gain ............. 314,649 10,313,957
-------------- --------------
3,247,884 13,650,363
Redeemed ......................................... (14,267,908) (5,656,108)
-------------- --------------
Net change ....................................... (11,020,024) 7,994,255
============== ==============
</TABLE>
See accompanying notes to financial statements
<PAGE>
CGM MUTUAL FUND
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
For a share of the Fund outstanding
throughout each period:
Net asset value at the beginning
of period ..................... $25.52 $31.42 $29.43 $25.05 $28.88
------ ------ ------ ------ ------
Net investment income ........... 1.00 0.66 0.75 0.73 1.09
Dividends from net investment
income ........................ (0.98) (0.67) (0.74) (0.77) (1.04)
Net realized and unrealized gain
(loss) on investments ......... 1.07 1.92 6.13 5.31 (3.88)
Distribution from net realized
gain .......................... (0.25) (7.81) (4.15) (0.89) --
------ ------ ------ ------ ------
Net increase (decrease) in net
asset value ................... 0.84 (5.90) 1.99 4.38 (3.83)
------ ------ ------ ------ ------
Net asset value at end of period $26.36 $25.52 $31.42 $29.43 $25.05
====== ====== ====== ====== ======
Total Return (%) ................ 8.2 8.2 23.7 24.3 -9.7
Ratios:
Operating expenses to average net
assets (%) .................... 1.02 0.98 0.87 0.91 0.92
Net investment income to average
net assets (%) ................ 3.56 1.91 2.33 2.55 4.39
Portfolio turnover (%) .......... 280 386 192 291 173
Net assets at end of period (in
thousands) ($)................. 940,930 1,192,154 1,216,523 1,154,439 1,063,375
</TABLE>
See accompanying notes to financial statements.
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 1998
1. The Fund is a diversified series of CGM Trust which is organized as a
Massachusetts business trust under the laws of Massachusetts pursuant to an
Agreement and Declaration of Trust. The Trust is registered under the Investment
Company Act of 1940 as an open-end management investment company. The Trust has
four other Funds whose financial statements are not presented herein. The Fund's
objective is reasonable long-term capital appreciation with a prudent approach
to protection of capital from undue risks. Current income is a consideration in
the selection of the Fund's portfolio securities, but it is not a controlling
factor.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. 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 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 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. Short-
term investments having a maturity of sixty days or less are stated at
amortized cost, which approximates value.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed) and dividend income is recorded on the ex-dividend date.
Interest income is recorded on the accrual basis. Net gain or loss on
securities sold is determined on the identified cost basis. Dividend
income received by the Fund from its investment in REITs may be comprised
of ordinary income, capital gains, and return of capital. The portion
derived from capital gains and return of capital will result in a
reduction of the Fund's dividend income and an increase in realized and
unrealized gain on investments.
C. FEDERAL INCOME TAXES -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies, and to distribute to its shareholders all of its
taxable income and net realized capital gains, within the prescribed time
period. Accordingly, no provision for federal income tax has been made.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions
are recorded by the Fund on the ex-dividend date. The classification of
income and capital gains distributions is determined in accordance with
income tax regulations. Permanent book and tax differences relating to
shareholder distributions may result in reclassifications to paid-in
capital. Undistributed net investment income, accumulated net investment
loss, or distributions in excess of net investment income may include
temporary book and tax differences which will reverse in a subsequent
period. Any taxable income or gain remaining at fiscal year end is
distributed in the following year.
2. PURCHASES AND SALES OF SECURITIES -- For the year ended December 31, 1998,
purchases and sales of securities other than United States government
obligations and short-term investments aggregated $2,721,906,132 and
$2,750,298,490, respectively. Purchases and sales of United States government
obligations aggregated $250,071,122 and $533,038,345, respectively.
3. A. MANAGEMENT FEES -- During the year ended December 31, 1998, the Fund
incurred management fees of $8,746,758, paid or payable to the Fund's
investment adviser, Capital Growth Management Limited Partnership
(CGM), certain officers and directors of which are also officers and
trustees of the Fund. The management agreement provides for a fee at
the annual rate of 0.90% on the first $500 million of the Fund's
average daily net assets, 0.80% of the next $500 million and 0.75% of
such assets in excess of $1 billion.
B. OTHER EXPENSES -- CGM performs certain administrative, accounting and
other services for the Fund. The expenses of those services, which
were paid to CGM by the Fund, include the following: (i) expenses for
personnel performing bookkeeping, accounting 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. The Accounting
and Administration expense of $84,000 is shown separately in the
financial statements.
C. TRUSTEES FEES AND EXPENSES -- The Fund does not pay any compensation
directly to its officers or to any trustees who are directors,
officers or employees of CGM, or any affiliate of CGM, (other than
registered investment companies). Each other trustee is compensated by
the CGM Funds with an annual fee of $37,000 plus travel expenses for
each meeting attended. Of this amount, the Fund is responsible for
$3,000 plus an annual variable fee calculated based on the proportion
of the Fund's average net assets to the aggregate average net assets
of the CGM Funds, which for 1998 was $9,829. In addition, the Chairman
of the Independent Trustees Committee receives an annual retainer of
$1,500.
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of CGM Mutual Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of CGM Mutual Fund at
December 31, 1998, and the results of its operations, the changes in its net
assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles. These financial statements and
the financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 8, 1999
<PAGE>
CGM MUTUAL FUND
- -------------------------------------------------------------------------------
BOARD OF TRUSTEES INVESTMENT ADVISER
PETER O. BROWN CAPITAL GROWTH MANAGEMENT LIMITED
NICHOLAS J. GRANT PARTNERSHIP
G. KENNETH HEEBNER Boston, Massachusetts 02110
ROBERT L. KEMP
ROBERT B. KITTREDGE TRANSFER AND DIVIDEND PAYING
LAURENS MACLURE AGENT AND CUSTODIAN OF ASSETS
JAMES VAN DYKE QUEREAU, JR.
J. BAUR WHITTLESEY STATE STREET BANK AND TRUST COMPANY
Boston, Massachusetts 02102
OFFICERS
SHAREHOLDER SERVICING AGENT
ROBERT L. KEMP, President FOR STATE STREET BANK AND
G. KENNETH HEEBNER, Vice President TRUST COMPANY
LESLIE A. LAKE, Vice President and
Secretary BOSTON FINANCIAL DATA SERVICES, INC.
KATHLEEN S. HAUGHTON, Vice President P.O. Box 8511
MARTHA I. MAGUIRE, Vice President Boston, Massachusetts 02266-8511
W. DUGAL THOMAS, Vice President
MARY L. STONE, Assistant Vice
President
FRANK N. STRAUSS, Treasurer
<PAGE>
CGM MUTUAL FUND
69th Annual Report
December 31, 1998
A No-Load Fund
[graphic omitted]
Investment Adviser
CAPITAL GROWTH MANAGEMENT
Limited Partnership
INVESTMENT ADVISER
CAPITAL GROWTH MANAGEMENT
LIMITED PARTNERSHIP
Boston, Massachusetts 02110
- -------------------------------------------------------------------------------
TELEPHONE NUMBERS
For information about:
[ ] Account Procedures and Status
[ ] Redemptions
[ ] Exchanges
Call 800-343-5678
[ ] New Account Procedures
[ ] Prospectuses
[ ] Performance
Call 800-345-4048
- -------------------------------------------------------------------------------
MAILING ADDRESSES
FOR EXISTING ACCOUNTS
Boston Financial Data Services
P.O. Box 8511
Boston, MA 02266-8511
FOR NEW ACCOUNT APPLICATIONS ONLY
The CGM Funds
P.O. Box 449
Boston, MA 02117-0449
- -------------------------------------------------------------------------------
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.
MAR98 Printed in U.S.A.
<PAGE>
TO OUR SHAREHOLDERS
- --------------------------------------------------------------------------------
CGM American Tax Free Fund was unchanged during the fourth quarter of 1998
compared to the Lehman Municipal Bond Index which increased 0.6% over the same
period. For the year just ended, CGM American Tax Free Fund returned 6.5% as
did the Lehman Municipal Bond Index, all on a total return basis.
THE YEAR IN REVIEW AND ECONOMIC OUTLOOK
Last year unfolded much as expected with growth in the U.S. economy, healthy
gains in productivity and employment, and moderate increases in corporate
profits. The market climbed during the first half of the year, but fell
precipitously in the third quarter in response to turmoil and falling markets
abroad. The Federal Reserve Board reduced interest rates on three occasions
over a fairly short period of time and, almost overnight, confidence was
restored to the markets. In the fourth quarter, the S&P 500 Index recovered
21% to end the year near 1998 highs.
In the bond market, long U.S. Treasuries provided the best overall returns
during 1998. Other markets, both domestic and foreign, experienced a severe
drop in liquidity and dramatic increases in risk premiums. However, as the
aftershocks of the second wave of Asian economic crisis and the Russian
collapse diminish, we believe the bond market seems to be recovering from its
period of heightened risk aversion.
