John Hancock Funds
Sovereign
U.S. Government
Income
Fund
ANNUAL REPORT
October 31, 1996
TRUSTEES
Edward J. Boudreau, Jr.
Dennis S. Aronowitz*
Richard P. Chapman, Jr.*
William J. Cosgrove*
Douglas M. Costle*
Leland O. Erdahl*
Richard A. Farrell*
Gail D. Fosler*
William F. Glavin*
Anne C. Hodsdon
Dr. John A. Moore*
Patti McGill Peterson*
John W. Pratt*
Richard S. Scipione
Edward Spellman*
*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
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Second Vice President and Compliance Officer
CUSTODIAN
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
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
INDEPENDENT AUDITORS
Price Waterhouse LLP
160 Federal Street
Boston, Massachusetts 02110
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
Since late 1994, prospectus simplification has been a major topic in
the mutual fund industry. At that time, Securities and Exchange
Commission Chairman Arthur Levitt called on fund companies to make
their prospectuses more user-friendly. He noted that prospectuses are
often overloaded with technical detail and are hard for most
investors to understand. Many industry observers agreed, and rightly
so.
So it is my pleasure to let you know that after being under
development for a year, John Hancock Funds has introduced new
simplified and consolidated prospectuses. The prospectuses feature
shorter, clearer language with a streamlined design, and they
incorporate several funds with similar investment objectives into one
document. They cover our income, growth, growth and income, tax-free
income, international/global and money market funds. We are gratified
at the favorable reviews that our new prospectuses have received from
shareholders, financial advisers, industry analysts and the press. We
believe they are a bold but sensible step forward. And while they are
easier to read, they still comply with all federal and state
guidelines.
We have taken the initiative to create a prospectus that dramatically
departs from the norm. Among its most innovative features is a two-
page spread highlighting each fund's goals and investment strategy,
the types of securities it buys, its portfolio management and risk
factors, all in plainer language. Fund expenses and financial
highlights are now found here, too, as is a new bar chart that shows
year-to-year volatility for each fund. Other features include a
better presentation of fund services, a new glossary of investment
risks and a discussion about how funds are organized, including a
diagram showing the connection of the various players that provide
services to your Hancock fund(s).
We believe we have made a significant advancement in the drive toward
better mutual fund prospectuses. We hope you will agree because in
the end, we did it for you, our shareholders.
Sincerely,
/S/ EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to first paragraph.
BY BARRY EVANS, CFA, PORTFOLIO MANAGER
John Hancock
Sovereign U.S.
Government Income Fund
Mixed economic news sends bonds on a seesaw ride
In the last 12 months, bond investors have been pushed and pulled
every which way. The Fund's fiscal year began in November 1995 on a
high. Interest rates were falling and bond prices rising on the
expectation that Congress was close to passing a balanced budget that
would have been good news for the economy and interest rates. But in
February, investor sentiment changed dramatically, as budget hopes
were dashed and interest rates began moving up. Then in March, the
first in a set of strong employment numbers came out suggesting the
economy was growing faster than expected. That caused a further jump
in rates and a drop in bond prices as fears of inflation revived.
Inflation, of course, is a bondholder's number one enemy because it
erodes the buying power of fixed-income earnings. When the period
began, the yield on the bellwether 30-year Treasury was at 6% and
rose as high as 7.2% before settling down around 6.6%. During the
spring and summer, bond yields careened within a narrow range as
monthly employment figures rekindled fears of wage inflation and then
actual inflation reports dissipated those fears. In September, the
bond market began to rally after softer economic numbers appeared and
inflation fears subsided.
"As interest
rates rose
during the
period, we
became more
defensive."
A 2 1/4" x 3 1/2" photo of fund management team. Caption reads: (l-r)
Barry Evans, Roger Hamilton and Seth Robbins."
Pie chart with the heading 'Portfolio Diversification" at top of left
hand column. The chart is divided into three sections. Going from top
left to right: Short-Term Investments & Other 4%, U.S. Treasury Bonds
36%, U.S. Government Agency Bonds 60%. Footnote below reads: "As a
percentage of net assets on October 31, 1996."
In this environment, John Hancock Sovereign U.S. Government Income
Fund performed well. For the 12 months ended October 31, 1996, John
Hancock Sovereign U.S. Government Income Fund's Class A and Class B
shares posted total returns of 4.02% and 3.33% respectively, at net
asset value. That was in line with the 4.04% return of the average
general U.S. government fund, according to Lipper Analytical
Services.1 Please see pages six and seven for longer-term Fund
performance information.
Mortgage-
backed
securities
performed
well over
the last six
months.
As interest rates rose during the period, we became more defensive.
