Scudder
GNMA
Fund
Semiannual Report
July 31, 1999
- -------------
No-Load Funds
- -------------
A no-load (no sales charges) mutual fund which seeks high current income
primarily from U.S. Government guaranteed mortgage-backed ("Ginnie Mae")
securities.
SCUDDER
<PAGE>
Scudder GNMA Fund
- --------------------------------------------------------------------------------
Date of Inception: 7/5/85 Total Net Assets as Ticker Symbol: SGMSX
of 7/31/99: $364.8 million
- --------------------------------------------------------------------------------
o Interest rates generally rose and bond prices declined over the six months, as
strong domestic economic growth and rebounding foreign markets heightened
inflation concerns.
o Mortgage-backed securities weathered the difficult period better than other
classes of fixed income securities, such as corporate bonds, asset-backed
securities, or Treasuries.
o Scudder GNMA Fund's -1.71% six-month total return reflects the rising interest
rate environment for the period ended July 31, 1999.
o Longer term, the fund maintained its overall four-star Morningstar Rating(TM)
for its risk-adjusted performance among 1552 taxable bond funds as of July 31,
1999.^1
Table of Contents
3 Letter from the Fund's President 12 Financial Statements
4 Performance Update 15 Financial Highlights
5 Portfolio Summary 16 Notes to Financial Statements
6 Portfolio Management Discussion 21 Officers and Trustees
9 Glossary of Investment Terms 22 Investment Products and Services
10 Investment Portfolio 23 Scudder Solutions
1^ Morningstar proprietary ratings reflect historical risk-adjusted performance
as of 7/31/99. Ratings are subject to change every month and are calculated
from the fund's three-, five-, and ten-year average annual returns in excess
of 90-day Treasury bill returns with appropriate fee adjustments, and a risk
factor that reflects fund performance below 90-day T-bill returns. In its
broad asset class, 10% of funds receive 5 stars and the next 22.5% receive 4
stars. In the taxable bond category, the fund received a 4-star rating for
the three-, five-, and ten-year periods among 1552, 1118, and 367 funds,
respectively. Past performance is no guarantee of future results.
2 - Scudder GNMA Fund
<PAGE>
Letter from the Fund's President
Dear Shareholders,
The rising interest rate environment was not kind to the average bondholder
as prices generally declined over the six-month period. However, mortgage-backed
securities, such as GNMAs, weathered this difficult environment better than most
other high quality fixed income investments. While any dip in an investment's
principal value is unwelcome (unless you are a buyer), the fund's net asset
value decline was relatively small by historical measures. Over the last few
years fixed-income investors have enjoyed generally rising bond prices resulting
in the double bonus of income plus price appreciation -- an anomaly for the bond
market's long-run performance.
While the generous returns of equities may seem appealing, their
outperformance has been a relatively recent phenomenon. For investors seeking
less price volatility, regular income, and portfolio diversification, bond funds
make sense for many investors. Considering these benefits and Scudder GNMA
Fund's long-term track record, we think the fund continues to serve as an
important component in many investors' portfolios.
For those of you who are interested in complementing your existing holdings,
we recently introduced two funds: Scudder Select 500 Fund -- which invests in a
subset of the stocks in the unmanaged S&P 500 Index, and Scudder Select 1000
Growth Fund -- which invests in a subset of the stocks in the unmanaged Russell
1000 Growth Index. Each fund uses a quantitative approach to screen out those
stocks with the lowest return potential, while otherwise maintaining portfolio
characteristics similar to their respective indices. For further information on
these unique funds, please visit our Web site at www.scudder.com, or call us at
1-800-SCUDDER (1-800-728-3337).
In closing, I would like to inform you that Daniel Pierce retired in June of
this year as President of Scudder GNMA Fund. At that time I assumed his role and
responsibilities. We are fortunate that Dan's long-standing affiliation with
Scudder is ongoing, and that we will continue to benefit from his counsel. I am
pleased to join the fund's team in this capacity, and look forward to serving
your interests.
Thank you for your continued investment in Scudder GNMA Fund.
Sincerely,
/s/Lynn S. Birdsong
Lynn S. Birdsong
President,
Scudder GNMA Fund
3 - Scudder GNMA Fund
<PAGE>
Performance Update as of July 31, 1999
- ----------------------------------------------------------------
Fund Index Comparison
- ----------------------------------------------------------------
Total Return
- --------------------------------------------
Period Ended Growth of Average
7/31/99 $10,000 Cumulative Annual
- --------------------------------------------
Scudder GNMA Fund
- --------------------------------------------
1 Year $10,173 1.73% 1.73%
5 Year $13,839 38.39 6.71%
10 Year $19,931 99.31 7.14%
- --------------------------------------------
Lehman Brothers GNMA Index
- --------------------------------------------
1 Year $10,281 2.81% 2.81%
5 Year $14,388 43.88% 7.54%
10 Year $21,650 116.50% 8.03%
- ------------------------------
Growth of a $10,000 Investment
- ------------------------------
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
CHART DATA:
Lehman Brothers GNMA
Index Scudder GNMA Fund
'89 10000 10000
'90 10941 10813
'91 12235 12032
'92 13821 13600
'93 15012 14721
'94 15047 14403
'95 16637 15785
'96 17669 16719
'97 19598 18285
'98 21059 19592
'99 21650 19931
Yearly Periods Ended 31
The unmanaged Lehman Brothers GNMA Index is a market value-weighted measure of
all fixed-rate securities backed by mortgage pools of the GNMA. Index returns
are calculated monthly and assume reinvestment of dividends. Unlike Fund
returns, Index returns do not reflect any fees or expenses.
