<PAGE> 1
Kemper U.S. Mortgage Fund
Semiannual Report to Shareholders
For the Period Ended
January 31, 1995
Offering investors the opportunity for
maximum current return from
U.S. Government securities
[LOGO]
<PAGE> 2
DEAR SHAREHOLDER:
We are pleased to provide you with an economic overview and performance for your
fund, Kemper U.S. Mortgage Fund, a series of Kemper Portfolios, for the six-
month period ended January 31, 1995. In addition, following the economic
overview is a question and answer interview with your fund's Portfolio Manager.
- ----------------------------
PERFORMANCE REVIEW
- ------------------------------------------------------------
<TABLE>
TOTAL RETURN*
For the six-month period ended January 31, 1995
(unadjusted for any sales charge)
<S> <C>
KEMPER U.S. MORTGAGE FUND A 0.95%
KEMPER U.S. MORTGAGE FUND B 0.55%
KEMPER U.S. MORTGAGE FUND C 0.57%
LIPPER U.S. MORTGAGE BACKED FUNDS
CATEGORY AVERAGE** 0.56%
</TABLE>
- ------------------------------------------------------------
Returns are historical and do not represent future performance. Returns and net
asset value fluctuate. Shares are redeemable at current net asset value, which
may be more or less than original cost.
When comparing Kemper U.S. Mortgage Funds B to all other U.S. Mortgage Backed
funds in its Lipper** category for the following time periods ended January 31,
1995, this fund ranked: 1-year, 35 of 54; 5-year 16 of 19 and 10-year 10 of 10.
- ----------------------
DIVIDEND REVIEW
The following table shows dividend and yield information for the Fund as of
January 31, 1995.
- ------------------------------------------------------------
<TABLE>
A SHARES B SHARES C SHARES
-------- -------- --------
<S> <C> <C> <C>
JANUARY DIVIDEND: $0.0440 $0.0395 $0.0398
NET ASSET VALUE: $6.76 $6.76 $6.75
ANNUALIZED
DISTRIBUTION RATE+: 7.81% 7.01% 7.08%
SEC YIELD+: 6.09% 5.49% 5.52%
</TABLE>
- ------------------------------------------------------------
- ---------------------------------------
GENERAL ECONOMIC OVERVIEW
The momentum of the 1994 economic expansion produced some of the most positive
economic reports we've seen in years. Income, consumer spending, construction
spending and hiring all were at high levels as we closed the pages on 1994 and
progressed through the first two months of 1995.
It was a year ago that the Federal Reserve Board initiated its series of rate
hikes intended to cool down the economy. As you'll note in the accompanying
graphs, the high 6.3 percent increase in gross domestic product (GDP) in the
fourth quarter of 1993 provoked the Fed's first rate increase in February of
1994. The government raised rates five additional times in 1994, yet the economy
continued to expand at relatively high rates. The economy's ability to produce a
fourth quarter 1994 GDP of 4.6% one year after steadily rising rates virtually
assured that the Fed would raise rates again in February--and it did. Later in
the month, though, Chairman Alan Greenspan indicated that the tightening might
be over.
Several measures indicate the strength and stability of today's economy compared
to the early 1990s: consumers are not in as much debt as they were just three or
four years ago, nonfinancial corporations have a much lower level of debt
relative to their cash flow, and the federal budget deficit relative to its
gross domestic product (GDP) is lower than it was earlier in the decade.
As the new year unfolds, a slowdown in housing starts and auto sales suggests
the economy will slow in 1995. Slower retail sales signal consumer caution and
retailer cutbacks in inventories. Two sectors are providing new strength:
Exports are up as many economies overseas are in the early phase of economic
recovery, and nonresidential construction is also starting to pick up.
1
<PAGE> 3
STRONG ECONOMIC GROWTH...
Data show the annual rate of increase in the U.S. gross domestic product by
quarter
<TABLE>
<CAPTION>
4Q1993 1Q1994 2Q1994 3Q1994 4Q1994
- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
6.30 3.30 4.10 4.00 4.50
</TABLE>
Source: Commerce Department
OUR OUTLOOK
While we believe that higher interest rates are slowing economic growth, the
Federal Reserve will remain focused on the inflation outlook as well as the
dollar. As a consequence, we expect the Fed to raise rates if inflation starts
to rise, for example. Long-term rates may rise but not to the same extent as
short-term rates as bond markets view as positive the Fed's attempt to head off
the inflation threat.
