ISI
TOTAL RETURN
U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Edward S. Hyman
Chairman
Richard T. Hale
Vice Chairman
W. James Price
Vice Chairman
James J. Cunnane
Director
John F. Kroeger
Director
Louis E. Levy
Director
Eugene J. McDonald
Director
Harry Woolf
Director
R. Alan Medaugh
President
Gary V. Fearnow
Vice President
Nancy Lazar
Vice President
Edward J. Veilleux
Vice President
Brian C. Nelson
Vice President and Secretary
Carrie L. Butler
Vice President
Joseph A. Finelli
Treasurer
Denice DeFlorio
Assistant Vice President
Laurie D. DePrine
Assistant Secretary
INVESTMENT OBJECTIVE
A mutual fund designed to provide a high level of total return with relative
stability of principal as well as the secondary objective of high current income
consistent with an investment in securities issued by the United States
Treasury.
================================================================================
INVESTMENT ADVISOR
ISI Inc.
717 Fifth Avenue
New York, NY 10022
(800) 955-7175
================================================================================
SHAREHOLDER SERVICING AGENT
Investment Company Capital Corp.
P.O. Box 419426
Kansas City, MO 64141-6426
(800) 882-8585
================================================================================
DISTRIBUTOR
Armata Financial Corp.
P.O. Box 515
Baltimore, MD 21203
ISI MUTUAL FUNDS
717 Fifth Avenue
New York, NY 10022
(800) 955-7175
/s/ INTERNATIONAL STRATEGY AND INVESTMENT
ISI
TOTAL RETURN
U.S. TREASURY
FUND SHARES
(A CLASS OF TOTAL RETURN
U.S. TREASURY FUND, INC.)
TREASURIES
SEMI-ANNUAL REPORT
APRIL 30, 1996
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISOR'S REPORT
We are pleased to report on the progress of your Fund for the period ended
April 30, 1996. As of this date, the Fund recorded a 6-month total return of
- -2.2% and a 12-month total return of 8.1%. Since its inception on August 10,
1988, the Fund has produced a cumulative total return of 87.8%, which translates
into an average annual total return of 8.5%. These figures assume the
reinvestment of dividends and capital gains distributions and exclude the impact
of any sales charge.
OVERVIEW
Overall, interest rates declined during the last 12 months. As stronger
economic news has surfaced recently, interest rates have moved back up. The
market's quick response to the appearance of fast growth has helped regulate the
economy and control inflation. The result has been a general decline in both
interest rates (see chart below) and inflation.
30-YEAR TREASURY YIELDS
[GRAPH GOES HERE]
DATE YIELD DATE YIELD DATE YIELD
4/96 6.907 6/95 6.618 6/94 7.609
5/95 6.650 5/94 7.429
3/96 6.668 4/95 7.337 4/94 7.308
2/96 6.470
1/96 6.029 3/95 7.432 3/94 7.093
2/95 7.444 2/94 6.662
12/95 5.949 1/95 7.699 1/94 6.239
11/95 6.131
10/95 6.329 12/94 7.882 12/93 6.349
11/94 8.000 11/93 6.302
9/95 6.502 10/94 7.970 10/93 5.971
8/95 6.648
7/95 6.847 9/94 7.818 9/93 6.026
8/94 7.452 8/93 6.093
7/94 7.397 7/93 6.565
6/93 6.673 6/92 7.781 6/91 8.406
5/93 6.981 5/92 7.838 5/91 8.266
4/93 6.933 4/92 8.037 4/91 8.183
3/93 6.927 3/92 7.959 3/91 8.247
2/93 6.898 2/92 7.790 2/91 8.204
1/93 7.198 1/92 7.759 1/91 8.196
12/92 7.397 12/91 7.401 12/90 8.249
11/92 7.598 11/91 7.943 11/90 8.487
10/92 7.627 10/91 7.915 10/90 8.760
9/92 7.382 9/91 7.810 9/90 8.950
8/92 7.410 8/91 8.061 8/90 8.985
7/92 7.459 7/91 8.342 7/90 8.412
6/90 8.401 6/89 8.038
5/90 8.579 5/89 8.596
4/90 8.995 4/89 8.929
3/90 8.627 3/89 9.093
2/90 8.543 2/89 9.115
1/90 8.453 1/89 8.821
12/89 7.979 12/88 8.992
11/89 7.891 11/88 9.069
10/89 7.907 10/88 8.741
9/89 8.237 9/88 9.052
8/89 8.205 8/88 9.299
7/89 7.921
Source: Bloomberg Financial Services
PORTFOLIO
We actively manage the Fund's maturity structure by moving the Fund's
investments into short-term maturities as the economy appears to be growing
quickly and into longer-term maturities when growth and inflation appear to be
slowing. During the last 12 months, the Fund has increased its short-term
maturities (cash reserves), as shown in the chart below.
