<PAGE> 1
KEMPER STRATEGIC
MUNICIPAL INCOME TRUST
SEMIANNUAL REPORT TO SHAREHOLDERS
FOR THE PERIOD ENDED MAY 31, 1996
". . . the [higher coupon] bonds experienced less price movement
as rates rose during the period. This cushioned the fund
from the potential impact of rising interest rates."
<PAGE> 2
TABLE OF
Contents
2
Terms to Know
3
General
Economic Overview
6
Performance Update
7
Largest Sectors
8
Portfolio Statistics
9
Portfolio of
Investments
13
Financial Statements
15
Notes to
Financial Statements
17
Financial Highlights
At A Glance
- --------------------------------------------------------------------------------
TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE PERIOD ENDED MAY 31, 1996
<TABLE>
<CAPTION>
BASED ON BASED ON
NET ASSET MARKET
VALUE PRICE
<S> <C> <C>
- -------------------------------------------------
KEMPER STRATEGIC
MUNICIPAL INCOME TRUST 1.32% 2.27%
- -------------------------------------------------
</TABLE>
NET ASSET VALUE AND MARKET PRICE
<TABLE>
<CAPTION>
AS OF AS OF
5/31/96 11/30/95
- ---------------------------------------------
<S> <C> <C>
NET ASSET VALUE $11.94 $ 12.19
- ---------------------------------------------
MARKET PRICE $12.00 $12.125
- ---------------------------------------------
</TABLE>
DIVIDEND REVIEW
THE FOLLOWING TABLE SHOWS PER SHARE DIVIDEND INFORMATION FOR THE FUND AS OF MAY
31, 1996.
<TABLE>
<S> <C>
- ------------------------------------------------
SIX-MONTH INCOME: $0.408
- ------------------------------------------------
MAY DIVIDEND: $0.068
- ------------------------------------------------
ANNUALIZED DISTRIBUTION RATE:
(BASED ON NET ASSET VALUE) 6.83%
- ------------------------------------------------
ANNUALIZED DISTRIBUTION RATE:
(BASED ON MARKET PRICE) 6.80%
- ------------------------------------------------
TAX EQUIVALENT DISTRIBUTION RATE:
(BASED ON NET ASSET VALUE AND A
37.1% FEDERAL INCOME TAX RATE AND
AN ASSUMED $150,000 OF INCOME FOR
A JOINT RETURN) 10.86%
- ------------------------------------------------
TAX EQUIVALENT DISTRIBUTION RATE:
(BASED ON MARKET PRICE AND A
37.1% FEDERAL INCOME TAX RATE AND
AN ASSUMED $150,000 OF INCOME FOR
A JOINT RETURN) 10.81%
- ------------------------------------------------
</TABLE>
Statistical Note: Current annualized distribution rate is the latest monthly
dividend shown as an annualized percentage of net asset value/market price on
the date shown. Distribution rate simply measures the level of dividends and is
not a complete measure of performance. Total return measures aggregate change in
net asset value/market value assuming reinvestment of dividends. Returns are
historical and do not represent future performance. Market price, net asset
value and returns fluctuate. Additional information concerning performance is
contained in the Financial Highlights appearing at the end of this report.
Income may be subject to state and local taxes and a portion of the income may
be subject to the alternative minimum tax for certain investors.
Terms to Know
DURATION Duration is a measure of the interest rate sensitivity of a fixed-
income investment or portfolio. The longer the duration, the greater the
interest rate risk.
REVENUE BOND INDEX (RBI) The average yield on 25 revenue bonds with 30-year
maturities compiled by THE BOND BUYER, a newspaper that covers the municipal
bond market.
TOTAL RETURN A fund's total return figure measures both the net investment
income and any realized and unrealized appreciation or depreciation of the
underlying investments in its portfolio for a specified period. Total return
assumes the reinvestment of all dividends and it represents the aggregate
percentage change in the value of an investment in the fund over the period.
Total return may be based upon net asset value or market price.
