IDS Federal
Income
Fund
1998 SEMIANNUAL REPORT
(icon of) clock
The goals of IDS Federal IncomeFund, Inc. are to provide shareholderswith a high
level of current income andsafety of principal consistent withinvestment in U.S.
government and government agency securities.
Distributed by American Express Financial Advisors Inc.
AMERICAN EXPRESS Financial Advisors
<PAGE>
A Comfortable Compromise
Balancing risk and reward is something all investors must consider. In
thefixed-income area, intermediate-term securities issued by the federal
government andits agencies offer a good middle ground. These securities, which
form the core of Federal Income Fund, normally provide greater investment
stability than long-term bonds, while still offering a yield higher than that of
insured investments such as bank CDs. For a conservative investor, that can be a
rewarding combination.
CONTENTS
From the Chairman 3
From the Portfolio Manager 3
Fund Facts 5
Financial Statements (Fund) 6
Notes to Financial Statements (Fund) 9
Financial Statements (Portfolio) 15
Notes to Financial Statements (Portfolio) 18
Investments in Securities 22
IDS FEDERAL INCOME FUND
<PAGE>
From the Chairman
(picture of) William R. Pearce
William R. Pearce
Chairman of the board
If you're an experienced investor, you know that the past six months was a
highly volatile period in many financial markets. But history tells us that
substantial market moves are nothing new. Though they're often unpredictable,
declines -- whether they're brief or long-lasting, moderate or substantial --
are always a possibility.
The potential for such volatility reinforces the need for investors to
periodically review their long-term goals and examine whether their investment
program remains on track to achieving them. Your quarterly investment statements
are one part of that monitoring process. The other is a meeting with your
American Express financial advisor. That becomes even more important if there's
a major change in your financial situation or in the financial markets.
William R. Pearce
From the Portfolio Manager
(picture of) James W. Snyder
James W. Snyder
Portfolio manager
Falling interest rates continued to provide support for the bond market and IDS
Federal Income Fund during the first half of the fiscal year. For the period --
June through November 1998 -- the Fund's Class A shares generated a total return
(net asset value change and interest income) of 3.36%.
Continuing the trend of recent years, the inflation rate -- the key influence on
interest rates and, thus, the bond market -- remained remarkably low over the
six months. Adding to the positive environment was another outbreak of the
so-called "Asian flu," the financial illness that first struck Southeast Asia in
the fall of 1997. This time, the victims were Russia and Latin America, whose
crumbling financial markets sent shock waves throughout the world, including the
U.S.
The upshot of the financial turmoil was a "flight to quality" on the part of
many concerned investors, who took refuge in U.S. Treasury securities. Their
heavy buying helped drive down interest rates, which in turn drove up prices for
Treasuries. Other sectors, including mortgage-backed bonds issued by federal
government agencies, were essentially ignored by investors and, therefore,
barely participated in the rally.
PORTFOLIO SHIFT
For the Fund, this meant that about half the portfolio benefited fully from the
upturn, as its asset mix of mortgage-backed bonds and short- and
intermediate-term Treasuries was roughly 50/50 when the fiscal year began. As
the period progressed, I shifted more money into mortgage bonds, concentrating
on low-coupon issues, which are less vulnerable to mortgage refinancing and,
consequently, a decline in value. By the end of the six months, mortgages made
up close to 80% of the portfolio, with Treasuries accounting for most of the
rest.
Because I thought interest rates were likely to come down, I maintained a
slightly long duration in the portfolio. (Duration, a function of the average
maturity of the bonds held in the portfolio, determines how sensitive the Fund's
value is to interest-rate changes. The longer the duration, the greater the
sensitivity.) Therefore, when rates declined, the Fund's performance was
enhanced somewhat. As is usually the case, I also maintained a small investment
in interest-rate futures contracts -- a form of "derivatives" -- to shield the
Fund from the possibility of a sharp rise in interest rates.
With its increased emphasis on mortgage-backed bonds, the Fund is positioned for
what I think will be a comparatively stable interest-rate environment in the
second half of the fiscal year. If that proves true, interest income will become
more important to performance, and mortgages hold an advantage over Treasuries
in that regard.
James W. Snyder
IDS FEDERAL INCOME FUND
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Fund Facts
Class A -- 6-month performance
(All figures per share)
Net asset value (NAV)
Nov. 30, 1998 $5.10
May 31, 1998 $5.08
Increase $0.02
Distributions -- June 1, 1998 - Nov. 30, 1998
From income $0.14
From capital gains $ --
Total distributions $0.14
Total return* +3.36%**
Class B -- 6-month performance
(All figures per share)
Net asset value (NAV)
Nov. 30, 1998 $5.10
May 31, 1998 $5.08
Increase $0.02
Distributions -- June 1, 1998 - Nov. 30, 1998
From income $0.12
From capital gains $ --
Total distributions $0.12
Total return* +2.99%**
Class Y -- 6-month performance
(All figures per share)
Net asset value (NAV)
Nov. 30, 1998 $5.10
May 31, 1998 $5.08
Increase $0.02
Distributions -- June 1, 1998 - Nov. 30, 1998
From income $0.14
From capital gains $ --
Total distributions $0.14
Total return* +3.39%**
*The prospectus discusses the effect of sales charges, if any, on the various
classes.
**The total return is a hypothetical investment in the Fund with all
distributions reinvested.
SEMIANNUAL REPORT -- 1998
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<CAPTION>
Financial Statements
Statement of assets and liabilities
IDS Federal Income Fund, Inc.