SHORT-TERM HOLDINGS
(MATURING IN LESS THAN ONE YEAR)
Percent of Portfolio
- --------------------------------------------------------------------------------
April 1995 7.6%
October 1995 20.5%
April 1996 23.1%
We believe that interest rates are moving close to a peak. As our economic
research indicates a slowing economy and lower inflation ahead, we will extend
the maturities of the short-term issues in the portfolio. Please see our
Interest Rate Outlook on the following page for more details.
We would like to welcome our new investors to the Fund and thank those who
have been with us for some time. We appreciate your confidence.
Sincerely,
/s/ R. ALAN MEDAUGH
R. Alan Medaugh
President
May 24, 1996
<PAGE>
INTEREST RATE OUTLOOK
The rate of growth in the economy is likely to slow as we move through
1996. The recent interest rate rise, a stretched consumer and a long lag between
Federal Reserve easing and a pick-up in growth should produce a slow growth
profile. Overseas, we expect slow growth to continue, especially in Europe as
these economies struggle with the impact of declining government spending.
Inflation, after picking up in early 1996, should return to a subdued 1.5% pace.
In the U.S., credit demand is moderate, in part because of work aimed at
reducing the government deficit. Slow growth, low inflation and subdued credit
demand should produce lower interest rates in the second half of 1996. Please
see our forecast table below for more details.
ISI ECONOMIC FORECAST
================================================================================
95:4Q 96:1Q 96:2Q* 96:3Q* 96:4Q* 97:1Q* 97:2Q*
- --------------------------------------------------------------------------------
Real GDP 0.6% 2.0% 2.5% 1.0% 1.0% 1.0% 3.5%
- --------------------------------------------------------------------------------
GDP Deflator** 1.9% 1.5% 2.5% 2.0% 1.5% 1.5% 1.5%
- --------------------------------------------------------------------------------
30-Year Bond
Yields 6.0% 6.7% 6.6% 6.2% 6.0% 5.5% 5.7%
Fed Funds Rate 5.5% 5.2% 5.2% 5.0% 4.8% 4.5% 4.5%
* Estimated.
** A more accurate cost of living barometer than the CPI.
Source: ISI Inc.
GROWTH IN THE U.S.
We expect growth in the first half of 1996 to be above the level in late
1995. The credit markets are sensitive to fast growth because it reduces excess
capacity in the economy, providing an opportunity for price increases. We expect
growth in the first half of 1996 to be in the 2% to 2.5% range. The inflation
risk from this level of growth is low because new capacity is being added at a
4.0% annual rate (see chart, top right).
<TABLE>
<CAPTION>
CAPACITY GROWTH Y/Y %
Mar 3.8%
[GRAPH GOES HERE]
<S> <C>
68:1 68:2 68:3 68:4 68:5 68:6 68:7 68:8 68:9 68:10 68:11 68:12
Y/Y % 5.2 5.2 5.3 5.2 5.1 5.1 4.9 4.9 4.9 4.9 4.7 4.7
69:1 69:2 69:3 69:4 69:5 69:6 69:7 69:8 69:9 69:10 69:11 69:12
Y/Y % 4.8 4.7 4.6 4.6 4.6 4.4 4.6 4.4 4.4 4.4 4.4 4.3
70:1 70:2 70:3 70:4 70:5 70:6 70:7 70:8 70:9 70:10 70:11 70:12
Y/Y % 4.2 4.2 4.2 4.1 4.0 4.1 4.0 4.0 3.9 3.8 3.8 3.6
71:1 71:2 71:3 71:4 71:5 71:6 71:7 71:8 71:9 71:10 71:11 71:12
Y/Y % 3.7 3.7 3.5 3.4 3.4 3.3 3.3 3.3 3.1 3.1 3.1 3.1
72:1 72:2 72:3 72:4 72:5 72:6 72:7 72:8 72:9 72:10 72:11 72:12
Y/Y % 3.0 3.0 3.1 3.1 3.1 3.1 3.1 3.0 3.2 3.2 3.1 3.1
73:1 73:2 73:3 73:4 73:5 73:6 73:7 73:8 73:9 73:10 73:11 73:12
Y/Y % 3.1 3.1 3.1 3.2 3.2 3.2 3.2 3.3 3.2 3.2 3.2 3.3
74:1 74:2 74:3 74:4 74:5 74:6 74:7 74:8 74:9 74:10 74:11 74:12
Y/Y % 3.3 3.3 3.4 3.3 3.4 3.4 3.5 3.3 3.4 3.4 3.6 3.4
