John Hancock Funds
Sovereign
U.S.
Government
Income
Fund
SEMI-ANNUAL REPORT
April 30, 1996
TRUSTEES
Edward J. Boudreau, Jr.
Chairman
Douglas M. Costle*
Leland O. Erdahl*
Richard A. Farrell*
William F. Glavin*
John A. Moore*
Patti McGill Peterson*
John W. Pratt*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President
Thomas H. Drohan
Senior Vice President and Secretary
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President, Assistant Secretary and Compliance Officer
James J. Stokowski
Vice President and Treasurer
CUSTODIAN
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
TRANSFER AGENT
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
A 1" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.
Chairman's Message
DEAR FELLOW SHAREHOLDERS:
The stock market's record-breaking, whirlwind performance in 1995 will
be a tough act to follow in 1996. In fact, we've already seen greater
market volatility this year, particularly among last year's leaders --
technology stocks. That's to be expected after a year that saw market
indexes soar, including the Standard & Poor's 500-Stock Index's 37%
advance. While many of the same economic conditions that fostered the
stellar 1995 market are still in place -- slow economic growth, muted
inflation and decent corporate earnings -- it would be unrealistic to
expect the market to stage a repeat in 1996. The old saying "trees don't
grow to the sky" comes to mind. Shareholders would do well to temper
expectations of investment returns and perhaps revisit their investment
allocations with their financial advisor to determine if
rebalancing their portfolio makes sense.
No matter how you scale back your market expectations, you should always
be able to count on consistent customer service performance. At John
Hancock Funds, we never stop working to find ways to sustain and improve
the quality of information and assistance we provide you. Our commitment
to this task is no less than John Hancock's loyalty was to his fledgling
country when he is said to have uttered, "if it does the public good,
burn Boston." We won't go that far, of course, but we share our
namesake's dedication to putting the public before all else.
In our case, that public is you, our shareholders. We take very
seriously the role you have entrusted to us, that of helping you achieve
your financial goals. Part of that will always involve good customer
service. So please do not hesitate to call your Customer Service
Representative at 1-800-225-5291 if you have any questions or need
information. We take pride in helping you with the same spirit that John
Hancock displayed at the dawning of America.
Sincerely,
/S/ EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
By Barry H. Evans, Portfolio Manager
John Hancock Sovereign
U.S. Government
Income Fund
Bond market reverses course; prices tumble
in early '96 as inflation fears resurface
In 1995, the bond market could do no wrong. Interest rates fell and bond
prices climbed, thanks to signs that the economy was slowing and
Congress was approaching a budget agreement. By late December, the
government shutdown and blizzard conditions along the Eastern seaboard
had further helped to slow the economy and lower inflation expectations.
This was positive news for bond investors, who hate inflation because it
erodes the value of fixed-income investments. Anticipating that the
Federal Reserve would have to lower short-term interest rates to
stimulate the economy, investors pushed bond prices higher.
But the bond market's ride came to an abrupt end in mid-January when it
looked like there would be no budget accord. Rising gold prices and the
possibility of higher wages exacerbated downward pressure on bond
prices. In January, the Fed's cut in short-term rates gave bonds a
temporary boost. But investors remained concerned. When economic news
was stronger than expected in late February and early March, bond prices
again took a dive. Prices fell further in April, as investors worried
about rising commodity prices and the possibility of a Fed rate hike.
A 2 1/4" x 3 1/4" photo of the Sovereign U.S. Government Income Fund
Portfolio Management Team. Caption reads: "Barry H. Evans (seated) and
Fund Management team members Roger Hamilton (center) and Seth Robbins
(right)."
"...the bond
market's
ride came
to an abrupt
end in mid-
January..."
The market's slide hurt most U.S. government bond funds, including John
Hancock Sovereign U.S. Government Income Fund. For the six months ended
April 30, 1996, the Fund's Class A and Class B shares had total returns
of -0.46% an -0.79% respectively, at net asset value. That compared to
the average general U.S. government fund's return of -0.60%, according
to Lipper Analytical Services.1
"In place
of Treasuries, we bought
mortgage-
backed
securities..."
Good news = bad news?
Bond shareholders often ask us why it is that good economic news spells
bad bond news. It seems like a paradox, but it's true that economic data
that is too good and too strong generally works against bondholders.
That's because a faster-growing economy provokes fears of renewed
inflation and rising interest rates. Since bond prices move in the
opposite direction from interest rates, a jump in interest rates, as we
have seen recently, tends to cause a drop in bond prices, and,
consequently, in the share price of a bond mutual fund. This doesn't
change the fact that shareholders still receive a stream of income from
the bonds held by the fund. In fact, that income stream could rise if
the fund buys newer bonds with higher yields. It's just that the
offsetting drop in bond prices creates a drag on the fund's net asset
value, or share price.
Treasury stake decreases,
while mortgages grow
We began the period with a heavy stake in interest-sensitive U.S.