We believe the economic outlook for 1999 is for more of the same with moderate
growth, low inflation, and, perhaps, low interest rates. Casting a shadow over
otherwise rosy forecasts, however, are commodity prices which are falling
across the board. Price pressures are squeezing profit margins to the downside
and corporations are being forced to reduce costs as excess capacity grows.
Weaker foreign markets for U.S. exports were a drag on the U.S. economy in
1998 and may continue to be in the new year although there are signs that
Japan, the second largest economy in the world, is taking steps to resume
economic growth. Additionally, the new Euro currency could bolster trade and
invigorate the European economy. In our view, the year ahead should prove
positive for bonds given the current low inflationary environment.
PORTFOLIO STRATEGY
The municipal bond market performed well during 1998 in spite of the stock
market lure for investors. Though municipal yields are low by recent
historical measures, they continued to be compelling on a tax-adjusted basis
throughout the year.
CGM American Tax Free Fund delivered a good performance in 1998 given holdings
of highly liquid, long discount bonds and high-coupon, lower quality
industrial development bonds. We maintained a somewhat bullish interest rate
exposure for the better part of the year capitalizing on falling rates.
Looking forward, low absolute yields on municipal securities and competing
investments could hold tax exempt rates at today's levels despite the positive
outlook for the general bond market. Nevertheless, municipal bonds continue to
offer an attractive and relatively safe investment vehicle to investors in the
maximum tax bracket.
CGM American Tax Free Fund's largest sectors are industrial revenue, general
obligation, and transportation bonds. The Fund's three largest holdings are
Hodge Louisiana (Stone Container), Washington State General Obligation Bonds
and Howard County Maryland Multi-family housing (Chase Glen Apartments).
/s/ Robert L. Kemp
Robert L. Kemp
President
/s/ Janice H. Saul
Janice H. Saul
Portfolio Manager
January 8, 1999
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
CGM AMERICAN TAX FREE FUND AND THE LEHMAN MUNICIPAL
BOND INDEX
assuming reinvestment of dividends and capital gains
------------------------------------
CGM American Tax Free Fund
Average Annual Total Returns
------------------------------------
1 year 5 year Life of Fund*
6.5% 5.3% 5.7%
*(Annualized from 11/10/93 - 12/31/98)
------------------------------------
Past performance is no indication
of future results
------------------------------------
CGM American Lehman Municipal
Tax Free Fund Bond Index
----------------- -----------------
11/10/1993 10,000 10,000
1993 10,290 10,040
1994 9,446 9,518
1995 11,147 11,184
1996 11,470 11,676
1997 12,503 12,750
1998 13,316 13,579
CGM AMERICAN TAX FREE FUND
PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
Janice H. Saul joined Capital Growth Management in June 1993, and assumed
management of CGM American Tax Free Fund at its inception, November 10, 1993.
Ms. Saul's experience with municipal securities began in 1979 at Scudder,
Stevens, and Clark. In 1983, she joined Loomis, Sayles and Company where she
ran private accounts for nine years. From 1991 until May 1993, Ms. Saul
managed a new long-term municipal bond fund at Loomis, Sayles and Company. Ms.
Saul currently is also co-manager of CGM Fixed Income Fund.
INVESTMENT PERFORMANCE
(unaudited)
- --------------------------------------------------------------------------------
Total Return for Periods Ended December 31, 1998
CGM AMERICAN
TAX FREE FUND
-------------
5 Years ......................................................... +29.4%
1 Year .......................................................... + 6.5
3 Months ........................................................ + 0.0
The Fund's average annual total returns for the five year period ended
December 31, 1998 and from inception (November 10, 1993) through December 31,
1998 are +5.3% and +5.7%, respectively. The adviser has agreed to absorb the
Fund's total operating expenses through December 31, 1999. Otherwise, the
Fund's total return for each period would have been lower.
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>
CGM AMERICAN TAX FREE FUND
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
PETER O. BROWN
NICHOLAS J. GRANT
G. KENNETH HEEBNER
ROBERT L. KEMP
ROBERT B. KITTREDGE
LAURENS MACLURE
JAMES VAN DYKE QUEREAU, JR.
J. BAUR WHITTLESEY
OFFICERS
ROBERT L. KEMP, President
G. KENNETH HEEBNER, Vice President
LESLIE A. LAKE, Vice President and Secretary
KATHLEEN S. HAUGHTON, Vice President
MARTHA I. MAGUIRE, Vice President
JANICE H. SAUL, Vice President
W. DUGAL THOMAS, Vice President
MARY L. STONE, Assistant Vice President
FRANK N. STRAUSS, Treasurer
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 02266-8511
<PAGE>
CGM AMERICAN TAX FREE FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENTS AS OF DECEMBER 31, 1998
MUNICIPAL BONDS -- 94.9% OF TOTAL NET ASSETS
FACE
AMOUNT VALUE(a)
------ --------
<S> <C> <C>
CALIFORNIA -- 11.3%
California State General Obligation Bonds, 4.50%, 12/01/21 ........ $ 500,000 $ 465,470
Los Angeles Regional Airport, 6.875%, 11/15/12 .................... 500,000 548,150
Metropolitan Water District Southern California, 5.00%, 7/01/37 ... 500,000 494,100
Sacramento County Airport, 5.00%, 7/01/26 ......................... 500,000 497,040
-----------
2,004,760
-----------
COLORADO -- 7.0%
Denver City & County Airport, 5.25%, 11/15/23 ..................... 500,000 509,505
E470 Public Highway Authority, 5.00%, 9/01/26 ..................... 750,000 737,805
-----------
1,247,310
-----------
FLORIDA -- 1.5%
Polk County Industrial Development Authority Revenue Bonds
(IMC Fertilizer), 7.525%, 1/01/15 ............................... 250,000 272,277
-----------
HAWAII -- 0.6%
Honolulu City and County Mortgage Revenue, 7.80%, 7/01/24 ......... 95,000 101,425
-----------
KENTUCKY -- 2.4%
Kenton County Airport Revenue Bonds (Delta Airlines),
6.75%, 2/01/02 .................................................. 400,000 426,108
-----------
LOUISIANA -- 6.0%
Hodge Utility Revenue Bonds (Stone Container), 9.00%, 3/01/10 ..... 1,000,000 1,059,090
-----------
MARYLAND -- 4.7%
Howard County Multifamily, Chase Glen Apartments, 7.00%, 7/01/24(b) 750,000 834,000
-----------
MASSACHUSETTS -- 11.3%
Massachusetts Municipal Wholesale Electric, 8.75%, 7/01/18 ........ 330,000 401,085
Massachusetts Port Authority, 5.00%, 7/01/27 ...................... 500,000 491,790
Massachusetts State General Obligation, 0%, 8/01/18 ............... 1,000,000 375,380
Massachusetts State Turnpike Authority, 5.00%, 1/01/37 ............ 750,000 730,095
-----------
1,998,350
-----------
MICHIGAN -- 4.5%
Michigan State Housing Development, 7.05%, 10/01/12 ............... 295,000 315,482
Wayne Charter County Airport, 5.00%, 12/01/28 ..................... 500,000 484,885
-----------
800,367
-----------
NEW JERSEY -- 2.7%
New Jersey Health Care Facilities, 4.75%, 7/01/28 ................. 500,000 476,385
-----------
NEW YORK -- 12.0%
Long Island Power Authority, 5.25%, 12/01/26 ...................... 500,000 502,105
New York General Obligation Bonds Series B, 8.25%, 6/01/05 ........ 100,000 122,148
New York General Obligation Bonds Series J, 5.50%, 2/15/26 ........ 500,000 515,130
New York State Dormitory Authority Revenue Bonds, 5.75%, 7/01/13 .. 250,000 275,415
New York State Dormitory Authority Revenue Bonds, 5.875%, 5/15/11 . 250,000 281,285
Port Authority New York and New Jersey Special Obligation,
9.125%, 12/01/15 ................................................ 395,000 433,129
-----------
2,129,212
-----------
PUERTO RICO -- 4.3
Puerto Rico Commonwealth Infrastructure, 5.00%, 7/01/28 ........... 750,000 752,513
-----------
TEXAS -- 12.9%
Alliance Airport Authority Special Facilities Revenue Bonds
(American Airlines Inc. Project), 7.00%, 12/01/11 ............... 250,000 295,532
Bexar County Health Facilities, 5.375%, 11/15/22 .................. 500,000 510,905
Harris County Health Facilities, 5.125%, 6/01/22 .................. 750,000 746,415
North Texas Thruway Authority, 5.00%, 1/01/20 ..................... 500,000 494,235
San Antonio Electric and Gas, 4.50%, 2/01/21 ...................... 250,000 233,398
-----------
2,280,485
-----------
VIRGINIA -- 2.2%
Hopewell Industrial Development Authority (Stone Container),
8.25%, 6/01/16 .................................................. 350,000 389,476
-----------
WASHINGTON -- 8.6%
Washington State General Obligation, 0%, 7/01/17 .................. 2,550,000 1,038,309
Seattle Municipal Light and Power, 4.875%, 6/01/21 ................ 500,000 485,055
-----------
1,523,364
-----------
WISCONSIN -- 2.9%
Southeast Wisconsin Professional Baseball Park District, 0%,
12/15/27 ........................................................ 2,250,000 504,968
-----------
TOTAL MUNICIPAL BONDS (Identified Cost $16,249,297) ................. 16,800,090
-----------
SHORT-TERM INVESTMENTS -- 3.9%
American Express Credit Corporation, 4.85%, 1/04/99 (Cost
$700,000) ......................................................... 700,000 700,000
-----------
TOTAL INVESTMENTS -- 98.8% (Identified Cost $16,949,297)(c) ....................... 17,500,090
Cash and Receivables .................................................. 273,971
Liabilities ........................................................... (67,913)
-----------
TOTAL NET ASSETS -- 100.0% ........................................................ $17,706,148
===========
(a) See Note 1A.
