Investment Advisor's Report
We are pleased to report on the progress of your Fund for the fiscal year
ended October 31, 1998. In a year of generally declining rates, the Fund
recorded a total return of 12.5%. From its inception on August 10, 1988 through
October 31, 1998, the Fund has posted a cumulative total return of 143.50%,
which translates into an average annual total return of 9.1%. These figures
assume the reinvestment of dividends and capital gains distributions, but
exclude the impact of any sales charge.
Review of Bond and Money Market Rates
Treasury yields dropped from 6.20% to 5.10% during the fiscal year. The
Asian financial crisis which began in March, 1997 influenced U.S. rates. The
Flight-to-Quality bid and very low domestic inflation were key to the general
decline in Treasury rates. Please see below for a graph of the 30 year Treasury
yield.
30-Year Treasury Yields
DATE YIELD DATE YIELD DATE YIELD
- ------------------------------------------------------------
F 10/30 5.157 F 10/9 5.115 F 9/18 5.147
T 10/29 5.078 T 10/8 4.999 T 9/17 5.179
W 10/28 5.120 W 10/7 4.860 W 9/16 5.221
T 10/27 5.089 T 10/6 4.735 T 9/15 5.260
M 10/26 5.107 M 10/5 4.716 M 9/14 5.230
F 10/23 5.178 F 10/2 4.840 F 9/11 5.229
T 10/22 5.137 T 10/1 4.882 T 9/10 5.204
W 10/21 5.071 W 9/30 4.978 W 9/ 9 5.262
T 10/20 5.069 T 9/29 5.094 T 9/ 8 5.363
M 10/19 4.983 M 9/28 5.141 M 9/ 7 5.284
F 10/16 4.978 F 9/25 5.109 F 9/ 4 5.288
T 10/15 4.967 T 9/24 5.164 T 9/ 3 5.303
W 10/14 5.031 W 9/23 5.168 W 9/ 2 5.333
T 10/13 5.089 T 9/22 5.152 T 9/ 1 5.341
M 10/12 5.117 M 9/21 5.125 M 8/31 5.267
- ------------------------------------------------------------
<PAGE>
DATE YIELD DATE YIELD DATE YIELD
- ------------------------------------------------------------
F 8/28 5.338 F 8/ 7 5.631 F 7/17 5.746
T 8/27 5.344 T 8/ 6 5.671 T 7/16 5.727
W 8/26 5.417 W 8/ 5 5.671 W 7/15 5.705
T 8/25 5.428 T 8/ 4 5.631 T 7/14 5.717
M 8/24 5.471 M 8/ 3 5.659 M 7/13 5.693
F 8/21 5.433 F 7/31 5.713 F 7/10 5.625
T 8/20 5.513 T 7/30 5.722 T 7/ 9 5.605
W 8/19 5.556 W 7/29 5.769 W 7/ 8 5.626
T 8/18 5.556 T 7/28 5.740 T 7/ 7 5.603
M 8/17 5.546 M 7/27 5.708 M 7/ 6 5.572
F 8/14 5.540 F 7/24 5.686 F 7/ 3 5.599
T 8/13 5.650 T 7/23 5.657 T 7/ 2 5.600
W 8/12 5.609 W 7/22 5.681 W 7/ 1 5.629
T 8/11 5.602 T 7/21 5.663 T 6/30 5.627
M 8/10 5.624 M 7/20 5.713 M 6/29 5.642
- ------------------------------------------------------------
<PAGE>
DATE YIELD DATE YIELD DATE YIELD
- ------------------------------------------------------------
F 6/26 5.632 F 6/ 5 5.787 F 5/15 5.972
T 6/25 5.655 T 6/ 4 5.817 T 5/14 5.984
W 6/24 5.658 W 6/ 3 5.781 W 5/13 5.939
T 6/23 5.643 T 6/ 2 5.790 T 5/12 5.972
M 6/22 5.669 M 6/ 1 5.777 M 5/11 6.029
F 6/19 5.669 F 5/29 5.802 F 5/ 8 5.977
T 6/18 5.700 T 5/28 5.825 T 5/ 7 5.953
W 6/17 5.747 W 5/27 5.846 W 5/ 6 5.940
T 6/16 5.649 T 5/26 5.835 T 5/ 5 5.986
M 6/15 5.574 M 5/25 5.900 M 5/ 4 5.937
F 6/12 5.662 F 5/22 5.900 F 5/ 1 5.933
T 6/11 5.654 T 5/21 5.923 T 4/30 5.949
W 6/10 5.702 W 5/20 5.894 W 4/29 6.075
T 6/ 9 5.788 T 5/19 5.934 T 4/28 6.069
M 6/ 8 5.779 M 5/18 5.923 M 4/27 6.053
- ------------------------------------------------------------
<PAGE>
DATE YIELD DATE YIELD DATE YIELD
- ------------------------------------------------------------
F F 4/10 5.881 F 3/20 5.885
T T 4/ 9 5.879 T 3/19 5.900
W W 4/ 8 5.896 W 3/18 5.906
T T 4/ 7 5.843 T 3/17 5.890
M 4/27 6.053 M 4/ 6 5.824 M 3/16 5.862
F 4/24 5.945 F 4/ 3 5.794 F 3/13 5.893
T 4/23 5.981 T 4/ 2 5.841 T 3/12 5.866
W 4/22 5.956 W 4/ 1 5.881 W 3/11 5.938
T 4/21 5.948 T 3/31 5.933 T 3/10 5.959
M 4/20 5.925 M 3/30 5.978 M 3/ 9 5.962
F 4/17 5.876 F 3/27 5.958 F 3/ 6 6.018
T 4/16 5.871 T 3/26 5.975 T 3/ 5 6.063
W 4/15 5.883 W 3/25 5.942 W 3/ 4 6.023
T 4/14 5.899 T 3/24 5.880 T 3/ 3 6.073
M 4/13 5.926 M 3/23 5.883 M 3/ 2 6.011
- ------------------------------------------------------------
<PAGE>
DATE YIELD DATE YIELD DATE YIELD
- ------------------------------------------------------------
F 2/27 5.923 F 2/ 6 5.920 F 1/16 5.809
T 2/26 5.947 T 2/ 5 5.933 T 1/15 5.739
W 2/25 5.921 W 2/ 4 5.862 W 1/14 5.733
T 2/24 5.960 T 2/ 3 5.863 T 1/13 5.738
M 2/23 5.900 M 2/ 2 5.878 M 1/12 5.689
F 2/20 5.871 F 1/30 5.800 F 1/ 9 5.728
T 2/19 5.851 T 1/29 5.840 T 1/ 8 5.750
W 2/18 5.837 W 1/28 5.942 W 1/ 7 5.787
T 2/17 5.796 T 1/27 5.940 T 1/ 6 5.718
M 2/16 5.848 M 1/26 5.897 M 1/ 5 5.735
F 2/13 5.849 F 1/23 5.970 F 1/ 2 5.838
T 2/12 5.865 T 1/22 5.865 T 1/ 1 5.925
W 2/11 5.846 W 1/21 5.811 W 12/31 5.923
T 2/10 5.922 T 1/20 5.845 T 12/30 5.970
M 2/ 9 5.943 M 1/19 5.809 M 12/29 5.925
- ------------------------------------------------------------
<PAGE>
DATE YIELD DATE YIELD DATE YIELD
- ------------------------------------------------------------
F 12/26 5.899 F 12/ 5 6.083 F 11/14 6.113
T 12/25 5.911 T 12/ 4 6.049 T 11/13 6.097
W 12/24 5.913 W 12/ 3 6.015 W 11/12 6.102
T 12/23 5.872 T 12/ 2 6.036 T 11/11 6.143
M 12/22 5.885 M 12/ 1 6.037 M 11/10 6.143
F 12/19 5.922 F 11/28 6.054 F 11/ 7 6.155
T 12/18 5.934 T 11/27 6.050 T 11/ 6 6.182
W 12/17 5.997 W 11/26 6.047 W 11/ 5 6.218
T 12/16 5.963 T 11/25 6.060 T 11/ 4 6.252
M 12/15 5.972 M 11/24 6.067 M 11/ 3 6.208
F 12/12 5.925 F 11/21 6.033 F 10/31 6.153
T 12/11 5.994 T 11/20 6.062
W 12/10 6.070 W 11/19 6.039
T 12/09 6.116 T 11/18 6.073
M 12/08 6.143 M 11/17 6.067
- ------------------------------------------------------------
Source: Bloomberg Inc.
The delayed response of the U.S. Federal Reserve and most other Central
Banks to the Asia financial crisis is not usual. The result has been a longer
running crisis and one that has spread out (Russia this past summer and Brazil
this fall). The Federal Reserve cut rates by 25 basis points three times; the
first on September 30th, a second time on October 15th, and a third time on
November 17. Other Central Banks have also cut rates. This global response
indicates a realization that deflation is just as destabilizing to an economy as
inflation. Please see a table of rate cuts announced in October and the first
half of November. We believe short interest rates will continue to be cut
through at least mid 1999.
Central Bank Easings
October
- --------------------------------------------------------------------------------
1. U.S. 7. Ireland 13. Indonesia
2. Canada 8. Denmark 14. Singapore
3. U.K. 9. Poland 15. Thailand
4. Italy 10. Czech Republic 16. Taiwan
5. Spain 11. South Korea 17. China
6. Portugal 12. Malaysia 18. Russia
November
- --------------------------------------------------------------------------------
1. Spain 7. Taiwan 13. Japan
2. Portugal 8. Ireland 14. U.S.
3. Denmark 9. Malaysia 15. Canada
4. Sweden 10. Hungary
5. U.K. 11. Sweden
6. Chile 12. Brazil
Portfolio Management
The structure of the fund was lengthened over the first ten months of the
fiscal year. The unfolding of the Asia Financial Crisis generally favored
Treasuries. With the turmoil of August, the market began to anticipate Federal
Reserve easings. At the close of the fiscal year with two Federal Reserve
easings accomplished, the portfolio duration was reduced slightly. Also in
August, the distortions caused by the long running Asian Financial Crisis hit
credit quality
1
<PAGE>
spreads. Recently, the Federal Reserve and other Central Bank
easings have moderated the credit crunch a bit but the retreat of risk capital
will most likely mean wide credit quality spreads remain through much of 1999.