Treasuries, which tend to outperform other government bonds when rates
are falling quickly. During November and December, we added 30-year
Treasuries which benefited from the prospect of a balanced budget. But
when budget talks failed in January, 30-year Treasuries took a hard hit
and hurt the Fund's performance. In late January and early February, we
sold long-term Treasuries to avoid additional losses. By the end of
April, we'd pared our Treasury investments from 61% of the Fund's assets
down to 53%.
To further protect the Fund, we also started hedging in January. A hedge
simply involves entering into a contract to sell a Treasury bond or note
at a future date and a future price. A futures contract gives us several
advantages. First, it allows us to lock in a selling price, while
keeping the income in the Fund. This reduces interest-rate risk (or the
risk that the bond or note's price will fall as rates rise). Second,
futures are easy to buy and sell quickly. If we think interest rates
have peaked, we can quickly sell the futures and restructure the Fund to
benefit from falling rates. Third, futures are inexpensive to trade. At
the end of April, about 7% of the Fund's assets were hedged. That meant
the Fund's 53% stake in Treasuries actually behaved like a 46% stake.
In place of the Treasuries, we bought mortgage-backed securities, mainly
GNMA fixed-rate mortgages with 7-1/2% coupons (or stated interest
rates). Mortgages offer a slightly higher yield than Treasuries to
compensate investors for prepayment risk -- the risk that homeowners
will prepay their mortgages and refinance at a lower rate. As expected,
mortgages started doing well once rates stopped falling and prepayments
slowed. In fact, mortgages outpaced Treasuries, with the Merrill Lynch
General Mortgage Index returning 1.64% for the six months ended April
30, 1996, compared to 0.05% for the Merrill Lynch General Government
Index.
Over the same six months, we grew our stake in mortgage bonds to 49% of
the Fund's assets, up from 32%. We reduced collateralized mortgage
obligations (CMOs) to 10% of the Fund's assets, favoring instead higher
yielding fixed-rate mortgage bonds. CMOs separate cash flows of mortgage
pools into different classes with various maturities and risk levels.
Bar chart with heading "Fund Performance" at top of left hand column.
Under the heading is the footnote: "For the six months ended April 30,
1996." The chart is scaled in increments of 5% from top to bottom, with
5% at the top and -5% at the bottom. Within the chart, there are three
solid bars. The first represents the -0.46% total return for John
Hancock Sovereign U.S. Government Income Fund: Class A. The second
represents the -0.79% total return for John Hancock Sovereign U.S.
Government Income Fund: Class B. The third represents the -0.60% total
return for the average U.S. government fund. Footnote below reads:
"Total returns for John Hancock Sovereign U.S. Government Income Fund
are at net asset value with all distributions reinvested. The average
general U.S. government fund is tracked by Lipper Analytical
Services.(1) See following page for historical performance information."
These changes all helped shorten the Fund's duration -- a measure of
interest-rate sensitivity. A shorter duration means a bond's price will
fall less as interest rates rise (or rise less as rates fall). Between
November and January, the Fund's duration was as high as 5.5 years.
Although this long duration initially helped performance, it hurt us
early in the new year. By mid-February, however, the Fund's duration was
five years. This neutral or slightly defensive position helped protect
the Fund's share price during the volatile months that followed.
A look ahead
We're not worried about inflation; we are worried about the perception
of inflation. The economy is still growing slower than it has in past
expansions. And we don't have the extreme shortages of labor and
production capacity that have traditionally signaled inflation. We do,
however, see commodity prices creeping up and Congressional leaders
pushing for a minimum wage hike. This combination increases the
probability of further inflation fears.
As inflation concerns escalate, we may see investors pushing Treasury
prices down in anticipation of a Fed rate hike. We'd view this as a
buying opportunity since we believe any move by the Fed to raise rates
would be short lived. Even if rates do rise, we believe higher rates
will eventually slow the economy. Once that happens, rates should come
down. In the meantime, we'll be watching employment trends, consumer
sales and commodity prices for signs that the economy is slowing.
"The economy
is still
growing
slower than it
has in past
expansions."
As bond investors struggle with which way the economy is going, what
course the Federal Reserve will pursue and who will win the election, we
expect more volatility. In this environment, we'll focus on boosting
income and protecting the Fund's share price. To do this, we'll keep a
neutral or slightly short duration, with hedges on our Treasury bonds
and notes and an above-average stake in mortgages.
This commentary reflects the views of the portfolio manager through the
end of the Fund's period discussed in this report. Of course, the
manager's views are subject to change as market and other conditions
warrant.
1Figures from Lipper Analytical Services include reinvested dividends
and do not take into account sales charges. Actual load-adjusted
performance is lower.
The tables on the right show the cumulative total returns and the
average annual total returns for the John Hancock Sovereign U.S.
Government Income Fund. Total return is a performance measure that
equals the sum of all income and capital gain distributions, assuming
reinvestment of these distributions and the change in the price of the
Fund's shares, expressed as a percentage of the Fund's average net
assets. Performance figures include the maximum applicable sales charge
of 4.50% for Class A shares. The effect of the maximum contingent
deferred sales charge for Class B shares (maximum 5% and declining to 0%
over six years) is included in Class B performance. Remember that all
figures represent past performance and are no guarantee of how the Fund
will perform in the future. Also, keep in mind that the total return and
share price of the Fund's investments will fluctuate. As a result, your
Fund's shares may be worth more or less than their original cost,
depending on when you sell them.
