BENHAM MORTGAGE-BACKED
SECURITIES FUNDS
-------------------
Annual Report * March 31, 1996
[picture of a front door]
Adjustable Rate Government Securities Fund
GNMA Income Fund
[company logo] The Benham Group
Part of the Twentieth Century Family of Mutual Funds
<PAGE>
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...............................30
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...............................35
INVESTMENT FUNDAMENTALS
Mortgage Pass-Throughs................................14
Portfolio Sensitivity Measurements....................16
Risk Factors..........................................17
Other Definitions.....................................18
U.S. ECONOMIC REVIEW
JAMES M. BENHAM
Chairman, Benham Funds
Slow economic growth and low inflation characterized the U.S. economy in 1995,
leading to expectations for similar economic performance in 1996. The U.S.
economy grew at a 2% annual rate in 1995, the weakest yearly performance since
the 1991 recession. U.S. inflation was just 2.5% in 1995, the lowest annual rate
since 1986.
The Federal Reserve's (the Fed's) success in slowing the economy and inhibiting
inflation by raising short-term interest rates from February 1994 to February
1995 eventually led to a new interest rate strategy. The Fed reduced the federal
funds rate target from 6.00% to 5.75% in July 1995, then lowered it twice
more--to 5.50% in December 1995 and to 5.25% in January 1996. Slowing corporate
and government spending, declining auto sales and housing activity, and
poorer-than-expected holiday season retail sales seemed to indicate lower
interest rates in 1996 and a possible recession.
[bar graph on left side of page. graph data described below]
Federal budget battles, which led to two government shutdowns, furthered the
cause of economic weakness. The shutdowns also delayed key economic reports,
causing confusion in the financial markets during the first quarter of 1996.
Amid the confusion and slow growth/low inflation expectations, the February
payroll employment report, showing the strongest job creation in 12 years,
exploded like a time bomb (see the graph above). It dashed hopes that the Fed
would cut interest rates at its policy meeting in March, triggering a bond
sell-off and higher interest rates.
The March payroll employment report and the government's estimate of
first-quarter U.S. economic growth were also unexpectedly strong. The strength
of these reports seems to indicate that the economy is picking up momentum, with
no immediate need for the Fed to reduce interest rates. Other signs of a
stronger economy include higher auto sales and factory orders, rising consumer
confidence and strong housing starts. But the economy still doesn't feel
particularly robust--layoffs are at historically high levels, wages are
stagnant, capital expenditures are slowing, and personal bankruptcies and loan
delinquencies are higher. Overall, we believe the evidence still suggests
moderate economic growth in 1996, with both growth and inflation around 3%.
[graph data]
U.S. Nonfarm Payroll Employment
(seasonally adjusted, in thousands)
Three-Month Moving Average Monthly Change
J 292 186
F 232 313
M 226 179
A 167 8
M 42 -62
J 82 299
J 88 28
A 197 263
S 128 94
O 142 68
N 125 212
D 142 145
J 70 -146
F 210 631
M 221 178
A 270 2
Source: Bloomberg Financial Markets
1
MARKET SUMMARY
MORTGAGE PASS-THROUGHS
by the Benham Mortgage-Backed Securities Portfolio Team
NOTE: TERMS MARKED WITH AN ASTERISK (*) ARE DEFINED IN THE INVESTMENT
FUNDAMENTALS SECTION (PAGES 14-18).
Interest rate shifts and mortgage prepayments* continued to have the greatest
impact on the performance of mortgage pass-throughs* during the fiscal year
ended March 31, 1996. Although mortgage pass-throughs perform best in a stable
interest rate environment, they managed to produce solid returns during the
fiscal year despite some significant interest rate volatility.
The higher yields of ARMs* and GNMAs* enabled them to outperform comparable
Treasury securities over the one-year period. The Lehman Brothers ARM Index had
a total return of 8.40% for the fiscal year, outpacing the 7.67% total return of
the Salomon Brothers One- to Three-Year Treasury Index. The Salomon Brothers
30-Year GNMA Index posted a 10.90% total return, compared to a return of 9.99%
for the Salomon Brothers Three- to Seven-Year Treasury Index.
All fixed-income securities experienced some price appreciation during the first
six months of the fiscal year as interest rates declined steadily. For mortgage
pass-throughs, the gains were tempered by prepayment fears--declining mortgage
rates caused investors to become concerned about a potential increase in
mortgage refinancings. But many homeowners (especially those with double-digit
mortgage rates) refinanced in 1993 when mortgage rates dropped below 7%. As a
result, fewer homeowners were tempted to refinance in 1995.
However, in early 1996, mortgage rates once again reached 7%, and this
ultimately sparked a fresh wave of mortgage refinancings (see the graph on page
3). This prepayment wave was smaller than past waves and was primarily
concentrated among two types of mortgage pass-throughs:
ADJUSTABLE-RATE MORTGAGES (ARMS)--in 1992 and 1993, many home buyers were
attracted to ARMs with very low starting rates (some as low as 4.5%). But these
homeowners watched their rates adjust upward significantly in 1994 and 1995. As
a result, many took advantage of the low mortgage rates in January and February
to refinance into fixed-rate mortgages.
GRADUATED PAYMENT MORTGAGES--designed for individuals with growing incomes,
these mortgages allow homeowners to pay a lower monthly amount during the first
year and then gradually increase their monthly payments until they reach a
prearranged maximum amount. By refinancing into normal fixed-rate mortgages,
many of these homeowners were able to lock in their current monthly payment,
avoiding any future increases.
2
MARKET SUMMARY
MORTGAGE PASS-THROUGHS
(Continued from the previous page)
Ordinary fixed-rate mortgages also experienced some increase in prepayments,
particularly among mortgages with interest rates of 9% or more, but there was
much less refinancing activity in this sector of the mortgage market.
The mortgage refinancing wave in early 1996 didn't last long. A dramatic
interest rate reversal in February and March (see page 1 for details) sent
mortgage rates back up above 8%, effectively ending the prepayment wave. The
rapid rise in interest rates battered most fixed-income securities, especially
intermediate- and long-term bonds. Fixed-rate mortgage pass-throughs, such as
GNMAs, were also hampered by duration extension,* which exacerbated the price
declines. ARMs fared a little better--in fact, ARMs were among the few
fixed-income securities to post positive returns during the first quarter of
1996.
Looking ahead, the interest rate stability that is favored by mortgage
pass-throughs may continue to be elusive. In recent years, the fixed-income
markets have consistently overreacted to changing economic conditions. In 1995,
the bond market priced in each short-term interest rate cut by the Federal
Reserve well in advance. After the strong employment figures in early 1996
shocked investors out of the "rate cut" mindset, the market shifted to the other
extreme, pricing in a Fed rate increase. Continued uncertainty about the
economic environment could keep bond prices gyrating over the next six months.
[line graph]
Mortgage Refinancing Trends
3/92-3/96
FHLMC 30-Yr. Fixed Mortgage MBA Refinancing Index
Lending Rate (left scale) (right scale)
3/6/92 8.85% 627 %
3/13/92 8.88 491.4
3/20/92 9.03 402.7
3/27/92 8.98 370.3
4/3/92 8.96 398.4
4/10/92 8.84 357.2
4/17/92 8.76 353.9
4/24/92 8.85 308.2
5/1/92 8.84 285.7
5/8/92 8.75 283.3
5/15/92 8.64 351.4
5/22/92 8.53 372.4
5/29/92 8.6 339.1
6/5/92 8.59 343.4
6/12/92 8.54 364.4
6/19/92 8.48 410.9
6/26/92 8.43 361.6
7/3/92 8.29 501.1
7/10/92 8.13 1017.8
7/17/92 8.09 1254.7
7/24/92 8.08 1313.2
7/31/92 8.05 1149.6
8/7/92 8.06 941.1
8/14/92 7.96 1053.7
8/21/92 7.87 1037.8
8/28/92 8.01 1086
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
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
Sources: Mortgage Bankers' Association, DRI/McGraw-Hill
3
ARM FUND
PERFORMANCE INFORMATION
For Periods Ended March 31, 1996
AVERAGE ANNUAL TOTAL RETURNS
NET ASSET 30-DAY -------------------------------------------
VALUE RANGE SEC LIFE OF
(4/1/95-3/31/96) YIELD 1 YEAR 3 YEARS 5 YEARS FUND
-------------------------------------------
$9.42-$9.53 5.43% 6.42% 3.80% N/A 4.62%
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.