Please see chart below.
SINGLE-A CORPORATE BOND YIELD minus
10 YEAR TREASURY YIELD
NOV. 12 217 BASIS POINTS
<TABLE>
<CAPTION>
SINGLE-A SINGLE-A SINGLE-A
CORPORATE BOND YIELD CORPORATE BOND YIELD CORPORATE BOND YIELD
minus minus minus
10 YEAR 10 YEAR 10 YEAR
TREASURY YIELD TREASURY YIELD TREASURY YIELD
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C>
1 JAN 97 117 25 MAR 97 112 16 JUN 97 122
2 JAN 97 115 26 MAR 97 108 17 JUN 97 119
3 JAN 97 115 27 MAR 97 106 18 JUN 97 121
6 JAN 97 115 28 MAR 97 106 19 JUN 97 121
7 JAN 97 117 31 MAR 97 106 20 JUN 97 120
8 JAN 97 115 1 APR 97 107 23 JUN 97 119
9 JAN 97 117 2 APR 97 109 24 JUN 97 119
10 JAN 97 114 3 APR 97 110 25 JUN 97 119
13 JAN 97 112 4 APR 97 112 26 JUN 97 118
14 JAN 97 114 7 APR 97 112 27 JUN 97 118
15 JAN 97 114 8 APR 97 110 30 JUN 97 118
16 JAN 97 116 9 APR 97 110 1 JUL 97 119
17 JAN 97 115 10 APR 97 109 2 JUL 97 120
20 JAN 97 115 11 APR 97 108 3 JUL 97 123
21 JAN 97 118 14 APR 97 108 4 JUL 97 123
22 JAN 97 114 15 APR 97 112 7 JUL 97 124
23 JAN 97 113 16 APR 97 110 8 JUL 97 121
24 JAN 97 116 17 APR 97 111 9 JUL 97 122
27 JAN 97 112 18 APR 97 114 10 JUL 97 122
28 JAN 97 113 21 APR 97 113 11 JUL 97 122
29 JAN 97 116 22 APR 97 114 14 JUL 97 120
30 JAN 97 116 23 APR 97 114 15 JUL 97 122
31 JAN 97 115 24 APR 97 110 16 JUL 97 121
3 FEB 97 116 25 APR 97 111 17 JUL 97 122
4 FEB 97 117 28 APR 97 113 18 JUL 97 121
5 FEB 97 116 29 APR 97 120 21 JUL 97 121
6 FEB 97 117 30 APR 97 118 22 JUL 97 124
7 FEB 97 124 1 MAY 97 120 23 JUL 97 121
10 FEB 97 123 2 MAY 97 122 24 JUL 97 120
11 FEB 97 116 5 MAY 97 119 25 JUL 97 120
12 FEB 97 116 6 MAY 97 116 28 JUL 97 119
13 FEB 97 121 7 MAY 97 114 29 JUL 97 121
14 FEB 97 119 8 MAY 97 112 30 JUL 97 122
17 FEB 97 119 9 MAY 97 117 31 JUL 97 122
18 FEB 97 120 12 MAY 97 116 1 AUG 97 117
19 FEB 97 119 13 MAY 97 114 4 AUG 97 117
20 FEB 97 116 14 MAY 97 116 5 AUG 97 117
21 FEB 97 119 15 MAY 97 116 6 AUG 97 116
24 FEB 97 119 16 MAY 97 115 7 AUG 97 116
25 FEB 97 118 19 MAY 97 114 8 AUG 97 117
26 FEB 97 116 20 MAY 97 117 11 AUG 97 115
27 FEB 97 116 21 MAY 97 117 12 AUG 97 112
28 FEB 97 114 22 MAY 97 115 13 AUG 97 116
3 MAR 97 116 23 MAY 97 117 14 AUG 97 119
4 MAR 97 114 26 MAY 97 117 15 AUG 97 118
5 MAR 97 114 27 MAY 97 117 18 AUG 97 120
6 MAR 97 116 28 MAY 97 116 19 AUG 97 117
7 MAR 97 119 29 MAY 97 117 20 AUG 97 117
10 MAR 97 117 30 MAY 97 118 21 AUG 97 117
11 MAR 97 118 2 JUN 97 117 22 AUG 97 117
12 MAR 97 117 3 JUN 97 118 25 AUG 97 114
13 MAR 97 115 4 JUN 97 118 26 AUG 97 118
14 MAR 97 113 5 JUN 97 119 27 AUG 97 116
17 MAR 97 114 6 JUN 97 123 28 AUG 97 118
18 MAR 97 113 9 JUN 97 121 29 AUG 97 115
19 MAR 97 115 10 JUN 97 121 1 SEP 97 115
20 MAR 97 114 11 JUN 97 120 2 SEP 97 118
21 MAR 97 114 12 JUN 97 122 3 SEP 97 115
24 MAR 97 113 13 JUN 97 119 4 SEP 97 115
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SINGLE-A SINGLE-A SINGLE-A
CORPORATE BOND YIELD CORPORATE BOND YIELD CORPORATE BOND YIELD
minus minus minus
10 YEAR 10 YEAR 10 YEAR
TREASURY YIELD TREASURY YIELD TREASURY YIELD
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C>
5 SEP 97 119 27 NOV 97 125 18 FEB 98 148
8 SEP 97 119 28 NOV 97 124 19 FEB 98 145
9 SEP 97 118 1 DEC 97 124 20 FEB 98 146
10 SEP 97 118 2 DEC 97 124 23 FEB 98 144
11 SEP 97 119 3 DEC 97 126 24 FEB 98 140
12 SEP 97 109 4 DEC 97 126 25 FEB 98 141
15 SEP 97 120 5 DEC 97 122 26 FEB 98 141
16 SEP 97 124 8 DEC 97 122 27 FEB 98 142
17 SEP 97 121 9 DEC 97 125 2 MAR 98 140
18 SEP 97 119 10 DEC 97 126 3 MAR 98 137
19 SEP 97 121 11 DEC 97 126 4 MAR 98 139
22 SEP 97 122 12 DEC 97 129 5 MAR 98 140
23 SEP 97 120 15 DEC 97 126 6 MAR 98 140
24 SEP 97 118 16 DEC 97 126 9 MAR 98 141
25 SEP 97 119 17 DEC 97 126 10 MAR 98 140
26 SEP 97 120 18 DEC 97 127 11 MAR 98 141
29 SEP 97 121 19 DEC 97 128 12 MAR 98 143
30 SEP 97 122 22 DEC 97 126 13 MAR 98 143
1 OCT 97 121 23 DEC 97 127 16 MAR 98 144
2 OCT 97 123 24 DEC 97 125 17 MAR 98 145
3 OCT 97 126 25 DEC 97 125 18 MAR 98 144
6 OCT 97 125 26 DEC 97 125 19 MAR 98 145
7 OCT 97 123 29 DEC 97 125 20 MAR 98 143
8 OCT 97 123 30 DEC 97 126 23 MAR 98 142
9 OCT 97 124 31 DEC 97 126 24 MAR 98 142
10 OCT 97 120 1 JAN 98 126 25 MAR 98 141
13 OCT 97 120 2 JAN 98 129 26 MAR 98 138
14 OCT 97 123 5 JAN 98 134 27 MAR 98 138
15 OCT 97 121 6 JAN 98 139 30 MAR 98 137
16 OCT 97 122 7 JAN 98 137 31 MAR 98 139
17 OCT 97 114 8 JAN 98 140 1 APR 98 144
20 OCT 97 122 9 JAN 98 147 2 APR 98 144
21 OCT 97 121 12 JAN 98 145 3 APR 98 146
22 OCT 97 123 13 JAN 98 143 6 APR 98 144
23 OCT 97 121 14 JAN 98 141 7 APR 98 145
24 OCT 97 124 15 JAN 98 141 8 APR 98 146
27 OCT 97 146 16 JAN 98 141 9 APR 98 142
28 OCT 97 130 19 JAN 98 141 10 APR 98 142
29 OCT 97 135 20 JAN 98 138 13 APR 98 141
30 OCT 97 135 21 JAN 98 140 14 APR 98 141
31 OCT 97 132 22 JAN 98 142 15 APR 98 142
3 NOV 97 129 23 JAN 98 140 16 APR 98 141
4 NOV 97 127 26 JAN 98 140 17 APR 98 140
5 NOV 97 130 27 JAN 98 137 20 APR 98 140
6 NOV 97 131 28 JAN 98 138 21 APR 98 139
7 NOV 97 130 29 JAN 98 143 22 APR 98 140
10 NOV 97 130 30 JAN 98 144 23 APR 98 139
11 NOV 97 130 2 FEB 98 143 24 APR 98 139
12 NOV 97 131 3 FEB 98 145 27 APR 98 137
13 NOV 97 129 4 FEB 98 145 28 APR 98 135
14 NOV 97 130 5 FEB 98 144 29 APR 98 135
17 NOV 97 130 6 FEB 98 144 30 APR 98 137
18 NOV 97 127 9 FEB 98 144 1 MAY 98 139
19 NOV 97 128 10 FEB 98 142 4 MAY 98 139
20 NOV 97 127 11 FEB 98 141 5 MAY 98 138
21 NOV 97 128 12 FEB 98 150 6 MAY 98 139
24 NOV 97 128 13 FEB 98 149 7 MAY 98 138
25 NOV 97 127 16 FEB 98 149 8 MAY 98 137
26 NOV 97 125 17 FEB 98 150 11 MAY 98 135
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SINGLE-A SINGLE-A SINGLE-A
CORPORATE BOND YIELD CORPORATE BOND YIELD CORPORATE BOND YIELD
minus minus minus
10 YEAR 10 YEAR 10 YEAR
TREASURY YIELD TREASURY YIELD TREASURY YIELD
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C>
12 MAY 97 136 3 AUG 98 145 23 OCT 98 230
13 MAY 98 137 4 AUG 98 146 26 OCT 98 227
14 MAY 98 140 5 AUG 98 146 27 OCT 98 231
15 MAY 98 139 6 AUG 98 147 28 OCT 98 236
18 MAY 98 140 7 AUG 98 147 29 OCT 98 240
19 MAY 98 139 10 AUG 98 147 30 OCT 98 236
20 MAY 98 140 11 AUG 98 147 2 NOV 98 229
21 MAY 98 136 12 AUG 98 150 3 NOV 98 229
22 MAY 98 137 13 AUG 98 148 4 NOV 98 219
25 MAY 98 137 14 AUG 98 149 5 NOV 98 225
26 MAY 98 139 17 AUG 98 150 6 NOV 98 217
27 MAY 98 140 18 AUG 98 148 9 NOV 98 216
28 MAY 98 137 19 AUG 98 149 10 NOV 98 218
29 MAY 98 137 20 AUG 98 148 11 NOV 98 218
1 JUN 98 140 21 AUG 98 159 12 NOV 98 217
2 JUN 98 138 24 AUG 98 161 13 NOV 98 215
3 JUN 98 137 25 AUG 98 158 16 NOV 98 214
4 JUN 98 137 26 AUG 98 172 17 NOV 98 209
5 JUN 98 135 27 AUG 98 181 18 NOV 98 212
8 JUN 98 135 28 AUG 98 184 19 NOV 98 209
9 JUN 98 135 31 AUG 98 184 20 NOV 98 206
10 JUN 98 136 1 SEP 98 183 23 NOV 98 204
11 JUN 98 138 2 SEP 98 180 24 NOV 98 203
12 JUN 98 141 3 SEP 98 186 25 NOV 98 201
15 JUN 98 141 4 SEP 98 184 26 NOV 98 201
16 JUN 98 138 7 SEP 98 184 27 NOV 98 202
17 JUN 98 136 8 SEP 98 185 30 NOV 98 204
18 JUN 98 136 9 SEP 98 192 1 DEC 98 209
19 JUN 98 139 10 SEP 98 203 2 DEC 98 215