A LOOK AT PERFORMANCE
CUMULATIVE TOTAL RETURNS
For the period ended March 31, 1996
One Five Life of
Year Years Fund
-------- -------- --------
John Hancock
Sovereign U.S. Government
Income Fund: Class A(1) 5.15% N/A 22.04%
John Hancock
Sovereign U.S. Government
Income Fund: Class B(2) 4.84% 38.34% 109.60%
AVERAGE ANNUAL TOTAL RETURNS
For the period ended March 31, 1996
One Five Life of
Year Years Fund
-------- -------- --------
John Hancock
Sovereign U.S. Government
Income Fund: Class A(1) 5.15% N/A 4.81%
John Hancock
Sovereign U.S. Government
Income Fund: Class B(2) 4.84% 6.71% 7.83%
YIELDS
As of April 30, 1996
SEC 30-Day
Yield
----------
John Hancock
Sovereign U.S. Government
Income Fund: Class A 5.67%
John Hancock
Sovereign U.S. Government
Income Fund: Class B 5.23%
Notes to Performance
(1)Class A shares commenced on January 3, 1992.
(2)Class B shares commenced on June 5, 1986.
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John
Hancock Sovereign U.S. Government Income Fund would be worth on April
30, 1996, assuming you had invested on the day each class of shares
started and reinvested all distributions. For comparison, we've shown
the same $10,000 investment in the Lehman Government Bond Index -- an
unmanaged index that measures the performance of U.S. Treasury bonds and
U.S. Government Agency bonds.
Sovereign U.S. Government Income Fund
Class A shares
Line chart with the heading Sovereign U.S. Government Income Fund: Class A,
representing the growth of a hypothetical $10,000 investment over the life
of the fund. Within the chart are three lines.
The first line represents the value of the Lehman Government Index and is
equal to $12,877 as of April 30, 1996. The second line represents the
value of the hypothetical $10,000 investment made in the Sovereign U.S.
Government Income Fund on January 3, 1992, before sales charge, and is
equal to $12,699 as of April 30, 1996. The third line represents the
Sovereign U.S. Government Income Fund after sales charge and is equal
to $12,122 as of April 30, 1996.
Sovereign U.S. Government Income Fund
Class B shares
Line chart with the heading Sovereign U.S. Government Income Fund: Class B*,
representing the growth of a hypothetical $10,000 investment over the life
of the fund. Within the chart are two lines.
The first line represents the value of the Lehman Government Index and is
equal to $21,511 as of April 30, 1996. The second line represents the
value of the hypothetical $10,000 investment made in the Sovereign U.S.
Government Income Fund on June 5, 1986, before contingent deferred sales
charge, and is equal to $20,812 as of April 30, 1996.
*No contingent deferred sales charge applicable.
<TABLE>
<CAPTION>
Financial Statements
John Hancock - Sovereign U.S. Government Income Fund
The Statement of Assets and Liabilities is the Fund's balance sheet and shows the
value of what the Fund owns, is due and owes on April 30, 1996. You'll also find
the net asset value and the maximum offering price per share as of that date.
Statement of Assets and Liabilities
April 30, 1996 (Unaudited)
- ---------------------------------------------------------------------
<S> <C>
Assets:
Investments at value - Note C:
United States government and agencies
securities (cost - $477,485,135) $478,669,028
Joint repurchase agreement (cost - $18,242,000) 18,242,000
Corporate savings account 37,724
------------
496,948,752
Receivable for shares sold 31,809
Receivable for variation margin 363,000
Interest receivable 6,177,947
Other assets 38,770
-----------
Total Assets 503,560,278
- ---------------------------------------------------------------------
Liabilities:
Payable for investments purchased 39,706,866
Dividend payable 82,176
Payable for shares repurchased 25,811
Payable to John Hancock Advisers, Inc.
and affiliates - Note B 257,620
Accounts payable and accrued expenses 156,607
-----------
Total Liabilities 40,229,080
- ---------------------------------------------------------------------
Net Assets:
Capital paid-in 510,625,370
Accumulated net realized loss on investments,
options and financial futures contracts (49,659,746)
Net unrealized appreciation of investments
and financial futures contracts 2,435,431
Distributions in excess of net investment income (69,857)
-----------
Net Assets $463,331,198
=====================================================================
Net Asset Value Per Share:
(Based on net assets and shares of beneficial
interest outstanding - unlimited number of shares
authorized with no par value, respectively)
Class A - $343,842,339 / 35,639,821 $9.65
=====================================================================
Class B - $119,488,859 / 12,395,819 $9.64
=====================================================================
Maximum Offering Price Per Share:*
Class A -- ($9.65 x 104.71%) $10.10
=====================================================================
*On single retail sales of less than $100,000. On sales of $100,000
or more and on group sales the offering price is reduced.