- ---------------------------------
Returns and Per Share Information
- ---------------------------------
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
ILLUSTRATING THE FUND TOTAL RETURN (%) AND
INDEX TOTAL RETURN (%)
CHART DATA:
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value $ 14.53 $ 14.88 $ 15.49 $ 15.42 $ 14.13 $ 14.47 $ 14.39 $ 14.74 $ 14.85 $ 14.25
- ----------------------------------------------------------------------------------------------------------------
Income Dividends $ 1.25 $ 1.22 $ 1.26 $ 1.30 $ .97 $ .96 $ .92 $ .95 $ .91 $ .86
- ----------------------------------------------------------------------------------------------------------------
Fund Total Return (%) 8.13 11.28 13.03 8.24 -2.16 9.60 5.92 9.36 7.15 1.73
- ----------------------------------------------------------------------------------------------------------------
Index Total Return (%) 9.41 11.83 12.96 8.62 0.23 10.57 6.20 10.92 7.45 2.81
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Performance is historical and assumes reinvestment of all dividends and capital
gains and is not indicative of future results. Total return and principal value
will fluctuate, so an investor's shares, when redeemed, may be worth more or
less than when purchased.
4 - Scudder GNMA Fund
<PAGE>
Portfolio Summary as of July 31, 1999
- ---------------
Diversification
- ---------------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the table below.
Government National Mortgage
Association 87%
U.S. Treasury Obligations 9%
Cash Equivalents, net of pending
purchases 4%
-------------------------------------------------
100%
-------------------------------------------------
The fund's GNMA position was reduced from 93% of assets to 87% to fend off
duration extension risk resulting from rising interest rates.
- --------------
GNMA Coupons*
- --------------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the table below.
0-Less than 7% 29%
7-Less than 8% 58%
8% or greater 13%
---------------------------
100%
---------------------------
*Excludes Cash Equivalents and
U.S. Treasury Obligations
Management reduced GNMAs with 6% and 7.5% coupons in favor of GNMA 6.5% and
15-year GNMA 7% issues.
- -------------------
Effective Maturity
- -------------------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the table below.
0-5 years 10%
5-8 years 57%
Greater than 8 years 33%
---------------------------
100%
---------------------------
Rising interest rates and lower refinancings caused the portfolio's duration to
lengthen from 2.4 years to 4.2 years over the six months.
For more complete details about the Fund's investment portfolio, see page 10.
A quarterly Fund Summary and Portfolio Holdings are available upon request.
5 - Scudder GNMA Fund
<PAGE>
Portfolio Management Discussion
In the following interview, lead portfolio manager Richard Vandenberg and
portfolio manager Scott Dolan discuss Scudder GNMA Fund's strategy and the
market environment for the six-month period ended July 31, 1999.
Q: With interest rates creeping up over the six months, fixed income
securities generally declined. How did this affect mortgage-backed securities?
A: While rising rates generally caused bond prices to decline, mortgages have
performed better than most, especially since the June 30th rate increase by the
Federal Reserve. We think the main reason for the improvement is tied to a sense
of relief that was felt by fixed income investors after the June rate increase.
Interest rates had generally been rising since the beginning of the year as
robust economic growth coupled with fears of accelerating inflation caused
yields to rise. The Fed's action, which had been widely anticipated by
investors, actually resulted in a bond market rally the day of the announcement
as investors had already fully anticipated an increase in interest rates.
Another factor that dampened the overall fixed income market has been the
unusually large calendar of corporate bonds that have come to market in the
first half of this year. Many companies have been attempting to lock in
relatively low interest rates and at the same time avoid issuance in the fourth
quarter of 1999 due to Y2K concerns. As a result, most of the year's issuance of
new corporate bonds piled up in the first two quarters of this year, causing
corporate yield spreads to widen (corporate bond yields rose relative to
Treasuries). This widening provided a lot of competition to other fixed income
asset classes such as asset-backed, Treasury, and mortgage-backed securities.
In the mortgage sector most of the new issuance activity has been in the form of
refinancings with little actual growth in supply. With corporate issues flooding
the market, mortgages did not outperform and many investors simply sat on the
sidelines.
Q: How did the fund perform?
A: The fund's -1.71% six-month return compares to the -0.78% return of its
unmanaged benchmark, the Lehman Brothers GNMA Index as of July 31, 1999. The
fund's performance for the one year period ended July 31, 1999 placed it ahead
of its peers, ranking in the top 37% of 54 GNMA funds tracked by Lipper
Analytical Services, Inc.^1 Reflecting the higher rate environment, the fund's
30-day net annualized SEC yield has increased to 5.63% from 4.83% six months
ago.
Q: What is the fund's investment strategy?
A: We employ a "top-down" approach that focuses on five key factors: the
portfolio's sensitivity to changes in interest rates (duration), the allocation
between GNMA and Treasury securities (sector), individual security selection,
the vintage and "seasoning" of issues, and the fund's positioning with respect
to the yield curve.