We did this by shortening the Fund's duration to help protect its
share price. Duration measures how sensitive a bond's price, and
therefore the Fund's share price, is to changes in interest rates.
The longer a bond's duration, the more its price will rise as
interest rates fall, or fall as rates rise. We began the period with
duration as high as 5.5 years. This relatively long duration
initially helped us as rates were falling. But as rates rose, we
shortened duration to 4.6 years, then moved it back up to 5.2 years
as rates eased.
Boost in mortgages
We began the period with a heavy stake in U.S. Treasuries, which tend
to outperform most government agency and mortgage bonds in a falling
rate environment. As the market turned and rates began rising, we
pared our Treasury investments from 61% of the Fund's net assets to
36% by the end of October. In exchange, we bought higher-yielding
securities, including mortgage-backed securities. Mortgages offer a
higher yield than Treasuries to compensate investors for prepayment
risk -- the risk that homeowners will prepay their mortgages as
interest rates fall, leaving the original mortgage holder with cash
to reinvest at a lower rate. As expected, they did well over the last
six months as interest rates stayed within a narrow range and the
risk of prepayments declined. More recently, we added to the Fund's
planned amortization classes (PACs) holdings, which now account for
8% of the Fund's net assets. Issued by government agencies such as
the Federal National Mortgage Association and the Federal Home Loan
Mortgage, PACs are portions of high-quality collateralized mortgage
obligations (CMOs) that have a lower probability of prepayment. CMOs
separate the cash flows of mortgage pools into different classes of
various maturities. Our PACs helped boost the Fund's yield, while
being more insulated from the threat of prepayment than traditional
mortgage-backed securities. Overall, we ended the period with a 48%
stake in mortgage bonds.
Toward the end of the period, we also increased our stake in agency
bonds issued by the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation, boosting our holdings from 3%
of the Fund to 12% of net assets by the end October. We bought them
because they were particularly cheap and had underperformed compared
to mortgage-backed securities during the period, so they still have a
better potential for price gains.
Bar chart with heading "Fund Performance" at top of left hand column.
Under the heading is the footnote: "For the year ended October 31,
1996." The chart is scaled in increments of 1% from bottom to top, with
5% at the top and 0% at the bottom. Within the chart there are three
solid bars. The first represents the 4.02% total return for the John
Hancock Sovereign U.S. Government Income Fund: Class A. The second
represents the 3.33% total return for John Hancock Sovereign U.S.
Government Income Fund: Class B. The third represents the 4.04% total
return for the average general U.S. government income fund. A footnote
below reads: "Total returns for John Hancock Sovereign U.S. Government
Income Fund are at net asset value with all distributions reinvested.
The average general U.S. government income fund is tracked by Lipper
Analytical Services. (1) See following two pages for historical
performance information.
Outlook
Our outlook for bonds remains favorable. In our view, the most likely
scenario over the next six months is for the economy to continue to
grow at a modest pace. We don't believe the consumer is tapped out
and expect consumer spending to bounce back enough from its third
quarter lull to prevent the economy from slipping into recession.
While it's possible that we'll see some periodic inflation scares as
the market struggles with wage concerns, we remain convinced that
there isn't a real threat of inflation, only a perceived one. As you
read this report, the presidential election is behind us and the bond
market has been pleased with the status quo results. This environment
suggests that interest rates still have room to come down somewhat,
on a more modest scale. For now, we'll maintain a slightly aggressive
posture and keep the Fund's duration just longer than average. But
once the yield on the 30-year Treasury falls to around 6.4%, we'll
begin shortening duration, unless we see further signs that lead us
to believe interest rates could go even lower.
"Our outlook
for bonds
remains
favorable."
- --------------------------------------------------------------------
This commentary reflects the views of the portfolio manager through
the end of the Fund's period discussed in this report. Of course, the
manager's views are subject to change as market and other conditions
warrant.
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 Sovereign U.S.
Government 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 average
net assets. Performance figures include the maximum applicable sales
charge of 4.50% for Class A shares. The effect of the maximum
contingent deferred sales charge for Class B shares (maximum 5% and
declining to 0% over six 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.
CUMULATIVE TOTAL RETURNS
For the period ended September 30, 1996
MOST
ONE FIVE RECENT
YEAR YEARS TEN YEARS
--------- --------- ----------
John Hancock Sovereign
U.S. Government Income
Fund: Class A (1.32%) N/A 24.07%(1)
John Hancock Sovereign
U.S. Government Income
Fund: Class B (2.33%) 30.88% 104.36%
AVERAGE ANNUAL TOTAL RETURNS
For the period ended September 30, 1996
MOST
ONE FIVE RECENT
YEAR YEARS TEN YEARS
--------- --------- ----------
John Hancock Sovereign
U.S. Government Income
Fund: Class A (1.32%) N/A 4.66%(1)
John Hancock Sovereign
U.S. Government Income
Fund: Class B (2.33%) 5.53% 7.41%
YIELDS
As of October 31, 1996
SEC 30-DAY
YIELD
-----------
John Hancock Sovereign U.S.