Nov. 30, 1998 (Unaudited)
Assets
<S> <C>
Investment in Government Income Portfolio (Note 1) $2,991,384,782
--------------
Liabilities
Dividends payable to shareholders 2,130,499
Accrued distribution fee 77,231
Accrued service fee 41,852
Accrued administrative services fee 11,014
Other accrued expenses 401,175
-------
Total liabilities 2,661,771
---------
Net assets applicable to outstanding capital stock $2,988,723,011
==============
Represented by
Capital stock-- $.01 par value (Note 1) $ 5,855,887
Additional paid-in capital 2,957,534,909
Undistributed net investment income 1,146,200
Accumulated net realized gain (loss) (31,438,913)
Unrealized appreciation (depreciation) on investments 55,624,928
----------
Total-- representing net assets applicable to outstanding capital stock $2,988,723,011
==============
Net assets applicable to outstanding shares: Class A $1,577,287,150
Class B $1,260,825,184
Class Y $ 150,610,677
Net asset value per share of outstanding capital stock: Class A shares 309,038,894 $ 5.10
Class B shares 247,040,972 $ 5.10
Class Y shares 29,508,809 $ 5.10
See accompanying notes to financial statements.
IDS FEDERAL INCOME FUND
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<CAPTION>
Statement of operations
IDS Federal Income Fund, Inc.
Six months ended Nov. 30, 1998 (Unaudited)
Investment income
Income:
<S> <C>
Interest $89,265,314
-----------
Expenses (Note 2):
Expenses allocated from Government Income Portfolio 7,128,077
Distribution fee -- Class B 4,315,383
Transfer agency fee 1,219,493
Incremental transfer agency fee-- Class B 29,323
Service fee
Class A 1,298,474
Class B 1,000,723
Class Y 68,494
Administrative services fees and expenses 636,707
Compensation of board members 5,437
Postage 205,941
Registration fees 257,663
Reports to shareholders 30,493
Audit fees 5,313
Other 4,912
-----
Total expenses 16,206,433
Earnings credits on cash balances (Note 2) (82,110)
-------
Total net expenses 16,124,323
----------
Investment income (loss) -- net 73,140,991
----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions 60,060,287
Financial futures contracts (73,905,904)
Options contracts written 34,536,813
----------
Net realized gain (loss) on investments 20,691,196
Net change in unrealized appreciation (depreciation) on investments (8,064,606)
----------
Net gain (loss) on investments 12,626,590
----------
Net increase (decrease) in net assets resulting from operations $85,767,581
-----------
See accompanying notes to financial statements.
SEMIANNUAL REPORT -- 1998
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<CAPTION>
Statements of changes in net assets
IDS Federal Income Fund, Inc.
Nov. 30, 1998 May 31, 1998
Six months ended Year ended
(Unaudited)
Operations and distributions
<S> <C> <C>
Investment income (loss)-- net $ 73,140,991 $ 133,540,143
Net realized gain (loss) on investments 20,691,196 (1,501,226)
Net change in unrealized appreciation (depreciation) on investments (8,064,606) 47,306,927
---------- ----------
Net increase (decrease) in net assets resulting from operations 85,767,581 179,345,844
---------- -----------
Distributions to shareholders from:
Net investment income
Class A (41,400,799) (78,592,006)
Class B (27,468,283) (47,677,831)
Class Y (3,837,034) (6,895,419)
---------- ----------
Total distributions (72,706,116) (133,165,256)
----------- ------------
Capital share transactions (Note 3)
Proceeds from sales
Class A shares (Note 2) 744,912,342 1,134,422,710
Class B shares 740,267,709 1,136,115,029
Class Y shares 53,386,063 51,390,904
Reinvestment of distributions at net asset value
Class A shares 34,203,088 66,667,607
Class B shares 25,554,436 45,475,793
Class Y shares 3,759,016 6,889,995
Payments for redemptions
Class A shares (611,775,207) (1,091,759,256)
Class B shares (Note 2) (555,697,810) (973,988,889)
Class Y shares (26,185,757) (56,274,053)
----------- -----------
Increase (decrease) in net assets from capital share transactions 408,423,880 318,939,840
----------- -----------
Total increase (decrease) in net assets 421,485,345 365,120,428
Net assets at beginning of period 2,567,237,666 2,202,117,238
------------- -------------
Net assets at end of period $2,988,723,011 $2,567,237,666
============== ==============
Undistributed net investment income $ 1,146,200 $ 711,325
-------------- --------------
See accompanying notes to financial statements.
IDS FEDERAL INCOME FUND
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Notes to Financial Statements
IDS Federal Income Fund, Inc.
(Unaudited as to Nov. 30, 1998)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940 (as amended) as
a diversified, open-end management investment company. The Fund has 10 billion
authorized shares of capital stock.
The Fund offers Class A, Class B and Class Y shares.
o Class A shares are sold with a front-end sales charge.
o Class B shares may be subject to a contingent deferred sales charge and
automatically convert to Class A shares during the ninth calendar year of
ownership.
o Class Y shares have no sales charge and are offered only to qualifying
institutional investors.
All classes of shares have identical voting, dividend and liquidation rights.
The distribution fee, transfer agency fee and service fee (class specific
expenses) differs among classes. Income, expenses (other than class specific
expenses) and realized and unrealized gains or losses on investments are
allocated to each class of shares based upon its relative net assets.
Investment in Government Income Portfolio
Effective June 10, 1996, the Fund began investing all of its assets in
Government Income Portfolio (the Portfolio), a series of Income Trust, an
open-end investment company that has the same objectives as the Fund. This was
accomplished by transferring the Fund's assets to the Portfolio in return for a
proportionate ownership interest in the Portfolio. The Portfolio invests
primarily in U.S. government and government agency securities.
The Fund records daily its share of the Portfolio's income, expenses and
realized and unrealized gains and losses. The financial statements of the
Portfolio are included elsewhere in this report and should be read in
conjunction with the Fund's financial statements.
The Fund records its investment in the Portfolio at value that is equal to the
Fund's proportionate ownership interest in the Portfolio's net assets. The
percentage of the Portfolio owned by the Fund at Nov. 30, 1998 was 99.97%.
Valuation of securities held by the Portfolio is discussed in Note 1 of the
Portfolio's "Notes to financial statements" (included elsewhere in this report).
Use of estimates
Preparing financial statements that conform to generally accepted accounting
principles requires management to make estimates (e.g., on assets and
liabilities) that could differ from actual results.