</TABLE>
<TABLE>
<CAPTION>
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Six months ended April 30, 1996 (Unaudited)
- ----------------------------------------------------------------------
<S> <C>
Investment Income:
Interest $18,482,356
-----------
Expenses:
Investment management fee - Note B 1,222,973
Distribution/service fee - Note B
Class A 542,867
Class B 604,709
Transfer agent fee - Note B 628,193
Custodian fee 45,845
Trustees' fees 36,919
Printing 36,784
Auditing fee 19,955
Legal fees 12,521
Registration and filing fees 10,488
Miscellaneous 8,891
----------
Total Expenses 3,170,145
- ----------------------------------------------------------------------
Net Investment Income 15,312,211
- ----------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Financial Futures Contracts:
Net realized loss on investments sold (2,642,291)
Net realized loss on options (17,525)
Net realized gain on financial futures contracts 749,933
Change in net unrealized appreciation/depreciation
of investments (17,577,474)
Change in net unrealized appreciation/depreciation
of financial futures contracts 1,880,375
----------
Net Realized and Unrealized Loss
on Investments, Options and
Financial Futures Contracts (17,606,982)
- ----------------------------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations ($2,294,771)
======================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
April 30, 1996 OCTOBER 31,
(UNAUDITED) 1995
------------ ------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $15,312,211 $33,146,878
Net realized loss on investments sold, options and
financial futures contracts (1,909,883) (30,917,795)
Change in net unrealized appreciation/depreciation
of investments and financial futures contracts (15,697,099) 71,309,862
------------ ------------
Net Increase (Decrease) in Net Assets Resulting
from Operations (2,294,771) 73,538,945
------------ ------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.3193 and $0.6504 per share,
respectively) (11,622,589) (22,638,537)
Class B - ($0.2868 and $0.5970 per share,
respectively) (3,677,290) (10,503,561)
------------ ------------
Total Distributions to Shareholders (15,299,879) (33,142,098)
------------ ------------
From Fund Share Transactions - Net* (20,863,884) (50,878,110)
------------ ------------
Net Assets:
Beginning of period 501,789,732 512,270,995
------------ ------------
End of period (including distributions in
excess of net investment income of $69,857 and
$82,189, respectively) $463,331,198 $501,789,732
============ ============
* Analysis of Fund Share Transactions: SIX MONTHS ENDED APRIL 30, 1996 YEAR ENDED
(UNAUDITED) OCTOBER 31, 1995
-------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
CLASS A --------- ----------- ----------- ------------
Shares sold 1,993,716 $19,983,128 7,317,218 $72,500,554
Shares issued to shareholders in reinvestment
of distributions 925,272 9,213,836 2,046,427 19,655,465
--------- ----------- ----------- ------------
2,918,988 29,196,964 9,363,645 92,156,019
Less shares repurchased (4,328,436) (43,290,969) (6,449,531) (62,018,777)
--------- ----------- ----------- ------------
Net increase (decrease) (1,409,448) ($14,094,005) 2,914,114 $30,137,242
========= =========== ========== ===========
CLASS B
Shares sold 658,115 $6,625,557 1,566,023 $15,058,524
Shares issued to shareholders in
reinvestment of distributions 200,161 1,992,378 622,218 5,939,906
--------- ----------- ----------- ------------
858,276 8,617,935 2,188,241 20,998,430
Less shares repurchased (1,542,777) (15,387,814) (10,444,168) (102,013,782)
--------- ----------- ----------- ------------
Net decrease (684,501) ($6,769,879) (8,255,927) ($81,015,352)
========= =========== ========== ===========
The Statement of Changes in Net Assets shows how the value of the Fund's net assets has changed since the end of the previous
period. The difference reflects earnings less expenses, any investment gains and losses, distributions paid to shareholders,
and any increase or decrease in the amount of money shareholders invested in the Fund. The footnote illustrates the number
of Fund shares sold, reinvested and redeemed during the last two periods, along with the corresponding dollar values.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout the periods indicated, investment returns,
key ratios and supplemental data are as follows:
- -------------------------------------------------------------------------------------------------------------------------
SIX MONTHS END YEAR ENDED OCTOBER 31,
APRIL 30, 1996 -------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992(a)
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $10.01 $9.24 $10.89 $10.29 $10.51
-------- -------- -------- -------- --------
Net Investment Income 0.32 0.65 0.65 0.68** 0.64
Net Realized and Unrealized Gain (Loss) on
Investments and
Financial Futures Contracts (0.36) 0.77 (1.34) 0.61 (0.22)
-------- -------- -------- -------- --------
Total from Investment Operations (0.04) 1.42 (0.69) 1.29 0.42
-------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income (0.32) (0.65) (0.65) (0.68) (0.64)
Distributions from Net Realized Gain on
Investments Sold -- -- (0.31) (0.01) --
-------- -------- -------- -------- --------
Total Distributions (0.32) (0.65) (0.96) (0.69) (0.64)
-------- -------- -------- -------- --------
Net Asset Value, End of Period $9.65 $10.01 $9.24 $10.89 $10.29
======== ======== ======== ======== ========
Total Investment Return at Net Asset Value (b) (0.46%)(c) 15.90% (6.66%) 12.89% 5.33%(c)
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) $343,842 $370,966 $315,372 $375,416 $350,907
Ratio of Expenses to Average Net Assets 1.13%* 1.17% 1.23% 1.30% 1.06%*
Ratio of Net Investment Income to Average Net Assets 6.43%* 6.76% 6.62% 6.47% 7.11%*
Portfolio Turnover Rate 51% 94% 127% 273% 140%
The Financial Highlights summarizes the impact of the following factors on a single share for the period indicated: the net
investment income, net realized and unrealized gains (losses), distributions and total investment return of the Fund. It
shows how the Fund's net asset value for a share has changed since the end of the previous period. Additionally, important
relationships between some items presented in the financial statements are expressed in ratio form.