We expect the economy to slow this year--but we do not expect a recession.
Inflation will likely increase gradually, ranging between 3.0 percent and 3.5
percent in the next six months. The Federal Reserve's commitment to fighting
inflation should be a long-term positive for financial assets.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
Steven Timbers
Chief Investment and Executive Officer
March 8, 1995
<TABLE>
<S> <C>
- ---------------- Stephen Timbers is Chief Executive Officer and
is also Chief Investment Officer of Kemper
[PHOTO] Financial Services, Inc. (KFS). KFS and its
affiliates manage approximately $60 billion in
- ---------------- assets, including $42 billion in retail mutual
funds. Timbers is a graduate of Yale
University and holds a M.B.A. from Harvard
University.
</TABLE>
PROVOKED A SERIES OF INTEREST RATE HIKES
The Federal Reserve Board started raising the Federal Funds (short-term)
interest rates in February 1994 and raised rates six times since.
<TABLE>
<CAPTION>
Before
Rate
Hikes 2/4/94 3/22/94 4/18/94 5/17/94 8/16/94 11/15/94 2/1/95
- ----- ------ ------- ------- ------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
3.00 3.25 3.50 3.75 4.25 4.75 5.50 6.00
</TABLE>
* Total return measures net investment income and capital gain or loss from
portfolio investments, assuming reinvestment of all dividends. During the
periods noted, securities prices fluctuated. For additional information, see
the Prospectus and Statement of Additional Information and the Financial
Highlights at the end of this report.
** Lipper Analytical Services, Inc. performance and rankings are based upon
changes in net asset value with all dividends reinvested and do not include
the effect of sales charges and, if they had, results may have been less
favorable. Performance and rankings are historical and do not reflect future
performance.
+ Current annualized distribution rate is the latest monthly dividend shown as
an annualized percentage of net asset value on January 31, 1995. Distribution
rate simply measures the level of dividends and is not a complete measure of
performance. The SEC yield is net investment income per share earned over the
month ended January 31, 1995 shown as an annualized percentage of the maximum
offering price on that date.
2
<PAGE> 4
Q & A
A PERFORMANCE REVIEW AND AN INTERVIEW WITH PORTFOLIO MANAGER
J. Patrick Beimford
- -------- J. Patrick Beimford joined Kemper Financial Services,
Inc., in 1976 and is now Vice President and Portfolio Manager of the
[PHOTO] Kemper U.S. Mortgage Fund. Mr. Beimford received a B.S.I.M. degree
from Purdue University and went on to receive his M.B.A. from the
- -------- University of Chicago.
Q: The Federal Reserve raised short-term interest rates an additional 1.75%
during the six-month period covered by this report, as part of its goal
of slowing the economy and keeping inflation low. What effect did the
Fed's actions have on the bond market?
A: Both short- and long-term interest rates were higher at the end of the
period, leaving bond prices lower. However, most sectors of the Treasury market
had positive performance as bond income exceeded principal losses. This was a
big improvement over the first six months of 1994 when the Treasury market fell
by 4.04% as measured by the Salomon Brothers Treasury Bond Index.+
Initially in the period, short-term interest rates climbed with investors'
expectations of further Fed tightening, and long-term interest rates rose due
to their concern of imminent inflation. However, following the Federal
Reserve's sixth hike to short-term interest rates in November, long-term
interest rates fell as investors became more confident that inflation would
remain near current levels. The market rallied strongly in January on the
belief that U.S. economic expansion was slowing and that the Fed would raise
the Fed Funds rate once more at its January 31 meeting. The Fed did in fact
tighten by 0.50% at that meeting.
Mortgage-backed securities, the mainstay of the fund's portfolio, outperformed
most sectors of the fixed-income market over the past six months, including
Treasuries of comparable maturities. Mortgages benefited from greater demand,
as investors showed a preference for mortgages' higher level of income, and
lower supply as home financing declined due to higher interest rates.