To identify securities with the greatest potential, we conduct an intensive
analysis of the prepayment expectations of individual GNMAs, the price
- --------------------------------------------------------------------------------
1^ Source: Lipper Analytical Services, Inc., an independent analyst of
investment performance. Performance includes reinvestment of dividends and
capital gains, and is no guarantee of future results. As of July 31, 1999,
the fund's Lipper rankings in the GNMA fund category are 20th of 54 funds for
the one-year period, 18th of 36 funds for the five-year period, and 16th of
23 funds for the ten-year period.
- --------------------------------------------------------------------------------
6 - Scudder GNMA Fund
<PAGE>
relationships among mortgages with different coupons, and projected total
returns.
We actively manage our exposure to prepayment risk by analyzing refinancing
expectations. This includes adjusting our weighting between seasoned mortgages,
which tend to have more predictable prepayment characteristics than those that
have been more recently issued. We also invest in Treasury securities, which
have lower yields but tend to provide better performance than GNMAs when
interest rates are declining.
Q: How did you position the fund in this environment?
A: The rising interest rate environment combined with lower refinancing activity
caused the portfolio's sensitivity to changes in interest rates (duration) to
lengthen to 4.24 years from 2.4 years six months ago. The fund's duration,
however, still ended the period a bit shorter than the 4.26 year duration of our
benchmark, the Lehman Brothers GNMA Index. This more conservative positioning
reflects our belief that continued strong economic growth might lead to further
increases in interest rates.
The fund's GNMA position was reduced from nearly 93% of assets to 87% in an
effort to fend off the duration extension risk (the automatic increase in
duration) inherent in all mortgages when interest rates rise. We increased our
exposure to Treasury securities as a defensive measure. While we are not
expecting a calamity of any sort, we are expecting decreased liquidity as some
investors move into high quality and highly liquid investments. We began to see
signs of this trend near the close of the fund's fiscal period, and think it may
continue through the start of the new year. We are also concerned that increased
issuance in competing fixed income products such as corporate bonds and
asset-backed issues may temporarily cause GNMAs to underperform.
Within our GNMA allocation, positions in GNMA 6% and GNMA 7.5% coupons were
reduced in favor of GNMA 6.5% and 15-year GNMA 7% coupon issues. These actions
reflected our belief that these issues have better risk/reward characteristics
in the environment we envision.
- --------------------------------------------------------------------------------
GNMA securities in a nutshell
Government National Mortgage Association (GNMA) securities, commonly called
"Ginnie Mae" securities, are backed by the full faith and credit of the U.S.
government. Each GNMA represents a pool of mortgages from which investors
receive principal and interest payments each month. If interest rates fall,
homeowners refinance and pay off their existing mortgages early, and
mortgage-backed investors are forced to reinvest the proceeds at lower
prevailing rates. If interest rates rise, principal is repaid more slowly,
but GNMA investors may receive lower total returns as previously issued
securities with lower coupon rates are worth less. As a result, GNMA funds
tend to perform best in environments when interest rates are not changing
significantly.
- --------------------------------------------------------------------------------
7 - Scudder GNMA Fund
<PAGE>
Q: What is your outlook?
A: We view the period ahead as somewhat uncertain, as conflicting signals, such
as strong economic growth and low inflation, have led us to no strong conviction
as to the near-term direction of interest rates. Longer term, we have a positive
outlook for the mortgage-backed market. When comparing GNMA yields versus
comparable Treasury yields, the differences (spreads) are near their historical
highs. We believe that this condition is the result of temporary factors and
thus not sustainable over the long term. Additionally, we expect that potential
increases in interest rates will cause new issuance of mortgages to decline as
the year progresses. With this backdrop, we think spreads will narrow over time,
which should bode well for GNMAs. Although we currently remain underweighted in
GNMAs, we expect to reenter the market when attractive opportunities appear.
With regard to the impact of Y2K on the mortgage market, we are generally not
concerned. While no one can say exactly how the fixed income market will react
near the end of the year, we are not expecting a crisis. In fact, the event will
likely present a number of opportunities for investors. We intend to approach
this period with a note of caution, yet with an eye to the long term in managing
the fund.
8 - Scudder GNMA Fund
<PAGE>
Glossary of Investment Terms
COUPON The interest rate on a bond the issuer (in the case
of mortgage-backed securities, the government)
promises to pay to the holder of the bond until
maturity, expressed as an annual percentage of face
value. As an example, a GNMA security with a 10%
coupon would pay $100 each year on $1,000 of the
face amount each year.
DURATION A measure of the portfolio's sensitivity to changes
in interest rates. If an investment portfolio has a
duration of 5 years and interest rates decline by 1%
from present levels, the value of the portfolio would
rise by about 5%, and vice versa.
SEASONED ISSUES Securities (usually from established
companies) that have gained a reputation for quality
with the investing public and enjoy liquidity in the
secondary market.
TOTAL RETURN The most common yardstick to measure the
performance of a fund. Total return -- annualized or
compound -- is based on a combination of share price
changes plus income and capital gain distributions,
if any, expressed as a percentage gain or loss in
value.
YIELD CURVE A graph showing the term structure of interest rates
by plotting the yields of all bonds of the same
quality with maturities ranging from the shortest to
the longest available. The resulting curve shows the
relationship between short-, intermediate-, and
long-term interest rates.
