BENHAM U.S. TREASURY
AND AGENCY BOND FUNDS
-------------
Annual Report * March 31, 1996
[picture of the U.S. Capitol Building]
Short-Term Treasury and Agency Fund
Treasury Note Fund
Long-Term Treasury and Agency 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
SHORT-TERM TREASURY AND AGENCY FUND
Performance Information............................... 3
Performance Comparison & Portfolio Information........ 4
Management Discussion & Portfolio Composition......... 5
Financial Highlights..................................22
Financial Statements and Notes........................25
Schedule of Investments...............................33
TREASURY NOTE FUND
Performance Information............................... 7
Performance Comparison & Portfolio Information........ 8
Management Discussion & Portfolio Composition......... 9
Financial Highlights..................................23
Financial Statements and Notes........................25
Schedule of Investments...............................34
LONG-TERM TREASURY AND AGENCY FUND
Performance Information...............................11
Performance Comparison & Portfolio Information........12
Management Discussion & Portfolio Composition.........13
Financial Highlights..................................24
Financial Statements and Notes........................25
Schedule of Investments...............................35
INVESTMENT FUNDAMENTALS
Definitions...........................................15
Portfolio Sensitivity Measures........................17
The Yield Curve.......................................18
Yield Spreads and Callability.........................19
U.S. ECONOMIC REVIEW
JAMES M. BENHAM [photo of James
Chairman, Benham Funds M. Benham]
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
U.S. TREASURY SECURITIES
by Dave Schroeder, Vice President & Senior Portfolio Manager
NOTE: THE TERMS MARKED WITH AN ASTERISK (*) ARE DEFINED IN THE INVESTMENT
FUNDAMENTALS SECTION (PAGES 15-19).
U.S. Treasury securities posted attractive returns during the fiscal year ended
March 31, 1996. One-year total returns for the period ranged from approximately
6% for short-term Treasuries to 20% for long-term Treasuries. These returns were
made even more attractive by the fact that inflation, the great eroder of bond
returns, never climbed higher than 3% during the period. That meant that "real"
bond returns (reported returns minus the inflation rate) were strongly positive
for the fiscal year.
[line graph on left side of page. graph data described below.]
However, the attractive fiscal year total returns obscured the fact that market
conditions were much different in March 1996 than in March 1995. In 1995, U.S.
bonds rallied strongly in response to the slow economic growth and low inflation
described on page 1. The rally caused the Treasury yield curve* to shift lower
and flatten from March 1995 to January 1996 (see the accompanying graph). Total
returns of Treasuries for the one-year period ended January 31, 1996, ranged
from approximately 7% for short-term Treasuries to over 50% for long-term
Treasuries.
Then, in response to increasing supply (caused by Treasury auctions in February
and the unwinding of large currency trades involving Treasuries) and inflation
fears (caused by the unexpectedly strong economic reports described on page 1),
bond prices plunged in February and March. The bond sell-off caused the Treasury
yield curve to shift upward and steepen from January to March (see the graph
above). Treasury total returns for the three months ended March 31, 1996, ranged
from approximately flat to losses of over 15%. However, the strong gains in 1995
offset the first-quarter losses in the total returns for the fiscal year ended
March 31, 1996.
Bonds continued to suffer price declines in April. Factors that could cause
further bond losses include signs of economic strength, wage increases, higher
commodity prices, and increases in the supply of Treasury securities.
Furthermore, bonds aren't likely to receive any near-term assistance from the
Fed. We believe the Fed will hold monetary policy steady in response to recent
increases in economic activity and accompanying inflation fears.
[graph data]
The Shifting Treasury Yield Curve
3/31/95 1/31/96 3/31/96
"1" 6.685% 5.044% 5.413%
"2" 6.811 5.099 5.794
"3" 6.932 5.22 5.906
7.0085 5.303 6.003
"5" 7.085 5.386 6.1
7.1095 5.45 6.147
7.134 5.514 6.194
7.158 5.5747 6.2397
7.182 5.6353 6.2853
"10" 7.206 5.696 6.331
7.2179 5.7166 6.3481
7.2297 5.7371 6.3651
7.2416 5.7577 6.3822
7.2534 5.7782 6.3992
7.2653 5.7988 6.4163
7.2771 5.8193 6.4333
7.289 5.8399 6.4504
7.3008 5.8604 6.4674
7.3127 5.881 6.4845
7.3245 5.9015 6.5015
7.3364 5.9221 6.5186
7.3482 5.9426 6.5356
7.3601 5.9632 6.5527
7.3719 5.9837 6.5697
7.3838 6.0043 6.5868
7.3956 6.0248 6.6038
7.4075 6.0454 6.6209
7.4193 6.0659 6.6379
7.4312 6.0865 6.655
"30" 7.443 6.107 6.672
Source: Bloomberg Financial Markets
2
SHORT-TERM TREASURY & AGENCY 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 LIFE OF FUND
---------------------------------------------
$9.74-$10.00 5.02% 6.71% 4.22% N/A 4.35%
The Fund commenced operations on September 8, 1992.
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.
DIVIDENDS: All income dividends distributed by the Fund during the fiscal year
ended March 31, 1996, came from net income on direct investments in U.S.
Treasury and agency securities. Interest income from these securities is not
subject to state and local taxes in many states.
ONE-YEAR TOTAL RETURN BREAKDOWN
For the Period Ended March 31, 1996
% FROM % FROM ASSET ONE-YEAR
INCOME + APPRECIATION = TOTAL RETURN
5.40% + 1.31% = 6.71%
3
SHORT-TERM TREASURY & AGENCY FUND
SEC PERFORMANCE COMPARISON
Comparative Performance of $10,000 Invested on 9/30/92 in the Fund and
in the Lehman Brothers, Inc. 1- to 3-Year Government Securities Index
[line graph]
Index Fund
Sep-92 $10,000 $10,000
Oct-92 9,943 9,930
Nov-92 9,928 9,895
Dec-92 10,021 9,992
Jan-93 10,126 10,110
Feb-93 10,206 10,205
Mar-93 10,238 10,247
Apr-93 10,300 10,312
May-93 10,275 10,280
Jun-93 10,352 10,355
Jul-93 10,374 10,365
Aug-93 10,460 10,449
Sep-93 10,494 10,479
Oct-93 10,517 10,486
Nov-93 10,519 10,485
Dec-93 10,561 10,524
Jan-94 10,626 10,586
Feb-94 10,561 10,520
Mar-94 10,508 10,468
Apr-94 10,468 10,425
May-94 10,482 10,445
Jun-94 10,509 10,465
Jul-94 10,603 10,549
Aug-94 10,638 10,573
Sep-94 10,614 10,552
Oct-94 10,638 10,575
Nov-94 10,593 10,524
Dec-94 10,614 10,540
Jan-95 10,758 10,671
Feb-95 10,904 10,817
Mar-95 10,965 10,871
Apr-95 11,063 10,953
May-95 11,252 11,123
Jun-95 11,313 11,186
Jul-95 11,358 11,217
Aug-95 11,426 11,282
Sep-95 11,482 11,333
Oct-95 11,577 11,421
Nov-95 11,676 11,506
Dec-95 11,763 11,587
Jan-96 11,863 11,663
Feb-96 11,817 11,626
Mar-96 11,809 11,600
Past performance does not guarantee future results.
This graph compares the Fund's performance with a broad-based market index, the
Lehman Brothers, Inc. One- to Three-Year Government Securities 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 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 "Short U.S.
Treasury Funds" category.
1 YEAR 3 YEARS LIFE OF FUND+
The Fund: 6.71% 4.22% 4.33%
Category Average: 7.35% 4.39% 4.42%
The Fund`s Ranking: 18 out of 22 8 out of 11 6 out of 8
+ from September 30, 1992, to March 31, 1996
Total returns are based on historical performance and do not guarantee future
results.
