John Hancock Funds
Short-Term
Strategic
Income
Fund
SEMI-ANNUAL REPORT
April 30, 1996
TRUSTEES
Edward J. Boudreau, Jr.
Chairman
Douglas M. Costle*
Leland O. Erdahl*
Richard A. Farrell*
William F. Glavin*
Anne C. Hodsdon
John A Moore*
Patti McGill Peterson*
John W. Pratt*
*Members of the Audit Committee
OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President
Thomas H. Drohan
Senior Vice President and Secretary
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President, Assistant Secretary and
Compliance Officer
James J. Stokowski
Vice President and Treasurer
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
TRANSFER AGENT
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief
Executive Officer, flush right, next to second paragraph.
Chairman's Message
DEAR FELLOW SHAREHOLDERS:
The stock market's record-breaking, whirlwind performance in 1995 will
be a tough act to follow in 1996. In fact, we've already seen greater
market volatility this year, particularly among last year's leaders --
technology stocks. That's to be expected after a year that saw market
indexes soar, including the Standard & Poor's 500-Stock Index's 37%
advance. While many of the same economic conditions that fostered the
stellar 1995 market are still in place -- slow economic growth, muted
inflation and decent corporate earnings -- it would be unrealistic to
expect the market to stage a repeat in 1996. The old saying "trees don't
grow to the sky" comes to mind. Shareholders would do well to temper
expectations of investment returns and perhaps revisit your investment
allocations with your financial advisor to determine if
rebalancing your portfolio makes sense.
No matter how you scale back your market expectations, you should always
be able to count on consistent customer service performance. At John
Hancock Funds, we never stop working to find ways to sustain and improve
the quality of information and the level of assistance we provide you.
Our commitment to this task is no less than John Hancock's loyalty was
to his fledgling country when he is said to have uttered, "if it does
the public good, burn Boston." We won't go that far, of course, but we
share our namesake's dedication to putting the public before all else.
In our case, that public is you, our shareholders. We take very
seriously the role you have entrusted to us, that of helping you achieve
your financial goals. Part of that will always involve good customer
service. So please do not hesitate to call your Customer Service
Representative at 1-800-225-5291 if you have any questions or need
information. We take pride in helping you with the same spirit that John
Hancock displayed at the dawning of America.
Sincerely,
/S/ EDWARD J. BOUDREAU, JR
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
By Lawrence J. Daly, Anthony A. Goodchild and Janet L. Clay,
Co-Portfolio Managers
John Hancock
Short-Term Strategic Income Fund
Emerging markets outperform Europe and
the United States; dollar gains versus yen
"... the Fund
had a
rewarding six
months."
Six months ago when the period began, most market participants --
ourselves included -- thought the outlook for global bonds was
especially promising. In the United States, speculation centered on when
the Federal Reserve would follow up on its July 1995 interest-rate cut
with further reductions in the rate banks charge each other for
overnight loans, known as the federal funds rate. In Europe, the
unusually wide gap between interest rates and the inflation rate held
out the promise of further rate cuts. And in the world's emerging
markets, improving credit quality and encouraging signs of fiscal
responsibility were helping investors erase the memory of Mexico's
sudden devaluation of the peso in December 1994.
A 2 1/4" x 3 1/4" photo of Anthony Goodchild, Janet Clay and Lawrence
Daly. Caption reads: "Anthony Goodchild, Janet Clay and Lawrence Daly,
Co-Portfolio Managers."
Indeed, the Fund had a rewarding six months. U.S. bonds, for example,
registered gains through January 1996, as the Fed twice lowered interest
rates a total of one-half percentage point. But from February through
the end of April, unexpected economic strength and renewed inflationary
pressures undercut bond prices in the United States and forced the Fund
to look elsewhere for value. Europe, it turns out, was disappointing
throughout the period, as rates stayed stubbornly high. Fortunately,
most emerging-market bonds performed even better than expected, rising
an average of 10%. Largely because of its emerging-market bond selection
and floating-rate notes, the Fund was able to outperform its peers.
During the six months ended April 30, 1996, John Hancock Short-Term
Strategic Income Fund's Class A and Class B shares had total returns of
4.10% and 3.77%, respectively, at net asset value, compared to 1.86% for
the average short-term investment grade bond fund, according to Lipper
Analytical Services.1
Chart entitled "Top Five Bond Sectors" at top left hand column. The chart
has five listings: 1) Foreign Governments 41.9%; 2) Banks 15.4%; 3) U.S.
Government /Agencies 10.1%; 4) Steel 6.5%; 5) Transportation 5.7%.
Emerging
market bonds
were strong
performers.
Strategic overview
The Fund's guidelines require an average maturity of three years or less
and an average credit rating of single A or better. For most of the past
six months, about 35% to 40% of the Fund's assets were invested in
highly-rated, U.S. dollar-denominated securities with floating-rate
coupons, about 19% of which were issued by U.S. governments or
corporations. For the most part, they held their own as rates rose
during the first quarter of 1996. Mainly, though, they helped balance
the Fund's more aggressive investments, including emerging-market bonds.
Emerging-market bonds totaled 50% of the Fund's assets at the end of
April, up from 45% last October. All told, about 80% of the Fund's
assets were dollar-denominated. That helped the Fund during a period in
which the dollar gained 20% versus the yen and 15% versus the
deutschemark.
