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[logo]
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
SEMIANNUAL REPORT AND PERFORMANCE UPDATE
NEW ENGLAND
GOVERNMENT
SECURITIES FUND
JUNE 30, 1996
<PAGE>
July 25, 1996
DEAR SHAREHOLDER,
New England Funds welcomes the opportunity to present you with the 1996
Semiannual Report for New England Government Securities Fund, containing your
portfolio manager commentary and complete financial information.
ECONOMIC GROWTH IN THE FIRST HALF OF 1996
Moderate growth with low inflation was the economic story during the first
half of 1996. U.S. Gross Domestic Product (GDP), a bellwether of economic
growth, remained strong at 2.3% through June, just shy of what most economists
consider optimal growth. As a result, the Federal Reserve Board opted not to
tinker with interest rates through the first half of the year, save for a
quarter-point ease in short-term rates in late January. The relatively calm
economic waters had a stimulating effect on the domestic equity market, boosting
stocks 537 points to 5,654 at the end of June, as measured by the Dow Jones
Industrial Average. Bond yields did not fare as well, rising to 7.00% at the end
of June from 6.65% earlier in the year. Money market yields remained stable,
falling back only slightly during the past six months.
THE BENEFITS OF MAINTAINING A LONG-TERM FOCUS
But the market volatility of the first three weeks in July claimed 5.5% of
the Dow Jones Industrial Average's first-half gains. Again, we are reminded that
no bull market lasts forever. Long-term financial goals are key in times like
these and it's important to anticipate this type of market volatility and remain
committed to your financial plan.
It's also a good idea to ask your financial representative for help. A
financial representative can guide you through volatile markets and help you
meet your long-term financial goals. A recent study by Dalbar, Inc., a mutual
fund monitoring and analytical service, shows that, on average, mutual fund
investors who bought and held shares, with the assistance of a financial
representative, enjoyed the benefits of a long-term commitment. Consequently,
they benefitted from higher returns than direct investors and others who bought
and sold, although this does not occur in every case.
CELEBRATING THE BIRTHDAYS OF THREE NEW ENGLAND FUNDS
During the past two months, we've celebrated the birthdays of three of our
most popular funds: New England Growth Opportunities Fund; New England Strategic
Income Fund and New England Star Advisers Fund. Demonstrating the remarkable
scope and breadth of our funds, the Growth Opportunities Fund celebrated its
65th birthday in May while the fast-growing Strategic Income and Star Advisers
Funds marked their first and second birthdays, respectively. We're proud of all
of our funds, but take special pride in recognizing that, whether six months or
65-years-old, all New England Funds are designed to help investors achieve their
goals.
NEW ENGLAND FUNDS: THE PLACE "WHERE THE BEST MINDS MEET"(TM)
The longevity of our more seasoned funds and the potential for growth of our
newer ones illustrates the ongoing progress of New England Funds. Our unique
multiple-adviser approach brings together some of the best minds in the
investment business. The ability to attract top-notch investment advisers and
our multiple-adviser approach to fund management are the cornerstones of New
England Funds' investment philosophy and the essence of our corporate logo,
Where The Best Minds Meet(TM).
OUTLOOK FOR THE REST OF 1996
Going forward, we anticipate that the economy will continue to grow
moderately and that inflationary pressures will not be excessive. While we
estimate the GDP may rise somewhat from its current level of 2.3%, the Federal
Reserve should be reluctant to tighten the money supply by raising short-term
interest rates. We also believe that the equity markets will continue to be
volatile through the rest of the year.
We believe that you will find your portfolio manager commentary informative.
If you have any questions or comments, please contact your financial
representative or New England Funds directly at 800-225-5478.
