<PAGE> 1
[NEW ENGLAND LOGO]
NEW ENGLAND FUNDS
Where The Best Minds Meet
SEMIANNUAL REPORT AND PERFORMANCE UPDATE
NEW ENGLAND
GOVERNMENT
SECURITIES FUND
[ARTWORK APPEARS HERE]
JUNE 30, 1995
<PAGE> 2
July 20, 1995
DEAR SHAREHOLDER:
We have good news to present in this Semiannual Report for New England
Government Securities Fund, which includes your Portfolio Manager's commentary
and complete financial information.
MARKET OVERVIEW
Investors who stayed the course in 1995 were amply rewarded. Major U.S. stock
market indices soared to record highs and the bond market staged a spectacular
comeback from its 1994 lows. Fueling the rally was clear evidence that the
economy had begun to slow down as a result of the interest rate hikes engineered
by the Federal Reserve Board to keep inflation in check. Indeed, with declining
housing starts and rising unemployment numbers reported in the first half of
1995, expectations grew that the Fed's next move would be downward, to prevent
the slowing economy from slipping into recession.
The bond market surged at the prospect of lower rates, and the stock market
followed suit, with the Standard & Poor's 500(R) Index gaining 20.14% during the
first half of the year. The large, blue-chip companies led the way, in part
because a weak U.S. dollar gave them a competitive advantage overseas and
contributed to surprisingly healthy earnings reports. Finally, on July 6, just
after this reporting period ended, the Fed lowered a key short-term rate by
0.25%, a relatively modest move, but a significant psychological change in
direction.
YOUR FINANCIAL ADVISER -- A TRUSTED ALLY
As a shareholder in New England Funds, you have a valuable ally you can turn
to at all times -- your financial adviser. This experienced
<PAGE> 3
professional can help you design an asset allocation program suitable to your
goals and risk tolerance. Most important, during times of market volatility or
uncertainty, your adviser can help you avoid making costly mistakes, such as
trying to "time" the market. Investors who go it alone can overreact to
short-term market events, buying and selling on the basis of this week's
headlines, or chasing the latest "hot" investment. Such behavior can derail an
otherwise prudent investment program. But investors who work with a financial
adviser receive guidance throughout the market's ups and downs. Your adviser
will help you place short-term market swings in their proper perspective and
keep you focused on your long-term investment program.
Your adviser is just one of the experts whose talents we have tapped in our
effort to bring the best minds in the business to the task of managing your
money. These experts are a vital part of the investment process at New England
Funds, and we encourage you to take advantage of their skills to the fullest.
We invite you to read the accompanying management commentary and financial
highlights. If you have any questions or comments, please contact your financial
adviser or New England Funds directly at 800-225-5478. Once again, we appreciate
your continued confidence and investment in New England Funds.
Sincerely,
/s/PETER S. VOSS /s/HENRY L.P. SCHMELZER
Peter S. Voss Henry L.P. Schmelzer
Chairman President
<PAGE> 4
NEW ENGLAND GOVERNMENT SECURITIES FUND
INVESTMENT RESULTS THROUGH JUNE 30, 1995
Putting Performance into Perspective
The graph comparing your Fund's performance to a benchmark index provides you
with a general sense of how your Fund performed. To put this information in
context, it may be helpful to understand the special differences between the
two. Your Fund's total return for the period shown appears with and without
sales charges and includes Fund expenses and management fees. A securities
index measures the performance of a theoretical portfolio. Unlike a fund, the
index is unmanaged; there are no expenses that affect the results. In addition,
few investors could purchase all of the securities necessary to match the
index. And, if they could, they would incur transaction costs and other
expenses.
A $10,000 INVESTMENT IN CLASS A SHARES
Compared to the Lehman Gov't. Bond Index(4) and the Cost of Living (5)
A chart in the form of a line graph appears here, illustrating the growth of a
$10,000 investment in Class A Shares compared to Lehman Gov't Bond Index(4)
and the Cost of Living(5). The data points from the graph are as follows:
New England Government Securities Fund - Net Asset Value(1)
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
9/85 $10,000
6/86 $11,438
6/87 $11,655
6/88 $12,512
6/89 $13,768
6/90 $14,324
6/91 $15,088
6/92 $17,829
6/93 $19,803
6/94 $19,259
6/95 $21,506
</TABLE>
New England Government Securities Fund - With Maximum Sales Charge(2)
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
9/85 $ 9,550
6/86 $10,923
6/87 $11,131
6/88 $11,949
6/89 $13,149
6/90 $13,680
6/91 $14,409
6/92 $17,027
6/93 $18,912
6/94 $18,392
6/95 $20,538
</TABLE>
Lehman Gov't(4)
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
9/85 $10,000
6/86 $11,809
6/87 $12,296
6/88 $13,181
6/89 $14,773
6/90 $15,797
6/91 $17,399
6/92 $19,794
6/93 $22,347
6/94 $22,047
6/95 $24,705
</TABLE>
Cost of Living(5)
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
9/85 $10,000
6/86 $10,105
6/87 $10,481
6/88 $10,893
6/89 $11,456
6/90 $11,992
6/91 $12,555
6/92 $12,943
6/93 $13,330
6/94 $13,617
6/95 $14,004
</TABLE>
This illustration represents past performance of Class A shares and cannot
predict future results. Investment return and principal value may vary,
resulting in a gain or loss on the sale of shares. Class B and Class Y share
performance will be greater or less than that shown based on differences in
inception date, fees and sales charges. All Index and Fund performance assumes
reinvested distributions.