Table entitled "Scorecard" at bottom of left hand column. The header for
the left column is "Investments"; the header for the right column is
"Recent performance ... and what's behind the numbers. The first listing
is Latin America followed by an up arrow and the phrase "Improving
economies." The second listing is Denmark followed by an up arrow and the
phrase "Floating-rate notes track rising rates." The third listing is
South Africa followed by a down arrow and the phrase "Political instability
undercuts currency in the near term." Footnote below reads: "See "Schedule
of Investments." Investment holdings are subject to change."
Emerging markets continue recovery
One reason emerging-market bonds performed so well is simply that they
were oversold in the wake of the Mexican currency crisis. Lately, as
conditions have stabilized in Mexico and throughout Latin America,
emerging-market bonds have recovered strongly. Beyond that, very low
bond yields in Japan and slumping bond prices in Europe have led many
investors to seek opportunities farther afield, increasing demand for
emerging-market bonds. Our focus lately has been on Central Europe,
including Hungary and the Czech Republic; and on Latin America,
including a 12% stake in various Brazilian securities. Brazil is more
attractive than most emerging-market countries because of the tremendous
size of its export economy, its ample reserves and its government's firm
policy of encouraging privatization and fiscal restraint. The Fund also
had a 3% stake in South Africa, which has made great strides lately in
reducing inflation, and a 7% stake in Mexico.
Bar chart with heading "Fund Performance" at top of left hand column.
Under the heading is the footnote: "For the six months ended April 30,
1996." The chart has plot points of 0%, 3% and 5% from bottom to top.
Within the chart, there are three solid bars. The first represents the
4.10% total return for John Hancock Short-Term Strategic Income Fund:
Class A. The second represents the 3.77% total return for John Hancock
Short-Term Strategic Income Fund: Class B. The third represents the
1.86% total return for the average short-term investment grade bond
fund. Footnote below reads: "Total returns for John Hancock Short-Term
Strategic Income Fund are at net asset value with all distributions
reinvested. The average short-term investment grade bond fund is tracked
by Lipper Analytical Servvices. (1) See following page for historical
performance information."
United States, Europe and New Zealand
With such a large stake in emerging-market bonds, the emphasis elsewhere
was on high-quality bonds that raised the Fund's overall credit rating.
Significant U.S. investments included a 10% stake in floating-rate bonds
issued by the Student Loan Marketing Association--known as Sallie Mae.
Sallie Maes as a percentage of the Fund's total assets declined from 20%
to 10% at the end of April, reflecting the weakness of the domestic bond
market. In Europe, the Fund ended the period with a 21% stake in
Denmark, our largest investment in any one country, including the United
States. All of our Danish holdings were high-quality, dollar-
denominated, floating-rate government bonds. They offered the Fund
slightly more yield than otherwise available from comparable European
securities. In New Zealand, the Fund had a 4% stake in government bonds,
denominated in local currency. That helped the Fund as the New Zealand
dollar appreciated versus the U.S. dollar.
"Inflation is the
key variable
as we look toward the future."
Outlook
Inflation is the key variable as we look toward the future. The
consensus in the marketplace is that inflationary pressures are
building, as seen by rising commodity prices and the surprisingly strong
performance of the U.S. economy. That's led most market participants to
shift their outlook 180 degrees. Whereas earlier in the year speculation
centered on when the next Fed rate cut might be, lately the debate has
focused on when the Fed might have to raise rates in order to prevent an
outbreak of inflation.
Our own sense is that inflationary fears may have gotten ahead of
underlying conditions in the global economy. Wage increases, for
example, have remained fairly tame, and labor is by far the largest
variable in corporate costs. That suggests a two-stage outlook for the
coming months: cautious in the near term, reflecting the market's unease
and the prospect for higher rates, then turning more optimistic the
closer we get to 1997. That's based on the assumption that interest
rates may have overshot underlying conditions and therefore have some
room to come back down.
This commentary reflects the views of the portfolio managers through the
end of the Fund's period discussed in this report. Of course, the
managers' views are subject to change as market and other conditions
warrant.
International investing involves special risks such as currency risks,
political risks and differences in accounting standards and financial
reporting. See prospectus for additional information.
1Figures from Lipper Analytical Services include reinvested dividends
and do not take into account sales charges. Actual load-adjusted
performance is lower.
A LOOK AT PERFORMANCE
The tables on the right show the cumulative total returns and the
average annual total returns for the John Hancock Short-Term Strategic
Income Fund. Total return is a performance measure that equals the sum
of all income and capital gain distributions, assuming reinvestment of
these distributions and the change in the price of the Fund's shares,
expressed as a percentage of the Fund's net asset value per share.
Performance figures include the maximum applicable sales charge of 3%
for Class A shares. The effect of the maximum contingent deferred sales
charge for Class B shares (maximum 3% and declining to 0% over four
years) is included in Class B performance. Remember that all figures
represent past performance and are no guarantee of how the Fund will
perform in the future. Also, keep in mind that the total return and
share price of the Fund's investments will fluctuate. As a result, your
Fund's shares may be worth more or less than their original cost,
depending on when you sell them. Please see your prospectus for risks
associated with international investing, including currency and
political risks and differences in accounting standards and financial
reporting.
CUMULATIVE TOTAL RETURNS
For the period ended March 31, 1996
One Life of
Year Fund
------ ------
John Hancock Short-Term
Strategic Income Fund: Class A(1) 8.57% 21.57%
John Hancock Short-Term
Strategic Income Fund: Class B(2) 8.20% 30.90%
AVERAGE ANNUAL TOTAL RETURNS
For the period ended March 31, 1996
One Life of
Year Fund
------ ------
John Hancock Short-Term
Strategic Income Fund: Class A(1) 8.57% 4.71%
John Hancock Short-Term
Strategic Income Fund: Class B(2) 8.20% 5.25%
YIELDS
As of April 30, 1996
SEC 30-Day
Yield
------------
John Hancock Short-Term
Strategic Income Fund: Class A 6.77%
John Hancock Short-Term
Strategic Income Fund: Class B 6.28%
Notes to Performance
(1)Class A shares commenced on January 3, 1992.