<PAGE> 3
GENERAL ECONOMIC OVERVIEW
[TIMBERS PHOTO]
STEPHEN B. TIMBERS IS PRESIDENT, CHIEF EXECUTIVE AND CHIEF INVESTMENT OFFICER OF
ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI AND ITS AFFILIATES MANAGE
APPROXIMATELY $78 BILLION IN ASSETS, INCLUDING $45 BILLION
IN RETAIL MUTUAL FUNDS. TIMBERS IS A GRADUATE OF YALE UNIVERSITY AND HOLDS AN
M.B.A. FROM HARVARD UNIVERSITY.
DEAR SHAREHOLDER,
The first six months of 1996 have provided a few surprises. As the year began,
most of us expected sluggish economic and corporate growth -- which the Federal
Reserve Board would address by reducing short-term interest rates. Yet, what we
experienced was stronger-than-anticipated economic growth, better corporate
earnings and rising interest rates. Although such surprises unsettled the bond
market, the stock market has followed a spectacular 1995 with strength so far
this year.
Where is the economy headed now? Its direction is even less predictable as we
draw nearer to the November elections. Half of the country's leading economists
are forecasting 3 percent growth while an equal number are looking for no better
than 1 percent growth. At Kemper Funds, we suspect that the economy is growing
at a subpar rate of 2 percent. Although commodity prices may suggest otherwise,
we think inflation is holding at less than 3 percent. We see no reason to expect
the Fed to reduce rates to stimulate growth but neither is it likely to raise
rates significantly to control growth. In an environment of stable or gently
rising rates, we would expect corporate earnings to grow at a rate of about 7 to
8 percent -- that's somewhat higher than we believed likely at the start of the
year.
Our forecast calls for a generally comfortable environment for investors. But
both the economy and the general direction of the markets are due for a
reversal. In July, the U.S. economy entered its 64th month of consecutive
growth. This is the longest expansion without a single quarter of negative
output growth since George Washington was president. Today's bull market started
in October 1990, which makes it one of the longest running bull markets in
history. By virtue of its length alone, the stock market is vulnerable to a
correction.
As expected, volatility has returned to the market this year. For example: The
stock market's performance on March 8, the date that a surprisingly strong
employment report was released, betrayed some level of investor skittishness.
But while the Standard & Poor's lost 3.1 percent that day, it quickly regained
the ground and moved higher.
CONSUMERS AND JOB SECURITY
The restructuring of corporate America, which is generally credited for its
improved profitability, has been an important influence on the consumer.
Economic growth is heavily dependent upon consumer spending which, in turn, is
a function of inflation, pay raises and fear of job loss. While the first two
have not been a recent concern, fear of losing one's job has dampened consumer
confidence.
Such anxiety in the workplace was the subject of a recent study by the
Council of Economic Advisors. According to that report, more than two-thirds
of the new jobs created in the United States in 1994 and 1995 paid better than
the average job. The report found that the rate at which jobs were eliminated
has risen slightly despite strong economic growth of recent years -- however, it
reported that the length of time most workers spent unemployed has declined.
The graph below tracks Bureau of Labor Statistics data that show the
recent relationship between number of jobs created versus the number of jobs
lost.
[LINE GRAPH]
<TABLE>
<CAPTION>
Jobs Created Jobs Lost
<S> <C> <C>
12/31/91 (300,000) 40,000
12/31/92 120,000 (30,000)
12/31/93 300,000 70,000
12/31/94 180,000 70,000
12/31/95 (80,000) (40,000)
3/31/96 490,000 (10,000)
</TABLE>
SOURCE: BUREAU OF LABOR STATISTICS
3
<PAGE> 4
GENERAL ECONOMIC OVERVIEW
ECONOMIC GUIDEPOSTS
Economic activity is a key influence on investment performance and
shareholder decision-making. Periods of recession or boom, inflation or
deflation, credit expansion or credit crunch have a significant impact on
mutual fund performance.