ONE-YEAR TOTAL RETURN BREAKDOWN
For the Period Ended March 31, 1996
% FROM % FROM ASSET ONE-YEAR
INCOME + APPRECIATION = TOTAL RETURN
5.72% + 0.70% = 6.42%
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]
Index Fund
Aug-91 $10,000 $10,000
Sep-91 10,074 10,113
Oct-91 10,151 10,194
Nov-91 10,228 10,265
Dec-91 10,321 10,382
Jan-92 10,349 10,433
Feb-92 10,376 10,457
Mar-92 10,402 10,455
Apr-92 10,463 10,521
May-92 10,505 10,595
Jun-92 10,560 10,672
Jul-92 10,638 10,726
Aug-92 10,687 10,790
Sep-92 10,755 10,830
Oct-92 10,743 10,833
Nov-92 10,752 10,868
Dec-92 10,811 10,925
Jan-93 10,867 10,950
Feb-93 10,905 10,986
Mar-93 10,936 10,991
Apr-93 10,975 11,045
May-93 10,965 11,082
Jun-93 11,018 11,161
Jul-93 11,045 11,202
Aug-93 11,095 11,235
Sep-93 11,127 11,262
Oct-93 11,146 11,267
Nov-93 11,167 11,290
Dec-93 11,207 11,319
Jan-94 11,252 11,375
Feb-94 11,239 11,385
Mar-94 11,241 11,350
Apr-94 11,231 11,264
May-94 11,245 11,192
Jun-94 11,282 11,244
Jul-94 11,351 11,271
Aug-94 11,390 11,283
Sep-94 11,407 11,258
Oct-94 11,451 11,283
Nov-94 11,446 11,167
Dec-94 11,485 11,185
Jan-95 11,599 11,343
Feb-95 11,701 11,460
Mar-95 11,769 11,550
Apr-95 11,837 11,650
May-95 11,942 11,748
Jun-95 12,011 11,804
Jul-95 12,070 11,811
Aug-95 12,128 11,903
Sep-95 12,178 11,971
Oct-95 12,251 12,031
Nov-95 12,324 12,103
Dec-95 12,393 12,171
Jan-96 12,472 12,247
Feb-96 12,486 12,279
Mar-96 12,521 12,291
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 3/31/96 for the funds in Lipper's "Adjustable Rate
Mortgage Funds" category.
1 YEAR 3 YEARS LIFE OF FUND+
The Fund: 6.42% 3.80% 4.44%
Category Average: 3.56% 1.70% 3.98%
The Fund`s Ranking: 28 out of 59 23 out of 45 8 out of 19
+ from September 30, 1991, to March 31, 1996
Total returns are based on historical performance and do not guarantee future
results.
5
ARM FUND
PORTFOLIO COMPOSITION BY SECURITY TYPE
[pie charts]
3/31/96 9/30/95
ARMs: 60.4% ARMs: 65.1%
CMOs: 35.9% CMOs: 30.2%
Fixed-Rates: 2.1% Fixed-Rates: 2.3%
Repos: 1.6% Treasury Notes: 1.5%
Repos: 0.9%
For definitions of these security types, see pages 14-15 and 18.
PORTFOLIO COMPOSITION BY DURATION+
[bar chart]
DURATION % OF FUND
3/31/96 9/30/95
"0-1 Yrs." 58.6% 87 %
"1-2 Yrs." 28.2 8.5
"2-3 Yrs." 11.7 3.4
"3-4 Yrs." 1.4 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 3/31/96 9/30/95
One-Year T-Bills Every 12 months 68% 77%
COFI Every month 21% 4%
Six-Month LIBOR Every 6 months 5% 4%
Six-Month T-Bills Every 6 months 4% 8%
Other Various 2% 7%
For definitions of these interest rate reset indexes, see page 14.
KEY PORTFOLIO STATISTICS
3/31/96 9/30/95
Market Value: $317,990,500 $336,515,394
Number of Issues: 90 105
Average Coupon: 6.68% 7.01%
Average Maturity: 22.33 years 15.55 years
Average Life: 4.74 years 4.62 years
Average Duration: 0.98 years 0.68 years
For definitions of these terms, see page 18.
The composition of the Fund's portfolio may change over time.
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 during the fiscal year?
A: The Fund continued to perform above average relative to its peer group.
For the fiscal year ended March 31, 1996, the Fund's total return was
6.42%, compared to the 3.56% average total return for its peers in
Lipper's "Adjustable Rate Mortgage Funds" category (see the Lipper
Performance Comparison on page 5). Although the Fund outperformed the
category average by a substantial margin, the category average return
continued to be skewed downward by the extremely poor performance of a
few ARM funds. The Fund's middle-of-the-pack ranking (28 out of 59
funds based on total return) is more indicative of the Fund's relative
performance.
A more appropriate comparative performance benchmark may be the
one-year Treasury bill, which posted a total return of 6.60% for the
fiscal year. The Fund's duration* is typically about the same as the
one-year T-bill.
Q: How was the Fund positioned during the fiscal year?
A: Our main strategy over the past year was to focus on improving the
Fund's share price stability. This strategy was intended to help the
Fund generate returns primarily from yield rather than from price
appreciation. To achieve this goal, we increased the Fund's position in
CMO floaters* to more than 35% of the Fund's portfolio, up from about
12% at the beginning of the fiscal year (see the Portfolio Composition
by Security Type graphs on page 6).
Because floaters typically reset their interest rates more frequently
than ARMs,* they have shorter durations, which gives them more price
stability. The Fund's increased position in floaters caused its
duration to shorten from 1.2 years to as low as 0.7 years during the
fiscal year.
Overall, our strategy was successful--the Fund's share price fluctuated
by just 11 cents during the fiscal year (see the Net Asset Value Range
on page 4). On a comparative basis, the Fund's share price was 30% less
volatile than the price of the one-year Treasury bill during the fiscal
year. This can be contrasted with the previous fiscal year (ended March
31, 1995), when the Fund's share price was twice as volatile as the
price of the one-year T-bill.
7
ARM FUND
MANAGEMENT DISCUSSION
(Continued from the previous page)
Q: Did the price stability strategy have an impact on the Fund's yield?
A: Yes, we sacrificed a little yield initially, but once this positioning
was established, we were able to focus on improving the Fund's yield.
For example, we recently sold some of the Fund's more conservative CMO
floaters and purchased floaters with longer maturities. This exchange
boosted the Fund's yield without adversely affecting the Fund's share
price stability. Adding these longer-term floaters caused the Fund's
duration to extend somewhat during the last six months of the fiscal
year (see the Key Portfolio Statistics on page 6).
Q: According to the Fund's ARM reset schedule (see page 6), the Fund
increased its exposure to the Cost of Funds Index* (COFI) during the
last six months of the fiscal year. Why?
A: We expanded the Fund's position in COFI ARMs in early 1996. These ARMs
were trading at extremely low prices, and they had stable prepayment
characteristics at a time when prepayments were soaring. However, COFI
is a lagging index--it tends to respond more slowly to interest rate
changes than other indexes--and this makes COFI ARMs particularly
undesirable when interest rates are rising. As a result, we have
drastically reduced the Fund's position in COFI ARMs since the end of
the fiscal year.
Q: Looking ahead, what are your plans for the Fund over the next six
months?
A: We plan to position the Fund defensively going forward. We believe that
there is a great deal of uncertainty in the current economic
environment, and interest rates have trended higher in the past couple
of months. We expect to maintain a position in CMO floaters, which will
help keep the Fund's duration short and enable the Fund's yield to
quickly reflect interest rate changes.
8
GNMA INCOME FUND
PERFORMANCE INFORMATION
For Periods Ended March 31, 1996
NET ASSET 30-DAY AVERAGE ANNUAL TOTAL RETURNS
VALUE RANGE SEC -------------------------------------------
(4/1/95-3/31/96) YIELD 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------
$10.22-$10.70 6.86% 10.08% 5.57% 7.93% 8.50%
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.