75:1 75:2 75:3 75:4 75:5 75:6 75:7 75:8 75:9 75:10 75:11 75:12
Y/Y % 3.4 3.4 3.3 3.3 3.1 3.1 3.0 2.9 2.8 2.8 2.6 2.6
76:1 76:2 76:3 76:4 76:5 76:6 76:7 76:8 76:9 76:10 76:11 76:12
Y/Y % 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.7 2.7 2.7 2.7 2.7
77:1 77:2 77:3 77:4 77:5 77:6 77:7 77:8 77:9 77:10 77:11 77:12
Y/Y % 2.7 2.7 2.8 2.8 2.7 2.7 2.8 2.8 2.8 2.8 2.8 2.9
78:1 78:2 78:3 78:4 78:5 78:6 78:7 78:8 78:9 78:10 78:11 78:12
Y/Y % 2.9 2.9 2.9 2.9 3.0 3.0 3.0 3.0 3.1 3.1 3.1 3.0
79:1 79:2 79:3 79:4 79:5 79:6 79:7 79:8 79:9 79:10 79:11 79:12
Y/Y % 3.0 3.0 3.0 3.0 2.9 3.0 2.9 2.9 2.8 2.9 2.9 2.8
80:1 80:2 80:3 80:4 80:5 80:6 80:7 80:8 80:9 80:10 80:11 80:12
Y/Y % 2.9 2.9 2.8 2.9 3.0 3.0 3.1 3.1 3.2 3.2 3.3 3.3
81:1 81:2 81:3 81:4 81:5 81:6 81:7 81:8 81:9 81:10 81:11 81:12
Y/Y % 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.4 3.4 3.4 3.4 3.5
82:1 82:2 82:3 82:4 82:5 82:6 82:7 82:8 82:9 82:10 82:11 82:12
Y/Y % 3.4 3.3 3.2 3.2 3.1 3.0 3.0 2.9 2.9 2.8 2.7 2.7
83:1 83:2 83:3 83:4 83:5 83:6 83:7 83:8 83:9 83:10 83:11 83:12
Y/Y % 2.7 2.6 2.6 2.5 2.6 2.6 2.5 2.5 2.4 2.4 2.4 2.4
84:1 84:2 84:3 84:4 84:5 84:6 84:7 84:8 84:9 84:10 84:11 84:12
Y/Y % 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.4 2.4 2.3
85:1 85:2 85:3 85:4 85:5 85:6 85:7 85:8 85:9 85:10 85:11 85:12
Y/Y % 2.4 2.4 2.5 2.5 2.5 2.5 2.6 2.7 2.8 2.7 2.8 2.9
86:1 86:2 86:3 86:4 86:5 86:6 86:7 86:8 86:9 86:10 86:11 86:12
Y/Y % 2.8 2.8 2.7 2.6 2.5 2.5 2.4 2.3 2.2 2.2 2.1 2.0
87:1 87:2 87:3 87:4 87:5 87:6 87:7 87:8 87:9 87:10 87:11 87:12
Y/Y % 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0
88:1 88:2 88:3 88:4 88:5 88:6 88:7 88:8 88:9 88:10 88:11 88:12
Y/Y % 1.9 1.8 1.8 1.8 1.7 1.7 1.6 1.6 1.6 1.5 1.5 1.4
89:1 89:2 89:3 89:4 89:5 89:6 89:7 89:8 89:9 89:10 89:11 89:12
Y/Y % 1.4 1.5 1.5 1.6 1.6 1.6 1.7 1.7 1.8 1.8 1.8 1.9
90:1 90:2 90:3 90:4 90:5 90:6 90:7 90:8 90:9 90:10 90:11 90:12
Y/Y % 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9
91:1 91:2 91:3 91:4 91:5 91:6 91:7 91:8 91:9 91:10 91:11 91:12
Y/Y % 1.9 1.9 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.9
92:1 92:2 92:3 92:4 92:5 92:6 92:7 92:8 92:9 92:10 92:11 92:12
Y/Y % 1.9 1.9 1.9 1.9 2.0 2.0 2.0 2.0 2.1 2.1 2.1 2.1
93:1 93:2 93:3 93:4 93:5 93:6 93:7 93:8 93:9 93:10 93:11 93:12
Y/Y % 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1
94:1 94:2 94:3 94:4 94:5 94:6 94:7 94:8 94:9 94:10 94:11 94:12
Y/Y % 2.2 2.3 2.4 2.4 2.5 2.6 2.7 2.8 2.9 3.0 3.1 3.2
95:1 95:2 95:3 95:4 95:5 95:6 95:7 95:8 95:9 95:10 95:11 95:12
Y/Y % 3.2 3.2 3.3 3.3 3.4 3.5 3.5 3.5 3.6 3.6 3.7 3.8
96:1 96:2 96:3 96:4 96:5 96:6
Y/Y % 3.8 3.8 3.8 3.9 N/A N/A
</TABLE>
Source: ISI Inc.
We expect growth in the second half of 1996 to slow to the 1.0% level. The
recent interest rate rise, a high consumer debt burden and the multi-year delay
between Federal Reserve easing and an upturn in economic growth are the
catalysts for the slowdown. A slowdown of this magnitude would reduce the fear
of a return to inflation and help reduce interest rates.
GROWTH OUTSIDE THE U.S.
In 1994, the specter of a synchronized global expansion caused a sharp
rise in interest rates. In 1996, European growth prospects are slight. Germany's
growth, for example, is forecast by the German government to be only 0.5% this
year. Japanese growth is likely to pick up, but slow money growth and a fragile
financial system should hold it to 2.0% or less for 1996. We survey 28 countries
to gauge world growth. Currently, these surveys show world growth as slow at
best. Please see our survey results on the top of p. 3.