Government Income Fund:
Class A 5.64%
John Hancock Sovereign U.S.
Government Income Fund:
Class B 5.26%
Notes to Performance
(1) Class A shares commenced on January 3, 1992.
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the
John Hancock Sovereign U.S. Government Income Fund would be worth on
October 31, 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 Lehman Government Bond
Index -- an unmanaged index that measures the performance of U.S.
Treasury bonds and U.S. Government Agency bonds.
Sovereign U.S. Government Fund
Class A shares
Line chart with the heading Sovereign U.S. Government 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 Lehman Government Bond Index
and is equal to $13,441 as of October 31, 1996.
The second line represents the value of the hypothetical $10,000 investment
made in the Sovereign U.S. Government Fund on January 3, 1992, before
sales charge, and is equal to $13,271 as of October 31, 1996.
The third line represents the Sovereign U.S. Government Fund, after sales
charge, and is equal to $12,669 as of October 31, 1996.
Sovereign U.S. Government Fund
Class B shares
Line chart with the heading Sovereign U.S. Government 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 *Lehman Government Bond Index
and is equal to $21,127 as of October 31, 1996.
The second line represents the value of the hypothetical $10,000 investment
made in the Sovereign U.S. Government Fund, before sales charge, on
October 31, 1986, and is equal to $20,547 as of October 31, 1996.
* No contingent deferred sales charge applicable.
FINANCIAL STATEMENTS
John Hancock Funds - Sovereign U.S. Government Income Fund
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 October
31, 1996. You'll also find the net asset value and the maximum
offering price per share as of that date.
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
October 31, 1996
- ----------------------------------------------------------------------------------
<S> <C>
Assets:
Investments at value - Note C:
United States government and agencies securities
(cost - $420,719,416) $ 427,594,449
Short-term investments (cost - $1,383,000) 1,383,000
Corporate savings account 6,319
-------------
428,983,768
Receivable for investments sold 39,622,791
Receivable for shares sold 17,611
Receivable for futures variation margin - Note A 70,646
Interest receivable 5,704,316
Other assets 31,527
-------------
Total Assets 474,430,659
- ----------------------------------------------------------------------------------
Liabilities:
Payable for investments purchased 31,301,134
Dividend payable 79,850
Payable for shares repurchased 190,731
Payable to John Hancock Advisers, Inc.
and affiliates - Note B 351,983
Accounts payable and accrued expenses 117,666
-------------
Total Liabilities 32,041,364
- ----------------------------------------------------------------------------------
Net Assets:
Capital paid-in 485,273,522
Accumulated net realized loss on investments and
financial futures contracts ( 50,154,353)
Net unrealized appreciation of investments
and financial futures contracts 7,351,041
Distributions in excess of net investment income ( 80,915)
-------------
Net Assets $ 442,389,295
==================================================================================
Net Asset Value Per Share:
(Based on net assets and shares of beneficial
interest outstanding - unlimited number of shares
authorized with no par value, respectively)
Class A - $330,161,631/33,869,367 $ 9.75
==================================================================================
Class B - $112,227,664/11,522,894 $ 9.74
==================================================================================
Maximum Offering Price Per Share:*
Class A - ($9.75 x 104.71%) $ 10.21
==================================================================================
* 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.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
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.