Q: Since rising interest rates tend to cause bond prices to decline, how
did you manage the fund in response to these events?
A: For most of the period we kept the fund positioned defensively by
maintaining a relatively short duration compared to the marketplace. Duration
is a measurement of a portfolio's sensitivity to interest rates and is based,
in part, on the average maturity of bonds within a portfolio. The shorter a
fund's duration the lower its sensitivity to interest rate changes. And so, a
short duration helped reduce the decline in prices that resulted as interest
rates rose during the period. At the beginning of the period, the fund's
duration was approximately 3.7 years. At the end of October, duration was at
3.4 years as we continued to hold a defensive outlook for the bond market.
Following the Fed's hike to short-term rates in November our outlook became
more favorable and so we extended the fund's duration. At the end of December,
duration was 5.2 years and at the end of January duration was 5.5 years.
Extending the fund's duration during this time helped performance since bonds
with longer maturities outperformed those with shorter maturities in the last
three months of the period.
Q: What was your allocation between mortgage-backed securities and
Treasuries based on your outlook for those sectors?
A: We continue to be primarily invested in mortgages because of their
income advantage over Treasuries and because of positive technical factors of
the mortgage market. The supply of new mortgages typically declines when home
3
<PAGE> 5
financing costs rise. This adds to the attractiveness of existing mortgages.
We began the period with a 97% position in mortgages and a 3% weighting in
short-term Treasuries and cash equivalents. We started to reduce mortgages
early in the period so that on October 31, mortgages comprised 84% of assets.
We began to reverse this course with strong performance by mortgages in
October. The fund's mortgage exposure climbed to 95% on November 30, and 98% on
January 31, 1995, with the remainder of assets in short-term Treasuries and
cash equivalents.
Q: How did these strategies work for the fund?
A: For the six-month period, the fund's B shares achieved a return of
0.55% while its Lipper peer group returned an average of 0.56%. The fund had
exceptionally strong performance in January because of its longer duration
during a time when interest rates declined. Also, our strategy of maintaining a
shorter duration at the beginning of the period and extending in the final
months was fairly well timed. The Treasury yield curve steepened during the
first three months of the period and later flattened.
Q: Do you think rates will continue to rise, and if so, how is the fund
positioned to buffer the effects?
A: While the Fed's recent statements and actions show it taking a tough
stance on inflation, it is also true that the Fed must avoid raising rates so
high that the economy goes back into recession. The Fed has shown that it will
seek to stabilize rates when it is satisfied that the economy is growing at a
steady rate of approximately 2.5% and that inflation is under control. We
expect the Fed to tighten at least one more time during the first part of 1995.
Yet, we believe that another year of rate hikes as severe as 1994 is unlikely.
The newly Republican controlled Congress also has important implications for
our interest rate outlook. The Republicans have promised to sponsor a mandate
to cut taxes, reduce government spending and the government budget deficit.
These changes would put downward pressure on interest rates and be positive for
the bond market. We think the fund is positioned well for the remainder of
1995. Mortgages, the fund's primary investment, tend to perform well in stable
to rising rate environments, and new supply of mortgage-backed securities
should remain low, providing good technicals for the sector. We are also
optimistic because of what has already transpired in 1994. As reflected in the
fund's dividend rate increase in September, the fund has been generating more
income as money was reinvested at higher rates versus those that prevailed
eight months ago.
Q: Given the Fed's actions so far, what is your outlook for inflation and
the bond market in 1995?
A: We think that 1995 will continue to be another challenging year for the
bond market as both the Fed and investors continue to be on guard for an
increase in inflation. Nevertheless, our outlook for 1995 is positive. The
Fed's tightening throughout 1994 should moderate growth in 1995 to a level well
below that of 1994. In the past, the Fed has waited for signs of inflation to
emerge before it has moved to raise interest rates. In this case, the Fed has
raised rates in anticipation of a rise in inflation. Because of this vigilant,
preemptive strategy, few people expect that the rise in inflation will be
significant. This should benefit bond holders in the long run.
+ The Salomon Brothers Treasury Bond Index is an unmanaged list of U.S.
Treasury securities.