ONE-YEAR TOTAL RETURN BREAKDOWN
For the Period Ended March 31, 1996
% FROM % FROM ASSET ONE-YEAR
INCOME + APPRECIATION = TOTAL RETURN
7.05% + 3.03% = 10.08%
9
GNMA INCOME FUND
SEC PERFORMANCE COMPARISON
Comparative Performance of $10,000 Invested on 3/31/86 in the Fund and
in the Salomon Brothers, Inc. 30-Year GNMA Index
[line graph]
Index Fund
Mar-86 $10,000 $10,000
Apr-86 10,083 10,113
May-86 9,889 9,904
Jun-86 10,048 10,003
Jul-86 10,233 10,210
Aug-86 10,421 10,355
Sep-86 10,440 10,422
Oct-86 10,573 10,539
Nov-86 10,770 10,712
Dec-86 10,825 10,752
Jan-87 10,962 10,883
Feb-87 11,073 11,001
Mar-87 11,073 10,951
Apr-87 10,733 10,552
May-87 10,694 10,514
Jun-87 10,884 10,689
Jul-87 10,907 10,711
Aug-87 10,843 10,658
Sep-87 10,564 10,369
Oct-87 10,915 10,766
Nov-87 11,077 10,902
Dec-87 11,205 11,047
Jan-88 11,668 11,458
Feb-88 11,808 11,603
Mar-88 11,699 11,524
Apr-88 11,612 11,500
May-88 11,602 11,448
Jun-88 11,908 11,709
Jul-88 11,860 11,697
Aug-88 11,872 11,685
Sep-88 12,167 11,953
Oct-88 12,455 12,177
Nov-88 12,271 12,048
Dec-88 12,204 11,989
Jan-89 12,429 12,157
Feb-89 12,332 12,101
Mar-89 12,337 12,108
Apr-89 12,557 12,350
May-89 12,987 12,683
Jun-89 13,361 13,038
Jul-89 13,660 13,254
Aug-89 13,462 13,119
Sep-89 13,546 13,175
Oct-89 13,862 13,438
Nov-89 14,023 13,576
Dec-89 14,112 13,655
Jan-90 13,985 13,545
Feb-90 14,036 13,605
Mar-90 14,097 13,649
Apr-90 13,935 13,519
May-90 14,389 13,914
Jun-90 14,629 14,127
Jul-90 14,885 14,349
Aug-90 14,733 14,212
Sep-90 14,857 14,312
Oct-90 15,022 14,485
Nov-90 15,395 14,798
Dec-90 15,653 15,041
Jan-91 15,874 15,253
Feb-91 15,969 15,359
Mar-91 16,094 15,446
Apr-91 16,261 15,606
May-91 16,390 15,731
Jun-91 16,426 15,743
Jul-91 16,705 16,015
Aug-91 17,009 16,307
Sep-91 17,327 16,595
Oct-91 17,589 16,851
Nov-91 17,703 16,961
Dec-91 18,149 17,383
Jan-92 17,948 17,161
Feb-92 18,109 17,338
Mar-92 18,046 17,275
Apr-92 18,201 17,434
May-92 18,521 17,719
Jun-92 18,775 17,956
Jul-92 18,920 18,118
Aug-92 19,181 18,366
Sep-92 19,334 18,532
Oct-92 19,199 18,369
Nov-92 19,306 18,483
Dec-92 19,526 18,716
Jan-93 19,802 18,975
Feb-93 19,972 19,155
Mar-93 20,102 19,223
Apr-93 20,202 19,296
May-93 20,317 19,389
Jun-93 20,525 19,594
Jul-93 20,609 19,691
Aug-93 20,644 19,777
Sep-93 20,656 19,752
Oct-93 20,700 19,847
Nov-93 20,671 19,770
Dec-93 20,828 19,950
Jan-94 21,001 20,103
Feb-94 20,906 19,993
Mar-94 20,375 19,473
Apr-94 20,255 19,346
May-94 20,326 19,410
Jun-94 20,281 19,388
Jul-94 20,660 19,723
Aug-94 20,679 19,768
Sep-94 20,431 19,534
Oct-94 20,406 19,475
Nov-94 20,339 19,420
Dec-94 20,565 19,617
Jan-95 21,003 20,019
Feb-95 21,563 20,482
Mar-95 21,652 20,549
Apr-95 21,951 20,811
May-95 22,633 21,415
Jun-95 22,780 21,566
Jul-95 22,842 21,634
Aug-95 23,045 21,846
Sep-95 23,267 22,055
Oct-95 23,464 22,250
Nov-95 23,741 22,481
Dec-95 24,043 22,728
Jan-96 24,225 22,869
Feb-96 24,058 22,696
Mar-96 24,004 22,620
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 3/31/96 for the funds in Lipper's "GNMA Funds"
category.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
The Fund: 10.08% 5.57% 7.93% 8.50%
Category Average: 9.63% 5.10% 7.40% 7.92%
The Fund`s Ranking: 19 out of 57 8 out of 35 4 out of 30 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]
3/31/96 9/30/95
GNMAs: 94.3% GNMAs: 92.4%
Repos: 3.6% Repos: 5.5%
Treasuries: 2.1% Treasury STRIPS: 2.1%
For definitions of these security types, see pages 14-15 and 18.
PORTFOLIO COMPOSITION BY GNMA COUPON
[bar chart]
GNMA Coupons % of Fund
3/31/96 9/30/95
Less than 7% 7.2% 0.6%
"7%-8%" 42.9 33.9
"8%-9%" 31 36.2
"9%-10%" 15.8 25.3
More than 10% 3.1 4
KEY PORTFOLIO STATISTICS
3/31/96 9/30/95
Market Value: $1,207,133,613 $1,098,801,148
Number of Issues: 3,157 2,883
Average Coupon: 7.83% 8.03%
Average Maturity: 25.05 years 24.79 years
Average Life: 7.30 years 6.30 years
Average Duration: 4.30 years 3.46 years
For definitions of these terms, see page 18.
The composition of the Fund's portfolio may change over time.
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 during the fiscal year?
A: The Fund continued to perform well relative to its peers. For the
fiscal year ended March 31, 1996, the Fund's total return was 10.08%,
compared to the 9.63% average total return for its peers in Lipper's
"GNMA Funds" category. Based on this one-year performance, the Fund
ranked in the top third of its category.
The Fund's longer-term performance has also been strong compared to its
peer group. For example, the Fund's five-year average annual return of
7.93% exceeded its peer group average return of 7.40%, ranking the Fund
in the top 15% of its category. (See the Lipper Performance Comparison
on page 10 for the Fund's one-, three-, five- and 10-year returns, as
well as comparisons of these returns to the Fund's peer group average.)
Q: How was the Fund positioned during the fiscal year?
A: At the beginning of the fiscal year, the Fund was overweighted in
premium GNMAs* (those with interest coupons of 9% or higher), which
helped boost the Fund's yield. As interest rates declined throughout
1995, the durations* of these high-coupon GNMAs shortened as the
mortgage market priced in fears of increased prepayment* activity.
Because we felt the market's prepayment fears were exaggerated, we
added Treasury notes* and Treasury STRIPS* to the Fund's portfolio to
keep its duration from shortening. This strategy paid off--the Fund
reaped additional price appreciation as interest rates continued to
decline and a prepayment increase failed to materialize.
By November, however, rates had fallen to the point where we too became
concerned about a wave of prepayments. As a result, we sold many of the
Fund's premium GNMAs, which were the most likely to be refinanced. By
the end of the fiscal year, less than 20% of the Fund's GNMAs had
coupons of 9% or more, compared to nearly 40% at the start of the
fiscal year.
Q: What did you do with the proceeds from these sales?
A: We doubled the Fund's position in discount GNMAs (those with interest
coupons of 7.5% or less), which were less susceptible to prepayment.
In particular, we expanded the Fund's holdings of 6.5%
12
GNMA INCOME FUND
MANAGEMENT DISCUSSION
(Continued from the previous page)
GNMAs, a sector that we've underweighted for the past couple of years
because of the low yields. We also purchased a 6% GNMA security--the
Fund hasn't owned a GNMA with a coupon this low since 1992.
Q: The Fund's duration jumped from 3.5 years to 4.3 years during the last
six months of the fiscal year (see the Key Portfolio Statistics on
page 11). What was your strategy here?
A: We typically do not make strategic adjustments to the Fund's
duration--we tend to keep it within a tight range around the duration
of the Fund's benchmark, the Salomon Brothers 30-Year GNMA Index. The
Fund's duration fluctuated throughout the fiscal year in response to
the mortgage market's prepayment expectations. As interest rates fell
in 1995, prepayment fears caused the durations of most GNMAs to
shorten. This caused the Fund's duration to fall as low as 2.6 years by
the end of 1995. However, when mortgage rates rose abruptly in the
first quarter of 1996, prepayment fears eased, and the Fund's duration
extended back out to 4.3 years.