Federal taxes
The Fund's policy is to comply with all sections of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
taxable income to the shareholders, no provision for income or excise taxes is
thus required.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of deferred losses on
certain futures contracts, and losses deferred due to "wash sale" transactions.
The character of distributions made during the year from net investment income
or net realized gains may differ from their ultimate characterization for
federal income tax purposes. Also, due to the timing of dividend distributions,
the fiscal year in which amounts are distributed may differ from the year that
the income or realized gains (losses) were recorded by the Fund.
Dividends to shareholders
Dividends from net investment income, declared daily and payable monthly, are
reinvested in additional shares of the Fund at net asset value or payable in
cash. Capital gains, when available, are distributed along with the last income
dividend of the calendar year.
2. EXPENSES AND SALES CHARGES
In addition to the expenses allocated from the Portfolio, the Fund accrues its
own expenses as follows:
Effective March 20, 1995, the Fund entered into an agreement with American
Express Financial Corporation (AEFC) to provide administrative services. Under
its Administrative Services Agreement, the Fund pays AEFC a fee for
administration and accounting services at a percentage of the Fund's average
daily net assets in reducing percentages from 0.05% to 0.025% annually.
Additional administrative service expenses paid by the Fund are office expenses,
consultants' fees and compensation of officers and employees. Under this
agreement, the Fund also pays taxes, audit and certain legal fees, registration
fees for shares, compensation of board members, corporate filing fees and any
other expenses properly payable by the Fund and approved by the board.
Under a separate Transfer Agency Agreement, American Express Client Service
Corporation (AECSC) maintains shareholder accounts and records. The Fund pays
AECSC an annual fee per shareholder account for this service as follows:
o Class A $15.50
o Class B $16.50
o Class Y $15.50
The Fund entered into agreements with American Express Financial Advisors Inc.
for distribution and shareholder services. Under a Plan and Agreement of
Distribution, the Fund pays a distribution fee at an annual rate of 0.75% of the
Fund's average daily net assets attributable to Class B shares for distribution
services.
Under a Shareholder Service Agreement, the Fund pays a fee for service provided
to shareholders by financial advisors and other servicing agents. The fee is
calculated at a rate of 0.175% of the Fund's average daily net assets
attributable to Class A and Class B shares and 0.10% of the Fund's average daily
net assets attributable to Class Y shares.
Sales charges received by American Express Financial Advisors Inc. for
distributing Fund shares were $20,738,040 for Class A and $596,578 for Class B
for the six months ended Nov. 30, 1998.
During the six months ended Nov. 30, 1998, the Fund's transfer agency fees were
reduced by $82,110 as a result of earnings credits from overnight cash balances.
<PAGE>
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<CAPTION>
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the periods indicated are as
follows:
Six months ended Nov. 30, 1998
Class A Class B Class Y
<S> <C> <C> <C>
Sold 145,781,609 144,884,663 10,456,783
Issued for reinvested distributions 6,697,361 5,004,102 735,842
Redeemed (119,811,722) (108,841,691) (5,125,331)
------------ ------------ ----------
Net increase (decrease) 32,667,248 41,047,074 6,067,294
Year ended May 31, 1998
Class A Class B Class Y
Sold 224,794,922 225,164,813 10,168,756
Issued for reinvested distributions 13,216,392 9,014,209 1,365,952
Redeemed (216,322,833) (192,999,127) (11,146,551)
------------ ------------ -----------
Net increase (decrease) 21,688,481 41,179,895 388,157
4. BANK BORROWINGS
The Fund entered into a revolving credit agreement with U.S. Bank, N.A., whereby
the Fund is permitted to have bank borrowings for temporary or emergency
purposes to fund shareholder redemptions. The Fund must have asset coverage for
borrowings not to exceed the aggregate of 333% of advances equal to or less than
5 business days plus 367% of advances over 5 business days. The agreement, which
enables the Fund to participate with other IDS Funds, permits borrowings up to
$200 million, collectively. Interest is charged to each Fund based on its
borrowings at a rate equal to the Federal Funds Rate plus 0.30% or the
Eurodollar Rate (Reserve Adjusted) plus 0.20%. Borrowings are payable up to 90
days after such loan is executed. The Fund also pays a commitment fee equal to
its pro rata share of the amount of the credit facility at a rate of 0.05% per
annum. The Fund had no borrowings outstanding during the six months ended Nov.
30, 1998.
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<CAPTION>
IDS Federal Income Fund
5. FINANCIAL HIGHLIGHTS
The tables below show certain important financial information for evaluating the
Fund's results.
Fiscal period ended May 31,
Per share income and capital changesa
Class A
1998c 1998 1997 1996b 1995
<S> <C> <C> <C> <C> <C>
Net asset value,beginning of period $5.08 $4.98 $4.92 $4.97 $4.85
Income from investment operations:
Net investment income (loss) .14 .30 .32 .28 .32
Net gains (losses)(both realized and unrealized) .02 .10 .06 (.04) .11
Total from investment operations .16 .40 .38 .24 .43
Less distributions:
Dividends fromnet investment income (.14) (.30) (.32) (.29) (.31)
Net asset value, end of period $5.10 $5.08 $4.98 $4.92 $4.97
Ratios/supplemental data
Class A
1998c 1998 1997 1996b 1995
Net assets, end of period(in millions) $1,577 $1,403 $1,267 $1,095 $977
Ratio of expenses toaverage daily net assetsd .85%e .86% .90% .91%e .79%
Ratio of net investment income (loss)
to average daily net assets 5.55%e 5.89% 6.37% 6.34%e 6.59%
Portfolio turnover rate
(excluding short-term securities) 129% 159% 146% 115% 213%
Total returnf 3.36% 8.15% 7.73% 5.04% 9.25%
a For a share outstanding throughout the period. Rounded to the nearest cent.
b The Fund's fiscal year-end was changed from June 30 to May 31, effective 1996.
c Six months ended Nov. 30, 1998 (Unaudited).
d Effective fiscal year 1996, expense ratio is based on total expenses of the
Fund before reduction of earnings credits on cash balances.
e Adjusted to an annual basis.
f Total return does not reflect payment of a sales charge.