4
<PAGE> 6
PORTFOLIO OF INVESTMENTS January 31, 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Coupon Principal
Type Rate Maturity Amount Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS
FEDERAL NATIONAL MORTGAGE ASSOCIATION--6.6%
(Cost: $235,840)
- ---------------------------------------------------------------------------------------------------------------------------------
Pass-through Certificates 8.00-11.50% 2016-2024 $ 242,267 $ 236,259
- ---------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--91.9%
(Cost: $3,376,275)
- ---------------------------------------------------------------------------------------------------------------------------------
Pass-through Certificates 6.50 2023-2024 239,928 211,436
7.00 2023-2024 821,245 750,156
7.50 2022-2024 632,378 596,807
8.00 2016-2024 554,303 538,713
8.50 2005-2024 382,803 381,898
9.00 2008-2024 635,751 646,924
9.50 2009-2023 157,608 164,405
10.00 2016-2021 10,191 10,837
10.50 2019-2021 12,579 13,550
11.00 2019 614 664
- ---------------------------------------------------------------------------------------------------------------------------------
3,315,390
U.S. TREASURY SECURITIES--24.3%
(Cost: $939,878) 10.375-11.25 1995 871,825 878,080
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS--122.8%
(Cost: $4,551,993) 4,429,729
- ---------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS--1.6%
(Cost: $57,000)
Collateralized by U.S. Government Agency Securities
- ---------------------------------------------------------------------------------------------------------------------------------
Yield-5.85%
Dated-January 1995
Due-February 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Goldman, Sachs & Co. 57,000 57,000
- ---------------------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS--.7%
(Cost: $25,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Yield-5.94%
Due-February 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association 25,000 25,000
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--125.1%
(Cost: $4,633,993) 4,511,729
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(25.1)% (904,713)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS--100% $3,607,016
=================================================================================================================================
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $4,633,993,000 for federal income tax
purposes at January 31, 1995, the aggregate gross unrealized appreciation was
$26,485,000, the aggregate gross unrealized depreciation was $148,749,000 and
the net unrealized depreciation of investments was $122,264,000.
See accompanying Notes to Financial Statements.
5
<PAGE> 7
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1995
(in thousands)
<TABLE>
<S> <C>
ASSETS
- -------------------------------------------------------------
Investments, at value
(Cost: $4,633,993) $ 4,511,729
- -------------------------------------------------------------
Cash 7,563
- -------------------------------------------------------------
Receivable for:
Fund shares sold 550
- -------------------------------------------------------------
Investments sold 44,642
- -------------------------------------------------------------
Interest 61,284
- -------------------------------------------------------------
Total assets 4,625,768
- -------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -------------------------------------------------------------
Payable for:
Fund shares redeemed 5,119
- -------------------------------------------------------------
Investments purchased 1,010,050
- -------------------------------------------------------------
Management fee 1,505
- -------------------------------------------------------------
Distribution services fee 1,085
- -------------------------------------------------------------
Administrative services fee 712
- -------------------------------------------------------------
Custodian and transfer agent
fees and related expenses 201
- -------------------------------------------------------------
Other 80
- -------------------------------------------------------------
Total liabilities 1,018,752
- -------------------------------------------------------------
Net assets $ 3,607,016
=============================================================
ANALYSIS OF NET ASSETS
- -------------------------------------------------------------
Excess of amounts received from
issuance of shares over amounts paid
on redemptions of shares on account
of capital $ 4,866,376
- -------------------------------------------------------------
Accumulated net realized loss
on investments (1,202,331)
- -------------------------------------------------------------
Unrealized depreciation of investments (122,264)
- -------------------------------------------------------------
Undistributed net investment income 65,235
- -------------------------------------------------------------
Net assets applicable to shares
outstanding $ 3,607,016
=============================================================
THE PRICING OF SHARES
- -------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($1,877,211,400 / 277,613,211 shares outstanding) $6.76
- -------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of net
asset value or 4.50% of offering price) $7.08
=============================================================
CLASS B SHARES
Net asset value, offering price and redemption
price (subject to contingent deferred sales charge)
per share ($1,729,505,024 / 256,029,349 shares
outstanding) $6.76
=============================================================
CLASS C SHARES
Net asset value, offering price and redemption
price per share ($299,046 / 44,283 shares
outstanding) $6.75
=============================================================
</TABLE>