Statement of Operations
Year ended October 31, 1996
- ----------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest $36,271,266
-----------
Expenses:
Investment management fee - Note B 2,346,755
Distribution/service fee - Note B
Class A 1,044,278
Class B 1,171,384
Transfer agent fee - Note B 1,231,688
Custodian fee 97,585
Trustees' fees 68,257
Financial services fee - Note B 28,344
Printing 72,233
Auditing fee 42,572
Registration and filing fees 39,721
Miscellaneous 23,987
Legal fees 45,791
-------------
Total Expenses 6,212,595
- ----------------------------------------------------------------------------------
Net Investment Income 30,058,671
- ----------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Financial Futures Contracts:
Net realized loss on investments sold ( 3,593,442)
Net realized gain on financial futures contracts 1,188,952
Change in net unrealized appreciation/depreciation
of investments ( 11,886,333)
Change in net unrealized appreciation/depreciation
of financial futures contracts 1,104,844
-------------
Net Realized and Unrealized Loss
on Investments and Financial
Futures Contracts ( 13,185,979)
- ----------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $16,872,692
==================================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------
1995 1996
------------ ------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $ 33,146,878 $ 30,058,671
Net realized loss on investments sold, and financial
futures contracts ( 30,917,795) ( 2,404,490)
Change in net unrealized appreciation/depreciation
of investments and financial futures contracts 71,309,862 ( 10,781,489)
------------ ------------
Net Increase in Net Assets Resulting from Operations 73,538,945 16,872,692
------------ ------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.6504 and $0.6445 per share, respectively) ( 22,638,537) ( 22,888,998)
Class B - ($0.5970 and $0.5788 per share, respectively) ( 10,503,561) ( 7,168,399)
------------ ------------
Total Distributions to Shareholders ( 33,142,098) ( 30,057,397)
------------ ------------
From Fund Share Transactions - Net* ( 50,878,110) ( 46,215,732)
------------ ------------
Net Assets:
Beginning of period 512,270,995 501,789,732
------------ ------------
End of period (including distributions in excess
of net investment $82,189 and $80,915, respectively) $501,789,732 $442,389,295
============ ============
* Analysis of Fund Share Transactions:
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------
1995 1996
------------------------------ ---------------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ----------- --------- -----------
CLASS A
Shares sold 7,317,218 $72,500,554 2,701,311 $26,773,125
Shares issued to shareholders in reinvestment
of distributions 2,046,427 19,655,465 1,861,397 18,201,055
---------- ----------- --------- -----------
9,363,645 92,156,019 4,562,708 44,974,180
Less shares repurchased ( 6,449,531) ( 62,018,777) (7,742,610) ( 76,053,085)
---------- ----------- --------- -----------
Net increase (decrease) 2,914,114 $30,137,242 (3,179,902) ($31,078,905)
========== =========== ========= ===========
CLASS B
Shares sold 1,566,023 $15,058,524 1,137,893 $11,221,296
Shares issued to shareholders in reinvestment
of distributions 622,218 5,939,906 397,229 3,883,010
---------- ----------- --------- -----------
2,188,241 20,998,430 1,535,122 15,104,306
Less shares repurchased (10,444,168) (102,013,782) (3,092,548) (30,241,133)
---------- ----------- --------- -----------
Net decrease ( 8,255,927) ($81,015,352) (1,557,426) ($15,136,827)
========== =========== ========= ===========
The Statement of Changes in Net Assets shows how the value of the Fund's net assets has changed since the end of the previous
period. The difference reflects earnings less expenses, any investment and foreign currency gains and losses, distributions
paid to shareholders, if any, and any increase or decrease in money shareholders invested in the Fund. The footnote
illustrates the number of Fund shares sold, reinvested and repurchased during the last two periods, along with the
corresponding dollar value.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout the periods indicated, investment returns, key
ratios and supplemental data are as follows:
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------
1992(1) 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 10.51 $ 10.29 $ 10.89 $ 9.24 $ 10.01
-------- -------- -------- -------- --------
Net Investment Income 0.64 0.68(2) 0.65 0.65 0.64(2)
Net Realized and Unrealized Gain (Loss)
on Investments and Financial
Futures Contracts ( 0.22) 0.61 ( 1.34) 0.77 ( 0.26)
-------- -------- -------- -------- --------
Total from Investment Operations 0.42 1.29 ( 0.69) 1.42 0.38
-------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ( 0.64) ( 0.68) ( 0.65) ( 0.65) ( 0.64)
Distributions from Net Realized Gain
on Investments Sold -- ( 0.01) ( 0.31) -- --
-------- -------- -------- -------- --------
Total Distributions ( 0.64) ( 0.69) ( 0.96) ( 0.65) ( 0.64)
-------- -------- -------- -------- --------
Net Asset Value, End of Period $ 10.29 $ 10.89 $ 9.24 $ 10.01 $ 9.75
======== ======== ======== ======== ========
Total Investment Return
at Net Asset Value(3) 5.33%(4) 12.89% ( 6.66%) 15.90% 4.02%
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) $350,907 $375,416 $315,372 $370,966 $330,162
Ratio of Expenses to Average Net Assets 1.06%(5) 1.30% 1.23% 1.17% 1.15%
Ratio of Net Investment Income
to Average Net Assets 7.11%(5) 6.47% 6.62% 6.76% 6.58%
Portfolio Turnover Rate 140% 273% 127% 94% 143%
The Financial Highlights summarizes the impact of the following factors on a single share for the period indicated: the
net investment income, net realized and unrealized gains (losses), distributions and total investment return of the
Fund. It shows how the Fund's net asset value for a share has changed since the end of the previous period.
