BENHAM MORTGAGE-BACKED
SECURITIES FUNDS
Semiannual Report * September 30, 1996
[sketch of a
front doorway]
Adjustable Rate Government Securities Fund
GNMA Income fund
Twentieth Century Mutual Funds
and The Benham Group
[front cover]
CONTENTS
U.S. ECONOMIC REVIEW................................. 1
MARKET SUMMARY....................................... 2
BENHAM ADJUSTABLE RATE GOVERNMENT
SECURITIES FUND (ARM FUND)
Performance Information.............................. 4
Performance Comparisons.............................. 5
Portfolio Composition & Statistics................... 6
Management Discussion................................ 7
Financial Highlights..................................20
Financial Statements and Notes........................22
Schedule of Investments...............................29
BENHAM GNMA INCOME FUND
Performance Information.............................. 9
Performance Comparisons...............................10
Portfolio Composition & Statistics....................11
Management Discussion ................................12
Financial Highlights..................................21
Financial Statements and Notes........................22
Schedule of Investments...............................34
INVESTMENT FUNDAMENTALS
Mortgage Pass-Throughs................................14
Portfolio Sensitivity Measurements....................16
Risk Factors..........................................17
Other Definitions.....................................18
U.S. ECONOMIC REVIEW
JAMES M. BENHAM [photo of James
Chairman, Benham Funds M. Benham]
The U.S. economy grew at a healthy pace for the first three quarters of 1996,
confounding market analysts who predicted a significant slowdown. During 1995,
economic weakness prompted the Federal Reserve (the Fed) to make a series of
short-term interest rate cuts, culminating in a quarter-of-a-percent cut in
January 1996. This expansionary monetary policy helped speed the pace of U.S.
economic growth from an anemic 0.3% annual rate in the fourth quarter of 1995 to
2.0% in the first quarter of 1996. Growth expanded further to an impressive 4.7%
in the second quarter of the year (see the graph below).
[bar graph - data described below]
Stronger-than-expected corporate earnings fueled increased corporate expansion
and job growth. Nearly two million new jobs were created in the first nine
months of the year, sending the U.S. unemployment rate to a six-year low.
Healthy employment numbers and a strong performance by U.S. stocks led to fears
of inflationary pressure and expectations of an interest rate hike by the Fed.
As a result, U.S. bonds overall gave a lackluster performance.
But the expected surge in inflation failed to materialize. For the first nine
months of the year, inflation, as measured by the consumer price index (CPI),
grew at an annualized rate of 3.2%, compared to the 2.5% inflation rate for all
of 1995 (the lowest annual rate since 1986). Because of this apparent lack of
inflationary pressure, the Fed held interest rates steady through September.
But the economic picture remains uncertain. The economy grew at a 2.2% annual
rate in the third quarter, and recent economic data seem to suggest that the
economy may be slowing. Market participants are no longer sure that the Fed will
raise interest rates this year, and some even contend that the Fed's next move
may be toward lower rates. On the other hand, signs of wage inflation have
surfaced in recent employment reports. In spite of higher interest rates for
most of this year, the housing market has remained robust, and consumer
confidence is high, indicating that the U.S. consumer may still have some
spending power. Given the present state of economic uncertainty, it is likely
that shifting expectations of Fed interest rate policy may have more of an
impact on U.S. financial markets in the coming months than any actual move by
the Fed.
[graph data]
GDP (Annualized)
vs. Inflation (Consumer Price Index)
July 1994 - September 1996
GDP CPI
Jan-94 2.52%
Feb-94 2.51
Mar-94 2.50% 2.51
Apr-94 2.36
May-94 2.29
Jun-94 4.90 2.56
Jul-94 2.70
Aug-94 2.90
Sep-94 3.50 3.03
Oct-94 2.68
Nov-94 2.60
Dec-94 3.00 2.60
Jan-95 2.87
Feb-95 2.79
Mar-95 0.40 2.86
Apr-95 2.98
May-95 3.12
Jun-95 0.70 3.04
Jul-95 2.83
Aug-95 2.62
Sep-95 3.80 2.54
Oct-95 2.74
Nov-95 2.67
Dec-95 0.30 2.67
Jan-96 2.72
Feb-96 2.72
Mar-96 2.00 2.84
Apr-96 2.90
May-96 2.96
Jun-96 4.70 2.75
Jul-96 2.95
Aug-96 2.88
Sep-96 2.20 3.00
Source: Bloomberg Financial Markets
1
MARKET SUMMARY
MORTGAGE PASS-THROUGHS
by the Benham Mortgage-Backed Securities Portfolio Team
NOTE: We suggest that you review the Investment Fundamentals and U.S. Economic
Review sections before you read this section. Terms marked with an asterisk (*)
are defined in the Investment Fundamentals section (pages 14-18).
Interest rate shifts continued to have an impact on the performance of mortgage
pass-throughs* during the six-month period ended September 30, 1996. Interest
rates did not move in a continuous direction over the period; instead, they
fluctuated in waves, primarily moving when the national employment reports were
released (see page 1). Despite these short-term gyrations, interest rates were
relatively well behaved overall. As a result, the period was a fairly good one
for mortgage-backed securities investors.
In the relatively stable interest rate environment, the higher yields of ARMs*
and GNMAs* enabled them to outperform comparable Treasury securities. The Lehman
Brothers ARM Index had a total return of 3.03% for the six-month period,
outpacing the 2.72% total return of the Salomon Brothers One- to Three-Year
Treasury Index. The Salomon Brothers 30-Year GNMA Index posted a 2.74% total
return, compared to a 2.16% return for the Salomon Brothers Three- to Seven-Year
Treasury Index.
After mortgage rates rose back above 8% in February and March, the prepayment
wave that hampered the returns of mortgage-backed securities early in the year
dwindled rapidly (see the graph on page 3). By May, prepayment fears had
diminished, and mortgage refinancing activity had returned to more historically
normal levels. While prepayment activity was fairly light over the period,
homeowners appear to be more fully apprised than ever about their refinancing
options. An example of this was the surge in new ARMs that were issued this
year. Over 30% of new mortgages issued so far in 1996 have been ARMs, a
significant increase from 1995 levels. As interest rates shifted early in the
period, the difference between ARM rates and 30-year fixed mortgage rates
increased to around 200 basis points.* We believe that this prompted many
homeowners to choose adjustable rate mortgages over more
2
MARKET SUMMARY
MORTGAGE PASS-THROUGHS
(Continued form the previous page)
traditional fixed-rate mortgages. While the increase in adjustable rate
mortgages should have no effect on refinancing activity in the near-term, it may
play a role three to five years from now.
Interest rates began to fall toward the end of October, leaving the outlook for
mortgage-backed securities uncertain. For now, moderating economic growth has
caused optimism that the Federal Reserve will leave short-term interest rates
unchanged.
[line graph data]
Mortgage Refinancing Trends
9/92-9/96
FHLMC 30-Yr. Fixed Mortgage Lending Rate MBA Refinancing Index
9/4/92 7.94% 1003.5
9/11/92 7.84 1148.4
9/18/92 7.89 1091.9
9/25/92 8.02 1062.8
10/2/92 7.93 972.3
10/9/92 8.01 945.9
10/16/92 8.06 802.2
10/23/92 8.23 787.1
10/30/92 8.21 793
11/6/92 8.29 642.3
11/13/92 8.32 449.2
11/20/92 8.32 404.3
11/27/92 8.29 340.2
12/4/92 8.34 356.2
12/11/92 8.23 338.5
12/18/92 8.19 281.8
12/25/92 8.13 397.5
1/1/93 8.14 788
1/8/93 8.07 378.9
1/15/93 8.04 422.9
1/22/93 8 470.2
1/29/93 7.86 566.6
2/5/93 7.8 583
2/12/93 7.75 830.4
2/19/93 7.65 1060.1
2/26/93 7.53 1215.2
3/5/93 7.44 1348
3/12/93 7.47 1604.2
3/19/93 7.57 1385.4
3/26/93 7.5 1291
4/2/93 7.53 1164.2
4/9/93 7.57 1270.3
4/16/93 7.45 1161
4/23/93 7.38 1134.5
4/30/93 7.43 1107.5
5/7/93 7.42 973.4
5/14/93 7.42 994
5/21/93 7.52 895.7
5/28/93 7.5 775.7
6/4/93 7.47 791.9
6/11/93 7.48 782
6/18/93 7.38 835.3
6/25/93 7.34 776.6
7/2/93 7.23 922.8
7/9/93 7.19 1147.9
7/16/93 7.16 1141
7/23/93 7.2 1370.5
7/30/93 7.25 1200.5
8/6/93 7.21 1151.8
8/13/93 7.17 1142.6
8/20/93 7.1 1174.2
8/27/93 6.97 1369.2
9/3/93 6.93 1574.4
9/10/93 6.82 1837.9
9/17/93 6.96 1795.8
9/24/93 6.95 1657.1
10/1/93 6.89 1641.6
10/8/93 6.87 1489.1
10/15/93 6.81 1545.3
10/22/93 6.74 1408.8
10/29/93 6.86 1344.2
11/5/93 7.11 1246
11/12/93 7.12 1174
11/19/93 7.08 1058.5
11/26/93 7.31 807.5
12/3/93 7.25 745
12/10/93 7.14 719.9
12/17/93 7.17 570.3
12/24/93 7.17 518.9
12/31/93 7.2 744
1/7/94 7.23 675.8
1/14/94 6.99 738.2
1/21/94 7.05 638.2
1/28/94 6.97 746.7
2/4/94 6.97 1138.5
2/11/94 7.21 928.1
2/18/94 7.11 734.5
2/25/94 7.32 834.1
3/4/94 7.51 655.5
3/11/94 7.63 544.1
3/18/94 7.76 446.7
3/25/94 7.8 481.2
4/1/94 8.04 429.8
4/8/94 8.47 263.6
4/15/94 8.26 234.2
4/22/94 8.49 257.6
4/29/94 8.32 207.8
5/6/94 8.53 177.7
5/13/94 8.77 176.4
5/20/94 8.56 175.5
5/27/94 8.53 153.9
6/3/94 8.55 134.4