Q: Are there any new trends developing in the mortgage market?
A: The proliferation of technology in the mortgage business has resulted
in better efficiency. The ability to refinance over the phone or on the
Internet makes it easier for homeowners to refinance their mortgages.
Five years ago, the excessive costs and paperwork prevented most
homeowners from refinancing unless they could reap significant savings.
For example, a homeowner with a 9% mortgage would typically wait until
rates fell below 8% before considering refinancing. Today, with
refinancing just a phone call or a keystroke away, that same homeowner
is likely to jump at the chance to refinance when rates hit 8.5%.
This trend offers a new challenge for mortgage fund managers. To
provide a high yield, a fund must seek out high-coupon mortgage
securities that have a low probability of refinancing. Such securities
get harder to find as technological advances make refinancing easier.
Q: Looking ahead, what are your plans for the Fund over the next six
months?
A: We believe that there is a great deal of uncertainty in the current
economic environment. Interest rates have trended higher in the past
couple of months, and this has caused prepayment activity to dry up. As
a result, we may look to selectively add premium GNMAs to the Fund's
portfolio to enhance the Fund's yield.
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. Because its issuer is a government agency, 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 March 31, 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 a bond portfolio receives its principal
payments from matured bonds. The longer a portfolio's average maturity is, 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 fall as well, 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.
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
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Benham Government Income Trust:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investment securities, of Benham Adjustable Rate Government
Securities Fund and Benham GNMA Income Fund (two of the series comprising Benham
Government Income Trust) (the Funds) as of March 31, 1996, and the related
statements of operations for the year then ended, the statements of changes in
net assets for each of the years in the two-year period then ended, and the
financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1996, by correspondence with the custodians and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Benham
Adjustable Rate Government Securities Fund and Benham GNMA Income Fund (two of
the series comprising Benham Government Income Trust) as of March 31, 1996, the
results of their operations, the changes in their net assets and the financial
highlights for the periods indicated above, in conformity with generally
accepted accounting principles.
/s/KPMG Peat Marwick LLP
San Francisco, California
May 3, 1996
19
<TABLE>
<CAPTION>
BENHAM ADJUSTABLE RATE GOVERNMENT SECURITIES FUND
FINANCIAL HIGHLIGHTS
For a Share Outstanding Throughout Years Ended March 31 (except as noted)
1996 1995 1994 1993 1992+
----- ----- ----- ----- -----
PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD............................... $9.42 9.75 9.97 10.04 10.00
Income From Investment Operations
Net Investment Income.............................................. .54 .49 .54 .57 .40
Net Realized and Unrealized Gains (Losses) on Investments.......... .05 (.33) (.22) (.07) .04
----- ----- ----- ----- -----
Total Income From Investment Operations.......................... .59 .16 .32 .50 .44
----- ----- ----- ----- -----
Less Distributions
Dividends from Net Investment Income............................... (.54) (.49) (.54) (.57) (.40)
Distributions from Net Realized Capital Gains...................... 0 0 0 0 0
----- ----- ----- ----- -----
Total Distributions.............................................. (.54) (.49) (.54) (.57) (.40)
----- ----- ----- ----- -----
NET ASSET VALUE AT END OF PERIOD..................................... $9.47 9.42 9.75 9.97 10.04
===== ===== ===== ===== =====
TOTAL RETURN*........................................................ 6.42% 1.75% 3.27% 5.13% 4.55%
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period (in thousands)........................... $298,538 397,391 936,539 1,495,164 886,012
Ratio of Expenses to Average Daily Net Assets........................ .60% .57% .51% .45% 0%
Ratio of Net Investment Income to Average Daily Net Assets........... 5.70% 4.98% 5.47% 5.66% 7.02%**
Portfolio Turnover Rate.............................................. 221.35% 60.29% 91.87% 82.71% 81.84%
- -------------------
+ From September 3, 1991 (commencement of operations), through March 31, 1992.
* 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 Throughout the Years Ended March 31
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
PER-SHARE DATA
- ---------------
NET ASSET VALUE AT BEGINNING
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OF PERIOD.................... $10.18 10.35 10.88 10.52 10.21 9.85 9.56 9.96 10.42 10.42
Income From Investment Operations
Net Investment Income........ .74 .72 .66 .79 .86 .88 .90 .89 .89 .91
Net Realized and Unrealized Gains
(Losses) on Investments..... .27 (.18) (.52) .36 .31 .36 .29 (.40) (.40) .02
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Income From
Investment Operations..... 1.01 .54 .14 1.15 1.17 1.24 1.19 .49 .49 .93
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Less Distributions
Dividends from Net
Investment Income........... (.74) (.71) (.66) (.79) (.86) (.88) (.90) (.89) (.95) (.93)
Distributions from Net Realized
Capital Gains............... 0 0 (.01) 0 0 0 0 0 0 0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Distributions......... (.74) (.71) (.67) (.79) (.86) (.88) (.90) (.89) (.95) (.93)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE AT END OF
PERIOD...................... $10.45 10.18 10.35 10.88 10.52 10.21 9.85 9.56 9.96 10.42
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
TOTAL RETURN*.................. 10.08% 5.53% 1.30% 11.28% 11.85% 13.16% 12.73% 5.07% 5.23% 9.51%
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period
(in thousands)..............$1,120,019 979,670 1,129,185 1,159,754 723,819 408,808 289,544 253,113 259,144 393,088
Ratio of Expenses to Average Daily
Net Assets................... .58% .58% .54% .56% .62% .72% .75% .75% .73% .74%
Ratio of Net Investment Income to
Average Daily Net Assets..... 6.98% 7.08% 6.12% 7.31% 8.18% 8.85% 9.04% 9.11% 8.94% 8.79%
Portfolio Turnover Rate........ 63.54% 119.56% 48.61% 70.57% 97.33% 206.60% 432.93% 496.52% 497.16% 566.27%
- -------------------
* Total return figures assume reinvestment of dividends and capital gain distributions. See the accompanying notes
to financial statements.
</TABLE>
21
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
March 31, 1996
BENHAM ADJUSTABLE
RATE GOVERNMENT BENHAM GNMA
SECURITIES FUND INCOME FUND
---------- ----------
ASSETS
<S> <C> <C>
Investment securities at value (cost of $318,878,940 and $1,205,378,021, respectively).... $317,990,500 1,207,133,613
Cash...................................................................................... 647,702 0
Interest receivable....................................................................... 1,326,737 7,271,328
Receivable for securities sold............................................................ 35,667,543 51,767,063
Receivable for fund shares sold........................................................... 139,019 4,645,507
Prepaid expenses and other assets......................................................... 45,841 24,886
------------ ------------
Total assets............................................................................ 355,817,342 1,270,842,397
------------ ------------
LIABILITIES
Payable for securities purchased.......................................................... 32,409,235 92,353,364
Securities sold for forward commitments (sales proceeds of $24,100,001 and $51,583,938,
respectively).......................................................................... 24,123,840 51,739,253
Payable for fund shares redeemed.......................................................... 290,730 1,504,055
Dividends payable......................................................................... 298,277 1,715,137
Payable to affiliates (Note 2)............................................................ 148,910 521,306
Accrued expenses and other liabilities.................................................... 8,275 2,990,046
------------ ------------
Total liabilities....................................................................... 57,279,267 150,823,161
------------ ------------
NET ASSETS.................................................................................. $298,538,075 1,120,019,236
============ ============
Net assets consist of:
Capital paid in........................................................................... $368,692,148 1,142,144,428
Undistributed accumulated net realized loss on investments................................ (69,225,819) (23,708,422)
Distributions in excess of net investment income.......................................... (15,975) (17,047)
Net unrealized appreciation (depreciation) on investments................................. (912,279) 1,600,277
------------ ------------
Net assets.................................................................................. $298,538,075 1,120,019,236
============ ============
Shares of beneficial interest outstanding (unlimited number of shares authorized)........... 31,524,695 107,220,778
============ ============
Net asset value, offering price and redemption price per share.............................. $9.47 10.45
==== ====
- -------------------
See the accompanying notes to financial statements.