The following are some significant economic guideposts and their investment
rationale that may help your investment decision-making. The 10-year Treasury
rate and the prime rate are prevailing interest rates. The other data report
year-to-year percentage changes.
<TABLE>
<CAPTION>
Now (5/31/96) 6 months ago 1 year ago 2 years ago
<S> <C> <C> <C> <C>
10-year Treasury rate(1) 6.74 5.71 6.17 7.10
Prime rate(2) 8.25 8.63 9.00 7.25
Inflation rate(3) 2.96 2.60 3.04 2.56
The U.S. dollar(4) 8.51 -2.58 -9.31 0.51
Capital
goods orders(5) 2.93 11.03 12.98 25.11
Industrial production(6) 3.26 1.08 2.80 6.61
Employment growth(7) 2.00 1.92 2.71 3.12
</TABLE>
(1) Falling interest rates in recent years have been a big plus for financial
assets.
(2) The interest rate that commercial lenders charge their best borrowers.
(3) Inflation reduces an investor's real return. In the last five years, infla-
tion has been as high as 6%. The low, moderate inflation of the last
few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters
and the value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on corporate profits and equity performance.
(7) An influence on family income and retail sales.
Source: Economics Department, Zurich Kemper Investments, Inc.
Such ebb and flow is to be expected in investing, especially at this point in
the cycle. Attempting to "prepare" for a correction is futile, we believe. Those
whose caution caused them to excuse themselves from the market early this year,
for example, would have forgone its significant gain year to date.
Several opportunities exist today for the careful investor. First, having
settled down some from a raucous 1995, the technology sector continues to enjoy
the product and market demand that make it the dominant sector of the 1990s.
Second, equity investors willing to look overseas may find opportunities in
countries whose economies today are at a point where the U.S. economy was in
1995. Our forecast assumes that strength in foreign markets could boost those
countries' currencies, which would weaken the value of the dollar.
We expect the fixed-income markets to continue to be sensitive to interest
rate and inflation news. However, for as long as economic growth is positive and
earnings are growing, we believe the high-yield market is one market segment
that has significant potential.
Finally, we look for political activity to have less and less bearing on the
markets' performance. Although they may continue to debate tax reform,
federal budget deficit reduction and health care reform, the incumbent
legislators are running out of time to take action before the November
elections. If there is any suspense by November, it is likely to be in whether
the Republicans can retain control of Congress. Their success would make a
balanced budget and tax reform likely agenda topics for 1997.
With that as an economic backdrop, we encourage you to read the following
detailed report of your fund, including an interview with your fund's portfolio
management. Thank you for your continued support. We appreciate the opportunity
to serve your investment needs.
Sincerely,
/s/ Stephen B. Timbers
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
ZURICH KEMPER INVESTMENTS, INC.
July 2, 1996
4
<PAGE> 5
MANAGEMENT TEAM
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
PORTFOLIO MANAGEMENT TEAM
[MIER PHOTO]
CHRIS MIER JOINED ZURICH KEMPER INVESTMENTS, INC. (ZKI) IN 1986 AND IS NOW
SENIOR VICE PRESIDENT OF ZKI AND A VICE PRESIDENT AND PORTFOLIO CO-MANAGER OF
KEMPER STRATEGIC MUNICIPAL INCOME TRUST. HE HAS BEEN PORTFOLIO MANAGER SINCE THE
FUND'S INCEPTION IN 1989. MIER RECEIVED A B.A. DEGREE IN ECONOMICS FROM THE
UNIVERSITY OF MICHIGAN AND WENT ON TO RECEIVE HIS M.M. IN FINANCE FROM THE
KELLOGG GRADUATE SCHOOL OF MANAGEMENT AT NORTHWESTERN UNIVERSITY. HE IS A
CHARTERED FINANCIAL ANALYST.
