- -----------------
Kleinwort
Benson
Australian
Income Fund, Inc.
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Quarterly Report
January 31, 1997
<PAGE>
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Kleinwort
Benson
Australian Report to Shareholders
Income Fund, Inc.
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To Our Shareholders,
During the three months ended January 31, 1997, bond prices in Australia
were generally stable but the Australian dollar depreciated against the US
dollar, leading to a modest decline in the net asset value of the Fund. The
currency was little changed in trade-weighted terms, but underperformed a rising
US dollar, mainly as a result of declining short-term interest rates in
Australia. The currency has stabilized since the end of January and market
expectations of a further narrowing of the interest rate differential between
the US and Australia have lessened. The New Zealand dollar outperformed the
Australian dollar over the period under review, and with New Zealand bond prices
little changed the Fund's exposure to New Zealand was beneficial. Over the
financial year to date, the Fund continued to fulfill its primary objective of
achieving a high level of income return. At January 31, 1997, the Fund's closing
market price was $8.875, a discount of 10.89% to its net asset value of $9.96.
For the quarter ended January 31, 1997, the Fund achieved a total return on
net asset value (with dividends reinvested) of -2.23%. The monthly dividend has
been maintained at $0.065 per share, resulting in a current dividend yield of
8.79% based on the Fund's market price at January 31, 1997. In December the Fund
declared an extra year-end dividend of $0.03 per share, which raises the yield
to 9.13% when viewed on a trailing 12 month basis. The income yield remains
ahead of US cash and bond investments for securities of credit quality
comparable to the Fund's portfolio. A further analysis of the Fund's performance
since inception is provided on page three.
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MARKET SUMMARY
- ------------------------
Recent developments in the Australian and New Zealand economies, debt and
foreign exchange markets are detailed in the Economic Review. In summary,
Australian economic growth slowed in late 1996 and early 1997 from the pace seen
earlier in 1996. Inflation has continued to trend lower, with the underlying
measure falling in the December quarter to the bottom of the Reserve Bank of
Australia's 2%-3% target range. Short-term interest rates have declined by 1.5%
since July, but market expectations of further cuts have been reduced in the
face on continued concern over wage inflation. Given signs of improvement in the
labor market, and the strength of private investment, there is a risk that
expectations of stronger economic activity may increase these concerns. In New
Zealand ongoing economic weakness has yet to feed into lower inflation
statistics, but expectations of an improvement have led to lower short-term
interest rates. Currency strength continues to subdue the economy, and there may
be room for short rates to fall further in the near term.
- ------------------------
OUTLOOK
- ------------------------
The short-term direction of the Australian and New Zealand bond market is
likely to be heavily influenced by US Treasury market conditions. While yields
appear reasonably well supported at the present time, the Fund may seek to
reduce its exposure to longer dated bonds in order to guard against wage related
concerns in Australia. The Fund will continue to seek exposure to New Zealand as
a
<PAGE>
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Kleinwort
Benson
Australian Economic Review
Income Fund, Inc.
- -----------------
useful diversification and will also continue to invest where possible in
securities which are not subject to any foreign withholding tax. The Australian
dollar should receive support from the receding likelihood of further interest
rate reductions, which should boost international capital flows into the
currency.
On behalf of the Board of Directors,
/s/Sir Robert Cotton
Sir Robert Cotton
Chairman
/s/David M. Felder
David M. Felder
President
February 19, 1997
- ------------------------
ECONOMIC REVIEW
- ------------------------
Statistics released over the final quarter of 1996 confirmed the broad
themes that had been in place earlier in the year. US economic growth continued
to fluctuate considerably and following a strong second quarter slowed in the
Autumn, before strengthening towards the year end. In Europe, the UK economy
continued to grow at about 2.5% over 1995 levels, but in Germany and France
overall recovery remained modest. In Japan, following some transitory strength
earlier in the year, growth faltered with an estimated outcome for 1996 of 2%.