1
<PAGE> 5
NEW ENGLAND GOVERNMENT SECURITIES FUND
AVERAGE ANNUAL TOTAL RETURNS 6/30/95
<TABLE>
<CAPTION>
Class A (Inception 9/16/85) Year to Date 1 Year 5 Years Since Inception
<S> <C> <C> <C> <C>
Net Asset Value(1) 12.17% 11.67% 8.47% 8.14%
With Max. Sales Charge(2) 7.14 6.64 7.48 7.63
Lipper General Gov't. Average(6) 10.49 10.85 8.26 n/a
</TABLE>
<TABLE>
<CAPTION>
Class B (Inception 9/21/93) Year to Date 1 Year Since Inception
<S> <C> <C> <C>
Net Asset Value(1) 11.74% 10.81% 2.00%
With CDSC(3) 7.74 6.81 0.44
Lehman Gov't. Bond Index(4) 12.06 11.20 3.99
Lipper General Gov't. Average(6) 10.49 10.85 n/a
</TABLE>
<TABLE>
<CAPTION>
Class Y (Inception 3/31/94) Year to Date 1 Year Since Inception
<S> <C> <C> <C>
Net Asset Value(1) 12.32% 12.01% 7.91%
Lehman Gov't. Bond Index(4) 12.06 11.20 8.53
Lipper General Gov't. Average(6) 10.49 10.85 n/a
</TABLE>
These returns represent past performance. Investment return and principal
value will fluctuate so that shares, upon redemption, may be worth more or
less than original cost. Class Y shares are available only to certain
institutional investors. Share price and return may vary.
NOTES TO CHARTS AND PERFORMANCE UPDATE
(1) Net Asset Value (NAV) performance assumes reinvestment of all distributions
and does not reflect the payment of a sales charge at the time of purchase.
(2) With Maximum Sales Charge performance assumes reinvestment of all
distributions and reflects the maximum sales charge of 4.50% at the time of
purchase of Class A shares.
(3) With Contingent Deferred Sales Charge (CDSC) performance assumes a maximum
4% sales charge is applied to a redemption of Class B shares. The sales
charge will decrease over time, declining to zero five years after the
purchase of shares.
(4) Lehman Government Bond Index is an unmanaged index of bonds issued by the
U.S. government and its agencies having maturities between one and ten
years. The Index performance has not been adjusted for ongoing management,
distribution and operating expenses and sales charges applicable to mutual
fund investments.
(5) Cost of Living is based on the Consumer Price Index, a widely recognized
measure of the cost of goods and services in the United States, calculated
by the U.S. Bureau of Labor Statistics.
(6) Lipper Average is an average of the total return performance (calculated on
the basis of net asset value) of funds with similar investment objectives
as calculated by Lipper Analytical Services, an independent mutual fund
ranking service.
2
<PAGE> 6
NEW ENGLAND GOVERNMENT SECURITIES FUND
[PHOTO]
NEW ENGLAND GOVERNMENT
SECURITIES FUND
Portfolio Manager: Eric Gutterson
Back Bay Advisors, L.P.(R)
THE MARKET
The bond market rallied strongly in the first six months of 1995 as fixed-income
investors drew reassurance from evidence of a slowing U.S. economy. The latest
Federal Reserve Board interest rate increase, in February 1995, came just a year
after the first of seven rate hikes the Fed made to cool an economy it feared
was growing at an excessive, inflationary pace. Inflation represents a major
negative for bond investors. Sluggish economic activity, which implies low
inflation, led bond prices higher beginning early in the year, in anticipation
of lower rates to come.
The economic scenario that has been playing out is essentially the soft landing
-- a slackening without a recession -- that the investment community had been
hoping for. A drop in consumer demand for autos, housing and manufactured goods
has led the slowdown. In the latter part of 1994, manufacturers were expanding,
thanks to strong export sales and positive consumer sentiment. Companies boosted
production and increased employment to meet anticipated demand for goods. In
part because of fast- rising interest rates, the demand did not materialize.
3
<PAGE> 7
NEW ENGLAND GOVERNMENT SECURITIES FUND
Businesses generally proceed cautiously in a slowing economy. They are inclined
to let inventories work down until signs appear of stronger consumer buying
patterns. This year firms have allowed inventories to contract to a point where
they are more in line with current sales levels. Consumers, on the other hand,
are still carrying high debt burdens which they are not paying down; rather,
they are lowering monthly expenses by exchanging high-cost for low-cost debt.
HOW YOUR FUND PERFORMED
From January through June, the bond market delivered positive returns in
virtually all sectors. New England Government Securities Fund had a total return
of 12.17% on net asset value for Class A shares and 11.74% for Class B shares.
These figures compare to 12.06% for the Lehman Government Bond Index(4).
YOUR FUND'S INVESTMENT STRATEGY
To take advantage of the soft landing and in anticipation of declining rates, we
extended the Fund's duration -- a measure of its sensitivity to interest rate
changes -- to 6.6 years. This means that the Fund's price movements would be
akin to those of an 8.5 year U.S. Treasury Bond, a substantially more bullish
posture than the 4.3-year duration in effect at year end.
We also increased the Fund's emphasis on direct U.S. Treasury obligations (as
distinct from agency obligations, whose government backing is indirect) from 71%
at
4
<PAGE> 8
NEW ENGLAND GOVERNMENT SECURITIES FUND
year end to 93% at the end of June. Treasury securities are not callable, so
they give the Fund greater assurance of a steadier, more predictable income
flow. A greater concentration in Treasuries is also designed to protect the Fund
against the credit risk implicit in a slowing economy. One reason the Fed might
sustain rates at levels that are still fairly high is to protect the dollar,
despite the recession risk that such a policy suggests.
Finally, we have taken a more bullish approach to our exposure along the yield
curve. Over the last six months, the portfolio's holdings, which had been
defensively "barbelled" in short and long maturities, became more concentrated
in intermediate issues to take advantage of further potential rate cuts.