<PAGE>
INTEREST RATE OUTLOOK (continued)
[GRAPH GOES HERE]
<TABLE>
<CAPTION>
FOREIGN (STRENGTH-WEAKNESS)--Plot points for Foreign (Strength-Weakness)
<S> <C>
9/5/94 9/12/94 9/19/94 9/26/94 10/3/94 10/10/94 10/17/94
13 Wk. Avg. NA NA NA 3.1 3.8 4.1 4.8
10/24/94 10/31/94 11/7/94 11/14/94 11/21/94 11/28/94 12/5/94
13 Wk. Avg. 6.0 5.6 4.6 5.2 5.4 5.8 6.5
12/12/94 12/19/94 12/26/94 1/2/95 1/9/95 1/16/95 1/23/95
13 Wk. Avg. 7.1 6.5 6.5 8.4 7.8 7.2 6.0
1/30/95 2/6/95 2/13/95 2/20/95 2/27/95 3/6/95 3/13/95 3/20/95
13 Wk. Avg. 5.8 6.4 5.3 5.8 6.7 7.2 6.7 7.4
3/27/95 4/3/95 4/10/95 4/17/95 4/24/95 5/1/95 5/8/95 5/15/95
13 Wk. Avg. 7.3 6.4 7.4 6.9 6.2 6.2 5.3 5.6
5/22/95 5/29/95 6/5/95 6/12/95 6/19/95 6/26/95 7/3/95 7/10/95
13 Wk. Avg. 5.6 4.1 2.1 1.3 0.5 1.1 0.5 0.3
7/17/95 7/24/95 7/31/95 8/7/95 8/14/95 8/21/95 8/28/95 9/4/95
13 Wk. Avg. 0.9 0.4 -0.6 -1.2 -1.0 -2.8 -2.7 -3.1
9/11/95 9/18/95 9/25/95 10/2/95 10/9/95 10/16/95 10/23/95
13 Wk. Avg. -2.5 -2.5 -3.6 -3.8 -4.8 -5.2 -5.2
10/30/95 11/6/95 11/13/95 11/20/95 11/27/95 12/4/95 12/11/95
13 Wk. Avg. -5.4 -3.9 -4.8 -4.9 -4.8 -4.5 -4.4
12/18/95 12/25/95 1/1/96 1/8/96 1/15/96 1/22/96 1/29/96
13 Wk. Avg. -4.5 -5.0 -4.8 -4.3 -5.0 -5.8 -5.2
2/5/96 2/12/96 2/19/96 2/26/96 3/4/96 3/11/96 3/18/96 3/25/96
13 Wk. Avg. -5.4 -5.9 -4.5 -3.7 -3.5 -4.3 -5.4 -4.7
4/1/96 4/8/96 4/15/96 4/22/96 4/29/96 5/6/96 5/13/96 5/20/96
13 Wk. Avg. -5.7 -6.4 -5.8 -5.3 -5.6 -5.7 -5.9 -7.3
5/27/96 6/3/96 6/10/96 6/17/96
13 Wk. Avg. -6.2 -6.2 -5.7 NA
</TABLE>
Source: ISI Inc.
OUTLOOK FOR INFLATION
The prices of many commodities have increased this year. As a result,
there is likely to be some pressure on consumer prices. Price increases become
large and widespread if money growth has been high. Central banks around the
world have been in an inflation-fighting posture, and money growth, although up
recently, is quite low compared to periods such as 1974, 1979 and 1990 when
commodity prices surged (see chart below).