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights (Continued)
- ----------------------------------------------------------------------------------------------------------------------
SIX MONTHS END YEAR ENDED OCTOBER 31,
APRIL 30, 1996 -----------------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992 1991(a)
-------- -------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $10.00 $9.23 $10.88 $10.28 $10.29 $9.83
-------- -------- -------- -------- ------- ------
Net Investment Income 0.29 0.60 0.61 0.66** 0.76 0.85
Net Realized and Unrealized Gain (Loss)
on Investments
and Financial Futures Contracts (0.36) 0.77 (1.34) 0.61 -- 0.51
-------- -------- -------- -------- ------- ------
Total from Investment Operations (0.07) 1.37 (0.73) 1.27 0.76 1.36
-------- -------- -------- -------- ------- ------
Less Distributions:
Dividends from Net Investment Income (0.29) (0.60) (0.61) (0.66) (0.77) (0.90)
Distributions from Net Realized Gain on
Investments Sold -- -- (0.31) (0.01) -- --
-------- -------- -------- -------- ------- ------
Total Distributions (0.29) (0.60) (0.92) (0.67) (0.77) (0.90)
-------- -------- -------- -------- ------- ------
Net Asset Value, End of Period $9.64 $10.00 $9.23 $10.88 $10.28 $10.29
======== ======== ======== ======== ======= ======
Total Investment Return at Net Asset
Value (b) (0.79%)(c) 15.27% (7.05%) 12.66% 7.58%(c) 14.46%
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) $119,489 $130,824 $196,899 $244,133 $197,032 $164,347
Ratio of Expenses to Average Net Assets 1.78%* 1.72% 1.64% 1.51% 1.55%* 1.51%
Ratio of Net Investment Income to
Average Net Assets 5.78%* 6.24% 6.19% 6.23% 7.35%* 8.53%
Portfolio Turnover Rate 51% 94% 127% 273% 140% 62%
* On an annualized basis.
** On average month end shares outstanding.
(a) Class A shares commenced operations on January 3, 1992.
(b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) Not annualized.
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Schedule of Investments
April 30, 1996 (Unaudited)
- -------------------------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by Sovereign U.S. Government Income Fund on
April 30, 1996. It's divided into two main categories: U.S. government and agencies obligations and short-term
Investments. Short-term investments, which represent the Fund's "cash" position, are listed last.
PAR VALUE
INTEREST MATURITY (000'S MARKET
ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- -------------------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
John Hancock Funds - Sovereign U.S. Government Income Fund
U.S. GOVERNMENT AND AGENCIES SECURITIES
Governmental -- U.S. (52.71%)
United States Treasury, Note 9.250% 8/15/98 $25,000 $26,644,500
United States Treasury, Note 9.125 5/15/99 17,000 18,328,040
United States Treasury, Bond 10.750 8/15/05 58,385 74,431,534
United States Treasury, Bond * 9.250 2/15/16 63,000 77,607,810
United States Treasury, Bond 8.125 8/15/19 42,300 47,217,375
-----------
244,229,259
-----------
Governmental -- U.S. Agencies (50.60%)
Federal Home Loan Mortgage Corp.,
CMO REMIC 1064-D 8.250 8/15/19 2,232 2,247,214
CMO REMIC 1122-E 8.000 5/15/20 5,638 5,729,498
CMO REMIC 1142-H 7.950 12/15/20 10,000 10,178,100
Federal National Mortgage Association,
15 Yr Pass Thru Ctf 6.500 2/15/11 10,000 9,684,300
30 Yr Pass Thru Ctf 9.000 2/1/10 9,347 9,808,662
30 Yr Pass Thru Ctf 6.500 3/1/11 13,206 12,788,685
30 Yr Pass Thru Ctf 7.000 5/1/24 19,163 18,474,236
30 Yr Pass Thru Ctf 8.000 10/1/24 8,446 8,527,407
GTD REMIC Pass Thru Ctf 1990-42-E 9.800 5/25/19 4,995 5,019,540
GTD REMIC Pass Thru Ctf 1991-76-M 9.000 7/25/06 5,000 5,121,850
GTD REMIC Pass Thru Ctf 1991-159-C 7.000 10/25/04 14,125 14,288,679
GTD REMIC Pass Thru Ctf 1991-G8-E 9.000 4/25/21 6,000 6,281,250
GTD REMIC Pass Thru Ctf G 17-B 8.750 9/25/19 688 690,782
Multicurrency PERLS + 11.450 7/10/96 1,000 405,000
Financing Corp.,
Bond Ser C 9.800 11/30/17 7,000 8,815,590
Government National Mortgage Association,
30 Yr Pass Thru Ctf ++ 7.000 06-15-23 to 18,686 18,026,055
3/15/26
30 Yr Pass Thru Ctf ++ 7.500 01-15-23 to 58,326 57,744,940
3/15/26
30 Yr Pass Thru Ctf 8.000 1/15/25 9,278 9,397,250
30 Yr Pass Thru Ctf 8.500 1/15/25 29,904 30,893,981
Governmental -- U.S. Agencies (continued)
Student Loan Marketing Association,
Multicurrency PERLS + 10.000% 11/19/96 $1,000 $271,250
Multicurrency PERLS + 11.100 4/7/97 200 45,500
------------
234,439,769
------------
TOTAL U.S. GOVERNMENT AND
AGENCIES SECURITIES
(Cost $477,485,135) (103.31%) 478,669,028
------- ------------
SHORT TERM INVESTMENTS
Joint Repurchase Agreement (3.94%),
Investment in a joint repurchase agreement transaction with
SBC Capital Markets Inc., Dated 4-30-96, Due 5-01-96
(secured by U.S. Treasury Bonds, 7.25% Due 05-15-16,
U.S. Treasury Bond, 10.375% Due 11-15-12) Note A 5.330% 5/1/96 18,242 18,242,000
------------
Corporate Savings Account (0.01%),
Investors Bank & Trust Company Daily Interest Savings