6/10/94 8.52 139.8
6/17/94 8.33 153.3
6/24/94 8.46 133.6
7/1/94 8.57 137.2
7/8/94 8.68 112.5
7/15/94 8.72 112.6
7/22/94 8.52 116.8
7/29/94 8.57 120
8/5/94 8.38 135
8/12/94 8.57 130.9
8/19/94 8.54 134.4
8/26/94 8.56 114.7
9/2/94 8.48 118.5
9/9/94 8.51 110.5
9/16/94 8.66 108.3
9/23/94 8.73 105.9
9/30/94 8.82 113.2
10/7/94 8.89 118.6
10/14/94 8.93 105.6
10/21/94 8.85 117.4
10/28/94 9.03 104.5
11/4/94 9.05 109.5
11/11/94 9.19 106.3
11/18/94 9.19 124.4
11/25/94 9.25 69.9
12/2/94 9.23 81.2
12/9/94 9.15 77.9
12/16/94 9.25 72.5
12/23/94 9.18 59
12/30/94 9.18 80.3
1/6/95 9.22 81
1/13/95 9.19 74.4
1/20/95 9.05 83.3
1/27/95 9.13 82.4
2/3/95 8.94 111.6
2/10/95 8.8 93.6
2/17/95 8.84 88.8
2/24/95 8.73 103.1
3/3/95 8.53 95.6
3/10/95 8.62 94.4
3/17/95 8.38 106
3/24/95 8.4 109.8
3/31/95 8.38 113
4/7/95 8.41 105
4/14/95 8.37 131.4
4/21/95 8.24 120.5
4/28/95 8.26 120.9
5/5/95 8.27 132.2
5/12/95 7.87 239.1
5/19/95 7.83 243.4
5/26/95 7.85 239.9
6/2/95 7.71 331.1
6/9/95 7.51 481.6
6/16/95 7.55 418.9
6/23/95 7.53 381.3
6/30/95 7.53 404.3
7/7/95 7.63 305.9
7/14/95 7.41 524.3
7/21/95 7.6 504
7/28/95 7.79 390.6
8/4/95 7.82 346.3
8/11/95 7.8 328.7
8/18/95 7.94 283
8/25/95 7.88 295.9
9/1/95 7.76 387
9/8/95 7.63 444.2
9/15/95 7.6 445.4
9/22/95 7.57 468.9
9/29/95 7.62 392.8
10/6/95 7.57 458.2
10/13/95 7.5 482.7
10/20/95 7.38 549
10/27/95 7.45 547.5
11/3/95 7.44 553
11/10/95 7.37 697.4
11/17/95 7.35 604.9
11/24/95 7.35 571.6
12/1/95 7.33 522.3
12/8/95 7.18 667
12/15/95 7.15 642.5
12/22/95 7.23 758.6
12/29/95 7.11 711.7
1/5/96 7.02 748.2
1/12/96 7.08 816.1
1/19/96 7.02 886.6
1/26/96 7 1102.4
2/2/96 7.02 1028.4
2/9/96 7.02 1071.4
2/16/96 6.94 1192.4
2/23/96 7.32 1129
3/1/96 7.41 1029.5
3/8/96 7.38 712.4
3/15/96 7.83 564.7
3/22/96 7.81 462.9
3/29/96 7.69 586.6
4/5/96 7.78 456.6
4/12/96 8.05 336.9
4/19/96 7.95 317.6
4/26/96 7.92 311.1
5/3/96 7.99 348.2
5/10/96 8.24 241
5/17/96 8.08 225.2
5/24/96 8.01 243.9
5/31/96 8.03 302.6
6/7/96 8.3 226.1
6/14/96 8.39 192.5
6/21/96 8.3 220
6/28/96 8.29 221.7
7/5/96 8.14 215.2
7/12/96 8.42 186.1
7/19/96 8.23 224.3
7/26/96 8.19 222.3
8/2/96 8.23 237.5
8/9/96 7.88 287.8
8/16/96 7.88 279.9
8/23/96 7.93 262.9
8/30/96 8.09 283.6
9/6/96 8.34 226.8
9/13/96 8.28 250.8
9/20/96 8.14 263.3
9/27/96 8.16 271.4
Sources: Mortgage Bankers' Association, DRI/McGraw-Hill
3
ARM FUND
PERFORMANCE INFORMATION
For Periods Ended September 30, 1996
Net Asset 30-Day Average Annual Total Returns
- --------------------------------------------------------------------------------
Value Range SEC Life of
(4/1/96-9/30/96) Yield 1 Year 3 Years 5 Years Fund
- --------------------------------------------------------------------------------
$9.46-$9.51 5.58% 5.74% 3.98% 4.60% 4.76%
The Fund commenced operations on September 3, 1991.
PLEASE NOTE: Yields and total returns are based on historical Fund performance
and do not guarantee future results. The Fund's share price, yields and total
returns will vary, so that shares, when redeemed, may be worth more or less than
their original cost.
PERFORMANCE DEFINITIONS
Net Asset Value (NAV) Range indicates the Fund's share price movements over the
stated period and can be used to gauge the stability of the Fund's share price.
Yields are a way of showing the rate of income the Fund earns on its investments
as a percentage of its share price. The 30-Day SEC Yield represents net
investment income earned by the Fund over a 30-day period, expressed as an
annualized percentage rate based on the Fund's share price at the end of the
30-day period. The SEC yield should be regarded as an estimate of the Fund's
rate of investment income, and it may not equal the Fund's actual income
distribution rate, the income paid to a shareholder's account, or the income
reported in the Fund's financial statements.
Total Return figures show the overall dollar or percentage change in the value
of a hypothetical investment in the Fund and assume that all of the Fund's
distributions are reinvested. Average Annual Total Returns illustrate the
annually compounded returns that would have produced the Fund's cumulative total
returns if the Fund's performance had been constant over the entire period.
Average annual total returns smooth out variations in a fund's return; they are
not the same as year-by-year results. For fiscal year-by-year total returns,
please refer to the Fund's "Financial Highlights" on page 20.
SIX-MONTH TOTAL RETURN BREAKDOWN
For the Period Ended September 30, 1996
% From Realized
% From and Unrealized Gains Six-Month
Income + on Investments = Total Return
2.75% + 0.25% = 3.00%
4
ARM FUND
SEC PERFORMANCE COMPARISON
Comparative Performance of $10,000 Invested on 9/3/91 in the Fund and
in the Merrill Lynch One-Year Treasury Bill Index
[line graph data]
Index Fund
Aug-91 $10000 $10000
Sep-91 10074 10113
Oct-91 10151 10194
Nov-91 10228 10265
Dec-91 10321 10382
Jan-92 10349 10433
Feb-92 10376 10457
Mar-92 10402 10455
Apr-92 10463 10521
May-92 10505 10595
Jun-92 10560 10672
Jul-92 10638 10726
Aug-92 10687 10790
Sep-92 10755 10830
Oct-92 10743 10833
Nov-92 10752 10868
Dec-92 10811 10925
Jan-93 10867 10950
Feb-93 10905 10986
Mar-93 10936 10991
Apr-93 10975 11045
May-93 10965 11082
Jun-93 11018 11161
Jul-93 11045 11202
Aug-93 11095 11235
Sep-93 11127 11262
Oct-93 11146 11267
Nov-93 11167 11290
Dec-93 11207 11319
Jan-94 11252 11375
Feb-94 11239 11385
Mar-94 11241 11350
Apr-94 11231 11264
May-94 11245 11192
Jun-94 11282 11244
Jul-94 11351 11271
Aug-94 11390 11283
Sep-94 11407 11258
Oct-94 11451 11283
Nov-94 11446 11167
Dec-94 11485 11185
Jan-95 11599 11343
Feb-95 11701 11460
Mar-95 11769 11550
Apr-95 11837 11650
May-95 11942 11748
Jun-95 12011 11804
Jul-95 12070 11811
Aug-95 12128 11903
Sep-95 12178 11971
Oct-95 12251 12031
Nov-95 12324 12103
Dec-95 12393 12171
Jan-96 12472 12247
Feb-96 12486 12279
Mar-96 12521 12291
Apr-96 12564 12337
May-96 12610 12393
Jun-96 12676 12472
Jul-96 12725 12532
Aug-96 12784 12587
Sep-96 12872 12660
Past performance does not guarantee future results.
This graph compares the Fund's performance with a broad-based market index, the
Merrill Lynch One-Year Treasury Bill Index, over the life of the Fund. Although
the investment characteristics of the index are similar to those of the Fund,
the securities owned by the Fund and those composing the index are different.
Investors cannot invest directly in the index.
PLEASE NOTE: The line representing the Fund's total return includes operating
expenses (such as transaction costs and management fees) that reduce returns,
while the index's total return line does not.
LIPPER PERFORMANCE COMPARISON
Lipper Analytical Services (Lipper) is an independent mutual fund ranking
service located in Summit, NJ. Rankings are based on average annual total
returns for the periods ended 9/30/96 for the funds in Lipper's "Adjustable Rate
Mortgage Funds" category.
1 Year 3 Years 5 Years
The Fund: 5.74% 3.98% 4.60%
Category Average: 4.31% 1.84% 4.15%
The Fund`s Ranking: 23 out of 53 28 out of 43 8 out of 19
Total returns are based on historical performance and do not guarantee future
results.
5
ARM FUND
PORTFOLIO COMPOSITION BY SECURITY TYPE
[pie charts]
9/30/96 3/31/96
ARMs: 80% ARMs: 60%
CMOs: 13% CMOs: 36%
Repos: 5% Repos: 2%
Fixed-Rates: 2% Fixed-Rates: 2%
For definitions of these security types, see pages 14-15 and 18.
PORTFOLIO COMPOSITION BY DURATION+
[bar charts]
9/30/96 3/31/96
"0-1 Yrs." 58% 59%
"1-2 Yrs." 22 28
"2-3 Yrs." 18 12
"3-5 Yrs." 2 1
Duration is defined on page 16.
+ Less than 1% of the Fund's securities had durations above the range displayed.
RESET SCHEDULE OF THE FUND'S ARMS
Interest Rate % of ARMs
Index Reset Frequency 9/30/96 3/31/96
One-Year T-Bills Every 12 months 88% 68%
COFI Every month 6% 21%
Six-Month LIBOR Every 6 months 1% 5%
Other Various 5% 6%
For definitions of these interest rate reset indexes, see page 14.
KEY PORTFOLIO STATISTICS
9/30/96 3/31/96
Market Value: $259,292,403 $317,990,500
Number of Issues: 104 90
Average Coupon: 7.0% 6.7%
Average Maturity: 21.6 years 22.3 years
Average Life: 4.9 years 4.7 years
Average Duration: 1.0 year 1.0 year
For definitions of these terms, see page 18.
6
ARM FUND
MANAGEMENT DISCUSSION
with Newlin Rankin, Portfolio Manager
NOTE: The terms marked with an asterisk (*) are defined in the Investment
Fundamentals section (pages 14-18).
Q: How did the Fund perform?
A: The Fund continued to perform well in comparison with its peers. For
the year ended September 30, 1996, the Fund's total return was 5.74%,
compared to the 4.31% average total return for its peers in Lipper's
"Adjustable Rate Mortgage Funds" category (see the Lipper Performance
Comparison on page 5). While the Fund's total return was 143 basis
points* higher than the category average return, the poor performance
of a few ARM funds continued to depress the category's results. Perhaps
a better indication of the Funds performance was its ranking of 23 out
of 53 funds based on total return. The Fund also managed a strong
performance over the six months ended September 30, 1996, posting a
3.00% return.
Q: Why did the Fund perform well against its peers?