</TABLE>
22
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
For the Year Ended Ended March 31, 1996
BENHAM ADJUSTABLE
RATE GOVERNMENT BENHAM GNMA
SECURITIES FUND INCOME FUND
---------- ----------
INVESTMENT INCOME
<S> <C> <C>
Interest Income........................................................... $21,452,894 80,640,703
----------- -----------
EXPENSES (NOTE 2)
Investment advisory fees.................................................. 950,475 2,980,327
Administrative fees....................................................... 423,862 1,149,339
Transfer agency fees...................................................... 329,830 1,033,782
Printing and postage...................................................... 96,263 268,364
Custodian fees............................................................ 96,133 435,349
Auditing and legal fees................................................... 20,412 45,113
Registration and filing fees.............................................. 22,372 71,372
Directors' fees and expenses.............................................. 10,174 19,432
Organization costs........................................................ 3,097 0
Other operating expenses.................................................. 83,546 148,178
----------- -----------
Total expenses.......................................................... 2,036,164 6,151,256
Amount recouped (Note 2).................................................... 20,799 0
Custodian earnings credits (Note 5)......................................... (56,155) (146,984)
----------- -----------
Net expenses.............................................................. 2,000,808 6,004,272
----------- -----------
Net investment income................................................... 19,452,086 74,636,431
----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 4)
Net realized gain (loss)
Proceeds from sales....................................................... 758,886,919 675,756,141
Cost of securities sold................................................... 759,401,141 667,528,531
----------- -----------
Net realized gain (loss)................................................ (514,222) 8,227,610
----------- -----------
Unrealized appreciation (depreciation) of investments:
Beginning of year......................................................... (3,742,453) (14,097,629)
End of year............................................................... (912,279) 1,600,277
----------- -----------
Net unrealized appreciation for the year................................ 2,830,174 15,697,906
----------- -----------
Net realized and unrealized gain on investments......................... 2,315,952 23,925,516
----------- -----------
Net increase in assets resulting from operations............................ $21,768,038 98,561,947
=========== ===========
- -------------------
See the accompanying notes to financial statements.
</TABLE>
23
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended March 31, 1996 and 1995
BENHAM ADJUSTABLE
RATE GOVERNMENT BENHAM
SECURITIES FUND GNMA INCOME FUND
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
FROM INVESTMENT ACTIVITIES:
<S> <C> <C> <C> <C>
Net investment income.................................................. $19,452,086 29,995,485 74,636,431 71,990,930
Net change in unrealized appreciation of investments................... 2,830,174 4,187,659 15,697,906 9,944,135
Net realized gain (loss) on investments................................ (514,222) (32,202,311) 8,227,610 (30,495,518)
----------- ----------- ------------ ------------
Change in net assets derived from investment activities.............. 21,768,038 1,980,833 98,561,947 51,439,547
----------- ----------- ------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income.................................................. (19,432,184) (30,055,213) (74,692,211) (71,560,450)
In excess of net investment income..................................... 0 (35,877) (17,047) 0
----------- ----------- ------------ ------------
Total distributions to shareholders.................................. (19,432,184) (30,091,090) (74,709,258) (71,560,450)
----------- ----------- ------------ ------------
FROM CAPITAL SHARE TRANSACTIONS (NOTE 3):
Proceeds from sales of shares.......................................... 59,010,559 119,239,892 345,352,436 313,981,418
Net asset value of dividends reinvested................................ 16,071,334 25,260,161 57,601,256 54,154,590
Cost of shares redeemed................................................ (176,270,354) (655,537,872) (286,456,680) (497,530,312)
----------- ----------- ------------ ------------
Change in net assets derived from capital share transactions......... (101,188,461) (511,037,819) 116,497,012 (129,394,304)
----------- ----------- ------------ ------------
Net increase (decrease) in net assets................................ (98,852,607) (539,148,076) 140,349,701 (149,515,207)
NET ASSETS:
Beginning of year...................................................... 397,390,682 936,538,758 979,669,535 1,129,184,742
----------- ----------- ------------ ------------
End of year............................................................ $298,538,075 397,390,682 1,120,019,236 979,669,535
=========== =========== ============ ============
- -------------------
See the accompanying notes to financial statements.
</TABLE>
24
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(1) 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. Significant accounting policies followed by
the Funds are summarized below.
VALUATION OF INVESTMENT SECURITIES--Securities held by the Funds are valued at
current market value as provided by an independent pricing service or broker
quotations. Securities for which quotations are not readily available are valued
at their fair value following procedures approved by the trustees. Repurchase
agreements are valued at cost and are collateralized by U.S. government
obligations whose market value plus accrued interest exceed the carrying value
of the individual repurchase agreements. Such collateral is maintained by the
Funds' custodian. Securities transactions are recorded on the date the order to
buy or sell is executed.
INCOME TAXES--Each Fund intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code. By complying with the
provisions of Subchapter M, each Fund will not be subject to federal or state
income or franchise taxes to the extent that it distributes its net investment
income and net realized capital gains to shareholders. Accordingly, no provision
for income taxes has been made.
Due to the timing of dividend distributions and the differences in accounting
for gains and losses for financial statement and federal income tax purposes,
the fiscal year in which amounts are distributed may differ from the year in
which the income and realized gains (losses) were recorded by each Fund. The
differences between the income and capital gains distributed on a book versus
tax basis are shown as excess distributions of income and realized gains in the
accompanying Statements of Changes in Net Assets and Financial Highlights.
25
As of March 31, 1996, the ARM Fund and the GNMA Fund had capital loss carryovers
of $69,205,630 and $23,041,420, respectively. If not offset against realized
capital gains within eight years of the fiscal year-end the capital loss was
realized, a capital loss carryover will expire. All capital loss carryovers will
expire during the period of March 31, 2000, through March 31, 2004. A Fund will
not make capital gains distributions until all of its loss carryovers have been
offset or expired.
SHARE VALUATION--Each Fund's net asset value per share is computed each business
day by dividing the value of the Fund's total assets, less its liabilities, by
the total number of shares outstanding at the beginning of each business day.
The Funds' net asset values fluctuate daily in response to changes in the market
value of their investments.
DIVIDENDS AND OTHER DISTRIBUTIONS--The Funds' dividends are declared daily,
accrued throughout the month, and distributed on the last business day of the
month. Net capital gains, if any, are declared and paid once a year. Dividends
are paid in cash or reinvested as additional shares.
INVESTMENT INCOME, PREMIUM, AND DISCOUNT--Interest income and expenses are
accrued daily. Premiums and discounts on mortgage-backed securities are
amortized in proportion to the monthly paydown amounts. For notes and bonds,
discounts are accrued to maturity on a straight-line basis (except zero-coupon
securities, which are amortized using the effective interest rate method), and
premiums are amortized using the effective interest rate method.
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 those 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.
OTHER LIABILITIES--As of March 31, 1996, the GNMA Fund had a bank overdraft of
$3,405,513.
26
(2) INVESTMENT ADVISORY FEES AND OTHER
TRANSACTIONS WITH AFFILIATES
Benham Management Corporation (BMC) is a wholly owned subsidiary of Twentieth
Century Companies, Inc. (TCC). BMC's former parent company, Benham Management
International, Inc., merged into TCC on June 1, 1995. 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.
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 Benham
Financial Services, Inc. (BFS), a wholly owned subsidiary of TCC. Under the
agreement, BFS provides substantially all administrative and transfer agency
services necessary to operate each Fund of BGIT. Fees for these services are
based on transaction volume, number of accounts and average net assets of all
funds in The Benham Group.
BGIT has an additional agreement with BMC pursuant to which BMC established a
contractual expense guarantee that limits each Fund's expenses (excluding
extraordinary expenses such as brokerage commissions and taxes and the impact of
custodian earnings credits) to .65% of average daily net assets. The percentages
were .60% for the ARM Fund and .66% for the GNMA Fund prior to June 1, 1995. 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
renewed annually in June.
27
The payables to affiliates as of March 31, 1996, based on the above agreements
were as follows:
ARM FUND GNMA FUND
------------ ------------
Investment Advisor......................... $70,235 263,740
Administrative Services.................... 24,257 91,088
Transfer Agent............................. 54,418 166,478
-------- --------
$148,910 521,306
======== ========
BGIT has a distribution agreement with Benham Distributors, Inc. (BDI), which is
responsible for promoting sales of and distributing the Funds' shares. BDI is
wholly owned subsidiary of TCC.