KEY PORTFOLIO STATISTICS
3/31/96 9/30/95
Market Value: $34,670,156 $35,029,918
Number of Issues: 6 7
Average Coupon: 6.45% 6.15%
Average Maturity: 1.80 years 1.84 years
Average Duration: 1.67 years 1.63 years
For definitions of these terms, see page 16.
4
SHORT-TERM TREASURY & AGENCY FUND
MANAGEMENT DISCUSSION
with Dave Schroeder, Vice President & Senior Portfolio Manager+
NOTE: THE TERMS MARKED WITH AN ASTERISK (*) ARE DEFINED IN THE INVESTMENT
FUNDAMENTALS SECTION (PAGES 15-19).
Q: How did the Fund perform?
A: The Fund benefited from the bond rally that began in 1995 and lasted
through January 1996, but its performance lagged behind the average of
its Lipper category. For the fiscal year ended March 31, 1996, the
Fund's total return was 6.71%, which was 64 basis points* lower than
the 7.35% average total return for the 22 funds in Lipper's "Short U.S.
Treasury Funds" category over the same period (see the Lipper
Performance Comparison on page 4).
We believe the Fund underperformed the Lipper average over the fiscal
year because it is positioned more conservatively than most of the
funds in its category. The Fund's average maturity* typically floats
around two years, while many of the other funds have average maturities
of about three years. As a result, the Fund tends to outperform the
category average in a declining market (such as the one that occurred
in February and March 1996), but the Fund's return tends to lag behind
the category average during market rallies, such as the one that
prevailed during most of the Fund's fiscal year.
Q: How did you position the Fund in response to the economic and market
conditions described on pages 1 and 2?
A: We maintained a slightly defensive position because of lingering
uncertainty about economic and inflationary conditions. By January,
bond prices had risen higher than we believed either the fundamental
economic data or the technical supply and demand factors warranted. At
that time, we invested the majority of the Fund's assets in Treasury
securities that matured in less than two years, which we felt were more
appropriately priced. This allowed us to keep the Fund's duration* 5%
shorter than the duration of its benchmark, the Lehman Brothers One- to
Three-Year Government Securities Index.
+On March 1, 1996, Robert V. Gahagan assumed the day-to-day management of the
Fund to allow Dave Schroeder to focus on managing Benham's intermediate and
long-term U.S. government bond funds. The Benham Group and Twentieth Century
Mutual Funds joined forces in June 1995. Mr. Gahagan joined Twentieth Century
in 1983 and is a vice president and portfolio manager of Twentieth Century's
money market funds and U.S. government bond funds. He holds a bachelor's degree
in economics and an MBA from the University of Missouri-Kansas City.
5
SHORT-TERM TREASURY & AGENCY FUND
MANAGEMENT DISCUSSION
(Continued from the previous page)
Q: The Fund no longer owned any agency securities at the end of the fiscal
year. Why did you eliminate the Fund's agency position?
A: At the end of September, 33.7% of the Fund's assets were invested in
callable agency securities* (see the chart at the bottom of this page).
These securities were bought at a discount and yielded 25-30 basis
points more than comparable Treasury securities. However, in rising
interest rate environments, the prices of callable agency securities
fall faster than comparable U.S. Treasury securities. In January, when
it appeared to us that the market environment was changing, we sold the
agency securities.
Q: What are your plans for the Fund over the next six months?
A: Recent market conditions have placed downward price pressure on bonds,
and increased supply from Treasury auctions could weigh heavily on the
short-term market in the coming months. However, we think the bond
market has already priced in the worst case scenarios for inflationary
pressure and faster economic growth. We plan to maintain the Fund's
defensive position until a clearer economic picture emerges. We believe
that some of the strength in the economic data for the first quarter of
1996 is payback for a weak fourth quarter in 1995. We also believe that
signs of increasing inflationary pressures may be seasonal (particular
to the first quarter) rather than lasting. If an economic slowdown
occurs and/or the market rallies, we may reassess the Fund's position
and slightly increase its duration from short to neutral.
We also plan to focus on yield curve* positioning (where to buy on the
yield curve, given its shape and location) and security selection.
Recently, some of the yield levels that we considered buying
opportunities in 1995 have reappeared. Specifically, two-year Treasury
notes with yields in the 6.00%-6.15% range have become attractive.
PORTFOLIO COMPOSITION BY SECURITY TYPE
[pie charts]
3/31/96 9/30/95
Treasury Notes: 100% Treasury Notes: 66.3%
Agency Notes: 33.7%
For definitions of these security types, see page 15.
The composition of the Fund's portfolio may change over time.
6
TREASURY NOTE 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
------------------------------------------
$10.01-$10.54 5.43% 8.42% 4.56% 7.14% 6.85%
The Fund commenced operations on May 16, 1980.
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 22.
DIVIDENDS: All income dividends distributed by the Fund during the fiscal year
ended March 31, 1996, came from net income on direct investments in U.S.
Treasury securities. Interest income from these securities is not subject to
state and local taxes in many states.
ONE-YEAR TOTAL RETURN BREAKDOWN
For the Period Ended March 31, 1996
% FROM % FROM ASSET ONE-YEAR
INCOME + APPRECIATION = TOTAL RETURN
5.66% + 2.76% = 8.42%
7
TREASURY NOTE FUND
SEC PERFORMANCE COMPARISON
Comparative Performance of $10,000 Invested on 3/31/86 in the Fund and
in the Merrill Lynch 1- to 10-Year Intermediate-Term U.S. Treasury Index
[line graph]
Index Fund
Mar-86 $10,000 $10,000
Apr-86 10,060 10,030
May-86 9,919 9,708
Jun-86 10,162 10,051
Jul-86 10,292 10,180
Aug-86 10,526 10,501
Sep-86 10,427 10,294
Oct-86 10,555 10,454
Nov-86 10,661 10,601
Dec-86 10,681 10,604
Jan-87 10,772 10,719
Feb-87 10,835 10,778
Mar-87 10,790 10,660
Apr-87 10,613 10,287
May-87 10,603 10,205
Jun-87 10,724 10,316
Jul-87 10,744 10,259
Aug-87 10,713 10,154
Sep-87 10,572 9,916
Oct-87 10,905 10,335
Nov-87 10,965 10,352
Dec-87 11,068 10,487
Jan-88 11,347 10,870
Feb-88 11,466 11,001
Mar-88 11,416 10,832
Apr-88 11,401 10,765
May-88 11,338 10,683
Jun-88 11,522 10,890
Jul-88 11,494 10,823
Aug-88 11,503 10,820
Sep-88 11,702 11,020
Oct-88 11,861 11,178
Nov-88 11,759 11,046
Dec-88 11,769 11,038
Jan-89 11,885 11,147
Feb-89 11,836 11,079
Mar-89 11,894 11,133
Apr-89 12,114 11,319
May-89 12,369 11,565
Jun-89 12,684 11,876
Jul-89 12,943 12,130
Aug-89 12,763 11,922
Sep-89 12,827 11,970
Oct-89 13,090 12,218
Nov-89 13,218 12,318
Dec-89 13,252 12,355
Jan-90 13,176 12,279
Feb-90 13,209 12,313
Mar-90 13,235 12,315
Apr-90 13,189 12,257
May-90 13,468 12,526
Jun-90 13,643 12,691
Jul-90 13,839 12,876
Aug-90 13,779 12,816
Sep-90 13,905 12,941
Oct-90 14,098 13,119
Nov-90 14,309 13,316
Dec-90 14,511 13,492
Jan-91 14,658 13,614
Feb-91 14,735 13,676
Mar-91 14,815 13,742
Apr-91 14,969 13,885
May-91 15,053 13,957
Jun-91 15,069 13,954
Jul-91 15,232 14,099
Aug-91 15,516 14,385
Sep-91 15,780 14,619
Oct-91 15,959 14,798
Nov-91 16,146 14,970
Dec-91 16,540 15,346
Jan-92 16,373 15,169
Feb-92 16,435 15,197
Mar-92 16,369 15,106
Apr-92 16,518 15,266
May-92 16,754 15,496
Jun-92 16,996 15,720
Jul-92 17,312 16,026
Aug-92 17,512 16,199
Sep-92 17,754 16,443
Oct-92 17,536 16,228
Nov-92 17,458 16,133
Dec-92 17,688 16,353
Jan-93 18,019 16,668
Feb-93 18,288 16,902
Mar-93 18,357 16,973
Apr-93 18,502 17,101
May-93 18,447 17,034
Jun-93 18,717 17,297
Jul-93 18,755 17,314
Aug-93 19,042 17,575
Sep-93 19,124 17,639
Oct-93 19,157 17,667
Nov-93 19,065 17,572
Dec-93 19,140 17,646
Jan-94 19,330 17,830
Feb-94 19,055 17,553
Mar-94 18,789 17,286
Apr-94 18,661 17,150
May-94 18,681 17,157
Jun-94 18,694 17,158
Jul-94 18,926 17,364
Aug-94 18,985 17,427
Sep-94 18,832 17,294
Oct-94 18,837 17,286
Nov-94 18,743 17,189
Dec-94 18,814 17,233
Jan-95 19,126 17,496
Feb-95 19,492 17,808
Mar-95 19,599 17,898
Apr-95 19,824 18,089
May-95 20,390 18,565
Jun-95 20,523 18,688
Jul-95 20,537 18,686
Aug-95 20,705 18,851
Sep-95 20,845 18,957
Oct-95 21,079 19,180
Nov-95 21,342 19,398
Dec-95 21,559 19,594
Jan-96 21,744 19,745
Feb-96 21,500 19,528
Mar-96 21,397 19,405
Past performance does not guarantee future results.