22 JUN 98 140 11 SEP 98 201 3 DEC 98 221
23 JUN 98 142 14 SEP 98 198 4 DEC 98 219
24 JUN 98 144 15 SEP 98 199 7 DEC 98 212
25 JUN 98 143 16 SEP 98 198 8 DEC 98 209
26 JUN 98 142 17 SEP 98 203 9 DEC 98 219
29 JUN 98 142 18 SEP 98 211 10 DEC 98 222
30 JUN 98 142 21 SEP 98 212 11 DEC 98 217
1 JUL 98 145 22 SEP 98 209 14 DEC 98 221
2 JUL 98 144 23 SEP 98 213 15 DEC 98 218
3 JUL 98 144 24 SEP 98 216 16 DEC 98 219
6 JUL 98 144 25 SEP 98 219 17 DEC 98 218
7 JUL 98 144 28 SEP 98 221 18 DEC 98 218
8 JUL 98 143 29 SEP 98 217 21 DEC 98 216
9 JUL 98 144 30 SEP 98 227 22 DEC 98 213
10 JUL 98 145 1 OCT 98 234 23 DEC 98 209
13 JUL 98 144 2 OCT 98 231 24 DEC 98 208
14 JUL 98 145 5 OCT 98 235 25 DEC 98 NA
15 JUL 98 143 6 OCT 98 236 28 DEC 98 NA
16 JUL 98 144 7 OCT 98 233
17 JUL 98 144 8 OCT 98 234
20 JUL 98 145 9 OCT 98 223
21 JUL 98 145 12 OCT 98 223
22 JUL 98 145 13 OCT 98 225
23 JUL 98 145 14 OCT 98 232
24 JUL 98 145 15 OCT 98 245
27 JUL 98 144 16 OCT 98 246
28 JUL 98 143 19 OCT 98 243
29 JUL 98 144 20 OCT 98 240
30 JUL 98 144 21 OCT 98 234
31 JUL 98 141 22 OCT 98 236
</TABLE>
Source: ISI Inc.
Performance Review
During the fiscal year, rates dropped across the maturity spectrum with the
largest declines occurring in the 2 to 7 year maturity range. The steep drop
also produced an inverted yield curve for 3 months to 2 years (4.31% vs. 4.11%).
U.S. Treasury Yields
Maturity 10/30/97 10/30/98 Yield Change
- --------------------------------------------------------------------------------
3 month 5.19% 4.31% -88 bp
1 year 5.34 4.17 -117 bp
2 years 5.60 4.11 -149 bp
3 years 5.68 4.35 -133 bp
5 years 5.71 4.22 -149 bp
7 years 5.84 4.51 -133 bp
10 years 5.83 4.60 -123 bp
30 years 6.15 5.15 -100 bp
On a total return basis, longer maturities performed better than shorter
maturities, even though they declined by a smaller number of basis points. For
example, 5-year notes purchased in October, 1997 produced a total return of
10.5% through October, 1998 while 30-year bonds produced an 18.2% total return
for the same period. The Fund's long maturity orientation meant it performed
well this fiscal year.
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
November 19, 1998
2
<PAGE>
Economic Outlook for 1999
Overview
We expect the U.S. economy will slow over the next six months. Of greater
investment importance, we see inflation turning into deflation. The Deflator, a
very broad measure of inflation, is likely to register negative readings in the
first half of 1999. Interest rates are likely to fall. For example, the 30-year
U.S. Treasury rate (the benchmark) should decline by one-half of a percent
during the first half of 1999. The U.S. Federal Reserve has cut its key short
term rate three times this year and we expect two more cuts in the first half of
1999, reducing the rate to 4.25% from its starting level of 5.50%. Please see
table below.
ISI ECONOMIC FORECAST
98:1Q 98:2Q 98:3Q 98:4Q 99:1Q 99:2Q
- --------------------------------------------------------------------------------
Nominal GDP 6.4% 2.7% 4.1% 2.0% 1.5% 1.5%
- --------------------------------------------------------------------------------
GDP Deflator 1.1% 0.9% 0.8% 0.0% 0.5% 0.5%
- --------------------------------------------------------------------------------
Real GDP 5.4% 1.8% 3.3% 2.0% 2.0% 2.0%
- --------------------------------------------------------------------------------
30-Year Bond Yields* 5.9% 5.6% 5.0% 5.1% 4.7% 4.6%
- --------------------------------------------------------------------------------
Fed Funds Rate* 5.5% 5.5% 5.2% 4.7% 4.5% 4.2%
- --------------------------------------------------------------------------------
*End of Quarter.
Synchronized Interest Rate Cutting
The strongest current theme is the global flood of Central Bank easings and
calls for more easings. This is not your typical backdrop for financial assets.
We counted 18 Central Bank easings in October, and we're already up to 15
through mid-November. The International Monetary Fund (IMF) has urged French
policymakers to cut rates. Germany's top economic adviser hinted at a
"temporary" relaxation of Maastricht budgetary rigor. We have the feeling that
Japanese policymakers have made more progress recently than they've made in the
past 7 years. The latest stimulus plan could top $180 billion. The Liberal
Democratic Party (LDP) agreed to a voucher plan designed to stimulate consumer
spending rather than saving. The Bank of Japan (BoJ) has pushed the overnight
call rate below 0.20% from 0.50%. The BoJ recently announced a host of new steps
to inject more liquidity, including buying corporate bonds for the first time.
The Nihon Keizai Shimbun, a Japanese business newspaper, reported that 15 of
Japan's biggest lenders will issue preferred securities as a first step in the
government's capital injection program. On top of a recent bank bailout program,
the Government will also lend $1 billion to Nissan Motor.
We believe that Central Banks will in large part justify upcoming rate cuts
with "tame inflation outlook" arguments. That's what Sweden's Central Bank did
recently. We believe Central Banks will consider deflation just as destabilizing
as inflation. The Group of 7 Industrialized Nations (G7) composite consumer
inflation measure is likely to slow to a new low of 1.1% year to year when all
the October numbers are in. Odds of lower inflation are very high. Odds of
global deflation are above 50% (more on this below). G7 economic growth is now
clearly slowing. The newly elected German government was successful in large
part because of its call for faster economic growth, i.e. lower rates and more
money growth.
Synchronized Global Cost Cutting
Shades of a deflationary cost-cutting spiral are developing. Japan Air
Lines (JAL) is cutting salaries. GM will "focus on slicing costs" in 1999.
Chrysler wants to cut costs by $1.5 billion. Malaysian oil producers aim to cut
costs by 30%. Also, Singapore announced plans in
3
<PAGE>
Economic Outlook for 1999 (concluded)
mid-November to make local industry more competitive, particularly
electronics companies, by cutting company wage costs an astounding 15%. The
value of the cuts equal an incredible 7% of Singapore's GDP. U.S. companies, in
an effort to stay profitable, have accelerated layoffs. It is now estimated that
calendar year 1998 will register the most layoffs in the 1990's. As an example
of the fast pace, ISI has counted 49 layoff announcements in the first half of
November with a total of 40,000 jobs involved.
Bond Market Support
Institutional investors have become bullish on bonds, extending their
portfolios. This is often a negative indicator because they have invested and
therefore prices reflect a lot of good news. Offsetting this today are two
powerful forces. First, as we have outlined above, short term rates are likely
to fall and that might push individuals out of money funds, etc. into longer
maturities as occurred in the early 1990's. Please see Money Mountain graph
below.