[BURROW PHOTO]
DALE BURROW HAS BEEN WITH ZKI SINCE 1987 AND IS A FIRST VICE PRESIDENT. HE
BECAME A VICE PRESIDENT AND PORTFOLIO CO-MANAGER OF THE FUND IN 1993. BURROW
RECEIVED A B.A. DEGREE FROM THE UNIVERSITY OF OKLAHOMA AND AN M.B.A. FROM DEPAUL
UNIVERSITY. HE IS A CHARTERED FINANCIAL ANALYST.
[WILLSON PHOTO]
STEPHEN WILLSON IS A FIRST VICE PRESIDENT OF ZKI AND HAS BEEN WITH THE COMPANY
SINCE 1985. HE BECAME A VICE PRESIDENT AND PORTFOLIO CO-MANAGER OF THE FUND IN
1993. WILLSON EARNED A B.A. IN MATHEMATICS AND A MASTER'S DEGREE IN FINANCE FROM
NORTHERN ILLINOIS UNIVERSITY AND IS A CHARTERED FINANCIAL ANALYST.
The views expressed in this report reflect those of the portfolio management
team only through the end of the period of the report, as stated on the cover.
The managers' views are subject to change at any time, based on market and
other conditions.
5
<PAGE> 6
PERFORMANCE UPDATE
THE PORTFOLIO MANAGEMENT TEAM OF KEMPER STRATEGIC MUNICIPAL INCOME TRUST
DISCUSSES THE FUND'S ABOVE-AVERAGE PERFORMANCE DURING A PERIOD OF SHIFTING
INTEREST RATES AND STRONGER ECONOMIC GROWTH.
Q. HOW WOULD YOU CHARACTERIZE THE MARKET OVER THE LAST SIX MONTHS, AND HOW
DID MUNICIPAL BONDS FARE?
A. In December, at the start of the period, the market was enjoying a
declining interest rate environment and bond yields were almost at their lowest
point in 1995. The Bond Buyer 25- Bond Revenue Bond Index (RBI) -- a gauge of
municipal bond interest rates -- began the period at 5.78 percent on November
30, 1995.
However, by mid-January that scenario began to change. Data began to
indicate that the economic slowdown experienced in late 1995, which helped
cause the decline in yields, may have been related mostly to the impact of
severe weather as opposed to any fundamental weakness in the economy. Moreover,
with the start of the Republican party presidential primaries, focus moved away
from the federal budget and deficit reduction proposals toward other issues.
Yields began to rise as the focus on the deficit reduction began to fall. By
the end of March, the RBI had risen to 6.15 percent. Although fluctuating
somewhat throughout the rest of the period, on May 30, the RBI was 6.17 percent.
Q. KEMPER STRATEGIC MUNICIPAL INCOME TRUST OUTPERFORMED THE AVERAGE RETURN
OF ITS LIPPER PEER GROUP FOR THE SIX-MONTH PERIOD. HOW WAS THE FUND MANAGED TO
ACHIEVE THESE RESULTS?
A. A good deal of the portfolio is invested in relatively high coupon bonds.
Because of their higher coupons, the bonds experienced less price movement as
rates rose during the period. This cushioned the fund from the potential impact
of rising interest rates. In addition, the portfolio's high yield bonds
provided an attractive income stream which supported the fund's total return.
Hedging activities during the period also helped. By hedging we were able to
support the fund's net asset value.
Q. HOW DID MUNICIPAL BOND SUPPLY IMPACT THE MARKET DURING THE PERIOD?
A. The volume of new supply during the period was heavier than anticipated.
As rates continued to fall early in the period, there was significant refunding
activity in the market. When an issuer refunds debt they offer new debt at
lower coupon rates. As market interest rates began to rise in late January and
February, the refunding activity subsided. Supply began to moderate somewhat,
although it remained slightly ahead of 1995 levels. Demand for municipal bonds
from the mutual fund industry was relatively weak, but demand from individuals
and property casualty insurance companies was fairly strong.
Q. DID TALK OF TAX REFORM CONTINUE TO IMPACT THE MUNICIPAL BOND MARKET
DURING THE PERIOD?
