FLAG INVESTORS
FLAG
INVESTORS
TOTAL
RETURN
U.S. TREASURY FUND
SHARES
ANNUAL REPORT
OCTOBER 31, 1998
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholders:
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 30, 1998, the Fund has posted a cumulative total return of 143.50%,
which translates into an average annual total return 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 5.099
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 3/29 5.958 F 3/ 6 6.018
T 4/16 5.871 T 3/28 5.975 T 3/ 5 6.063
W 4/15 5.883 W 3/27 5.942 W 3/ 4 6.023
T 4/14 5.899 T 3/26 5.880 T 3/ 3 6.073
M 4/13 5.926 M 3/25 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.
1
<PAGE>
LETTER TO SHAREHOLDERS (CONCLUDED)
- --------------------------------------------------------------------------------
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 Asian 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 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
10 JUN 98 135 31 AUG 98 184 20 NOV 98 206
19 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.
2
<PAGE>
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 10/31/97 10/31/98 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
3
<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 have 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
4
<PAGE>
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 is 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 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 to 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.
5
<PAGE>
ECONOMIC OUTLOOK FOR 1998 (CONCLUDED)
- --------------------------------------------------------------------------------
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 1,089.4
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
29 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 significant CD rollover problem. The problem is that $100 billion in CDs
purchased 5 years ago at a 6% interest rate 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.
6
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
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 the currently effective 4.50% maximum sales charge
for the Fund's Class A Shares and 2.00% maximum contingent deferred sales charge
for the Fund's Class B Shares.
While the following charts are 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 4.50% maximum sales
charge for the Fund's Class A Shares and 2.00% maximum contingent deferred sales
charge for the Fund's Class B Shares. 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.
7
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Additional Performance Information (concluded)
Change in Value of a $10,000 Investment in Class A Shares*
August 10, 1988-October 31, 1998 Average Annual Total Return*
<TABLE>
<CAPTION>
Treasury Fund Class A Lehman Intermediate Lehman Treasury Index Lehman Long-Term Index
<S> <C> <C> <C> <C>
8/88 9550 10000 10000 10000
10/88 9846 10313 10407 10685
10/89 11015 11388 11676 12493
10/90 11173 12266 12345 12592
10/91 12948 13889 14140 14876
10/92 14109 15268 15608 16593
10/93 16555 16685 17659 20526
10/94 15526 16400 16871 18143
10/95 18334 18329 19464 23016
10/96 18965 19359 20449 23810
10/97 20671 20766 22210 26815
10/98 22208 22793 24780 31189
</TABLE>
Periods Ended 10/31/98 1 Year 5 Years 10 Years Since Inception**
- --------------------------------------------------------------------------------
Class A Shares 7.44% 6.05% 8.47% 8.60%
- --------------------------------------------------------------------------------
**These figures assume the reinvestment of dividends and capital gains
distributions and include the Fund's 4.50% 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 11.6 years. Past performance is not an indicator of future
results. Investment return and principal value may fluctuate, so that an
investor's shares, when redeemed, may not be worth more or less than their
original cost.
**8/10/88.
8
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
Change in Value of a $10,000 Investment in Class B Shares*
June 20, 1996-October 31, 1998 Average Annual Total Return*
<TABLE>
<CAPTION>
Treasury Fund Class B Lehman Intermediate Lehman Treasury Index Lehman Long-Term Index
<S> <C> <C> <C> <C>
6/96 10000 10000 10000 10000
10/96 10637 10338 10391 10551
4/97 10620 10513 10520 10546
10/97 11340 11089 11285 11884
4/98 11860 11428 11688 12476
10/98 12858 12171 12591 13822
</TABLE>
- --------------------------------------------------------------------------------
Periods Ended 10/31/98 1 Year Since Inception**
Class B Shares 10.29% 11.22%
- --------------------------------------------------------------------------------
**These figures assume the reinvestment of dividends and capital gains
distributions and include the Fund's 2.00% maximum contingent deferred sales
charge. Past performance is not an indicator of future results. Investment
return and principal value may fluctuate, so that an investor's shares, when
redeemed, may not be worth more or less than their original cost.
**6/20/96.
9
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
- --------------------------------------------------------------------------------
Statement of Net Assets October 31, 1998
Par
Interest Rate Maturity Date (000) Value
- --------------------------------------------------------------------------------
U.S. 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
=============
10
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
- --------------------------------------------------------------------------------
Net Asset Value and Redemption Price Per:
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
======
ISI Class Share
($171,336,381 / 16,120,920 shares outstanding)................. $10.62
======
Maximum Offering Price Per:
Flag Investors Class A Share
($10.62 / 0.955)............................................... $11.12
======
Flag Investors Class B Share...................................... $10.62
======
ISI Class Share
($10.62 / 0.9555).............................................. $11.11
======
- --------------------
** Yield as of October 31, 1998.
** Also aggregate cost for federal tax purposes.
See Notes to Financial Statements.
11
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
- --------------------------------------------------------------------------------
Statement of Operations
For the
Year Ended
October 31,
- --------------------------------------------------------------------------------
1998
----
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 on investments:
Net realized gain 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
===========
See Notes to Financial Statements.