INVESTMENT OUTLOOK
In our December 1994 report to shareholders, we expressed confidence in the
steps the Federal Reserve was taking to keep inflation under control. Now,
however, we feel that Fed policy is too restrictive for today's slower economic
conditions. The U.S. economy will need some stimulus to regain its momentum, and
there is no better stimulus than lower interest rates. Just after the close of
our reporting period, the Fed took a modest step in that direction, cutting the
Fed Funds rate by 1/4 of a percentage point.
Now the Federal Reserve Board's challenge is to avoid reheating the economy and
sparking inflation by letting rates fall too far. Ideally, the Fed will
facilitate a
5
<PAGE> 9
NEW ENGLAND GOVERNMENT SECURITIES FUND
more measured economic expansion. A moderately expanding, only mildly
inflationary economy has traditionally represented a very positive environment
for fixed-income investors.
These factors, especially if supported by reduced federal deficits, could go a
long way to reassuring investors overseas. The result could be increased foreign
participation in our securities markets, as the belief grows that this country
is learning once again to manage its finances.
6
<PAGE> 10
NEW ENGLAND GOVERNMENT SECURITIES FUND
TREASURY YIELD CURVE
The "yield curve" illustrates the yields available on U.S. Treasury securities
of varying maturities, ranging from 3-month Treasury bills to 30-year Treasury
bonds. Under normal conditions, a security with a longer maturity will offer a
higher yield than a shorter term security, to compensate the bond holder for
tying up money for longer periods of time. The chart below illustrates the yield
curve as of the beginning of 1995 and as of June 30, 1995. As you can see,
long-term rates dropped substantially, with the 30-year bond falling more than
1.25 percentage points, from 7.88% to 6.62%.
THE YIELD CURVE JAN-JUNE, 1995
A chart in the form of a line graph appears here, illustrating the yield curve
of U.S. Treasury securities as of the beginning of 1995 and as of June 30,
1995. The data points from the graph are as follows:
As of 1/2/95:
<TABLE>
<CAPTION>
Maturity Yield
-------- -----
<S> <C>
3 Month 5.68%
6 Month 6.50%
1 Year 7.16%
3 Year 7.78%
5 Year 7.83%
10 Year 7.83%
30 Year 7.88%
</TABLE>
As of 6/30/95:
<TABLE>
<CAPTION>
Maturity Yield
-------- -----
<S> <C>
3 Month 5.56%
6 Month 5.58%
1 Year 5.62%
3 Year 5.85%
5 Year 5.97%
10 Year 6.20%
30 Year 6.62%
</TABLE>
Source: Bloomberg
What caused this dramatic drop in just six months? During the first half of the
year the economy showed clear signs of a slowdown, which indicated that
inflation was under control and would not resurface as a threat. (Inflation is
the bond market's primary enemy because it eats away at the value of fixed
income investments). The markets responded enthusiastically, driving down long
term rates. Bond prices, which move in the opposite direction from interest
rates, moved sharply upwards in an impressive rebound from last year's sell-off.
7
<PAGE> 11
[NEW ENGLAND LOGO]
NEW ENGLAND FUNDS
Where The Best Minds Meet
PORTFOLIO COMPOSITION, FINANCIAL STATEMENTS AND HIGHLIGHTS
NEW ENGLAND
GOVERNMENT SECURITIES
FUND
JUNE 30, 1995
<PAGE> 12
--------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
Investments as of June 30, 1995
(unaudited)
BONDS AND NOTES--98.0% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
FACE
AMOUNT DESCRIPTION VALUE (A)
<C> <S> <C>
-------------------------------------------------------------------------------------
GOVERNMENT AGENCIES--4.6% (B)
$ 534,102 Government National Mortgage Association 8.500%, 2/15/2006..... $ 555,300
1,073,069 Government National Mortgage Association 9.000% with various
maturities to 2016........................................... 1,128,396
370,333 Government National Mortgage Association 9.500% with various
maturities to 2009........................................... 393,131
1,060,683 Government National Mortgage Association 10.000% with various
maturities to 2016........................................... 1,145,577
1,268,596 Government National Mortgage Association 12.000% with various
maturities to 2015........................................... 1,446,199
307,985 Government National Mortgage Association 13.000% with various
maturities to 2015........................................... 362,075
581,073 Government National Mortgage Association 13.250% with various
maturities to 2014........................................... 687,482
735,620 Government National Mortgage Association 13.500% with various
maturities to 2013........................................... 868,032
494,408 Government National Mortgage Association 14.000% with various
maturities to 2014........................................... 586,492
-----------
7,172,684
-----------
U.S. GOVERNMENT--93.4%
20,000,000 U.S. Treasury Bonds 9.875%, 11/15/2015......................... 27,053,400
22,000,000 U.S. Treasury Bonds 10.750%, 8/15/2005......................... 29,219,740
15,000,000 U.S. Treasury Bonds 11.250%, 2/15/2015......................... 22,520,100
10,000,000 U.S. Treasury Bonds 11.875%, 11/15/2003........................ 13,636,000
15,000,000 U.S. Treasury Bonds 12.375%, 5/15/2004......................... 21,179,250
25,000,000 U.S. Treasury Bond Strip Zero Coupon, 11/15/2021............... 4,201,000
26,500,000 U.S. Treasury Notes 9.250%, 8/15/1998.......................... 28,967,150
-----------
146,776,640
-----------
Total Bonds and Notes (Identified Cost $149,494,244)........... 153,949,324
-----------
</TABLE>
OPTIONS--0.2%
<TABLE>
<CAPTION>
CONTRACTS DESCRIPTION STRIKE PRICE
<C> <S> <C> <C>
-------------------------------------------------------------------------------------
250 U.S. Treasury Notes December 10 Year Put............ $ 107.00 109,375
250 U.S. Treasury Notes September 10 Year Put........... 109.00 285,156
-----------
Total Options (Identified Cost $507,158)......................... 394,531
-----------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 13
--------------------------------------------------------------------------------
PORTFOLIO COMPOSITION--CONTINUED
Investments as of June 30, 1995
(unaudited)
SHORT-TERM INVESTMENT--0.2%
<TABLE>
<CAPTION>
FACE
AMOUNT DESCRIPTION VALUE (a)
-------------------------------------------------------------------------------------
<S> <C> <C>
$340,000 Household Finance Corp. 6.050%, 7/03/1995...................... $ 339,886
-----------
Total Short-Term Investment (Identified Cost $339,886)......... 339,886
-----------
Total Investments--98.4% (Identified Cost $150,341,288) (c).... 154,683,741
Cash and Receivables........................................... 3,174,646
Liabilities.................................................... (736,519)
-----------
Total Net Assets--100%......................................... $157,121,868
===========
(a) See Note 1a.