(b) Variable or floating rate security. Rate disclosed is as of December 31, 1998.
(c) Federal Tax Information: At December 31, 1998 the net unrealized appreciation on investments
based on cost of $16,949,297 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 ............................................ $ 583,592
Aggregate gross unrealized depreciation for all investments in which there is
an excess of tax cost over value ............................................ (32,799)
-----------
Net unrealized appreciation ................................................... $ 550,793
===========
See accompanying notes to financial statements
</TABLE>
<PAGE>
CGM AMERICAN TAX FREE FUND
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
ASSETS
Investments at value (Identified cost -- $16,949,297) ...... $17,500,090
Cash ....................................................... 4,797
Receivable for:
Shares of the Fund sold .................... $ 15,512
Interest ................................... 253,662 269,174
-------- -----------
17,774,061
-----------
LIABILITIES
Payable for:
Shares of the Fund redeemed ................ 1,001
Expense advance from adviser ............... 39,475
Distributions declared ..................... 27,437 67,913
-------- -----------
NET ASSETS ................................................... $17,706,148
===========
Net Assets consist of:
Capital paid-in .......................................... $18,038,669
Undistributed net investment income ...................... 1,475
Accumulated net realized loss ............................ (884,789)
Unrealized appreciation on investments -- net ............ 550,793
-----------
NET ASSETS ................................................... $17,706,148
===========
Shares of beneficial interest outstanding, no par value ... 1,813,202
===========
Net asset value per share* ................................. $9.77
===========
* Shares of the Fund are sold and redeemed at net asset value
($17,706,148 / 1,813,202).
See accompanying notes to financial statements
<PAGE>
CGM AMERICAN TAX FREE FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
INVESTMENT INCOME
Income
Interest ..................................................... $ 879,126
---------
Expenses
Management fees .............................................. 93,642
Trustees' fees ............................................... 22,220
Accounting and Administration ................................ 3,000
Custodian .................................................... 52,400
Transfer agent ............................................... 24,850
Audit and tax services ....................................... 21,900
Legal ........................................................ 14,660
Printing ..................................................... 13,100
Registration ................................................. 16,807
Miscellaneous ................................................ 409
---------
262,988
Less expenses assumed by the investment adviser .............. (262,988)
---------
Net investment income ........................................ 879,126
---------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain on investments -- net ............................ 68,196
Unrealized appreciation -- net ................................. 26,584
---------
Net gain on investments ........................................ 94,780
---------
NET CHANGE IN ASSETS FROM OPERATIONS ............................. $ 973,906
=========
See accompanying notes to financial statements
<PAGE>
CGM AMERICAN TAX FREE FUND
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
FROM OPERATIONS
Net investment income .................................... $ 879,126 $ 806,023
Net realized gain from investments ....................... 68,196 158,954
Unrealized appreciation .................................. 26,584 172,076
----------- -----------
Change in net assets from operations ................... 973,906 1,137,053
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income .................................... (877,714) (806,094)
----------- -----------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares ............................. 4,055,485 3,124,269
Net asset value of shares issued in connection with
reinvestment of:
Dividends from net investment income ................... 601,144 588,720
----------- -----------
4,656,629 3,712,989
Cost of shares redeemed .................................. (1,489,676) (2,030,606)
----------- -----------
Change in net assets derived from capital share
transactions ......................................... 3,166,953 1,682,383
----------- -----------
Total change in net assets ............................... 3,263,145 2,013,342
NET ASSETS
Beginning of period ...................................... 14,443,003 12,429,661
----------- -----------
End of period (including undistributed net investment
income of $1,475 and $63, respectively) ................ $17,706,148 $14,443,003
=========== ===========
NUMBER OF SHARES OF THE FUND:
Issued from sale of shares ............................... 415,494 327,534
Issued in connection with reinvestment of:
Dividends from net investment income ................... 61,756 61,837
----------- -----------
477,250 389,371
Redeemed ............................................... (153,268) (213,563)
----------- -----------
Net change ............................................. 323,982 175,808
=========== ===========
</TABLE>
<PAGE>
CGM AMERICAN TAX FREE FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
For a share of the Fund outstanding throughout
each period:
Net asset value at the beginning of
period .............................. $ 9.70 $ 9.46 $ 9.77 $ 8.83 $10.25
------ ------ ------ ------ ------
Net investment income (a) ............. 0.55 0.58 0.58 0.61 0.58
Dividends from net investment income .. (0.55) (0.58) (0.58) (0.61) (0.58)
Net realized and unrealized gain (loss)
on investments ...................... 0.07 0.24 (0.31) 0.94 (1.42)
------ ------ ------ ------ ------
Net increase (decrease) in net asset
value ............................... 0.07 0.24 (0.31) 0.94 (1.42)
------ ------ ------ ------ ------
Net asset value at end of period ...... $ 9.77 $ 9.70 $ 9.46 $ 9.77 $ 8.83
====== ====== ====== ====== ======
Total Return (%) (b) .................. 6.5 9.0 2.9 18.0 -8.2
Ratios:
Operating expenses to average net
assets (%) .......................... 0 0 0 0 0
Operating expenses to average net
assets before waiver (%) ............ 1.69 2.04 2.14 2.59 2.42
Net investment income to average net
assets (%) .......................... 5.63 6.11 6.10 6.50 6.39
Portfolio turnover (%) ................ 37 140 107 125 169
Net assets at end of period (in
thousands) .......................... $17,706 $14,443 $12,430 $11,855 $10,150
(a) Net of fees waived and reimbursed
amounted to ..................... $ 0.16 $ 0.19 $ 0.20 $ 0.24 $ 0.22
(b) The total return would have been lower had the total fees and expenses not been waived or reimbursed
during the period.
See accompanying notes to financial statements
</TABLE>
<PAGE>
CGM AMERICAN TAX FREE FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 1998
1. The Fund is a diversified series of CGM Trust which is organized as a
Massachusetts business trust under the laws of Massachusetts pursuant to an
Agreement and Declaration of Trust. The Trust is registered under the
Investment Company Act of 1940 as an open-end management investment company.
The Trust has four other funds whose financial statements are not presented
herein. The Fund commenced operations on November 10, 1993. The primary
investment objective of the Fund is to provide high current income exempt from
federal income tax. The Fund's secondary investment objective is capital
appreciation.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. 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 -- 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.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed) and dividend income is recorded on the ex-dividend date.
The Fund may trade securities on other than normal settlement terms. This
may increase the risk if the other party to the transaction fails to
deliver and causes the Fund to subsequently invest at less advantageous
prices. Interest income is recorded on the accrual basis. Interest income
is increased by the accretion of discount. Premium is amortized against
interest income with a corresponding decrease in the cost basis. Net gain
or loss on securities sold is determined on the identified cost basis.
C. FEDERAL INCOME TAXES -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies, and to distribute to its shareholders all of its
taxable and tax exempt income and net realized capital gains, within the
prescribed time period. Accordingly, no provision for federal income tax
has been made. At December 31, 1998, there were capital loss carryovers
available to offset future realized gains of $659,836 expiring in the year
2002 and $224,953 expiring in 2004.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions
are recorded by the Fund on the ex-dividend date. The classification of
income and capital gains distributions is determined in accordance with
income tax regulations. Permanent book and tax differences relating to
shareholder distributions may result in reclassifications to paid-in
capital. Undistributed net investment income, accumulated net investment
loss, or distributions in excess of net investment income may include
temporary book and tax differences which will reverse in a subsequent
period. Any taxable income or gain remaining at fiscal year end is
distributed in the following year.
E. OTHER -- The Fund has greater than 10% of its net assets at December 31,
1998 invested in California, Massachusetts, New York and Texas. There are
certain risks arising from geographical concentration in any state.
Certain revenue or tax related events in a state may impair the ability of
certain issuers of municipal securities to pay principal and interest on
their obligations.
2. PURCHASES AND SALES OF SECURITIES -- For the year ended December 31, 1998,
purchases and sales of securities other than United States government
obligations and short-term investments aggregated $8,325,205 and $5,571,559,
respectively. There were no purchases or sales of United States government
obligations.
3. A. MANAGEMENT FEES -- During the year ended December 31, 1998, the Fund
incurred management fees of $93,642 payable to the Fund's investment
adviser, Capital Growth Management Limited Partnership (CGM), certain
officers and directors of which are also officers and trustees of the
Fund. The management agreement provides for a fee at the annual rate
of 0.60% on the first $500 million of the Fund's average daily net
assets, 0.55% of the next $500 million and 0.45% of such assets in
excess of $1 billion. CGM waived its entire fee. See Note 4.