MONEY MARKET FUNDS + SMALL CDs
OCT. 26 $1714.8 BILLION
MONEY
MOUNTAIN
7 JAN 85 1,059.7
14 JAN 85 1,061.4
21 JAN 85 1,061 3
28 JAN 85 1,061.2
4 FEB 85 1,060.0
11 FEB 85 1,059.8
18 FEB 85 1,060.3
25 FEB 85 1,059.5
4 MAR 85 1,059.2
11 MAR 85 1,059.4
18 MAR 85 1,059.6
25 MAR 85 1,061.2
1 APR 85 1,063.2
8 APR 85 1,062.0
15 APR 85 1,060.6
22 APR 85 1,062.7
29 APR 85 1,062.7
6 MAY 85 1,063.4
13 MAY 85 1,064.0
20 MAY 85 1,064.8
27 MAY 85 1,064.9
3 JUN 85 1,066.0
10 JUN 85 1,066.7
17 JUN 85 1,067.6
24 JUN 85 1,069.8
1 JUL 85 1,070.3
8 JUL 85 1,067.9
15 JUL 85 1,067.0
22 JUL 85 1,065.3
29 JUL 85 1,063.8
5 AUG 85 1,063.0
12 AUG 85 1,062.9
19 AUG 85 1,061.9
26 AUG 85 1,060.8
2 SEP 85 1,060.8
9 SEP 85 1,059.7
16 SEP 85 1,059.7
23 SEP 85 1,059.8
30 SEP 85 1,061.2
7 OCT 85 1,060.7
14 OCT 85 1,060.0
21 OCT 85 1,059.4
28 OCT 85 1,058.5
4 NOV 85 1,058.0
11 NOV 85 1,058.2
18 NOV 85 1,058.0
25 NOV 85 1,058.7
2 DEC 85 1,060.2
9 DEC 85 1,061.1
16 DEC 85 1,061.8
23 DEC 85 1,063.0
30 DEC 85 1,064.0
6 JAN 86 1,066.2
13 JAN 86 1,067.5
20 JAN 86 1,069.1
<PAGE>
27 JAN 86 1,071.6
3 FEB 86 1,072.0
10 FEB 86 1,072.8
17 FEB 86 1,073.7
24 FEB 86 1,073.5
3 MAR 86 1,075.2
10 MAR 86 1,077.6
MONEY
MOUNTAIN
17 MAR 86 1,079.9
24 MAR 86 1,081.9
31 MAR 86 1,086.2
7 APR 86 1,085.4
14 APR 86 1,086.7
21 APR 86 1,088.0
28 APR 86 1,088.6
5 MAY 86 1,088.5
12 MAY 86 1,089.0
19 MAY 86 1,088.4
26 MAY 86 1,088.3
2 JUN 86 1,086.9
9 JUN 86 1,086.1
16 JUN 86 1,086.5
23 JUN 86 1,087.9
30 JUN 86 1,087.4
7 JUL 86 1,087.4
14 JUL 86 1,086.9
21 JUL 86 1,087.3
28 JUL 86 1,087.2
4 AUG 86 1,087.2
11 AUG 86 1,087.2
18 AUG 86 1,084.4
25 AUG 86 1,083.1
1 SEP 86 1,082.1
8 SEP 86 1,081.6
15 SEP 86 1,081.7
22 SEP 86 1,083.8
29 SEP 86 1,084.9
6 OCT 86 1,083.5
13 OCT 86 1,081.4
20 OCT 86 1,079.0
27 OCT 86 1,077.4
3 NOV 86 1,075.5
10 NOV 86 1,072.0
17 NOV 86 1,071.1
24 NOV 86 1,070.4
1 DEC 86 1,069.0
8 DEC 86 1,067.3
15 DEC 86 1,067.9
22 DEC 86 1,069.3
29 DEC 86 1,069.2
5 JAN 87 1,071.5
12 JAN 87 1,069.6
19 JAN 87 1,066.7
26 JAN 87 1,066.4
2 FEB 87 1,064.6
<PAGE>
9 FEB 87 1,064.6
16 FEB 87 1,065.1
23 FEB 87 1,063.2
2 MAR 87 1,062.5
9 MAR 87 1,062.4
16 MAR 87 1,061.8
23 MAR 87 1,060.7
30 MAR 87 1,060.7
6 APR 87 1,059.7
13 APR 87 1,058.7
20 APR 87 1,059.6
27 APR 87 1,060.1
4 MAY 87 1,061.0
11 MAY 87 1,058.9
18 MAY 87 1,059.0
MONEY
MOUNTAIN
25 MAY 87 1,061.1
1 JUN 87 1,063.2
8 JUN 87 1,066.7
15 JUN 87 1,066.7
22 JUN 87 1,067.8
29 JUN 87 1,069.4
6 JUL 87 1,073.1
13 JUL 87 1,074.6
20 JUL 87 1,075.6
27 JUL 87 1,078.7
3 AUG 87 1,081.4
10 AUG 87 1,084.5
17 AUG 87 1,086.3
24 AUG 87 1,088.2
31 AUG 87 1,089.5
7 SEP 87 1,093.2
14 SEP 87 1,096.7
21 SEP 87 1,099.1
28 SEP 87 1,100.1
5 OCT 87 1,103.5
12 OCT 87 1,106.3
19 OCT 87 1,109.5
26 OCT 87 1,118.1
2 NOV 87 1,121.8
9 NOV 87 1,126.4
16 NOV 87 1,130.7
23 NOV 87 1,133.5
30 NOV 87 1,135.2
7 DEC 87 1,139.6
14 DEC 87 1,143.6
21 DEC 87 1,147.6
28 DEC 87 1,148.9
4 JAN 88 1,151.2
11 JAN 88 1,154.8
18 JAN 88 1,161.1
25 JAN 88 1,166.0
1 FEB 88 1,172.2
8 FEB 88 1,176.1
15 FEB 88 1,181.0
<PAGE>
22 FEB 88 1,184.2
29 FEB 88 1,187.0
7 MAR 88 1,190.2
14 MAR 88 1,192.5
21 MAR 88 1,196.1
28 MAR 88 1,198.2
4 APR 88 1,200.4
11 APR 88 1,203.3
18 APR 88 1,203.6
25 APR 88 1,207.1
2 MAY 88 1,208.1
9 MAY 88 1,208.9
16 MAY 88 1,210.7
23 MAY 88 1,213.1
30 MAY 88 1,213.8
6 JUN 88 1,212.5
13 JUN 88 1,212.2
20 JUN 88 1,213.4
27 JUN 88 1,216.3
4 JUL 88 1,217.6
11 JUL 88 1,219.2
18 JUL 88 1,221.4
25 JUL 88 1,222.7
MONEY
MOUNTAIN
1 AUG 88 1,224.6
8 AUG 88 1,225.5
15 AUG 88 1,227.9
22 AUG 88 1,232 1
29 AUG 88 1,233.6
5 SEP 88 1,236.2
12 SEP 88 1,239.0
19 SEP 88 1,243.0
26 SEP 88 1,245.9
3 OCT 88 1,250.7
10 OCT 88 1,253.2
17 OCT 88 1,256.2
24 OCT 88 1,259.3
31 OCT 88 1,261.6
7 NOV 88 1,265.8
14 NOV 88 1,269.3
21 NOV 88 1,273.6
28 NOV 88 1,275.8
5 DEC 88 1,277.2
12 DEC 88 1,279.7
19 DEC 88 1,283.0
26 DEC 88 1,285.3
2 JAN 89 1,289.9
9 JAN 89 1,291.5
16 JAN 89 1,296.4
23 JAN 89 1,299.9
30 JAN 89 1,303.5
6 FEB 89 1,305.9
13 FEB 89 1,309.1
20 FEB 89 1,313.9
27 FEB 89 1,316.3
<PAGE>
6 MAR 89 1,321.9
13 MAR 89 1,325.9
20 MAR 89 1,330.3
27 MAR 89 1,335.3
3 APR 89 1,341.1
10 APR 89 1,346.6
17 APR 89 1,352.0
24 APR 89 1,357.6
1 MAY 89 1,362.7
8 MAY 89 1,369.2
15 MAY 89 1,375.0
22 MAY 89 1,382.1
29 MAY 89 1,385.0
5 JUN 89 1,389.7
12 JUN 89 1,395.2
19 JUN 89 1,400.5
26 JUN 89 1,404.9
3 JUL 89 1,409.4
10 JUL 89 1,413.8
17 JUL 89 1,417.6
24 JUL 89 1,420.4
31 JUL 89 1,423.3
7 AUG 89 1,428.7
14 AUG 89 1,431.8
21 AUG 89 1,435.9
28 AUG 89 1,438.4
4 SEP 89 1,440.7
11 SEP 89 1,442.6
18 SEP 89 1,445.9
25 SEP 89 1,449.0
2 OCT 89 1,452.5
MONEY
MOUNTAIN
9 OCT 89 1,453.5
16 OCT 89 1,454.1
23 OCT 89 1,458.8
30 OCT 89 1,460.4
6 NOV 89 1,462.9
13 NOV 89 1,465.6
20 NOV 89 1,465.6
27 NOV 89 1,467.1
4 DEC 89 1,470.0
11 DEC 89 1,470.8
18 DEC 89 1,472.6
25 DEC 89 1,474.9
1 JAN 90 1,476.2
8 JAN 90 1,476.6
15 JAN 90 1,476.0
22 JAN 90 1,476.7
29 JAN 90 1,478.4
5 FEB 90 1,480.8
12 FEB 90 1,481.8
19 FEB 90 1,482.1
26 FEB 90 1,483.8
5 MAR 90 1,482.7
12 MAR 90 1,485.0
<PAGE>
19 MAR 90 1,486.2
26 MAR 90 1,488.2
2 APR 90 1,490.1
9 APR 90 1,490.0
16 APR 90 1,489.1
23 APR 90 1,491.0
30 APR 90 1,493.5
7 MAY 90 1,492.4
14 MAY 90 1,492.2
21 MAY 90 1,489.1
28 MAY 90 1,489.6
4 JUN 90 1,492.3
11 JUN 90 1,492.5
18 JUN 90 1,497.9
25 JUN 90 1,498.0
2 JUL 90 1,500.8
9 JUL 90 1,499.7
16 JUL 90 1,501.9
23 JUL 90 1,503.1
30 JUL 90 1,505.9
6 AUG 90 1,507.5
13 AUG 90 1,511.4
20 AUG 90 1,511.1
27 AUG 90 1,514.5
3 SEP 90 1,516.5
10 SEP 90 1,516.7
17 SEP 90 1,517.1
24 SEP 90 1,518.4
1 OCT 90 1,521.1
8 OCT 90 1,522.9
15 OCT 90 1,522.3
22 OCT 90 1,523.4
29 OCT 90 1,523.5
5 NOV 90 1,523.3
12 NOV 90 1,524.4
19 NOV 90 1,523.9
26 NOV 90 1,525.3
3 DEC 90 1,527.8
10 DEC 90 1,527.6
MONEY
MOUNTAIN
17 DEC 90 1,528.8
24 DEC 90 1,530.2
31 DEC 90 1,533.9
7 JAN 91 1,534.6
14 JAN 91 1,538.6
21 JAN 91 1,541.2
28 JAN 91 1,542.5
4 FEB 91 1,543.1
11 FEB 91 1,544.0
18 FEB 91 1,542.3
25 FEB 91 1,545.1
4 MAR 91 1,545.0
11 MAR 91 1,543.6
18 MAR 91 1,543.7
25 MAR 91 1,544.3
<PAGE>
1 APR 91 1,542.5
8 APR 91 1,541.3
15 APR 91 1,538.3
22 APR 91 1,537.1
29 APR 91 1,534.5
6 MAY 91 1,533.0
13 MAY 91 1,531.4
20 MAY 91 1,528.2
27 MAY 91 1,525.6
3 JUN 91 1,523.0
10 JUN 91 1,519.1