A. Talk of tax reform -- including a possible flat tax -- has raised
considerable interest in the media and among municipal bond investors. At this
writing, however, it seems that the market is less confident that a flat tax
will come to pass. President Clinton has not embraced such tax changes and
Republican presidential candidate Robert Dole has gone on record as supporting
a "flatter" tax but not a flat tax. These factors should mitigate the risk of
radical tax law change.
Q. WHAT'S YOUR OUTLOOK FOR THE REMAINDER OF THE FISCAL YEAR?
A. We anticipate continued moderate growth with inflation remaining under
control at approximately 2.5 percent to 3.0 percent.
6
<PAGE> 7
LARGEST SECTORS
THE FUND'S LARGEST SECTORS*
Representing 61% of the fund's total net assets on May 31, 1996
<TABLE>
<CAPTION>
HOLDINGS PERCENT
<S> <C> <C>
- --------------------------------------------------------
SENIOR CARE BONDS 16%
1.
- --------------------------------------------------------
U.S. GOVERNMENT SECURED 14%
2.
- --------------------------------------------------------
NON-SENIOR CARE BONDS 11%
3.
- --------------------------------------------------------
SINGLE FAMILY STATE HOUSING BONDS 11%
4.
- --------------------------------------------------------
HOSPITAL BONDS 9%
5.
- --------------------------------------------------------
</TABLE>
*Portfolio composition and holdings are subject to change.
7
<PAGE> 8
PORTFOLIO STATISTICS
SECURITIES RATINGS
<TABLE>
<CAPTION>
ON 5/31/96 ON 11/30/95
<S> <C> <C>
- ----------------------------------------------------------------------------
AAA 4% 4%
- ----------------------------------------------------------------------------
AA 9 10
- ----------------------------------------------------------------------------
A 3 6
- ----------------------------------------------------------------------------
BBB 22 22
- ----------------------------------------------------------------------------
B 2 2
- ----------------------------------------------------------------------------
NOT RATED+ 60 56
- ----------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
AAA
AA
A
BBB
B
Not Rated
ON 5/31/96 ON 11/30/95
- -------------------------------------------------------------------------------
The ratings of Standard & Poor's Corporation (S&P) and Moody's Investors
Services, Inc. (Moody's) represent their opinions as to the quality of
securities that they undertake to rate. The percentage shown reflects the higher
of Moody's or S&P ratings. Portfolio composition will change over time. Ratings
are relative and subjective and not absolute standards of quality.
+These securities are not rated by S&P or Moody's, however they are rated by
Zurich Kemper Investments, Inc. as follows: AAA 9%, A 4%, BBB 9%, BB 33% and B
5%.
AVERAGE MATURITY
<TABLE>
<CAPTION>
ON 5/31/96 ON 11/30/95
<S> <C> <C>
- ----------------------------------------------------------------------------
AVERAGE MATURITY 18.0 YEARS 17.2 YEARS
- ----------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
Portfolio of Investments at May 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PRINCIPAL
ISSUER AMOUNT VALUE
ADVANCED REFUNDED OBLIGATIONS SECURED AS TO PRINCIPAL
AND INTEREST BY THE UNITED STATES GOVERNMENT SECURITIES--13.4%
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IL, Chicago, Tax Increment Rev., 8.90%, to be called
1-1-02 @ 102 $2,170 $ 2,606
IL, Itasca, Central Manufacturing District, Rev.,
8.375%, to be called 12-1-2000 @ 102 2,585 2,814
IN, Indianapolis, Local Public Improvement Bond Bank,
Rev., 8.50%, to be called 2-1-98 @ 102 3,000 3,271
OH, Marion County, United Church Health Care
Facilities, Rev., 8.875%, to be called 12-1-99 @
103 2,780 3,211
FL, Volusia County, Health Facilities Auth., Memorial
Health Systems, Hospital Facilities, Rev., 8.25%,
to be called 6-1-2000 @ 102 2,390 2,727
FL, Greater Orlando, Aviation Auth., Airport
Facilities, Rev., 8.00%, to be called 10-1-98 @ 102 70 77
PA, Greene County, Gen. Oblg., 8.75% to be called
12-1-2000 @ 100 1,835 2,119
-----------------------------------------------------------------------------
TOTAL ADVANCED REFUNDED OBLIGATIONS
(Cost: $14,767) 16,825