(b) The Fund's investments in mortgage backed securities of the Government
National Mortgage Association are interests in separate pools of
mortgages. All separate investments of each of these issues, which
have the same coupon rate, have been aggregated for the purpose of
presentation in the schedule of investments.
(c) Federal Tax Information: At June 30, 1995 the net unrealized
appreciation on investments based on cost for federal income tax
purposes of $150,341,288 was as follows:
Aggregate gross unrealized appreciation for all investments in which
there is an excess of value over tax cost............................. $ 4,769,354
Aggregate gross unrealized depreciation for all investments in which
there is an excess of tax cost over value............................. (426,901)
----------
Net unrealized appreciation........................................... $ 4,342,453
==========
At December 31, 1994 the Fund had a capital loss carryover of
approximately $17,959,000 which expires December 31, 2002. This may be
available to offset future realized capital gains, if any, to the
extent provided by regulations.
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 14
--------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES
June 30, 1995
(unaudited)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value.......................................... $154,683,741
Cash.......................................................... 1,595
Receivable for:
Fund shares sold............................................ 28,587
Accrued interest............................................ 3,144,464
-----------
157,858,387
LIABILITIES
Payable for:
Fund shares redeemed........................................ $ 450,392
Dividends declared.......................................... 102,477
Accrued expenses:
Management fees............................................. 81,913
Deferred trustees' fees..................................... 37,512
Accounting and administrative............................... 4,124
Other expenses.............................................. 60,101
-------
736,519
-----------
$157,121,868
===========
NET ASSETS
Net Assets consist of:
Capital paid in............................................. $165,807,512
Undistributed net investment income......................... 200,748
Accumulated net realized losses............................. (13,228,845)
Unrealized appreciation on investments...................... 4,342,453
-----------
NET ASSETS...................................................... $157,121,868
===========
Computation of net asset value and offering price:
Net asset value and redemption price of Class A shares
($148,644,669 divided by 13,134,116 shares of beneficial
interest)..................................................... $11.32
=====
Offering price per share (100/95.5 of $11.32)................... $11.85*
=====
Net asset value and offering price of Class B shares ($3,763,544
divided by 332,385 shares of beneficial interest)............. $11.32**
=====
Net asset value, offering price and redemption price of Class Y
shares ($4,713,655 divided by 416,097 shares of beneficial
interest)..................................................... $11.33
=====
Identified cost of investments.................................. $150,341,288
===========
</TABLE>
* Based upon single purchases of less than $100,000. Reduced sales charges
apply for purchases in excess of these amounts.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements.
4
<PAGE> 15
--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Six Months Ended June 30, 1995
(unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest..................................................... $ 6,272,109
Expenses
Management fees............................................ $ 497,016
Service fees--Class A...................................... 182,737
Service and Distribution Fees--Class B..................... 16,233
Trustees' fees and expenses................................ 14,088
Accounting and administrative.............................. 26,716
Custodian.................................................. 68,137
Transfer agent............................................. 166,920
Audit and tax services..................................... 23,000
Legal...................................................... 12,994
Printing................................................... 26,583
Registration............................................... 16,429
Miscellaneous.............................................. 7,548 1,058,401
---------- ----------
Net investment income........................................ 5,213,708
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, OPTIONS AND
FUTURES CONTRACTS
Realized gain (loss) on:
Investments--net............................................. 5,704,086
Options closed--net.......................................... (1,010,376)
Futures contracts closed--net................................ 1,025,813
----------
Total realized gain on investment transactions............... 5,719,523
Unrealized appreciation on investments--net.................. 6,765,823
----------
Net gain on investment transactions.......................... 12,485,346
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS..................... $17,699,054
==========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 16
--------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
(unaudited)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1994 1995
----------- ---------------
<S> <C> <C>
FROM OPERATIONS
Net investment income................................. $ 11,300,782 $ 5,213,708
Net realized gain (loss) on investment transactions... (19,482,114) 5,719,523
Unrealized appreciation (depreciation) on
investments......................................... (1,649,028) 6,765,823
----------- -------------
Increase (decrease) in net assets from operations..... (9,830,360) 17,699,054
----------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A............................................. (10,319,365) (4,802,726)
Class B............................................. (128,881) (94,018)
Class Y............................................. (224,780) (151,648)
----------- -------------
(10,673,026) (5,048,392)
----------- -------------
Decrease from capital share transactions.............. (8,338,702) (10,377,559)