In this environment of at best trend growth in the G7 economies, there was no
material pressure on inflation which was steady at just under 3% in the US, 1.5%
in Germany and 0.5% in Japan. Bond markets drew support from these developments,
taking their lead from the US which in turn responded positively to weaker
domestic data and short-term interest rate stability. Stronger growth in the US,
relative to Europe and Japan, led to an appreciation of the US dollar against
the Yen and the Deutschemark.
Australia
Economic growth in Australia slowed over the second half of 1996 from the
substantial levels reported in the first half of the year. GDP(A) grew by 3.8%
in the twelve months ended September 1996, after having risen by 5.4% and 4.7%
in twelve month periods ended in March and June, respectively. The September
quarter data confirmed the strength in private investment that had been
suggested by
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY
At January 31, 1997, the average maturity of the Fund's portfolio was 5.5 years,
with an average duration of 4.0 years. The average current yield to maturity was
7.1%. 80% of the portfolio was invested in securities rated AAA, with the
remaining 20% in AA rated securities.
- --------------------------------------------------------------------------------
2
<PAGE>
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Kleinwort
Benson
Australian Performance from Inception through January 31, 1997
Income Fund, Inc. (Unaudited)
- -----------------
[The following table was represented as a line graph in the printed material.]
Growth of a Hypothetical $10,000 Investment
Australian Index Net Asset Value Market Value U.S. Index
---------------- --------------- ------------ ----------
11/86 10000 10000 10000 10000
1/87 10311 10086 10000 10113
1/88 13473 12919 11783 10555
1/89 17890 16692 15572 11068
1/90 18090 16758 14909 12311
1/91 22020 19857 16214 13711
1/92 25215 22345 20927 15397
1/93 26269 22843 20868 17150
1/94 32150 27702 24602 18820
1/95 31393 27397 24599 18291
1/96 37617 32107 28429 21363
1/97 42850 35690 30044 21839
Since its inception in 1986, the Fund has achieved an average annualized return
on market value of 11.43%, on the basis noted below. On a net asset value basis,
which measures the performance of the Fund's underlying portfolio, the average
annualized return has been 13.33%. Both the market and net asset value
performance measures have outpaced the Salomon Brothers US Government Bond Index
which has averaged 7.99%. The Salomon Brothers Australian Government Bond Index
has averaged 15.39% since the Fund's inception, with the difference between the
Fund's net asset value performance and that of the index primarily attributable
to the Fund's operating and foreign tax expenses, which neither index is subject
to. After adjusting for these expenses, which have averaged 2.25% since
inception, the Fund has outperformed the Australian index as well.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Annualized Since
Performance 3 Months* 1 Year 3 Years 5 Years Inception+
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fund Market Value(1) -0.34% 5.68% 6.89% 7.50% 11.43%
- -----------------------------------------------------------------------------------------------------------
Fund Net Asset Value(2) -2.23% 11.16% 8.81% 9.82% 13.33%
- -----------------------------------------------------------------------------------------------------------
Salomon Brothers US Gov't Bond Index(3) 0.79% 2.23% 5.08% 7.24% 7.99%
- -----------------------------------------------------------------------------------------------------------
Salomon Brothers Australian Gov't Bond Index(4) -2.12% 13.91% 10.05% 11.19% 15.39%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
+ Fund commenced operations November 28, 1986.
(1) Based on market value per share, adjusted for rights offerings, and
assumes reinvestment of all distributions at reinvestment plan prices.
(2) Based on net asset value per share, adjusted for rights offerings, and
assumes reinvestment of all distributions at the ex-dividend date net
asset value. This measures the performance of the underlying Fund
portfolio and may not be indicative of returns to investors.
(3)(4) The Salomon Brothers US and Australian Government Bond Indices are US$
based unmanaged indices.
Please remember that past performance may not be indicative of future
results.
3
<PAGE>
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Kleinwort
Benson
Australian Economic Review
Income Fund, Inc.
- -----------------
capital expenditure and building approvals data, and the weakness in the
consumption sector. Growth continued to be concentrated in certain areas of the
economy, with some sectors continuing to struggle with adverse market
conditions. More recently there have been signs, particularly in business
confidence surveys, that the rate of growth may have stabilized in the early
months of 1997.