This graph compares the Fund's performance with a broad-based market index, the
Merrill Lynch One- to Ten-Year Intermediate-Term U.S. Treasury Index, over 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 "Intermediate
U.S. Treasury Funds" category.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
The Fund: 8.42% 4.56% 7.14% 6.85%
Category Average: 9.18% 4.63% 7.15% 6.85%
The Fund`s Ranking: 11 out of 12 6 out of 8 4 out of 5 1 out of 1
Total returns are based on historical performance and do not guarantee future
results.
KEY PORTFOLIO STATISTICS
3/31/96 9/30/95
Market Value: $306,236,678 $304,340,348
Number of Issues: 10 13
Average Coupon: 6.89% 6.89%
Average Maturity: 3.80 years 3.69 years
Average Duration: 3.08 years 3.02 years
For definitions of these terms, see page 16.
8
TREASURY NOTE FUND
MANAGEMENT DISCUSSION
with Dave Schroeder, Vice President & Senior Portfolio Manager
NOTE: THE TERMS MARKED WITH AN ASTERISK (*) ARE DEFINED IN THE INVESTMENT
FUNDAMENTALS SECTION (PAGES 15-19).
Q: How did the Fund perform?
A: The Fund benefited from the bond rally that began in 1995 and lasted
through January 1996, but the Fund's performance lagged behind the
average of its Lipper category. For the fiscal year ended March 31,
1996, the Fund's total return was 8.42%, which was 76 basis points*
lower than the 9.18% average total return for the 12 funds in Lipper's
"Intermediate U.S. Treasury Funds" category over the same period (see
the Lipper Performance Comparison on page 8).
We believe the Fund underperformed the Lipper average over the fiscal
year because it is positioned more conservatively than most of the
funds in its category. The Fund's average maturity* typically floats
around four years, while many of the other funds have average
maturities of five to ten years. As a result, the Fund tends to
outperform the category average in a declining market (such as the one
that occurred in February and March 1996), but the Fund's return tends
to lag behind the category average during market rallies, such as the
one that prevailed during most of the Fund's fiscal year.
Q: How did you position the Fund in response to the economic and market
conditions described on pages 1 and 2?
A: To take advantage of the flattening yield curve* during the bond rally,
we employed a barbell portfolio structure* until mid-October. At that
point, when the yield curve had flattened significantly, we began to
unwind the barbell. By December, the yield spread between the two-year
Treasury note and the 30-year Treasury bond had fallen to around 70
basis points, and we decided to remove the remainder of the barbell.
PORTFOLIO COMPOSITION BY MATURITY
[pie charts]
3/31/96 9/30/95
10-30 Years: 3.4% 0-3 Years: 47.2%
5-7 Years: 17.4% 3-5 Years: 33.8%
3-5 Years: 47.5% 5-7 Years: 6.3%
0-3 Years: 31.7% 7-10 Years: 7.8%
10-30 Years: 4.9%
The Fund invests primarily in U.S. Treasury notes. The Fund's weighted average
portfolio maturity is typically one to ten years.
The composition of the Fund's portfolio may change over time.
9
TREASURY NOTE FUND
MANAGEMENT DISCUSSION
(Continued from the previous page)
In February, as interest rates moved higher and the yield curve
steepened, we implemented a bullet portfolio structure* by selling one-
and ten-year Treasury notes. These securities were replaced with
Treasury notes with maturities of approximately 4.5 years. This bullet
structure tends to outperform a barbell structure when the yield curve
is moving from flat to steep. We also maintained a neutral position for
the Fund by keeping its duration* close to the three-year duration of
its benchmark, the Merrill Lynch One- to Ten-Year Intermediate-Term
U.S. Treasury Index.
Q: What are your plans for the Fund over the next six months?
A: We plan to maintain the Fund's current duration and bullet portfolio
structure until the next significant change in the yield curve. As the
yield curve has steepened and interest rates have moved higher,
intermediate-term Treasuries have become more attractively priced than
short- and long-term Treasuries. We are currently overweighted in
three- and five-year Treasuries because we believe that these
securities offer the best value and will outperform other maturity
sectors should the bond market stabilize or rally.
We also plan to focus on yield curve positioning (where to buy on the
yield curve, given its shape and location) and security selection.
Recently, some of the yield levels that we considered buying
opportunities in 1995 have reappeared. Specifically, if five-year
Treasury note yields rise to 6.50%-6.75% and ten-year Treasury note
yields rise to 7.00%, we will probably trade some of the Fund's
shorter-maturity holdings for longer-maturity securities to extend the
Fund's duration.
PORTFOLIO COMPOSITION BY SECURITY TYPE
[pie charts]
3/31/96 9/30/95
Treasury Notes: 96.6% Treasury Notes: 95.1%
Treasury Bonds:: 3.4% Treasury Bonds: 3.5%
STRIPS: 1.4%
For definitions of these security types, see page 15.
The composition of the Fund's portfolio may change over time.
10
LONG-TERM TREASURY & AGENCY 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 LIFE OF FUND
--------------------------------------------
$9.10-$10.55 6.18% 13.46% 6.42% N/A 7.26%
The Fund commenced operations on September 8, 1992.
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 23.
DIVIDENDS: All income dividends distributed by the Fund during the fiscal year
ended March 31, 1996, came from net income on direct investments in U.S.
Treasury and agency securities. Interest income from these securities is not
subject to state and local taxes in many states.