-----------------------------------------------------------------------------
OTHER MUNICIPAL OBLIGATIONS
- ----------------------------------------------------------------------------------------------------------------------
ILLINOIS--12.3%
Chicago, O'Hare International Airport, American
Airlines Special Facilities, Rev., 8.20%, 2018 and
2024 4,075 4,353
Harvard, Multifamily Housing, Northfield Court Proj.,
Rev., 9.50%, 2006 1,975 2,141
Health Facilities Auth., Bethany Home and Hospital of
the Methodist Church, Rev., 8.625%, 2009 2,510 2,787
Lombard, Tax Increment Rev., 8.80%, 2004 1,760 1,978
St. Charles, Multifamily Housing, Wessel Court Proj.,
Rev., 7.60%, 2024 1,985 2,016
University Park, Tax Increment Rev., 8.50%, 2011 1,970 2,120
-------------------------------------------------------------------------------
15,395
- ----------------------------------------------------------------------------------------------------------------------
ARIZONA--7.0%
Coconino County, Industrial Dev. Auth., The Guidance
Center, Inc. Proj., Rev., 9.25%, 2011 1,875 1,999
Health Facilities Auth., The New Foundation,
Healthcare Rev., 8.25%, 2019 2,450 2,541
Industrial Dev. Auth. of the County of Pima, Larson
Company Proj., Rev., 9.50%, 2010 2,300 2,525
Maricopa County, Gen. Oblg., 8.625%, 2007 1,560 1,774
-------------------------------------------------------------------------------
8,839
- ----------------------------------------------------------------------------------------------------------------------
INDIANA--6.4%
Fishers, Economic Dev. Water Facilities, Indianapolis
Water Company, Rev., 7.875%, 2019 685 725
Health Facilities Finance Auth., Fayette Memorial
Hospital, Rev., 7.20%, 2022 2,800 2,804
Housing Finance Auth., Rev., 8.375%, 2020 1,675 1,745
Indianapolis Airport Auth., United Air Lines, Inc.,
Indianapolis Maintenance Center Proj., 6.50%, 2031 2,900 2,805
-------------------------------------------------------------------------------
8,079
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(Dollars in thousands)
PRINCIPAL
AMOUNT VALUE
<S> <C> <C> <C>
NEW YORK--5.4%
Medical Care Facilities Finance Agcy., Rev.,
7.30%, 2021 $ 60 $ 65
New York City, Gen. Oblg., 7.00% and 7.50%, 2010 3,735 3,915
Port Auth., LaGuardia Airport Passenger Terminal,
Rev., 9.125%, 2015 2,500 2,740
-------------------------------------------------------------------------------
6,720
- ----------------------------------------------------------------------------------------------------------------------
FLORIDA--5.1%
Greater Orlando Aviation Auth., Airport Facilities,
Rev., 8.00%, 2018 625 676
Martin County Industrial Dev. Auth., Rev.,
7.875%, 2025 1,500 1,672
Nassua County, Amelia Island Proj., Rev.,
9.75%, 2023 1,985 2,181
Manatee County, First Mortgage Rev.,
7.350%, 2015 1,775 1,821
-------------------------------------------------------------------------------
6,350
- ----------------------------------------------------------------------------------------------------------------------
COLORADO--4.1%
Arapahoe County, Capital Improvement Trust Fund
Highway, Rev., zero coupon, 2010 5,000 1,882
City and County of Denver, Airport System Rev., 7.50%
to 8.75%, 2023 through 2025 2,900 3,295
-------------------------------------------------------------------------------
5,177
- ----------------------------------------------------------------------------------------------------------------------
MISSOURI--4.0%
St. Louis, Scullin Redevelopment Proj., Rev., 10.00%,
2010 2,365 2,816
West Plains, Industrial Dev. Auth., Ozarks Medical
Center, Hospital Rev., 8.625%, 2020 2,000 2,180
-------------------------------------------------------------------------------
4,996
- ----------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA--3.9%
Columbia County, Industrial Dev. Auth., First
Mortgage Rev., 9.00%, 2014 1,950 2,077
Lehigh County General Purpose Auth., Wiley House,
Rev., 8.65%, 2004 2,800 2,871
-------------------------------------------------------------------------------
4,948
- ----------------------------------------------------------------------------------------------------------------------
OKLAHOMA--3.8%
Housing Finance Agency, Single Family Mortgage Rev.,
6.35%, 2027 1,415 1,406