Retail trade figures have continued to reflect the weakness in the consumer
sector. Real retail sales fell 1.3% over the December quarter, to be only 0.1%
higher than in the December quarter of 1995. These figures were weaker than had
been expected but anecdotal evidence from retailers suggests that January sales
were strong, and improving conditions in the labor market, along with recent
interest rate cuts should support retail sales in early 1997. Consumer sentiment
remained reasonably subdued in late 1996 and early 1997, despite an improving
labor market and reductions in official interest rates. The Westpac consumer
sentiment index rose from 101.4 in October to 106.5 in January, before declining
to 101.2 in February.
The labor market improved slightly over the period under review, with the
rate of unemployment falling from 8.8% in October to 8.6% in January. After
falling 34,100 in September, the total number of persons employed has risen for
four consecutive months by a total of 92,900. In addition the Australian Bureau
of Statistics has revealed that the change to a telephone based survey may have
resulted in the understatement of employment figures by 6,000-9,000 persons per
month for the last six months. These figures suggest that the labor market
should be supportive of a recovery in consumer spending in early 1997.
Inflation continued to trend downwards over the second half of 1996.
Headline CPI for the December quarter was 1.5% year on year, down from 2.1% in
the September quarter. The Treasury underlying measure, which excludes the
downward pressure of falling mortgage rates, was at 2.1% for the December
quarter, close to the bottom of the Reserve Bank's 2%-3% target band. The
strength of the Australian dollar over 1996 was a major restraint on import
prices, particularly in the auto sector, where mainly Japanese imports were also
affected by the weakness of the Yen. The benign releases of CPI over 1996 have
been consistent with the very low deflator figures in the National Accounts.
The main risk to future inflation, highlighted consistently in recent
statements from the Reserve Bank, is the rate of wage inflation. Average weekly
ordinary time earnings for the quarter to November 1996 were up 3.9% year on
year, after a rise of 3.8% in the quarter to August. Wage inflation had been
falling over late 1995 and early 1996, and the increase reported in the November
1996 figures raised fears that wage rises may be stabilizing at close to 4%.
Settlements from enterprise bargaining agreements have continued to cause
concern at the Reserve Bank, and trade union claims for a substantial increase
in "safety net" wages will be a further pressure.
The Australian current account deficit came in better than expected at
A$1.4bn in December 1996, after a deficit of A$1.9bn in November, and the
government forecast of A$20bn for 1996/97 should be achieved, or improved upon.
However, the trade balance, which had driven much of the improvement in the
current account over the past year, has displayed some deterioriation in recent
months.
4
<PAGE>
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Kleinwort
Benson
Australian Economic Review
Income Fund, Inc.
- -----------------
New Zealand
The weakness seen in New Zealand economic growth over the first two
quarters of 1996 continued into the third quarter of the year. The production
measure of GDP rose 0.6% over the September quarter of 1996, to be 2.2% above
September 1995 levels. Again, growth was concentrated in the service sector, and
a large proportion of increase in manufacturing output went into the
accumulation of inventories, with ongoing weakness in final demand. The export
sector performed reasonably well, but was boosted by a rise in key commodity
prices, which may not be a feature of the final quarter of 1996. December
quarter retail sales showed continued weakness, falling 0.1% over the quarter,
and offered an early indication that growth in the final quarter of 1996 may be
disappointing.
The current weakness in economic activity has still to feed into lower
inflation, and underlying CPI was up 2.4% year on year in the December quarter,
after 2.3% in the September quarter. The disparity between inflation in
tradeable and non-tradeable goods continued, with the strength of the New
Zealand dollar restraining tradeable prices, particularly in the auto sector.
The housing sector was a significant contributor to December quarter inflation.
However, more recent evidence from the retail sales figures and from the labor
market suggests that weakness in domestic demand will eventually lead inflation
lower. Employment fell by 0.5% over the December quarter, to be 2.1% above year
ago levels, suggesting that weaker activity is finally feeding through to the
labor market. The unemployment rate actually fell from 6.3% to 5.9% over the
quarter, but this was a result of a large fall in the volatile participation
rate.