ONE-YEAR TOTAL RETURN BREAKDOWN
For the Period Ended March 31, 1996
% FROM % FROM ASSET ONE-YEAR
INCOME + APPRECIATION = TOTAL RETURN
6.16% + 7.30% = 13.46%
11
LONG-TERM TREASURY & AGENCY FUND
SEC PERFORMANCE COMPARISON
Comparative Performance of $10,000 Invested on 9/30/92 in the Fund and
in the Lehman Brothers, Inc. Long-Term Government Securities Index
[line graph]
Index Fund
Sep-92 $10,000 $10,000
Oct-92 9,790 9,774
Nov-92 9,835 9,854
Dec-92 10,108 10,110
Jan-93 10,396 10,385
Feb-93 10,749 10,773
Mar-93 10,775 10,767
Apr-93 10,855 10,828
May-93 10,891 10,852
Jun-93 11,354 11,320
Jul-93 11,544 11,538
Aug-93 12,020 12,080
Sep-93 12,059 12,114
Oct-93 12,148 12,221
Nov-93 11,834 11,877
Dec-93 11,870 11,894
Jan-94 12,154 12,184
Feb-94 11,656 11,605
Mar-94 11,143 11,076
Apr-94 11,010 10,895
May-94 10,934 10,790
Jun-94 10,827 10,693
Jul-94 11,198 11,015
Aug-94 11,111 10,972
Sep-94 10,760 10,619
Oct-94 10,720 10,585
Nov-94 10,788 10,646
Dec-94 10,953 10,794
Jan-95 11,237 11,047
Feb-95 11,558 11,344
Mar-95 11,659 11,436
Apr-95 11,865 11,622
May-95 12,780 12,480
Jun-95 12,929 12,634
Jul-95 12,720 12,406
Aug-95 13,005 12,666
Sep-95 13,247 12,910
Oct-95 13,616 13,261
Nov-95 13,965 13,588
Dec-95 14,338 13,952
Jan-96 14,333 13,929
Feb-96 13,638 13,246
Mar-96 13,369 12,975
Past performance does not guarantee future results.
This graph compares the Fund's performance with a broad-based index, the Lehman
Brothers, Inc. Long-Term Government Securities 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 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 "General U.S.
Treasury Funds" category.
1 YEAR 3 YEARS LIFE OF FUND+
The Fund: 13.46% 6.42% 7.72%
Category Average: 10.94% 5.72% 6.68%
The Fund`s Ranking: 5 out of 16 3 out of 12 2 out of 10
+ from September 30, 1992, to March 31, 1996
Total returns are based on historical performance and do not guarantee future
results.
KEY PORTFOLIO STATISTICS
3/31/96 9/30/95
Market Value: $108,726,780 $76,119,300
Number of Issues: 9 7
Average Coupon: 8.79% 9.39%
Average Maturity: 22.90 years 21.82 years
Average Duration: 10.56 years 10.55 years
For definitions of these terms, see page 16.
12
LONG-TERM TREASURY & AGENCY FUND
MANAGEMENT DISCUSSION
with Dave Schroeder, Vice President & Senior Portfolio Manager
NOTE: THE TERMS MARKED WITH AN ASTERISK (*) ARE DEFINED IN THE INVESTMENT
FUNDAMENTALS SECTION (PAGES 15-19).
Q: How did the Fund perform?
A: The Fund benefited from the bond rally that began in 1995 and lasted
through January 1996, and it performed well compared with the average
of its Lipper category. For the fiscal year ended March 31, 1996, the
Fund's total return was 13.46%, compared to the 10.94% average total
return for the 16 funds in Lipper's "General U.S. Treasury Funds"
category over the same period (see the Lipper Performance Comparison on
page 12).
We believe the Fund outperformed the Lipper average over the fiscal
year because its average maturity* is positioned more aggressively than
that of other funds in its category. The Fund usually maintains an
average maturity of 20 years or more, while the average maturity for
the Lipper category is around 15 years. As a result, the Fund typically
outperforms the Lipper category average during market rallies (such as
in 1995), but the Fund's returns tend to lag behind the category
average in declining markets, such as the one that occurred at the end
of the fiscal year.
Q: How did you position the Fund in response to the economic and market
conditions described on pages 1 and 2?
A: We maintained our strategy of keeping the Fund's duration* close to the
10.5-year duration of its benchmark, the Lehman Brothers Long-Term
Government Securities Index. The Fund benefited from this positioning
during the bond rally. Recently, the Treasury announced plans to
auction more longer-term debt, which will likely increase the supply of
long-term bonds and cause the Treasury yield curve* to steepen. In
response, we employed a bullet portfolio structure,* a
PORTFOLIO COMPOSITION BY MATURITY
[pie charts]
3/31/96 9/30/95
10-20 Years: 24.4% 10-20 Years: 31.5%
20-25 Years: 59.5% 20-25 Years: 58.3%
25-30 Years: 16.1% 25-30 Years: 10.2%
The Fund invests exclusively in long-term U.S. Treasury and government agency
securities. The Fund's weighted average portfolio maturity is typically 20 to 30
years.
The composition of the Fund's portfolio may change over time.
13
LONG-TERM TREASURY & AGENCY FUND
MANAGEMENT DISCUSSION
(Continued from the previous page)
favorable structure when the yield curve is moving from flat to steep.
The Fund's portfolio is currently overweighted in Treasury bonds with
15- to 20-year maturities.
Q: In the Fund's 9/30/95 semiannual report, you discussed a 30-year agency
bond that you had purchased in October. What happened to it?
A: We sold the bond in February at a profit. The bond was issued by the
Tennessee Valley Authority (TVA), and we had purchased it at a yield
spread of 38 basis points* over comparable Treasury bonds. We believed
that the TVA bond offered a reasonable yield advantage over Treasuries
and provided the potential for price appreciation if yield spreads
narrowed. We sold the bond after the yield spread narrowed to 22 basis
points.
Q: What are your plans for the Fund over the next six months?
A: We plan to maintain the Fund's duration and bullet portfolio structure
until the next significant change in the yield curve. As the yield
curve has steepened and interest rates have moved higher,
intermediate-term Treasuries have become more attractively priced than
long-term Treasuries. We plan to maintain our underweighting in 25- to
30-year Treasuries as long as shorter-term Treasuries remain
attractive.
We also plan to focus on yield curve positioning (where to buy on the
yield curve, given its shape and location) and security selection.
Recently, some of the yield levels that we considered buying
opportunities in 1995 have reappeared. Specifically, if the yield of
the 30-year Treasury bond rises to 7.00%-7.25%, we will probably trade
some of the Fund's shorter-maturity holdings for longer-maturity
securities to extend the Fund's duration.
PORTFOLIO COMPOSITION BY SECURITY TYPE
[pie charts]
3/31/96 9/30/95
Treasury Bonds: 100% Treasury Bonds: 100%
For definitions of these security types, see page 15.
The composition of the Fund's portfolio may change over time.
14
INVESTMENT FUNDAMENTALS
DEFINITIONS
SECURITY TYPES
Treasury Securities--debt securities issued by the U.S. Treasury and backed by
the direct "full faith and credit" pledge of the U.S. government. Treasury
securities include bills (maturing in one year or less), notes (maturing in two
to ten years) and bonds (maturing in more than ten years).
Government Agency Securities--debt securities issued by U.S. government agencies
(such as the Federal Farm Credit Bank and the Federal Home Loan Bank). Some
agency securities are backed by the full faith and credit of the U.S.
government, while others are guaranteed only by the issuing agency. Government
agency securities include discount notes (maturing in one year or less) and
medium-term notes, debentures and bonds (maturing in three months to 50 years).
STRIPS--zero-coupon bonds (zeros) issued by the U.S. Treasury and backed by the
direct "full faith and credit" pledge of the U.S. government. Unlike ordinary
Treasury securities, which pay interest periodically, zeros pay no interest.
Instead, these securities are issued at a deep discount and then redeemed for
their full face value at maturity. When held to maturity, the entire return of a
zero comes from the difference between its purchase price and its value at
maturity.
Structured Notes--a broad range of securities that fall under the general
definition of "derivatives." They are usually variations on traditional
securities, offering options such as floating rates (which are usually tied to
an underlying index, like the three-month Treasury bill rate or the federal
funds rate), call options (see page 19) or coupon "caps" and "floors" (maximum
and minimum interest rates on floating-rate securities). Structured notes run
the gamut from "safe" derivatives--conservative securities that closely resemble
traditional debt securities--to "risky" derivatives such as inverse floaters,
leveraged floaters and capped floaters.
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%). Basis
points are used to clearly describe interest rate changes. For example, if a
news report indicates that interest rates rose by 1%, does that mean 1% of the
previous rate or one percentage point? It is more accurate to state that
interest rates rose by 100 basis points.