Account Current Rate 4.750% 37,724
------------
TOTAL SHORT-TERM INVESTMENTS (3.95%) 18,279,724
------- ------------
TOTAL INVESTMENTS (107.26%) $496,948,752
======= ============
* U.S. Treasury Bonds with a value of $2,342,401 owned by the Fund were designated as margin deposits for future
contracts at April 30, 1996.
The percentage shown for each investment category is the total value of that category as a percentage of the net
assets of the Fund.
+ Principal Exchange Rate Linked Securities (PERLS). PERLS are debt instruments that are denominated in U.S.
dollars and pay interest in U.S. dollars, but whose principal repayments are linked to the performance of the
U.S. dollar versus a foreign currency. If the foreign currency gains value against the U.S. dollar when the
PERL matures, redemption will be at a premium. The redemption will be at a discount if the foreign dollar
loses value against the U.S. dollar. As of 4/30/96, the Fund has PERLS with a total cost of $2,244,963 and a
total value of $721,750, or 0.16% of the the Fund's total net assets.
++ These securities having an aggregate value of $39,081,000 or 8.43% of the Fund's net assets, have been purchased
on a when issued basis. The purchase price and the interest rate of such securities are fixed at trade date,
although the Fund does not earn any interest on such securities until settlement date. The fund has instructed its
Custodian Bank to segregate assets with a current value at least equal to the amount of its when issued commitments.
Accordingly, the market values of $10,565,576 of U.S. Treasury Note, 9.125%, 05-15-99, $10,652,730 of Federal
National Mortgage Association, 6.5%, 03-01-11, and $23,441,250 of U.S. Treasury Bond, 8.125%, 08-15-19 have been
segregated to cover the when issued commitments.
See notes to financial statements
</TABLE>
Notes to Financial Statements
John Hancock Funds - Sovereign U.S. Government Income Fund
(UNAUDITED)
NOTE A --
ACCOUNTING POLICIES
Freedom Investment Trust (the "Trust") is an open-end management
investment company registered under the Investment Company Act of 1940.
The Trust consists of six series portfolios: John Hancock Sovereign U.S.
Government Income Fund (the "Fund"), John Hancock Gold & Government
Fund, John Hancock Regional Bank Fund, John Hancock Disciplined Growth
Fund, John Hancock Managed Tax-Exempt Fund and John Hancock Financial
Industries Fund (which commenced operations on March 14, 1996). Prior to
April 1, 1996, John Hancock Disciplined Growth Fund was known as John
Hancock Sovereign Achievers Fund. The investment objective of the Fund
is to provide as high a level of income as is consistent with long-term
total return by investing in securities issued, guaranteed or
otherwise backed by the United States government, its agencies or
instrumentalities.
The Trustees have authorized the issuance of two classes of the Fund,
designated as Class A and Class B. The shares of each class represent an
interest in the same portfolio of investments of the Fund and have equal
rights to voting, redemption, dividends, and liquidation, except that
certain expenses, subject to the approval of the Trustees, may be
applied differently to each class of shares in accordance with current
regulations of the Securities and Exchange Commission and the Internal
Revenue Service. Shareholders of a class which bears
distribution/service expenses under the terms of a distribution plan,
have exclusive voting rights regarding such distribution plan.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued
on the basis of market quotations, valuations provided by independent
pricing services or, at fair value as determined in good faith in
accordance with procedures approved by the Trustees. Short-term debt
investments maturing within 60 days are valued at amortized cost which
approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other
registered investment companies having a management contract with John
Hancock Advisers, Inc. (the "Adviser"), a wholly-owned subsidiary of The
Berkeley Financial Group, may participate in a joint repurchase
agreement transaction. Aggregate cash balances are invested in one or
more repurchase agreements, whose underlying securities are obligations
of the U.S. government and/or its agencies. The Fund's custodian bank
receives delivery of the underlying securities for the joint account on
the Fund's behalf. The Adviser is responsible for ensuring that the
agreement is fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the
date of purchase, sale or maturity. Net realized gains and losses on
sales of investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the
requirements of the Internal Revenue Code that are applicable to
regulated investment companies and to distribute all of its taxable
income, including any net realized gain on investment, to its
shareholders. Therefore, no federal income tax provision is required.