17 JUN 91 1,518.0
24 JUN 91 1,516.1
1 JUL 91 1,515.4
8 JUL 91 1,511.6
15 JUL 91 1,508.8
22 JUL 91 1,506.5
29 JUL 91 1,501.9
5 AUG 91 1,497.5
12 AUG 91 1,496.1
19 AUG 91 1,493.0
26 AUG 91 1,492.2
2 SEP 91 1,488.9
9 SEP 91 1,486.2
16 SEP 91 1,484.2
23 SEP 91 1,481.4
30 SEP 91 1.476.8
7 OCT 91 1,473.1
14 OCT 91 1,470.8
21 OCT 91 1,467.9
28 OCT 91 1,463.1
4 NOV 91 1,457.8
11 NOV 91 1,457.1
18 NOV 91 1,452.7
25 NOV 91 1,450.5
2 DEC 91 1,446.3
9 DEC 91 1,442.4
16 DEC 91 1,442.6
23 DEC 91 1,434.8
30 DEC 91 1,430.0
6 JAN 92 1,420.6
13 JAN 92 1,416.7
20 JAN 92 1,411.6
27 JAN 92 1,409.5
3 FEB 92 1,404.3
10 FEB 92 1,398.9
17 FEB 92 1,393.9
MONEY
MOUNTAIN
24 FEB 92 1,390.6
2 MAR 92 1,386.7
9 MAR 92 1,378.7
16 MAR 92 1,372.7
23 MAR 92 1,368.2
30 MAR 92 1,362.4
6 APR 92 1,356.3
<PAGE>
13 APR 92 1,352.8
20 APR 92 1,346.8
27 APR 92 1,343.3
4 MAY 92 1,339.8
11 MAY 92 1,333.9
18 MAY 92 1,329.0
25 MAY 92 1,325.7
1 JUN 92 1,323.7
8 JUN 92 1,320.2
15 JUN 92 1,316.6
22 JUN 92 1,313.8
29 JUN 92 1,310.1
6 JUL 92 1,303.2
13 JUL 92 1,303.5
20 JUL 92 1,296.9
27 JUL 92 1,293.9
3 AUG 92 1,290.3
10 AUG 92 1,284.7
17 AUG 92 1,282.6
24 AUG 92 1,280.3
31 AUG 92 1,279.3
7 SEP 92 1,273.7
14 SEP 92 1,270.3
21 SEP 92 1,264.7
28 SEP 92 1,261.7
5 OCT 92 1,256.0
12 OCT 92 1,257.7
19 OCT 92 1,255.0
26 OCT 92 1,250.8
2 NOV 92 1,248.1
9 NOV 92 1,241.1
16 NOV 92 1,236.1
23 NOV 92 1,232.4
30 NOV 92 1,232.0
7 DEC 92 1,228.2
14 DEC 92 1,223.5
21 DEC 92 1,221.5
28 DEC 92 1,217.8
4 JAN 93 1,217.5
11 JAN 93 1,215.7
18 JAN 93 1,211.0
25 JAN 93 1,209.8
1 FEB 93 1,206.1
8 FEB 93 1,203.6
15 FEB 93 1,201.2
22 FEB 93 1,201.7
1 MAR 93 1,199.9
8 MAR 93 1,198.9
15 MAR 93 1,196.3
22 MAR 93 1,194.3
29 MAR 93 1,192.3
5 APR 93 1,187.6
12 APR 93 1,187.5
19 APR 93 1,184.7
26 APR 93 1,184.4
MONEY
MOUNTAIN
<PAGE>
3 MAY 93 1,184.6
10 MAY 93 1,181.9
17 MAY 93 1,179.1
24 MAY 93 1,180.6
31 MAY 93 1,178.7
7 JUN 93 1,177.5
14 JUN 93 1,175.6
21 JUN 93 1,172.6
28 JUN 93 1,168.0
5 JUL 93 1,163.0
12 JUL 93 1,165.1
19 JUL 93 1,162.2
26 JUL 93 1,160.5
2 AUG 93 1,159.2
9 AUG 93 1,156.1
16 AUG 93 1,153.7
23 AUG 93 1,153.9
30 AUG 93 1,150.6
6 SEP 93 1,149.0
13 SEP 93 1,150.6
20 SEP 93 1,148.2
27 SEP 93 1,148.6
4 OCT 93 1,146.3
11 OCT 93 1,145.2
18 OCT 93 1,142.2
25 OCT 93 1,141.5
1 NOV 93 1,142.2
8 NOV 93 1,140.4
15 NOV 93 1,140.3
22 NOV 93 1,143.2
29 NOV 93 1,140.8
6 DEC 93 1,139.4
13 DEC 93 1,139.6
20 DEC 93 1,138.3
27 DEC 93 1,136.2
3 JAN 94 1,137.3
10 JAN 94 1,137.7
17 JAN 94 1,133.7
24 JAN 94 1,133.7
31 JAN 94 1,131.3
7 FEB 94 1,130.3
14 FEB 94 1,129.7
21 FEB 94 1,128.6
28 FEB 94 1,127.7
7 MAR 94 1,128.4
14 MAR 94 1,129.0
21 MAR 94 1,129.3
28 MAR 94 1,127.4
4 APR 94 1,127.3
11 APR 94 1,134.6
18 APR 94 1,135.0
25 APR 94 1,138.8
2 MAY 94 1,138.9
9 MAY 94 1,141.0
16 MAY 94 1,140.4
23 MAY 94 1,142.2
30 MAY 94 1,138.2
6 JUN 94 1,137.6
13 JUN 94 1,138.3
<PAGE>
20 JUN 94 1,136.9
27 JUN 94 1,138.4
4 JUL 94 1,141.1
MONEY
MOUNTAIN
11 JUL 94 1,145.3
18 JUL 94 1,146.2
25 JUL 94 1,147.2
1 AUG 94 1,148.5
8 AUG 94 1,150.7
15 AUG 94 1,151.5
22 AUG 94 1,153.7
29 AUG 94 1,150.3
5 SEP 94 1,151.4
12 SEP 94 1,156.6
19 SEP 94 1,159.5
26 SEP 94 1,161.3
3 OCT 94 1,164.0
10 OCT 94 1,168.6
17 OCT 94 1,170.9
24 OCT 94 1,172.8
31 OCT 94 1,176.3
7 NOV 94 1,179.6
14 NOV 94 1,184.3
21 NOV 94 1,188.4
28 NOV 94 1,190.3
5 DEC 94 1,195.0
12 DEC 94 1,199.5
19 DEC 94 1,202.7
26 DEC 94 1,205.4
2 JAN 95 1,209.5
9 JAN 95 1,213.6
16 JAN 95 1,220.3
23 JAN 95 1,225.8
30 JAN 95 1,230.4
6 FEB 95 1,233.6
13 FEB 95 1,238.9
20 FEB 95 1,241.9
27 FEB 95 1,248.9
6 MAR 95 1,250.2
13 MAR 95 1,259.4
20 MAR 95 1,262.2
27 MAR 95 1,266.6
3 APR 95 1,269.7
10 APR 95 1,275.9
17 APR 95 1,280.0
24 APR 95 1,285.6
1 MAY 95 1,288.3
8 MAY 95 1,295.8
15 MAY 95 1,298.1
22 MAY 95 1,307.1
29 MAY 95 1,309.6
5 JUN 95 1,315.4
12 JUN 95 1,322.9
19 JUN 95 1,326.3
26 JUN 95 1,328.2
<PAGE>
3 JUL 95 1,333.6
10 JUL 95 1,338.1
17 JUL 95 1,340.9
24 JUL 95 1,346.5
31 JUL 95 1,347.5
7 AUG 95 1,352.6
14 AUG 95 1,354.1
21 AUG 95 1,357.8
28 AUG 95 1,359.0
4 SEP 95 1,363.2
11 SEP 95 1,364.4
MONEY
MOUNTAIN
18 SEP 95 1,365.9
25 SEP 95 1,365.7
2 OCT 95 1,368.2
9 OCT 95 1,370.6
16 OCT 95 1,371.7
23 OCT 95 1,373.3
30 OCT 95 1,374.7
6 NOV 95 1,376.6
13 NOV 95 1,379.8
20 NOV 95 1,380.6
27 NOV 95 1,383.1
4 DEC 95 1,384.1
11 DEC 95 1,385.3
18 DEC 95 1,389.0
25 DEC 95 1,390.1
1 JAN 96 1,389.5
8 JAN 96 1,391.3
15 JAN 96 1,398.0
22 JAN 96 1,394.3
29 JAN 96 1,394.5
5 FEB 96 1,394.0
12 FEB 96 1,398.6
19 FEB 96 1,400.9
26 FEB 96 1,408.6
4 MAR 96 1,407.3
11 MAR 96 1,407.8
18 MAR 96 1,410.6
25 MAR 96 1,410.3
1 APR 96 1,410.0
8 APR 96 1,412.1
15 APR 96 1,415.4
22 APR 96 1,411.5
29 APR 96 1,408.3
6 MAY 96 1,411.0
13 MAY 96 1,418.5
20 MAY 96 1,414.0
27 MAY 96 1,412.4
3 JUN 96 1,419.1
10 JUN 96 1,420.5
17 JUN 96 1,424.7
24 JUN 96 1,424.5
1 JUL 96 1,424.3
8 JUL 96 1,428.0
<PAGE>
15 JUL 96 1,428.6
22 JUL 96 1,433.6
29 JUL 96 1,433.0
5 AUG 96 1,433.7
12 AUG 96 1,435.8
19 AUG 96 1,438.6
26 AUG 96 1,439.7
2 SEP 96 1,441.8
9 SEP 96 1,445.4
16 SEP 96 1,446.3
23 SEP 96 1,446.1
30 SEP 96 1,446.2
7 OCT 96 1,449.3
14 OCT 96 1,453.2
21 OCT 96 1,455.4
28 OCT 96 1,458.9
4 NOV 96 1,459.9
11 NOV 96 1,462.2
18 NOV 96 1,461.6
MONEY
MOUNTAIN
25 NOV 96 1,461.8
2 DEC 96 1,462.0
9 DEC 96 1,469.8
16 DEC 96 1,470.9
23 DEC 96 1,473.9
30 DEC 96 1,473.8
6 JAN 97 1,475.6
13 JAN 97 1,480.4
20 JAN 97 1,476.9
27 JAN 97 1,478.2
3 FEB 97 1,483.7
10 FEB 97 1,485.6
17 FEB 97 1,487.0
24 FEB 97 1,485.5
3 MAR 97 1,488.8
10 MAR 97 1,493.5
17 MAR 97 1,493.3
24 MAR 97 1,495.0
31 MAR 97 1,497.9
7 APR 97 1,503.9
14 APR 97 1,507.0
21 APR 97 1,507.7
28 APR 97 1,505.4
5 MAY 97 1,501.6
12 MAY 97 1,506.9
19 MAY 97 1,510.3
26 MAY 97 1,513.7
2 JUN 97 1,514.8
9 JUN 97 1,519.6
16 JUN 97 1,518.3
23 JUN 97 1,519.3
30 JUN 97 1,521.5
7 JUL 97 1,528.8
14 JUL 97 1,526.9
21 JUL 97 1,527.0
<PAGE>
28 JUL 97 1,528.8
4 AUG 97 1,531.3
11 AUG 97 1,538.7
18 AUG 97 1,544.2
25 AUG 97 1,545.1
1 SEP 97 1,553.5
8 SEP 97 1,555.3
15 SEP 97 1,557.3
22 SEP 97 1,555.8
29 SEP 97 1,555.8
6 OCT 97 1,557.2
13 OCT 97 1,560.8
20 OCT 97 1,564.3
27 OCT 97 1,564.9
3 NOV 97 1,567.0
10 NOV 97 1,567.7
17 NOV 97 1,569.8
24 NOV 97 1,573.0
1 DEC 97 1,570.6
8 DEC 97 1,574.5