A: The Fund's relatively conservative positioning compared with many of
the funds in its Lipper category was the primary reason. Our main goal
is to provide investors with a high degree of price stability. This
strategy is intended to help the Fund generate returns primarily from
yield rather than from price appreciation.
Q: How did you position the Fund to accomplish this goal?
A: We concentrated on ARMs* with relatively high coupon rates, which
helped keep the Fund's duration* short in comparison with its peer
group throughout the period. Many of these high-yielding securities
also have fairly high lifetime caps (for further information concerning
lifetime caps, see the explanation of Adjustable-Rate Mortgage
Pass-Throughs on page 14), which makes them less susceptible to price
volatility when interest rates increase. This positioning helped
significantly during the rising interest rate environment in the first
half of 1996.
7
ARM FUND
MANAGEMENT DISCUSSION
(Continued from the previous page)
Q: According to the composition-by-security-type chart on page 6, the
amount of ARMs held in the Fund increased dramatically, while the
amount of CMOs* decreased. Why the change?
A: During the first quarter of 1996, short-term CMOs worked very well for
the Fund by insulating it from price volatility. However, the price
difference between securities that reset monthly (like the Fund's CMOs)
as opposed to yearly increased significantly in May. This situation
caused ARMs that reset yearly to become more attractively valued than
CMOs. Therefore, we decreased our CMO holdings from 36% to 13% during
the six-month period.
We replaced the Fund's CMOs with ARMs, increasing our holdings from 60%
on March 31 to 80% by September 30. By purchasing ARMs with yearly
resets, we were able to pick up extra yield for the Fund while adding
very little share-price volatility. As an added precaution against
unwanted volatility, we also purchased premium* "seasoned"
ARMs--securities backed by mortgages that are five to six years old and
are therefore less likely to be refinanced than more recently issued
ARMs. As a result, premium seasoned ARMs typically have less price
motion either up or down when interest rates fluctuate.
Q: Is this why you increased the amount of ARMs that are reset on the
one-year T-bill while decreasing the amount of ARMs that reset based on
COFI* (see the ARM reset schedule on page 6)?
A: Yes. As the probability that the Federal Reserve might raise short-term
interest rates increased (see page 1), we decreased the amount of COFI
ARMs by 15%. We sold these securities because ARMs that reset based on
COFI have limited liquidity and perform poorly in a rising interest
rate environment. We replaced these COFI securities with ARMs that
reset against the one-year T-bill, increasing these holdings by 20%.
Q: What are your plans for the Fund over the next six months?
A: We will likely maintain the Fund's defensive posture going forward
unless the outlook for mortgage-backed securities and interest rates in
general changes dramatically. Moderating economic growth caused
interest rates to trend lower during October, but our focus on
share-price stability means that we commonly retain a rather bearish
outlook on the economic environment to reduce capital losses. In doing
so, we are often able to avoid unpleasant surprises when the outlook
for bonds suddenly shifts directions. However, if the bond market
continues to rally, we may extend the Fund's duration slightly.
8
GNMA INCOME FUND
PERFORMANCE INFORMATION
For Periods Ended September 30, 1996
Net Asset 30-Day Average Annual Total Returns
Value Range SEC
- --------------------------------------------------------------------------------
(4/1/96-9/30/96) Yield 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$10.20-$10.48 7.04% 5.06% 5.47% 6.91% 8.32%
The Fund commenced operations on September 23, 1985.
PLEASE NOTE: Yields and total returns are based on historical Fund performance
and do not guarantee future results. The Fund's share price, yields and total
returns will vary, so that shares, when redeemed, may be worth more or less than
their original cost.
PERFORMANCE DEFINITIONS
Net Asset Value (NAV) Range indicates the Fund's share price movements over the
stated period and can be used to gauge the stability of the Fund's share price.
Yields are a way of showing the rate of income the Fund earns on its investments
as a percentage of its share price. The 30-Day SEC Yield represents net
investment income earned by the Fund over a 30-day period, expressed as an
annualized percentage rate based on the Fund's share price at the end of the
30-day period. The SEC yield should be regarded as an estimate of the Fund's
rate of investment income, and it may not equal the Fund's actual income
distribution rate, the income paid to a shareholder's account, or the income
reported in the Fund's financial statements.
Total Return figures show the overall dollar or percentage change in the value
of a hypothetical investment in the Fund and assume that all of the Fund's
distributions are reinvested. Average Annual Total Returns illustrate the
annually compounded returns that would have produced the Fund's cumulative total
returns if the Fund's performance had been constant over the entire period.
Average annual total returns smooth out variations in a fund's return; they are
not the same as year-by-year results. For fiscal year-by-year total returns,
please refer to the Fund's "Financial Highlights" on page 21.
SIX-MONTH TOTAL RETURN BREAKDOWN
For the Period Ended September 30, 1996
% From Realized
% From and Unrealized Losses Six-Month
Income + on Investments = Total Return
3.48% + (1.03)% = 2.45%
9
GNMA INCOME FUND
SEC PERFORMANCE COMPARISON
Comparative Performance of $10,000 Invested on 9/30/86 in the Fund and
in the Salomon Brothers, Inc. 30-Year GNMA Index
[line graph data]
Index Fund
Sep-86 $10000 $10000
Oct-86 10128 10113
Nov-86 10316 10279
Dec-86 10369 10317
Jan-87 10501 10443
Feb-87 10607 10556
Mar-87 10607 10508
Apr-87 10281 10125
May-87 10244 10088
Jun-87 10425 10257
Jul-87 10447 10278
Aug-87 10387 10227
Sep-87 10119 9950
Oct-87 10456 10331
Nov-87 10610 10461
Dec-87 10734 10601
Jan-88 11177 10994
Feb-88 11311 11133
Mar-88 11207 11058
Apr-88 11123 11035
May-88 11114 10985
Jun-88 11406 11235
Jul-88 11361 11224
Aug-88 11372 11213
Sep-88 11655 11469
Oct-88 11930 11684
Nov-88 11755 11561
Dec-88 11690 11504
Jan-89 11905 11665
Feb-89 11812 11611
Mar-89 11817 11618
Apr-89 12029 11850
May-89 12440 12170
Jun-89 12798 12510
Jul-89 13085 12718
Aug-89 12895 12588
Sep-89 12975 12642
Oct-89 13279 12894
Nov-89 13433 13027
Dec-89 13517 13102
Jan-90 13396 12997
Feb-90 13445 13054
Mar-90 13503 13097
Apr-90 13348 12972
May-90 13783 13351
Jun-90 14013 13555
Jul-90 14258 13768
Aug-90 14113 13637
Sep-90 14232 13733
Oct-90 14390 13899
Nov-90 14746 14200
Dec-90 14994 14432
Jan-91 15206 14636
Feb-91 15297 14738
Mar-91 15416 14821
Apr-91 15576 14974
May-91 15699 15094
Jun-91 15734 15105
Jul-91 16002 15366
Aug-91 16293 15647
Sep-91 16597 15923
Oct-91 16848 16169
Nov-91 16958 16274
Dec-91 17385 16679
Jan-92 17192 16466
Feb-92 17347 16636
Mar-92 17286 16576
Apr-92 17435 16728
May-92 17741 17001
Jun-92 17984 17229
Jul-92 18123 17385
Aug-92 18373 17622
Sep-92 18520 17782
Oct-92 18390 17625
Nov-92 18493 17735
Dec-92 18704 17958
Jan-93 18968 18207
Feb-93 19131 18379
Mar-93 19255 18445
Apr-93 19352 18515
May-93 19462 18604
Jun-93 19661 18800
Jul-93 19741 18894
Aug-93 19775 18976
Sep-93 19787 18953
Oct-93 19828 19043
Nov-93 19800 18970
Dec-93 19951 19142
Jan-94 20116 19289
Feb-94 20026 19184
Mar-94 19517 18684
Apr-94 19402 18562
May-94 19470 18624
Jun-94 19427 18603
Jul-94 19790 18924
Aug-94 19808 18967
Sep-94 19571 18743
Oct-94 19547 18687
Nov-94 19483 18633
Dec-94 19699 18823
Jan-95 20118 19209
Feb-95 20656 19652
Mar-95 20740 19717
Apr-95 21026 19968
May-95 21680 20548
Jun-95 21821 20693
Jul-95 21880 20758
Aug-95 22075 20961
Sep-95 22287 21162
Oct-95 22476 21349
Nov-95 22742 21571
Dec-95 23030 21808
Jan-96 23205 21944
Feb-96 23045 21777
Mar-96 22993 21704
Apr-96 22888 21624
May-96 22850 21538
Jun-96 23136 21803
Jul-96 23229 21894
Aug-96 23240 21890
Sep-96 23620 22236
Past performance does not guarantee future results.
This graph compares the Fund's performance with a broad-based market index, the
Salomon Brothers, Inc. 30-Year GNMA Index, over the past 10 years. Although the
investment characteristics of the index are similar to those of the Fund, the
securities owned by the Fund and those composing the index are likely to be
different, and securities that the Fund and the index have in common are likely
to have different weightings in the respective portfolios. Investors cannot
invest directly in the index.
PLEASE NOTE: The line representing the Fund's total return includes operating
expenses (such as transaction costs and management fees) that reduce returns,
while the index's total return line does not.
LIPPER PERFORMANCE COMPARISON
Lipper Analytical Services (Lipper) is an independent mutual fund ranking
service located in Summit, NJ. Rankings are based on average annual total
returns for the periods ended 9/30/96 for the funds in Lipper's "GNMA Funds"
category.
1 Year 3 Years 5 Years 10 Years
The Fund: 5.06% 5.47% 6.91% 8.32%
Category Average: 4.45% 4.77% 6.47% 7.69%
The Fund`s Ranking: 13 out of 52 7 out of 35 6 out of 29 3 out of 19
Total returns are based on historical performance and do not guarantee future
results.
10
GNMA INCOME FUND
PORTFOLIO COMPOSITION BY SECURITY TYPE
[pie charts]
9/30/96 3/31/96
GNMAs: 91% GNMAs: 94%
Repos: 4% Repos: 4%
Treasurys: 5% Treasurys: 2%
For definitions of these security types, see pages 14-15 and 18.
PORTFOLIO COMPOSITION BY GNMA COUPON
[bar graph data]
9/30/96 3/31/96
Less than 7% 7% 7%
"7%-8%" 37 43
"8%-9%" 33 31
"9%-10%" 20 16
More than 10% 3 3
KEY PORTFOLIO STATISTICS
9/30/96 3/31/96
Market Value: $1,124,075,837 $1,207,133,613
Number of Issues: 3,383 3,157
Average Coupon: 8.0% 7.8%
Average Maturity: 24.7 years 25.0 years
Average Life: 7.5 years 7.3 years
Average Duration: 4.3 years 4.3 years
For definitions of these terms, see page 18.