Sincerely,
/s/ Henry L.P. Schmelzer
Henry L.P. Schmelzer, President
<PAGE>
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NEW ENGLAND GOVERNMENT SECURITIES FUND
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INVESTMENT RESULTS THROUGH JUNE 30, 1996
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 chart in the form of a line graph appears here illustrating the growth of a
$10,000 investment in the Government Securites Fund's Class A Shares since
inception compared to the Lehman Government Bond Index and Cost of Living over
the same period. The data points in this chart are as follows:]
- --------------------------------------------------------------------------------
A $10,000 INVESTMENT IN CLASS A SHARES
- --------------------------------------------------------------------------------
NE GOVERNMENT Government Securities Cost of
Class A/Index NAV POP Lehman* Living
9/16/95 $10,000 $9,550 $10,000 $10,000
1986 $11,438 $10,923 $11,809 $10,105
1987 $11,655 $11,131 $12,296 $10,481
1988 $12,512 $11,949 $13,181 $10,893
1989 $13,768 $13,149 $14,773 $11,456
1990 $14,324 $13,680 $15,797 $11,992
1991 $15,088 $14,409 $17,399 $12,555
1992 $17,829 $17,027 $19,794 $12,943
1993 $19,803 $18,912 $22,347 $13,330
1994 $19,259 $18,392 $22,047 $13,617
1995 $21,506 $20,538 $24,705 $14,004
1996 $22,233 $21,232 $25,817 $14,381
* Lehman Govt Index
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.
<PAGE>
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NEW ENGLAND GOVERNMENT SECURITIES FUND
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS 6/30/96
CLASS A (INCEPTION 9/16/85) 1 YEAR 3 YEAR 5 YEAR 10 YEAR
Net Asset Value(1) 3.38% 3.93% 8.06% 6.87%
With Max. Sales Charge(2) -1.24 2.34 7.07 6.38
Lipper General Gov't.
Average(6) 3.48 3.74 7.15 7.17
CLASS B (INCEPTION 9/13/93) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 2.80% 2.29%
With CDSC(3) -1.07 1.35
Lehman Gov't. Bond Index(4) 4.50 4.17
Lipper General Gov't.
Average(6) 3.48 n/a
CLASS Y (INCEPTION 3/31/94) 1 YEAR SINCE INCEPTION
Net Asset Value(1) 3.69% 6.03%
Lehman Gov't. Bond Index(4) 4.50 -6.72
Lipper General Gov't.
Average(6) 3.48 n/a
- ------------------------------------------------------------------------------
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 4.5% 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.
<PAGE>
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NEW ENGLAND GOVERNMENT SECURITIES FUND
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[Photo of Eric Gutterson]
NEW ENGLAND
GOVERNMENT SECURITIES FUND
Portfolio Manager: Eric Gutterson
Back Bay Advisors, L.P.
The Market
The first six months of 1996 were challenging for fixed income investments. The
strong bond market rally of 1995 fizzled out quickly in mid-February, when
reports of stronger than expected economic activity caused interest rates to
reverse direction and move sharply higher. Long-term interest rates, as measured
by the yield on the 30-year Treasury bond, increased from 5.95% to 6.89% over
the six-month period.
Changing dynamics in the forces that drove the market rally throughout 1995
played a large role in this reversal. Increased corporate productivity
continued, as demonstrated by strong corporate earnings without accompanying
wage and price inflation. However, strong earnings, normally, a positive for the
bond market, instead increased investors' preference for the stock market,
depressing demand and prices for fixed income securities.
In addition, newly confident consumers began to spend more and save less,
reversing the low spending levels that were predominant throughout 1995. This
increase in spending contributed to expectations of higher inflation, always a
negative for bond prices.
Third, the failure of the federal government to reach a balanced budget
agreement was discouraging to overseas investors and, consequently, the U.S.
government bond market lost much of the strong international support it enjoyed
during 1995.
How Your Fund Performed
For the sixth month period, New England Government Securities Fund had a total
return of -3.39% for Class A shares, based on net asset value, compared to a
total return of -2.62 for the Lehman Government Bond Index. This
underperformance is due primarily to a duration that was somewhat longer than
that of the Lehman Index. Duration is a measure of the portfolio's sensitivity
to interest rate changes.
How We Managed Your Fund
As we reported to you in the Fund's Annual Report, we grew more cautious during
the fourth quarter of 1995 in the belief that the majority of downward interest
rate moves were behind us. As a result, we began 1996 with the Fund positioned
for a period of market consolidation that we believed would result from moderate
economic growth and low levels of inflation.
While our strategy going into the market decline was relatively defensive, we
were surprised by the speed with which the market reversed direction. We
continued to shorten the Fund's duration and to barbell maturities by adding
shorter maturity bonds to balance our investment in bonds with longer
maturities. We took securities out of the 5-10 year maturity range and moved
into the 2-3 year range to reduce the Fund's duration from 6 years at December
31, to 4.5-5 years. In addition, we moved some securities into the 20 year and
longer maturity range for current income purposes. We also expanded holdings in
mortgage-backed securities, which tend to perform well in periods of rising
interest rates because there is a higher likelihood that interest payments will
be collected over longer periods; homeowners are less likely to refinance and
prepay their mortgage when rates are rising.