The inconclusive general election on October 12, 1996 was followed by
protracted negotiations which finally resulted in a National/NZ First coalition
government in December. The National Party's Jim Bolger remained as Prime
Minister, and NZ First leader Winston Peters assumed the post of Treasurer. In
terms of policy changes, the Reserve Bank of New Zealand's inflation target was
widened to from 0%-2% to 0%-3%, but this had been expected and the main
principles of the Reserve Bank Act remained in place. The slight increases in
spending announced by the new coalition will be largely balanced in the
short-term by a deferral of expected tax cuts.
Debt Markets
The Reserve Bank of Australia reduced the official cash rate twice over the
final quarter of 1996, from 7% to 6%, citing the downwards trend in inflation.
The bond market was largely driven by the US Treasury market, and Australian
bonds rallied in November and December, with ten year yields falling from 7.35%
to 7%. However, in January, when stronger activity in the US sparked fears of an
imminent rise in the Fed funds rate, the Australian bond market declined in line
with the US Treasury market. Ten year yields ended the period under review
little changed at 7.41%, with the yield premium over US bonds declining slightly
to just below 1%.
The weakening of the New Zealand economy and expectations of future
improvements in inflation led the Reserve Bank of New Zealand (RBNZ) to allow
cash rates to decline from 9% to 7.5% over the quarter. The New Zealand bond
market, like its Australian counterpart, closely tracked the US Treasury market
over the period. Ten year yields in
5
<PAGE>
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Kleinwort
Benson
Australian Economic Review
Income Fund, Inc.
- -----------------
New Zealand declined from 7.24% at the beginning of November to a low of 6.94%
in early December. However the New Zealand bond market then declined over the
remainder of the period, and yields rose to 7.34% at the end of January.
Australian and New Zealand Dollars
The Australian dollar declined against the US dollar over the period under
review, falling from US$0.788 to US$0.762. Its performance in trade-weighted
terms was slightly better, with the index almost unchanged over the period. The
A$/US$ rate was depressed by reductions in short-term interest rates and an
increasing expectation of further cuts in the near future. In addition, the
strong demand for Australian dollar assets from Japanese investors, keen to take
advantage of the large yield premium over the Yen, decreased sharply. A third
factor working against the currency was the decline in the gold price, sparked
by falling demand from central banks. Since the end of January, interest rate
expectations have been revised upwards in light of recent evidence on potential
wage pressures. Therefore the currency, which has stabilized, should receive
some support going forward.
The New Zealand dollar rose in trade-weighted terms but underperformed a
rising US dollar. On a trade-weighted basis the NZ$ rose from 67.3 at the end of
October to 68.3 at the end of January, but against the US$ the currency fell
from $0.708 to $0.688 over the same period. The fall in short-term interest
rates led to a decline in demand for the currency, especially Japanese demand
for short dated NZ$ eurobond issues. However, the RBNZ's hawkish stance on
inflation seems to have been little changed by the new coalition government, and
the currency has remained well supported. The Governor of the RBNZ has again
stated that he would prefer to see a higher interest rate/lower currency
monetary policy mix, but foreign exchange markets seem unwilling to comply.