11
GNMA INCOME FUND
MANAGEMENT DISCUSSION
with Casey Colton and Dave Schroeder, Co-Managers
NOTE: The terms marked with an asterisk (*) are defined in the Investment
Fundamentals section (pages 14-18).
Q: How did the Fund perform?
A: The Fund managed a strong performance in comparison with its peers. For
the year ended September 30, 1996, the Fund's total return was 5.06%,
compared to the 4.45% average total return for its peers in Lipper's
"GNMA Funds" category. Based on this total return, the Fund placed in
the top 25% of its category. For the six months ended September 30,
1996, the Fund posted a 2.45% return.
The Fund's longer-term performance has been even stronger compared to
its peers. For example, the Fund's average annual total return for the
three-year period, in which the Fund finished in the top 20% of its
category. (See the Lipper Performance Comparison on page 10 for
comparisons of the Fund's one-, three-, five- and 10-year returns to
the returns of the Fund's peer group average.)
Q: Why did the Fund perform well relative to its peers?
A: The Fund's relatively conservative positioning compared with many of
the funds in its Lipper category was the primary reason. Our main goal
is to provide investors with a fund that offers relative price
stability and competitive yields. This strategy is intended to help
generate relatively predictable returns without interest rate bets or
unpleasant surprises.
Q: The Fund's duration* remained fairly close to its benchmark (the
Salomon Brothers 30-Year GNMA Index) throughout the period. Is this
typical?
A: Yes. Our goal is to stay within a tight range around the duration of
the Fund's benchmark. As a result, the Fund's duration never varied
more than 5% from the duration of its benchmark throughout the period.
This was a slightly shorter position than most of the Fund's peers,
many of which started the period slightly long but gradually moved to a
duration position more closely aligned with the index by the end of
September. Our disciplined approach helped the Fund provide an
index-like return, representing the mainstream performance of
mortgage-backed securities.
12
GNMA INCOME FUND
MANAGEMENT DISCUSSION
(Continued from the previous page)
Q: Did you make any adjustments to the Fund's Treasury holdings over the
last six months?
A: Yes. At the start of the six-month period, most of the Treasury
securities we held in the Fund's portfolio were STRIPS.* These
securities perform well when the yield curve* is moving from steep to
flat, while mortgage-backed securities perform best when the yield
curve is moving from flat to steep. Including some STRIPS in the Fund's
portfolio allowed us to enhance the Fund's total return as the shape of
the yield curve changed in anticipation of possible Fed policy changes.
Once interest rates stabilized, we sold the STRIPS in favor of three-
and 10-year Treasury notes. We purchased these securities to help
maintain the Fund's duration when interest rates began moving lower in
early September. In a declining interest rate environment, Treasury
notes hold their durations, while mortgage-backed securities shorten,
providing smaller incremental returns for each drop in interest rates.
Q: What are your plans for the Fund over the next six months?
A: Although interest rates have trended lower recently because of the low
inflation outlook, there is still some uncertainty concerning the
strength of the economy and the longer-term direction of interest
rates. As a result, we will likely maintain the Fund's neutral position
going forward unless the outlook for mortgage-backed securities changes
dramatically. If the bond market continues to rally, we may add to the
Fund's holdings of Treasury notes to offset the erosion of duration
that mortgage-backed securities typically experience when interest
rates decline. In addition, we will continue to manage the Fund with
the intent of providing competitive long-term returns.
13
INVESTMENT FUNDAMENTALS
MORTGAGE PASS-THROUGHS
Most mortgage-backed securities (which represent ownership interests in pools of
mortgage loans) are structured as pass-throughs. Pass-throughs are created when
a group of mortgages is pooled to back a security. The monthly payments of
principal and interest on the mortgages in the pool are collected by the bank
that securitized the mortgages and "passed through" to investors. While the
payments of principal and interest are considered secure (many are backed by
government agencies that guarantee interest and principal payments whether or
not borrowers make their scheduled mortgage payments), the cash flow is less
certain than in other fixed-income investments. If a homeowner sells the house
or refinances and pays off the mortgage early, this prepayment is distributed to
investors on a pro rata basis, reducing future interest payments.
The vast majority of mortgage pass-throughs are issued or guaranteed by U.S.
government-sponsored enterprises (GSEs), including the Federal National Mortgage
Association (FNMA or Fannie Mae), the Federal Home Loan Mortgage Corp. (FHLMC or
Freddie Mac) and the Government National Mortgage Association (GNMA or Ginnie
Mae). GSEs are financing entities created by Congress for two purposes: (1) to
allow banks to sell and securitize their loans without concerns about liquidity,
and (2) to ensure that certain groups of borrowers, such as homeowners, have
sufficient funds to borrow at affordable rates.
Adjustable-Rate Mortgage (ARM) Pass-Throughs
An ARM is a pass-through backed by a pool of adjustable-rate mortgages. Unlike
traditional bonds or fixed-rate pass-throughs (such as GNMAs), ARMs have
interest rates that reset periodically based on an underlying interest rate
index (such as a bank interest rate). If market interest rates rise, then ARM
interest rates also eventually rise, limiting the price fluctuation of ARMs.
However, there is always a lag between market interest rate changes and ARM rate
resets. ARMs reset monthly, quarterly, semiannually or annually based on a money
market or bank interest rate index, such as:
CMT (Constant Maturity Treasury) Index--based on the average yield of a range of
Treasury securities with various fixed maturities.
COFI (Cost of Funds Index)--reflects the cost of funds for savings banks
(typically published by the 11th District Federal Home Loan Bank).
LIBOR (London Interbank Offered Rate)--the interest rate at which the most
creditworthy international banks make large loans to one another.
In addition to the lag factor, ARM rate resets may also be restrained by caps
(interest rate maximums) and floors (interest rate minimums) that limit the
extent of ARM rate changes. ARMs can have periodic caps and floors and lifetime
caps and floors. A periodic cap or floor limits how much an ARM's interest rate
14
INVESTMENT FUNDAMENTALS
MORTGAGE PASS-THROUGHS
(Continued from the previous page)
can reset in a relatively short time, such as six months or a year. For example,
some ARMs have periodic caps of 1% per year, which means that their interest
rates can't reset by more than 1% per year, no matter how high market interest
rates rise. By contrast, a lifetime cap limits how high an ARM's interest rate
can rise in its entire lifetime. When an ARM reaches its cap because of rapidly
rising interest rates (known as "capping out"), it mimics a fixed-rate security,
and its price becomes less stable.
GNMA Pass-Throughs
A GNMA is a pass-through issued by the Government National Mortgage Association,
a U.S. government agency. Unlike an ARM, a GNMA is backed by a pool of
fixed-rate mortgages. A GNMA is also backed by the full faith and credit of the
U.S. government as to the timely payment of interest and principal. This means
GNMA investors will receive their share of interest and principal payments
whether or not borrowers make their scheduled mortgage payments. GNMAs typically
have higher yields than U.S. Treasury securities.
Collateralized Mortgage Obligations (CMOs)
A collateralized mortgage obligation (CMO) is a generic mortgage derivative.
Mortgage derivatives are usually securities created (derived) from a pool of
mortgages or mortgage pass-throughs. Whereas a pass-through is an ownership
interest in a complete mortgage pool, a derivative is typically an interest in
just one part of a pool.
Typically, each CMO is a set of two or more classes of securities with different
yields, maturities and cash flow patterns. The purpose of a CMO is to take the
cash flow from a mortgage pool and reallocate it in ways that appeal to
different types of investors. For example, an interest-only (IO) security is a
CMO that provides an ownership interest in just the interest payments from a
mortgage pool. The ability to restructure cash flows makes it possible to create
CMOs that are less risky than traditional securities as well as CMOs that are
more risky than traditional securities. CMO risk also depends on the issuer.
While CMO collateral is typically issued by GNMA, FNMA or FHLMC, the CMO itself
may be issued by a private party, such as a brokerage firm, that is not covered
by government guarantees.
The GNMA Fund is permitted to buy CMOs collateralized by GNMA pass-throughs, but
it does not own any currently and has no plans to do so. The ARM Fund owns CMO
floaters, which are technically derivatives but behave very much like
traditional securities. Like an ARM, the interest rate on a CMO floater
typically resets monthly to a specific interest rate index.
15
INVESTMENT FUNDAMENTALS
PORTFOLIO SENSITIVITY MEASUREMENTS
Duration
Duration measures the price sensitivity of a bond or bond fund to changes in
interest rates. Specifically, duration represents the approximate percentage
change in the price of a bond or bond fund if interest rates move up or down by
100 basis points (defined on page 18). For example, as of September 30, 1996,
the ARM Fund's duration was one year, while the GNMA Fund's duration was 4.3
years. If interest rates were to fall by 100 basis points (e.g., from 7% to 6%),
the ARM Fund's share price would be expected to increase by 1.0%, while the GNMA
Fund's share price would increase by 4.3%. Conversely, if interest rates were to
rise by 100 basis points (e.g., from 7% to 8%), the ARM Fund's share price would
be expected to decline by 1.0%, while the GNMA Fund's share price would decline
by 4.3%.
As this example illustrates, the longer the duration, the more bond or bond fund
prices will move in response to interest rate changes. Therefore, portfolio
managers generally lengthen durations when interest rates fall (to maximize the
effects of bond price increases) and shorten durations when interest rates rise
(to minimize the effects of bond price declines), taking into account the
investment objectives of the portfolio.
Average Maturity and Average Life
For most bond funds, average maturity is another measurement of the interest
rate sensitivity of a bond portfolio. Average maturity measures the average
amount of time that will pass until the securities in the portfolio mature. The
longer a portfolio's average maturity, the more interest rate exposure and
interest rate sensitivity it has. For example, a portfolio with a ten-year
average maturity has much more potential exposure to interest rate changes than
a portfolio with a one-year average maturity.
Whereas most bonds return the entire principal at maturity, ARMs and GNMAs
provide gradual payments of principal throughout their lives. As a result,
comparing the average maturity of ARM and GNMA funds to other bond funds is like
comparing apples to oranges. A more accurate measure for ARM and GNMA funds is
the average life of a fund's portfolio. The average life includes only principal
payments and weights each payment equally. An ARM or GNMA fund with an average
life of ten years has approximately the same interest rate sensitivity as a bond
fund with an average maturity of ten years.
16
INVESTMENT FUNDAMENTALS
RISK FACTORS
ARM and GNMA funds are essentially high-yielding short- and intermediate-term
bond funds. They should not be placed in the same category as money market funds
or long-term bond funds. ARM and GNMA funds typically pay higher yields than
money market funds because they do not attempt to maintain a constant share
price. They also typically pay higher yields than Treasury funds with comparable
maturities because mortgage pass-throughs tend to underperform when interest
rates rise or fall sharply. Over time, the higher yields on ARM and GNMA funds
tend to compensate investors for the following mortgage-related risks:
Prepayments--when interest rates fall, mortgage rates also fall, which
encourages homeowners to refinance (or "prepay") their mortgages to reduce their
monthly payments. Although prepayments are good for homeowners, they're bad for
ARM and GNMA investors, who purchase a pass-through expecting it to exist for a
certain number of years. Prepayments shorten the lives of mortgage portfolios
and force ARM and GNMA investors to reinvest in lower-yielding mortgage pools.