15 DEC 97 1,571.3
22 DEC 97 1,571.1
29 DEC 97 1,574.0
5 JAN 98 1,576.0
12 JAN 98 1,585.3
19 JAN 98 1,587.4
26 JAN 98 1,589.7
MONEY
MOUNTAIN
2 FEB 98 1,590.6
9 FEB 98 1,595.6
16 FEB 98 1,600.1
23 FEB 98 1,606.5
2 MAR 98 1,605.4
9 MAR 98 1,609.9
16 MAR 98 1,609.8
23 MAR 98 1,611.7
30 MAR 98 1,613.6
6 APR 98 1,613.9
13 APR 98 1,620.4
20 APR 98 1,617.4
27 APR 98 1,620.6
4 MAY 98 1,619.5
11 MAY 98 1,624.1
18 MAY 98 1,623.6
25 MAY 98 1,628.4
1 JUN 98 1,632.5
8 JUN 98 1,635.8
15 JUN 98 1,634.7
22 JUN 98 1,638.2
29 JUN 98 1,639.0
6 JUL 98 1,635.0
13 JUL 98 1,637.9
20 JUL 98 1,634.9
27 JUL 98 1,641.7
3 AUG 98 1,644.9
<PAGE>
10 AUG 98 1,650.6
17 AUG 98 1,653.5
24 AUG 98 1,660.2
31 AUG 98 1,665.8
7 SEP 98 1,676.5
14 SEP 98 1,684.9
21 SEP 98 1,690.2
28 SEP 98 1,689.8
5 OCT 98 1,686.8
12 OCT 98 1,696.2
19 OCT 98 1,705.9
26 OCT 98 1,712.2
2 NOV 98 1,712.4
9 NOV 98 1,714.5
16 NOV 98 1,712.9
23 NOV 98 1,711.2
30 NOV 98 1,711.1
7 DEC 98 1,713.8
14 DEC 98 1,718.3
21 DEC 98 NA
28 DEC 98 NA
Source: ISI Inc.
And second, Japan, a heavy world saver, has extremely low interest rates and a
major CD rollover problem. The problem is that $100 billion in CDs purchased 5
years ago at a 6% interest rates are coming due. The new 5-year rate is
approximately 0.75%. That means individuals are faced with the prospect of
receiving only one eighth of their current income if they buy a new 5-year
investment. Capital outflows from Japan are likely to result and the U.S. market
with its higher rates is a strong candidate for this investment flow.
- --------------------------------------------------------------------------------
Tax Information for the Shareholder
None of the ordinary income distributions paid monthly by the Fund during
the year ended October 31,1998, qualify for the dividends received deduction for
corporations.
- --------------------------------------------------------------------------------
4
<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. To further
assist in this evaluation, the Securities and Exchange Commission (SEC) requires
that we include, on an annual basis, a line graph comparing the Fund's
performance to that of an appropriate market index. This graph must measure the
growth of a $10,000 hypothetical investment from the Fund's inception on August
10, 1988 through the most recent fiscal year-end and must reflect the impact of
the Fund's total expenses and its currently effective 4.45% maximum sales
charge.
While the following chart is required by SEC rules, such comparisons are of
limited utility since the indices shown are not adjusted for sales charges and
ongoing management, distribution and operating expenses applicable to the Fund.
An investor who wished to replicate the total return of these indices would have
had to own the securities that they represent. Acquiring these securities would
require a considerable amount of money and would incur expenses that are not
reflected in the index results.
The SEC also requires that we report 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 currently effective 4.45% maximum sales
charge. 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.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN*
% Return with
Periods ended 10/31/98: Sales Charge
- --------------------------------------------------------------------------------
One Year 7.50
- --------------------------------------------------------------------------------
Five Years 6.06
- --------------------------------------------------------------------------------
Ten Year 8.48
- --------------------------------------------------------------------------------
Since Inception (8/10/88) 8.61
- --------------------------------------------------------------------------------
CHANGE IN VALUE OF A $10,000 INVESTMENT
August 10, 1998--October 31, 1998
<TABLE>
<CAPTION>
Intermediate Lehman
ISI Total Return Lehman Bros. Bros. Treasury Lehman Bros. Long-Term
---------------- ------------ -------------- ----------------------
<S> <C> <C> <C> <C>
8/10/88 9555 10000 10000 10000
10/88 9852 10313 10407 10685
10/89 11021 11388 11676 12493
10/90 11178 12266 12345 12592
10/91 12954 13889 14140 14876
10/92 14116 15268 15608 16593
10/93 16564 16685 17659 20526
10/94 15534 16400 16871 18143
10/95 18344 18329 19464 23016
10/96 18975 19359 20449 23810
10/97 20682 20766 22210 26815
10/98 22231 22793 24780 31189
</TABLE>
*These figures assume the reinvestment of dividends and capital gains
distributions and include the Fund's 4.45% maximum sales charge. The Lehman
Brothers indices listed above are unmanaged. The Intermediate Index and the
Long-Term Index reflect the performance of U.S. Treasury securities in their
respective sectors. The Treasury Index is more of a general index in that it
reflects the performance of all public obligations and does not focus on any
one particular segment. Management is not aware of any single index that is
truly representative of the Fund since its active maturity management policy
allows the manager to adjust the weighted average maturity throughout each U.S.
Treasury sector. Currently, the Fund's weighted average maturity is
approximately 14.6 years. Past performance is not an indicator of future
results.
5
<PAGE>
Total Return U.S. Treasury Fund, Inc.
Statement of Net Assets October 31, 1998
Maturity Par
Interest Rate Date (000) Value
- --------------------------------------------------------------------------------
Treasury Bonds - 73.5%
12.000% 8/15/13 $ 8,000 $ 12,351,248
11.750 11/15/14 36,000 56,604,384
8.875 2/15/19 33,000 47,143,602
8.125 8/15/19 23,750 31,806,451
7.875 2/15/21 45,750 60,361,406
8.125 8/15/21 7,900 10,708,205
------------
Total U.S. Treasury Bonds
(Cost $212,025,123) ................................... 218,975,296
------------
U.S. Treasury Bill - 7.5%
4.170 1/14/99 22,650 22,471,396
------------
Total U.S. Treasury Bill
(Cost $22,471,395) .................................... 22,471,396
------------
Zero Coupon U.S. Treasury Bonds (S.T.R.I.P.S.) -- 17.4%
5.630* 5/15/17 59,500 21,260,659
4.590* 2/15/99 31,000 30,599,263
------------
Total Zero Coupon U.S. Treasury Bonds (S.T.R.I.P.S.)