For federal income tax purposes, the Fund has $43,025,223 of capital
loss carryforwards available, to the extent provided by regulations, to
offset future net realized capital gains. If such carryforwards are
used by the Fund, no capital gain distribution will be made. The
carryforwards expire as follows: October 31, 1998 - $282,637, October
31, 2002 - $16,549,431 and October 31, 2003 - $26,193,155.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment
securities is recorded on the ex-dividend date. Interest income on
investment securities is recorded on the accrual basis.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions
are determined in conformity with income tax regulations, which may
differ from generally accepted accounting principles. Dividends paid by
the Fund with respect to each class of shares will be calculated in the
same manner, at the same time and will be in the same amount, except for
the effect of expenses that may be applied differently to each class as
explained previously.
USE OF ESTIMATES The preparation of these financial statements in
accordance with generally accepted accounting principles incorporates
estimates made by management in determining the reported amounts of
assets, liabilities, revenues and expenses of the Fund.
EXPENSES The majority of the expenses of the Trust are directly
identifiable to an individual Fund. Expenses which are not readily
identifiable to a specific Fund are allocated in such manner as deemed
equitable, taking into consideration, among other things, the nature and
type of expense and the relative sizes of the Funds.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized
gains (losses) are calculated at the Fund level and allocated daily to
each class of shares based on the appropriate net assets of the
respective classes. Transfer agent expenses and distribution/service
fees if any, are calculated daily at the class level based on the
appropriate net assets of each class and the specific expense rate(s)
applicable to each class.
DISCOUNT ON SECURITIES The Fund accretes discount from par value on
securities from either the date of issue or the date of purchase over
the life of the security, as required by the Internal Revenue Code.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts for speculative purposes and/or to hedge against the effects
of fluctuations in interest rates, currency exchange rates and other
market conditions. At the time the Fund enters into a financial futures
contract, it will be required to deposit with its custodian a specified
amount of cash or U.S. government securities, known as "initial margin",
equal to a certain percentage of the value of the financial futures
contract being traded. Each day, the futures contract is valued at the
official settlement price on the board of trade or U.S. commodities
exchange. Subsequent payments, known as "variation margin", to and from
the broker are made on a daily basis as the market price of the
financial futures contract fluctuates. Daily variation margin
adjustments, arising from this "mark to market", will be recorded by the
Fund as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks
of entering into futures contracts include the possibility that there
may be an illiquid market and/or that a change in the value of the
contracts may not correlate with changes in the value of the underlying
securities. In addition, the Fund could be prevented from opening or
realizing the benefits of closing out futures positions because of
position limits or limits on daily price fluctuation imposed by an
exchange.
For federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures
contracts.
At April 30, 1996, open positions in financial futures contracts were as
follows:
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION APPRECIATION
- ----------- -------------- -------- ------------
June 1996 318 Treasury Bond Short $1,200,844
June 1996 385 Treasury Note Short 49,219
----------
$1,250,063
==========
At April 30, 1996, the Fund has deposited in a segregated account
$1,901,500 par value of U.S. Treasury Bond, 9.25%,
02-15-16, to cover margin requirements on open futures contracts.
OPTIONS Listed options will be valued at the last quoted sales price on
the exchange on which they are primarily traded. Purchased put or call
over-the-counter options will be valued at the average of the "bid"
prices obtained from two independent brokers. Written put or call over-
the-counter options will be valued at the average of the "asked" prices
obtained from two independent brokers. Upon the writing of a call or put
option, an amount equal to the premium received by the Fund will be
included in the Statement of Assets and Liabilities as an asset and
corresponding liability. The amount of the liability will be
subsequently marked-to-market to reflect the current market value of the
written option.
The Fund may use option contracts to manage its exposure to the stock
market. Writing puts and buying calls will tend to increase the Fund's
exposure to the underlying instrument and buying puts and writing calls
will tend to decrease the Fund's exposure to the underlying instrument,
or hedge other Fund investments.
The maximum exposure to loss for any purchased options will be limited
to the premium initially paid for the option. In all other cases, the
face (or "notional") amount of each contract at value will reflect the
maximum exposure of the Fund in these contracts, but the actual exposure
will be limited to the change in value of the contract over the period
the contract remains open.
Risks may also arise if counterparties do not perform under the
contract's terms ("credit risk"), or if the Fund is unable to offset a
contract with a counterparty on a timely basis ("liquidity risk").