(2)Class B shares commenced on December 28, 1990.
The charts on the right show how much a $10,000 investment in the John
Hancock Short-Term Strategic Income Fund would be worth on April 30,
1996, assuming you had invested on the day each class of shares started
and reinvested all distributions. For comparison, we've shown the same
$10,000 investment in the Salomon Brothers World Money Market Index --
an unmanaged index that is composed of various non-U.S.-currency-
denominated bonds, usually with an average maturity of three years or
less.
Short-Term Strategic Income Fund
Class A shares
Line chart with the heading Short-Term Strategic Income Fund: Class A,
representing the growth of a hypothetical $10,000 investment over the
life of the fund. Within the chart are three lines.
The first line represents the value of the Salomon Brothers Money Market
Index and is equal to $12,682 as of April 30, 1996. The second line represents
the value of the hypothetical $10,000 investment made in the Short-Term
Strategic Income Fund on January 3, 1992, before sales charge, and is equal
to $12,594 as of April 30, 1996. The third line represents the Short-Term
Strategic Income Fund after sales charge and is equal to $12,222 as of
April 30, 1996.
Short-Term Strategic Income Fund
Class B shares
Line chart with the heading Short-Term Strategic Income Fund: Class B*,
representing the growth of a hypothetical $10,000 investment over the
life of the fund . Within the chart are two lines.
The first line represents the value of the Salomon Brothers Money Market
Index and is equal to $13,859 as of April 30, 1996. The second line
represents the value of the hypothetical $10,000 investment made in the
Short-Term Strategic Income Fund on December 28, 1990, before contingent
deferred sales charge, and is equal to $13,152 as of April 30, 1996.
*No contingent deferred sales charge applicable.
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
April 30, 1996 (Unaudited)
- -------------------------------------------------------------------
<S> <C>
Assets:
Investments at value - Note C:
Bonds (cost - $90,034,860) $90,972,261
Joint repurchase agreement (cost - $6,075,000) 6,075,000
------------
97,047,261
Cash 1,565
Receivable for shares sold 3,341,048
Foreign taxes receivable 18,084
Interest receivable 1,985,153
Deferred organization expenses - Note A 793
Other assets 18,793
------------
Total Assets 102,412,697
- -------------------------------------------------------------------
Liabilities:
Dividend payable 18,527
Payable for shares repurchased 3,303,243
Payable to John Hancock Advisers, Inc.
and affiliates - Note B 63,459
Accounts payable and accrued expenses 53,154
------------
Total Liabilities 3,438,383
- -------------------------------------------------------------------
Net Assets:
Capital paid-in $127,456,179
Accumulated net realized loss on investments
and foreign currency transactions (29,400,203)
Net unrealized appreciation of investments
and foreign currency transactions 933,988
Distributions in excess of net investment income (15,650)
------------
Net Assets $98,974,314
===================================================================
Net Asset Value Per Share:
(Based on net asset values and shares of beneficial
interest outstanding - unlimited number of shares authorized
with no par value, respectively)
Class A - $34,290,089 / 4,078,340 $8.41
===================================================================
Class B - $64,684,225 / 7,702,069 $8.40
===================================================================
Maximum Offering Price Per Share*
Class A - ($8.41 x 103.09%) $8.67
===================================================================
* On single retail sales of less than $100,000. On sales of $100,000
or more and on group sales the offering price is reduced.
The Statement of Assets and Liabilities is the Fund's balance sheet
and shows the value of what the Fund owns, is due and owes on April 30,
1996. You'll also find the net asset value per share and the maximum
offering price per share as of that date.
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the period ended March 31, 1996
- -------------------------------------------------------------------
<S> <C>
Investment Income:
Interest (net of foreign withholding
taxes of $6,210) $4,690,954
------------
Expenses
Distribution/service fee - Note B
Class A 37,554
Class B 354,319
Investment management fee - Note B 321,505
Transfer agent fee - Note B 96,136
Custodian fee 53,645
Auditing fee 28,501
Registration and filing fees 13,786
Printing 10,273
Organization expense - Note A 7,830
Trustees' fees 6,911
Legal fees 2,752
Miscellaneous 2,335
------------
Total Expenses 935,547
- -------------------------------------------------------------------
Net Investment Income 3,755,407
- -------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency Transactions
Net realized loss on investments sold (113,437)
Net realized loss on foreign currency
transactions (70,405)
Change in net unrealized appreciation/
depreciation of investments 101,224
Change in net unrealized appreciation/
depreciation of foreign currency transactions 21,648
------------
Net Realized and Unrealized Loss on
Investments and Foreign Currency Transactions (60,970)
- -------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations $3,694,437
===================================================================
The Statement of Operations summarizes the Fund's investment income
earned and expenses incurred in operating the Fund. It also shows net
gains (losses) for the period stated.