Woodward Municipal Auth., Hospital Rev., 8.50% and
9.25%, 2014 3,085 3,388
-------------------------------------------------------------------------------
4,794
- ----------------------------------------------------------------------------------------------------------------------
MINNESOTA--3.5%
Housing Finance Agcy., Single Family Mortgage Rev.,
7.95%, 2022 2,045 2,147
Sauk Rapids, Industrial Dev., Gold N Plump, Rev.,
9.50%, 2005 2,160 2,247
-------------------------------------------------------------------------------
4,394
- ----------------------------------------------------------------------------------------------------------------------
IOWA--3.4%
Finance Auth., On With Life, Healthcare Facility
Rev., 7.25%, 2015 2,000 2,044
Lake City, Health Care Facility, Opportunity Living
Proj., Rev., 10.00%, 2015 2,000 2,202
-------------------------------------------------------------------------------
4,246
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(Dollars in thousands)
PRINCIPAL
AMOUNT VALUE
<S> <C> <C> <C>
MICHIGAN--2.7%
Gogebic County, Grand View Hospital, Rev., 8.75%,
2016 $2,250 $ 2,424
Madison Heights, Tax Increment Finance Auth., Rev.,
8.50%, 2001 980 1,029
-------------------------------------------------------------------------------
3,453
- ----------------------------------------------------------------------------------------------------------------------
OHIO--2.1%
Cuyahoga County, Judson Retirement Community Center,
Rev., 8.875%, 2019 2,500 2,669
- ----------------------------------------------------------------------------------------------------------------------
NEW MEXICO--2.0%
Albuquerque Health Care Ltd., Nursing Home, Rev.,
9.75%, 2014 1,400 1,515
Truth or Consequences, Nursing Home Improvement,
Sierra Health Care, Inc., Rev., 9.75%, 2014 935 1,011
-------------------------------------------------------------------------------
2,526
- ----------------------------------------------------------------------------------------------------------------------
WYOMING--2.0%
Community Dev. Auth., Housing Rev., 6.30%, 2028 2,500 2,500
- ----------------------------------------------------------------------------------------------------------------------
CONNECTICUT--1.8%
Dev. Auth., Pierce Memorial Baptist Home, Rev.,
9.25%, 2018 2,000 2,202
- ----------------------------------------------------------------------------------------------------------------------
TEXAS--1.7%
Brazos River Auth., Texas Utilities Electric Company,
Pollution Control Rev., 8.25%, 2019 2,000 2,157
- ----------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS--1.7%
Worcester, Briarwood Retirement Community, Rev.,
9.25%, 2022 2,000 2,110
- ----------------------------------------------------------------------------------------------------------------------
NEW HAMPSHIRE--1.6%
Higher Educational and Health Facilities Auth., Rev.,
7.45%, 2025 2,000 1,974
- ----------------------------------------------------------------------------------------------------------------------
NEVADA--1.5%
Housing Division, Single Family Program, Rev., 7.90%,
2021 1,865 1,945
- ----------------------------------------------------------------------------------------------------------------------
CALIFORNIA--1.4%
Sacramento County, Rev., 7.20%, 2015 1,250 1,280
San Diego, Detention Facility, Certificates of
Participation, Rev., 8.00%, 2002 425 452
-------------------------------------------------------------------------------
1,732
- ----------------------------------------------------------------------------------------------------------------------
UTAH--1.3%
Housing Finance Agency, Single Family Mortgage Rev.,
6.65%, 2026 1,600 1,628
- ----------------------------------------------------------------------------------------------------------------------
SOUTH CAROLINA--1.3%
Aiken County, Mattie C. Hall Health Care Center,
Hospital Facilities, Rev., 8.625%, 2010 1,500 1,592
- ----------------------------------------------------------------------------------------------------------------------
KENTUCKY--1.3%
Jefferson County, Louisville Gas and Electric,
Pollution Control, Control Rev., 7.75%, 2019 1,500 1,588