STATEMENT OF OPERATIONS
Six months ended January 31, 1995
(in thousands)
<TABLE>
<S> <C>
INTEREST INCOME $ 173,875
- -------------------------------------------------------------
EXPENSES
- -------------------------------------------------------------
Management fee 9,542
- -------------------------------------------------------------
Distribution services fee 7,144
- -------------------------------------------------------------
Administrative services fee 4,511
- -------------------------------------------------------------
Custodian and transfer agent fees and related
expenses 3,278
- -------------------------------------------------------------
Professional fees 65
- -------------------------------------------------------------
Reports to shareholders 300
- -------------------------------------------------------------
Trustees' fees and other 114
- -------------------------------------------------------------
Total expenses 24,954
- -------------------------------------------------------------
Net investment income 148,921
- -------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
- -------------------------------------------------------------
Net realized loss on sales of investments
(including options purchased) (72,103)
- -------------------------------------------------------------
Net realized gain from futures transactions 2,206
- -------------------------------------------------------------
Net realized loss (69,897)
- -------------------------------------------------------------
Net change in balance of unrealized
depreciation of investments (59,471)
- -------------------------------------------------------------
Net loss on investments (129,368)
- -------------------------------------------------------------
Net increase in net assets resulting from
operations $ 19,553
=============================================================
</TABLE>
See accompanying Notes to Financial Statements.
6
<PAGE> 8
STATEMENT OF CHANGES IN NET ASSETS
(in thousands)
<TABLE>
<CAPTION>
Six months
ended Year ended
January 31, July 31,
1995 1994
OPERATIONS ----------- ----------
<S> <C> <C>
- --------------------------------------------------------------
Net investment income $ 148,921 326,261
- --------------------------------------------------------------
Net realized loss on investments (69,897) (383,592)
- --------------------------------------------------------------
Net change in unrealized depreciation (59,471) (23,587)
- --------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 19,553 (80,918)
- --------------------------------------------------------------
Net equalization charges (8,338) (17,926)
- --------------------------------------------------------------
Distribution from net investment income (138,785) (325,917)
- --------------------------------------------------------------
Net decrease from capital share
transactions (423,480) (1,056,270)
- --------------------------------------------------------------
Total decrease in net assets (551,050) (1,481,031)
- --------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------
Beginning of period 4,158,066 5,639,097
- --------------------------------------------------------------
End of period (including undistributed
net investment income of $65,235 for
1995, and $63,437 for 1994) $3,607,016 4,158,066
==============================================================
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF THE FUND
Kemper U.S. Mortgage Fund is a separate series of Kemper Portfolios, an open-end
management investment company organized as a business trust under the laws of
Massachusetts. The Fund currently offers three classes of shares. Class A shares
are sold to investors subject to an initial sales charge. Class B shares are
sold without an initial sales charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales charge payable upon certain
redemptions. Class B shares automatically convert to Class A shares six years
after issuance. Class C shares are sold without an initial or a contingent
deferred sales charge but are subject to higher ongoing expenses than Class A
shares and do not convert into another class. The Fund may offer Class I shares
and no such shares are outstanding as of January 31, 1995. Each share represents
an identical interest in the investments of the Fund and has the same rights.
2. SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT VALUATION
Investments are stated at value. Fixed income securities are valued by using
market quotations, or independent pricing services that use prices provided by
market makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics. Exchange traded fixed
income options are valued at the last sale price unless there is no sale price,
in which event prices provided by market makers are used. Over-the-counter
traded fixed income options are valued based upon prices provided by market
makers. Financial futures and options thereon are valued at the settlement price
established each day by the board of trade or exchange on which they are traded.
Other securities and assets are valued at fair value as determined in good faith
by the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME
Investment transactions are accounted for on the trade date (date the order to
buy or sell is executed). Interest income is recorded on the accrual basis and
includes premium and discount amortization of money market instruments and
mortgage-backed securities; it also includes original issue and market discount
amortization on long-term fixed income securities. Realized gains and losses
from investment transactions are reported on an identified cost basis. Realized
and unrealized gains and losses on financial futures and options are included in
net realized and unrealized gain (loss) on investments, as appropriate.