G7 MONEY Y/Y % U.S., J, G, F, U.K., C Eq. Wts
Mar 5.4%
[GRAPH GOES HERE]
<TABLE>
<CAPTION>
G7 MONEY U.S.,J,G,F,U.K.,C Eq.Wts= Plot points for G7 Money Y/Y Chart
<S> <C>
72:1 72:2 72:3 72:4 72:5 72:6 72:7 72:8 72:9 72:10 72:11 72:12
Y/Y % 12.8 11.2 12.2 12.8 13.3 13.6 13.6 13.7 14.3 15.2 15.7 16.8
73:1 73:2 73:3 73:4 73:5 73:6 73:7 73:8 73:9 73:10 73:11 73:12
Y/Y % 16.3 16.5 16.2 16.2 16.3 15.2 14.9 14.8 13.9 13.0 13.1 13.0
74:1 74:2 74:3 74:4 74:5 74:6 74:7 74:8 74:9 74:10 74:11 74:12
Y/Y % 13.8 13.0 13.5 13.1 12.5 12.7 12.7 12.7 13.2 13.3 13.6 13.1
75:1 75:2 75:3 75:4 75:5 75:6 75:7 75:8 75:9 75:10 75:11 75:12
Y/Y % 12.6 13.3 13.1 13.0 13.1 13.8 13.8 13.8 14.0 14.1 13.7 14.3
76:1 76:2 76:3 76:4 76:5 76:6 76:7 76:8 76:9 76:10 76:11 76:12
Y/Y % 14.4 14.5 14.2 14.4 14.7 14.7 14.7 15.0 14.2 14.7 14.2 13.3
77:1 77:2 77:3 77:4 77:5 77:6 77:7 77:8 77:9 77:10 77:11 77:12
Y/Y % 13.9 13.2 12.9 12.9 12.6 12.3 12.2 11.8 12.2 11.6 12.3 13.1
78:1 78:2 78:3 78:4 78:5 78:6 78:7 78:8 78:9 78:10 78:11 78:12
Y/Y % 12.6 12.9 12.7 13.0 12.8 13.0 13.7 13.5 13.5 13.4 13.8 12.5
79:1 79:2 79:3 79:4 79:5 79:6 79:7 79:8 79:9 79:10 79:11 79:12
Y/Y % 12.6 12.6 12.6 12.4 12.8 12.5 11.9 12.3 12.2 12.1 11.3 11.7
80:1 80:2 80:3 80:4 80:5 80:6 80:7 80:8 80:9 80:10 80:11 80:12
Y/Y % 11.4 11.3 11.2 10.3 10.0 9.9 9.8 10.1 9.7 9.5 10.0 9.3
81:1 81:2 81:3 81:4 81:5 81:6 81:7 81:8 81:9 81:10 81:11 81:12
Y/Y % 8.8 9.3 9.7 11.1 10.7 10.3 10.5 9.7 9.6 9.3 8.0 9.2
82:1 82:2 82:3 82:4 82:5 82:6 82:7 82:8 82:9 82:10 82:11 82:12
Y/Y % 10.3 9.3 8.7 7.6 7.8 8.1 7.5 7.7 8.1 8.8 8.9 8.9
83:1 83:2 83:3 83:4 83:5 83:6 83:7 83:8 83:9 83:10 83:11 83:12
Y/Y % 8.9 9.1 9.4 9.6 9.2 9.0 9.1 9.0 8.9 8.8 8.9 9.1
84:1 84:2 84:3 84:4 84:5 84:6 84:7 84:8 84:9 84:10 84:11 84:12
Y/Y % 8.4 7.1 6.9 6.9 6.7 6.8 6.3 6.2 6.7 6.3 6.8 7.5
85:1 85:2 85:3 85:4 85:5 85:6 85:7 85:8 85:9 85:10 85:11 85:12
Y/Y % 8.1 8.4 8.7 8.5 8.4 8.7 8.9 9.1 9.0 9.2 9.1 9.2
86:1 86:2 86:3 86:4 86:5 86:6 86:7 86:8 86:9 86:10 86:11 86:12
Y/Y % 8.8 8.6 9.0 8.9 9.7 9.4 9.7 10.2 10.1 10.2 10.6 10.0
87:1 87:2 87:3 87:4 87:5 87:6 87:7 87:8 87:9 87:10 87:11 87:12
Y/Y % 10.8 10.9 10.3 10.7 10.2 9.8 9.5 9.1 9.0 9.2 8.1 7.8
88:1 88:2 88:3 88:4 88:5 88:6 88:7 88:8 88:9 88:10 88:11 88:12
Y/Y % 7.7 7.4 7.4 7.3 7.4 7.5 7.9 8.0 8.0 8.0 8.6 8.7
89:1 89:2 89:3 89:4 89:5 89:6 89:7 89:8 89:9 89:10 89:11 89:12
Y/Y % 8.4 8.5 8.5 8.2 7.9 8.1 8.3 8.3 8.7 8.9 8.9 9.7
90:1 90:2 90:3 90:4 90:5 90:6 90:7 90:8 90:9 90:10 90:11 90:12
Y/Y % 9.8 10.0 9.7 9.9 9.7 11.9 11.1 10.9 11.0 10.3 9.7 9.5
91:1 91:2 91:3 91:4 91:5 91:6 91:7 91:8 91:9 91:10 91:11 91:12
Y/Y % 8.7 8.2 8.6 8.4 8.5 5.9 5.9 5.7 5.2 4.8 5.2 4.2
92:1 92:2 92:3 92:4 92:5 92:6 92:7 92:8 92:9 92:10 92:11 92:12
Y/Y % 4.8 5.1 5.0 5.1 5.4 4.9 5.2 5.3 5.3 5.6 5.3 4.8
93:1 93:2 93:3 93:4 93:5 93:6 93:7 93:8 93:9 93:10 93:11 93:12
Y/Y % 4.7 4.4 4.3 4.2 4.3 4.6 4.2 3.9 3.8 3.9 3.7 4.3
94:1 94:2 94:3 94:4 94:5 94:6 94:7 94:8 94:9 94:10 94:11 94:12
Y/Y % 4.6 4.4 4.2 4.5 3.5 3.3 3.7 3.4 3.5 3.3 3.0 2.7
95:1 95:2 95:3 95:4 95:5 95:6 95:7 95:8 95:9 95:10 95:11 95:12
Y/Y % 2.3 2.3 2.2 1.9 2.4 2.8 2.8 3.1 3.4 3.0 3.5 4.5
96:1 96:2 96:3 96:4 96:5 96:6
Y/Y % 4.5 4.9 5.7 5.3 N/A N/A
</TABLE>
Source: ISI Inc.