----------- -------------
Total increase (decrease) in net assets............... (28,842,088) 2,273,103
NET ASSETS
Beginning of the period............................... 183,690,853 154,848,765
----------- -------------
End of the period..................................... $154,848,765 $157,121,868
=========== =============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period............................... $ 0 $ 35,432
=========== =============
End of the period..................................... $ 35,432 $ 200,748
=========== =============
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 17
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(unaudited)
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1990 1991 1992 1993 1994 1995
------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period......................... $ 11.99 $ 11.38 $ 11.92 $ 11.73 $ 11.75 $ 10.43
------- ------- ------- ------- ------- --------
Income From Investment Operations
Net Investment Income.......... 0.86 0.82 0.70 0.72 0.69 0.37
Net Realized and Unrealized Gain
(Loss) on Investments.......... (0.27) 0.75 0.07 0.32 (1.32) 0.88
------- ------- ------- ------- ------- --------
Total From Investment
Operations..................... 0.59 1.57 0.77 1.04 (0.63) 1.25
------- ------- ------- ------- ------- --------
Less Distributions
Distributions From Net Investment
Income......................... (0.89) (0.82) (0.68) (0.72) (0.69) (0.36)
Distributions From Net Realized
Capital Gains.................. 0.00 (0.21) (0.28) (0.30) 0.00 0.00
Distributions From Paid-in
Capital........................ (0.31) 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------- ------- --------
Total Distributions.............. (1.20) (1.03) (0.96) (1.02) (0.69) (0.36)
------- ------- ------- ------- ------- --------
Net Asset Value, End of Period... $ 11.38 $ 11.92 $ 11.73 $ 11.75 $ 10.43 $ 11.32
======= ======= ======= ======= ======= ========
Total Return (%)................. 5.7 14.9 6.8 9.0 (5.5) 12.2(b)
Ratio of Operating Expenses to
Average Net Assets (%)......... 1.21 1.21 1.23 1.22 1.29 1.37(a)
Ratio of Net Investment Income to
Average Net Assets (%)......... 7.63 7.28 5.92 5.70 6.66 6.73(a)
Portfolio Turnover Rate (%)...... 737 305 730 276 809 758(a)
Net Assets, End of Period
(000).......................... $181,343 $180,198 $178,030 $182,436 $147,986 $148,645
</TABLE>
(a) Computed on an annualized basis.
(b) Not computed on an annualized basis.
See accompanying notes to financial statements.
7
<PAGE> 18
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--CONTINUED
(unaudited)
<TABLE>
<CAPTION>
CLASS B CLASS Y
------------------------------------- ---------------------
SEPTEMBER 23(A) YEAR SIX MONTHS MARCH 31(A) SIX MONTHS
THROUGH ENDED ENDED THROUGH ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30,
1993 1994 1995 1994 1995
--------------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period... $12.26 $11.75 $10.43 $11.20 $10.44
---------- -------- ------- -------- -------
Income From Investment
Operations
Net Investment Income... 0.16 0.60 0.33 0.54 0.39
Net Realized and
Unrealized Gain (Loss)
on Investments........ (0.30) (1.32) 0.88 (0.77) 0.88
---------- -------- ------- -------- -------
Total From Investment
Operations............ (0.14) (0.72) 1.21 (0.23) 1.27
---------- -------- ------- -------- -------
Less Distributions
Distributions From Net
Investment Income..... (0.16) (0.60) (0.32) (0.53) (0.38)
Distributions From Net
Realized Capital
Gains................. (0.21) 0.00 0.00 0.00 0.00
---------- -------- ------- -------- -------
Total Distributions..... (0.37) (0.60) (0.32) (0.53) (0.38)
---------- -------- ------- -------- -------
Net Asset Value, End of
Period................ $11.75 $10.43 $11.32 $10.44 $11.33
========== ======== ======= ======== =======
Total Return (%)........ (1.2)(c) (6.2) 11.7(c) (2.0)(c) 12.3(c)
Ratio of Operating
Expenses to Average
Net Assets (%)........ 1.97(b) 2.04 2.12(b) 0.93(b) 1.12(b)
Ratio of Net Investment
Income to Average
Net Assets (%)........ 5.03(b) 5.91 5.98(b) 7.25(b) 6.98(b)
Portfolio Turnover Rate
(%)................... 276 809 758(b) 809 758(b)
Net Assets, End of
Period (000).......... $1,255 $2,760 $3,764 $4,104 $4,714
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
See accompanying notes to financial statements.
8
<PAGE> 19
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1995 (unaudited)
1. The Fund is a series of The New England Funds Trust I, a Massachusetts
business trust (the "Trust"), and is registered under the Investment Company Act
of 1940, as amended (the "1940 Act"), as an open-end management investment
company. The Declaration of Trust permits the Trustees to issue an unlimited
number of shares of the Trust in multiple series (each such series of shares a
"Fund").
The Fund offers Class A, Class B, and Class Y shares. The Fund commenced its
public offering of Class B shares on September 23, 1993, and of Class Y shares
on March 31, 1994. Class A shares are sold with a maximum front end sales charge
of 4.50%. Class B shares do not pay a front end sales charge, but pay a higher
ongoing distribution fee than Class A shares, and are subject to a contingent
deferred sales charge if those shares are redeemed within five years of
purchase. Class Y shares do not pay a front end sales charge, a contingent
deferred sales charge or distribution fees. They are intended for institutional
investors with a minimum of $1,000,000 to invest. Expenses of the Fund are borne
pro-rata by the holders of all classes of shares, except that each class bears
expenses unique to that class (including the Rule 12b-1 service and distribution
fees applicable to such class), and votes as a class only with respect to its
own Rule 12b-1 plan. Shares of each class would receive their pro-rata share of
the net assets attributable to their class, if the Fund were liquidated. In
addition, the Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
A. SECURITY VALUATION. The Fund's investment adviser, Back Bay Advisors, L.P.
("Back Bay Advisors"), under the supervision of the Fund's trustees, determines
the value of the Fund's portfolio of securities, using valuations provided by a
pricing service selected by Back Bay Advisors and other information with respect
to transactions in securities, including quotations from securities dealers.