Therefore, when prepayment levels climb, mortgage analysts increase the
prepayment assumptions used to price pass-throughs. As a result, pass-through
durations shorten, while Treasuries benefit from longer durations when interest
rates fall.
Duration Extension--when interest rates rise sharply, higher interest rates
reduce prepayments, which is good, but the lower level of prepayments causes ARM
and GNMA durations to extend, which is bad when rates are rising. Pass-through
portfolios become more susceptible to price declines at a time when greater
price stability would be desirable. By contrast, Treasury durations generally
shorten when interest rates experience a large increase.
Yield Curve
The yield curve is a graphic representation of the relationship between risk and
return for fixed-income securities. Yield curve graphs plot lengthening
maturities along the horizontal axis and rising yields along the vertical axis.
Most "normal" yield curves start in the lower left corner of the graph and rise
to the upper right corner, indicating that yields rise as maturities lengthen.
This upward sloping yield curve illustrates a normal risk/return
relationship--more return (yield) for more risk (a longer maturity). Conversely,
a "flat" yield curve provides little or no extra return for taking on more risk.
17
INVESTMENT FUNDAMENTALS
OTHER DEFINITIONS
Other Security Types
Fixed-Rates--mortgage pass-throughs backed by fixed-rate mortgages.
Repos--repurchase agreements backed by securities with government guarantees.
These are very short-term securities used as cash equivalents.
Treasury Notes--intermediate-term Treasury securities.
Treasury STRIPS--zero-coupon bonds issued by the U.S. Treasury. Unlike ordinary
Treasury securities, which pay interest periodically, zero-coupon bonds pay no
interest. Instead, these securities are issued at a deep discount and then
redeemed for their full face value at maturity.
Portfolio Statistics
Market Value--the market value of a fund's investments on a given date.
Number of Issues--the number of different securities issuances held by a fund on
a given date.
Average Coupon--a weighted average of all interest coupons held in a fund's
portfolio.
Average Maturity--a weighted average of all bond maturities in a fund's
portfolio (see also page 16).
Average Life--a weighted average of the "life" of each bond in a fund's
portfolio (see also page 16).
Average Duration--a weighted average of all bond durations in a fund's portfolio
(see also page 16).
Investment Terms
Basis Points--a basis point equals one one-hundredth of a percentage point (or
0.01%). Therefore, 100 basis points equals one percentage point (or 1%).
Coupon--the stated interest rate of a security.
Premium and Discount Bonds
If a bond's interest coupon is higher than prevailing rates, the bond is
considered to be a premium bond. If the coupon is lower than prevailing rates,
the bond is considered to be a discount bond. Premium pass-throughs tend to have
more price stability than discount pass-throughs--premium pass-throughs
depreciate less when interest rates rise, but they appreciate less when interest
rates fall. Discount pass-throughs behave more like long-term Treasury
securities.
18
[This page intentionally left blank]
19
<TABLE>
<CAPTION>
BENHAM ADJUSTABLE RATE GOVERNMENT SECURITIES FUND
FINANCIAL HIGHLIGHTS
For a Share Outstanding Throughout the Six Months Ended September 30
and the Years Ended March 31 (except as noted)
Sept. 30,
1996 March 31, March 31, March 31, March 31, March 31,
(Unaudited) 1996 1995 1994 1993 1992+
----- ----- ----- ----- ----- -----
PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value at Beginning of Period ........................ $9.47 9.42 9.75 9.97 10.04 10.00
Income From Investment Operations
Net Investment Income ........................................ .26 .54 .49 .54 .57 .40
Net Realized and Unrealized Gains
(Losses) on Investments ..................................... .02 .05 (.33) (.22) (.07) .04
----- ----- ----- ----- ----- -----
Total Income From Investment Operations .................... .28 .59 .16 .32 .50 .44
----- ----- ----- ----- ----- -----
Less Distributions
Dividends from Net Investment Income ........................ (.26) (.54) (.49) (.54) (.57) (.40)
Distributions from Net Realized Capital Gains ................ 0 0 0 0 0 0
----- ----- ----- ----- ----- -----
Total Distributions ........................................ (.26) (.54) (.49) (.54) (.57) (.40)
----- ----- ----- ----- ----- -----
Net Asset Value at End of Period ............................... $9.49 9.47 9.42 9.75 9.97 10.04
===== ===== ===== ===== ===== =====
TOTAL RETURN* .................................................. 3.00% 6.42% 1.75% 3.27% 5.13% 4.55%
- -------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period (in thousands) .................... $261,334 298,538 397,391 936,539 1,495,164 886,012
Ratio of Expenses to Average Daily Net Assets++ ............... .60%** .60% .57% .51% .45% 0%
Ratio of Net Investment Income to Average Daily Net Assets++ . 5.44%** 5.70% 4.98% 5.47% 5.66% 7.02%**
Portfolio Turnover Rate ....................................... 62.03% 221.35% 60.29% 91.87% 82.71% 81.84%
- ------------------------
+ From September 3, 1991 (commencement of operations), through March 31, 1992.
++ The ratios beginning with the year ended March 31, 1996, include expenses paid through expense offset arrangements.
* Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized.
** Annualized.
See the accompanying notes to financial statements.
</TABLE>
20
<TABLE>
<CAPTION>
BENHAM GNMA INCOME FUND
FINANCIAL HIGHLIGHTS
For a Share Outstanding the Throughout Six Months Ended September 30 and the Years Ended March 31
Sept. 30,
1996 March 31, March 31, March 31, March 31, March 31, March 31, March 31, March 31, March 31,
(Unaudited) 1996 1995 1994 1993 1992 1991 1990 1989 1988
------ ---- ---- ---- ---- ---- ---- ---- ---- ----
PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value at Beginning
of Period .................. $10.45 10.18 10.35 10.88 10.52 10.21 9.85 9.56 9.96 10.42
Income From Investment Operations
Net Investment Income ....... .36 .74 .72 .66 .79 .86 .88 .90 .89 .89
Net Realized and Unrealized Gains
(Losses) on Investments .... (.11) .27 (.18) (.52) .36 .31 .36 .29 (.40) (.40)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Income From Investment
Operations ............... .25 1.01 .54 .14 1.15 1.17 1.24 1.19 .49 .49
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Less Distributions
Dividends from Net Investment
Income ..................... (.36) (.74) (.71) (.66) (.79) (.86) (.88) (.90) (.89) (.95)
Distributions from Net Realized
Capital Gains .............. 0 0 0 (.01) 0 0 0 0 0 0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Distributions ........ (.36) (.74) (.71) (.67) (.79) (.86) (.88) (.90) (.89) (.95)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net Asset Value at End
of Period ................... $10.34 10.45 10.18 10.35 10.88 10.52 10.21 9.85 9.56 9.96
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
TOTAL RETURN* ................. 2.45% 10.08% 5.53% 1.30% 11.28% 11.85% 13.16% 12.73% 5.07% 5.23%
SUPPLEMENTAL DATA AND RATIOS
Net Assets at End of Period
(in thousands) .......... $1,118,270 1,120,019 979,670 1,129,185 1,159,754 723,819 408,808 289,544 253,113 259,144
Ratio of Expenses to Average Daily
Net Assets+ ................. .56%** .58% .58% .54% .56% .62% .72% .75% .75% .73%
Ratio of Net Investment Income to
Average Daily Net Assets+ .. 6.90%** 6.98% 7.08% 6.12% 7.31% 8.18% 8.85% 9.04% 9.11% 8.94%
Portfolio Turnover Rate ...... 45.79% 63.54% 119.56% 48.61% 70.57% 97.33% 206.60% 432.93% 496.52% 497.16%
- ------------------------
* Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized.
+ The ratios beginning with the year ended March 31, 1996, include expenses paid through expense offset arrangements.
** Annualized.
See the accompanying notes to financial statements.
</TABLE>
21
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
September 30, 1996
(Unaudited)
Benham Adjustable
Rate Government Benham GNMA
Securities Fund Income Fund
---------- ----------
<S> <C> <C>
ASSETS
Investment securities at value (cost $259,472,149 and $1,129,431,463, respectively) ........ $259,292,403 1,124,075,837
Cash ....................................................................................... 401,408 3,316,041
Interest receivable ........................................................................ 1,309,359 7,583,410
Receivable for securities sold ............................................................. 1,842,332 0
Receivable for fund shares sold ............................................................ 100 33,913
Prepaid expenses and other assets .......................................................... 52,914 128,013
----------- ------------
Total assets ............................................................................. 262,898,516 1,135,137,214
----------- ------------
LIABILITIES
Payable for securities purchased 0 11,400,238
Payable for fund shares redeemed ........................................................... 1,281,723 4,038,550
Dividends payable .......................................................................... 132,736 698,563
Payable to affiliates (Note 2) ............................................................. 142,650 597,766
Accrued expenses and other liabilities ..................................................... 7,602 131,872
----------- ------------
Total liabilities ........................................................................ 1,564,711 16,866,989
----------- ------------
NET ASSETS ................................................................................... $261,333,805 1,118,270,225
=========== ============
Net assets consist of:
Capital paid in ............................................................................ $330,836,487 1,151,255,414
Undistributed accumulated net realized loss on investments ................................. (69,331,213) (27,655,047)
Undistributed net investment income ........................................................ 8,277 25,484
Net unrealized depreciation on investments ................................................. (179,746) (5,355,626)
----------- ------------
Net assets ................................................................................... $261,333,805 1,118,270,225
=========== ============
Shares of beneficial interest outstanding (unlimited number of shares authorized) ............ 27,527,436 108,106,970
=========== ============
Net asset value, offering price and redemption price per share ............................... $9.49 10.34
=========== ============
- ------------------------
See the accompanying notes to financial statements.
</TABLE>
22
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
For the Six Months Ended Ended September 30, 1996
(Unaudited)
Benham Adjustable
Rate Government Benham GNMA
Securities Fund Income Fund
---------- ----------
<S> <C> <C>
Investment Income
Interest income .............................................................................. $8,367,847 41,156,984
--------- -----------
Expenses (Note 2)
Investment advisory fees ................................................................... 384,643 1,538,387
Administrative fees ........................................................................ 132,973 529,602
Transfer agency fees ....................................................................... 172,904 584,058
Printing and postage ....................................................................... 44,384 105,511
Custodian fees ............................................................................. 44,179 213,799
Auditing and legal fees .................................................................... 9,741 30,679
Registration and filing fees ............................................................... 12,724 9,048
Directors' fees and expenses ............................................................... 4,899 9,184
Other operating expenses ................................................................... 23,579 62,336
--------- -----------
Total expenses ........................................................................... 830,026 3,082,604
Amount recouped (waived) (Note 2) ............................................................ (2,438) 2,438
Custodian earnings credits (Note 5) .......................................................... (21,836) (56,283)
--------- -----------
Net expenses ............................................................................... 805,752 3,028,759
--------- -----------
Net investment income .................................................................... 7,562,095 38,128,225
--------- -----------
Realized and Unrealized Gain (Loss) on Investments (Note 4)
Net realized loss on investments ............................................................. (105,394) (3,946,624)
Change in net unrealized appreciation (depreciation) on investments .......................... 732,533 (6,955,903)
--------- -----------
Net realized and unrealized gain (loss) on investments ..................................... 627,139 (10,902,527)
--------- -----------
Net increase in assets resulting from operations ........................................... $8,189,234 27,225,698
========= ===========
- ------------------------
See the accompanying notes to financial statements.