It is likely that individual commodity prices will show gains in 1996 due to
specific supply/demand situations, but we expect that the entire basket of
commodities will show only a modest increase. After a first half rise that
carried the Consumption Price Deflator (an indicator of price changes and shifts
in the GDP) into the 2.5% range, we expect inflation to return to a low 1.5%
rate later in 1996.
INTEREST RATES
The bond market has reacted to reports of stronger growth in early 1996 by
moving interest rates up 1%. The hike in rates is to prevent a return of
inflation. The interest rate sensitive areas of the economy, such as housing,
have already felt the effect of higher rates, and the refinancing of mortgages
has fallen sharply as rates have climbed. With the Prime Rate already at a high
8.25%, loans to small and mid-sized businesses seem likely to be affected by
cost pressure. The recent jump in rates is another force lowering second half
growth. As the economy slows, interest rates have room to fall from today's 7%
on long-term Treasuries to 6% by year-end.
<PAGE>
ADDITIONAL PERFORMANCE INFORMATION
The shareholder letter included in this report contains statistics
designed to help you evaluate the performance of your Fund's management.The
Securities and Exchange Commission (SEC) requires that when we report such
figures, we also include the Fund's total return, according to a standardized
formula, for various time periods through the end of the most recent calendar
quarter. The SEC total return figures differ from those we reported because the
time periods may be different and because the SEC calculation includes the
impact of the Fund's currently effective 4.45% maximum sales charge.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
% Return with
Periods ended 3/31/96: Sales Charge
- --------------------------------------------------------------------------------
One Year 5.93%
- --------------------------------------------------------------------------------
Five Years 7.70%
- --------------------------------------------------------------------------------
Since Inception (8/10/88) 8.13%
- --------------------------------------------------------------------------------
These total returns correspond to those experienced by individual
shareholders only if their shares were purchased on the first day of each time
period and the maximum sales charge was paid.
Any performance figures shown are for the full period indicated. Since
investment return and principal value will fluctuate, an investor's shares may
be worth more or less than their original cost when redeemed. Past performance
is not an indicator of future results.
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the ISI Funds, including
charges and expenses, obtain a prospectus from your investment representative or
directly from the Fund at 1-800-955-7175. Read it carefully before you invest.
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS
APRIL 30, 1996
(UNAUDITED)
MATURITY PAR VALUE
INTEREST RATE DATE (000) (NOTE A)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
U.S. TREASURY BONDS - 67.2%
10.000% 5/15/10 $ 5,000 $ 6,048,440
12.000 8/15/13 20,500 28,949,854
11.750 11/15/14 36,000 50,940,000
7.500 11/15/16 37,000 38,682,353
9.000 11/15/18 69,750 84,571,875
8.875 2/15/19 10,000 11,990,630
8.750 8/15/20 7,000 8,324,533
TOTAL U.S. TREASURY BONDS
(Cost $247,957,681) 229,507,685
U.S. TREASURY NOTES - 22.6%
7.000 9/30/96 47,000 47,323,125
6.375 3/31/01 30,000 29,934,390
TOTAL U.S. TREASURY NOTES
(Cost $77,425,530) 77,257,515
REPURCHASE AGREEMENTS - 8.7%
GOLDMAN SACHS & CO., 5.20%
Dated 4/30/96, to be repurchased on 5/1/96,
collateralized by U.S. Treasury
Bonds with a market value of $30,407,342.
(Cost $29,811,000) 29,811 29,811,000
TOTAL INVESTMENTS IN SECURITIES - 98.5%
(Cost $355,194,211)* 336,576,200
OTHER ASSETS IN EXCESS OF LIABILITIES, NET - 1.5% 5,254,429
NET ASSETS - 100.0% $341,830,629
NET ASSET VALUE AND REDEMPTION PRICE PER:
ISI CLASS SHARE
($193,020,641 / 20,083,409 shares outstanding) $ 9.61
FLAG INVESTORS CLASS A SHARE
($148,809,988 / 15,488,576 shares outstanding) $ 9.61
MAXIMUM OFFERING PRICE PER:
ISI CLASS SHARE
($9.61 / .9555) $10.06
FLAG INVESTORS CLASS A SHARE
($9.61 / .955) $10.06
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Also aggregate cost for federal tax purposes.
See accompanying Notes to Financial Statements.