YIELD SPREAD The difference in yield between various types of
bonds. A mortgage-backed security's yield is often
measured against the yield of a Treasury security of
similar maturity as a market yardstick. If GNMA
yield spreads are "narrow," for example, it often
means that GNMA yields have been declining, and
prices rising, compared with Treasury bonds of
similar maturity.
30-DAY SEC YIELD The standard yield reference for bond funds, based
on a formula prescribed by the SEC. This annualized
yield calculation reflects the 30-day average of the
income earnings capability of every holding in a
given fund's portfolio, net of expenses, assuming
each is held to maturity.
(Sources: Scudder Kemper Investments, Inc.; Barron's Dictionary of Finance and
Investment Terms)
An expanded list of terms is located at our Web site, www.scudder.com.
9 - Scudder GNMA Fund
<PAGE>
Investment Portfolio as of July 31, 1999 (Unaudited)
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreements 9.8%
- ------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement with State Street Bank and Trust Company dated 7/30/1999 at
5.04%, to be repurchased at $35,903,073 on 8/2/1999, collateralized by a -------------
$33,165,000 U.S. Treasury Bond, 5/15/2016 (Cost $35,888,000) .......................... 35,888,000 35,888,000
-------------
U.S. Treasury Obligations 9.3%
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bond, 9.25%, 2/15/2016 .................................................... 9,820,000 12,968,899
U.S. Treasury Note, 6.875%, 5/15/2006 ................................................... 7,300,000 7,625,069
U.S. Treasury Note, 6.125%, 8/15/2007(d) ................................................ 13,350,000 13,385,511
- ------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury Obligations (Cost $34,074,588) 33,979,479
- ------------------------------------------------------------------------------------------------------------------------------
Government National Mortgage Association 87.1%*
- ------------------------------------------------------------------------------------------------------------------------------
6.0% with various maturities to 8/1/2029(b)(c) .......................................... 7,696,409 7,094,477
6.5% with various maturities to 8/1/2029(b)(c) .......................................... 90,243,370 86,030,842
7.0% with various maturities to 8/1/2029(b)(c) .......................................... 118,989,415 114,763,154
7.5%, with various maturities to 10/1/2029(b)(c) ........................................ 67,768,953 66,395,686
8.0% with various maturities to 8/1/2029(b)(c) .......................................... 43,788,232 43,326,295
- ------------------------------------------------------------------------------------------------------------------------------
Total Government National Mortgage Association (Cost $328,486,379) 317,610,454
- ------------------------------------------------------------------------------------------------------------------------------
% of
Net Assets
Total Investment Portfolio (Cost $398,448,967) (a) ...................................... 106.2 387,477,933
Other Assets and Liabilities, Net ....................................................... (6.2) (22,645,467)
------ -------------
Net Assets .............................................................................. 100.0 364,832,466
====== =============
</TABLE>
(a) Cost for federal income tax purposes was $398,707,082. At July 31, 1999,
net unrealized depreciation for all securities based on tax cost was
$11,229,149. This consisted of aggregate gross unrealized depreciation for
all securities in which there was an excess of tax cost over market value
of $11,229,149.
(b) At July 31, 1999, these pools, in part or in whole, have been segregated to
cover when-issued or forward delivery pools.
(c) When-issued or forward delivery pools included.
(d) At July 31, 1999, these securities have been pledged to cover, in whole or
in part, initial margin requirements for open futures contracts.
The accompanying notes are an integral part of the financial statements.
10 - Scudder GNMA Fund
<PAGE>
- --------------------------------------------------------------------------------
(e) At July 31, 1999, open futures contracts sold short were as follows:
<TABLE>
<CAPTION>
Aggregate
Futures Expiration Contracts Face Value ($) Market Value ($)
------- ---------- --------- -------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Note September 1999 69 7,703,250 7,611,563
U.S. Treasury Bond September 1999 69 8,049,656 7,932,843
U.S. Treasury Note September 1999 18 1,964,813 1,950,750
------------ ------------
17,717,719 17,495,156
Total unrealized appreciation on open futures
short contracts sold .......................... $222,563
============
</TABLE>
* The investments in mortgage-backed securities of the Government National
Mortgage Association are interests in separate pools of mortgages. All
separate investments in each of these issues which have similar coupon
rates have been aggregated for presentation purposes in the Investment
Portfolio. Effective maturities of these investments will be shorter than
stated maturities due to prepayments.
The accompanying notes are an integral part of the financial statements.