</TABLE>
23
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Six Months Ended September 30, 1996 (Unaudited), and Year Ended March 31, 1996
Benham Adjustable
Rate Government Benham
Securities Fund GNMA Income Fund
------------------ ------------------
Sept. 30, March 31, Sept. 30, March 31,
1996 1996 1996 1996
-------- -------- -------- --------
From investment activities:
<S> <C> <C> <C> <C>
Net investment income ............................................... $ 7,562,095 19,452,086 38,128,225 74,636,431
Net change in unrealized appreciation (depreciation) of investments . 732,533 2,830,174 (6,955,903) 15,697,906
Net realized loss on investments .................................... (105,394) (514,222) (3,946,624) 8,227,610
------------- ------------ -------------- --------------
Change in net assets derived from investment activities .......... 8,189,234 21,768,038 27,225,698 98,561,947
------------- ------------ -------------- --------------
From distributions to shareholders:
Net investment income ............................................... (7,537,843) (19,432,184) (38,085,694) (74,692,211)
In excess of net investment income .................................. 0 0 0 (17,047)
------------- ------------ -------------- --------------
Total distributions to shareholders ............................... (7,537,843) (19,432,184) (38,085,694) (74,709,258)
------------- ------------ -------------- --------------
From capital share transactions (Note 3):
Proceeds from sales of shares ....................................... 45,317,920 59,010,559 150,713,435 345,352,436
Net asset value of dividends reinvested ............................. 6,161,869 16,071,334 29,179,323 57,601,256
Cost of shares redeemed ............................................. (89,335,450) (176,270,354) (170,781,773) (286,456,680)
------------- ------------ -------------- --------------
Change in net assets derived from capital share transactions ...... (37,855,661) (101,188,461) 9,110,985 116,497,012
------------- ------------ -------------- --------------
Net decrease in net assets ..................................... (37,204,270) (98,852,607) (1,749,011) 140,349,701
Net assets:
Beginning of period ................................................. 298,538,075 397,390,682 1,120,019,236 979,669,535
------------- ------------ -------------- --------------
End of period ....................................................... $ 261,333,805 298,538,075 1,118,270,225 1,120,019,236
============= ============ ============== ==============
- ------------------------
See the accompanying notes to financial statements.
</TABLE>
24
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Benham Government Income Trust (BGIT) is registered under the Investment Company
Act of 1940 as an open-end management investment company. BGIT is composed of
six funds, including the Benham Adjustable Rate Government Securities Fund (ARM)
and Benham GNMA Income Fund (GNMA). The ARM Fund invests primarily in adjustable
rate mortgage securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities. The GNMA Fund invests primarily in
mortgage-backed GNMA certificates. The following significant accounting policies
are in accordance with accounting policies generally accepted in the investment
company industries.
Security Valuations--Securities held by the Funds are valued at current market
value as provided by an independent commercial pricing service. When valuations
are not readily available, securities are valued at fair value as determined in
good faith by or under the direction of the Board of Trustees.
Security Transactions--Security transactions are accounted for on the date
purchased or sold. Net realized gains and losses are determined on the
identified cost basis, which is also used for federal income tax purposes.
Income Tax Status--It is the policy of the Funds to distribute all net
investment income and net realized capital gains to shareholders and to
otherwise qualify as a regulated investment company under the provisions of the
Internal Revenue Code. Accordingly, no provision has been made for federal or
state taxes.
Distributions to Shareholders--Net investment income dividends are declared
daily and distributed monthly. Net realized gains in excess of available capital
loss carryovers will be distributed each December. As of March 31, 1996, the
accumulated net realized capital loss carryover of $69,205,630 for ARM and
$23,041,420 for GNMA (expiring 2000 through 2004) may be used to offset future
taxable gains.
The character of distributions made during the year from net investment income
or net realized gains may differ from their ultimate characterization for
federal income tax purposes due to differences in the recognition of income and
expense items for financial statement and tax purposes.
25
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increase and decrease in net assets from
operations during the period. Actual results could differ from these estimates.
Forward Commitments--The Funds may purchase and sell some U.S. government
securities on a firm commitment basis. Under these arrangements, the securities'
prices and yields are fixed on the date of the commitment, but payment and
delivery are scheduled for a future date. During this period, securities are
subject to market fluctuations. The Funds maintain segregated accounts
consisting of cash or high quality securities in an amount sufficient to meet
the purchase price.
(2) INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Benham Management Corporation (BMC) is a wholly owned subsidiary of Twentieth
Century Companies, Inc. (TCC). Each Fund pays BMC a monthly investment advisory
fee based on its pro rata share of the dollar amount derived from applying
BGIT's average daily net assets to the following annualized investment advisory
fee schedule.
.50% of the first $100 million
.45% of the next $100 million
.40% of the next $100 million
.35% of the next $100 million
.30% of the next $100 million
.25% of the next $1 billion
.24% of the next $1 billion
.23% of the next $1 billion
.22% of the next $1 billion
.21% of the next $1 billion
.20% of the next $1 billion
.19% of net assets over $6.5 billion
BMC provides BGIT with all investment advice. Twentieth Century Services, Inc.
(TCS) pays all compensation of BGIT officers and trustees who are officers or
directors of TCC or any of its subsidiaries. In addition, promotion and
distribution expenses are paid by BMC.
BGIT has an Administrative Services and Transfer Agency Agreement with TCS, a
wholly owned subsidiary of TCC. Under the agreement, TCS provides substantially
all administrative and transfer agency services necessary to operate each Fund
of BGIT. Fees for these
26
services are based on transaction volume, number of accounts and average net
assets of all funds in The Benham Group. The agreement was formerly with Benham
Financial Services, Inc.
BGIT has an additional agreement with BMC pursuant to which BMC established a
contractual expense guarantee that limits each Fund's expenses (excluding
expenses such as brokerage commissions, taxes, interest, custodian earnings
credits, and extraordinary expenses) to .60% (.65% prior to June 1, 1996) of
average daily net assets. The agreement provides that BMC may recover amounts
(representing expenses in excess of the Fund's expense guarantee rate) absorbed
during the 11 preceding months if, and to the extent that, for any given month,
the Fund's expenses were less than the expense guarantee rate in effect at that
time. The expense rate is subject to renewal in June 1997.
The payables to affiliates as of September 30, 1996, based on the above
agreements were as follows:
ARM Fund GNMA Fund
------------ ------------
Investment Advisor .......................... $ 73,708 335,266
Administrative Services ..................... 20,682 87,098
Transfer Agent .............................. 48,260 175,402
-------- --------
$142,650 597,766
======== ========
BGIT has a distribution agreement with Twentieth Century Securities, Inc., which
is responsible for promoting sales of and distributing the Funds' shares.
Twentieth Century Securities, Inc. is wholly owned subsidiary of TCC. The
agreement was formerly with Benham Distributors, Inc.
(3) SHARE TRANSACTIONS
Share transactions for the six months ended September 30, 1996, and year ended
March 31, 1996, were as follows:
ARM Fund GNMA Fund
-------------- -------------
Sept. 30, March 31, Sept. 30, March 31,
1996 1996 1996 1996
------ ------- ------ ------
Shares sold ................. 4,787,774 6,219,269 14,611,713 32,776,505
Reinvestment of dividends ... 649,802 1,693,549 2,830,301 5,471,620
---------- ---------- ---------- ----------
5,437,576 7,912,818 17,442,014 38,248,125
Less shares redeemed ........(9,434,835) (18,583,809)(16,555,822)(27,214,841)
---------- ---------- ---------- ----------
Net increase (decrease)
in shares .................(3,997,259) (10,670,991) 886,192 11,033,284
========== ========== ========== ==========
27
(4) INVESTMENT TRANSACTIONS
Investment transactions, excluding short-term securities, for the six months
ended September 30, 1996, was as follows:
ARM Fund GNMA Fund
-------- ---------
Purchases ....................................... $161,885,623 $495,354,520
=========== ===========
Sales Proceeds .................................. $205,092,397 $511,770,516
=========== ===========
On September 30, 1996, the composition of unrealized appreciation (depreciation)
of investment securities based on the aggregate cost of investments for federal
income tax purposes was as follows:
Federal
Appreciation Depreciation Net Tax Cost
------------ ------------ ---------- -----------
ARM Fund ................. $ 667,249 $ (867,184) $ (199,935) $ 259,492,338
GNMA Fund ................ 10,376,552 (17,411,088) (7,034,536) 1,131,110,373
(5) EXPENSE OFFSET ARRANGEMENTS
Each Fund's Statement of Operations reflects custodian earnings credits. These
amounts are used to offset the custody fees payable by the Funds to the
custodian bank. The credits are earned when the Fund maintains a balance of
uninvested cash at the custodian bank. Beginning with the year ending March 31,
1996, the ratios of expenses to average daily net assets shown in the Financial
Highlights are calculated as if these credits had not been earned.