SEMIANNUAL REPORT -- 1998
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<CAPTION>
Fiscal period ended May 31,
Per share income and capital changesa
Class B Class Y
1998d 1998 1997 1996c 1995b 1998d 1998 1997 1996c 1995b
Net asset value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning of period $5.08 $4.98 $4.92 $4.96 $4.87 $5.08 $4.98 $4.92 $4.97 $4.87
Income from investment operations:
Net investment income (loss) .12 .26 .28 .26 .06 .14 .30 .32 .29 .07
Net gains (losses)
both realized and unrealized) .02 .10 .06 (.04) .14 .02 .10 .06 (.04) .15
Total from investment operations .14 .36 .34 .22 .20 .16 .40 .38 .25 .22
Less distributions:
Dividends from net
investment income (.12) (.26) (.28) (.26) (.11) (.14) (.30) (.32) (.30) (.12)
Net asset value, end of period $5.10 $5.08 $4.98 $4.92 $4.96 $5.10 $5.08 $4.98 $4.92 $4.97
Ratios/supplemental data
Class B Class Y
1998d 1998 1997 1996c 1995b 1998d 1998 1997 1996c 1995b
Net assets, end of period
(in millions) $1,261 $1,045 $820 $520 $292 $151 $119 $115 $99 $85
Ratio of expenses to
average daily net assetse 1.61%f 1.61% 1.66% 1.67%f 1.74%f .78%f .78% .73% .74%f .75%f
Ratio of net investment income
(loss) to average daily net assets 4.81%f 5.13% 5.60% 5.59%f 6.21%f 5.64%f 5.97% 6.54% 6.53%f 7.20%f
Portfolio turnover rate
(excluding short-term securities) 129% 159% 146% 115% 213% 129% 159% 146% 115% 213%
Total returng 2.99% 7.32% 6.95% 4.30% 4.22% 3.39% 8.23% 7.91% 5.22% 4.48%
a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date was March 20, 1995.
c The Fund's fiscal year-end was changed from June 30 to May 31, effective 1996.
d Six months ended Nov. 30, 1998 (Unaudited).
e Effective fiscal year 1996, expense ratio is based on total expenses of the
Fund before reduction of earnings credits on cash balances.
f Adjusted to an annual basis.
g Total return does not reflect payment of a sales charge.
IDS FEDERAL INCOME FUND
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<CAPTION>
Financial Statements
Statement of assets and liabilities
Government Income Portfolio
Nov. 30, 1998 (Unaudited)
Assets
Investments in securities, at value (Note 1)
<S> <C>
(identified cost $3,589,417,480) $3,668,483,822
Cash in bank on demand deposit 7,490,520
Accrued interest receivable 26,665,945
Receivable for investment securities sold 172,970,598
U.S. government securities held as collateral (Note 5) 79,721,822
----------
Total assets 3,955,332,707
-------------
Liabilities
Payable for investment securities purchased 844,955,391
Payable upon return of securities loaned (Note 5) 91,009,322
Accrued investment management services fee 121,210
Option contracts written, at value (premium received $26,805,756) (Note 6) 27,018,485
----------
Total liabilities 963,104,408
-----------
Net assets $2,992,228,299
==============
See accompanying notes to financial statements.
SEMIANNUAL REPORT -- 1998
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<CAPTION>
Statement of operations
Government Income Portfolio
Six months ended Nov. 30, 1998 (Unaudited)
Investment income
Income:
<S> <C>
Interest $89,294,815
-----------
Expenses (Note 2):
Investment management services fee 6,946,441
Compensation of board members 7,073
Custodian fees 133,245
Audit fees 15,938
Other 35,132
------
Total expenses 7,137,829
Earnings credits on cash balances (Note 2) (7,658)
------
Total net expenses 7,130,171
---------
Investment income (loss) -- net 82,164,644
----------
Realized and unrealized gain (loss) -- net Net realized gain (loss) on:
Security transactions (Note 3) 60,077,637
Financial futures contracts (73,927,375)
Options contracts written (Note 6) 34,546,699
----------
Net realized gain (loss) on investments 20,696,961
Net change in unrealized appreciation (depreciation) on investments (8,066,331)
----------
Net gain (loss) on investments 12,630,630
----------
Net increase (decrease) in net assets resulting from operations $94,795,274
-----------
See accompanying notes to financial statements.
IDS FEDERAL INCOME FUND
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<CAPTION>
Statements of changes in net assets
Government Income Portfolio
Nov. 30, 1998 May 31, 1998
Six months ended Year ended
(Unaudited)
Operations
<S> <C> <C>
Investment income (loss)-- net $ 82,164,644 $ 148,446,162
Net realized gain (loss) on investments 20,696,961 (1,501,667)
Net change in unrealized appreciation (depreciation) on investments (8,066,331) 47,320,048
---------- ----------
Net increase (decrease) in net assets resulting from operations 94,795,274 194,264,543
Net contributions (withdrawals) from partners 328,161,864 171,023,648
----------- -----------
Total increase (decrease) in net assets 422,957,138 365,288,191
Net assets at beginning of period 2,569,271,161 2,203,982,970
------------- -------------
Net assets at end of period $2,992,228,299 $2,569,271,161
============== ==============
See accompanying notes to financial statements.
SEMIANNUAL REPORT -- 1998
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<PAGE>
Notes to Financial Statements
Government Income Portfolio
(Unaudited as to Nov. 30, 1998)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Government Income Portfolio (the Portfolio) is a series of Income Trust (the
Trust) and is registered under the Investment Company Act of 1940 (as amended)
as a diversified, open-end management investment company. Government Income
Portfolio seeks to provide a high level of current income and safety of
principal consistent with investment in U.S. government and government agency
securities. The Declaration of Trust permits the Trustees to issue
non-transferable interests in the Portfolio. On April 15, 1996, American Express
Financial Corporation (AEFC) contributed $40,000 to the Portfolio. Operations
did not formally commence until June 10, 1996, at which time an existing fund
transferred its assets to the Portfolio in return for an ownership percentage of
the Portfolio.