11 - Scudder GNMA Fund
<PAGE>
Financial Statements
Statement of Assets and Liabilities
as of July 31, 1999 (Unaudited)
<TABLE>
<S> <C> <C>
Assets
- ------------------------------------------------------------------------------------------------------------------------------
Investments, at market (identified cost $398,448,967) ............ $ 387,477,933
Cash ............................................................. 339
Receivable for investments sold .................................. 46,493,677
Receivable for Fund shares sold .................................. 201,755
Interest receivable .............................................. 2,605,630
Receivable for daily variation margin on open futures contracts .. 46,094
Other assets ..................................................... 5,052
----------------
Total assets ..................................................... 436,830,480
Liabilities
- ------------------------------------------------------------------------------------------------------------------------------
Payable for investments purchased ................................ 2,580,315
Payable for when-issued and forward delivery pools ............... 68,365,625
Payable for Fund shares redeemed ................................. 243,968
Dividends payable ................................................ 447,237
Accrued management fee ........................................... 191,220
Other payables and accrued expenses .............................. 169,649
----------------
Total liabilities ................................................ 71,998,014
----------------------------------------------------------------------------------------
Net assets, at market value $ 364,832,466
----------------------------------------------------------------------------------------
Net Assets
- ------------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Unrealized appreciation (depreciation) on:
Investments ...................................................... (10,971,034)
Futures .......................................................... 222,563
Accumulated net realized gain (loss) ............................. (24,436,749)
Paid-in capital .................................................. 400,017,686
----------------------------------------------------------------------------------------
Net assets, at market value $ 364,832,466
----------------------------------------------------------------------------------------
Net Asset Value
- ------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($364,832,466 / 25,601,396 outstanding shares of beneficial ----------------
interest, $.01 par value, unlimited number of shares authorized) . $14.25
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 - Scudder GNMA Fund
<PAGE>
Statement of Operations
six months ended July 31, 1999 (Unaudited)
<TABLE>
<S> <C> <C>
Investment Income
- ------------------------------------------------------------------------------------------------------------------------
Income:
Interest ................................................................... $ 12,983,376
----------------
Expenses:
Management fee ............................................................. 1,180,080
Services to shareholders ................................................... 470,600
Custodian and accounting fees .............................................. 62,264
Trustees' fees and expenses ................................................ 21,358
Reports to shareholders .................................................... 44,649
Legal ...................................................................... 10,860
Auditing ................................................................... 23,530
Registration fees .......................................................... 15,385
Other ...................................................................... 10,720
----------------
1,839,446
------------------------------------------------------------------------------------------------------
Net investment income 11,143,930
------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
- ------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments ................................................................ (5,410,126)
Futures .................................................................... 297,578
----------------
(5,112,548)
Net unrealized appreciation (depreciation) during the period
on:
Investments ................................................................ (12,972,444)
Futures .................................................................... 319,961
----------------
(12,652,483)
------------------------------------------------------------------------------------------------------
Net gain (loss) on investment transactions (17,765,031)
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ (6,621,101)
------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13 - Scudder GNMA Fund
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months Ended Ten Months
July 31, Ended
1999 January 31, Year Ended
Increase (Decrease) in Net Assets (Unaudited) 1999 (Note A) March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations:
Net investment income ............................... $11,143,930 $19,144,991 $24,804,253
Net realized gain (loss) from investment
transactions ..................................... (5,112,548) 1,847,588 7,697,612
Net unrealized appreciation (depreciation) on
investment transactions during the period ........ (12,652,483) 1,391,070 5,956,931
---------------- ---------------- ----------------
Net increase (decrease) in net assets resulting
from operations .................................. (6,621,101) 22,383,649 38,458,796
Distributions to shareholders from net investment
income ........................................... (11,143,930) (19,144,991) (24,804,253)
---------------- ---------------- ----------------
Fund share transactions:
Proceeds from shares sold ........................... 35,983,945 74,346,313 73,746,402
Net asset value of shares issued to shareholders in
reinvestment of distributions .................... 8,318,642 14,012,577 18,027,356
Cost of shares redeemed ............................. (54,766,403) (90,981,055) (95,991,645)
---------------- ---------------- ----------------
Net increase (decrease) in net assets from Fund
share transactions ............................... (10,463,816) (2,622,165) (4,217,887)
---------------- ---------------- ----------------
Increase (decrease) in net assets ................... (28,228,847) 616,493 9,436,656
Net assets at beginning of period ................... 393,061,313 392,444,820 383,008,164
---------------- ---------------- ----------------
Net assets at end of period ......................... $364,832,466 $393,061,313 $392,444,820
---------------- ---------------- ----------------
Other Information
- ------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period ........... 26,319,381 26,503,842 26,796,857
---------------- ---------------- ----------------
Shares sold ......................................... 2,458,549 4,984,258 5,020,317
Shares issued to shareholders in reinvestment of
distributions .................................... 570,894 939,252 1,225,867
Shares redeemed ..................................... (3,747,428) (6,107,971) (6,539,199)
---------------- ---------------- ----------------
Net increase (decrease) in Fund shares .............. (717,985) (184,461) (293,015)
---------------- ---------------- ----------------
Shares outstanding at end of period ................. 25,601,396 26,319,381 26,503,842
---------------- ---------------- ----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 - Scudder GNMA Fund
<PAGE>
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Six Months Ended Ten Months
July 31, Ended
1999 January 31, Years Ended March 31,
(Unaudited) 1999 (Note A) 1998 1997 1996 1995 1994(b)
- ------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ......................... $14.93 $14.81 $ 14.29 $ 14.54 $ 14.07 $ 14.33 $ 15.52
------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ............ .86 .73 .94 .93 .94 .93 1.12
Net realized and unrealized gain
(loss) on investment transactions (.68) .12 .52 (.25) .47 (.26) (1.19)
------------------------------------------------------------------------------------------
Total from investment operations . .18 .85 1.46 .68 1.41 .67 (.07)
------------------------------------------------------------------------------------------
Less distributions from:
Net investment income ............ (.86) (.73) (.94) (.93) (.94) (.92) (1.12)
Tax return of capital ............ -- -- -- -- -- (.01) --
------------------------------------------------------------------------------------------
Total distributions .............. (.86) (.73) (.94) (.93) (.94) (.93) (1.12)
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Net asset value, end of period ... $14.25 $14.93 $ 14.81 $ 14.29 $ 14.54 $ 14.07 $ 14.33
------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Return (%) ................. (1.71)** 5.87** 10.44 4.81 10.20 4.94 (.64)
Ratios and Supplemental Data
Net assets, end of period ($
millions) ...................... 365 393 392 383 425 429 544
Ratio of operating expenses to
average daily net assets (%) ... .98* .94* 1.02 .96 .94 .95 .87
Ratio of net investment income to
average daily net assets (%) ... 5.91* 5.87* 6.38 6.44 6.45 6.65 7.35
Portfolio turnover rate (%) ...... 279.9(a)* 280.8(a)* 197.2(a) 188.0 157.8 220.5(a) 272.1(a)
</TABLE>
(a) The portfolio turnover rates including mortgage dollar roll transactions
were 300.9%, 289.9%, 250.8%, 255.4% and 392.5% for the periods ended July
31, 1999, January 31, 1999, March 31, 1998, 1995 and 1994, respectively.