(3) SHARE TRANSACTIONS
Share transactions for the years ended March 31, 1996, and 1995, were as
follows:
ARM Fund GNMA Fund
----------------------- ----------------------
1996 1995 1996 1995
------ ------- ------ ------
Shares sold................. 6,219,269 12,526,210 32,776,505 31,038,369
Reinvestment of dividends... 1,693,549 2,669,773 5,471,620 5,359,370
---------- ---------- ---------- ----------
7,912,818 15,195,983 38,248,125 36,397,739
Less shares redeemed........(18,583,809) (69,007,988)(27,214,841)(49,295,662)
---------- ---------- ---------- ----------
Net increase (decrease)
in shares..................(10,670,991) (53,812,005) 11,033,284 (12,897,923)
========== ========== ========== ==========
(4) INVESTMENT TRANSACTIONS
Investment transactions, excluding short-term securities, for the year ended
March 31, 1996, was as follows:
ARM Fund GNMA Fund
----------- ------------
Purchases................................ $731,779,091 1,004,151,596
=========== ============
Sales Proceeds........................... $758,886,919 675,756,141
=========== ============
As of March 31, 1996, unrealized appreciation (depreciation) was as follows:
ARM Fund GNMA Fund
----------- -----------
Unrealized appreciation.................. $ 659,584 14,284,474
Unrealized depreciation.................. (1,571,863) (12,684,197)
----------- ------------
Net unrealized appreciation (depreciation) $ (912,279) 1,600,277
=========== ============
28
For the ARM Fund and the GNMA Fund, the costs of securities for federal income
tax purposes as of March 31, 1996, were $318,899,129 and $1,206,044,887,
respectively. Gross unrealized appreciation and depreciation of investments,
based on this cost, were:
ARM Fund GNMA Fund
------------ ------------
Appreciated securities.................... $ 657,384 13,990,574
Depreciated securities.................... (1,589,852) (13,057,163)
----------- ------------
Net unrealized appreciation (depreciation) $ (932,468) 933,411
=========== ============
(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.
29
<TABLE>
<CAPTION>
BENHAM GOVERNMENT INCOME TRUST
Benham Adjustable Rate Government Securities Fund
Schedule of Investment Securities
March 31, 1996
FACE
COUPON AMOUNT VALUE
-------- -------- --------
ADJUSTABLE RATE MORTGAGE SECURITIES*
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 28.21%
<S> <C> <C> <C>
FNMA-ARM, due 11/01/25, Pool 325305.............................................. 6.095% $ 955,778 977,283
FNMA-ARM, due 05/01/28, Pool 062688.............................................. 6.309 14,786,242 14,892,555
FNMA-ARM, due 02/01/99, Pool 066254.............................................. 6.309 218,862 218,453
FNMA-ARM, due 04/01/26, Pool 062836.............................................. 6.372 150,821 149,558
FNMA-ARM, due 01/01/29, Pool 070716.............................................. 6.620 406,599 410,856
FNMA-ARM, due 10/01/30, Pool 316518.............................................. 6.645 5,113,002 5,210,456
FNMA-ARM, due 01/01/27, Pool 062835.............................................. 6.741 236,119 234,230
FNMA-ARM, due 08/01/21, Pool 129482.............................................. 6.775 363,187 367,955
FNMA-ARM, due 10/01/25, Pool 318767.............................................. 6.863 1,271,207 1,315,699
FNMA-ARM, due 08/01/24, Pool 291248.............................................. 6.985 3,487,491 3,599,195
FNMA-ARM, due 10/01/14, Pool 009781.............................................. 7.067 63,436 64,160
FNMA-ARM, due 08/01/15, Pool 020635.............................................. 7.180 136,024 137,724
FNMA-ARM, due 01/01/20, Pool 070595.............................................. 7.268 2,075,168 2,110,508
FNMA-ARM, due 09/01/22, Pool 178295.............................................. 7.280 688,734 692,983
FNMA-ARM, due 01/01/18, Pool 099782.............................................. 7.288 5,378,560 5,473,546
FNMA-ARM, due 02/01/29, Pool 091689.............................................. 7.290 300,117 302,274
FNMA-ARM, due 05/01/22, Pool 334441.............................................. 7.290 1,091,881 1,114,407
FNMA-ARM, due 08/01/19, Pool 244477.............................................. 7.295 693,584 699,978
FNMA-ARM, due 02/01/27, Pool 091688.............................................. 7.302 186,319 187,193
FNMA-ARM, due 12/01/17, Pool 070088.............................................. 7.372 444,975 454,849
FNMA-ARM, due 06/01/18, Pool 070186.............................................. 7.390 491,240 501,295
FNMA-ARM, due 07/01/22, Pool 173165.............................................. 7.411 979,160 987,091
FNMA-ARM, due 03/01/18, Pool 086885.............................................. 7.428 2,000,587 2,041,219
FNMA-ARM, due 08/01/14, Pool 020155.............................................. 7.491 392,204 399,437
FNMA-ARM, due 09/01/03, Pool 066221.............................................. 7.500 361,251 361,645
FNMA-ARM, due 07/01/17, Pool 066415.............................................. 7.501 1,825,717 1,872,510
</TABLE>
30
<TABLE>
<CAPTION>
Schedule of Investment Securities--Benham Adjustable Rate Government Securities Fund (Continued)
============================================================================================================================
FACE
COUPON AMOUNT VALUE
-------- -------- --------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- CONTINUED
<S> <C> <C> <C>
FNMA-ARM, due 06/01/22, Pool 169868.............................................. 7.545% $ 965,380 971,762
FNMA-ARM, due 08/01/23, Pool 303336.............................................. 7.590 6,691,057 6,861,478
FNMA-ARM, due 04/01/18, Pool 070224.............................................. 7.597 623,680 641,024
FNMA-ARM, due 12/01/18, Pool 099577.............................................. 7.619 1,655,184 1,702,258
FNMA-ARM, due 04/01/16, Pool 025432.............................................. 7.625 523,486 528,313
FNMA-ARM, due 02/01/18, Pool 064708.............................................. 7.625 502,451 516,660
FNMA-ARM, due 01/01/27, Pool 070184.............................................. 7.628 317,097 327,352
FNMA-ARM, due 07/01/16, Pool 009883.............................................. 7.750 105,171 105,680
FNMA-ARM, due 08/01/16, Pool 036922.............................................. 7.750 536,384 542,333
FNMA-ARM, due 02/01/32, Pool 238852.............................................. 7.817 13,213,909 13,676,395
FNMA-ARM, due 05/01/19, Pool 075462.............................................. 7.825 318,099 326,201
FNMA-ARM, due 12/01/20, Pool 070909.............................................. 7.883 1,188,027 1,221,256
FNMA-ARM, due 07/01/17, Pool 061392.............................................. 7.893 600,245 620,972
FNMA-ARM, due 05/01/18, Pool 162880.............................................. 7.900 2,140,909 2,200,127
FNMA-ARM, due 08/01/23, Pool 190647.............................................. 7.915 1,629,435 1,668,640
FNMA-ARM, due 02/01/01, Pool 066376.............................................. 8.000 232,388 231,556
FNMA-ARM, due 01/01/17, Pool 105843.............................................. 8.032 686,888 710,929
FNMA-ARM, due 07/01/23, Pool 222649.............................................. 8.117 599,646 620,634
FNMA-ARM, due 07/01/18, Pools 063167, 063623, 063658............................. 8.125 972,831 990,212
FNMA-ARM, due 06/01/23, Pool 220498.............................................. 8.148 815,713 840,820
FNMA-ARM, due 08/01/18, Pool 013786.............................................. 8.153 1,165,492 1,189,023
FNMA-ARM, due 05/01/17, Pool 061401.............................................. 8.192 2,812,644 2,935,247
----------- -----------
TOTAL FNMA (COST $84,713,560)........................................................... 82,394,381 84,205,931
----------- -----------
</TABLE>
31
<TABLE>
<CAPTION>
Schedule of Investment Securities--Benham Adjustable Rate Government Securities Fund (Continued)
===========================================================================================================================
FACE
COUPON AMOUNT VALUE
-------- -------- --------
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) -- 14.01%
<S> <C> <C> <C>
FHLMC-ARM, due 01/01/26, Pool 610350.............................................. 5.956% $ 6,857,376 6,962,362
FHLMC-ARM, due 01/01/21, Pool 390263.............................................. 6.500 660,741 662,472
FHLMC-ARM, due 03/01/24, Pool 876559.............................................. 6.960 3,261,759 3,375,920