This strategy paid off as the Fund regained some of the ground lost early in the
period. We continue to be cautious on the market, although a stronger bond
market is possible during the second half of 1996. Therefore, we are not
inclined to further shorten the Fund's duration at this time.
Our Investment Outlook
We believe that the economy's current level of growth is unsustainable and that
the second half of 1996 will be weaker than the first. Despite stronger than
expected economic growth over the past six months, we have not seen any
appreciable wage and price pressure, which should calm the market's near-term
fears of inflation. While we believe that interest rates will continue to
fluctuate and that volatility will continue to be high, we are hopeful that
rates will be lower by year-end.
The presidential election in November will almost certainly have some impact on
the bond market, although it is too early to predict the outcome. It is likely
that if the Republicans retain control of the House of Representatives the bond
market will respond favorably, while if the Republicans lose the House, the
expectation of increased government spending will be negative for the market.
As a result of election uncertainty and expected market volatility, we will not
be inclined to dramatically alter the Fund's structure or implement any major
strategic changes.
Please see page 7 for
an illustration and
explanation of the
yield curve.
<PAGE>
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NEW ENGLAND GOVERNMENT SECURITIES FUND
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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 at the beginning and at the end of 1995. As you can see, long-term rates
dropped substantially, with the 30-year bond falling almost two percentage
points, from 6.89% to 5.95%.
- --------------------------------------------------------------------------------
THE YIELD CURVE JANUARY - JUNE, 1996
- --------------------------------------------------------------------------------
[A chart in the form of a line graph appears here, illustrating the drop in the
yield curve of 3-month Treasury bills to 30-year Treasury bonds. The data from
the graph is as follows:]
Date Range 1/02/96 6/28/96 CHANGE
- ---------- ------- ------- ------
3 MONTH 5.113 5.152 0.0394
6 MONTH 5.179 5.358 0.1793
1 YEAR 5.175 5.674 0.4993
2 YEAR 5.175 6.107 0.9320
3 YEAR 5.225 6.269 1.0439
5 YEAR 5.381 6.462 1.0810
10 YEAR 5.587 6.714 1.1269
30 YEAR 5.95 6.894 0.9304
Source: Bloomberg
What caused this dramatic drop? Over the year it became apparent that the
economy was growing at a more subdued pace and that inflation remained under
control. (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
of interest rates, moved sharply upwards in an impressive rebound from 1994's
market decline.
<PAGE>
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[logo]
NEW ENGLAND FUNDS
Where The Best Minds Meet(TM)
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PORTFOLIO COMPOSITION, FINANCIAL STATEMENTS AND HIGHLIGHTS
- ------------------------------------------------------------------------------
NEW ENGLAND
GOVERNMENT SECURITIES
FUND
- -------------
JUNE 30, 1996
- -------------
<PAGE>
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PORTFOLIO COMPOSITION
- ------------------------------------------------------------------------------
Investments as of June 30, 1996
(unaudited)
BONDS AND NOTES--97.6% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
FACE
AMOUNT DESCRIPTION VALUE (A)
- -----------------------------------------------------------------------------------------------
<C> <S> <C>
GOVERNMENT AGENCIES--21.8% (B)
$29,768,916 Government National Mortgage Association, 7.000%, with
various maturities in 2026 .................................. $ 28,568,929
464,230 Government National Mortgage Association, 8.500%, 2/15/2006 ... 477,721
932,393 Government National Mortgage Association, 9.000%, with
various maturities to 2016 .................................. 976,682
297,581 Government National Mortgage Association, 9.500%, with
various maturities in 2009 .................................. 318,227
659,356 Government National Mortgage Association, 10.000%, with
various maturities to 2016 .................................. 712,443
54,119 Government National Mortgage Association, 12.500%, with
various maturities to 2014 .................................. 62,863
------------
31,116,865
------------
U.S. GOVERNMENT--75.8%
20,000,000 U.S. Treasury Bonds, 10.750%, 8/15/2005 ....................... 25,427,600
8,500,000 U.S. Treasury Bonds, 10.375%, 11/15/2012 ...................... 10,791,005
15,000,000 U.S. Treasury Bonds, 7.125%, 2/15/2023 ........................ 15,168,750
28,000,000 U.S. Treasury Notes, 9.250%, 8/15/1998 ........................ 29,704,080
25,000,000 U.S. Treasury Notes, 9.150%, 5/15/1999 ........................ 26,832,750
------------
107,924,185
------------
Total Bonds and Notes (Identified Cost $141,611,091) .......... 139,041,050
------------
SHORT-TERM INVESTMENT--0.7%
- -----------------------------------------------------------------------------------------------