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -----------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
APRIL 30,19 96 OCTOBER 31,
(UNAUDITED) 1995
------------ ------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $3,755,407 $8,936,129
Net realized loss on investments
sold and foreign currency transactions (183,842) (5,911,889)
Change in net unrealized appreciation/
depreciation of investments and
foreign currency transactions 122,872 5,061,667
------------ ------------
Net Increase in Net Assets Resulting
from Operations 3,694,437 8,085,907
------------ ------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.3381 and $0.6084
per share, respectively) (1,006,727) (1,163,444)
Class B - ($0.3105 and $0.5592
per share, respectively) (2,748,680) (5,943,424)
Distributions from capital paid-in
Class A - (none and $0.1566 per
share, respectively) -- (299,463)
Class B - (none and $0.1439 per
share, respectively) -- (1,529,798)
------------ ------------
Total Distributions to Shareholders (3,755,407) (8,936,129)
------------ ------------
From Fund Share Transactions - Net* (2,562,302) (9,033,071)
------------ ------------
Net Assets:
Beginning of period 101,597,586 111,480,879
------------ ------------
End of period (including distributions in
excess of net investment income of $15,650,
applicable for both periods) $98,974,314 $101,597,586
============ ============
* Analysis of Fund Share Transactions:
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 1996 OCTOBER 31,
(UNAUDITED) 1995
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- -----------
CLASS A
Shares sold 2,605,863 $21,917,718 1,378,812 $11,536,477
Shares issued to shareholders in
reinvestment of distributions 70,583 594,129 123,825 1,038,224
---------- ----------- ---------- -----------
2,676,446 22,511,847 1,502,637 12,574,701
Less shares repurchased (618,262) (5,204,137) (1,027,565) (8,585,443)
---------- ----------- ---------- -----------
Net increase 2,058,184 $17,307,710 475,072 $3,989,258
========== =========== ========== ===========
CLASS B
Shares sold 930,187 $7,818,631 2,159,157 $18,090,152
Shares issued to shareholders in
reinvestment of distributions 165,838 1,393,850 493,658 4,130,850
---------- ----------- ---------- -----------
1,096,025 9,212,481 2,652,815 22,221,002
Less shares repurchased (3,462,493) (29,082,493) (4,211,675) (35,243,331)
---------- ----------- ---------- -----------
Net decrease (2,366,468) ($19,870,012) (1,558,860) ($13,022,329)
========== =========== ========== ===========
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout
the period indicated, investment returns, key ratios and supplemental
data are listed as follows:
- ------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED OCTOBER 31,
APRIL 30, 1996 ---------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992(a)
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $8.41 $8.47 $9.12 $9.32 $9.86
------ ------ ------ ------ ------
Net Investment Income 0.33** 0.77** 0.76** 0.83** 0.65
Net Realized and Unrealized
Gain (Loss) on Investments and
Foreign Currency Transactions 0.01 (0.06) (0.53) (0.20) (0.55)
------ ------ ------ ------ ------
Total from Investment Operations 0.34 0.71 0.23 0.63 0.10
------ ------ ------ ------ ------
Less Distributions:
Dividends from Net Investment
Income (0.34) (0.61) (0.62) (0.83) (0.64)
Distributions in Excess of Net
Investment Income -- -- (0.04) -- --
Distributions in Excess of Net
Realized Gain on Investments Sold -- -- (0.12) -- --
Distributions from Capital Pain-in -- (0.16) (0.10) -- --
------ ------ ------ ------ ------
Total Distributions (0.34) (0.77) (0.88) (0.83) (0.64)
------ ------ ------ ------ ------
Net Asset Value, End of Period $8.41 $8.41 $8.47 $9.12 $9.32
====== ====== ====== ====== ======
Total Investment Return at
Net Asset Value (c) 4.10%(d) 8.75% 2.64% 6.78% 1.16%*
Ratios and Supplemental Data
Net Assets, End of Period
(000's omitted) $34,290 $16,997 $13,091 $11,130 $20,468
Ratio of Expenses to Average
Net Assets 1.40%* 1.33% 1.26% 1.21% 1.37%*
Ratio of Net Investment
Income to Average Net Assets 8.05%* 9.13% 8.71% 8.59% 8.09%*
Portfolio Turnover Rate 39% 147% 150% 306% 86%
The Financial Highlights summarizes the impact of the following factors on a single share for the period
indicated: the net investment income, gains (losses), and total investment return of the Fund. It shows
how the Fund's net asset value for a share has changed since the commencement of operations. Additionally,
important relationships between some items presented in the financial statements are expressed in
ratio form.
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout
the period indicated, investment returns, key ratios and supplemental
data are listed as follows:
- ----------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED OCTOBER 31,
APRIL 30, 1996 -------------------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992(a) 1991(b)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $8.40 $8.46 $9.11 $9.31 $10.01 $10.00
------ ------ ------ ------ ------ ------
Net Investment Income 0.31** 0.70** 0.70** 0.75** 0.87 0.76+
Net Realized and Unrealized Gain
(Loss) on Investments
and Foreign Currency Transactions 0.00 (0.06) (0.53) (0.20) (0.80) 0.01
------ ------ ------ ------ ------ ------
Total from Investment Operations 0.31 0.64 0.17 0.55 0.07 0.77
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends from Net Investment
Income (0.31) (0.56) (0.56) (0.75) (0.77) (0.76)
Distributions in Excess of Net
Investment Income -- -- (0.04) -- -- --
Distributions in Excess of Net
Realized Gain on Investments Sold -- -- (0.12) -- -- --
Distributions from Capital Paid-in -- (0.14) (0.10) -- -- --
------ ------ ------ ------ ------ ------
Total Distributions (0.31) (0.70) (0.82) (0.75) (0.77) (0.76)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $8.40 $8.40 $8.46 $9.11 $9.31 $10.01
====== ====== ====== ====== ====== =======
Total Investment Return at
Net Asset Value (c) 3.77%(d) 7.97% 1.93% 5.98% 0.64% 8.85%*+
Ratios and Supplemental Data
Net Assets, End of Period
(000's omitted) $64,684 $84,601 $98,390 $142,873 $236,059 $218,562
Ratio of Expenses to Average
Net Assets 2.06%* 2.07% 1.99% 2.01% 2.07% 1.89%*+
Ratio of Net Investment
Income to Average Net Assets 7.44%* 8.40% 8.00% 7.81% 8.69% 8.72%*+
Portfolio Turnover Rate 39% 147% 150% 306% 86% 22%
* On an annualized basis.