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 (continued)
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------
1992(1) 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 10.29 $ 10.28 $ 10.88 $ 9.23 $ 10.00
-------- -------- -------- -------- --------
Net Investment Income 0.76 0.66(2) 0.61 0.60 0.58(2)
Net Realized and Unrealized Gain
(Loss) on Investments and Financial
Futures Contracts -- 0.61 ( 1.34) 0.77 ( 0 .26)
-------- -------- -------- -------- --------
Total from Investment Operations 0.76 1.27 ( 0.73) 1.37 0.32
-------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ( 0.77) ( 0.66) ( 0.61) ( 0.60) ( 0.58)
Distributions from Net Realized Gain on
Investments Sold -- ( 0.01) ( 0.31) -- --
-------- -------- -------- -------- --------
Total Distributions ( 0.77) ( 0.67) ( 0.92) ( 0.60) ( 0.58)
-------- -------- -------- -------- --------
Net Asset Value, End of Period $ 10.28 $ 10.88 $ 9.23 $ 10.00 $ 9.74
======== ======== ======== ======== ========
Total Investment Return
at Net Asset Value(3) 7.58% 12.66% ( 7.05%) 15.27% 3.33%
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) $197,032 $244,133 $196,899 $130,824 $112,228
Ratio of Expenses to Average Net Assets 1.55% 1.51% 1.64% 1.72% 1.82%
Ratio of Net Investment Income to
Average Net Assets 7.35% 6.23% 6.19% 6.24% 5.91%
Portfolio Turnover Rate 140% 273% 127% 94% 143%
(1) Class A shares commenced operations on January 3, 1992.
(2) Based on the average of shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(4) Not annualized.
(5)Annualized.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Schedule of Investments
October 31, 1996
- -------------------------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by Sovereign U.S. Government Income Fund
on October 31, 1996. It's divided into two main categories: U.S. government and agencies securities and short-term
investments. Short-term investments, which represent the Fund's "cash" position, are listed last.
PAR VALUE
INTEREST MATURITY (000'S MARKET
ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- -------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCIES SECURITIES
Governmental -- U.S. (36.29%)
United States Treasury,
Bond 11.875% 11-15-03 $10,000 $ 13,154,700
Bond 10.750 08-15-05 29,585 38,215,536
Bond 12.750 11-15-10 6,000 8,561,220
Bond* 9.250 02-15-16 43,050 54,834,938
Bond 6.750 08-15-26 7,700 7,791,399
Note 9.250 08-15-98 19,625 20,781,109
Note 9.125 05-15-99 16,000 17,215,040
------------
160,553,942
------------
Governmental -- U.S. Agencies (60.36%)
Federal Farm Credit Banks,
Bond 11.900 10-20-97 6,000 6,347,820
Federal Home Loan Mortgage Corp.,
15 Yr Pass Thru Ctf 10.500 02-01-03 5,918 6,282,655
30 Yr Pass Thru Ctf 9.500 08-01-16 14,978 16,175,529
CMO Remic 1608-L 6.500 09-15-23 5,000 4,620,300
CMO Remic 1617-PM 6.500 11-15-23 10,000 9,256,200
CMO Remic 34-C 9.000 11-15-19 5,431 5,634,180
CMO Remic G-8-E 9.000 04-25-21 6,000 6,470,625
CMO Remic 1142-H 7.950 12-15-20 10,000 10,337,500
CMO Remic Ctf 1603-K 6.500 10-15-23 5,000 4,609,350
CMO Remic Ctf 1866-G 7.000 07-15-26 5,686 5,476,329
Global Bond 7.256 09-17-01 10,000 10,164,000
Federal National Mortgage Assn.,
10 Yr Pass Thru Ctf 7.875% 02-24-05 9,500 10,298,570
10 Yr Pass Thru Ctf 9.550 12-10-97 1,020 1,061,596
10 Yr Pass Thru Ctf 9.050 04-10-00 10,000 10,900,000
10 Yr Pass Thru Ctf 8.900 06-12-00 5,000 5,442,200
10 Yr Pass Thru Ctf 6.850 09-12-05 5,000 4,956,250
15 Yr Pass Thru Ctf 7.500 06-01-11 7,863 7,989,956
15 Yr Pass Thru Ctf 7.500 06-01-11 4,936 5,013,420
15 Yr Pass Thru Ctf 7.500 07-01-11 4,895 4,974,170
15 Yr Pass Thru Ctf 9.000 02-01-10 8,104 8,479,468
30 Yr Pass Thru Ctf 8.000 10-01-24 7,938 8,114,724
GTD Remic Pass Thru Ctf 1996-28 PK 6.500 07-25-25 7,589 6,934,723
GTD Remic Pass Thru Ctf 1994-75-K 7.000 04-25-24 3,100 2,996,336
GTD Remic Pass Thru Ctf 1989-78G 9.050 12-25-18 9,603 9,908,638
GTD Remic Pass Thru Ctf 1990-42-E 9.800 05-25-19 1,187 1,185,279
GTD Remic Pass Thru Ctf 1991-76-M 9.000 07-25-06 4,517 4,629,451
GTD Remic Pass Thru Ctf X-225C-TK 6.500 12-25-23 5,032 4,638,850
GTD Remic Pass Thru Ctf G-17-B 8.750 09-25-19 57 56,722
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf ++ 7.000 12-01-99 13,300 13,051,024
30 Yr Pass Thru Ctf 7.500 01-15-23 to 37,023 37,261,414