The Portfolio's accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to generally accepted accounting
principles requires management to make estimates (e.g., on assets and
liabilities) that could differ from actual results.
Valuation of securities
All securities are valued at the close of each business day. Securities traded
on national securities exchanges or included in national market systems are
valued at the last quoted sales price. Debt securities are generally traded in
the over-the-counter market and are valued at a price that reflects fair value
as quoted by dealers in these securities or by an independant pricing service.
Securities for which market quotations are not readily available are valued at
fair value according to methods selected in good faith by the board. Short-term
securities maturing in more than 60 days from the valuation date are valued at
the market price or approximate market value based on current interest rates;
those maturing in 60 days or less are valued at amortized cost.
Option transactions
To produce incremental earnings, protect gains and facilitate buying and selling
of securities for investments, the Portfolio may buy and sell put and call
options and write covered call options on portfolio securities and may write
cash-secured put and call options on U.S. government securities. The Portfolio
also may purchase mortgage-backed security (MBS) put spread options and write
covered MBS call spread options. MBS spread options are based upon the changes
in the price spread between a specified mortgage-backed security and a
like-duration Treasury security. The risk in writing a call option is that the
Portfolio gives up the opportunity for profit if the market price of the
security increases. The risk in writing a put option is that the Portfolio may
incur a loss if the market price of the security decreases and the option is
exercised. The risk in buying an option is that the Portfolio pays a premium
whether or not the option is exercised. The Portfolio also has the additional
risk of being unable to enter into a closing transaction if a liquid secondary
market does not exist. The Portfolio also may write over-the-counter options
where the completion of the obligation is dependent upon the credit standing of
the other party.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The Portfolio
will realize a gain or loss when the option transaction expires or closes. When
options on debt securities or futures are exercised, the Portfolio will realize
a gain or loss. When other options are exercised, the proceeds on sales for a
written call option, the purchase cost for a written put option or the cost of a
security for a purchased put or call option is adjusted by the amount of premium
received or paid.
Futures transactions
To gain exposure to or protect itself from market changes, the Portfolio may buy
and sell financial futures contracts. Risks of entering into futures contracts
and related options include the possibility of an illiquid market and that a
change in the value of the contract or option may not correlate with changes in
the value of the underlying securities.
Upon entering into a futures contract, the Portfolio is required to deposit
either cash or securities in an amount (initial margin) equal to a certain
percentage of the contract value. Subsequent payments (variation margin) are
made or received by the Portfolio each day. The variation margin payments are
equal to the daily changes in the contract value and are recorded as unrealized
gains and losses. The Portfolio recognizes a realized gain or loss when the
contract is closed or expires.
Securities purchased on a when-issued basis
Delivery and payment for securities that have been purchased by the Portfolio on
a forward-commitment or when-issued basis can take place one month or more after
the transaction date. During this period, such securities are subject to market
fluctuations, and they may affect the Portfolio's gross assets the same as owned
securities. The Portfolio designates cash or liquid high-grade short-term debt
securities at least equal to the amount of its commitment. As of Nov. 30, 1998,
the Portfolio had entered into outstanding when-issued or forward-commitments of
$749,626,199.
Federal taxes
For federal income tax purposes the Portfolio qualifies as a partnership and
each investor in the Portfolio is treated as the owner of its proportionate
share of the net assets, income, expenses and realized and unrealized gains and
losses of the Portfolio. As a "pass-through" entity, the Portfolio therefore
does not pay any income dividends or capital gain distributions.
Other
Security transactions are accounted for on the date securities are purchased or
sold. Interest income, including level-yield amortization of premium and
discount, is accrued daily.
2. FEES AND EXPENSES
The Trust, on behalf of the Portfolio, has entered into an Investment Management
Services Agreement with AEFC for managing its portfolio. Under this agreement,
AEFC determines which securities will be purchased, held or sold. The management
fee is a percentage of the Portfolio's average daily net assets in reducing
percentages from 0.52% to 0.395% annually.
Under the agreement, the Trust also pays taxes, brokerage commissions and
nonadvisory expenses, which include custodian fees, audit and certain legal
fees, fidelity bond premiums, registration fees for units, office expenses,
consultants' fees, compensation of trustees, corporate filing fees, expenses
incurred in connection with lending securities of the Portfolio and any other
expenses properly payable by the Trust or Portfolio and approved by the board.
The Portfolio also pays custodian fees to American Express Trust Company, an
affiliate of AEFC.
During the six months ended Nov. 30, 1998, the Portfolio's custodian fees were
reduced by $7,658 as a result of earnings credits from overnight cash balances.
According to a Placement Agency Agreement, American Express Financial Advisors
Inc. acts as placement agent of the Trust's units.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $4,723,451,339 and $4,119,162,895, respectively, for the
six months ended Nov. 30, 1998. For the same period, the portfolio turnover rate
was 129%. Realized gains and losses are determined on an identified cost basis.
4. INTEREST RATE FUTURES CONTRACTS
As of Nov. 30, 1998, investments in securities included securities valued at
$99,831,977 that were pledged as collateral to cover initial margin deposits on
5,939 open purchase contracts and 9,608 open sale contracts. The market value of
the open purchase contracts at Nov. 30, 1998, was $861,878,509 with a net
unrealized loss of $4,862,917. The market value of the open sale contracts at
Nov. 30, 1998, was $1,199,243,173 with a net unrealized loss of $18,349,868. See
"Summary of significant accounting policies."
5. LENDING OF PORTFOLIO SECURITIES
As of Nov. 30, 1998, securities valued at $87,304,957 were on loan to brokers.
For collateral, the Portfolio received $11,287,500 in cash and U.S. government
securities valued at $79,721,822. Income from securities lending amounted to
$547,868 for the year ended Nov. 30, 1998. The risks to the Portfolio of
securities lending are that the borrower may not provide additional collateral
when required or return the securities when due.