** On average month end shares outstanding.
+ Reflects expense limitation in effect for the period ended October 31, 1991. As a result of such limitation, expenses
for Class B shares reflect a reduction of $0.0039 per share. Absent of such reduction, for the year ended October 31, 1991
the ratio of expenses to average net assets would have been 1.93% and the ratio of net investment income to average net
assets would have been 8.68%. Without the reimbursement, total investment return would have been 8.81%. This is an
estimated total return calculation which takes into consideration fees and expenses waived or borne by the Adviser
during the periods shown.
(a) Class A shares commenced operations on January 3, 1992.
(b) Class B shares commenced operations on December 28, 1990.
(c) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(d) Not annualized
</TABLE>
<TABLE>
<CAPTION>
Schedule of Investments
April 30, 1996 (Unaudited)
- ---------------------------------------------------------------------------------
PAR VALUE
INTEREST (000'S MARKET
ISSUER, DESCRIPTION RATE OMITTED)# VALUE
- --------------------------------------------------- -----------------------------
<S> <C> <C> <C>
Canadian Dollar (0.76%)
Republic of Argentina,
(Argentina), Government
Bond 10-14-97 10.500% 1,000 $752,038
-----------
Chilean Peso (3.45%)
Citibank, N.A., Nassau Time
Deposit 11-18-96
(Time deposit with
redemption linked to
Chilean Peso Fx rates) ** 12.000 466,776 1,146,165
Citibank, N.A., Nassau Time
Deposit 03-17-97
(Time deposit with
redemption linked to
Chilean Peso Fx rates) ** 12.800 924,685 2,270,559
-----------
3,416,724
-----------
Czech Koruna (2.57%)
SKOFIN, Foreign Corp.
Bond 02-09-98 11.625 70,000 2,544,378
-----------
Hungarian Forint (0.95%)
Government of Hungary,
Government Bond 02-01-97 31.860* 136,000 941,585
-----------
Italian Lira (1.08%)
Government of Italy, BTPS
Government Bond 12-01-97 9.500 1,650,000 1,065,752
-----------
New Zealand Dollar (4.16%)
Government of New Zealand,
Government Bond 11-15-96 9.000 6,000 4,118,519
-----------
Spanish Peseta (1.99%)
Government of Spain,
Government Bond
10/31/98 9.900 240,000 1,967,711
-----------
Swedish Krona (1.04%)
Kingdom of Sweden,
Government Bond
1/23/97 10.750 6,800 1,032,248
-----------
South African Rand (3.18%)
Transnet Ltd., Foreign
Corp. Bond 02-15-99 11.500% 4,000 838,519
Republic of South Africa,
Government Bond
9/21/98 15.350* 10,000 2,312,500
-----------
3,151,019
-----------
United States Dollar (72.73%)
Banco Central De Costa Rica,
Series A, (Costa Rica),
Foreign Corp. Bond
5/21/05 6.094* 1,176 1,035,021
Banco Central De Costa Rica,
Series B, (Costa Rica), Foreign
Corp. Bond 05-21-05 6.094* 1,176 1,058,544
Banco Central Do Brazil, (Brazil),
Foreign Corp. Bond
10/15/99 6.438* 7,125 6,840,000
Banco Credibanco S.A., (Brazil),
Foreign Corp. Bond
11/25/97 11.625 1,376 1,413,840
Banco Nacional Comercio,
(Mexico), Foreign Corp.
Bond 06-23-97 (R) 10.555* 1,000 1,032,500
Bridas Corp., (Argentina),
Corp. Bond 11-15-99 12.500 1,500 1,575,939
Centrais Electricas Brasileiras
S.A., (Brazil), Foreign Corp.
Bond 10-30-98 (R) 10.000 1,000 1,023,750
Empresas ICA Sociedad
Controladora, (Mexico),
Foreign Corp. Bond 08-02-96 7.625* 1,000 998,750
Essar Gujarat Ltd., (India),
Foreign Agency 07-15-99 (R) 8.099* 4,000 3,800,000
United States Dollar (continued)
Government of Barbados,
(Barbados), Government
Bond 06-09-97 (R) 10.500% 1,000 $1,015,000
IMO Industries, Inc.,
Sub Deb 08-15-97 12.250 933 936,499
ING Bank Sao Paolo, (Brazil),
Foreign Corp. Bond 10-19-97 10.250 400 408,500
Kingdom of Denmark,
(Denmark), Government
Bond 09-10-97 5.168* 21,000 20,993,700
NWA Inc., Note 11-30-00 12.092 2,966 3,065,627
Petroleo Brasileiro, (Brazil),
Foreign Corp. Bond 06-08-98 10.088* 2,000 2,057,500
PT Semen Cibinong,
(Indonesia), Foreign Corp.