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME (NOTE A):
Interest $ 11,680,187
EXPENSES:
Investment advisory fee (Note B) 488,740
Distribution fee (Note B) 453,202
Administration fee (Note B) 215,147
Transfer agent fee (Note B) 96,171
Accounting fee (Note B) 47,083
Printing and postage 30,816
Legal 13,650
Audit 11,967
Miscellaneous 9,473
Insurance 5,849
Custodian fee 5,460
Registration fee 4,894
Directors' fees 4,550
Total expenses 1,387,002
Net investment income 10,293,185
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain from security transactions 2,385,791
Change in unrealized appreciation/(depreciation) of investments (20,085,536)
Net loss on investments (17,699,745)
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (7,406,560)
- --------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX
MONTHS ENDED FOR THE YEAR
APRIL 30, 1996 ENDED
(UNAUDITED) OCTOBER 31, 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
INCREASE/(DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 10,293,185 $ 21,682,495
Net gain from security transactions 2,385,791 2,796,088
Change in unrealized appreciation/(depreciation)
on investments (20,085,536) 36,191,069
Net increase/(decrease) in net assets
resulting from operations (7,406,560) 60,669,652
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income:
ISI Class Shares (7,493,203) (11,897,210)
Flag Investors Class A Shares (5,860,239) (9,785,285)
Net realized short-term gains:
ISI Class Shares -- (1,385,249)
Flag Investors Class A Shares -- (1,162,209)
Total distributions (13,353,442) (24,229,953)
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of shares 18,782,838 31,613,586
Value of shares issued in reinvestment of dividends 7,151,777 15,133,836
Cost of shares repurchased (34,164,675) (87,824,419)
Decrease in net assets derived
from capital share transactions (8,230,060) (41,076,997)
Total decrease in net assets (28,990,062) (4,637,298)
NET ASSETS:
Beginning of period 370,820,691 375,457,989
End of period $341,830,629 $370,820,691
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS--ISI CLASS SHARES AND FLAG INVESTORS CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
FOR THE SIX
MONTHS ENDED
APRIL 30, 1996 FOR THE YEAR ENDED OCTOBER 31,
(UNAUDITED) 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period $ 10.19 $ 9.22 $ 11.35 $ 10.47 $ 10.41
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.28 0.57 0.51 0.62 0.76
Net realized and unrealized gain/(loss)
on investments (0.49) 1.04 (1.16) 1.12 0.05
Total from Investment Operations (0.21) 1.61 (0.65) 1.74 0.81
LESS DISTRIBUTIONS:
Dividends from net investment income
and short-term gains (0.37) (0.64) (1.20) (0.79) (0.70)
Distributions from net realized
long-term gains -- -- (0.28) (0.07) (0.05)
Total distributions (0.37) (0.64) (1.48) (0.86) (0.75)
Net asset value at end of period $ 9.61 $ 10.19 $ 9.22 $ 11.35 $ 10.47
TOTAL RETURN* (2.16)% 18.09 % (6.22)% 17.33% 8.96 %
RATIOS TO AVERAGE DAILY NET ASSETS:
Expenses(1) 0.76 % 0.80 % 0.77 % 0.77 % 0.77 %
Net investment income(1) 5.66 % 5.94 % 4.98 % 5.21 % 5.65 %
SUPPLEMENTAL DATA:
Net assets at end of period (000):
ISI Class Shares $193,021 $206,615 $200,309 $232,103 $207,518
Flag Investors Class A Shares 148,810 164,206 175,149 224,790 250,210
Portfolio turnover rate 128 % 194 % 68 % 249 % 191 %
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total return excludes the effect of sales charge.
(1) Annualized.
See accompanying Notes to Financial Statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
A. SIGNIFICANT ACCOUNTING POLICIES -- Total Return U.S. Treasury Fund, Inc. (the
"Fund") was organized as a Maryland Corporation on June 3, 1988 and commenced
operations on August 10, 1988. The Fund is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
At April 30, 1996, the Fund consisted of two classes of shares: ISI Total
Return U.S. Treasury Fund ("ISI Class") and Flag Investors Total Return U.S.
Treasury Fund Class A Shares ("Flag Investors Class A"). The Flag Investors
Class A and the ISI Class Shares each have a different sales charge.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant accounting
policies are as follows:
SECURITY VALUATION -- Portfolio securities that are listed on a national
securities exchange are valued on the basis of their last sale price or, in
the absence of recorded sales, at the average of readily available closing
bid and asked prices. Securities or other assets for which market quotations
are not readily available are valued at their fair value so determined in
good faith by the Investment Advisor under procedures established and
monitored by the Board of Directors. Short-term obligations with maturities
of 60 days or less are valued at amortized cost which approximates market.
REPURCHASE AGREEMENTS -- The Fund may agree to purchase money market
instruments subject to the seller's agreement to repurchase them at an agreed
upon date and price. The seller, under a repurchase agreement, will be
required on a daily basis to maintain the value of the securities subject to
the agreement at not less than the repurchase price. The agreement is
conditioned upon the collateral being deposited under the Federal Reserve
book-entry system.
FEDERAL INCOME TAXES -- No provision is made for federal income taxes as it
is the Fund's intention to continue to qualify as a regulated investment
company and to make requisite distributions to shareholders that will be
sufficient to relieve it from all or substantially all federal income and
excise taxes. The Fund's policy is to distribute to shareholders
substantially all of its taxable net investment income and net realized
capital gains.