The Fund may purchase securities with delivery or payment to occur at a later
date. At the time the Fund enters into a commitment to purchase a security, the
transaction is recorded and the value of the security is reflected in the net
asset value. The value of the security may vary with market fluctuations. No
interest accrues to the Fund until payment takes place. At the time the Fund
enters into this type of transaction it is required to
7
<PAGE> 9
designate cash or other liquid assets equal to the value of the securities
purchased. At January 31, 1995 the Fund had $962,519,000 in purchase
commitments outstanding (27% of net assets) with a corresponding amount of
assets designated.
FUND SHARE VALUATION
Fund shares are sold and redeemed on a continuous basis at net asset value (plus
an initial sales charge on most sales of Class A Shares). Proceeds payable on
redemption of Class B shares will be reduced by the amount of any applicable
contingent deferred sales charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is determined as of the earlier
of 3:00 p.m. Chicago time or the close of the Exchange. The net asset value per
share is determined separately for each class by dividing the Fund's net assets
attributable to that class by the number of shares of the class outstanding.
FEDERAL INCOME TAXES AND DIVIDENDS TO SHAREHOLDERS
The Fund has complied with the special provisions
of the Internal Revenue Code available to investment companies and therefore no
federal income tax provision is required. The accumulated net realized loss on
sales of investments for federal income tax purposes at January 31, 1995,
amounting to approximately $1,195,930,000, is available to offset future taxable
gains. If not applied, the loss carryover expires during the period 1996 through
2003.
Differences in dividends per share are due to different class expenses.
Dividends payable to its shareholders are recorded by the Fund on the
ex-dividend date.
On February 14, 1995, the following per share dividends were declared, payable
February 28, 1995 to shareholders of record on February 15, 1995.
<TABLE>
<CAPTION>
Class A Class B Class C
- ----------------------------------------------------------------
<S> <C> <C> <C>
Income $.044 $.039 $.0393
- -----------------------------------------------------------------
</TABLE>
Distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. These differences are
primarily due to differing treatments for certain transactions.
EQUALIZATION ACCOUNTING
A portion of proceeds from sales and cost of redemptions of Fund shares is
credited or charged to undistributed net investment income so that income per
share available for distribution is not affected by sales or redemptions of
shares.
3. TRANSACTIONS WITH AFFILIATES
MANAGEMENT AGREEMENT
The Fund has a management agreement with Kemper Financial Services, Inc. (KFS)
and pays a management fee at an annual rate of .55% of the first $250 million
of average daily net assets declining gradually to .40% of average daily net
assets in excess of $12.5 billion. The Fund incurred a management fee of
$9,542,000 for the six months ended January 31, 1995.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT
The Fund has an underwriting and distribution services agreement with Kemper
Distributors, Inc. (KDI). Before February 1, 1995, KFS was the Fund's principal
underwriter. As principal underwriter for the Fund, KDI (as successor to KFS)
retained commissions of $8,000 for the six months ended January 31, 1995 for
sales of Class A shares after allowing $76,000 as commissions to firms, of which
$7,000 was paid to firms affiliated with KDI. For services under the
distribution services agreement, the Fund pays KDI a fee of .75% of average
daily net assets of the Class B and Class C shares. Pursuant to the agreement,
KDI enters into related selling group agreements with various firms that provide
distribution services to investors. KDI compensates these firms at various rates
for sales of Class B and Class C shares. During the six months ended January 31,
1995, the Fund incurred a distribution services fee for Class B and Class C
shares of $7,144,000, and KDI paid $674,000 for commissions and distribution
fees to firms, including $76,000 to firms affiliated with KDI. In addition, KDI
received $3,015,000 of contingent deferred sales charges.
ADMINISTRATIVE SERVICES AGREEMENT
The Fund has an administrative services agreement with KDI. Before February 1,
1995, KFS was the Fund's administrator. For providing information and
administrative services to shareholders, the Fund pays KDI a fee at an annual
rate of up to .25% of average daily net assets. KDI in turn has various
arrangements with financial services firms that provide these services and pays
these firms based on assets of Fund accounts the firms service. For the six
months ended January 31, 1995, the Fund incurred an administrative services fee
of $4,511,000 and KDI (as successor to KFS) paid $4,477,000 to firms, including
$585,000 that was paid to firms affiliated with KDI.