Bond 12-15-98 9.000 2,000 2,055,000
Republic of Argentina,
(Argentina), Government
Bond 02-23-01 9.250 1,500 1,436,250
Republic of Panama, (Panama),
Government Bond 05-10-02 6.750* 5,250 4,849,687
Siderar S.A.I.C., (Argentina),
Foreign Corp. Bond
10-18-97 (R) 11.000 1,000 1,030,000
Student Loan Marketing
Association, Government
Agency 09-28-98 5.320* 7,000 6,964,930
Student Loan Marketing
Association, Government
Agency 11-10-98 5.320* 3,000 2,985,000
Transportacion Maritima
Mexicana, (Mexico), Foreign
Corp. Bond 10-28-97 9.750 1,500 1,522,500
Tubos de Acero de Mexico,
(Mexico), 12-08-99 13.750 2,500 2,643,750
United Mexican States, (Mexico),
Government Bond 02-06-01 9.750 1,000 990,000
USAfrica Airways, Inc., Unit
(Sr Note 05-31-99 and
Warrant), (r)+ 12.000 1,000 250,000
-----------
71,982,287
-----------
TOTAL BONDS
(Cost $90,034,860) (91.91%) 90,972,261
-----------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (6.14%)
Investment in a joint repurchase
agreement transaction with
SBC Capital Markets -
Dated 04-30-96, Due 05-01-96
(secured by U.S. Treasury Bonds,
7.250% Due 05-15-16,
and, 10.375% Due 11-15-12)
Note A 5.330% 6,075 $6,075,000
TOTAL SHORT-TERM INVESTMENTS
(Cost $6,075,000) (6.14%) 6,075,000
-------- -----------
TOTAL INVESTMENTS (98.05%) $97,047,261
======== ===========
NOTES TO SCHEDULE OF INVESTMENTS
* Represents rate in effect on April 30, 1996.
** An indexed security's value is linked to changes in foreign currencies, interest rates or other
reference instruments. Indexed securities amounted to $3,416,724 or 3.45% of the Fund's net assets as
of April 30, 1996.
# Par value of non US$ denominated foreign bonds is expressed in local currency for each country listed.
(R) Security is exempt from registration under rule 144A of the Securities Act of 1933. Such securities
may be resold, normally to qualified institutional buyers, in transactions exempt from registration.
See Note A of the Notes to Financial Statements for valuation policy. Rule 144A securities amounted
to $7,901,250 or 7.98% of the Fund's net assets as of April 30, 1996.
(r) Direct placement securities are restricted to resale. They have been valued using procedures
approved by the Trustees after considerations of restrictions as to resale, financial condition and
prospects of the issuer, general market conditions and pertinent information in accordance with the
Fund's By-Laws and the Investment Company Act of 1940, as amended. The Fund has limited rights to
registration under the Securities Act of 1933 with respect to these restricted securities.
+ Non-income producing.
<CAPTION>
Additional information on each restricted security is as follows:
VALUE AS A
PERCENTAGE VALUE AT
ACQUISITION ACQUISITION OF FUND'S APRIL 30,
DATE COST NET ASSETS 1996
-------- -------- --------------- --------
USAfrica Airways, Inc.,
Unit (Sr Note 05-31-99
and Warrant) 10/13/94 $1,000,000 0.25% $250,000
The percentage shown for each investment category is the total value of that category as a
percentage of the net assets of the Fund.
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Portfolio Concentration (Unaudited)
- --------------------------------------------------------------------------------
The Fund primarily invests in bonds issued by companies and governments of other
countries. The performance of the Fund is closely tied to the economic condition
within the countries in which it invests. The concentration of investments by
currency denomination for individual securities held by the Fund is shown in the
schedule of investments. In addition, concentration of investments can be aggregated
by various investment categories. The table below shows the percentages of the Fund's
investments at April 30, 1996 assigned to the various investment categories.
MARKET VALUE AS A
INVESTMENT CATEGORIES % OF NET ASSETS
- ----------------------- -----------------
<S> <C>
Automobile/Trucks 2.57%
Banks 15.36
Building Products 2.08
Construction 1.01
Electronics 0.95
Finance 1.04
Governmental - Foreign 41.90
Governmental - U.S. Agencies 10.05
Oil & Gas 2.08
Steel 6.51
Transportation 5.74
Utility 2.62
Short-term Investments 6.14
---------------
TOTAL INVESTMENTS 98.05%
===============
See notes to financial statements
</TABLE>
Notes to Financial Statements
John Hancock Funds - Short-Term Strategic Income Fund
(UNAUDITED)
NOTE A --
ACCOUNTING POLICIES
Freedom Investment Trust II (the "Trust") is a diversified open-end
management investment company, registered under the Investment Company
Act of 1940. The Trust consists of five series portfolios: John Hancock
Short-Term Strategic Income Fund (the "Fund"), John Hancock Global Fund,
John Hancock Global Income Fund, John Hancock Special Opportunities Fund
and John Hancock International Fund. The investment objective of the
Fund is a high level of current income.