02-15-26
30 Yr Pass Thru Ctf 8.000 07-15-24 to 27,191 27,864,828
07-15-26
Student Loan Marketing Assn.,
Multicurrency PERLS+ 10.000 11-19-96 1,000 300,000
Multicurrency PERLS+ 11.100 04-07-97 200 69,500
Tennessee Valley Authority,
Bond 8.250 04-15-42 5,000 5,538,900
------------
267,040,507
------------
TOTAL U.S. GOVERNMENT AND AGENCIES SECURITIES
(Cost $420,719,416) (96.65%) $427,594,449
----- ------------
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
PAR VALUE
INTEREST MATURITY (000'S MARKET
ISSUER, DESCRIPTION RATE DATE OMITTED) VALUE
- -------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (.32%)
Investment in a joint repurchase agreement
transaction with SBC Capital Markets Inc.,
Dated 10-31-96, Due 11-01-96 (secured by
U.S. Treasury Bonds, 11.250% Due 02-15-15,
U.S. Treasury Bonds, 12.000% Due 8-15-13,
U.S. Treasury Bond, 6.250% Due 8-15-23,
U.S. Treasury Bonds, 10.375% Due 11-15-12)
Note A 5.540% 11-01-96 $ 1,383 $ 1,383,000
------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company Daily
Interest Savings Account Current
Rate 4.750% 6,319
------------
TOTAL SHORT-TERM INVESTMENTS ( 0.32%) 1,389,319
------------
TOTAL INVESTMENTS (96.97%) $428,983,768
===== ============
* U.S. Treasury Bonds with a value of $1,236,525 owned by the Fund were designated as margin deposits for
future contracts at October 31, 1996.
+ Principal Exchange Rate Linked Securities (PERLS). PERLS are debt instruments that are denominated in U.S.
dollars and pay interest in U.S. dollars, but whose principal repayments are linked to the performance of
the U.S. dollar versus a foreign currency. If the foreign currency gains value against the U.S. dollar when
the PERL matures, redemption will be at a premium. The redemption will be at a discount if the foreign
dollar loses value against the U.S. dollar. As of 10/31/96, the Fund has PERLS with a total cost of
$1,197,463 and a total value of $369,500, or 0.08% of the the Fund's total net assets.
++ This security having an aggregate value of $13,051,024 or 2.95% of the Fund's net assets, has been purchased
on a when issued basis. The purchase price and the interest rate of such securities are fixed at trade date,
although the Fund does not earn any interest on such securities until settlement date. The Fund has
instructed its Custodian Bank to segregate assets with a current value at least equal to the amount of its
when issued commitments. Accordingly, the market values of $13,636,688 of U.S. Treasury Bond, 10.750%, 08-
15-05 has been segregated to cover the issued commitments.
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>
NOTES TO FINANCIAL STATEMENTS
NOTE A --
ACCOUNTING POLICIES
John Hancock Strategic Series (the "Trust") is an open-end management
investment company registered under the Investment Company Act of
1940. The Trust consists of two series: John Hancock Sovereign U.S.
Government Income Fund (the "Fund"), and John Hancock Strategic
Income Fund. Until August 30, 1996, the Fund was a series of Freedom
Investment Trust. The other series of the Trust is reported in
separate financial statements. The investment objective of the Fund
is to provide as high a level of income as is consistent with long-
term total return by investing in securities issued, guaranteed or
otherwise backed by the United States government, it agencies or
instrumentalities.
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 and the Internal Revenue Service.
Shareholders of a class which bears distribution and service expenses
under terms of a distribution plan have exclusive voting rights to
that 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.
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 transaction. 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.
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 $47,195,214 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 gain distribution will be made. The
carryforwards expire as follows: October 31, 1998 -- $282,637,
October 31, 2002 -- $16,549,431, October 31, 2003 -- $26,193,155 and
October 31, 2004 -- $4,169,991.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment
securities is recorded on the ex-dividend date. Interest income on
investment securities is recorded on the accrual basis.