<PAGE>
<TABLE>
<CAPTION>
6. OPTIONS CONTRACTS WRITTEN
Contracts and premium amounts associated with options contracts written are as
follows:
Six months ended Nov. 30, 1998
Puts Calls MBS Puts and Calls
Contracts Premium Contracts Premium Contracts Premium
<S> <C> <C> <C> <C> <C> <C>
Balance May 31, 1998 2,146 $ 4,017,648 2,380 $ 3,811,781 12,000 $ 123,773,405
Opened 28,300 38,288,411 27,320 43,042,817 36,750 1,058,984
Closed (17,656) (23,121,024) (13,558) (22,531,561) (12,000) (123,773,404)
Exercised (4,831) (7,585,873) (2,263) (3,418,658) (4,250) (19,922)
Expired (2,349) (3,167,011) (3,997) (3,452,649) (20,000) (117,188)
------ ---------- ------ ---------- ------- --------
Balance Nov. 30, 1998 5,610 $ 8,432,151 9,882 $ 17,451,730 12,500$ 921,875
See "Summary of significant accounting policies."
SEMIANNUAL REPORT -- 1998
<PAGE>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Investments in Securities
Government Income Portfolio
Nov. 30, 1998 (Unaudited)
(Percentages represent value of investments compared to net assets)
Bonds (121.1%)
Issuer Coupon Principal Value(a)
rate amount
Govt Natl Mtge Assn (--%)
<S> <C> <C> <C> <C>
08-20-19 11.00% $206,773 $231,585
Mortgage-backed securities (84.4%)
Federal Home Loan Mtge Corp
08-01-00 7.50 8,995,438 9,078,800
07-01-03 6.50 66,254 66,658
07-15-03 5.75 30,750,000 31,714,923
01-15-08 5.50 42,640,000(j) 43,234,419
09-01-09 6.50 5,339,549 5,427,972
03-01-10 5.50 42,000,000 41,383,125
10-01-10 7.00 13,842,502 14,158,250
01-01-13 6.00 12,041,698 12,072,216
01-25-13 6.25 39,000,000 39,387,270
11-01-23 8.00 15,390,297 15,976,975
05-01-24 7.50 5,897,236 6,061,238
07-01-24 8.00 9,044,809 9,366,986
01-01-25 9.00 7,901,348 8,326,045
06-01-25 8.00 13,148,292 13,604,406
08-01-25 8.00 2,973,642 3,076,798
02-01-26 6.00 18,333,097 18,109,616
05-01-26 9.00 19,135,662 20,194,055
12-01-27 6.00 146,901,630 145,209,099
01-01-28 6.00 2,924,308 2,887,754
02-01-28 6.00 17,992,026 17,771,127
08-01-28 6.00 34,673,386 34,239,969
09-01-28 6.00 143,411,987 141,622,589
10-01-28 6.00 13,831,200 13,658,310
Zero Coupon
02-15-28 15.35 145,493,910(b) 1,636,807
Collateralized Mtge Obligation
08-15-03 6.50 14,652,880 14,969,037
04-15-22 8.50 9,150,000 10,008,087
11-15-22 4.00 44,310,000 41,424,958
11-15-23 4.00 8,940,984 8,691,084
11-18-25 6.50 12,750,000 12,910,321
02-15-28 .00 2,298,294 1,597,314
Interest Only
01-01-20 10.00 193,308(f) 37,379
Principal Only
09-15-03 6.46 9,272,987(e) 8,505,042
10-15-07 8.47 2,868,277(e) 2,728,000
05-15-08 8.13 7,523,918(e) 6,880,858
05-15-08 7.14 7,628,336(e) 6,721,279
03-15-09 7.38 5,669,869(e) 5,358,912
11-15-23 7.86 6,272,778(e) 6,086,008
Trust Series Z
04-25-24 8.25 29,818,998(d) 29,806,739
Federal Natl Mtge Assn
12-01-99 7.00 5,998,951 6,058,582
09-01-07 8.50 3,611,662 3,731,280
02-15-08 5.75 84,875,000 87,621,325
03-01-10 5.50 162,660,000(j) 160,220,099
03-01-10 6.00 135,750,000(j) 135,877,265
05-01-13 6.00 63,029,608 63,085,302
06-01-13 6.00 51,378,967 51,424,367
08-01-13 6.00 82,734,969 82,786,264
09-01-13 6.00 18,530,882 18,547,256
11-01-21 8.00 2,954,034 3,067,588
05-01-22 8.50 5,324,805 5,611,014
03-01-23 9.00 2,044,837 2,170,083
04-01-23 8.50 7,457,983 7,854,151
08-01-23 8.50 17,013,955 17,928,455
08-25-23 6.00 14,400,000 14,192,015
09-01-23 6.50 45,043,868(h,i) 45,367,733
09-01-23 8.50 27,190,783 28,669,418
11-01-23 6.00 10,885,218 10,769,617
12-01-23 7.00 15,666,869 15,999,790
01-01-24 6.50 16,663,442 16,783,252
06-01-24 9.00 6,321,739 6,712,928
03-01-25 6.00 208,500,000(j) 205,828,593
06-01-25 8.50 2,573,380 2,693,196
09-01-25 6.50 19,339,552 19,472,608
09-01-25 6.50 3,368,088(h,i) 3,391,260
11-01-25 6.50 22,967,924(h,i) 23,125,943
12-01-25 8.50 6,642,167 6,949,367
01-15-26 5.50 41,000,000(j) 39,629,063
02-01-26 6.00 580,119 572,688
02-01-26 8.00 2,827,617(h,i) 2,927,460
04-01-26 6.00 315,836 311,790
05-01-26 7.50 18,896,756 19,428,133
02-01-27 6.00 2,522,028 2,488,939
04-01-27 6.00 5,759,879 5,684,309
04-01-27 6.50 14,954,680 15,057,568
04-01-27 7.00 11,194,309 11,425,136
09-01-27 7.00 7,505,062 7,659,816
03-01-28 6.00 23,006,912 22,707,761
04-01-28 6.00 106,871,589 105,487,707
05-01-28 6.00 9,712,117 9,586,320
05-01-28 6.50 22,409,942 22,562,803
07-01-28 6.00 9,860,098 9,732,384
09-01-28 6.00 96,169,908 94,916,422
10-01-28 6.00 17,149,659 16,924,655
10-01-28 6.50 18,914,481 19,056,339
10-01-28 6.50 54,869,455 55,280,976
Collateralized Mtge Obligation