The Trustees have authorized the issuance of multiple classes of shares
of the Fund, designated as Class A and Class B shares. The shares of
each class represent an interest in the same portfolio of investments of
the Fund and have equal rights to voting, redemptions, dividends, and
liquidation, except that certain expenses subject to the approval of the
Trustees, may be applied differently to each class of shares in
accordance with current regulations of the Securities and Exchange
Commission. Shareholders of a class which bears distribution/service
expenses under terms of a distribution plan, have exclusive voting
rights regarding such distribution plan. Significant accounting policies
of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued
on the basis of market quotations, valuations provided by independent
pricing services or, at fair value as determined in good faith in
accordance with procedures approved by the Trustees. Short-term debt
investments maturing within 60 days are valued at amortized cost which
approximates market value. All portfolio transactions initially
expressed in terms of foreign currencies have been translated into U.S.
dollars as described in "Foreign Currency Translation" below. The Fund
may invest in indexed securities whose value is linked either directly
or inversely to changes in foreign currencies, interest rates,
commodities, indices or other reference instruments. Indexed securities
may be more volatile than the reference instrument itself, but any loss
is limited to the amount of the original investment.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other
registered investment companies having a management contract with John
Hancock Advisers, Inc. (the "Adviser"), a wholly-owned subsidiary of The
Berkeley Financial Group, may participate in a joint repurchase
agreement. Aggregate cash balances are invested in one or more
repurchase agreements, whose underlying securities are obligations of
the U.S. government and/or its agencies. The Fund's custodian bank
receives delivery of the underlying securities for the joint account on
the Fund's behalf. The Adviser is responsible for ensuring that the
agreement is fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the
date of purchase, sale or maturity. Net realized gains and losses on
sales of investments are determined on the identified cost basis.
Capital gains realized on some foreign securities are subject to foreign
taxes and are accrued, as applicable.
FEDERAL INCOME TAXES The Fund's policy is to comply with the
requirements of the Internal Revenue Code that are applicable to
regulated investment companies and to distribute all of its taxable
income, including any net realized gain on investment, to its
shareholders. Therefore, no federal income tax provision is required.
For federal income tax purposes, the Fund has $29,216,361 of capital
loss carryforwards available, to the extent provided by regulations, to
offset future net realized capital gains. If such carryforwards are used
by the Fund, no capital gains distributions will be made. The
carryforwards expire as follows: October 31, 1999 -- $1,001,257, October
31, 2000 -- $17,243,199, October 31, 2001 --$3,127,414, October 31, 2002
- -- $2,740,548 and October 31, 2003 -- $5,103,943. Expired capital loss
carryforwards are reclassified to capital paid-in in the year of
expiration. For federal income tax purposes, net currency exchange gains
and losses from sales of foreign debt securities must be treated as
ordinary income even though such items are gains and losses for
accounting purposes.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Interest income on investment
securities is recorded on the accrual basis. Foreign income may be
subject to foreign withholding taxes which are accrued as applicable.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions
are determined in conformity with income tax regulations, which may
differ from generally accepted accounting principles. Dividends paid by
the Fund with respect to each class of shares will be calculated in the
same manner, at the same time and will be in the same amount, except for
the effect of expenses that may be applied differently to each class as
explained previously.
EXPENSES The majority of the expenses of the Trust are directly
identifiable to an individual Fund. Expenses which are not readily
identifiable to a specific Fund are allocated in such a manner as deemed
equitable, taking into consideration, among other things, the nature and
type of expense and the relative sizes of the Funds.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized
gains (losses) are calculated at the Fund level and allocated daily to
each class of shares based on the appropriate net assets of the
respective classes. Distribution/service fees if any, are calculated
daily at the class level based on the appropriate net assets of each
class and the specific expense rate(s) applicable to each class.
USE OF ESTIMATES The preparation of these financial statements in
accordance with generally accepted accounting principles incorporates
estimates made by management in determining the reported amounts of
assets, liabilities, revenues, and expenses of the Fund.
FOREIGN CURRENCY TRANSLATION All assets and liabilities initially
expressed in terms of foreign currencies are translated into U.S.
dollars based on London currency exchange quotations as of 5:00 p.m.,
London time, on the date of any determination of the net asset value of
the Fund. Transactions affecting statement of operations accounts and
net realized gain/(loss) on investments are translated at the rates
prevailing at the dates of the transactions.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held.
Such fluctuations are included with the net realized and unrealized gain
or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales
of foreign currency, currency gains or losses realized between the trade
and settlement dates on securities transactions and the difference
between the amounts of dividends, interest, and foreign withholding
taxes recorded on the Fund's books and the U.S. dollar equivalent of the
amounts actually received or paid. Net unrealized foreign exchange gains
or losses arise from changes in the value of assets and liabilities
other than investments in securities at fiscal year end, resulting from
changes in the exchange rate.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Fund may enter into
forward foreign currency exchange contracts as a hedge against the
effect of fluctuations in currency exchange rates. A forward foreign
currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date at a set price. The aggregate
principal amounts of the contracts are marked-to-market daily at the
applicable foreign currency exchange rates. Any resulting unrealized
gains and losses are included in the determination of the Fund's daily
net assets. The Fund records realized gains and losses at the time the
forward foreign currency contract is closed out or offset by a matching
contract. Risks may arise upon entering these contracts from potential
inability of counterparties to meet the terms of the contract and from
unanticipated movements in the value of a foreign currency relative to
the U.S. dollar.
These contracts involve market or credit risk in excess of the
unrealized gain or loss reflected in the Fund's Statement of Assets and
Liabilities. The Fund may also purchase and sell forward contracts to
facilitate the settlement of foreign currency denominated portfolio
transactions, under which it intends to take delivery of the foreign
currency. Such contracts normally involve no market risk other than that
offset by the currency amount of the underlying transaction.
At April 30, 1996, there were no open forward foreign currency exchange
contracts.