(b) Per share amounts have been calculated using monthly average shares
outstanding.
* Annualized
** Not annualized
15 - Scudder GNMA Fund
<PAGE>
Notes to Financial Statements (Unaudited)
A. Significant Accounting Policies
Scudder GNMA Fund (the "Fund") is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end, diversified management
investment company organized as a Massachusetts business trust.
On August 10, 1998, the Board of Trustees of the Fund changed the fiscal year
end from March 31 to January 31.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.
Security Valuation. Portfolio debt securities purchased with an original
maturity greater than sixty days are valued by pricing agents approved by the
officers of the Fund, whose quotations reflect broker/dealer-supplied valuations
and electronic data processing techniques. If the pricing agents are unable to
provide such quotations, the most recent bid quotation supplied by a bona fide
market maker shall be used. Money market instruments purchased with an original
maturity of sixty days or less are valued at amortized cost. All other
securities are valued at their fair value as determined in good faith by the
Valuation Committee of the Board of Trustees.
Repurchase Agreements. The Fund may enter into repurchase agreements with
certain banks and broker/dealers whereby the Fund, through its custodian or
sub-custodian bank, receives delivery of the underlying securities, the amount
of which at the time of purchase and each subsequent business day is required to
be maintained at such a level that the market value is equal to at least the
principal amount of the repurchase price plus accrued interest.
Futures Contracts. A futures contract is an agreement between a buyer or seller
and an established futures exchange or its clearinghouse in which the buyer or
seller agrees to take or make a delivery of a specific amount of a financial
instrument at a specified price on a specific date (settlement date). During the
period, the Fund purchased interest rate futures to manage the duration of the
portfolio. In addition, the Fund also sold interest rate futures to hedge
against declines in the value of portfolio securities.
Upon entering into a futures contract, the Fund is required to deposit with a
financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Fund dependent upon
the daily fluctuations in the value of the underlying security and are recorded
for financial reporting purposes as unrealized gains or losses by the Fund. When
entering into a closing transaction, the Fund will realize a gain or loss equal
to the difference between the value of the futures contract to sell and the
futures contract to buy. Futures contracts are valued at the most recent
settlement price.
Certain risks may arise upon entering into futures contracts, including the risk
that an illiquid secondary market will limit the Fund's ability to close out a
futures contract prior to the settlement date and that a change in the value of
a futures contract may not correlate exactly with the changes in the value of
the securities or currencies hedged. When utilizing futures contracts to hedge,
the Fund gives up the opportunity to profit from favorable price movements in
the hedged positions during the term of the contract.
Mortgage Dollar Rolls. The Fund may enter into mortgage dollar rolls in which
the Fund sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase similar, but not identical, securities on
a fixed date.
16 - Scudder GNMA Fund
<PAGE>
The Fund receives compensation as consideration for entering into the commitment
to repurchase. The compensation is paid in the form of a fee which is recorded
as deferred income and amortized to income over the roll period, or
alternatively, a lower price for the security upon its repurchase. Mortgage
dollar rolls may be renewed with a new sale and repurchase price and a cash
settlement made at each renewal without physical delivery of the securities
subject to the contract.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code, as amended, which are applicable to regulated
investment companies and to distribute all of its taxable income to its
shareholders. Accordingly, the Fund paid no federal income taxes and no federal
income tax provision was required
At January 31, 1999, the Fund had a net tax basis capital loss carryforward of
approximately $18,017,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until January 31,
2003, the expiration date. In addition, from November 1, 1998 through January
31, 1999, the Fund incurred approximately $1,150,000 of net realized capital
losses. As permitted by tax regulations, the Fund elected to defer these losses
and treat them as arising in the fiscal year ended January 31, 2000.
Distribution of Income and Gains. All of the net investment income of the Fund
is declared as a daily dividend and is distributed to shareholders monthly. Net
investment income includes all realized gains (losses) on portfolio securities.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from generally accepted accounting principles. These
differences primarily relate to investments in mortgage-backed securities. As a
result, net investment income (loss) and net realized gain (loss) on investment
transactions for a reporting period may differ significantly from distributions
during such period.
Accordingly, the Fund may periodically make reclassifications among certain of
its capital accounts without impacting the net asset value of the Fund.