06-25-05 6.10 40,925,603 41,014,411
08-25-08 6.00 1,372,733 1,367,354
09-25-08 4.50 38,000,000 36,259,581
11-25-08 5.50 5,517,709 5,479,525
10-25-10 4.50 8,204,208 8,010,507
07-25-12 7.00 2,868,264 2,904,230
01-25-19 3.00 11,250,000 10,929,375
03-25-19 5.75 37,973,624 37,950,753
07-18-19 5.50 13,976,000 13,812,815
10-25-20 9.00 11,666,000 12,426,040
03-25-21 8.50 12,350,000 13,064,010
01-25-22 5.75 10,000,000 9,901,897
01-25-24 5.00 1,936,927 1,927,864
05-18-26 5.00 17,000,000 16,140,592
Interest Only
07-01-18 10.00 3,346,053(f) 638,553
08-01-18 9.50 71,077(f) 13,588
01-15-20 10.00 3,267,751(f) 940,524
09-25-20 9.50 1,025,408(f) 178,316
01-25-21 10.50 8,126,116(f) 1,650,557
11-25-21 9.50 2,678,435(f) 737,882
02-25-22 9.50 519,924(f) 112,531
02-25-22 10.00 19,299,644(f) 5,276,716
05-25-22 10.00 6,323,426(f) 1,157,701
07-25-22 8.50 11,016,845(f) 1,959,410
07-25-22 9.50 5,566,727(f) 1,128,425
Inverse Floater
08-25-23 8.08 4,979,808(g) 4,862,135
03-25-24 9.61 3,298,066(g) 3,307,186
Principal Only
06-25-21 12.57 426,430(e) 350,731
Total 2,525,816,315
Other (3.8%)
California Infrastructure
Pacific Gas & Electric
09-25-05 6.32 20,400,000 21,128,280
San Diego Gas & Electric
03-25-03 6.07 7,500,000 7,613,175
09-25-05 6.19 6,000,000 6,185,340
San Diego Gas & Electric 1st Series 1997
09-25-08 6.31 25,000,000 26,138,000
Southern California Edison
03-25-03 6.17 13,895,000 14,130,659
09-25-08 6.38 12,000,000 12,591,240
Citibank Credit Card Master Trust I
Series 1998-2 Cl A
01-15-08 6.05 15,000,000 15,557,700
GMAC Commercial Mtge Securities
Series 1997-C2 Cl A1
12-15-04 6.45 9,578,665 9,872,251
Total 113,216,645
U.S. government obligations (32.9%)
Resolution Funding Corp
10-15-19 8.13 8,000,000 10,514,946
Zero Coupon
04-15-02 6.15 11,170,000(b) 9,489,438
10-15-03 6.36 16,000,000(b) 12,618,520
04-15-06 5.74 4,803,000(b) 3,317,693
04-15-08 5.88 21,250,000(b) 13,144,460
07-15-08 6.13 48,500,000(b) 29,618,455
01-15-09 5.76 24,173,000(b) 14,381,461
07-15-09 5.91 32,646,000(b) 18,687,586
10-15-12 8.04 8,400,000(b) 3,903,645
04-15-17 7.28 37,700,000(b) 13,473,565
07-15-17 7.28 6,650,000(b) 2,343,387
01-15-18 7.20 8,000,000(b) 2,736,232
10-15-18 7.87 7,500,000(b) 2,412,065
U.S. Treasury
07-31-01 6.63 17,000,000 17,848,679
08-31-01 6.50 8,500,000(h,i) 8,906,908
11-30-01 5.88 6,000,000(h,i) 6,210,212
04-30-02 6.63 10,000,000 10,613,158
02-15-03 10.75 15,000,000 18,399,467
08-15-03 5.75 18,500,000(c) 19,341,961
05-15-04 12.38 7,000,000 9,522,430
08-15-05 6.50 5,000,000 5,506,115
08-15-05 10.75 4,750,000(h,i) 6,353,620
07-15-06 7.00 35,750,000 40,669,743
10-15-06 6.50 36,100,000 40,006,045
11-15-08 4.75 42,000,000 42,029,531
08-15-19 8.13 104,000,000(h,i) 140,012,225
08-15-20 8.75 49,000,000(h,i) 70,315,377
05-15-21 8.13 74,000,000 100,771,823
08-15-21 8.13 124,700,000 169,981,687
08-15-23 6.25 76,500,000(c,h,i) 86,099,985
11-15-27 6.13 10,000,000(c) 11,294,676
Zero Coupon
11-15-04 5.65 33,000,000(b,h,i) 24,921,993
Collateralized Mtge Acceptance Corp
12-15-30 6.50 14,239,636 14,664,974
Collateralized Mtge Securities Corp
12-20-20 14.08 3,750,000 3,803,816
Total 983,915,878
Total bonds
(Cost: $3,543,373,331) $3,623,180,423
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Options purchased (--%)
Issuer Shares Exercise Expiration Value(a)
price date
Put
<S> <C> <C> <C> <C>
U.S. Treasury Bond March 99 59,500 $116 Dec. 1998 $18,594
U.S. Treasury Bond March 99 42,500 112 Feb. 1999 132,813
U.S. Treasury Bond March 99 289,000 125 Feb. 1999 225,767
Total options purchased
(Cost: $1,117,924) $377,174
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Short-term securities (1.5%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agencies (0.4%)
Federal Farm Credit Disc Nt
<S> <C> <C> <C> <C>
12-02-98 4.75% $4,300,000 $4,299,435
Federal Home Loan Bank Disc Nt
12-11-98 4.79 1,100,000 1,098,546
Federal Home Loan Mtge Corp Disc Nts
12-07-98 5.00 1,700,000 1,698,589
12-10-98 4.77 400,000 399,525
12-21-98 4.83 3,200,000 3,191,448
12-22-98 4.81 1,100,000 1,096,920
Federal Natl Mtge Assn Disc Nt
12-15-98 5.00 500,000 499,032
Total 12,283,495
Letter of credit (1.1%)
Student Loan Marketing Assn-
Nebraska Higher Education
12-14-98 4.86 32,700,000 32,642,730
Total short-term securities
(Cost: $44,926,225) $44,926,225
Total investments in securities
(Cost: $3,589,417,480)(k) $3,668,483,822
See accompanying notes to investments in securities.