B. OTHER EXPENSES -- CGM performs certain administrative, accounting and
other services for the Fund. The expenses of those services, which are
paid to CGM by the Fund, include the following: (i) expenses for
personnel performing bookkeeping, accounting 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 year
ended December 31, 1998 these expenses amounted to $3,000 and are
shown separately in the financial statements as Accounting and
Administration. The entire expense was waived by CGM. See Note 4.
C. TRUSTEES FEES AND EXPENSES -- The Fund does not pay any compensation
directly to its officers or to any trustees who are directors,
officers or employees of CGM, or any affiliate of CGM, other than
registered investment companies. Each other trustee is compensated by
the CGM Funds with an annual fee of $37,000 plus travel expenses for
each meeting attended. Of this amount, the Fund is responsible for
$3,000 plus an annual variable fee calculated based on the proportion
of the Fund's average net assets to the aggregate average net assets
of the CGM Funds, which for 1998 was $99. In addition, the Chairman of
the Independent Trustees Committee receives an annual retainer of
$1,000.
4. EXPENSE LIMITATION -- Until December 31, 1999, and, thereafter, until
further notice to the Fund, CGM has voluntarily agreed to waive its management
fee and to assume all expenses of the Fund. For the year ended December 31,
1998, CGM waived its entire management fee of $93,642, the entire Accounting
and Administration expense of $3,000 and assumed Fund expenses of $166,346.
<PAGE>
CGM AMERICAN TAX FREE FUND
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of CGM American Tax Free Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of CGM American Tax
Free Fund at December 31, 1998, and the results of its operations, the changes
in its net assets and the financial highlights for the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and the financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1998 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 8, 1999
<PAGE>
CGM
AMERICAN
TAX FREE FUND
6th Annual Report
December 31, 1998
A No-Load Fund
[graphic omitted]
Investment Adviser
CAPITAL GROWTH MANAGEMENT
Limited Partnership
INVESTMENT ADVISER
CAPITAL GROWTH MANAGEMENT
LIMITED PARTNERSHIP
Boston, Massachusetts 02110
- -------------------------------------------------------------------------------
TELEPHONE NUMBERS
For information about:
[ ] Account Procedures and Status
[ ] Redemptions
[ ] Exchanges
Call 800-343-5678
[ ] New Account Procedures
[ ] Prospectuses
[ ] Performance
Call 800-345-4048
- -------------------------------------------------------------------------------
MAILING ADDRESSES
FOR EXISTING ACCOUNTS
Boston Financial Data Services
P.O. Box 8511
Boston, MA 02266-8511
FOR NEW ACCOUNT APPLICATIONS ONLY
The CGM Funds
P.O. Box 449
Boston, MA 02117-0449
- ------------------------------------------------------------------------------
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.
AAR98 Printed in U.S.A.
<PAGE>
TO OUR SHAREHOLDERS
- --------------------------------------------------------------------------------
CGM Realty Fund declined -1.4% during the fourth quarter of 1998 compared to
the National Association of Real Estate Investment Trust's (NAREIT) Equity
REIT Index which fell -2.9% over the same period. For the year just ended, CGM
Realty Fund declined -21.2% while the NAREIT Equity REIT Index fell -17.5%,
all on a total return basis.
THE YEAR IN REVIEW AND ECONOMIC OUTLOOK
Last year unfolded much as expected with growth in the U.S. economy, healthy
gains in productivity and employment, and moderate increases in corporate
profits. The market climbed during the first half of the year, but fell
precipitously in the third quarter in response to turmoil and falling markets
abroad. The Federal Reserve Board reduced interest rates on three occasions
over a fairly short period of time and, almost overnight, confidence was
restored to the markets. In the fourth quarter, the S&P 500 Index recovered
21% to end the year near 1998 highs.
The one exceptional event of 1998 was a huge jump in the market price of large
capitalization company stocks which drove the leading averages to new highs.
Though the S&P 500 Index was up 28.6% for the year, the average stock in the
Index was up only 5% on an equal weighted basis.
We believe the outlook for 1999 is for more of the same with moderate growth,
low inflation, and, perhaps, low interest rates. Casting a shadow over
otherwise rosy economic forecasts, however, are commodity prices which are
falling across the board. Price pressures are squeezing profit margins to the
downside and corporations are being forced to reduce costs as excess capacity
grows. Weaker foreign markets for U.S. exports were a drag on the U.S. economy
in 1998 and may continue to be in the new year although there are signs that
Japan, the second largest economy in the world, is taking steps to resume
economic growth. Additionally, the new Euro currency could bolster trade and
invigorate the European economy.
From a large capitalization company perspective, the securities markets begin
1999 with generous valuations. However, as we learned in 1998, the securities
market is segmented and many smaller and mid-size companies, which have not
participated in the rising market, represent good value at current prices. We
expect the market to broaden to comprise smaller capitalization companies
including many of the real estate investment trusts (REITs) in which our
assets are invested today.
PORTFOLIO STRATEGY
CGM Realty Fund was fully invested in REITs throughout 1998 with more than
half the portfolio in the office and industrial sector. While we viewed the
outlook for the office and industrial sector as the most attractive in the
group, this was the worst performing sector in the REIT universe during 1998
and was the principal factor in the disappointing total return of -21.2% for
the year.
We believe the significant decline in REIT prices is unrelated to fundamentals
and constitutes a buying opportunity. The companies we own operate in property
types and regions where supply and demand are favorable and we anticipate
rising occupancies and rental rates. While we hope that a recovery in REIT
valuations will permit accretive acquisitions, our companies should experience
rising cash flows even if this does not occur as existing leases expire and
are replaced by higher market rents.
<PAGE>
CGM Realty Fund's largest sector positions are in office/industrial REITs,
apartment REITs and hotel REITs. The Fund's three largest holdings are SL
Green Realty Corporation, Prime Group Realty Trust and Apartment Investment &
Management Company.
/s/ Robert L. Kemp
Robert L. Kemp
President
/s/ G. Kenneth Heebner
G. Kenneth Heebner
Portfolio Manager
January 8, 1999
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
CGM REALTY FUND AND THE UNMANAGED S&P 500 INDEX
assuming reinvestment of dividends and capital gains
------------------------------------
CGM Realty Fund
Average Annual Total Returns
------------------------------------
1 year Life of Fund*
-21.2% 12.5%
*(Annualized from 5/13/94 - 12/31/98)
------------------------------------
Past performance is no indication
of future results
------------------------------------
CGM Unmanaged
Realty Fund S&P 500 Index
----------------- -----------------
5/13/1994 10,000 10,000
12/31/1994 10,020 10,340
12/31/1995 12,004 14,218
12/31/1996 17,298 17,488
12/31/1997 21,916 23,328
12/31/1998 17,270 30,000
CGM REALTY FUND
PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
G. Kenneth Heebner has managed CGM Realty Fund since its inception on May 13,
1994. In 1990, Mr. Heebner founded Capital Growth Management Limited Partnership
with Robert L. Kemp. Prior to establishing the new company, Mr. Heebner managed
mutual funds at Loomis, Sayles and Company. In addition to CGM Realty Fund, he
currently manages CGM Capital Development Fund, CGM Mutual Fund and CGM Focus
Fund, and two other mutual funds. He also co-manages CGM Fixed Income Fund with
Janice Saul.
INVESTMENT PERFORMANCE
(unaudited)
- -------------------------------------------------------------------------------
Total Return for Periods Ended December 31, 1998
THE FUND'S
CGM AVERAGE ANNUAL NAREIT EQUITY
REALTY FUND TOTAL RETURN REIT INDEX
-------- ---------------- ----------------
3 Years ............. +44.0% +12.9% +10.3%
1 Year .............. -21.2 -21.2 -17.5%
3 Months ............ - 1.4 -- - 2.9%
The Fund's average annual total return since inception (May 13, 1994) through
December 31, 1998 is +12.5%. The adviser limited the Fund's total operating
expenses to 1.00% of its average net assets through December 31, 1997.
Otherwise, the Fund's total return for the three year period 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>
CGM REALTY FUND
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
PETER O. BROWN
NICHOLAS J. GRANT
G. KENNETH HEEBNER
ROBERT L. KEMP
ROBERT B. KITTREDGE
LAURENS MACLURE
JAMES VAN DYKE QUEREAU, JR.