Valuations of securities and other assets owned by the Fund for which market
quotations are readily available are based on those quotations. Short-term
obligations that will mature in 60 days or less are stated at amortized cost
which approximates market value. All other securities and assets are valued at
their fair value as determined in good faith by Back Bay Advisors under the
supervision of the Fund's trustees.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME. Security transactions
are accounted for on the trade date (the date the buy or sell is executed).
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Interest income is increased by the accretion of
discount. In determining net gain or loss on securities sold, the cost of
securities has been determined on the identified cost basis.
9
<PAGE> 20
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--CONTINUED
June 30, 1995 (unaudited)
C. OPTIONS AND FUTURES. CALLS AND PUTS. The Fund may write (sell) call and put
options on securities to manage its exposure to interest rates and the bond
market. Buying futures, writing puts, and buying calls tend to increase the
fund's exposure to the underlying instrument. Selling future, buying puts, and
writing calls tend to decrease the fund's exposure to the underlying instrument,
or hedge other fund investments. When a fund writes a call or put option, an
amount equal to the premium received by the fund is included in the fund's
statement of assets and liabilities as an asset and as an equivalent liability.
The amount of the liability is subsequently marked-to-market to reflect the
current market value of the option written. The current value of a written
option is the closing price on the principal exchange on which such option is
traded. If an option which the fund has written expires on its stipulated
expiration date, or if the fund enters into a closing purchase transaction, the
fund realizes a gain (or loss if the cost of a closing purchase transaction
exceeds the premium received when the option was written) without regard to any
unrealized gain or loss on the underlying security, and the liability related to
such option is extinguished. If a call option which the fund has written is
exercised, the fund realizes a capital gain or loss from the sale of the
underlying security and the proceeds from such sale are increased by the premium
originally received. If a put option which the fund has written is exercised,
the amount of the premium originally received will reduce the cost of the
security which the fund purchases upon exercise of the option.
The premium paid by a fund for the purchase of a call or a put option is
included in the asset section of the fund's statement of assets and liabilities
as an investment and subsequently adjusted to the current market value of the
option. The current value of a purchased option is the closing price on the
principal exchange on which such option is traded. If an option which the fund
has purchased expires on the stipulated expiration date, the fund will realize a
loss in the amount of the cost of the option. If the fund enters into a closing
sale transaction, the fund will realize a gain or loss, depending on whether the
sales proceeds from the closing sale transaction are greater or less than the
cost of the option. If the fund exercises a purchased put option, it will
realize a gain or loss from the sale of the underlying security and the proceeds
from such sale will be decreased by the premium originally paid. If the fund
exercises a purchased call option, the cost of the security which the fund
purchases upon exercise will be increased by the premium originally paid.
The risk in writing a call option is that the fund gives up the opportunity of
profit if the market price of the underlying security increases above the strike
price. The risk in writing a put option is that the fund may incur a loss if the
market price of the security decreases and the option is exercised. The fund
also has the additional risk of not being able to enter into a closing
transaction if a liquid secondary market does not exist. The fund also may write
over-the-counter options where the completion of the obligation is dependent
upon the credit standing of the other party.
10
<PAGE> 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--CONTINUED
June 30, 1995 (unaudited)
D. INTEREST RATE FUTURES CONTRACTS. The Fund may enter into interest rate
futures contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. An interest rate futures contract is an agreement
between two parties to buy and sell a debt security for a set price (or to
deliver an amount of cash) on a future date. Upon entering into such a contract,
the purchasing fund is required to pledge to the broker an amount of cash, U.S.
Government securities or other high quality debt securities equal to the minimum
"initial margin" requirements of the exchange on which the contract is traded,
currently up to $3,000 per contract. Pursuant to the contract, the fund agrees
to receive from or pay to the broker involved in the transaction an amount of
cash equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as "variation margin," and are recorded by the fund as
unrealized gains or losses. When the contract is closed, the fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed. Risks of
entering into futures contracts include the possibility that there may be an
illiquid market and that changes in the value of the contract may not correlate
with changes in the value of the underlying securities.
E. FEDERAL INCOME TAXES. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders all of its income and any net realized capital
gains at least annually. Accordingly, no provision for federal income tax has
been made.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily to
shareholders of record at the time and are paid monthly.
The timing and characterization of certain income and capital gains
distributions are determined in accordance with federal tax regulations which
may differ from generally accepted accounting principles. These differences are
primarily due to differing treatment for mortgaged backed securities for book
and tax purposes. Permanent book and tax basis differences will result in
reclassification to the capital accounts.
G. REPURCHASE AGREEMENTS. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 100%
of the repurchase price. Back Bay Advisors is responsible for determining that
the value of the collateral is at all times at least equal to the repurchase
price. Repurchase agreements could involve certain risks in the event of default
or insolvency of the other party including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities.
H. DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities on a
forward commitment basis. Payment and delivery may take place a month or more
after the date of the transaction. The price of the underlying securities and
the date when the
11
<PAGE> 22
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--CONTINUED
June 30, 1995 (unaudited)
securities will be delivered and paid for are fixed at the time the transaction
is negotiated.
2. PURCHASES AND SALES OF SECURITIES (excluding short-term investments) for the
six months ended June 30, 1995 were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ ------------
U.S. U.S.