28
<TABLE>
<CAPTION>
BENHAM GOVERNMENT INCOME TRUST
Benham Adjustable Rate Government Securities Fund
Schedule of Investment Securities
September 30, 1996
(Unaudited)
Face
Coupon Amount Value
-------- -------- --------
ADJUSTABLE RATE MORTGAGE SECURITIES*
Federal National Mortgage Association (FNMA) -- 25.69%
<S> <C> <C> <C>
FNMA-ARM, due 11/01/25, Pool 325305 ......................................... 6.033% $ 778,513 802,717
FNMA-ARM, due 02/01/99, Pool 066254 ......................................... 6.059 217,138 215,646
FNMA-ARM, due 05/01/28, Pool 062688 ......................................... 6.059 3,740,572 3,702,007
FNMA-ARM, due 10/01/30, Pool 316518 ......................................... 6.391 4,880,032 4,883,838
FNMA-ARM, due 08/01/21, Pool 129482 ......................................... 6.525 361,083 360,906
FNMA-ARM, due 04/01/16, Pool 025432 ......................................... 6.625 517,964 525,330
FNMA-ARM, due 01/01/29, Pool 070716 ......................................... 6.630 385,127 383,984
FNMA-ARM, due 04/01/26, Pool 062836 ......................................... 6.658 148,639 145,318
FNMA-ARM, due 01/01/27, Pool 062835 ......................................... 6.741 231,143 225,799
FNMA-ARM, due 01/01/20, Pool 070595 ......................................... 6.980 1,923,170 1,973,653
FNMA-ARM, due 10/01/14, Pool 009781 ......................................... 7.067 62,696 62,441
FNMA-ARM, due 06/01/18, Pool 070186 ......................................... 7.142 457,922 472,090
FNMA-ARM, due 01/01/18, Pool 099782 ......................................... 7.157 5,185,035 5,321,142
FNMA-ARM, due 08/01/15, Pool 020635 ......................................... 7.180 129,581 132,133
FNMA-ARM, due 07/01/17, Pool 066415 ......................................... 7.197 1,627,460 1,685,690
FNMA-ARM, due 08/01/19, Pool 244477 ......................................... 7.203 687,388 700,812
FNMA-ARM, due 05/01/22, Pool 163993 ......................................... 7.262 1,578,838 1,615,104
FNMA-ARM, due 07/01/22, Pool 173165 ......................................... 7.276 638,376 643,757
FNMA-ARM, due 03/01/18, Pool 086885 ......................................... 7.284 1,955,199 2,012,642
FNMA-ARM, due 02/01/29, Pool 091689 ......................................... 7.290 298,548 301,348
FNMA-ARM, due 05/01/22, Pool 334441 ......................................... 7.299 990,278 1,010,856
FNMA-ARM, due 02/01/27, Pool 091688 ......................................... 7.302 183,585 185,736
FNMA-ARM, due 06/01/22, Pool 169868 ......................................... 7.310 959,962 977,961
FNMA-ARM, due 08/01/23, Pool 303336 ......................................... 7.366 5,423,720 5,546,621
29
Schedule of Investment Securities---Benham Adjustable Rate Government Securities Fund (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Face
Coupon Amount Value
Federal National Mortgage Association (FNMA) -- continued -------- -------- --------
FNMA-ARM, due 07/01/15, Pool 105320 ......................................... 7.370% $ 1,033,487 1,060,130
FNMA-ARM, due 07/01/16, Pool 009883 ......................................... 7.375 103,007 104,326
FNMA-ARM, due 01/01/22, Pool 145556 ......................................... 7.375 977,109 995,733
FNMA-ARM, due 12/01/17, Pool 070088 ......................................... 7.383 413,964 427,352
FNMA-ARM, due 01/01/27, Pool 070184 ......................................... 7.400 284,259 294,743
FNMA-ARM, due 09/01/22, Pool 178295 ......................................... 7.405 684,865 695,569
FNMA-ARM, due 12/01/20, Pool 070909 ......................................... 7.430 1,088,824 1,127,107
FNMA-ARM, due 05/01/18, Pool 162880 ......................................... 7.436 1,986,710 2,048,795
FNMA-ARM, due 12/01/18, Pool 099577 ......................................... 7.440 1,380,783 1,420,481
FNMA-ARM, due 08/01/14, Pool 020155 ......................................... 7.491 387,479 386,692
FNMA-ARM, due 09/01/03, Pool 066221 ......................................... 7.500 358,475 354,722
FNMA-ARM, due 07/01/17, Pool 061392 ......................................... 7.506 522,458 543,440
FNMA-ARM, due 09/01/19, Pool 142402 ......................................... 7.518 5,913,628 6,142,781
FNMA-ARM, due 04/01/18, Pool 070224 ......................................... 7.625 527,464 548,726
FNMA-ARM, due 08/01/23, Pool 190647 ......................................... 7.689 1,367,842 1,405,239
FNMA-ARM, due 04/01/20, Pool 113709 ......................................... 7.707 1,543,405 1,609,972
FNMA-ARM, due 10/01/25, Pool 318767 ......................................... 7.708 1,032,433 1,068,568
FNMA-ARM, due 07/01/18, Pools 063658, 063623, 063167 ........................ 7.750 852,702 881,053
FNMA-ARM, due 05/01/17, Pool 061401 ......................................... 7.822 2,625,810 2,757,521
FNMA-ARM, due 05/01/19, Pool 075462 ......................................... 7.825 248,322 257,674
FNMA-ARM, due 08/01/24, Pool 291248 ......................................... 7.853 3,193,801 3,307,085
FNMA-ARM, due 08/01/16, Pool 036922 ......................................... 7.875 434,855 445,796
FNMA-ARM, due 02/01/18, Pool 064708 ......................................... 7.875 495,404 514,987
FNMA-ARM, due 03/01/21, Pool 336479 ......................................... 7.886 987,052 1,027,926
FNMA-ARM, due 08/01/18, Pool 013786 ......................................... 7.896 1,115,242 1,118,242
FNMA-ARM, due 01/01/17, Pool 105843 ......................................... 7.900 613,895 640,373
FNMA-ARM, due 02/01/01, Pool 066376 ......................................... 8.000 230,322 228,074
FNMA-ARM, due 06/01/23, Pool 220498 ......................................... 8.119 726,641 757,865
FNMA-ARM, due 07/01/23, Pool 222649 ......................................... 8.125 534,849 554,820
----------- -----------
Total FNMA (cost $67,024,039) .................................................................. 65,027,056 66,613,323
----------- -----------
30
Schedule of Investment Securities---Benham Adjustable Rate Government Securities Fund (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Face
Coupon Amount Value
Federal Home Loan Mortgage Corporation (FHLMC) -- 24.55% ------ -------- --------
FHLMC-ARM, due 01/01/21, Pool 390263 ........................................ 6.375%$ 480,510 476,618
FHLMC-ARM, due 10/01/25, Pool 846197 ........................................ 6.458 8,346,324 8,552,395
FHLMC-ARM, due 05/01/17, Pool 350053 ........................................ 6.875 3,893,043 3,980,013
FHLMC-ARM, due 09/01/20, Pool 755188 ........................................ 7.151 3,323,331 3,408,508
FHLMC-ARM, due 05/01/22, Pool 406645 ........................................ 7.185 1,126,909 1,137,930
FHLMC-ARM, due 06/01/21, Pool 775473 ........................................ 7.359 55,074 54,722
FHLMC-ARM, due 04/01/19, Pool 605775 ........................................ 7.497 1,722,089 1,796,363
FHLMC-ARM, due 09/01/19, Pool 606116 ........................................ 7.518 2,078,554 2,155,211
FHLMC-ARM, due 03/01/24, Pool 845986 ........................................ 7.554 5,560,351 5,779,318
FHLMC-ARM, due 06/01/24, Pool 845898 ........................................ 7.555 2,963,062 3,046,413
FHLMC-ARM, due 06/01/24, Pool 846018 ........................................ 7.596 13,451,112 14,003,818
FHLMC-ARM, due 03/01/24, Pool 876559 ........................................ 7.600 2,517,387 2,605,496
FHLMC-ARM, due 11/01/18, Pool 606095 ........................................ 7.629 717,867 733,459
FHLMC-ARM, due 08/01/18, Pool 635104 ........................................ 7.656 247,708 252,779
FHLMC-ARM, due 09/01/24, Pool 845995 ........................................ 7.679 9,151,251 9,545,944
FHLMC-ARM, due 07/01/24, Pool 846061 ........................................ 7.688 5,862,074 6,114,906
----------- -----------
Total FHLMC-ARM (cost $63,409,797) ............................................................. 61,496,646 63,643,893
----------- -----------
Government National Mortgage Association (GNMA) -- 29.22%
GNMA-ARM, due 11/20/25, Pool 008744 ......................................... 5.500 8,290,505 8,284,039
GNMA-ARM, due 08/20/25, Pool 008684 ......................................... 6.000 17,204,635 17,446,533
GNMA-ARM, due 12/20/25, Pool 008767 ......................................... 6.000 6,816,063 6,881,020
GNMA-ARM, due 01/20/22, Pool 008902 ......................................... 6.500 13,704 13,867
GNMA-ARM, due 02/20/21, Pool 008763 ......................................... 7.000 407,197 414,323
GNMA-ARM, due 11/20/21, Pool 008867 ......................................... 7.000 639,336 650,326
GNMA-ARM, due 08/20/22, Pool 008038 ......................................... 7.000 9,321,193 9,498,853
GNMA-ARM, due 07/20/25, Pool 008663 ......................................... 7.000 12,919,408 13,175,729
GNMA-ARM, due 05/20/17, Pool 008230 ......................................... 7.125 379,488 382,217
GNMA-ARM, due 04/20/23, Pool 008180 ......................................... 7.125 2,006,478 2,038,140
GNMA-ARM, due 08/20/24, Pool 008484 ......................................... 7.250 12,559,718 12,808,902
GNMA-ARM, due 11/20/21, Pool 008872 ......................................... 7.500 480,394 492,327
GNMA-ARM, due 09/20/25, Pool 008706 ......................................... 7.500 3,613,446 3,687,413
----------- -----------
Total GNMA-ARM (cost $75,680,664) .............................................................. 74,651,565 75,773,689
----------- -----------
Total Adjustable Rate Mortgage Securities-- 79.46% (cost $206,114,500) .............................. 201,175,267 206,030,905
----------- -----------
31
Schedule of Investment Securities---Benham Adjustable Rate Government Securities Fund (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Face
Coupon Amount Value
FIXED RATE MORTGAGE SECURITIES* ------ -------- -------
Federal Home Loan Mortgage Corporation (FHLMC) -- 0.00%
FHLMC-FRM, due 09/01/13, Pool 250918 ........................................ 13.250%$ 4,145 4,754
----------- -----------
Total FHLMC (cost $4,652) ..................................................................... 4,145 4,754
----------- -----------
Government National Mortgage Association (GNMA) -- 2.35%
GNMA-FRM, due 01/20/09, Pool 001565 ......................................... 5.500 244,974 226,601
GNMA-FRM, due 09/20/23, Pool 001376 ......................................... 8.000 2,340,012 2,354,637
GNMA-FRM, due 11/20/16, Pool 187019 ......................................... 9.000 236,782 247,141
GNMA-FRM, due 12/20/16, Pools 179457, 199973 ................................ 9.000 441,601 460,921
GNMA-FRM, due 08/20/17, Pool 220128 ......................................... 9.000 530,660 553,876
GNMA-FRM, due 08/20/17, Pool 220134 ......................................... 9.500 322,164 343,608
GNMA-FRM, due 09/20/17, Pool 220127 ......................................... 9.500 85,984 91,708
GNMA-FRM, due 10/20/17, Pool 234860 ......................................... 9.500 418,400 446,249
GNMA-FRM, due 11/20/19, Pool 001291 ......................................... 9.500 1,181,545 1,260,191
GNMA-FRM, due 05/15/98, Pool 059438 ......................................... 11.500 13,403 14,425
GNMA-FRM, due 08/15/00, Pool 126325 ......................................... 11.500 38,552 41,492
GNMA-FRM, due 06/15/99, Pool 113802 ......................................... 12.500 39,319 42,513
GNMA-FRM, due 06/15/00, Pool 127619 ......................................... 12.500 13,494 14,590
----------- -----------
Total GNMA (cost $6,221,224) ................................................................... 5,906,890 6,097,952
----------- -----------
Total Fixed Rate Mortgage Securities-- 2.35% (cost $6,225,876) ...................................... 5,911,035 6,102,706
----------- -----------
COLLATERALIZED MORTGAGE OBLIGATIONS*
Federal National Mortgage Association -- 1.75%
FNMA-CMO, due 11/25/99 FNR 92-199 F ......................................... 6.031 4,503,076 4,527,073
----------- -----------
Total FNMA (cost $4,525,592) ................................................................... 4,503,076 4,527,073
----------- -----------
Federal Home Loan Mortgage Corporation (FHLMC) -- 11.35%
FHLMC-CMO, due 05/15/99 FHR 1234 G .......................................... 5.800 2,511,923 2,514,031
FHLMC-CMO, due 09/15/98 FHR 1581 F .......................................... 6.000 7,215,907 7,244,763
FHLMC-CMO, due 12/15/08 FHR 1640 FC ......................................... 6.000 8,000,000 8,024,472
FHLMC-CMO, due 09/15/08 FHR 1580 FA ......................................... 6.050 10,000,000 10,046,390
FHLMC-CMO, due 05/15/05 FHR 1110 F .......................................... 6.300 1,600,146 1,605,633
----------- -----------
Total FHLMC (cost $29,410,207) ................................................................. 29,327,976 29,435,289
----------- -----------
32
Schedule of Investment Securities---Benham Adjustable Rate Government Securities Fund (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Face
Coupon Amount Value
Private Label -- 0.08% ------ -------- -------
Dean Witter CMO Trust I Floater (1)
Underlying Collateral FHLMC, due 04/20/18, DW I-A ........................... 6.063%$ 196,835 196,430
----------- -----------
Total Private Label (cost $195,974) ............................................................ 196,835 196,430
----------- -----------
Total Collaterlized Mortgage Obligations-- 13.18% (cost $34,131,773) ................................ 34,027,887 34,158,792
----------- -----------
REPURCHASE AGREEMENTS -- 5.01%
Daiwa Securities, 5.730%, due in the amount of $13,002,069, entered into on
09/30/96, due 10/01/96; collateral consists of U.S. Treasury bonds, 8.125% to
8.875%, due 08/15/17
to 05/15/21 (cost $13,000,000) .................................................................... 13,000,000 13,000,000
----------- -----------
TOTAL INVESTMENT SECURITIES-- 100.00% (cost $259,472,149**) ......................................... $254,114,189 259,292,403
=========== ===========
- ------------------------
* Certificates are subject to principal paydowns as a result of prepayments or refinancing of the underlying mortgage instruments.