OTHER -- Security transactions are accounted for on the trade date and the
cost of investments sold or redeemed is determined by use of the specific
identification method for both financial reporting and income tax purposes.
Interest income is recorded on an accrual basis and includes, when
applicable, the pro rata amortization of premiums and accretion of discounts.
B. INVESTMENT ADVISORY FEE, TRANSACTIONS WITH AFFILIATES AND OTHER FEES --
International Strategy & Investment Inc. ("ISI") serves as the Fund's
investment advisor and Investment Company Capital Corp. ("ICC"), a subsidiary
of Alex. Brown Financial Corp., serves as the Fund's administrator. As
compensation for its advisory services, ISI receives an annual fee from the
Fund, calculated daily and paid monthly, at the following annual rates based
upon the Fund's average daily net assets: .20% of the first $100 million,
.18% of the next $100 million, .16% of the next $100 million, .14% of the
next $200 million and .12% of that portion in excess of $500 million. In
addition, the Fund pays the investment advisor 1.5% of the Fund's gross
income.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
As compensation for its administrative services, ICC receives an annual fee
from the Fund, calculated daily and paid monthly, at the following annual
rates based upon the Fund's average daily net assets: .10% of the first $100
million, .09% of the next $100 million, .08% of the next $100 million, .07%
of the next $200 million and .06% of that portion in excess of $500 million.
In addition, the Fund pays the administrator .50% of the Fund's gross income.
As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, based on the Fund's average
daily net assets. ICC received $47,083 for accounting services for the six
months ended April 30, 1996.
As compensation for its transfer agent services, ICC receives from the Fund a
per account fee, calculated and paid monthly. ICC received $96,171 for
transfer agent services for the six months ended April 30, 1996.
As compensation for providing distribution services, Armata Financial Corp.,
an affiliate of Alex. Brown & Sons Incorporated ("Alex. Brown"), receives
from the Fund an annual fee, calculated daily and paid monthly, at an annual
rate equal to .25% of the average daily net assets of the ISI Class Shares.
Alex. Brown receives from the Fund an annual fee, calculated daily and paid
monthly, at the annual rate of .25% of the average daily net assets of the
Flag Investors Class A Shares. For the six months ended April 30, 1996,
distribution fees aggregated $453,202, of which $254,335 and $198,867 were
allocated to the ISI Class and Flag Investors Class A Shares, respectively.
The fund complex of which the Fund is a part has adopted a retirement plan
for eligible Directors. The actuarially computed pension expense allocated to
the Fund for the six months ended April 30, 1996 was $3,640.
C. CAPITAL SHARE TRANSACTIONS -- At April 30, 1996 there were 100 million shares
of $.001 par value common stock authorized (44 million Flag Investors Class
A, 44 million ISI Class, 5 million Flag Investors Class B, 500,000 Flag
Investors Class D and 6.5 million undesignated). Transactions of the Fund
were as follows:
ISI CLASS SHARES
- -----------------------------------------------------------------
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
APRIL 30, 1996 OCTOBER 31,
(UNAUDITED) 1995
- -----------------------------------------------------------------
Shares sold 1,346,511 2,579,624
Shares issued to share-
holders on reinvest-
ment of dividends 421,617 929,740
Shares redeemed (1,962,282) (4,961,123)
Net decrease in shares
outstanding (194,154) (1,451,759)
Proceeds from sale
of shares $ 13,722,841 $ 24,590,536
Reinvested dividends 4,277,918 8,893,813
Net asset value of
shares redeemed (19,864,715) (47,310,070)
Net decrease from
capital share
transactions $ (1,863,956) $(13,825,721)
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
FLAG INVESTORS CLASS A SHARES
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
APRIL 30, 1996 OCTOBER 31,
(UNAUDITED) 1995
- -----------------------------------------------------------------
Shares sold 501,743 726,425
Shares issued to share-
holders on reinvest-
ment of dividends 282,897 653,526
Shares redeemed (1,415,664) (4,262,626)
Net decrease in shares
outstanding (631,024) (2,882,675)
Proceeds from sale
of shares $ 5,059,997 $ 7,023,050
Reinvested dividends 2,873,859 6,240,023
Net asset value of
shares redeemed (14,299,960) (40,514,349)
Net decrease from
capital share
transactions $ (6,366,104) $(27,251,276)
D. INVESTMENT TRANSACTIONS -- Purchases and sales of investment securities,
other than short-term obligations, aggregated $428,684,660 and $443,583,447,
respectively, for the six months ended April 30, 1996.
At April 30, 1996, aggregate gross unrealized appreciation for all securities
in which there is an excess of market value over tax cost was $2,318, and
aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over market value was $18,620,329.
E. NET ASSETS -- At April 30, 1996, net assets consisted of:
Paid-in capital:
ISI Class Shares $205,712,244
Flag Investors Class A
Shares 155,162,231
Undistributed net realized gain
from security transactions 3,977,827
Overdistribution of net
investment income (4,403,662)
Unrealized depreciation of
investments (18,618,011)
$341,830,629
- -----------------------------------------------------------------