GOVERNMENT GOVERNMENT
------------ ------------
<S> <C>
$579,632,195 $597,996,396
</TABLE>
Investments in written options for the Fund for the six months ended June 30,
1995 are summarized as follows:
<TABLE>
<CAPTION>
WRITTEN OPTIONS
----------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- --------
<S> <C> <C>
Contracts opened.............................. 1,150 $380,027
Contracts closed.............................. (1,150) (380,027)
--------- --------
0 $ 0
======= ========
</TABLE>
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES. During the six
months ended June 30, 1995, the Fund incurred management fees payable to its
investment adviser, Back Bay Advisors. Certain officers and directors of the
adviser and its affiliated companies are also officers or trustees of the Fund.
Back Bay Advisors is a wholly owned subsidiary of New England Investment
Companies, L.P. ("NEIC"), which is a majority owned subsidiary of New England
Mutual Life Insurance Company. The management agreement in effect during the six
months ended June 30, 1995 provided for fees as set forth below:
<TABLE>
<CAPTION>
ANNUAL PERCENTAGE
FEES EARNED RATE ANNUAL NET ASSET VALUE LEVELS
---------- ------------------ ------------------------------
<S> <C> <C>
$497,016 0.650% the first $200 million
0.625% the next $300 million
0.600% the excess over $500 million
</TABLE>
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds L.P. ("New England
Funds"), the Fund's distributor, performs certain accounting and administrative
services for the Fund. The Fund reimburses New England Funds for all or part of
New England Funds' expenses of providing these services which include the
following: (i) expenses for personnel performing bookkeeping, accounting,
internal auditing and financial reporting functions and clerical functions
relating to the Fund, (ii) expenses for services required in connection with the
preparation of registration statements and prospectuses, shareholder reports and
notices, proxy solicitation material furnished to shareholders of the Fund or
regulatory authorities and reports and questionnaires for SEC compliance, and
(iii) registration, filing and other fees in
12
<PAGE> 23
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--CONTINUED
June 30, 1995 (unaudited)
connection with requirements of regulatory authorities. For the six months ended
June 30, 1995 these expenses amounted to $26,716 and are shown separately in the
financial statements as accounting and administrative services.
C. TRANSFER AGENT FEES. New England Funds is the transfer and shareholder
servicing agent to the Fund. For the six months ended June 30, 1995, the Fund
paid New England Funds $128,094 as compensation for its services in that
capacity.
D. SERVICE AND DISTRIBUTION FEES. Pursuant to Rule 12b-1 under the 1940 Act,
the Trust has adopted a Service Plan relating to the Fund's Class A Shares (the
"Class A Plan") and a Service and Distribution Plan relating to the Fund's Class
B shares (the "Class B Plan").
Under the Class A Plan, the Fund pays New England Funds a monthly service fee at
the annual rate of up to 0.25% of the average daily net assets attributable to
the Fund's Class A shares, as reimbursement for expenses (including certain
payments to securities dealers, who may be affiliated with New England Funds)
incurred by New England Funds in providing personal services to investors in
Class A shares and/or the maintenance of shareholder accounts. For the six
months ended June 30, 1995, the Fund paid New England Funds $182,737 in fees
under the Class A Plan. If the expenses of New England Funds that are otherwise
reimbursable under the Class A Plan incurred in any year exceed the amounts
payable by the Fund under the Class A Plan, the unreimbursed amount (together
with unreimbursed amounts from prior years) may be carried forward for
reimbursement in future years in which the Class A Plan remains in effect. The
amount of unreimbursed expenses carried forward into 1995 is $1,583,658.
Under the Class B Plan, the Fund pays New England Funds a monthly service fee at
the annual rate of up to 0.25% of the average daily net assets attributable to
the Fund's Class B shares, as compensation for services provided and expenses
(including certain payments to securities dealers, who may be affiliated with
New England Funds) incurred by New England Funds in providing personal services
to investors in Class B shares and/or the maintenance of shareholder accounts.
For the six months ended June 30, 1995, the Fund paid New England Funds $4,058
in service fees under the Class B Plan.
Also under the Class B Plan, the Fund pays New England Funds a monthly
distribution fee at the annual rate of up to 0.75% of the average daily net
assets attributable to the Fund's Class B shares, as compensation for services
provided and expenses (including certain payments to securities dealers, who may
be affiliated with New England Funds) incurred by New England Funds in
connection with the marketing or sale of Class B shares. For the six months
ended June 30, 1995, the Fund paid New England Funds $12,175 in distribution
fees under the Class B Plan.
13
<PAGE> 24
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--CONTINUED
June 30, 1995 (unaudited)
Commissions (including contingent deferred sales charges) on Fund shares paid to
New England Funds by investors in shares of the Fund during the six months ended
June 30, 1995 amounted to $108,790.
E. TRUSTEES FEES AND EXPENSES. The Fund does not pay any compensation directly
to its officers or trustees who are directors, officers or employees of Back Bay
Advisors, New England Funds, NEIC or their affiliates, other than registered
investment companies. Each other trustee is compensated by the Fund as follows:
<TABLE>
<S> <C>
Annual Retainer $2,400
Meeting Fee $125/meeting
Committee Meeting Fee $75/meeting
Committee Chairman Annual Retainer $125
</TABLE>
A deferred compensation plan is available to the trustees on a voluntary basis.
Each participating trustee will receive an amount equal to the value that such
deferred compensation would have had, had it been invested in the Fund on the
normal payment date.