As a result, the actual life of a pool may be substantially less than the life of the original underlying mortgages and the
indicated maturity.
** Cost for federal income tax purposes is presented in Note 4 to the accompanying financial statements.
(1)The coupons on these securities reset frequently (monthly or quarterly) and are not restricted by low periodic or lifetime caps,
so their price volatility is similar to Adjustable Rate Mortgage Securities.
See the accompanying notes to the financial statements.
</TABLE>
33
<TABLE>
<CAPTION>
BENHAM GOVERNMENT INCOME TRUST
Benham GNMA Income Fund
Schedule of Investment Securities
September 30, 1996
(Unaudited)
Face
Coupon Amount Value Percent
-------- -------- -------- --------
Government National Mortgage Association Certificates*
<S> <C> <C> <C> <C>
GNMA due 07/20/16 ............................................................. 6.000%$ 25,343 22,904 0.00%
GNMA due 09/20/08 to 05/15/26 ................................................. 6.500 78,451,955 73,413,603 6.53
GNMA due 09/15/08 to 06/15/26 ................................................. 7.000 153,893,816 148,356,096 13.20
GNMA due 09/15/22 to 12/20/25 ................................................. 7.250 16,430,774 15,872,248 1.41
GNMA due 01/15/06 to 03/15/26 ................................................. 7.500 177,332,571 175,450,216 15.61
GNMA due 06/15/16 to 02/15/18 ................................................. 7.650 9,772,884 9,724,068 0.87
GNMA due 09/20/17 to 01/20/26 ................................................. 7.750 23,438,199 23,197,223 2.06
GNMA due 04/15/20 to 01/15/21 ................................................. 7.770 7,197,146 7,204,653 0.64
GNMA due 11/20/20 to 10/20/22 ................................................. 7.850 4,830,306 4,828,340 0.43
GNMA due 09/20/22 ............................................................. 7.890 2,450,928 2,451,217 0.22
GNMA due 06/15/19 ............................................................. 7.980 4,547,222 4,594,335 0.41
GNMA due 06/15/06 to 06/15/34 ................................................. 8.000 123,431,814 124,637,265 11.09
GNMA due 11/15/19 to 02/15/21 ................................................. 8.150 3,971,725 4,038,748 0.36
GNMA due 02/15/06 to 10/20/25 ................................................. 8.250 44,662,826 45,147,162 4.02
GNMA due 01/15/19 to 12/15/20 ................................................. 8.350 10,566,856 10,824,423 0.96
GNMA due 12/15/04 to 05/15/31 ................................................. 8.500 123,902,617 127,220,614 11.32
GNMA due 01/15/32 ............................................................. 8.625 1,817,243 1,844,502 0.16
GNMA due 02/15/16 to 04/15/25 ................................................. 8.750 22,633,384 23,334,929 2.08
GNMA due 11/15/04 to 07/20/26 ................................................. 9.000 115,359,833 120,848,415 10.75
GNMA due 04/15/16 to 03/20/25 ................................................. 9.250 24,860,271 26,149,415 2.33
GNMA due 06/15/09 to 07/20/25 ................................................. 9.500 36,261,538 38,690,622 3.43
GNMA due 06/15/05 to 11/20/21 ................................................. 9.750 9,570,073 10,213,550 0.91
GNMA due 11/15/09 to 02/20/22 ................................................. 10.000 6,380,185 6,937,641 0.62
GNMA due 05/15/12 to 02/15/21 ................................................. 10.250 5,665,056 6,100,748 0.53
GNMA due 11/15/97 to 03/15/21 ................................................. 10.500 1,414,629 1,561,276 0.14
GNMA due 12/15/09 to 08/15/19 ................................................. 10.750 787,484 873,199 0.08
GNMA due 12/15/09 to 08/15/20 ................................................. 11.000 3,799,306 4,238,630 0.38
34
Schedule of Investment Securities--Benham GNMA Income Fund (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Face
Coupon Amount Value Percent
-------- -------- -------- --------
Government National Mortgage Association Certificates*--continued
GNMA due 10/20/15 to 02/20/16 ................................................. 11.250%$ 42,095 46,712 0.00%
GNMA due 01/15/98 to 02/20/20 ................................................. 11.500 1,046,821 1,179,324 0.10
GNMA due 02/15/99 ............................................................. 11.750 53,638 57,259 0.01
GNMA due 06/15/00 to 01/20/15 ................................................. 12.000 1,019,225 1,155,330 0.10
GNMA due 08/15/13 to 07/15/15 ................................................. 12.250 562,100 637,687 0.06
GNMA due 10/15/99 to 10/15/15 ................................................. 12.500 1,188,368 1,374,629 0.12
GNMA due 11/15/13 to 06/15/15 ................................................. 12.750 90,349 103,647 0.01
GNMA due 11/15/10 to 08/15/15 ................................................. 13.000 2,017,919 2,359,031 0.21
GNMA due 01/20/15 ............................................................. 13.250 65,098 74,558 0.01
GNMA due 05/15/10 to 12/15/14 ................................................. 13.500 810,864 946,502 0.08
GNMA due 08/15/14 to 10/15/14 ................................................. 13.750 53,720 62,130 0.01
GNMA due 06/15/11 to 11/15/14 ................................................. 14.000 81,890 96,503 0.01
GNMA due 09/15/12 to 10/15/14 ................................................. 14.500 403,967 476,681 0.04
GNMA due 06/15/11 to 10/15/12 ................................................. 15.000 908,136 1,072,831 0.10
GNMA due 10/15/11 to 04/15/12 ................................................. 16.000 242,626 287,284 0.03
------------- ------------ ------
Total (cost $1,033,244,261) .......................................................... 1,022,042,800 1,027,706,150 91.43
------------- ------------ ------
U.S. TREASURY SECURITIES
U.S. Treasury note due 08/15/99 ............................................... 6.000 10,000,000 9,931,250 0.88
U.S. Treasury bond due 07/15/06 ............................................... 7.000 45,500,000 46,438,437 4.13
------------- ------------ ------
Total (cost $56,187,202) ............................................................. 55,500,000 56,369,687 5.01
------------- ------------ ------
REPURCHASE AGREEMENT
Daiwa Securities, 5.730 due in the amount of $40,006,367, entered into on
9/30/96, due 10/01/96; collateral consists of U.S. Treasury bonds, 8.125% to
8.875%, due 8/15/17 to 5/15/21
Total (cost $40,000,000) ............................................................. 40,000,000 40,000,000 3.56
------------- ------------ ------
TOTAL INVESTMENT SECURITIES (cost $1,129,431,463**) .................................... $1,117,542,800 1,124,075,837 100.00%
============= ============ ======
- ------------------------
* Government National Mortgage Association certificates are subject to principal paydowns as a result of prepayments or refinancing
of the underlying mortgage instruments. As a result, the actual life of pool may be substantially less than the life of the original
underlying mortgages and the indicated maturity.
** Cost for federal income tax purposes is presented in Note 4 to the accompanying financial statements.
See the accompanying notes to the financial statements.
</TABLE>
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36
TRUSTEES
James M. Benham
Albert A. Eisenstat
Ronald J. Gilson
Myron S. Scholes
Kenneth E. Scott
Ezra Solomon
Isaac Stein
James E. Stowers, III
Jeanne D. Wohlers
OFFICERS
James M. Benham
Chairman of the Board
Maryanne Roepke
Treasurer and Chief Financial Officer
Douglas A. Paul
Vice President, Secretary
and General Counsel
Ann N. McCoid
Controller
TWENTIETH CENTURY MUTUAL FUNDS
and THE BENHAM GROUP
- ------------------------------
P.O. Box 419200 * Kansas City, Missouri 64141-6200
Person-to-person assistance:
1-800-345-2021 or 816-531-5575
Internet: http://www.twentieth-century.com
For more information on risks, management fees and
expenses, call 1-800-345-2021 for a free prospectus. Read the
prospectus carefully before investing or sending money.
(C) 1996 Twentieth Century Services, Inc.
Twentieth Century Securities, Inc. BN-BKT-6134 11/96
[back cover]