940,000 American Express Credit Corp., 5.250%, 7/1/1996 ............... 940,000
------------
Total Short-Term Investment (Identified Cost $940,000) ........ 940,000
------------
Total Investments-98.3% (Identified Cost $142,551,091) (c) .... 139,981,050
Other assets less liabilities ................................. 2,425,361
------------
Total Net Assets--100% ........................................ $142,406,411
============
<FN>
(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, 1996 the net unrealized depreciation
on investments based on cost for federal income tax purposes of $142,551,091
was as follows:
Aggregate gross unrealized appreciation for all investments in which
there is an excess of value over tax cost ............................... $ 743,933
Aggregate gross unrealized depreciation for all investments in which
there is an excess of tax cost over value ............................... (3,313,974)
------------
Net unrealized depreciation ............................................. $ (2,570,041)
============
</TABLE>
At June 30, 1996 the Fund had a capital loss carryover of
approximately $7,302,000 which expires December 31, 2002. This may be
available to offset future realized capital gains, if any, to the
extent provided by regulations.
See accompanying notes to financial statements.
<PAGE>
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STATEMENT OF ASSETS & LIABILITIES
- ------------------------------------------------------------------------------
ASSETS
Investments at value ............................ $139,981,050
Cash ............................................ 20,762
Receivable for:
Fund shares sold .............................. 41,000
Accrued interest .............................. 2,782,594
Prepaid registration expense .................... 7,000
------------
142,832,406
LIABILITIES
Payable for:
Fund shares redeemed .......................... $140,979
Dividends declared ............................ 102,212
Accrued expenses:
Management fees ............................... 75,381
Deferred trustees' fees ....................... 43,861
Accounting and administrative ................. 3,490
Other expenses ................................ 60,072
--------
425,995
------------
NET ASSETS ........................................ $142,406,411
============
Net Assets consist of:
Capital paid in ............................... $155,718,284
Undistributed net investment income ........... 2,835
Accumulated net realized losses ............... (10,744,667)
Unrealized depreciation on investments ........ (2,570,041)
------------
NET ASSETS ........................................ $142,406,411
============
Computation of net asset value and offering price:
Net asset value and redemption price of Class A
shares ($129,562,496 divided by 11,819,023 shares
of beneficial interest) ......................... $10.96
======
Offering price per share (100/95.50 of $10.96) .... $11.48*
======
Net asset value and offering price of Class B shares
($5,310,268 divided by 483,851 shares of
beneficial interest) ............................ $10.98**
======
Net asset value and offering price of Class Y shares
($7,533,647 divided by 688,247 shares of
beneficial interest) ............................ $10.95
======
Identified cost of investments .................... $142,551,091
============
* Based upon single purchases of less than $100,000. Reduced sales charges
apply for purchases in excess of this amount.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See accompanying notes to financial statements.
<PAGE>
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STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------
Six Months Ended June 30, 1996
(unaudited)
INVESTMENT INCOME
Interest .................................... $ 5,742,925
Expenses
Management fees ........................... $ 480,651
Service fees--Class A ..................... 168,922
Service and distribution fees--Class B .... 25,648
Trustees' fees and expenses ............... 10,349
Accounting and administrative ............. 26,175
Custodian ................................. 54,863
Transfer agent ............................ 162,766
Audit and tax services .................... 25,000
Legal ..................................... 9,394
Printing .................................. 22,850
Registration .............................. 10,296
Miscellaneous ............................. 2,750
-----------
Total expenses .............................. 999,664
------------
Net investment income ....................... 4,743,261
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
OPTIONS AND FUTURES CONTRACTS Realized gain (loss) on:
Investments--net .......................... (3,245,518)
Options--net .............................. 10,458
Futures contracts--net .................... (206,148)
-----------
Total realized loss on investments, options
and futures contracts ......................... (3,441,208)
-----------
Unrealized depreciation on investments--net . (6,633,563)
-----------
Net loss on investment transactions ......... (10,074,771)
------------
NET DECREASE IN NET ASSETS FROM OPERATIONS .... $ (5,331,510)
============
See accompanying notes to financial statements.