6
<PAGE>
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Kleinwort
Benson
Australian Portfolio of Investments and Cash on Deposit
Income Fund, Inc. January 31, 1997
- ----------------- (Unaudited)
<TABLE>
<CAPTION>
Long-Term Investments -- 97.1%
Principal Amount Value (US$)
- ---------------- ------------
<C> <S> <C> <C>
Australian Government and Semi-Government Bonds -- 64.4%
Australian Government Bonds -- 17.7%
A$ 6,000,000 Commonwealth Government Bond 12.5% due 9/15/97.................... $ 4,756,145
12,000,000 Commonwealth Government Bond 12% due 11/15/01..................... 11,027,184
6,000,000 Commonwealth Government Bond 10% due 2/15/06...................... 5,334,630
------------
..................................... 21,117,959
------------
Government and Semi-Government Bonds with Eurobond Structure -- 39.0%
A$ 5,000,000 Australian Industrial Development Corp. 9.25% due 2/17/03.................... 4,136,423
1,300,000 State Bank of New South Wales 9.25% due 2/18/03.................... 1,074,231
16,450,000 Queensland Treasury Corp. 8% due 5/14/03....................... 12,987,072
6,500,000 South Australian Finance Authority 7.75% due 6/30/03.................... 5,048,339
22,400,000 Queensland Treasury Corp. 6.5% due 6/14/05..................... 15,996,346
2,200,000 Treasury Corp. of Victoria 9% due 6/27/05....................... 1,810,479
1,000,000 Commonwealth Bank of Australia 9% due 8/15/05....................... 823,426
6,500,000 New South Wales Treasury Corp. 6.5% due 5/1/06...................... 4,584,987
------------
..................................... 46,461,303
------------
Other Semi-Government Bonds -- 7.7%
A$ 6,500,000 Western Australia Treasury Corp. 12.5% due 4/1/98.................... 5,325,448
4,000,000 Victorian Public Finance Authority 12.5% due 10/15/03.................. 3,874,201
------------
..................................... 9,199,649
------------
Total Australian Government and Semi-Government Bonds -- (Cost $67,681,925) ..................................... 76,778,911
------------
Eurobonds -- 25.9%
A$ 2,500,000 Deutsche Bank Australia 9.75% due 4/8/97..................... 1,919,342
5,800,000 Toyota Motor Credit Corp. 10.75% due 3/6/98.................... 4,638,125
2,500,000 Unilever Australia Ltd. 12% due 4/8/98....................... 2,031,337
3,500,000 DSL Finance N.V. 10.25% due 4/7/00.................... 2,921,815
6,000,000 Morgan Guaranty Trust Co. 8% due 4/18/01....................... 4,723,473
2,000,000 Bayerische Vereinsbank AG 8.75% due 5/17/01.................... 1,613,966
3,300,000 Export Finance & Insurance Corp. 9% due 3/26/03....................... 2,696,063
2,000,000 Bayerische Vereinsbank AG 10.25% due 10/28/04.................. 1,740,947
5,000,000 KFW International Finance 9.125% due 7/26/05................... 4,146,681
5,000,000 Eurofima 9.875% due 1/17/07................... 4,381,348
------------
Total Eurobonds -- (Cost $29,243,713) ..................................... 30,813,097
------------
Australian Corporate Bond -- 2.9%
A$ 4,000,000 National Australia Bank 12% due 7/15/99 -- (Cost $3,153,736) 3,425,153
------------
New Zealand Government Bond -- 3.9%
NZ$ 6,600,000 New Zealand Government Bond 10% due 7/15/97 -- (Cost $4,541,349) 4,597,491
------------
Total Long-Term Investments -- (Cost $104,620,223) ..................................... 115,614,652
------------
Cash on Deposit -- 0.5%
A$ 774,129 Brown Brothers Harriman & Co., upon demand at 5% ..................................... 590,390
US$ 35,382 Brown Brothers Harriman & Co., upon demand at 4.25% ..................................... 35,382
------------
Total Cash on Deposit -- (Cost $639,767) ..................................... 625,772
------------
Total Portfolio of Investments and Cash on Deposit -- 97.6% (Cost $105,259,990).................................. 116,240,424
Other Assets less Liabilities -- 2.4% ..................................... 2,813,974
------------
Net Assets -- 100.0% ..................................... $119,054,398
============
</TABLE>
7
<PAGE>
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Kleinwort
Benson
Australian Financial Summary
Income Fund, Inc. for the Three Months ended January 31, 1997
- ----------------- (Unaudited)
Net Asset Value
Total Net Assets Per Share
---------------- ---------
Beginning of period, November 1, 1996 ....... $ 124,501,149 $10.41
------------- ------
Net investment income* .................... 2,315,505 0.19
Net realized gain on:
Investment transactions* ................ 27,141 0.00
Foreign currency transactions** ....... 529,578 0.05
Change in unrealized appreciation on:
Investments* .......................... (847,455) (0.07)
Foreign currency denominated assets
and liabilities** ................... (4,781,742) (0.40)
Dividends paid from net investment income (2,689,778) (0.22)
------------- ------
Net decrease in net asset value ........... (5,446,751) (0.45)
------------- ------
End of period, January 31, 1997 ............. $ 119,054,398 $ 9.96
============= ======
* Net increase in net assets before net foreign currency loss and dividends
paid was $1,495,191, equal to $0.12 per share.