Coupon--the stated interest rate of a security.
15
INVESTMENT FUNDAMENTALS
DEFINITIONS
(Continued from the previous page)
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 coupons held in a fund's portfolio.
Average Maturity--a weighted average of all bond maturities in a fund's
portfolio (see also page 17).
Average Duration--a weighted average of all bond durations in a fund's portfolio
(see also page 17).
BOND PORTFOLIO STRUCTURES
Barbell Structure--a structure that overweights a portfolio in short- and
long-term securities and underweights intermediate-term securities. This
structure tends to outperform a bullet structure when yield curves are moving
from steep to flat (short-term rates are rising faster than long-term rates, or
long-term rates are falling faster than short-term rates). In a rising interest
rate environment, the cash captures the higher short-term yields with little
price depreciation. In a declining interest rate environment, the cash provides
a relatively steady yield, while the long bonds produce more price appreciation
than intermediate-term securities.
Bullet Structure--a structure that clusters a portfolio's bond maturities around
a single maturity (usually an intermediate-term maturity). This structure tends
to outperform a barbell structure when the yield curve is moving from flat to
steep (long-term rates are rising faster than short-term rates, or short-term
rates are falling faster than long-term rates). In a rising interest rate
environment, intermediate-term securities experience significantly less price
depreciation than long-term securities. In a declining interest rate
environment, intermediate-term securities produce significantly more price
appreciation than short-term securities.
Ladder Structure--a balanced structure that staggers bond maturities so they
occur at regular intervals. This structure tends to be effective when interest
rates are relatively stable, and it provides a regular schedule of maturing
securities.
16
INVESTMENT FUNDAMENTALS
PORTFOLIO SENSITIVITY MEASURES
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 (a basis point equals 0.01%). For example, as of March 31,
1996, the Short-Term Treasury and Agency Fund's duration was 1.7 years, while
the Long-Term Treasury and Agency Fund's duration was 10.6 years. If interest
rates were to rise by 100 basis points, the Short-Term Fund's share price would
be expected to decline by 1.7%, while the Long-Term Fund's share price would
decline by 10.6%. Conversely, if interest rates were to fall by 100 basis
points, the Short-Term Fund's share price would be expected to increase by 1.7%,
while the Long-Term Fund's share price would increase by 10.6%.
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 want durations to be as long as possible when interest rates
fall (to maximize bond price increases) and as short as possible when interest
rates rise (to minimize bond price declines), taking into account the objectives
of the portfolio.
Duration, measured in years, also approximates (but understates) the weighted
average life of a bond or bond portfolio. To calculate duration, the future
interest and principal payments are added together and weighted in proportion to
their time value (early payments are valued more than later payments because
early payments can be reinvested and compound additional returns).
AVERAGE MATURITY
Average maturity is another measurement of the interest rate sensitivity of a
bond portfolio. Average maturity measures the average amount of time that will
pass until the securities in the portfolio mature. The longer a portfolio's
average maturity 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.
Portfolio managers generally lengthen average maturities when interest rates
fall (to maximize exposure and capture as much price appreciation as possible)
and reduce average maturities when interest rates rise (to minimize exposure and
avoid as much price depreciation as possible), as long as this strategy is
compatible with the objectives of the portfolio. Reducing the average maturity
in a rising interest rate environment allows the portfolio manager to more
quickly reinvest matured assets in higher-yielding securities.
17
INVESTMENT FUNDAMENTALS
THE YIELD CURVE
One of the fundamental tenets of investing is the relationship between risks and
returns--the greater the risks, the greater the chances of earning higher
returns over time. The downside is the correspondingly higher potential for
short-term losses--an investment that generates a high return probably has a
greater likelihood of significant fluctuations in value or return, especially in
the short run.
Bonds are no exception. The riskiest bonds--those with the greatest exposure to
interest rate movements and price fluctuations--generally have the highest
yields and returns over time but can experience severe short-term losses. On the
other hand, bonds with less exposure to interest rate movements and less price
fluctuation generally have lower yields and returns but are more stable.
The yield curve is a graphic representation of the relationship between bond
risks and returns at a point in time. Yield curve graphs plot lengthening bond
maturities (which represent risk because longer maturities increase risk) along
the horizontal axis and rising yields (which represent return) on the vertical
axis. Therefore, the lower left corner of yield curve graphs have the lowest
risks and the lowest potential returns, while the upper right corners have the
highest risks and the highest potential returns.
Yield curves can have several different shapes, depending on interest rate
levels and the economic environment:
Normal (Upward Sloping) Yield Curve--a yield curve that shows a normal
risk/return relationship--short-term securities have lower yields than long-term
securities. Most normal yield curves start in the lower left corner of the graph
and rise to the upper right corner.
Steep Yield Curve--a normal yield curve that shows a large difference between
short-term yields and long-term yields. This typically occurs when the bond
market is responding to inflation fears (causing high long-term bond yields) and
the Fed hasn't raised short-term interest rates enough (or the economy hasn't
slowed down enough) to quell those fears.
Flat Yield Curve--a yield curve that shows short-term securities having almost
the same yields as long-term securities. This typically occurs after the Fed has
raised short-term interest rates several times (to fight inflation when the
economy is strong) or when the bond market expects the Fed to lower short-term
interest rates (in a weaker economic environment).
Inverted Yield Curve--a yield curve that shows short-term securities having
higher yields than long-term securities. This typically develops from a flat
yield curve if the Fed continues to raise short-term interest rates (when the
economy is strong) or if it fails to lower short-term rates when the market
expects it to do so (in a weaker economic environment).
18
INVESTMENT FUNDAMENTALS
YIELD SPREADS AND CALLABILITY
Yield Spreads Between Government Agency and Treasury Securities
To determine whether or not to purchase government agency securities for the
Short-Term and Long-Term Treasury and Agency Funds, the Funds' portfolio manager
looks at the yield spreads between government agency securities and Treasury
securities. Yield spreads are the difference between the yields of Treasury and
agency securities with comparable maturities. Yield spreads are used to
determine the relative values of the different securities.
In general, agency securities have higher yields than Treasury securities with
comparable maturities because they have slightly more credit risk and are less
liquid than Treasury securities. When yield spreads are considered to be narrow
(i.e., agency securities yield little more than comparable Treasury securities),
the portfolio manager will tend to avoid agency securities because their yields
are not enough to compensate for the additional risk. Conversely, when yield
spreads are considered to be wide (i.e., agency securities yield substantially
more than comparable Treasury securities), the portfolio manager will tend to
buy agency securities because yields are high enough to compensate for the
additional risk. Wide yield spreads also enable the portfolio manager to enhance
the Funds' yields.
Callability of Treasury and Government Agency Securities
Some Treasury and government agency securities are callable, which means they
can be redeemed by the issuer before maturity. When interest rates fall, the
U.S. Treasury and government agencies find it financially rewarding to refinance
the bonds they've issued because they can reduce their monthly interest
payments. If a security is callable, the agency can exercise a "call" option at
a prearranged interval to refinance the security. Although calls are beneficial
for government agencies, they can be detrimental for investors--calls shorten
the life of a security and force the portfolio manager to reinvest in
lower-yielding securities. To compensate for the additional risks associated
with callability, yields for callable Treasury and agency securities are
generally higher than for noncallable Treasury and agency securities.