J. BAUR WHITTLESEY
OFFICERS
ROBERT L. KEMP, President
G. KENNETH HEEBNER, Vice President
LESLIE A. LAKE, Vice President and Secretary
KATHLEEN S. HAUGHTON, Vice President
MARTHA I. MAGUIRE, Vice President
W. DUGAL THOMAS, Vice President
MARY L. STONE, Assistant Vice President
FRANK N. STRAUSS, Treasurer
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 02266-8511
<PAGE>
CGM REALTY FUND
- -------------------------------------------------------------------------------
INVESTMENTS AS OF DECEMBER 31, 1998
<TABLE>
REAL ESTATE INVESTMENT TRUSTS -- 98.8% OF TOTAL NET ASSETS
<CAPTION>
SHARES VALUE(a)
------ --------
<S> <C> <C>
APARTMENTS -- 13.4%
Apartment Investment & Management Company ......................... 775,000 $ 28,820,312
Home Properties New York, Inc. .................................... 1,067,000 27,475,250
------------
56,295,562
------------
HOTELS -- 9.5%
Lasalle Hotel Properties .......................................... 1,677,000 17,398,875
Meristar Hospitality Corporation .................................. 1,197,425 22,227,202
------------
39,626,077
------------
MISCELLANEOUS -- 4.9%
Glenborough Realty Trust, Inc. .................................... 1,014,200 20,664,325
------------
OFFICE & INDUSTRIAL -- 65.9%
Alexandria Real Estate Equity ..................................... 682,400 21,111,750
Boston Properties, Inc. ........................................... 824,000 25,132,000
Brandywine Realty Trust ........................................... 1,340,000 23,952,500
Crescent Real Estate Equities ..................................... 851,000 19,573,000
Equity Office Properties Trust .................................... 867,000 20,808,000
Liberty Property Trust ............................................ 622,600 15,331,525
Pacific Gulf Properties, Inc. ..................................... 971,400 19,488,713
Parkway Properties, Inc. .......................................... 512,000 16,000,000
Prentiss Properties Trust ......................................... 1,026,000 22,892,625
Prime Group Realty Trust .......................................... 2,285,100 34,562,137
SL Green Realty Corporation ....................................... 1,785,000 38,600,625
Vornado Realty Trust .............................................. 549,000 18,528,750
------------
275,981,625
------------
RETAIL -- 5.1%
Crown American Realty Trust ....................................... 1,132,400 8,776,100
Pan Pacific Retail Properties, Inc. ............................... 315,600 6,292,275
Philips International Realty Corporation .......................... 405,000 6,226,875
------------
21,295,250
------------
TOTAL REAL ESTATE INVESTMENT TRUSTS (Identified Cost $462,875,756) .. 413,862,839
------------
<PAGE>
INVESTMENTS AS OF DECEMBER 31, 1998 (CONTINUED)
FACE
SHORT-TERM INVESTMENT -- 0.2% AMOUNT VALUE(a)
------ --------
American Express Credit Corporation, 4.85%, 1/04/99 (Cost
$980,000) ..................................................... $ 980,000 $ 980,000
------------
TOTAL INVESTMENTS -- 99.0% (Identified Cost $463,855,756)(b) ....................... 414,842,839
Cash, receivables and other assets ............................................. 11,776,897
Liabilities .................................................................... (7,718,264)
------------
TOTAL NET ASSETS -- 100% ........................................................... $418,901,472
============
(a) See Note 1A.
(b) Federal Tax Information: At December 31, 1998 the net unrealized depreciation on investments based on cost
of $466,505,328 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 ............................................. $ 13,502,117
Aggregate gross unrealized depreciation for all investments in which there is
an excess of tax cost over value ............................................. (65,164,606)
-------------
Net unrealized depreciation .................................................... $ (51,662,489)
=============
See accompanying notes to financial statements
</TABLE>
<PAGE>
CGM REALTY FUND
- -------------------------------------------------------------------------------
STATEMENT OF
ASSETS AND LIABILITIES
December 31, 1998
ASSETS
Investments at value (Identified
cost -- $463,855,756) .................................... $414,842,839
Cash ...................................................... 4,437
Receivable for:
Securities sold .......................... $5,567,702
Shares of the Fund sold .................. 551,571
Dividends and interest ................... 5,648,152 11,767,425
----------
Unamortized organizational expenses ....................... 5,035
------------
426,619,736
------------
LIABILITIES
Payable for:
Shares of the Fund redeemed .............. 5,880,548
Distributions declared ................... 1,436,424 7,316,972
----------
Accrued expenses:
Management fees .......................... 310,054
Trustees' fees ........................... 9,611
Accounting and Administration ............ 3,000
Other expenses ........................... 78,627 401,292
---------- ------------
7,718,264
------------
NET ASSETS .................................................. $418,901,472
============
Net Assets consist of:
Capital paid-in .......................................... $524,385,737
Accumulated net realized loss ............................ (56,471,348)
Unrealized depreciation on investments -- net ............ (49,012,917)
------------
NET ASSETS ................................................. $418,901,472
============
Shares of beneficial interest
outstanding, no par value ............................... 36,157,518
============
Net asset value per share* ................................ $11.59
============
* Shares of the Fund are sold and redeemed at net asset value
($418,901,472 / 36,157,518).
See accompanying notes to financial statements
<PAGE>
CGM REALTY FUND
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
INVESTMENT INCOME
Income
Dividends ............................................... $ 26,931,969
Interest ................................................ 118,017
-------------
27,049,986
-------------
Expenses
Management fees ......................................... 4,238,774
Trustees' fees .......................................... 37,055
Accounting and Administration ........................... 36,000
Custodian ............................................... 101,382
Transfer agent .......................................... 540,669
Audit and tax services .................................. 24,900
Legal ................................................... 20,737
Printing ................................................ 49,466
Registration ............................................ 152,324
Amortization of organization expense .................... 14,038
Line of credit commitment fee ........................... 20,000
Miscellaneous ........................................... 4,047
-------------
5,239,392
-------------
Net investment income .................................... 21,810,594
-------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Realized loss on investments -- net (56,462,786)
Unrealized depreciation -- net .......................... (93,081,106)
-------------
Net loss on investments ................................. (149,543,892)
-------------
NET CHANGE IN ASSETS FROM OPERATIONS ...................... $(127,733,298)
=============
See accompanying notes to financial statements
<PAGE>
CGM REALTY FUND
- -------------------------------------------------------------------------------
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income .................................. $ 21,810,594 $ 15,337,560
Net realized gain (loss) from investments .............. (56,462,786) 56,525,787
Unrealized appreciation (depreciation) ................. (93,081,106) 9,136,478
------------ ------------
Change in net assets from operations ................. (127,733,298) 80,999,825
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income .................................. (21,820,376) (15,347,351)
Net realized gain on investments ....................... -- (56,478,540)
Tax return of capital .................................. (6,031,564) (959,745)
------------ ------------
(27,851,940) (72,785,636)
------------ ------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares ........................... 336,265,354 386,218,359
Net asset value of shares issued in connection with
reinvestment of:
Dividends from net investment income ................. 18,483,827 12,925,041
Distributions from net realized gain ................. -- 49,450,035
Tax return of capital ................................ 5,109,279 758,662
------------ ------------
359,858,460 449,352,097
Cost of shares redeemed ................................ (274,820,721) (129,844,349)
------------ ------------
Change in net assets derived from capital share
transactions ....................................... 85,037,739 319,507,748
------------ ------------
Total change in net assets ............................. (70,547,499) 327,721,937
NET ASSETS
Beginning of period .................................... 489,448,971 161,727,034
------------ ------------
End of period .......................................... $418,901,472 $489,448,971
============ ============
NUMBER OF SHARES OF THE FUND:
Issued from sale of shares ............................. 23,546,700 24,655,430
Issued in connection with reinvestment of:
Dividends from net investment income ................. 1,474,850 814,265
Distributions from net realized gain ................. -- 3,169,874
Distributions from tax return of capital ............. 407,676 50,920
------------ ------------
25,429,226 28,690,489
Redeemed ............................................. (20,652,412) (8,465,532)
------------ ------------
Net change ........................................... 4,776,814 20,224,957
============ ============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
CGM REALTY FUND
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<CAPTION>
FOR THE YEAR ENDED FOR THE PERIOD
DECEMBER 31, MAY 13, 1994(c)
--------------------------------------------------------------------- THROUGH
1998 1997 1996 1995 DECEMBER 31, 1994
------ ------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C>
For a share of the Fund outstanding
throughout each period:
Net asset value at the beginning
of period .................... $15.60 $14.50 $10.89 $ 9.71 $10.00
------ ------ ------ ------ ------
Net investment income (a) ...... 0.59 0.64 0.52 0.54 0.31
Dividends from net investment
income ....................... (0.59) (0.64) (0.52) (0.54) (0.23)
Distributions from net realized
gain ......................... -- (2.03) (0.41) -- --
Distributions from tax return of
capital ..................... (0.16) (0.04) -- (0.14) (0.08)
Distributions in excess of net
investment income -- -- (0.12) -- --
Net realized and unrealized gain
(loss) on investments ........ (3.85) 3.17 4.14 1.32 (0.29)
------ ------ ------ ------ ------
Net increase (decrease) in net
asset value .................. (4.01) 1.10 3.61 1.18 (0.29)
------ ------ ------ ------ ------
Net asset value at end of period $11.59 $15.60 $14.50 $10.89 $ 9.71
====== ====== ====== ====== ======
Total Return (%) ............... -21.2 26.7(b) 44.1(b) 19.8(b) 0.2(b)(d)
Ratios:
Operating expenses to average
net assets (%) 1.04 1.00 1.00 1.00 1.00(e)
Operating expenses to average
net assets before expense
limitation (%) ............... N/A 1.07 1.25 1.68 2.00(e)
Net income to average net assets
(%) .......................... 4.35 4.48 4.97 5.51 7.40(e)
Portfolio turnover (%) ......... 86 128 57 85 47(e)
Net assets at end of period (in
thousands) ................... $418,901 $489,449 $161,727 $47,694 $34,277
(a) Net of reimbursement which
amounted to ................ N/A $ 0.01 $ 0.02 $ 0.07 $ 0.04
(b) The total return would have been lower had certain expenses not been reduced during the period.