CUSTODIAN AND TRANSFER AGENT AGREEMENTS
The Fund has a custodian agreement and a transfer agent agreement with Investors
Fiduciary Trust Company (IFTC), which was 50% owned by KFS until January 31,
1995, when KFS completed the sale of IFTC to a third party. For the six months
ended January 31, 1995, the Fund incurred custodian and transfer agent fees of
$2,191,000 (excluding related expenses). Pursuant to a services' agreement with
IFTC, Kemper Service Company (KSvC), an affiliate of KFS, is the shareholder
service agent of the Fund. For the six months ended January 31, 1995, IFTC
remitted shareholder service fees of $3,101,000 to KSvC.
8
<PAGE> 10
OFFICERS AND TRUSTEES
Certain officers or trustees of the Fund are also officers or directors of KFS.
For the six months ended January 31, 1995, the Fund made no payments to its
officers and incurred trustees' fees of $38,000 to independent trustees.
4. INVESTMENT TRANSACTIONS
For the six months ended January 31, 1995, investment transactions (excluding
short term instruments) are as follows (in thousands):
<TABLE>
<S> <C>
Purchases $13,885,368
- -------------------------------------------------------------
Proceeds from sales 14,285,308
- -------------------------------------------------------------
</TABLE>
5. CAPITAL SHARE TRANSACTIONS
The following table summarizes the activity in capital shares of the Fund (in
thousands):
<TABLE>
<CAPTION>
Six months ended Year ended
January 31, July 31,
1995 1994
------------------- ----------------------
Shares Amount Shares Amount
------- --------- -------- -----------
<S> <C> <C> <C> <C>
Shares sold:
Class A 4,691 $ 28,756 5,222 $ 35,884
- -------------------------------------------------------------------
Class B 4,575 30,617 32,281 233,525
- -------------------------------------------------------------------
Class C 33 221 21 148
- -------------------------------------------------------------------
Shares issued in
reinvestment of
dividends:
Class A 6,028 40,617 9,802 71,165
- -------------------------------------------------------------------
Class B 5,656 38,094 15,471 113,238
- -------------------------------------------------------------------
Class C 1 5 -- --
- -------------------------------------------------------------------
Shares redeemed:
Class A (38,300) (255,155) (68,014) (484,338)
- -------------------------------------------------------------------
Class B (46,512) (306,564) (143,028) (1,025,892)
- -------------------------------------------------------------------
Class C (11) (71) -- --
- -------------------------------------------------------------------
Conversion of shares:
Class A 19,271 129,958 142,904 1,034,102
- -------------------------------------------------------------------
Class B (19,302) (129,958) (143,035) (1,034,102)
- -------------------------------------------------------------------
Net decrease from
capital share
transactions $(423,480) $(1,056,270)
- -------------------------------------------------------------------
</TABLE>
9
<PAGE> 11
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Six months January 10,
ended 1992 to
January 31, Year ended July 31, July 31,
CLASS A SHARES 1995 1994 1993 1992
- --------------------------------------------------- ----------- ----- ---- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $6.96 7.56 7.78 7.81
- ------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .26 .51 .62 .38
- ------------------------------------------------------------------------------------------------------------
Net realized and unrealized loss on investments (.20) (.59) (.21) (.03)
- ------------------------------------------------------------------------------------------------------------
Total from investment operations .06 (.08) .41 .35
- ------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .26 .52 .63 .38
- ------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.76 6.96 7.56 7.78
============================================================================================================
TOTAL RETURN (%): .95 (1.21) 5.52 4.76
============================================================================================================
RATIOS TO AVERAGE NET ASSETS (%):
Expenses .89 .99 .97 .94
- ------------------------------------------------------------------------------------------------------------
Net investment income 8.22 7.00 8.22 8.73
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Six months
ended
January 31, Year ended July 31,
CLASS B SHARES 1995 1994 1993 1992 1991 1990