19
[THIS PAGE INTENTIONALLY LEFT BLANK]
20
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 Short-Term Treasury and Agency
Fund, Benham Treasury Note Fund, and Benham Long-Term Treasury and Agency Fund
(three 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
Short-Term Treasury and Agency Fund, Benham Treasury Note Fund, and Benham
Long-Term Treasury and Agency Fund (three 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
21
<TABLE>
<CAPTION>
BENHAM SHORT-TERM TREASURY AND AGENCY FUND
FINANCIAL HIGHLIGHTS
For a Share Outstanding Throughout the Years Ended March 31 (except as noted)
1996 1995 1994 1993+
------ ------ ------ ------
PER-SHARE DATA
- ---------------
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD.......................................... $9.73 9.86 10.04 10.00
Income From Investment Operations
Net Investment Income......................................................... .53 .50 .36 .25
Net Realized and Unrealized Gains (Losses) on Investments..................... .11 (.13) (.14) .04
----- ----- ----- -----
Total Income From Investment Operations..................................... .64 .37 .22 .29
----- ----- ----- -----
Less Distributions
Dividends from Net Investment Income.......................................... (.53) (.50) (.36) (.25)
Distributions from Net Realized Capital Gains................................. 0 0 (.03) 0
Distributions in Excess of Net Realized Capital Gains......................... 0 0 (.01) 0
----- ----- ----- -----
Total Distributions......................................................... (.53) (.50) (.40) (.25)
----- ----- ----- -----
NET ASSET VALUE AT END OF PERIOD................................................ $9.84 9.73 9.86 10.04
===== ===== ===== =====
TOTAL RETURN*................................................................... 6.71% 3.85% 2.16% 2.79%
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period (in thousands)......................................$35,648 56,090 24,929 14,889
Ratio of Expenses to Average Daily Net Assets................................... .67% .67% .58% 0%
Ratio of Net Investment Income to Average Daily Net Assets...................... 5.39% 5.22% 3.53% 4.50%**
Portfolio Turnover Rate......................................................... 224.03% 140.82% 261.61% 157.79%
- -------------------
+ From September 8, 1992 (commencement of operations), through March 31, 1993.
* Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized.
** Annualized.
</TABLE>
See the accompanying notes to financial statements.
22
<TABLE>
<CAPTION>
BENHAM TREASURY NOTE 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
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD.................... $9.99 10.18 10.73 10.52 10.23 9.87 9.63 10.11 10.91 11.97
Income From Investment Operations
Net Investment Income........ .58 .53 .48 .56 .69 .75 .77 .76 .75 .71
Net Realized and Unrealized Gains
(Losses) on Investments.... .25 (.19) (.27) .69 .29 .36 .24 (.49) (.60) (.08)
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Income From Investment
Operations............... .83 .34 .21 1.25 .98 1.11 1.01 .27 .15 .63
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Less Distributions
Dividends from Net
Investment Income.......... (.58) (.53) (.48) (.56) (.69) (.75) (.77) (.75) (.92) (.89)
Distributions from Net
Realized Capital Gains..... 0 0 (.06) (.48) 0 0 0 0 (.03) (.80)
Distributions in Excess of
Net Realized Capital Gains. 0 0 (.22) 0 0 0 0 0 0 0
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Distributions........ (.58) (.53) (.76) (1.04) (.69) (.75) (.77) (.75) (.95) (1.69)
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE AT END OF
PERIOD......................... $10.24 9.99 10.18 10.73 10.52 10.23 9.87 9.63 10.11 10.91
====== ===== ===== ===== ===== ===== ===== ===== ===== =====
TOTAL RETURN+.................. 8.42% 3.54% 1.85% 12.36% 9.92% 11.59% 10.61% 2.78% 1.60% 6.60%
SUPPLEMENTAL DATA AND RATIOS
Net Assets at End of Period
(in thousands)..............$311,020 305,353 351,369 391,538 302,865 158,630 96,978 71,625 54,172 43,271
Ratio of Expenses to
Average Daily Net Assets..... .53% .53% .51% .53% .59% .73% .75% .75% .75% .93%
Ratio of Net Investment Income to
Average Daily Net Assets..... 5.65% 5.35% 4.50% 5.18% 6.55% 7.49% 7.66% 7.67% 7.36% 6.26%
Portfolio Turnover Rate........ 167.89% 92.35% 212.91% 299.29% 148.75% 69.72% 216.84% 386.46% 465.35% 395.91%
- -------------------
+ Total return figures assume reinvestment of dividends and capital gain
distributions.
</TABLE>
See the accompanying notes to financial statements.
23
<TABLE>
<CAPTION>
BENHAM LONG-TERM TREASURY AND AGENCY FUND
FINANCIAL HIGHLIGHTS
For a Share Outstanding Throughout the Years Ended March 31 (except as noted)
1996 1995 1994 1993+
------ ------ ------ ------
PER-SHARE DATA
- ---------------
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD......................................... $9.05 9.38 10.24 10.00
Income From Investment Operations
Net Investment Income........................................................ .60 .60 .63 .39
Net Realized and Unrealized Gains (Losses) on Investments.................... .62 (.33) (.27) .24
----- ----- ----- -----
Total Income From Investment Operations.................................... 1.22 .27 .36 .63
----- ----- ----- -----
Less Distributions
Dividends from Net Investment Income......................................... (.60) (.60) (.63) (.39)
Distributions from Net Realized Capital Gains................................ 0 0 (.45) 0
Distributions in Excess of Net Realized Capital Gains........................ 0 0 (.14) 0
----- ----- ----- -----
Total Distributions........................................................ (.60) (.60) (1.22) (.39)
----- ----- ----- -----
NET ASSET VALUE AT END OF PERIOD............................................... $9.67 9.05 9.38 10.24
===== ===== ===== =====
TOTAL RETURN*.................................................................. 13.46% 3.25% 2.87% 6.48%
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period (in thousands)....................................$110,741 34,906 18,003 20,975
Ratio of Expenses to Average Daily Net Assets.................................. .67% .67% .57% 0%
Ratio of Net Investment Income to Average Daily Net Assets..................... 5.93% 6.84% 5.89% 7.18%**
Portfolio Turnover Rate........................................................ 112.35% 146.81% 200.34% 56.97%
- -------------------
+ From September 8, 1992 (commencement of operations), through March 31, 1993.
* Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized.
** Annualized.
</TABLE>
See the accompanying notes to financial statements.
24
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
March 31, 1996
BENHAM BENHAM
SHORT-TERM TREASURY BENHAM TREASURY LONG-TERM TREASURY
AND AGENCY FUND NOTE FUND AND AGENCY FUND
---------- -------- ----------
ASSETS
<S> <C> <C> <C>
Investment securities at value (cost of $34,855,153, $306,210,734,
and $108,496,602, respectively)....................................... $34,670,156 306,236,678 108,726,780
Cash..................................................................... 63,831 0 232,140
Interest receivable...................................................... 792,755 5,331,150 1,417,549
Receivable for fund shares sold.......................................... 171,409 67,082 526,304
Prepaid expenses and other assets........................................ 7,563 5,391 7,269
----------- ----------- ----------
Total assets.......................................................... 35,705,714 311,640,301 110,910,042
----------- ----------- ----------
LIABILITIES
Payable for fund shares redeemed......................................... 1,000 69,314 950
Dividends payable........................................................ 36,589 318,518 84,671
Payable to affiliates (Note 2)........................................... 17,812 138,670 53,907
Accrued expenses and other liabilities................................... 2,141 93,885 29,606
----------- ----------- ----------
Total liabilities..................................................... 57,542 620,387 169,134
----------- ----------- ----------
NET ASSETS............................................................... $35,648,172 311,019,914 110,740,908
=========== =========== ==========
Net assets consist of:
Capital paid in....................................................... $35,523,872 318,511,986 111,489,464
Undistributed accumulated net realized gain (loss) on investments..... 309,297 (7,516,953) (978,734)
Distributions in excess of net investment income...................... 0 (1,063) 0
Net unrealized appreciation (depreciation) on investments (Note 4).... (184,997) 25,944 230,178
----------- ----------- ----------
Net assets............................................................... $35,648,172 311,019,914 110,740,908
=========== =========== ==========
Shares of beneficial interest outstanding (unlimited number of shares
authorized)........................................................... 3,624,308 30,370,621 11,450,121
=========== =========== ==========
Net asset value, offering price and redemption price per share........... $9.84 10.24 9.67
===== ===== ====
- -------------------
See the accompanying notes to financial statements.