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.
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. Actual
results could differ from these estimates.
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 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 determined at the Fund level and allocated daily
to each class of shares based on the relative net assets of the
respective classes. Distribution and 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.
DISCOUNT ON SECURITIES The Fund accretes discount from par value on
securities from either the date of issue or the date of purchase over
the life of the security, as required by the Internal Revenue Code.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial
futures contracts for speculative purposes and/or to hedge against
the effects of fluctuations in interest rates, currency exchange
rates and other market conditions. Buying futures tends to increase
the Fund's exposure to the underlying instrument. Selling futures
tends to decrease the Fund's exposure to the underlying instrument or
hedge other Fund instruments. At the time the Fund enters into a
financial futures contract, it will be required to deposit with its
custodian a specified amount of cash or U.S. government securities,
known as "initial margin", equal to a certain percentage of the value
of the financial futures contract being traded. Each day, the futures
contract is valued at the official settlement price on the board of
trade or U.S. commodities exchange on which it trades. Subsequent
payments, known as "variation margin", to and from the broker are
made on a daily basis as the market price of the financial futures
contract fluctuates. Daily variation margin adjustments, arising from
this "mark to market", will be recorded by the Fund as unrealized
gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss.
Risks of entering into futures contracts include the possibility that
there may be an illiquid market and/or that a change in the value of
the contracts may not correlate with changes in the value of the
underlying securities. In addition, the Fund could be prevented from
opening or realizing the benefits of closing out futures positions
because of position limits or limits on daily price fluctuation
imposed by an exchange.
For federal income tax purposes, the amount, character and timing of
the Fund's gains and/or losses can be affected as a result of futures
contracts.
At October 31, 1996, there were the following open positions in
financial futures contracts:
UNREALIZED
EXPIRATION OPEN POSITION APPRECIATION
- ---------- -------- ---------- ------------
DEC 1996 175 TREASURY LONG $474,531
BOND
OPTIONS Listed options will be valued at the last quoted sales price
on the exchange on which they are primarily traded. Purchased put or
call over-the-counter options will be valued at the average of the
"bid" prices obtained from two independent brokers. Written put or
call over-the-counter options will be valued at the average of the
"asked" prices obtained from two independent brokers. Upon the
writing of a call or put option, an amount equal to the premium
received by the Fund will be included in the Statement of Assets and
Liabilities as an asset and corresponding liability. The amount of
the liability will be subsequently marked-to-market to reflect the
current market value of the written option.
The Fund may use option contracts to manage its exposure to the bond
market. Writing puts and buying calls will tend to increase the
Fund's exposure to the underlying instrument and buying puts and
writing calls will tend to decrease the Fund's exposure to the
underlying instrument, or hedge other Fund investments.
The maximum exposure to loss for any purchased options will be
limited to the premium initially paid for the option. In all other
cases, the face (or "notional") amount of each contract at value will
reflect the maximum exposure of the Fund in these contracts, but the
actual exposure will be limited to the change in value of the
contract over the period the contract remains open.
Risks may also arise if counterparties do not perform under the
contract's terms ("credit risk"), or if the Fund is unable to offset
a contract with a counterparty on a timely basis ("liquidity risk").
Exchange-traded options have minimal credit risk as the exchanges act
as counterparties to each transaction, and only present liquidity
risk in highly unusual market conditions. To minimize credit and
liquidity risks in over-the-counter option contracts, the Fund will
continuously monitor the creditworthiness of all its counterparties.
At any particular time, except for purchased options, market or
credit risk may involve amounts in excess of those reflected in the
Fund's period-end Statement of Assets and Liabilities.
There were no written option transactions for the period ended
October 31, 1996.
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) 0.50% of
the first $500,000,000 of the Fund's average daily net asset value,
and (b) 0.45% 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
of beneficial interest, 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 October 31,
1996, net sales charges received on sales of Class A shares of the
Fund amounted to $379,649. Of this amount, $41,439 was retained and
used for printing prospectuses, advertising, sales literature, and
other purposes, $85,083 was paid as sales commissions to unrelated
broker-dealers and $253,127 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 six years of purchase will
be subject to a contingent deferred sales charge ("CDSC") at
declining rates beginning at 5.0% 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 for providing
distribution related services to the Fund in connection with the sale
of Class B shares. For the period ended October 31, 1996 the
contingent deferred sales charges received by JH Funds amounted to
$345,181.