<PAGE>
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STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------
(unaudited)
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1995 JUNE 30, 1996
----------- ------------
FROM OPERATIONS
Net investment income ..................... $ 10,367,613 $ 4,743,261
Net realized gain (loss) on investment
transactions ............................ 11,531,660 (3,441,208)
Unrealized appreciation (depreciation) on
investment transactions ................. 6,486,892 (6,633,563)
------------ ------------
Increase (decrease) in net assets from
operations .............................. 28,386,165 (5,331,510)
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income
Class A ................................. (9,617,397) (4,440,896)
Class B ................................. (214,648) (150,144)
Class Y ................................. (347,523) (259,614)
------------ ------------
(10,179,568) (4,850,654)
------------ ------------
Decrease in net assets derived from capital
share transactions ....................... (13,330,766) (7,136,021)
------------ ------------
Total increase (decrease) in net assets ... 4,875,831 (17,318,185)
NET ASSETS
Beginning of the period ................... 154,848,765 159,724,596
------------ ------------
End of the period ......................... $159,724,596 $142,406,411
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period ................... $ 35,432 $ 110,228
============ ============
End of the period ......................... $ 110,228 $ 2,835
============ ============
See accompanying notes to financial statements.
<PAGE>
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FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period ................ $11.38 $11.92 $11.73 $11.75 $10.43 $11.73
------ ------ ------ ------ ------ ------
Income From Investment Operations
Net Investment Income ...... 0.82 0.70 0.72 0.69 0.74 0.37
Net Realized and Unrealized
Gain (Loss) on
Investments .............. 0.75 0.07 0.32 (1.32) 1.29 (0.76)
------ ------ ------ ------ ------ ------
Total From Investment
Operations ............... 1.57 0.77 1.04 (0.63) 2.03 (0.39)
------ ------ ------ ------ ------ ------
Less Distributions
Distributions From Net
Investment Income ........ (0.82) (0.68) (0.72) (0.69) (0.73) (0.38)
Distributions From Net
Realized Capital Gains ... (0.21) (0.28) (0.30) 0.00 0.00 0.00
------ ------ ------ ------ ------ ------
Total Distributions ........ (1.03) (0.96) (1.02) (0.69) (0.73) (0.38)
------ ------ ------ ------ ------ ------
Net Asset Value, End of
Period ..................... $11.92 $11.73 $11.75 $10.43 $11.73 $10.96
====== ====== ====== ====== ====== ======
Total Return (%) (b) ....... 14.9 6.8 9.0 (5.5) 20.0 (3.4)
Ratio of Operating Expenses
to Average Net Assets (%) 1.21 1.23 1.22 1.29 1.35 1.34 (a)
Ratio of Net Investment
Income to Average Net
Assets (%) ............. 7.28 5.92 5.70 6.66 6.69 6.38 (a)
Portfolio Turnover Rate (%) 305 730 276 809 559 530 (a)
Net Assets, End of Period (000) $180,198 $178,030 $182,436 $147,986 $147,503 $129,562
<FN>
(a) Computed on an annualized basis.