SEMIANNUAL REPORT -- 1998
</TABLE>
<PAGE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) For zero coupon bonds, the interest rate disclosed represents the annualized
effective yield on the date of acquisition.
(c) Security is partially or fully on loan. See Note 4 to the financial
statements.
(d) This security is a collateralized mortgage obligation that pays no interest
or principal during its initial accrual period until payment of a previous
series within the trust have been paid off. Interest is accrued at an effective
yield; similar to a zero coupon bond.
(e) Principal-only represents securities that entitle holders to receive only
principal payments on the underlying mortgages. The yield to maturity of a
principal-only is sensitive to the rate of principal payments on the underlying
mortgage assets. A slow (rapid) rate of principal repayments may have an adverse
(positive) effect on yield to maturity. Interest rate disclosed represents
current yield based upon the current cost basis and estimated timing of future
cash flows.
(f) Interest-only represents securities that entitle holders to receive only
interest payments on the underlying mortgages. The yield to maturity of an
interest-only is extremely sensitive to the rate of principal payments on the
underlying mortgage assets. A rapid (slow) rate of principal repayments may have
an adverse (positive) effect on yield to maturity.
The principal amount shown is the notional amount of the underlying mortgages.
(g) Inverse floaters represent securities that pay interest at a rate that
increases (decreases) in the same magnitude as, or in a multiple of, a decline
(increase) in the LIBOR (London InterBank Offering Rate) Index. Interest rate
disclosed is the rate in effect on Nov. 30, 1998. Inverse floaters in the
aggregate represent 0.27% of the Portfolio's net assets as of Nov. 30, 1998.
(h) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 4 to the financial statements):
Type of security Notional amount
Purchase contracts
Eurodollar Dec. 1999 $56,900,000
Eurodollar March 2000 56,900,000
Eurodollar June 2000 56,900,000
Eurodollar Sept. 2000 61,100,000
U.S. Treasury Note Dec. 1998, 5-year notes 275,400,000
U.S. Treasury Note Dec. 1998, 10-year notes 83,700,000
U.S. Treasury Note Feb. 1999, 10-year notes 3,000,000
Sale contracts
U.S. Treasury Note Dec. 1998, 2-year notes $12,600,000
U.S. Treasury Note Dec. 1998, 10-year notes 108,300,000
U.S. Treasury Note Feb. 1999, 5-year notes 198,900,000
U.S. Treasury Bond March 1999 641,000,000
SEMIANNUAL REPORT -- 1998
<PAGE>
<TABLE>
<CAPTION>
(i) At Nov. 30, 1998, securities valued at $99,831,977 were held to cover open
call options written as follows:
Issuer Shares Exercise Expiration Value(a)
price date
<S> <C> <C> <C> <C>
U.S. Treasury Bond 500,000 $99 Dec. 1998 $359,375
U.S. Treasury Bond March 99 195,500 114 Feb. 1999 1,618,975
U.S. Treasury Bond March 99 42,500 119 Feb. 1999 670,701
U.S. Treasury Bond March 99 221,000 120 Feb. 1999 2,451,708
U.S. Treasury Bond March 99 17,000 128 Feb. 1999 345,312
U.S. Treasury Bond March 99 17,000 130 Feb. 1999 143,437
U.S. Treasury Bond March 99 187,000 126 Feb. 1999 8,544,372
U.S. Treasury Bond March 99 34,000 128 Feb. 1999 1,094,375
U.S. Treasury Bond March 99 204,000 130 Feb. 1999 4,398,750
U.S. Treasury Bond March 99 70,200 134 Feb. 1999 592,312
Total $20,219,317
At Nov. 30, 1998, cash or short-term securities were designated to cover open put options written as follows:
Issuer Shares Exercise Expiration Value(a)
price date
Federal Natl Mtge Assn 750,000 $97 Dec. 1998 $58,594
U.S. Treasury Bond March 99 12,800 112 Feb. 1999 56,000
U.S. Treasury Bond March 99 38,200 127 Feb. 1999 147,311
U.S. Treasury Bond March 99 191,200 126 Feb. 1999 1,881,197
U.S. Treasury Bond March 99 127,500 128 Feb. 1999 1,979,174
U.S. Treasury Bond March 99 8,500 118 Feb. 1999 71,719
U.S. Treasury Bond March 99 42,500 119 Feb. 1999 524,607
U.S. Treasury Bond March 99 8,500 128 Feb. 1999 37,187
U.S. Treasury Bond March 99 8,500 127 Feb. 1999 19,921
U.S. Treasury Bond March 99 123,300 128 Feb. 1999 2,023,458
Total $6,799,168
</TABLE>
<PAGE>
(j) At Nov. 30, 1998, the cost of securities purchased, including interest
purchased, on awhen-issued basis was $749,626,199.
(k) At Nov. 30, 1998, the cost of securities for federal income tax purposes was
approximately $3,589,417,000 and the approximate aggregate gross unrealized
appreciation and depreciation based on that cost was:
Unrealized appreciation...........................................$93,937,822
Unrealized depreciation...........................................(14,871,000)
Net unrealized appreciation.......................................$79,066,822
SEMIANNUAL REPORT -- 1998
<PAGE>
Bulk Rate
U.S. POSTAGE
PAID
Permit No. 85
Spencer, IA
S-6442 M (1/99)
IDS Federal Income Fund
IDS Tower 10
Minneapolis, MN 55440-0010