Exchange-traded options have minimal credit risk as the exchanges act as
counterparties to each transaction, and only present liquidity risk in
highly unusual market conditions. To minimize credit and liquidity risks
in over-the-counter option contracts, the Fund will continuously monitor
the creditworthiness of all its counterparties.
At any particular time, except for purchased options, market or credit
risk may involve amounts in excess of those reflected in the Fund's
period-end Statement of Assets and Liabilities.
There were no written option transactions for the period ended April 30,
1996.
NOTE B --
MANAGEMENT FEE AND TRANSACTIONS WITH
AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a
monthly management fee to the Adviser for a continuous investment
program equivalent, on an annual basis, to the sum of (a) 0.50% of the
first $500,000,000 of the Fund's average daily net asset value, and (b)
0.45% of the Fund's average daily net asset value in excess of
$500,000,000.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive
state limit where the Fund is registered to sell shares of beneficial
interest, the fee payable to the Adviser will be reduced to the extent
of such excess and the Adviser will make additional arrangements
necessary to eliminate any remaining excess expenses. The current limits
are 2.5% of the first $30,000,000 of the Fund's average daily net asset
value, 2.0% of the next $70,000,000, and 1.5% of the remaining average
daily net asset value.
John Hancock Funds, Inc. ("JH Funds"), a wholly-owned subsidiary of the
Adviser, and Freedom Distributors Corporation ("FDC") act as Co-
Distributors for shares of the Fund. For the period ended April 30,
1996, net sales charges received on sales of Class A shares of the Fund
amounted to $249,678. Out of this amount, $25,897 was retained and used
for printing prospectuses, advertising, sales literature, and other
purposes, $65,583 was paid as sales commissions to unrelated broker-
dealers and $158,198 was paid as sales commissions to sales personnel of
John Hancock Distributors, Inc. ("Distributors"), Tucker Anthony,
Incorporated ("Tucker Anthony") and Sutro & Co., Inc. ("Sutro"), all of
which are broker-dealers. The Adviser's indirect parent, John Hancock
Mutual Life Insurance Company, is the indirect sole shareholder of
Distributors and John Hancock Freedom Securities Corporation and its
subsidiaries, which include FDC, Tucker Anthony and Sutro.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining
rates beginning at 5.0% of the lesser of the current market value at the
time of redemption or the original purchase cost of the shares being
redeemed. Proceeds from the CDSC are paid to JH Funds and are used in
whole or in part to defray its expenses related to providing
distribution related services to the Fund in connection with the sale of
Class B shares. For the period ended April 30, 1996 the contingent
deferred sales charges received by JH Funds amounted to $192,190.
In addition, to compensate the Co-Distributors for the services they
provide as distributors of shares of the Fund, the Fund has adopted
Distribution Plans with respect to Class A and Class B pursuant to Rule
12b-1 under the Investment Company Act of 1940. Accordingly, the Fund
will make payments to the Co-Distributors for distribution and service
expenses, at an annual rate not exceed 0.30% of Class A average daily
net assets and 1.00% of Class B average daily net assets to reimburse
the Co-Distributors for their distribution/service costs. Up to a
maximum of 0.25% of such payments may be service fees as defined by the
amended Rules of Fair Practice of the National Association of Securities
Dealers. Under the amended Rules of Fair Practice, curtailment of a
portion of the Fund's 12b-1 payments could occur under certain
circumstances
The Fund has a transfer agent agreement with John Hancock Investor
Services, Inc. ("Investor Services"), a wholly-owned subsidiary of The
Berkeley Financial Group. The Fund pays transfer agent fees based on the
number of shareholder accounts and certain out-of-pocket expenses.
Mr. Edward J. Boudreau, Jr. is a director and officer of the Adviser,
and its affiliates, as well as a Trustee of the Fund. The compensation
of unaffiliated Trustees is borne by the Fund. Effective with the fees
paid for 1995, the unaffiliated Trustees may elect to defer for tax
purposes their receipt of this compensation under the John Hancock Group
of Funds Deferred Compensation Plan. The Fund makes investments into
other John Hancock funds, as applicable, to cover its liability for the
deferred compensation. Investments to cover the Fund's deferred
compensation liability are recorded on the Fund's books as an other
asset. The deferred compensation liability and the related other asset
are always equal and are marked to market on a periodic basis to reflect
any income earned by the investment as well as any unrealized gains or
losses. At April 30, 1996, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $1,476.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales and maturities of obligations of the
U.S. government and its agencies, other than short-term securities,
during the period ended April 30, 1996 aggregated $301,387,402 and
$297,896,022, respectively.
The cost of investments owned at April 30, 1996 (excluding the corporate
savings account) for federal income tax purposes was $497,013,072. Gross
unrealized appreciation and depreciation of investments aggregated
$4,397,431 and $4,481,475, respectively, resulting in net unrealized
depreciation of $102,044.
[BLANK PAGE]
[BLANK PAGE]
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John Hancock Funds
101 Huntington Avenue, Boston, MA 02199-7603
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This report is for the information of shareholders of the John Hancock
Sovereign U.S. Government Income Fund. It may be used as sales
literature when preceded or accompanied by the current prospectus, which
details charges, investment objectives and operating policies.
020SA 4/96
6/96