(b) A sales charge is not reflected in total return calculations. Periods less than one year are not annualized.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
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FINANCIAL HIGHLIGHTS -- continued
- ------------------------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------------------
SEPTEMBER 23(A) YEAR YEAR
THROUGH ENDED ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED
1993 1994 1995 JUNE 30, 1996
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ... $12.26 $11.75 $10.43 $11.74
------ ------ ------ ------
Income From Investment Operations
Net Investment Income .................. 0.16 0.60 0.65 0.32
Net Realized and Unrealized Gain (Loss)
on Investments ....................... (0.30) (1.32) 1.30 (0.75)
------ ------ ------ ------
Total From Investment Operations ....... (0.14) (0.72) 1.95 (0.43)
------ ------ ------ ------
Less Distributions
Distributions From Net Investment Income (0.16) (0.60) (0.64) (0.33)
Distributions From Net Realized Capital
Gains ................................ (0.21) 0.00 0.00 0.00
------ ------ ------ ------
Total Distributions .................... (0.37) (0.60) (0.64) (0.33)
------ ------ ------ ------
Net Asset Value, End of Period ......... $11.75 $10.43 $11.74 $10.98
====== ====== ====== ======
Total Return (%) (c) ................... (1.2) (6.2) 19.2 (3.7)
Ratio of Operating Expenses to Average
Net Assets (%) ....................... 1.97 (b) 2.04 2.10 2.09 (b)
Ratio of Net Investment Income to
Average Net Assets (%) ............... 5.03 (b) 5.91 5.94 5.63 (b)
Portfolio Turnover Rate (%) ............ 276 809 559 530 (b)
Net Assets, End of Period (000) ........ $1,255 $2,760 $4,858 $5,310
<FN>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) A contingent deferred sales charge is not reflected in total return calculations. Periods less than one year are not
annualized.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
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FINANCIAL HIGHLIGHTS -- continued
- ------------------------------------------------------------------------------
(unaudited)
<TABLE>
CLASS Y
-----------------------------------------------------
MARCH 31(A) YEAR
THROUGH ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, ENDED
1994 1995 JUNE 30, 1996
----------- ----------- -------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ............. $11.20 $10.44 $11.71
------ ------ ------
Income From Investment Operations
Net Investment Income ............................ 0.54 0.80 0.38
Net Realized and Unrealized Gain (Loss)
on Investments ................................. (0.77) 1.26 (0.75)
------ ------ ------
Total From Investment Operations ................. (0.23) 2.06 (0.37)
------ ------ ------
Less Distributions
Distributions From Net Investment Income ......... (0.53) (0.79) (0.39)
------ ------ ------
Net Asset Value, End of Period ................... $10.44 $11.71 $10.95
====== ====== ======
Total Return (%) (c) ............................. (2.0) 20.3 (3.2)
Ratio of Operating Expenses to Average
Net Assets (%) ................................. 0.93 (b) 1.10 1.09 (b)
Ratio of Net Investment Income to Average Net
Assets (%) ..................................... 7.25 (b) 6.94 6.63 (b)
Portfolio Turnover Rate (%) ...................... 809 559 530 (b)
Net Assets, End of Period (000) .................. $4,104 $7,364 $7,534
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Periods less than one year are not computed on an annualized basis.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
June 30, 1996
(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 for eight years (at which point
they automatically convert to 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 of the Fund, if the Fund were liquidated. In addition, the
Trustees approve 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. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
A. SECURITY VALUATION. The Fund's investment subadviser, 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. Interest income is decreased by the amortization of acquisition
premium on original issue discount securities. In determining net gain or loss
on securities sold, the cost of securities has been determined on the identified
cost basis.
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 futures, 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.
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 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, 1996 were as follows:
PURCHASES SALES
-------------- ---------------
U.S. GOVERNMENT U.S. GOVERNMENT
-------------- ---------------
$385,368,515 $392,628,556
Investments in written options and futures contracts for the Fund for the six
months ended June 30, 1996 are summarized as follows:
WRITTEN OPTIONS
----------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- --------
Contracts opened .......................... 1,380 $ 508,047
Contracts closed .... ..................... (1,380) (508,047)
----- -----------
Open at June 30, 1996 ..................... 0 $ 0
===== ===========
SALES OF FUTURES CONTRACTS
-------------------------------
AGGREGATE
NUMBER OF FACE VALUE
CONTRACTS OF CONTRACTS
--------- ------------
Contracts opened .......................... 280 $29,795,750
Contracts closed .......................... (280) (29,795,750)
--- ------------
Open at June 30, 1996 ..................... 0 $ 0
=== ===========
3A. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
The Fund pays management fees to its investment adviser, New England Funds
Management L.P. ("NEFM") at the annual rate of 0.65% of the first $200 million
of the Fund's average daily net assets, 0.625% of the next $300 million and
0.60% of such assets in excess of $500 million. NEFM pays the Fund's investment
subadviser, Back Bay Advisors, at the rate of 0.325% of the first $200 million
of the Fund's average daily net assets, 0.3125% of the next $300 million and
0.30% of such assets in excess of $500 million. Certain officers and directors
of NEFM and Back Bay Advisors are also officers or trustees of the Fund. NEFM
and Back Bay Advisors are wholly owned subsidiaries of New England Investment
Companies, L.P., ("NEIC") which is a subsidiary of New England Mutual Life
Insurance Company. Fees earned by NEFM and Back Bay Advisors under the
management agreement in effect during the six months ended June 30, 1996 are as
follows:
FEES EARNED
- -----------
$240,326 New England Funds Management, L.P.
$240,325 Back Bay Advisors, L.P.