In addition, to reimburse JH Funds for the services it provides 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 JH Funds 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 JH
Funds for its distribution and 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 ranged from 0.90% to 1.00% of average daily net assets
throughout the period.
The Fund has a transfer agent agreement with John Hancock Investor
Services, Inc. ("Investor Services"), a wholly-owned subsidiary of
The Berkeley Financial Group. The Fund pays transfer agent fees based
on the number of shareholder accounts and certain out-of-pocket
expenses.
On August 27, 1996, the Board of Trustees approved retroactively to
July 1, 1996, an agreement with the Adviser to perform necessary tax
and financial management services for the Fund. The compensation for
1996 is estimated to be at an annual rate of 0.01875% of the average
net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Mr. Richard S. Scipione and Ms. Anne C.
Hodsdon are directors and officers of the Adviser and its affiliates,
as well as a 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 October 31, 1996, the Fund's
investments to cover the deferred compensation liability had
unrealized appreciation of $1,477.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales and maturities of obligations of
the U.S. government and its agencies, other than short-term
securities, during the period ended October 31, 1996 aggregated
$703,864,337 and $756,420,784, respectively.
The cost of investments owned at October 31, 1996 for federal income
tax purposes was $422,405,650. Gross unrealized appreciation and
depreciation of investments aggregated $7,984,477 and $1,412,678,
respectively, resulting in net unrealized appreciation of $6,571,799.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of John Hancock Sovereign U.S. Government Income
Fund and the Trustees of John Hancock Strategic Series
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
John Hancock Sovereign U.S. Government Income Fund (the "Fund") (a
series of John Hancock Strategic Series) at October 31, 1996, and the
results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with
generally accepted accounting principles. These financial statements
and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and the significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 1996 by correspondence with
the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received,
provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
December 12, 1996
SHAREHOLDER MEETING (UNAUDITED)
On June 26, 1996, a special meeting of John Hancock Sovereign U.S.
Government Income Fund was held.
The Shareholders approved an Amended and Restated Declaration of
Trust for the Fund. The shareholder votes were 23,799,093 FOR,
542,914 AGAINST and 2,375,213 ABSTAINING.
The Shareholders approved an Agreement and Plan of Reorganization for
the Fund. The shareholder votes were 23,667,375 FOR, 681,798 AGAINST
and 2,368,046 ABSTAINING.
The Shareholders approved a new investment management contract
between John Hancock Advisers, Inc. and the Fund. The shareholder
votes were 23,921,142 FOR, 732,787 AGAINST and 2,241,217 ABSTAINING.
The Shareholders eliminated the Fund's fundamental restriction on
investing in a single class of securities of an issuer. The
shareholder votes were 23,492,399 FOR, 829,457 AGAINST and 2,395,363
ABSTAINING.
The Shareholders redesignated as nonfundamental the Fund's
fundamental investment restriction on investing in other investment
companies. The shareholder votes were 23,357,196 FOR, 957,947 AGAINST
and 2,402,076 ABSTAINING.
The Shareholders elected the following Trustees with votes as
indicated:
NAME OF TRUSTEE FOR WITHHELD
- --------------- ------------ ------------------
Dennis S. Aronowitz 26,098,326 796,820
Edward J. Boudreau, Jr. 26,102,649 792,497
Richard P. Chapman, Jr. 26,110,739 784,407
William J. Cosgrove 26,107,475 787,671
Douglas M. Costle 26,113,513 781,633
Leland O. Erdahl 26,097,639 797,507
Richard A. Farrell 26,108,362 786,784
Gail D. Fosler 26,109,483 785,663
William F. Glavin 26,087,789 807,357
Anne C. Hodsdon 26,106,574 788,573
Dr. John A. Moore 26,105,368 789,778
Patti McGill Peterson 26,106,137 789,009
John W. Pratt 26,104,298 790,848
Richard S. Scipione 26,092,723 802,423
Edward J. Spellman 26,122,689 782,457
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is
furnished with respect to the distributions of the Fund during its
fiscal year ended October 31, 1996.
None of the distributions qualify for the dividends received
deduction available to corporations.
Shareholders will receive a 1996 U.S. Treasury Department Form 1099-
DIV in January of 1997. This will reflect the total of all
distributions which are taxable for the calender year 1996.
NOTES
John Hancock Funds - Sovereign U.S. Government Income Fund
[THIS PAGE INTENTIONALLY LEFT BLANK]
NOTES
John Hancock Funds - Sovereign U.S. Government Income Fund
[THIS PAGE INTENTIONALLY LEFT BLANK]
NOTES
John Hancock Funds - Sovereign U.S. Government Income Fund
[THIS PAGE INTENTIONALLY LEFT BLANK]
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This report is for the information of shareholders of the John
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