** Net realized and unrealized foreign currency loss was ($4,252,164), equal
to ($0.35) per share.
The financial statements contained in this report were not audited and,
accordingly, no opinion is expressed on them.
8
<PAGE>
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Kleinwort
Benson
Australian Dividend Reinvestment and Cash Purchase Plan
Income Fund, Inc. Tax Information (Unaudited)
- -----------------
Dividend Reinvestment and Cash
Purchase Plan
The Fund offers to shareholders a Dividend Reinvestment Plan which provides
participants with a prompt and simple way to reinvest their income dividends and
capital gain distributions in additional Fund shares. If you choose to
participate in the Plan, your income dividends and capital gain distributions
will automatically be reinvested in Fund shares at the lower of market price or
net asset value, at up to a 5% discount from market price, on valuation date.
The Plan also includes a Cash Purchase option which provides Reinvestment Plan
participants with the opportunity to make additional cash investments in Fund
shares directly through the Plan Agent.
The Plan is entirely voluntary and, subject to the terms and conditions of
the Plan, you may join or withdraw at any time. A brochure with more
information, including the full terms and conditions, and an application is
available from the Plan Agent, Boston EquiServe, telephone (800) 730-6001.
If you wish to participate and your shares are registered in your name,
simply complete and return the application form. If your shares are held in the
name of a brokerage firm, bank or other nominee, your shares may need to be
re-registered in your own name in order for you to participate. Please consult
your broker to determine what needs to be done to arrange for you to join the
Plan.
Tax Information
In accordance with United States Federal income tax regulations, a summary
for the fiscal year ended December 31, 1996, of the dividends and distributions
paid for Federal income tax purposes on a per share basis is listed below.
Distributions to Shareholders:
- ------------------------------
Dividends ............................................. $ 0.8100
Foreign Taxes (Australia) ............................. 0.0414
--------
Total Distributions ................................... $ 0.8514
========
Distributions by Source:
- ------------------------
Ordinary Income, Foreign Source:
Australia ........................................... $ 0.8185
New Zealand ......................................... 0.0303
--------
Total Foreign Source ................................ 0.8488
Ordinary Income, U.S. Source .......................... 0.0026
--------
Total Distributions ................................... $ 0.8514
========
For 1996 the Fund has elected to treat the foreign taxes paid by it as
having been paid proportionately by its shareholders. These foreign taxes have
been allocated and reported according to the above schedule.
Shareholders can generally use this foreign tax amount, which is reported
in Box 3 on Form 1099-DIV, to claim either a tax credit or an itemized deduction
on their U.S. Federal tax return. IRS Form 1116 should be used to apply for a
tax credit while for a deduction the amount of foreign taxes paid should be
included on IRS Schedule A.
If you require further tax information please consult your tax advisor.
Please note that if you report for Federal income tax purposes on a
calendar year basis, amounts which should be included in your 1996 return should
be based on the Form 1099-DIV provided to you in January 1997.
9
<PAGE>
Directors and Officers
Sir Robert C. Cotton
Director and Chairman of the Board
Sydney, Australia
David M. Felder
Director and President
London, England
James J. Foley
Director
Belmont, MA
Leonard T. Hinde
Director
Cremorne, NSW, Australia
The Earl of Limerick
Director
London, England
Nigel S. MacEwan
Director
Darien, CT
G. William Miller
Director and Deputy Chairman of the Board
Washington, DC
Michael Fortier
Secretary and Treasurer
New York, NY
Investment Advisor
Kleinwort Benson Investment
Management Americas Inc.
New York, NY
Kleinwort
Benson
Australian
Income Fund, Inc.
75 Wall Street
New York, NY 10005
(800) 237-4218