</TABLE>
25
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
For the Year Ended March 31, 1996
BENHAM BENHAM
SHORT-TERM TREASURY BENHAM TREASURY LONG-TERM TREASURY
AND AGENCY FUND NOTE FUND AND AGENCY FUND
---------- -------- ----------
INVESTMENT INCOME
<S> <C> <C> <C>
Interest income....................................................... $2,491,421 19,193,382 4,814,158
----------- ----------- ----------
EXPENSES (NOTE 2)
Investment advisory fees.............................................. 114,253 867,876 200,023
Transfer agency fees.................................................. 44,415 283,949 120,818
Administrative fees................................................... 39,657 301,079 69,302
Printing and postage.................................................. 9,443 76,595 17,173
Custodian fees........................................................ 14,369 43,137 21,895
Auditing and legal fees............................................... 6,595 16,592 7,445
Registration and filing fees.......................................... 22,364 18,704 51,182
Directors' fees and expenses.......................................... 6,349 9,783 6,751
Organization costs.................................................... 4,362 0 4,362
Other operating expenses.............................................. 9,544 30,732 12,486
----------- ----------- ----------
Total expenses...................................................... 271,351 1,648,447 511,437
Amount (reimbursed) recovered (Note 2)................................... 4,468 0 (25,358)
Custodian earnings credits (Note 5)...................................... (8,361) (27,767) (15,471)
----------- ----------- ----------
Net expenses.......................................................... 267,458 1,620,680 470,608
----------- ----------- ----------
Net investment income............................................... 2,223,963 17,572,702 4,343,550
----------- ----------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 4)
Net realized gain
Proceeds from sales................................................... 102,166,631 478,208,476 79,809,982
Cost of securities sold............................................... 101,322,831 472,100,478 78,225,234
----------- ----------- ----------
Net realized gain................................................... 843,800 6,107,998 1,584,748
----------- ----------- ----------
Unrealized appreciation (depreciation) of investments:
Beginning of year..................................................... (86,663) (1,259,547) 683,971
End of year........................................................... (184,997) 25,944 230,178
----------- ----------- ----------
Net unrealized appreciation (depreciation) for the period........... (98,334) 1,285,491 (453,793)
----------- ----------- ----------
Net realized and unrealized gain on investments..................... 745,466 7,393,489 1,130,955
----------- ----------- ----------
Net increase in assets resulting from operations......................... $2,969,429 24,966,191 5,474,505
=========== =========== ==========
- -------------------
See the accompanying notes to financial statements.
</TABLE>
26
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended March 31, 1996 and 1995
Benham Benham
Short-Term Treasury Benham Treasury Long-Term Treasury
and Agency Fund Note Fund and Agency Fund
------------------ ------------------ ------------------
1996 1995 1996 1995 1996 1995
-------- -------- -------- -------- -------- --------
FROM INVESTMENT ACTIVITIES:
<S> <C> <C> <C> <C> <C> <C>
Net investment income............................. $ 2,223,963 1,640,446 17,572,702 16,996,940 4,343,550 1,694,571
Net realized gain (loss) on investments........... 843,800 (489,491) 6,107,998 (9,511,397) 1,584,748 (2,211,504)
Net change in unrealized appreciation of investments (98,334) 252,606 1,285,491 2,734,208 (453,793) 1,667,570
----------- ----------- ----------- ------------ ----------- -----------
Change in net assets derived from investment
activities................................... 2,969,429 1,403,561 24,966,191 10,219,751 5,474,505 1,150,637
----------- ----------- ----------- ------------ ----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income............................. (2,223,963) (1,640,446) (17,574,013) (17,002,369) (4,343,550) (1,694,571)
Distributions in excess of net investment income.. 0 0 (1,063) 0 0 0
----------- ----------- ----------- ------------ ----------- -----------
Total distributions to shareholders............. (2,223,963) (1,640,446) (17,575,076) (17,002,369) (4,343,550) (1,694,571)
----------- ----------- ----------- ------------ ----------- -----------
FROM CAPITAL SHARE TRANSACTIONS (NOTE 3):
Proceeds from sales of shares..................... 24,141,147 53,981,369 88,990,754 104,968,795 132,086,594 49,760,531
Net asset value of dividends reinvested........... 1,812,665 1,211,331 14,503,565 13,972,674 3,753,001 1,210,997
Cost of shares redeemed........................... (47,141,302) (23,794,262) (105,218,219) (158,175,579) (61,135,165)(33,525,316)
----------- ----------- ----------- ------------ ----------- -----------
Change in net assets derived from
capital share transactions.................... (21,187,490) 31,398,438 (1,723,900) (39,234,110) 74,704,430 17,446,212
----------- ----------- ----------- ------------ ----------- -----------
Net increase (decrease) in net assets......... (20,442,024) 31,161,553 5,667,215 (46,016,728) 75,835,385 16,902,278
NET ASSETS:
Beginning of year................................. 56,090,196 24,928,643 305,352,699 351,369,427 34,905,523 18,003,245
----------- ----------- ----------- ------------ ----------- -----------
End of year....................................... $35,648,172 56,090,196 311,019,914 305,352,699 110,740,908 34,905,523
=========== =========== =========== ============ =========== ===========
- -------------------
See the accompanying notes to financial statements.
</TABLE>
27
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. Benham Short-Term
Treasury and Agency Fund (Short-Term Fund), Benham Treasury Note Fund (Treasury
Note Fund), and Benham Long-Term Treasury and Agency Fund (Long-Term Fund) (the
Funds) are three of the six funds composing BGIT. The Short-Term Fund invests
exclusively in securities issued or guaranteed by the U.S. Treasury and agencies
and instrumentalities of the U.S. government. Treasury Note Fund invests
exclusively in U.S. Treasury securities and primarily in U.S. Treasury notes.
The Long-Term Fund invests exclusively in securities issued or guaranteed by the
U.S. Treasury and agencies and instrumentalities of the U.S. government.
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 market quotations are not readily available are
stated at fair value following procedures approved by the Board of Trustees.
Securities transactions are recorded on the date the order to buy or sell is
executed. Realized gains and losses on securities transactions are determined on
the basis of identified cost.
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 net investment
income and net realized capital gains. 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 capital gains
in the accompanying Statements of Changes in Net Assets and Financial
Highlights.
28
As of March 31, 1996, Treasury Note Fund and the Long-Term Fund had capital loss
carryovers of $7,505,846 and $857,191, respectively. If not fully offset against
realized capital gains within eight years of the fiscal year-end the capital
loss was realized, the capital loss carryover will expire. All capital loss
carryovers will expire on March 31, 2003. A fund will not make capital gain
distributions until all of its loss carryovers have been offset or have 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. 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.
(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 Benham
Management Corporation (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 rate schedule.
29
.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 an annual rate of .65% (.66% prior to June 1,
1995) of average daily net assets. The agreement provides further that BMC may
recover amounts (representing expenses in excess of the Fund's expense guarantee
rate) absorbed during the preceding 11 months, if, and to the extent that, for
any given month, the Fund's expenses are less than the expense guarantee rate in
effect at that time. The expense guarantee rate is renewed annually in June.
The payables to affiliates as of March 31, 1996, based on the above agreements
were as follows:
BENHAM BENHAM
SHORT-TERM BENHAM LONG-TERM
TREASURY AND TREASURY NOTE TREASURY AND
AGENCY FUND FUND AGENCY FUND
------------- ------------- -------------
Investment Advisor.............. $ 9,356 73,392 17,692
Administrative Services......... 2,910 25,347 8,728
Transfer Agent.................. 5,546 39,931 27,487
------- ------- -------
$17,812 138,670 53,907
======= ======= =======
30
BGIT has a distribution agreement with Benham Distributors, Inc. (BDI), which is
responsible for promoting sales of and distributing the Funds' shares. BDI is a
wholly owned subsidiary of TCC.