(c) Commencement of operations.
(d) Not computed on an annualized basis.
(e) Computed on an annualized basis.
See accompanying notes to financial statements
</TABLE>
<PAGE>
CGM REALTY FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 1998
1. The Fund is a diversified series of CGM Trust which is organized as a
Massachusetts business trust under the laws of Massachusetts pursuant to an
Agreement and Declaration of Trust. The Trust is registered under the
Investment Company Act of 1940 as an open-end management investment company.
The Trust has four other funds whose financial statements are not presented
herein. The Fund commenced operations on May 13, 1994. The Fund's investment
objective is to earn above-average income and long-term growth of capital. The
Fund intends to pursue its objective by investing primarily in equity
securities of companies in the real estate industry.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. 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 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 investments having a maturity of sixty days or less are stated
at amortized cost, which approximates value.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed) and dividend income is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis. Net
gain or loss on securities sold is determined on the identified cost
basis. Dividend income received by the Fund from its investment in REITs
may consist of ordinary income, capital gains and return of capital. The
portion derived from capital gains and return of capital will result in a
reduction of the Fund's dividend income and an increase in realized and
unrealized gain on investments.
C. FEDERAL INCOME TAXES -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies, and to distribute to its shareholders all of its taxable income
and net realized capital gains, within the prescribed time period.
Accordingly, no provision for federal income tax has been made. At December
31, 1998 there were capital loss carryovers available to offset future
realized gains of approximately $53,820,000 expiring in the year 2006.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions
are recorded by the Fund on the ex-dividend date. The classification of
income and capital gains distributions is determined in accordance with
income tax regulations. Permanent book and tax differences relating to
shareholder distributions may result in reclassifications to paid-in
capital. Undistributed net investment income, accumulated net investment
loss, or distributions in excess of net investment income may include
temporary book and tax differences, which will reverse in a subsequent
period. Any taxable income or gain remaining at fiscal year end is
distributed in the following year.
E. ORGANIZATION EXPENSE -- Costs incurred in 1994 in connection with the
Fund's organization and registration amounting to $70,186 have been paid
by the Fund. These costs are being amortized over 60 months beginning May
13, 1994.
2. PURCHASES AND SALE OF SECURITIES -- For the year ended December 31, 1998,
purchases and sales of securities other than United States government
obligations and short-term investments aggregated $513,236,623 and $429,069,735,
respectively. There were no purchases or sales of United States government
obligations.
3. A. MANAGEMENT FEES -- During the year ended December 31, 1998, the Fund
incurred management fees of $4,238,774, paid or payable to the Fund's
investment adviser, Capital Growth Management Limited Partnership
(CGM), certain officers and directors of which are also officers and
trustees of the Fund. The management agreement provides for a fee at
the annual rate of 0.85% on the first $500 million of the Fund's
average daily net assets and 0.75% on amounts in excess of $500
million.
B. OTHER EXPENSES -- CGM performs certain administrative, accounting and
other services for the Fund. The expenses of those services, which are
paid to CGM by the Fund, include the following: (i) expenses for
personnel performing bookkeeping, accounting 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 year
ended December 31, 1998 these expenses amounted to $36,000 and are
shown separately in the financial statements as Accounting and
Administration.
C. TRUSTEES FEES AND EXPENSES -- The Fund does not pay any compensation
directly to its officers or to any trustees who are directors,
officers or employees of CGM, or any affiliate of CGM (other than
registered investment companies). Each other trustee is compensated by
the CGM Funds with an annual fee of $37,000 plus travel expenses for
each meeting attended. Of this amount, the Fund is responsible for
$3,000 plus an annual variable fee calculated based on the proportion
of the Fund's average net assets to the aggregate average net assets
of the CGM Funds, which for 1998 was $2,614. In addition, the Chairman
of the Independent Trustees Committee receives an annual retainer of
$1,000.
4. LINE OF CREDIT -- The Fund has a $20,000,000 committed unsecured line of
credit with its custodian bank. Borrowings under the line will be charged
interest at 0.75% over the current Overnight Federal Funds Rate. The Fund will
incur a commitment fee of 0.10% per annum on the unused portion of the line of
credit, payable quarterly. There were no borrowings under the line of credit
during the year ended December 31, 1998.
<PAGE>
CGM REALTY FUND
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of CGM Realty Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of CGM Realty Fund at
December 31, 1998, and the results of its operations, the changes in its net
assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles. These financial statements and
the financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 8, 1999
<PAGE>
CGM
REALTY FUND
5th Annual Report
December 31, 1998
A No-Load Fund
[graphic omitted]
Investment Adviser
CAPITAL GROWTH MANAGEMENT
Limited Partnership
INVESTMENT ADVISER
CAPITAL GROWTH MANAGEMENT
LIMITED PARTNERSHIP
Boston, Massachusetts 02110
- -------------------------------------------------------------------------------
TELEPHONE NUMBERS
For information about:
[ ] Account Procedures and Status
[ ] Redemptions
[ ] Exchanges
Call 800-343-5678
[ ] New Account Procedures
[ ] Prospectuses
[ ] Performance
Call 800-345-4048
- -------------------------------------------------------------------------------
MAILING ADDRESSES
FOR EXISTING ACCOUNTS
Boston Financial Data Services
P.O. Box 8511
Boston, MA 02266-8511
FOR NEW ACCOUNT APPLICATIONS ONLY
The CGM Funds
P.O. Box 449
Boston, MA 02117-0449
- ------------------------------------------------------------------------------
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.
RAR98 Printed in U.S.A.
<PAGE>
TO OUR SHAREHOLDERS
- -------------------------------------------------------------------------------
CGM Focus Fund increased 23.7% during the fourth quarter of 1998 compared to
the Standard and Poor's 500 Index which rose 21.4%. For the year just ended,
CGM Focus Fund returned 3.5% while the unmanaged S&P 500 Index returned 28.6%,
all on a total return basis.
THE YEAR IN REVIEW AND ECONOMIC OUTLOOK
Last year unfolded much as expected with growth in the U.S. economy, healthy
gains in productivity and employment, and moderate increases in corporate
profits. The market climbed during the first half of the year, but fell
precipitously in the third quarter in response to turmoil and falling markets
abroad. The Federal Reserve Board reduced interest rates on three occasions
over a fairly short period of time and, almost overnight, confidence was
restored to the markets. In the fourth quarter, the S&P 500 Index recovered
21% to end the year near 1998 highs.
The one exceptional event of 1998 was a huge jump in the market price of large
capitalization company stocks which drove the leading averages to new highs.
Though the S&P 500 Index was up 28.6% for the year, the average stock in the
Index was up only 5% on an equal weighted basis.
We believe the outlook for 1999 is for more of the same with moderate growth,
low inflation, and, perhaps, low interest rates. Casting a shadow over
otherwise rosy economic forecasts, however, are commodity prices which are
falling across the board. Price pressures are squeezing profit margins to the
downside and corporations are being forced to reduce costs as excess capacity
grows. Weaker foreign markets for U.S. exports were a drag on the U.S. economy
in 1998 and may continue to be in the new year although there are signs that
Japan, the second largest economy in the world, is taking steps to resume
economic growth. Additionally, the new Euro currency could bolster trade and
invigorate the European economy.
From a large capitalization company perspective, the securities markets begin
1999 with generous valuations. However, as we learned in 1998, the securities
market is segmented and many smaller and mid-size companies, which have not
participated in the rising market, represent good value at current prices. We
expect the market to broaden to include those companies in which many of our
assets are invested today.
PORTFOLIO STRATEGY
CGM Focus Fund was fully invested during 1998, but substantially
underperformed the S&P 500 Index during the year. Throughout the year, a
significant portion of the Fund's assets was invested in small and mid-cap
stocks and this group generally failed to keep pace with the significant
appreciation of the S&P 500 despite mostly favorable earnings progress.
Limited short selling had a modest negative impact on the Fund's performance.
CGM Focus Fund's three largest industry positions are in housing and building
materials, retail, and electronic components. The three largest company
holdings are NCI Building Systems, Inc., Monaco Coach Corporation and Ames
Department Stores.