Investment Transactions and Investment Income. Investment transactions are
accounted for on the trade date. Interest income is recorded on the accrual
basis. Realized gains and losses from investment transactions are recorded using
the identified cost method.
B. Purchases and Sales of Securities
During the six months ended July 31, 1999, purchases and sales of investment
securities (excluding short-term investments, mortgage dollar roll transactions
and direct U.S. Government obligations) aggregated $310,950,700 and
$341,125,025, respectively. Purchases and sales of direct U.S. Government
obligations aggregated $199,520,360 and $186,663,923, respectively. Purchases
and sales of mortgage dollar roll transactions aggregated $31,867,704 and
$31,928,941, respectively.
The aggregate face value of futures contracts opened and closed during the six
months ended July 31, 1999 was $253,464,353 and $249,473,236, respectively.
17 - Scudder GNMA Fund
<PAGE>
C. Related Parties
Under the Management Agreement (the "Agreement") with Scudder Kemper
Investments, Inc. ("Scudder Kemper" or the "Adviser"), the Adviser directs the
investments of the Fund in accordance with its investment objectives, policies,
and restrictions. The Adviser determines the securities, instruments, and other
contracts relating to investments to be purchased, sold or entered into by the
Fund. In addition to portfolio management services, the Adviser provides certain
administrative services in accordance with the Agreement. The management fee
payable under the Agreement is equal to an annual rate of 0.65% on the first
$200,000,000 of the Fund's average daily net assets, 0.60% on the next
$300,000,000 of such net assets, and 0.55% of such net assets in excess of
$500,000,000, computed and accrued daily and payable monthly. For the six months
ended July 31, 1999, the fees pursuant to these agreements amounted to
$1,180,080, of which $191,220 is unpaid at July 31, 1999. This was equivalent to
an annualized effective rate of 0.63% of the Fund's average daily net assets.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend paying and shareholder service agent for the Fund. For the
six months ended July 31, 1999, the amount charged to the Fund by SSC aggregated
$284,691, of which $47,771 is unpaid at July 31, 1999.
Scudder Trust Company ("STC"), a subsidiary of the Adviser, provides
recordkeeping and other services in connection with certain retirement and
employee benefit plans invested in the Fund. For the six months ended July 31,
1999, the amount charged to the Fund by STC aggregated $81,271, of which $26,843
is unpaid at July 31, 1999.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the six months
ended July 31, 1999, the amount charged to the Fund by SFAC aggregated $60,856,
of which $21,336 is unpaid at July 31, 1999.
The Fund is one of several Scudder Funds (the "Underlying Funds") in which the
Scudder Pathway Series Portfolios (the "Portfolios") invest. In accordance with
the Special Servicing Agreement entered into by the Adviser, the Portfolios, the
Underlying Funds, SSC, SFAC, STC, and Scudder Investor Services, Inc., expenses
from the operation of the Portfolios are borne by the Underlying Funds based on
each Underlying Fund's proportionate share of assets owned by the Portfolios. No
Underlying Funds will be charged expenses that exceed the estimated savings to
each respective Underlying Fund. These estimated savings result from the
elimination of separate shareholder accounts which either currently are or have
the potential to be invested in the Underlying Funds. At July 31, 1999, the
Special Servicing Agreement expense charged to the Fund amounted to $23,349.
The Fund pays each Trustee not affiliated with the Adviser an annual retainer,
plus specified amounts for attended board and committee meetings. For the six
months ended July 31, 1999, Trustees' fees and expenses aggregated $21,358.
18 - Scudder GNMA Fund
<PAGE>
D. Line of Credit
The Fund and several Scudder Funds (the "Participants") share in a $850 million
revolving credit facility for temporary or emergency purposes, including the
meeting of redemption requests that otherwise might require the untimely
disposition of securities. The Participants are charged an annual commitment fee
which is allocated among each of the Participants. Interest is calculated based
on the market rates at the time of the borrowing. The Fund may borrow up to a
maximum of 33 percent of its net assets under the agreement.
19 - Scudder GNMA Fund
<PAGE>
This Page
intentionally
left blank.
20 - Scudder GNMA Fund
<PAGE>
Officers and Trustees
Lynn S. Birdsong*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General
Manager, WGBH Educational
Foundation
Dawn-Marie Driscoll
Trustee; President, Driscoll
Associates; Executive Fellow,
Center for Business Ethics,
Bentley College
Peter B. Freeman
Trustee; Corporate Director and
Trustee
George M. Lovejoy, Jr.
Trustee; President and Director,
Fifty Associates
Wesley W. Marple, Jr.
Trustee; Professor of Business
Administration, Northeastern
University, College of Business
Administration
Jean C. Tempel
Trustee; Managing Partner,
Technology Equity Partners
Kathryn L. Quirk*
Trustee; Vice President and
Assistant Secretary
Ann M. McCreary*
Vice President
Richard L. Vandenberg*
Vice President
John Millette*
Vice President and Secretary
John R. Hebble*
Treasurer
Caroline Pearson*
Assistant Secretary
*Scudder Kemper Investments, Inc.