(3) SHARE TRANSACTIONS
Share transactions for the years ended March 31, 1996, and 1995, were as
follows:
<TABLE>
<CAPTION>
BENHAM BENHAM BENHAM
SHORT-TERM TREASURY TREASURY NOTE LONG-TERM TREASURY
AND AGENCY FUND FUND AND AGENCY FUND
----------- ------------ -----------
1996 1995 1996 1995 1996 1995
----- ----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Shares sold..... 2,445,501 5,562,659 8,615,958 10,553,490 13,328,034 5,597,129
Reinvestment
of dividends.. 183,661 124,794 1,406,699 1,404,605 374,702 136,146
--------- --------- --------- ---------- --------- ---------
2,629,162 5,687,453 10,022,657 11,958,095 13,702,736 5,733,275
Less shares
redeemed......(4,770,075) (2,449,358)(10,209,066) (15,910,373) (6,109,519) (3,796,301)
--------- --------- ---------- --------- --------- ---------
Net increase
(decrease) in
shares........(2,140,913) 3,238,095 (186,409) (3,952,278) 7,593,217 1,936,974
========= ========= ========= ========= ========= =========
</TABLE>
(4) INVESTMENT TRANSACTIONS
Investment transactions, excluding short-term securities, for the year ended
March 31, 1996, were as follows:
BENHAM BENHAM
SHORT-TERM BENHAM LONG-TERM
TREASURY AND TREASURY NOTE TREASURY AND
AGENCY FUND FUND AGENCY FUND
-------- -------- -------
Purchases.......................... $81,134,211 476,194,126 153,921,164
========== ========== =========
Sales Proceeds..................... $92,590,149 478,208,476 79,809,982
========== ========== =========
At March 31, 1996, the composition of unrealized appreciation (depreciation)
based on the aggregate cost of investments for federal income tax purposes was
as follows:
BENHAM BENHAM
SHORT-TERM BENHAM LONG-TERM
TREASURY AND TREASURY NOTE TREASURY AND
AGENCY FUND FUND AGENCY FUND
-------- -------- -------
Appreciated securities.............. $ 22,166 2,892,331 1,626,907
Depreciated securities.............. (207,163) (2,866,387) (1,396,729)
--------- --------- ---------
Net unrealized appreciation
(depreciation).................... $(184,997) 25,944 230,178
========= ========= =========
As of March 31, 1996, the cost of investment securities for the Short-Term
Treasury and Agency Fund for financial reporting and federal income tax purposes
was the same. For Treasury Note Fund and Long-
31
Term Treasury and Agency Fund, the cost of investment securities for federal
income tax purposes was $306,221,841 and $108,618,150, respectively. Gross
unrealized appreciation and depreciation of investments, based on this cost,
were:
BENHAM
BENHAM LONG-TERM
TREASURY NOTE TREASURY AND
FUND AGENCY FUND
-------- --------
Appreciated securities........................ $ 2,881,224 1,626,907
Depreciated securities........................ (2,866,387) (1,518,277)
---------- ---------
Net unrealized appreciation................... $ 14,837 108,630
========== =========
(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.
32
<TABLE>
<CAPTION>
BENHAM SHORT-TERM TREASURY AND AGENCY FUND
SCHEDULE OF INVESTMENT SECURITIES
March 31, 1996
YIELD TO FACE PERCENT OF
MATURITY AMOUNT VALUE NET ASSETS
-------- ------ ----- ----------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTES
7.500% due 01/31/97................................................................ 5.43% $ 4,100,000 4,167,773 11.69%
6.875% due 03/31/97................................................................ 5.46 2,500,000 2,533,975 7.11
6.500% due 04/30/97................................................................ 5.54 7,835,000 7,912,332 22.20
6.125% due 05/15/98................................................................ 5.80 9,020,000 9,077,006 25.46
0.500% due 11/15/98................................................................ 5.91 5,000,000 4,950,450 13.89
6.750% due 05/31/99................................................................ 5.98 5,900,000 6,028,620 16.91
---------- ---------- ------
TOTAL INVESTMENT SECURITIES (COST $34,855,153).......................................... $34,355,000 34,670,156 97.26
========== ---------- ------
Other assets less liabilities.............................................................. 978,016 2.74
---------- ------
Net assets................................................................................. $35,648,172 100.00%
========== ======
- -------------------
See the accompanying notes to financial statements
</TABLE>
33
<TABLE>
<CAPTION>
BENHAM TREASURY NOTE FUND
SCHEDULE OF INVESTMENT SECURITIES
March 31, 1996
YIELD TO FACE PERCENT OF
MATURITY AMOUNT VALUE NET ASSETS
-------- ------ ----- ----------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTES
7.250% due 11/15/96................................................................ 5.34% $29,840,000 30,181,370 9.70%
5.375% due 11/30/97................................................................ 5.74 32,000,000 31,814,400 10.23
8.125% due 02/15/98................................................................ 5.78 35,000,000 36,432,900 11.71
6.750% due 05/31/99................................................................ 5.98 46,265,000 47,273,577 15.20
7.750% due 11/30/99................................................................ 6.05 30,500,000 32,177,195 10.35
5.875% due 06/30/00................................................................ 6.10 45,490,000 45,106,974 14.50
5.750% due 10/31/00................................................................ 6.12 20,375,000 20,076,302 6.46
7.875% due 08/15/01................................................................ 6.16 24,600,000 26,502,072 8.52
6.250% due 02/15/03................................................................ 6.29 26,400,000 26,339,280 8.47
----------- ---------- ------
TOTAL U.S. TREASURY NOTES (COST $296,537,456)............................................ 290,470,000 295,904,070 95.14
----------- ---------- ------
U.S. TREASURY BOND
12.000% due 08/15/13, Callable 08/15/08............................................ 6.66 7,150,000 10,332,608 3.32
----------- ---------- ------
TOTAL U.S. TREASURY BONDS (COST $9,673,278).............................................. 7,150,000 10,332,608 3.32
----------- ---------- ------
TOTAL INVESTMENT SECURITIES (COST $306,210,734).......................................... $297,620,000 306,236,678 98.46
=========== ---------- ------
Other assets less liabilities............................................................... 4,783,236 1.54
---------- ------
Net assets.................................................................................. $311,019,914 100.00%
========== ======
- -------------------
See the accompanying notes to financial statements.
</TABLE>
34
<TABLE>
<CAPTION>
BENHAM LONG-TERM TREASURY AND AGENCY FUND
SCHEDULE OF INVESTMENT SECURITIES
March 31, 1996
YIELD TO FACE PERCENT OF
MATURITY AMOUNT VALUE NET ASSETS
-------- ------ ----- ----------
<S> <C> <C> <C> <C>
U.S. TREASURY BONDS
12.000% due 08/15/13, Callable 08/15/08......................................... 6.66% $11,700,000 16,907,904 15.27%
11.250% due 02/15/15............................................................ 6.79 2,000,000 2,940,760 2.66
9.875% due 11/15/15............................................................. 6.82 5,000,000 6,638,200 5.99
8.750% due 05/15/17............................................................. 6.86 13,000,000 15,718,170 14.19
8.875% due 02/15/19............................................................. 6.87 9,000,000 11,064,960 9.99
8.125% due 08/15/19............................................................. 6.87 11,800,000 13,509,466 12.20
8.750% due 08/15/20............................................................. 6.88 20,000,000 24,387,600 22.02
7.125% due 02/15/23............................................................. 6.87 9,500,000 9,794,120 8.85
6.000% due 02/15/26............................................................. 6.67 8,500,000 7,765,600 7.01
---------- ---------- ------
TOTAL INVESTMENT SECURITIES (COST $108,496,602).......................................... $90,500,000 108,726,780 98.18
========== ---------- ------
Other assets less liabilities............................................................... 2,014,128 1.82
---------- ------
Net assets.................................................................................. $110,740,908 100.00%
========== ======
- -------------------
See the accompanying notes to financial statements.
</TABLE>
35
[THIS PAGE INTENTIONALLY LEFT BLANK]
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 Q066