/s/ Robert L. Kemp
Robert L. Kemp
President
/s/ G. Kenneth Heebner
G. Kenneth Heebner
Portfolio Manager
January 8, 1999
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
CGM FOCUS FUND AND THE UNMANAGED S&P 500 INDEX
assuming reinvestment of dividends and capital gains
------------------------------------
CGM Focus Fund
Average Annual Total Returns
------------------------------------
1 year Life of Fund*
3.5% -2.2%
*(Annualized from 9/3/97 - 12/31/98)
------------------------------------
Past peformance is no indication
of future results
------------------------------------
CGM Unmanaged
Focus Fund S&P 500 Index
----------------- -----------------
9/3/1997 10,000 10,000
12/31/1997 9,380 10,490
12/31/1998 9,708 13,490
CGM FOCUS FUND
PORTFOLIO MANAGER
- -------------------------------------------------------------------------------
G. Kenneth Heebner has managed CGM Focus Fund since its inception on September
3, 1997. In 1990, Mr. Heebner founded Capital Growth Management Limited
Partnership with Robert L. Kemp. Prior to establishing the new company, Mr.
Heebner managed mutual funds at Loomis, Sayles and Company. In addition to CGM
Focus Fund, he currently manages CGM Capital Development Fund, CGM Mutual Fund,
CGM Realty Fund and two other mutual funds. He also co-manages CGM Fixed Income
Fund with Janice Saul.
INVESTMENT PERFORMANCE
(unaudited)
- -------------------------------------------------------------------------------
Total Return for Period Ended December 31, 1998
CGM FOCUS
FUND
---------
1 Year ................................................... +3.5%
3 Months ................................................. +23.7%
The Fund's average annual total return since inception (September 3, 1997)
through December 31, 1998 is -2.2%. The adviser has agreed to limit the Fund's
total operating expenses to 1.20% of its average net assets through December
31, 1999. Otherwise, for each period, the Fund's total return 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>
CGM FOCUS FUND
- -------------------------------------------------------------------------------
BOARD OF TRUSTEES
PETER O. BROWN
NICHOLAS J. GRANT
G. KENNETH HEEBNER
ROBERT L. KEMP
ROBERT B. KITTREDGE
LAURENS MACLURE
JAMES VAN DYKE QUEREAU, JR.
J. BAUR WHITTLESEY
OFFICERS
ROBERT L. KEMP, President
G. KENNETH HEEBNER, Vice President
LESLIE A. LAKE, Vice President and Secretary
KATHLEEN S. HAUGHTON, Vice President
MARTHA I. MAGUIRE, Vice President
W. DUGAL THOMAS, Vice President
MARY L. STONE, Assistant Vice President
FRANK N. STRAUSS, Treasurer
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 02266-8511
<PAGE>
CGM FOCUS FUND
- -------------------------------------------------------------------------------
INVESTMENTS AS OF DECEMBER 31, 1998
COMMON STOCKS -- 98.9% OF TOTAL NET ASSETS
SHARES VALUE(a)
------ --------
ELECTRIC COMPONENTS -- 9.0%
Intel Corporation(c) ......................... 35,000 $ 4,149,688
Micron Technology, Inc.(b).................... 104,000 5,258,500
Texas Instruments, Inc. ...................... 6,000 513,375
------------
9,921,563
------------
HOTELS AND RESTAURANTS -- 6.0%
CKE Restaurants, Inc. ........................ 227,100 6,685,256
------------
HEAVY CAPITAL GOODS -- 5.8%
Terex Corporation(b) ......................... 223,000 6,369,437
------------
HOUSING AND BUILDING MATERIALS -- 20.5%
Beazer Homes USA, Inc.(b) .................... 222,000 5,550,000
Crossmann Communities, Inc.(b) ............... 62,500 1,726,562
Kaufman and Broad Home Corporation ........... 148,000 4,255,000
M.D.C. Holdings, Inc.(b) ..................... 210,100 4,490,888
NVR, Inc.(b) ................................. 138,000 6,580,875
------------
22,603,325
------------
LEISURE -- 8.1%
Monaco Coach Corporation(b) .................. 310,000 8,215,000
Radica Games Ltd.(b) ......................... 50,200 696,525
------------
8,911,525
------------
MISCELLANEOUS -- 22.8%
CHS Electronics, Inc.(b) ..................... 380,000 6,436,250
Granite Construction, Inc. ................... 40,000 1,342,500
Gucci Group N.V. ADR(d) ...................... 37,000 1,799,125
National R.V. Holdings, Inc.(b) .............. 252,500 6,501,875
NCI Building Systems, Inc.(b) ................ 324,000 9,112,500
------------
25,192,250
------------
PAPER PRODUCTS/CONSUMER -- 4.9%
Asia Pulp & Paper Ltd. Sponsored ADR(b)(d) ... 660,000 5,403,750
------------
RETAIL -- 16.0%
Ames Department Stores, Inc.(b) .............. 290,000 7,830,000
First Years, Inc. ............................ 230,000 3,636,875
K-Swiss, Inc. ................................ 230,000 6,181,250
------------
17,648,125
------------
TEXTILE AND APPAREL -- 5.8%
Tommy Hilfiger Corporation(b) ................ 106,000 $ 6,360,000
------------
TOTAL COMMON STOCKS (Identified
Cost $100,160,692) ..................................... 109,095,231
------------
FACE
SHORT-TERM INVESTMENT -- 2.0% AMOUNT
------
American Express Credit Corporation,
4.85% 1/04/99 (Cost $2,215,000) ........... $2,215,000 2,215,000
------------
TOTAL INVESTMENTS -- 100.9% (Identified
Cost $102,375,692)(e) ..................................... 111,310,231
Cash, receivables and other assets ....................... 4,379,299
Liabilities .............................................. (5,365,855)
------------
TOTAL NET ASSETS -- 100.0% .................................. $110,323,675
------------
SECURITY SOLD SHORT SHARES
------
Books A Million, Inc. (Proceeds $620,917) ... 50,000 $ 650,000
============
(a) See Note 1A.
(b) Non-income producing security.
(c) A portion of this security has been segregated as collateral in connection
with short sale investments (See Note 1F).
(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) Federal Tax Information: At December 31, 1998 the net unrealized
appreciation on investments based on cost of $104,191,847 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 ... $ 11,477,443
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ........................................... (4,359,059)
------------
Net unrealized appreciation ............................ $ 7,118,384
============
See accompanying notes to financial statements
<PAGE>
CGM FOCUS FUND
- -------------------------------------------------------------------------------
STATEMENT OF
ASSETS AND LIABILITIES
December 31, 1998
ASSETS
Investments at value (Identified cost -- $102,375,692) .... $111,310,231
Cash ...................................................... 3,962
Restricted cash ........................................... 621,247
Receivable for:
Securities sold ............................. $3,547,020
Shares of the Fund sold 135,524
Dividends and interest....................... 4,899 3,687,443
----------
Unamortized organizational expenses ........................ 66,647
------------
115,689,530
------------
LIABILITIES
Securities sold short at current market value
(Proceeds $620,917) ...................................... 650,000
Payable for:
Securities purchased ........................ 3,156,737
Shares of the Fund redeemed ................. 1,395,780 4,552,517
----------
Accrued expenses:
Management fees ............................. 87,358
Trustees' fees .............................. 6,279
Accounting and Administrative Fees .......... 837
Other expenses .............................. 68,864 163,338
---------- ------------
5,365,855
------------
NET ASSETS ................................................... $110,323,675
============
Net Assets consist of:
Capital paid-in .......................................... $124,795,841
Accumulated net realized loss ............................ (23,377,622)
Unrealized appreciation on investments -- net............. 8,905,456
------------
NET ASSETS ................................................... $110,323,675
============
Shares of beneficial interest outstanding, no par value .... 11,362,739
============
Net asset value per share* ................................. $9.71
=====
* Shares of the Fund are sold and redeemed at net asset value
($110,323,675 / 11,362,739).