B. ACCOUNTING AND ADMINISTRATIVE EXPENSE. New England Funds L.P. ("New England
Funds"), the Fund's distributor, is a wholly owned subsidiary of NEIC and
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 connection with requirements of regulatory authorities. For the six months
ended June 30, 1996 these expenses amounted to $26,175 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, 1996, the Fund
paid New England Funds $119,445 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, 1996, the Fund paid New England Funds $168,922 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 1996 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, 1996, the Fund paid New England Funds $6,412
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, 1996, the Fund paid New England Funds $19,236 in distribution
fees under the Class B Plan.
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, 1996 amounted to $94,494.
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 NEFM,
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:
Annual Retainer $2,207
Meeting Fee $114/meeting
Committee Meeting Fee $68/meeting
Committee Chairman Annual Retainer $75
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.
4. CAPITAL SHARES. At June 30, 1996 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:
<PAGE>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
------------------- -------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ------- ------ ------ ------ ------
Shares sold ............... 1,068,035 $ 11,814,179 389,290 $ 4,387,270
Shares issued in connection
with the reinvestment of:
Dividends from net
investment income ...... 750,226 8,348,543 354,802 3,969,222
--------- ---------- --------- -----------
1,818,261 20,162,722 744,092 8,356,492
Shares repurchased ........ (3,428,266) (37,859,136) (1,500,087) (16,986,217)
--------- ---------- --------- -----------
Net decrease (1,610,005) (17,696,414) (755,995) (8,629,725)
--------- ---------- --------- -----------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
------------------- -------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ------- ------ ------ ------ ------
Shares sold ............... 177,242 1,973,019 90,024 1,025,362
Shares issued in connection
with the reinvestment of:
Dividends from net
investment income ...... 14,498 162,005 10,524 117,767
-------- --------- -------- -----------
191,740 2,135,024 100,548 1,143,129
-------- --------- -------- -----------
Shares repurchased ........ (42,705) (477,235) (30,377) (339,231)
Net increase .............. 149,035 1,657,789 70,171 803,898
-------- --------- -------- -----------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
------------------- -------------------
CLASS Y SHARES AMOUNT SHARES AMOUNT
- ------- ------ ------ ------ ------
Shares sold .............. 319,873 3,655,072 106,500 1,205,072
Shares issued in connection
with the reinvestment of:
Dividends from net
investment income ..... 30,819 344,793 23,750 265,099
-------- --------- -------- ---------
350,692 3,999,865 130,250 1,470,171
-------- --------- -------- ----------
Shares repurchased ....... (114,950) (1,292,006) (70,805) (780,365)
Net increase ............. 235,742 2,707,859 59,445 689,806
--------- ---------- --------- ----------
Decrease derived from
capital share
transactions ............ (1,225,228) $(13,330,766) (626,379) $(7,136,021)
========== ============ ======== ===========
<PAGE>
- --------------------------------------------------------------------------------
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
retirememt 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:]
Monthly investments of $50
Years Growth of Monthly Investments
0 $0
5 $3,661
10 $9,040
15 $16,943
20 $28,555
25 $45,618
Monthly investments of $100
Years Growth of Monthly Investments
0 $0
5 $7,322
10 $18,079
15 $33,886
20 $57,111
25 $91,236
Monthly investments of $200
Years Growth of Monthly Investments
0 $0
5 $14,643
10 $36,158
15 $67,772
20 $114,222
25 $182,472
Monthly investments of $500
Years Growth of Monthly Investments
0 $0
5 $36,608
10 $90,396
15 $169,429
20 $285,555
25 $456,181
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 a 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.
<PAGE>
- -----------------------------------------------------------------------------
NEW ENGLAND FUNDS
- -----------------------------------------------------------------------------
STOCK FUNDS
Growth Fund
Star Advisers Fund
Capital Growth Fund
Value Fund
Growth Opportunities Fund
Balanced Fund
INTERNATIONAL STOCK FUNDS
Growth Fund of Israel
International Equity Fund
Star Worldwide 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
Municipal 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.
VISIT OUR WORLD WIDE WEB SITE AT HTTP://WWW.MUTUALFUNDS.COM
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>
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FIRST CLASS
U.S. POSTAGE PAID
[logo] BOSTON, MA
NEW ENGLAND FUNDS PERMIT NO. 770
Where The Best Minds Meet(TM) -----------------
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Boston, Massachusetts
02116
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