14
<PAGE> 25
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--CONTINUED
June 30, 1995 (unaudited)
4. CAPITAL SHARES. At June 30, 1995 there was an unlimited number of shares of
beneficial interest authorized, divided into three classes, Class A, Class B and
Class Y capital stock. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1994 JUNE 30, 1995
----------------------- -----------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold....................... 1,707,576 $ 19,003,399 541,776 $ 5,836,929
Shares issued in connection with
the reinvestment of:
Distributions from net
investment income............. 813,974 8,906,248 389,545 4,239,391
--------- ----------- --------- -----------
2,521,550 27,909,647 931,321 10,076,320
Shares redeemed................... (3,859,299) (42,427,673) (1,982,228) (21,426,729)
--------- ----------- --------- -----------
Net decrease...................... (1,337,749) $(14,518,026) (1,050,907) $(11,350,409)
========= ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1994 JUNE 30, 1995
----------------------- -----------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold....................... 233,553 $ 2,587,547 76,493 $ 825,231
Shares issued in connection with
the reinvestment of:
Distributions from net
investment income............. 9,080 98,541 6,821 74,362
--------- ----------- --------- -----------
242,633 2,686,088 83,314 899,593
Shares redeemed................... (84,746) (907,115) (15,574) (170,488)
--------- ----------- --------- -----------
Net increase...................... 157,887 $ 1,778,973 67,740 $ 729,105
========= =========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31 (A) THROUGH SIX MONTHS ENDED
DECEMBER 31, 1994 JUNE 30, 1995
----------------------- -----------------------
CLASS Y SHARES AMOUNT SHARES AMOUNT
------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold....................... 503,105 $ 5,576,530 51,885 $ 553,585
Shares issued in connection with
the reinvestment of:
Distributions from net
investment income............. 20,659 222,025 14,172 154,409
--------- ----------- --------- -----------
523,764 5,798,555 66,057 707,994
Shares redeemed................... (130,704) (1,398,204) (43,020) (464,249)
--------- ----------- --------- -----------
Net increase...................... 393,060 $ 4,400,351 23,037 $ 243,745
========= =========== ========= ===========
Total (decrease) from capital
share transactions.............. (786,802) $ (8,338,702) (960,130) $(10,377,559)
========= =========== ========= ===========
</TABLE>
(a) Commencement of operations.
15
<PAGE> 26
-------------------------------------------------------------------------------
REGULAR INVESTING PAYS
-------------------------------------------------------------------------------
FIVE GOOD REASONS TO INVEST REGULARLY
1. It's an easy way to build assets
2. It's convenient and effortless
3. It requires a low minimum to get started
4. It can help you reach important long-term goals like retirement or college
funding
5. It can help you benefit from the ups and downs of the market
With Investment Builder, New England Funds' automatic investment program, you
can invest as little as $50 a month in your New England Fund automatically --
without even writing a check. And, as you can see from the chart below, your
monthly investments can really add up over time.
THE POWER OF MONTHLY INVESTING
A line graph appears here, illustrating the hypothetical accumulation of
monthly investments at an 8% annual rate of return. The data points of the
graph are as follows:
<TABLE>
<CAPTION>
Monthly investments of $50:
Years Growth of Monthly Investments
----- -----------------------------
<S> <C>
0 $0
5 $3,661
10 $9,040
15 $16,943
20 $28,555
25 $45,618
Monthly investments of $100:
<CAPTION>
Years Growth of Monthly Investments
----- -----------------------------
<S> <C>
0 $0
5 $7,322
10 $18,079
15 $33,886
20 $57,111
25 $91,236
Monthly investments of $200:
<CAPTION>
Years Growth of Monthly Investments
----- -----------------------------
<S> <C>
0 $0
5 $14,643
10 $36,158
15 $67,772
20 $114,222
25 $182,472
Monthly investments of $500:
<CAPTION>
Years Growth of Monthly Investments
----- -----------------------------
<S> <C>
0 $0
5 $36,608
10 $90,396
15 $169,429
20 $285,555
25 $456,181
</TABLE>
[Chart Caption]
For illustrative purposes only. These figures represent hypothetical
accumulation at an 8% annual rate of return, and are not indicative of future
performance of any New England Fund. The value of a New England Fund will
fluctuate with changing market conditions.
This program cannot assure a profit nor protect against a loss in declining
market. It does, however, ensure that you buy more shares when the price is low
and fewer shares when the price is high.
You can start an Investment Builder program with your current New England Fund
account, or with any of our other funds. To open an Investment Builder account
today, call your financial representative or New England Funds at
1-800-225-5478.
16
<PAGE> 27
NEW ENGLAND FUNDS
STOCK FUNDS
International Equity Fund
Growth Fund
Star Advisers Fund
Capital Growth Fund
Value Fund
Growth Opportunities Fund
Balanced Fund
BOND FUNDS
High Income Fund
Strategic Income Fund
Government Securities Fund
Bond Income Fund
Limited Term U.S. Government Fund
Adjustable Rate U.S. Government Fund
TAX EXEMPT FUNDS
Tax Exempt Income Fund
Massachusetts Tax Free Income Fund
Intermediate Term Tax Free Fund of California
Intermediate Term Tax Free Fund of New York
MONEY MARKET FUNDS
Cash Management Trust
-- Money Market Series
-- U.S. Government Series
Tax Exempt Money Market Trust
To learn more, and for a free prospectus,
contact your financial representative.
New England Funds, L.P.
399 Boylston Street
Boston, MA 02116
Toll Free 800-225-5478
This material is authorized for distribution to prospective
investors when it is preceded or accompanied by the Fund's
current prospectus, which contains information about
distribution charges, management and other items of interest. Investors are
advised to read the prospectus carefully before investing.
<PAGE> 28
[NEW ENGLAND LOGO]
NEW ENGLAND FUNDS
Where The Best Minds Meet
--------------------
399 Boylston Street
Boston, Massachusetts
02116
--------------------
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