(Cost $51,758,163) .................................... 51,859,922
------------
Repurchase Agreement - 0.8%
Goldman Sachs & Co., 5.25%
Dated 10/30/98, to be repurchased on 11/2/98,
collateralized by U.S. Treasury Bonds with a
market value of $2,366,300.
(Cost $2,319,000) ........................... 2,319 2,319,000
------------
Total Investments in Securities -- 99.2%
(Cost $288,573,681)** ................................. 295,625,614
Other Assets in Excess of Liabilities -- 0.8% ............... 2,383,429
------------
Net Assets -- 100.0% ........................................ $298,009,043
============
6
<PAGE>
Total Return U.S. Treasury Fund, Inc.
Statement of Net Assets (concluded) October 31, 1998
- --------------------------------------------------------------------------------
Net Asset Value and Redemption Price Per:
ISI Class Share
($171,336,381 / 16,120,920 shares outstanding) ............... $10.62
======
Flag Investors Class A Share
($122,784,570 / 11,566,395 shares outstanding) ............... $10.62
======
Flag Investors Class B Share
($3,888,092 / 365,906 shares outstanding) .................... $10.62
======
Maximum Offering Price Per:
ISI Class Share
($10.62 / 0.9555) ............................................ $11.11
======
Flag Investors Class A Share
($10.62 / 0.955) ............................................. $11.12
======
Flag Investors Class B Share ................................... $10.62
======
- --------------------------------------------------------------------------------
* Yield as of October 31, 1998.
** Also aggregate cost for federal tax purposes.
See Notes to Financial Statements.
7
<PAGE>
Total Return U.S. Treasury Fund, Inc.
<TABLE>
<CAPTION>
Statement of Operations For the Year Ended October 31, 1998
- ----------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest ...................................................... $17,081,488
-----------
EXPENSES:
Investment advisory fee ....................................... 784,379
Distribution fee .............................................. 739,554
Administration fee ............................................ 349,575
Transfer agent fee ............................................ 209,357
Professional fees ............................................. 109,444
Registration fees ............................................. 86,503
Accounting fee ................................................ 83,948
Custodian fee ................................................. 52,536
Printing and postage .......................................... 29,847
Miscellaneous ................................................. 48,135
-----------
Total expenses ............................................... 2,493,278
-----------
Net investment income ........................................ 14,588,210
-----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss from security transactions .................. 13,531,220
Change in unrealized appreciation/depreciation of investments.. 6,533,717
-----------
Net gain on investments ....................................... 20,064,937
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............... $34,653,147
===========
- ----------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Total Return U.S. Treasury Fund, Inc.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Years Ended October 31,
-------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS:
Operations:
Net investment income ................................... $ 14,588,210 $ 17,322,998
Net gain/(loss) from security transactions .............. 13,531,220 (2,143,673)
Change in unrealized appreciation/
depreciation on investments .......................... 6,533,717 10,567,788
------------ ------------
Net increase in net assets
resulting from operations ............................ 34,653,147 25,747,113
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income and short-term gains:
ISI Class Shares ..................................... (10,498,284) (10,059,052)
Flag Investors Class A Shares ........................ (7,541,487) (7,246,184)
Flag Investors Class B Shares ........................ (119,476) (17,762)
Tax return of capital distribution:
ISI Class Shares ..................................... -- (1,433,152)
Flag Investors Class A Shares ........................ -- (1,040,753)
Flag Investors Class B Shares ........................ -- (2,606)
Distributions in excess of net investment income:
ISI Class Shares ..................................... -- (160,000)
Flag Investors Class A Shares ........................ -- (116,192)
Flag Investors Class B Shares ........................ -- (291)
------------ ------------
Total distributions ..................................... (18,159,247) (20,075,992)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares ............................ 34,205,451 15,601,057
Value of shares issued in reinvestment of dividends ..... 11,075,840 12,541,599
Cost of shares repurchased .............................. (57,907,621) (77,072,611)
------------ ------------
Decrease in net assets derived
from capital share transactions ...................... (12,626,330) (48,929,955)
------------ ------------
Total increase/(decrease) in net assets ................. 3,867,570 (43,258,834)
NET ASSETS:
Beginning of year ....................................... 294,141,473 337,400,307
------------ ------------
End of year ............................................. $298,009,043 $294,141,473
============ ============
- ---------------------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
9
<PAGE>
Total Return U.S. Treasury Fund, Inc.
Financial Highlights--ISI Class and Flag Investors Class A Shares
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
For the Years Ended October 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year .......... $ 10.04 $ 9.83 $ 10.19 $ 9.22 $ 11.35
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income ......................... 0.51 0.55 0.56 0.57 0.51
Net realized and unrealized gain/(loss)
on investments .............................. 0.71 0.30 (0.23) 1.04 (1.16)
-------- -------- -------- -------- --------
Total from Investment Operations .............. 1.22 0.85 0.33 1.61 (0.65)
Less Distributions:
Net investment income and
short-term gains ............................ (0.64) (0.55) (0.65) (0.64) (1.15)
Tax return of capital distribution ............ -- (0.08) -- -- (0.05)
Distribution in excess of
net investment income ....................... -- (0.01) (0.04) -- --
Net realized long-term gains .................. -- -- -- -- (0.28)
-------- -------- -------- -------- --------
Total distributions ........................... (0.64) (0.64) (0.69) (0.64) (1.48)
-------- -------- -------- -------- --------
Net asset value at end of year ................ $ 10.62 $ 10.04 $ 9.83 $ 10.19 $ 9.22
======== ======== ======== ======== ========
Total Return(1) .................................. 12.50% 9.00% 3.44% 18.09% (6.22)%
Ratios to Average Daily Net Assets:
Expenses ...................................... 0.85% 0.83% 0.81% 0.80% 0.77%
Net investment income ......................... 4.98% 5.62% 5.69% 5.94% 4.98%
Supplemental Data:
Net assets at end of year (000):
ISI Class Shares ........................... $171,336 $171,074 $193,486 $206,615 $200,309
Flag Investors Class A Shares .............. $122,785 $122,229 $143,791 $164,206 $175,149
Portfolio turnover rate ....................... 179% 92% 199% 194% 68%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return excludes the effect of sales charge.
See Notes to Financial Statements.
10
<PAGE>
Total Return U.S. Treasury Fund, Inc.
Financial Highlights--Flag Investors Class B Shares
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Years Ended October 31, For the Period
------------------------------- June 20, 19961 through
1998 1997 October 31, 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ........ $10.03 $ 9.85 $10.00
------ ------ ------
Income from Investment Operations:
Net investment income ......................... 0.55 0.56 0.22
Net realized and unrealized gain/(loss)
on investments .............................. 0.65 0.23 (0.15)
------ ------ ------
Total from Investment Operations .............. 1.20 0.79 0.07
Less Distributions (Note A):
Distributions from net investment income
and short-term gains ........................ (0.61) (0.56) (0.22)
Tax return of capital distribution ............ -- (0.04) --
Distributions in excess of net
investment income ........................... -- (0.01) --
------ ------ ------
Total distributions .............................. (0.61) (0.61) (0.22)
------ ------ ------
Net asset value at end of period .............. $10.62 $10.03 $ 9.85
====== ====== ======
Total Return(2) .................................. 12.29% 8.49% 6.37%
Ratios to Average Daily Net Assets:
Expenses ...................................... 1.20% 1.18% 1.40%(3)
Net investment income ......................... 4.59% 5.24% 5.45%(3)
Supplemental Data:
Net assets at end of period (000) ............. $3,888 $ 838 $ 123
Portfolio turnover rate ....................... 179% 92% 199%(3)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Annualized.
See Notes to Financial Statements.
11
<PAGE>
Notes to Financial Statements
A. Significant Accounting Policies -- Total Return U.S. Treasury Fund, Inc.
(the "Fund"), which was organized as a Maryland Corporation on June 3, 1988
and commenced operations August 10, 1988, is registered under the
Investment Company Act of 1940 as a diversified, open-end investment
management company. It is 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.
The Fund consists of three share classes: ISI Total Return U.S. Treasury
Fund Shares ("ISI Class Shares") and Flag Investors Total Return U.S.
Treasury Fund Class A Shares ("Flag Investors Class A Shares"), which both
commenced August 10, 1988, and Flag Investors Total Return U.S. Treasury
Fund Class B Shares ("Flag Investors Class B Shares"), which commenced June
20, 1996.
The ISI Class Shares have a 4.45% maximum front-end sales charge, the Flag
Investors Class A Shares have a 4.50% maximum front-end sales charge and
the Flag Investors Class B Shares have a 2.00% maximum contingent deferred
sales charge. The classes have different distribution fees.
When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles.
These estimates affect 1) the assets and liabilities that we report at the
date of the financial statements; 2) the contingent assets and liabilities
that we disclose at the date of the financial statements; and 3) the
revenues and expenses that we report for the period. Our estimates could be
different from the actual results. Under certain circumstances, it is
necessary to reclassify prior year information in order to conform to the
current year's presentation. The Fund's significant accounting policies
are:
Security Valuation -- The Fund values a portfolio security that is
primarily traded on a national exchange by using the last price reported
for the day by an independent pricing source. If there are no sales or the
security is not traded on a listed exchange, the Fund values the security
at the average of the last bid and asked prices in the over-the-counter
market. When a market quotation is not readily available, the Investment
Advisor determines a fair value using procedures that the Board of
Directors establishes and monitors. The Fund values short-term obligations
with maturities of 60 days or less at amortized cost.