See accompanying notes to financial statements
<PAGE>
CGM FOCUS FUND
- -------------------------------------------------------------------------------
STATEMENT OF
OPERATIONS
Year Ended December 31, 1998
INVESTMENT INCOME
Income
Dividends (net of withholding tax of $26,398) .......... $ 530,361
Interest ............................................... 166,743
-----------
697,104
-----------
Expenses
Management fees ........................................ 1,277,430
Trustees' fees ......................................... 24,300
Accounting and Administration .......................... 10,000
Custodian .............................................. 65,500
Transfer agent ......................................... 206,070
Audit and tax services ................................. 34,880
Legal .................................................. 22,700
Printing ............................................... 37,490
Registration ........................................... 59,640
Amortization of organization expense ................... 18,155
Line of credit commitment fee .......................... 25,000
Dividend expense on short sales ........................ 800
Miscellaneous .......................................... 1,230
-----------
1,783,195
Less expenses assumed by the
investment adviser ..................................... (249,479)
-----------
Net investment loss ...................................... (836,612)
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Realized loss on investments -- net ...................... (8,382,527)
Unrealized appreciation -- net ........................... 7,190,688
-----------
Net loss on investments .................................. (1,191,839)
-----------
NET CHANGE IN ASSETS FROM OPERATIONS ....................... $(2,028,451)
===========
See accompanying notes to financial statements
<PAGE>
CGM FOCUS FUND
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD
SEPTEMBER 3, 1997*
YEAR ENDED THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
FROM OPERATIONS
Net investment loss .................. $ (836,612) $ (185,649)
Net realized loss from investments ... (8,382,527) (14,995,095)
Unrealized appreciation .............. 7,190,688 1,714,768
------------ ------------
Change in net assets from operations (2,028,451) (13,465,976)
------------ ------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares ......... 78,493,940 124,907,984
Cost of shares redeemed .............. (64,927,811) (12,656,011)
------------ ------------
Change in net assets derived from
capital share transactions ....... 13,566,129 112,251,973
------------ ------------
Total change in net assets ........... 11,537,678 98,785,997
NET ASSETS
Beginning of period .................. 98,785,997 --
------------ ------------
End of period ........................ $110,323,675 $ 98,785,997
============ ============
NUMBER OF SHARES OF THE FUND:
Issued from sale of shares ........... 7,773,832 11,858,670
Redeemed ............................. (6,945,863) (1,323,900)
------------ ------------
Net change ........................... 827,969 10,534,770
============ ============
* Commencement of operations
See accompanying notes to financial statements
<PAGE>
CGM FOCUS FUND
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR THE PERIOD
SEPTEMBER
3, 1997(a)
YEAR ENDED THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
For a share of the Fund outstanding
throughout the period:
Net asset value at the beginning of
period ................................ $ 9.38 $10.00
------ ------
Net investment loss(b)(c) ............... (0.07) (0.02)
Net realized and unrealized gain (loss)
on investments ........................ 0.40(d) (0.60)
------ ------
Net increase (decrease) in net asset
value ................................. 0.33 (0.62)
------ ------
Net asset value at end of period ........ $ 9.71 $ 9.38
====== ======
Total Return (%)(e) ..................... 3.5 -6.20(f)
Ratios:
Operating expenses to average net assets(%) 1.20 1.20(g)
Operating expenses to average net assets
before expense limitation (%) ......... 1.40 1.63(g)
Net loss to average net assets (%) ...... -0.65 -0.83(g)
Portfolio turnover (%) .................. 340 330(g)
Net assets at end of period (in
thousands) ............................ $110,324 $98,786
(a) Commencement of operations.
(b) Net of reimbursement which amounted to $ 0.02 $ 0.01
(c) Per share net investment loss does not reflect the period's reclassification
of permanent differences between book and tax basis net investment loss. See
note 1D.
(d) The amount shown for a share outstanding does not correspond with the
aggregate net gain/(loss) on investments for the period ended December 31,
1998, due to the timing of purchases and redemptions of fund shares in
relation to fluctuating market values of the investments of the Fund.
(e) The total return would have been lower had certain expenses not been reduced
during the period.
(f) Not computed on an annualized basis.
(g) Computed on an annualized basis.
<PAGE>
CGM FOCUS FUND
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 1998
1. The Fund is a non-diversified series of CGM Trust which is organized as a
Massachusetts business trust under the laws of Massachusetts pursuant to an
Agreement and Declaration of Trust. The Trust is registered under the
Investment Company Act of 1940 as an open-end management investment company.
The Trust has four other funds whose financial statements are not presented
herein. The Fund commenced operations on September 3, 1997. The Fund's
investment objective is long-term growth of capital. The Fund intends to
pursue its objective by investing in a core position of equity securities. In
addition, should the investment outlook of the Fund's investment manager so
warrant, the Fund may engage in a variety of investment techniques designed to
capitalize on declines in the price of specific equity securities of one or
more companies.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. 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 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 investments having a
maturity of sixty days or less are stated at amortized cost, which
approximates value.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed) and dividend income is recorded on the ex-dividend date.
Interest income is recorded on the accrual basis. Net gain or loss on
securities sold is determined on the identified cost basis.
C. FEDERAL INCOME TAXES -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies, and to distribute to its shareholders all of its taxable income
and net realized capital gains, within the prescribed time period.
Accordingly, no provision for federal income tax has been made. At December
31, 1998 there were capital loss carryovers available to offset future
realized gains of $13,022,258 expiring in the year 2005 and approximately
$8,539,000 expiring in the year 2006.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions
are recorded by the Fund on the ex-dividend date. The classification of
income and capital gains distributions is determined in accordance with
income tax regulations. Undistributed net investment income, accumulated net
investment loss, or distributions in excess of net investment income may
include temporary book and tax differences, which will reverse in a
subsequent period. Any taxable income or gain remaining at fiscal year end
is distributed in the following year.
E. ORGANIZATION EXPENSE -- Costs incurred in 1997 in connection with the Fund's
organization and registration amounting to $90,771 have been paid by the
Fund. These costs are being amortized over 60 months beginning September 3,
1997.
F. SHORT SALES -- The Fund may sell securities short. A short sale is a
transaction in which the Fund sells a security it does not own in
anticipation that the market price of that security will decline. When the
Fund makes a short sale, it must borrow the security sold short to make
delivery to the buyer. The Fund then is obligated to replace the security
borrowed by purchasing the security at the market price at the time of
replacement. While the short sale is outstanding, the Fund is required to
collateralize its obligations, which has the practical effect of limiting
the extent to which the Fund may engage in short sales. At December 31, 1998
the market value of securities and cash segregated to cover short positions
was $948,500 and $621,247, respectively. Securities sold short at December
31, 1998 and their related market values are set forth in the schedule of
investments.
2. PURCHASES AND SALES OF SECURITIES -- For the year ended December 31, 1998,
purchases and sales of securities other than United States government
obligations and short-term investments aggregated $431,223,177 and
$424,138,553, respectively. There were no purchases or sales of United States
government obligations.
3. A. MANAGEMENT FEES -- During the year ended December 31, 1998, the Fund
incurred management fees of $1,277,430, paid or payable to the Fund's
investment adviser, Capital Growth Management Limited Partnership
(CGM), certain officers and directors of which are also officers and
trustees of the Fund. The management agreement provides for a fee at
the annual rate of 1.00% on the first $500 million of the Fund's
average daily net assets, 0.95% of the next $500 million and 0.90% on
amounts in excess of $1 billion. CGM waived a portion of its fee. See
Note 4.
B. OTHER EXPENSES -- CGM performs certain administrative, accounting and
other services for the Fund. The expenses of those services, which are
paid to CGM by the Fund, include the following: (i) expenses for
personnel performing bookkeeping, accounting 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 questionnaires for SEC compliance; and (iii)
registration, filing and other fees in connection with requirements of
regulatory authorities. For the year ended December 31, 1998 these
expenses amounted to $10,000 and are shown separately in the financial
statements as Accounting and Administration.
C. TRUSTEES FEES AND EXPENSES -- The Fund does not pay any compensation
directly to its officers or to any trustees who are directors,
officers or employees of CGM, or any affiliate of CGM, (other than
registered investment companies). Each other trustee is compensated by
the CGM Funds with an annual fee of $37,000 plus travel expenses for
each meeting attended. Of this amount, the Fund was responsible for
$3,000 plus an annual variable fee calculated based on the proportion
of the Fund's average net assets to the aggregate average net assets
on the CGM Funds, which for 1998 was $527. In addition, the Chairman
of the Independent Trustees Committee receives an annual retainer of
$1,000.
4. EXPENSE LIMITATION -- Until December 31, 1999 and, thereafter until
further notice to the Fund, CGM has voluntarily agreed to reduce its
management fee and, if necessary, to assume expenses of the Fund in order to
limit the Fund's expenses to an annual rate of 1.20% of average daily net
assets exclusive of any dividend expense occurred on short sales. As a result
of the Fund's expenses exceeding the voluntary expense limitation, CGM waived
$249,479 of its management fee. The Fund incurred operating expenses of
$1,533,716, representing 1.20% of the average daily net assets.
5. LINE OF CREDIT -- The Fund has a $20,000,000 committed, secured line of
credit with its custodian bank. Borrowings under the line will be charged
interest at 0.75% over the current Overnight Federal Funds Rate. The Fund will
incur a commitment fee of 0.125% per annum on the unused portion of the line
of credit, payable quarterly. There were no borrowings under the line of
credit during the year ended December 31, 1998.
<PAGE>
CGM FOCUS FUND
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of CGM Focus Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of CGM Focus Fund at
December 31, 1998, and the results of its operations, the changes in its net
assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 8, 1999
<PAGE>
CGM
FOCUS FUND
2nd Annual Report
December 31, 1998
A No-Load Fund
[graphic omitted]
Investment Adviser
CAPITAL GROWTH MANAGEMENT
Limited Partnership
INVESTMENT ADVISER
CAPITAL GROWTH MANAGEMENT
LIMITED PARTNERSHIP
Boston, Massachusetts 02110
- -------------------------------------------------------------------------------
TELEPHONE NUMBERS
For information about:
[ ] Account Procedures and Status
[ ] Redemptions
[ ] Exchanges
Call 800-343-5678
[ ] New Account Procedures
[ ] Prospectuses
[ ] Performance
Call 800-345-4048
- -------------------------------------------------------------------------------
MAILING ADDRESSES
FOR EXISTING ACCOUNTS
Boston Financial Data Services
P.O. Box 8511
Boston, MA 02266-8511
FOR NEW ACCOUNT APPLICATIONS ONLY
The CGM Funds
P.O. Box 449
Boston, MA 02117-0449
- -------------------------------------------------------------------------------
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.
FFAR98 Printed in U.S.A.