FHLMC-ARM, due 06/01/21, Pool 775473.............................................. 7.234 55,429 55,442
FHLMC-ARM, due 08/01/18, Pool 635104.............................................. 7.326 426,288 427,907
FHLMC-ARM, due 09/01/20, Pool 755188.............................................. 7.481 3,708,051 3,772,348
FHLMC-ARM, due 08/01/22, Pool 875079.............................................. 7.500 588,659 592,862
FHLMC-ARM, due 11/01/18, Pool 606095.............................................. 7.797 759,825 770,751
FHLMC-ARM, due 06/01/24, Pool 846018.............................................. 7.835 14,958,569 15,391,022
FHLMC-ARM, due 03/01/24, Pool 845986.............................................. 7.873 3,451,520 3,551,822
FHLMC-ARM, due 05/01/17, Pool 350053.............................................. 8.000 4,391,060 4,469,265
FHLMC-ARM, due 05/01/22, Pool 406645.............................................. 8.145 1,735,825 1,783,838
----------- -----------
TOTAL FHLMC-ARM (COST $41,948,920)...................................................... 40,855,102 41,816,011
----------- -----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) -- 14.03%
GNMA-ARM, due 01/20/24, Pool 008351.............................................. 5.500 8,923,119 8,990,042
GNMA-ARM, due 08/20/25, Pool 008684.............................................. 6.000 13,908,231 14,006,005
GNMA-ARM, due 01/20/22, Pool 008902.............................................. 6.500 14,763 14,943
GNMA-ARM, due 02/20/21, Pool 008763.............................................. 7.000 489,038 497,674
GNMA-ARM, due 11/20/21, Pool 008867.............................................. 7.000 701,255 710,680
GNMA-ARM, due 08/20/22, Pool 008038.............................................. 7.000 10,226,011 10,368,256
GNMA-ARM, due 05/20/17, Pool 008230.............................................. 7.375 458,851 460,498
GNMA-ARM, due 04/20/23, Pool 008180.............................................. 7.375 2,226,459 2,249,770
GNMA-ARM, due 11/20/21, Pool 008872.............................................. 7.500 572,197 583,732
GNMA-ARM, due 09/20/25, Pool 008706.............................................. 7.500 3,978,473 4,035,683
----------- -----------
TOTAL GNMA-ARM (COST $42,135,103)....................................................... 41,498,397 41,917,283
----------- -----------
TBA SECURITIES -- 8.08%
GNMA-ARM, TBA settlement 04/23/96................................................ 5.000 9,000,000 9,046,440
GNMA-ARM, TBA settlement 04/23/96................................................ 6.000 5,000,000 5,025,800
FNMA-ARM, TBA settlement 04/23/96................................................ 6.309 10,000,000 10,051,600
----------- -----------
TOTAL TBA (COST $24,145,156)............................................................ 24,000,000 24,123,840
----------- -----------
TOTAL ADJUSTABLE RATE MORTGAGE SECURITIES-- 64.33% (COST $192,942,739)....................... 188,747,880 192,063,065
----------- -----------
</TABLE>
32
<TABLE>
<CAPTION>
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%
<S> <C> <C> <C>
FHLMC-FRM, due 09/01/13, Pool 250918............................................. 13.250% $ 5,900 6,792
----------- -----------
TOTAL FHLMC (COST $6,623)............................................................... 5,900 6,792
----------- -----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) -- 2.26%
GNMA-FRM, due 01/20/09, Pool 001565.............................................. 5.500 252,778 238,243
GNMA-FRM, due 09/20/23, Pool 001376.............................................. 8.000 2,520,569 2,559,152
GNMA-FRM, due 11/20/16, Pool 187019.............................................. 9.000 238,680 248,226
GNMA-FRM, due 12/20/16, Pools179457, 199973...................................... 9.000 492,900 512,613
GNMA-FRM, due 08/20/17, Pool 220128.............................................. 9.000 608,047 632,366
GNMA-FRM, due 08/20/17, Pool 220134.............................................. 9.500 324,552 342,400
GNMA-FRM, due 09/20/17, Pool 220127.............................................. 9.500 158,373 167,082
GNMA-FRM, due 10/20/17, Pool 234860.............................................. 9.500 421,330 444,501
GNMA-FRM, due 11/20/19, Pool 001291.............................................. 9.500 1,348,839 1,423,017
GNMA-FRM, due 05/15/98, Pool 059438.............................................. 11.500 17,513 18,931
GNMA-FRM, due 08/15/00, Pool 126325.............................................. 11.500 42,740 46,199
GNMA-FRM, due 06/15/99, Pool 113802.............................................. 12.500 51,794 56,245
GNMA-FRM, due 06/15/00, Pool 127619.............................................. 12.500 14,880 16,159
GNMA-FRM, due 03/15/13, Pool 062989.............................................. 15.000 39,097 46,159
----------- -----------
TOTAL GNMA (COST $6,887,118)............................................................ 6,532,092 6,751,293
----------- -----------
TOTAL FIXED RATE MORTGAGE SECURITIES-- 2.26% (COST $6,893,741)............................... 6,537,992 6,758,085
----------- -----------
COLLATERALIZED MORTGAGE OBLIGATIONS*
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 10.82%
FNMA-CMO, due 11/25/99 Floater(1) FNR 92-199 F................................... 5.969 5,010,843 5,037,396
FNMA-CMO, due 06/25/22 Floater(1) FNR 93-149 FC.................................. 5.969 1,463,041 1,468,848
FNMA-CMO, due 02/25/24 Floater(1) FNR 94-61 FD................................... 5.969 10,000,000 10,043,690
FNMA-CMO, due 05/25/00 Floater(1) FNR 93-64 F.................................... 6.369 10,439,138 10,623,588
FNMA-CMO, due 08/25/22 Floater(1) FNR 92-137 F................................... 6.469 5,000,000 5,118,645
----------- -----------
TOTAL FNMA (COST $32,235,548)........................................................... 31,913,022 32,292,167
----------- -----------
</TABLE>
33
<TABLE>
<CAPTION>
Schedule of Investment Securities--Benham Adjustable Rate Government Securities Fund (Continued)
===========================================================================================================================
FACE
COUPON AMOUNT VALUE
-------- -------- --------
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) -- 27.35%
<S> <C> <C> <C>
FHLMC-CMO, due 05/15/99 Floater(1) FHR 1234 G.................................... 5.738% $ 2,511,923 2,511,469
FHLMC-CMO, due 05/15/01 Floater(1) FHR 1724 F.................................... 5.788 16,840,146 16,886,272
FHLMC-CMO, due 06/15/23 Floater(1) FHR 1637 JA................................... 5.888 13,859,781 13,890,537
FHLMC-CMO, due 09/15/98 Floater(1) FHR 1581 F.................................... 5.938 7,981,085 8,015,554
FHLMC-CMO, due 12/15/00 Floater(1) FHR 1640 FC................................... 5.938 8,000,000 8,021,512
FHLMC-CMO, due 02/15/24 Floater(1) FHR 1710 AC................................... 5.938 10,000,000 10,043,590
FHLMC-CMO, due 09/15/00 Floater(1) FHR 1580 FA................................... 5.988 10,000,000 10,039,490
FHLMC-CMO, due 01/15/02 Floater(1) FHR 1765-A F.................................. 6.138 8,138,163 8,249,485
FHLMC-CMO, due 05/15/05 Floater(1) FHR 1110 F.................................... 6.238 2,814,476 2,825,872
FHLMC-CMO, due 01/15/23 Floater(1) FHR 1627 FE................................... 6.288 1,153,846 1,171,510
----------- -----------
TOTAL FHLMC (COST $81,585,597).......................................................... 81,299,420 81,655,291
----------- -----------
PRIVATE LABEL -- .07%
Dean Witter CMO Trust I Floater(1)
Underlying Collateral FHLMC, due 04/20/18, DW I-A ............................... 6.313 222,288 221,892
----------- -----------
TOTAL PRIVATE LABEL (COST $221,315)........................................................ 222,288 221,892
----------- -----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS-- 38.24% (COST $114,042,460)....................... 113,434,730 114,169,350
----------- -----------
REPURCHASE AGREEMENTS -- 1.67%
Bank of Tokyo, 5.40%, due in the amount of $5,002,250, entered into on 03/29/96, due
04/01/96; collateral consists of a U.S. Treasury note, 6.500%, due 04/30/97 (cost $5,000,000) 5,000,000 5,000,000
----------- -----------
TOTAL INVESTMENT SECURITIES -- 106.50% (COST $318,878,940**)................................. 313,720,602 317,990,500
----------- -----------
Other Assets less Liabilities-- (6.50%)...................................................... (19,452,425)
-----------