21 - Scudder GNMA Fund
<PAGE>
Investment Products and Services
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series --
Prime Reserve Shares*
Premium Shares*
Managed Shares*
Scudder Government Money Market Series --
Managed Shares*
Tax Free Money Market^+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series --
Managed Shares*
Scudder California Tax Free Money Fund**
Scudder New York Tax Free Money Fund**
Tax Free^+
- ---------
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund**
Scudder Massachusetts Limited Term Tax Free Fund**
Scudder Massachusetts Tax Free Fund**
Scudder New York Tax Free Fund**
Scudder Ohio Tax Free Fund**
U.S. Income
- -----------
Scudder Short Term Bond Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
- ----------------
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder Select 500 Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment Fund
U.S. Growth
- -----------
Value
Scudder Large Company Value Fund
Scudder Value Fund***
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund***
Scudder Large Company Growth Fund
Scudder Select 1000 Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Equity
- -------------
Worldwide
Scudder Global Fund
Scudder International Value Fund
Scudder International Growth and Income Fund
Scudder International Fund++
Scudder International Growth Fund
Scudder Global Discovery Fund***
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Preferred Series
- ----------------
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small
Company Fund
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP IRA
Keogh Plan
401(k), 403(b) Plans
Variable Annuities
Scudder Horizon Plan**+++ +++
Scudder Horizon Advantage**+++ +++ +++
Education Accounts
- ------------------
Education IRA
UGMA/UTMA
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money. +++Funds within categories are listed in order from
expected least risk to most risk. Certain Scudder funds or classes thereof may
not be available for purchase or exchange. +A portion of the income from the
tax-free funds may be subject to federal, state, and local taxes. *A class of
shares of the Fund. **Not available in all states. ***Only the Scudder Shares of
the Fund are part of the Scudder Family of Funds. ++Only the International
Shares of the Fund are part of the Scudder Family of Funds. +++ +++A no-load
variable annuity contract provided by Charter National Life Insurance Company
and its affiliate, offered by Scudder's insurance agencies, 1-800-225-2470. +++
+++ +++A no-load variable annuity contract issued by Glenbrook Life and Annuity
Company and underwritten by Allstate Financial Services, Inc., sold by Scudder's
insurance agencies, 1-800-225-2470. #These funds, advised by Scudder Kemper
Investments, Inc., are traded on the New York Stock Exchange and, in some cases,
on various other stock exchanges.
22 - Scudder GNMA Fund
<PAGE>
Scudder Solutions
<TABLE>
<CAPTION>
Convenient ways to invest, quickly and reliably:
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automatic Investment Plan QuickBuy
A convenient investment program in which money is Lets you purchase Scudder fund shares
electronically debited from your bank account monthly to electronically, avoiding potential mailing delays;
regularly purchase fund shares and "dollar cost average" money for each of your transactions is
-- buy more shares when the fund's price is lower and electronically debited from a previously designated bank
fewer when it's higher, which can reduce your average account.
purchase price over time.*
Automatic Dividend Transfer Payroll Deduction and Direct Deposit
The most timely, reliable, and convenient way to Have all or part of your paycheck -- even government
purchase shares -- use distributions from one Scudder checks -- invested in up to four Scudder funds at
fund to purchase shares in another, automatically one time.
(accounts with identical registrations or the same
social security or tax identification number).
* Dollar cost averaging involves continuous investment in securities regardless of price
fluctuations and does not assure a profit or protect against loss in declining markets.
Investors should consider their ability to continue such a plan through periods of low price
levels.
Around-the-clock electronic account service and information, including some transactions:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Automated Information Line: SAIL(TM) -- Scudder's Web Site -- www.scudder.com
1-800-343-2890
Personal Investment Organizer: Offering
Personalized account information, the ability to account information and transactions, interactive
exchange or redeem shares, and information on other worksheets, prospectuses and applications for all
Scudder funds and services via touchtone telephone. Scudder funds, plus your current asset allocation,
whenever you need them. Scudder's Site also
provides news about Scudder funds, retirement
planning information, and more.
Retirees and those who depend on investment proceeds for living expenses can enjoy these convenient,
timely, and reliable automated withdrawal programs:
- ------------------------------------------------------------------------------------------------------------------------------
Automatic Withdrawal Plan QuickSell
You designate the bank account, determine the schedule Provides speedy access to your money by
(as frequently as once a month) and amount of the electronically crediting your redemption proceeds
redemptions, and Scudder does the rest. to the bank account you previously designated.
Distributions Direct
Automatically deposits your fund distributions into the
bank account you designate within three business days
after each distribution is paid.
For more information about these services, call a Scudder representative at 1-800-SCUDDER
Please address all written correspondence to: The Scudder Funds, P.O. Box 2291, Boston, Massachusetts 02107-2291
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23 - Scudder GNMA Fund
<PAGE>
About the Fund's Adviser
Scudder Kemper Investments, Inc. is one of the largest and most experienced
investment management organizations worldwide, managing more than $280 billion
in assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts.
Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded 80
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Financial Services Group. As a result, Zurich's subsidiary, Zurich
Kemper Investments, Inc., with 50 years of mutual fund and investment management
experience, was combined with Scudder. Headquartered in New York, Scudder Kemper
Investments offers a full range of investment counsel and asset management
capabilities, based on a combination of proprietary research and disciplined,
long-term investment strategies. With its global investment resources and
perspective, the firm seeks opportunities in markets throughout the world to
meet the needs of investors.
Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Financial Services Group. The Zurich Financial Services Group is
an internationally recognized leader in financial services, including
property/casualty and life insurance, reinsurance, and asset management.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
SCUDDER