Repurchase Agreements -- The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase agreement
is a short-term investment in which the Fund buys a debt security that the
broker agrees to repurchase at a set time and price. The third party, which
is the broker's custodial bank, holds the collateral in a separate account
until the repurchase agreement matures. The agreement ensures that the
collateral's market value, including any accrued interest, is sufficient if
the broker defaults. The Fund's access to the collateral may be delayed or
limited if the broker defaults, the value of the collateral declines or if
the broker enters into an insolvency proceeding.
Federal Income Taxes -- The Fund determines its distributions according to
income tax regulations, which may be different from generally accepted
accounting principles. As a result, the Fund occasionally makes
reclassifications within its capital accounts to reflect income and gains
that are available for distribution under income tax regulations.
The Fund is organized as a regulated investment company. As long as it
maintains this status and distributes to its shareholders substantially all
of its taxable net investment income
12
<PAGE>
Notes to Financial Statements (continued)
and net realized capital gains, it will be exemptfrom most, if not all,
federal income and excise taxes. As a result, the Fund has made no
provisions for federal income taxes.
Security Transactions, Investment Income, Distributions and Other -- The
Fund uses the trade date to account for security transactions and the
specific identification method for financial reporting and income tax
purposes to determine the gain or loss on investments sold or redeemed.
Interest income is recorded on an accrual basis and includes the pro rata
scientific method for amortization of premiums and accretion of discounts
when appropriate. Income and common expenses are allocated to each class
based on its respective average net assets. Class specific expenses are
charged directly to each class. Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are
recorded on the ex-dividend dates. Distributions in excess of net
investment income are due to differing tax treatments of dividends
declared.
B. Investment Advisory Fees, Transactions with Affiliates and Other Fees --
International Strategy & Investment Inc. ("ISI") is the Fund's investment
advisor and Investment Company Capital Corp. ("ICC"), an indirect
subsidiary of Bankers Trust Corporation, is the Fund's administrator. As
compensation for its advisory services, the Fund pays ISI an annual fee
based on the Fund's average daily net assets. This fee is calculated daily
and paid monthly at the following annual rates: 0.20% of the first $100
million, 0.18% of the next $100 million, 0.16% of the next $100 million,
0.14% of the next $200 million and 0.12% of the amount over $500 million.
In addition, the Fund pays ISI 1.5% of the Fund's gross income.
As compensation for its administrative services, the Fund pays ICC an
annual fee based on the Fund's average daily net assets. This fee is
calculated daily and paid monthly at the following annual rates: 0.10% of
the first $100 million, 0.09% of the next $100 million, 0.08% of the next
$100 million, 0.07% of the next $200 million and 0.06% of the amount over
$500 million. In addition, the Fund pays ICC 0.50% of the Fund's gross
income. At October 31, 1998, the Fund owed $30,087 of administration fees.
Certain officers and directors of the Fund are also officers or directors
of the Fund's investment advisor or administrator.
As compensation for its accounting services, the Fund pays ICC an annual
fee that is calculated daily and paid monthly from the Fund's average daily
net assets. The Fund paid ICC $83,948 for accounting services for the year
ended October 31, 1998. At October 31, 1998, the Fund owed $7,249 of
accounting services fees.
As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund paid ICC $209,357
for transfer agent services for the year ended October 31, 1998. At October
31, 1998, the Fund owed $45,235 of transfer agent services fees.
Effective September 22, 1997 Bankers Trust Company became the Funds
custodian. At October 31, 1998 the Fund owed $8,811 in custodian fees.
As compensation for providing distribution services for the ISI Class, the
Fund pays ISI Group Inc. ("ISI Group"), which is affiliated with ISI, an
annual fee that is calculated daily and paid monthly. This fee is paid at
an annual rate equal to 0.25% of the ISI Class' average daily net assets.
As compensation for providing distribution services for the Flag Investors
classes, the Fund pays ICC Distributors, Inc. ("ICC Distributors"), a
member of the Forum Financial Group of companies, an annual fee that is
calculated daily and paid monthly. This fee is paid at an annual rate equal
to 0.25% of the Flag Investors Class A Shares' average daily net assets and
0.60%
13
<PAGE>
Notes to Financial Statements (continued)
(including a 0.25% shareholder servicing fee) of the Flag Investors Class B
Shares' average daily net assets. For the year ended October 31, 1998,
distribution fees aggregated $739,554, of which $423,709 was attributable
to the ISI Class Shares, $303,655 was attributable to the Flag Investors
Class A Shares and $12,190 was attributable to the Flag Investors Class B
Shares. At October 31, 1998, the Fund owed distribution fees amounting to
$65,271, of which $36,774 was attributable to the ISI Class Shares, $26,654
was attributable to the Flag Investors Class A Shares and $1,843 was
attributable to the Flag Investors Class B Shares.
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the year
ended October 31, 1998 was $26,806, and the accrued liability was $61,879.
C. Capital Share Transactions -- The Fund is authorized to issue up to 99.5
million shares of $.001 par value capital stock (44 million ISI Class, 44
million Flag Investors Class A, 5 million Flag Investors Class B, and 6.5
million undesignated). Transactions in shares of the Fund were as follows:
ISI Class Shares
-----------------------------
For the Year Ended
October 31,
-----------------------------
1998 1997
------------ ------------
Shares sold ................................. 1,567,913 1,028,342
Shares issued to shareholders on reinvest-
ment of dividends ......................... 656,907 787,090
Shares redeemed ............................. (3,140,348) (4,455,189)
------------ ------------
Net decrease in shares
outstanding ............................... (915,528) (2,639,757)
============ ============
Proceeds from sale
of shares ................................. $ 16,133,407 $ 10,021,751
Value of reinvested
dividends ................................. 6,725,045 7,664,314
Cost of shares redeemed ..................... (32,214,373) (43,406,641)
------------ ------------
Net decrease from capital
share transactions ........................ $ (9,355,921) $(25,720,576)
============ ============
-----------------------------
Flag Investors Class A Shares
-----------------------------
For the Year Ended
October 31,
-----------------------------
1998 1997
------------ ------------
Shares sold ................................. 1,422,232 490,187
Shares issued to shareholders on reinvest-
ment of dividends ......................... 418,958 499,834
Shares redeemed ............................. (2,454,224) (3,438,672)
------------ ------------
Net decrease in shares
outstanding ............................... (613,034) (2,448,651)
------------ ------------
------------ ------------
Proceeds from sale
of shares ................................. $ 14,837,317 $ 4,746,207
Value of reinvested
dividends ................................. 4,289,957 4,867,694
Cost of shares
redeemed .................................. (25,308,085) (33,514,991)
------------ ------------
Net decrease from
capital share
transactions .............................. $ (6,180,811) $(23,901,090)
============ ============
-----------------------------
Flag Investors Class B Shares
-----------------------------
For the Year Ended
October 31,
-----------------------------
1998 1997
------------ ------------
Shares sold ................................. 313,798 85,484
Shares issued to share-
holders on reinvest-
ment of dividends ......................... 5,893 982
Shares redeemed ............................. (37,386) (15,359)
---------- ---------
Net increase in shares
outstanding ............................... 282,305 71,107
========== =========
Proceeds from sale
of shares ................................. $3,234,727 $ 833,099
Value of reinvested
dividends ................................. 60,838 9,591
Cost of shares
redeemed .................................. (385,163) (150,979)
---------- ---------
Net increase from
capital share
transactions .............................. $2,910,402 $ 691,711
========== =========
D. Investment Transactions -- Excluding short-term obligations, purchases of
investment securities aggregated $471,701,093 and sales of
14
<PAGE>
Notes to Financial Statements
(concluded)
investment securities aggregated $475,383,157 for the year ended October
31, 1998.
On October 31, 1998, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was
$7,059,925 and aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over value was $7,992.
E. Net Assets -- On October 31, 1998, net assets consisted of:
Paid-in capital:
ISI Class Shares .................................. $165,252,861
Flag Investors Class A Shares ..................... 115,728,558
Flag Investors Class B Shares ..................... 3,720,993
Distributions in excess
of net investment income .......................... (1,490,713)
Accumulated net realized gain
from security transactions ........................ 7,745,411
Unrealized appreciation
of investments .................................... 7,051,933
------------
$298,009,043
============
F. Federal Income Tax Information -- Generally accepted accounting principles
require that certain components of net assets be reclassified to reflect
permanent differences between financial reporting and tax purposes.
Accordingly permanent book/tax differences related to the tax treatment of
short-term capital gains of $3,642,137 have been reclassified from net
investment income to the accumulated net realized gain from security
transactions. These reclassifications have no effect on net assets or net
asset values per share.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Independent Auditors' Report
The Board of Directors and Shareholders
Total Return U.S. Treasury Fund, Inc.:
We have audited the statement of net assets of the Total Return U.S.
Treasury Fund, Inc. as of October 31, 1998, the related statements of operations
for the year then ended and changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the five-year period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1998 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Total Return
U.S.Treasury Fund, Inc. as of October 31, 1998, the results of its operations,
the changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
November 30, 1998
15
<PAGE>
ISI
Total Return
U.S. Treasury Fund Shares
- --------------------------------------------------------------------------------
Directors and Officers
Edward S. Hyman R. Alan Medaugh
Chairman President
Richard T. Hale Nancy Lazar
Vice Chairman Vice President
James J. Cunnane Carrie L. Butler
Director Vice President
Joseph R. Hardiman Margaret M. Beeler
Director Assistant Vice President
Louis E. Levy Keith C. Reilly
Director Assistant Vice President
Eugene J. McDonald Amy M. Olmert
Director Secretary
Rebecca W. Rimel Joseph A. Finelli
Director Treasurer
Truman T. Semans Scott J. Liotta
Director Assistant Secretary
Carl W. Vogt, Esq.
Director
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.
Investor 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
ISI Group Inc.
717 Fifth Avenue
New York, NY 10022
(800) 955-7175
[ISI LOGO]
ISI
TOTAL RETURN
U.S. TREASURY
FUND SHARES
(A Class of Total Return
U.S. Treasury Fund, Inc.)
ANNUAL REPORT
October 31, 1998