12
<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:
Flag Investors Class A Shares ....................................... (7,541,487) (7,246,184)
Flag Investors Class B Shares ....................................... (119,476) (17,762)
ISI Class Shares .................................................... (10,498,284) (10,059,052)
Tax return of capital distribution:
Flag Investors Class A Shares ....................................... -- (1,040,753)
Flag Investors Class B Shares ....................................... -- (2,606)
ISI Class Shares .................................................... -- (1,433,152)
Distributions in excess of net investment income:
Flag Investors Class A Shares ....................................... -- (116,192)
Flag Investors Class B Shares ....................................... -- (291)
ISI Class Shares .................................................... -- (160,000)
------------- -------------
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
============= =============
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
- --------------------------------------------------------------------------------
Financial Highlights -- Flag Investors Class A and ISI Class Shares
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
For the Year Ended
October 31, 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:
Distributions from 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)
Distributions 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):
Flag Investors Class A Shares ..................... $122,785 $122,229 $143,791 $164,206 $175,149
ISI Class Shares .................................. $171,336 $171,074 $193,486 $206,615 $200,309
Portfolio turnover rate .............................. 179% 92% 199% 194% 68%
</TABLE>
- -----------
(1) Total return excludes the effect of sales charge.
See Notes to Financial Statements.
14/15
<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 Period
June 20, 19961
through
For the Years Ended October 31, October 31,
- ---------------------------------------------------------------------------------------------
1998 1997 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:
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.
16
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
- --------------------------------------------------------------------------------
Notes to Financial Statements
NOTE 1--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:
A. 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.
17
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 1--concluded
B. 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 and the value of the collateral declines or if the broker
enters into an insolvency proceeding.
C. 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 and net realized
capital gains, it will be exempt from most, if not all, federal income
and excise taxes. As a result, the Fund has made no provisions for
federal income taxes.
D. 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.
18
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
- --------------------------------------------------------------------------------
NOTE 2--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. At October 31, 1998, the Fund owed $67,196 of advisory fees.
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 Fund's
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.
19
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 2--concluded
As compensation for providing distribution services for the Flag Investors
classes, the Fund pays ICC Distributors, Inc. ("ICC Distributors"), 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% (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.
NOTE 3--Capital Share Transactions
The Fund is authorized to issue up to 99.5 million shares of $.001 par
value capital stock (44 million Flag Investors Class A, 44 million ISI Class, 5
million Flag Investors Class B and 6.5 million undesignated). Transactions in
shares of the Fund were as follows:
Flag Investors Class A Shares
------------------------------------
For the For the
Year Ended Year Ended
October 31, 1998 October 31, 1997
---------------- -----------------
Shares sold .............................. 1,422,232 490,187
Shares issued to shareholders on
reinvestment 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)
============ =============
20
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
- --------------------------------------------------------------------------------
NOTE 3--concluded
Flag Investors Class B Shares
------------------------------------
For the For the
Year Ended Year Ended
October 31, 1998 October 31, 1997
---------------- ----------------
Shares sold ............................. 313,798 85,484
Shares issued to shareholders on
reinvestment 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
============ ============
ISI Class Shares
-------------------------------------
For the For the
Year Ended Year Ended
October 31, 1998 October 31, 1997
---------------- ----------------
Shares sold ............................. 1,567,913 1,028,342
Shares issued to shareholders on
reinvestment 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)
============ ============
21
<PAGE>
TOTAL RETURN U.S. TREASURY FUND, INC.
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
NOTE 4--Investment Transactions
Excluding short-term obligations, purchases of investment securities aggre-
gated $471,701,093 and sales of 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.
NOTE 5--Net Assets
On October 31, 1998, net assets consisted of:
Paid-in capital
Flag Investors Class A Shares ............................ $ 115,728,558
Flag Investors Class B Shares ............................ 3,720,993
ISI Class Shares ......................................... 165,252,861
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
=============
NOTE 6--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.
22
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
- --------------------------------------------------------------------------------
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
23
<PAGE>
FLAG INVESTORS TOTAL RETURN U.S. TREASURY FUND SHARES
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Directors and Officers
EDWARD S. HYMAN
Chairman
RICHARD T. HALE R. ALAN MEDAUGH
Vice Chairman President
JAMES J. CUNNANE NANCY LAZAR
Director Vice President
JOSEPH R. HARDIMAN CARRIE L. BUTLER
Director Vice President
LOUIS E. LEVY MARGARET M. BEELER
Director Assistant Vice President
EUGENE J. MCDONALD KEITH C. REILLY
Director Assistant Vice President
REBECCA W. RIMEL AMY M. OLMERT
Director Secretary
TRUMAN T. SEMANS JOSEPH A. FINELLI
Director Treasurer
CARL W. VOGT, ESQ. SCOTT J. LIOTTA
Director 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.
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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 Flag Investors
Funds, including charges and expenses, obtain a prospectus from your
investment representative or directly from the Fund at 1-800-767-FLAG. Read
it carefully before you invest.
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FLAG INVESTORS
Growth
Flag Investors Emerging Growth Fund
Flag Investors Equity Partners Fund
Flag Investors International Fund
Specialty
Flag Investors Real Estate Securities Fund
Flag Investors Communications Fund
Balanced
Flag Investors Value Builder Fund
Income
Flag Investors Short-Intermediate Income Fund
Flag Investors Total Return U.S. Treasury Fund Shares
Tax-Free Income
Flag Investors Managed Municipal Fund Shares
Current Income
Flag Investors Cash Reserve Prime Shares
P.O. Box 515
Baltimore, Maryland 21203
800-767-FLAG
Distributed by:
ICC DISTRIBUTORS, INC.