NOTE B --
MANAGEMENT FEE AND
TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a
monthly management fee to the Adviser for a continuous investment
program equivalent, on an annual basis, to the sum of (a) 0.65% of the
first $500,000,000 of the Fund's average daily net asset value and (b)
0.60% of the Fund's average daily net asset value in excess of
$500,000,000.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive
state limit where the Fund is registered to sell shares, the fee payable
to the Adviser will be reduced to the extent of such excess, and the
Adviser will make additional arrangements necessary to eliminate any
remaining excess expenses. The current limits are 2.5% of the first
$30,000,000 of the Fund's average daily net asset value, 2.0% of the
next $70,000,000, and 1.5% of the remaining average daily net asset
value.
John Hancock Funds, Inc. ("JH Funds"), a wholly owned subsidiary of the
Adviser, and Freedom Distributors Corporation ("FDC") act as Co-
Distributors for shares of the Fund. For the period ended April 30,
1996, net sales charges received with regard to sales of Class A shares
amounted to $56,959. Out of this amount, $7,961 was retained and used
for printing prospectuses, advertising, sales literature and other
purposes, $23,154 was paid as sales commissions to unrelated broker-
dealers and $25,844 was paid as sales commissions to sales personnel of
John Hancock Distributors, Inc. ("Distributors"), Tucker Anthony,
Incorporated ("Tucker Anthony") and Sutro & Co., Inc. ("Sutro"), all of
which are broker dealers. The Adviser's indirect parent, John Hancock
Mutual Life Insurance Company, is the indirect sole shareholder of
Distributors and John Hancock Freedom Securities Corporation and its
subsidiaries, which include FDC, Tucker Anthony and Sutro.
Class B shares which are redeemed within four years of purchase (three
years for purchases prior to January 1, 1994) will be subject to a
contingent deferred sales charge ("CDSC") at declining rates beginning
at 3.0% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed.
Proceeds from the CDSC are paid to JH Funds and are used in whole or in
part to defray its expenses related to providing distribution related
services to the Fund in connection with the sale of Class B shares. For
the period ended April 30, 1996, the contingent deferred sales charges
paid to JH Funds amounted to $40,550.
In addition, to reimburse the Co-Distibutors for the services they
provide as distributors of shares of the Fund, the Fund has adopted
Distribution Plans with respect to Class A and Class B pursuant to Rule
12b-1 under the Investment Company Act of 1940. Accordingly, the Fund
will make payments to the Co-Distributors for distribution and service
expenses, at an annual rate not to exceed 0.30% of Class A average daily
net assets and 1.00% of Class B average daily net assets to reimburse
the Co-Distibutors for their distribution/service costs. Up to a maximum
of 0.25% of such payments may be service fees as defined by the amended
Rules of Fair Practice of the National Association of Securities
Dealers. Under the amended Rules of Fair Practice, curtailment of a
portion of the Fund's 12b-1 payments could occur under certain
circumstances. In order to comply with this Rule, the 12b-1 fee on Class
B shares was reduced to 0.95% effective December 1, 1995, reduced to
0.90% effective February 1, 1996, increased to 0.95% effective March 1,
1996 and was increased to 1.00% effective April 1, 1996.
The Fund has a transfer agent agreement with John Hancock Investor
Services Corporation ("Investor Services"), a wholly-owned subsidiary of
The Berkeley Financial Group. The Fund pays Investor Services a fee
based on the number of shareholder accounts and certain out-of-pocket
expenses.
Mr. Edward J. Boudreau, Jr. and Ms. Anne C. Hodson are directors and/or
officers of the Adviser and/or its affiliates, as well as Trustees of
the Fund. The compensation of unaffiliated Trustees is borne by the
Fund. Effective with the fees paid for 1995, the unaffiliated Trustees
may elect to defer for tax purposes their receipt of this compensation
under the John Hancock Group of Funds Deferred Compensation Plan. The
Fund makes investments into other John Hancock funds, as applicable, to
cover its liability for the deferred compensation. Investments to cover
the Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the
related other asset are always equal and are marked to market on a
periodic basis to reflect any income earned by the investment as well as
any unrealized gains or losses. At April 30, 1996, the Fund's
investments to cover the deferred compensation liability had unrealized
appreciation of $320.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations
of the U.S. government and its agencies and short-term securities,
during the period ended April 30, 1996, aggregated $36,915,777 and
$38,162,056, respectively. Purchases and proceeds from sales of
obligations of the U.S. government and its agencies aggregated none and
$6,021,563, respectively, during the period ended April 30, 1996.
The cost of investments owned at April 30, 1996 for federal income tax
purposes was $96,109,860. Gross unrealized appreciation and depreciation
of investments aggregated $2,580,683 and $1,643,282, respectively,
resulting in net unrealized appreciation of $937,401.
A 1/2" by 1/2" John Hancock Funds logo in upper left hand corner of the
page. A box sectioned in quadrants with a triangle in upper left, a circle
in upper right, a cube in lower left and a diamond in lower right. A tag line
below reads: "A Global Investment Management Firm."
John Hancock Funds
A Global Investment Management Firm
101 Huntington Avenue, Boston, MA 02199-7603
Bulk Rate
U.S. Postage
PAID
Brockton, MA
Permit No. 582
This report is for the information of shareholders of the John Hancock
Sovereign U.S. Government Income Fund. It may be used as sales
literature when preceded or accompanied by the current prospectus, which
details charges, investment objectives and operating policies.
A recycled logo in lower left hand corner with the caption
" Printed on Recycled Paper."
320SA 4/96
6/96