- ------------------------------------------------- ----------- ----- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $6.96 7.56 7.77 7.25 7.25 7.61
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .23 .45 .57 .65 .64 .66
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments (.20) (.59) (.21) .49 .01 (.36)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .03 (.14) .36 1.14 .65 .30
- ---------------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .23 .46 .57 .62 .65 .66
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.76 6.96 7.56 7.77 7.25 7.25
=================================================================================================================================
TOTAL RETURN (%): .55 (2.00) 4.85 16.36 9.37 4.26
=================================================================================================================================
RATIOS TO AVERAGE NET ASSETS (%):
Expenses 1.72 1.79 1.75 1.86 2.03 1.99
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 7.39 6.27 7.44 8.70 8.86 9.00
=================================================================================================================================
</TABLE>
10
<PAGE> 12
<TABLE>
<CAPTION>
Six months
ended
January 31, May 31, 1994
CLASS C SHARES 1995 to July 31, 1994
- ------------------------------------------------ ----------- ----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $6.95 6.99
- -----------------------------------------------------------------------------
Income from investment operations:
Net investment income .24 .07
- -----------------------------------------------------------------------------
Net realized and unrealized loss on
investments (.20) (.04)
- -----------------------------------------------------------------------------
Total from investment operations .04 .03
- -----------------------------------------------------------------------------
Less distribution from net investment income .24 .07
- -----------------------------------------------------------------------------
Net asset value, end of period $6.75 6.95
=============================================================================
TOTAL RETURN (%): .57 .47
=============================================================================
RATIOS TO AVERAGE NET ASSETS (%):
Expenses 1.66 1.55
- -----------------------------------------------------------------------------
Net investment income 7.37 6.46
=============================================================================
</TABLE>
<TABLE>
<CAPTION>
Six months
ended
January 31, Year ended July 31,
SUPPLEMENTAL DATA FOR ALL CLASSES: 1995 1994 1993 1992 1991 1990
----------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net assets at end of period (in
thousands) $3,607,016 4,158,066 5,639,097 5,602,682 4,879,832 5,178,159
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 771 963 551 376 498 206
=================================================================================================================================
</TABLE>
NOTE FOR ALL CLASSES: Ratios have been determined on an annualized basis. Total
return is not annualized and does not reflect the effect of any sales charges.
11
<PAGE> 13
[LOGO]
KEMPER FINANCIAL SERVICES, INC.
120 South LaSalle Street
Chicago, IL 60603
KEMPER PORTFOLIOS
KEMPER U.S. MORTGAGE FUND
<TABLE>
<CAPTION>
Trustees Officers
<S> <C> <C>
STEPHEN B. TIMBERS J. PATRICK BEIMFORD, JR. JEROME L. DUFFY
Trustee and Vice President Treasurer
President
MICHELLE M. KEELEY ELIZABETH C. WERTH
DAVID W. BELIN Vice President Assistant Secretary
Trustee
JOHN E. PETERS
LEWIS A. BURNHAM Vice President
Trustee
FRANK J. RACHWALSKI
DONALD L. DUNAWAY Vice President
Trustee
PHILIP J. COLLORA
ROBERT B. HOFFMAN Vice President and
Trustee Secretary
DONALD R. JONES CHARLES F. CUSTER
Trustee Vice President and
Assistant Secretary
DAVID B. MATHIS
Trustee
WILLIAM P. SOMMERS
Trustee
- -----------------------------------------------------------
Legal Counsel Custodian and Transfer Agent
VEDDER, PRICE, KAUFMAN INVESTORS FIDUCIARY
& KAMMHOLZ TRUST COMPANY
222 North LaSalle Street 127 West 10th Street
Chicago, IL 60601 Kansas City, MO 64105
Shareholder Service Agent
KEMPER SERVICE COMPANY
P.O. Box 419557
Kansas City, MO 64141
1-800-621-1048
</TABLE>
Investment Manager
KEMPER FINANCIAL SERVICES, INC.
Principal Underwriter
KEMPER DISTRIBUTORS, INC.
120 South LaSalle Street
Chicago, IL 60603
[LOGO] Printed on recycled paper.
This report is not to be 236720
KUSMF-3 (3/95) distributed unless preceded Printed in the U.S.A.
or accompanied by a Kemper
Fixed Income Funds prospectus.