Total Net Assets-- 100.00%................................................................... $298,538,075
===========
- -------------------
* 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>
34
<TABLE>
<CAPTION>
BENHAM GOVERNMENT INCOME TRUST
Benham GNMA Income Fund
Schedule of Investment Securities
March 31, 1996
FACE PERCENT OF
COUPON AMOUNT VALUE NET ASSETS
-------- -------- -------- --------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES*
<S> <C> <C> <C> <C>
GNMA due 09/20/08 to 03/20/26................................................... 6.500% $ 44,237,925 41,983,157 3.75%
GNMA due 09/15/08 to 03/15/26................................................... 7.000 122,778,476 119,697,532 10.69
GNMA due 09/15/22 to 12/20/25................................................... 7.250 17,161,523 16,779,231 1.50
GNMA due 01/15/06 to 03/15/26................................................... 7.500 261,456,967 261,587,546 23.36
GNMA due 06/15/16 to 02/15/18................................................... 7.650 10,286,557 10,352,006 .92
GNMA due 09/20/17 to 01/20/26................................................... 7.750 24,631,507 24,662,963 2.20
GNMA due 04/15/20 to 01/15/21................................................... 7.770 7,820,108 7,918,641 .71
GNMA due 11/20/20 to 10/20/22................................................... 7.850 5,351,682 5,397,974 .48
GNMA due 09/20/22............................................................... 7.890 2,698,634 2,723,394 .24
GNMA due 06/15/19............................................................... 7.980 5,052,154 5,162,892 .46
GNMA due 06/15/06 to 06/15/34................................................... 8.000 130,512,305 133,176,658 11.89
GNMA due 11/15/19 to 02/15/21................................................... 8.150 4,380,268 4,508,093 .40
GNMA due 02/15/06 to 10/20/25................................................... 8.250 50,866,643 52,063,152 4.65
GNMA due 01/15/19 to 12/15/20................................................... 8.350 11,654,162 12,093,315 1.08
GNMA due 12/15/04 to 05/15/31................................................... 8.500 100,654,400 104,720,704 9.35
GNMA due 01/15/3................................................................ 8.625 1,820,858 1,869,070 .17
GNMA due 02/15/16 to 04/15/25................................................... 8.750 25,755,717 26,780,121 2.39
GNMA due 11/15/04 to 09/20/25................................................... 9.000 104,128,960 109,217,720 9.75
GNMA due 04/15/16 to 03/20/25................................................... 9.250 29,360,063 30,873,643 2.76
GNMA due 06/15/09 to 07/20/25................................................... 9.500 25,909,131 27,450,457 2.45
GNMA due 06/15/05 to 11/20/21................................................... 9.750 11,394,160 12,207,378 1.08
GNMA due 11/15/09 to 02/20/22................................................... 10.000 7,364,560 8,053,902 .72
GNMA due 05/15/12 to 02/15/21................................................... 10.250 7,286,385 7,915,575 .71
GNMA due 11/15/97 to 03/15/21................................................... 10.500 1,597,096 1,776,500 .16
GNMA due 12/15/09 to 07/15/20................................................... 10.750 1,156,092 1,288,182 .12
GNMA due 12/15/09 to 08/15/20................................................... 11.000 4,339,719 4,865,134 .43
GNMA due 06/20/14 to 02/20/16................................................... 11.250 48,343 53,857 .00
GNMA due 01/15/98 to 02/20/20................................................... 11.500 1,379,531 1,547,762 .14
GNMA due 02/15/99............................................................... 11.750 62,951 67,496 .01
GNMA due 06/15/00 to 01/20/15................................................... 12.000 1,049,700 1,188,851 .11
GNMA due 08/15/13 to 07/15/15................................................... 12.250 714,203 810,019 .07
GNMA due 10/15/99 to 10/15/15................................................... 12.500 1,265,641 1,458,979 .13
GNMA due 11/15/13 to 06/15/15................................................... 12.750 186,441 213,269 .02
GNMA due 11/15/10 to 08/15/15................................................... 13.000 2,280,830 2,660,714 .24
</TABLE>
35
<TABLE>
<CAPTION>
Schedule of Investment Securities--Benham GNMA Income Trust (Continued)
====================================================================================================================================
FACE PERCENT OF
COUPON AMOUNT VALUE NET ASSETS
-------- -------- -------- --------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES*--CONTINUED
<S> <C> <C> <C> <C>
GNMA due 01/20/15............................................................... 13.250% $ 66,059 75,597 .01%
GNMA due 05/15/10 to 12/15/14................................................... 13.500 900,215 1,050,013 .09
GNMA due 08/15/14 to 10/15/14................................................... 13.750 70,422 81,381 .01
GNMA due 06/15/11 to 11/15/14................................................... 14.000 82,706 97,386 .01
GNMA due 09/15/12 to 10/15/14................................................... 14.500 464,168 547,282 .05
GNMA due 06/15/11 to 10/15/12................................................... 15.000 1,026,456 1,211,669 .11
GNMA due 10/15/11 to 04/15/12................................................... 16.000 280,216 331,531 .03
------------- ------------ ------
TOTAL (COST $1,044,645,398)........................................................... 1,029,533,934 1,046,520,746 93.45
------------- ------------ ------
GNMA TBA
GNMA TBA settlement 04/18/96.................................................... 6.000 10,000,000 9,237,440 .82%
GNMA TBA settlement 04/18/96 to 05/20/96........................................ 6.500 31,800,000 30,180,013 2.69
GNMA TBA settlement 04/18/96.................................................... 7.000 30,000,000 29,277,960 2.61
GNMA TBA settlement 04/18/96.................................................... 7.500 5,000,000 5,003,095 .45
GNMA TBA settlement 04/18/96.................................................... 8.000 10,000,000 10,228,070 .91
GNMA TBA settlement 04/18/96.................................................... 8.500 7,000,000 7,308,399 .65
------------- ------------ ------
TOTAL (COST $91,367,875).............................................................. 93,800,000 91,234,977 8.13
------------- ------------ ------
U.S. TREASURY SECURITIES
U.S. Treasury note due 11/15/05................................................. 5.875 10,000,000 9,628,110 .86
U.S. Treasury Zero-Coupon Bond - STRIPS due 02/15/06***......................... 6.600 10,000,000 5,267,000 .47
U.S. Treasury Zero-Coupon Bond - STRIPS due 11/15/12***......................... 7.020 33,000,000 10,482,780 .94
------------- ------------ ------
TOTAL (COST $25,364,748).............................................................. 53,000,000 25,377,890 2.27
------------- ------------ ------
REPURCHASE AGREEMENTS
Bank of Tokyo, 5.400% due in the amount of $39,017,550, entered into on 03/29/96,
due 04/01/96; collateral consists of U.S. Treasury notes, 6.500%, due 04/30/97.......... 39,000,000 39,000,000 3.48
BA Securities, 5.150%, due in the amount of $5,002,146, entered into on 03/29/96,
due 04/01/96; collateral consists of U.S. Treasury notes, 6.875%, due 03/31/00......... 5,000,000 5,000,000 0.45
------------- ------------ ------
TOTAL (COST $44,000,000).............................................................. 44,000,000 44,000,000 3.93
------------- ------------ ------
TOTAL INVESTMENT SECURITIES (COST $1,205,378,021 **).................................... $1,220,333,934 1,207,133,613 107.78%
============= ------------ ------
Other Assets less Liabilities.......................................................................... (87,114,377) (7.78)%
------------ ------
Total Net Assets....................................................................................... $1,120,019,236 100.00%
============ ======
- -------------------
* 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 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. ***The rate for U.S.
Treasury STRIPS is the yield to maturity at March 31, 1996.
See the accompanying notes to the financial statements.
</TABLE>
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
[company logo] The Benham Group
Part of the Twentieth Century Family of Mutual Funds
1665 Charleston Road
Mountain View, CA 94043
1-800-321-8321
Not authorized for distribution unless preceded or
accompanied by a current fund prospectus
Benham Distributors, Inc. 5/96 Q067