- ----------------------------------------------------------------------------------------------------------------------
STATES LESS THAN
ONE PERCENT--2.6%
NJ, Educational Facilities Auth., Caldwell College,
Rev., 7.25%, 2025 1,150 1,173
-------------------------------------------------------------------------------
ND, Housing Finance Agcy., Single Family Mortgage
Rev., 8.375%, 2021 1,010 1,065
-------------------------------------------------------------------------------
RI, Housing and Mortgage Finance Corp., Rev.,
8.30%, 2011 565 572
-------------------------------------------------------------------------------
NE, Investment Finance Auth., Single Family Housing
Rev., 6.70%, 2026 500 510
-------------------------------------------------------------------------------
3,320
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(Dollars in thousands)
PRINCIPAL
AMOUNT VALUE
<S> <C> <C> <C>
TOTAL OTHER MUNICIPAL OBLIGATIONS--83.9%
(Cost: $98,491) $105,334
-------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS--97.3%
(Cost: $113,258) 122,159
-------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS--.3%
Yield--3.90%
Due--June 1996
(Cost: $400) $ 400 400
-------------------------------------------------------------------------------
TOTAL INVESTMENTS--97.6%
(Cost: $113,658) 122,559
-------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--2.4% 3,071
-------------------------------------------------------------------------------
NET ASSETS--100% $125,630
-------------------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $113,658,000 for federal income tax purposes
at May 31, 1996 the gross unrealized appreciation of investments was $9,036,000,
the gross unrealized depreciation was $135,000 and the net unrealized
appreciation of investments was $8,901,000.
See accompanying Notes to Financial Statements.
12
<PAGE> 13
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1996
(in thousands)
ASSETS
<TABLE>
<S> <C>
Investments, at value
(Cost: $113,658) $122,559
- -------------------------------------------------------------------------------------------------------
Cash 167
- -------------------------------------------------------------------------------------------------------
Receivable for:
Investments sold 1,716
- -------------------------------------------------------------------------------------------------------
Interest 2,955
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS 127,397
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
Payable for:
Investments purchased 1,679
- -------------------------------------------------------------------------------------------------------
Management fee 63
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 10
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 15
- -------------------------------------------------------------------------------------------------------
Total liabilities 1,767
- -------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO 10,526 SHARES OUTSTANDING,
$.01 PAR VALUE, EQUIVALENT TO $11.94 PER SHARE $125,630
- -------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
Paid-in capital $116,899
- -------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (554)
- -------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 8,901
- -------------------------------------------------------------------------------------------------------
Undistributed net investment income 384
- -------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $125,630
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE
($125,630 / 10,526 shares outstanding) $11.94
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended May 31, 1996
(in thousands)
NET INVESTMENT INCOME
<TABLE>
<S> <C>
Interest income $ 4,791
- --------------------------------------------------------------------------------------------------------
Expenses:
Management fee 380
- --------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 23
- --------------------------------------------------------------------------------------------------------
Professional fees 26
- --------------------------------------------------------------------------------------------------------
Reports to shareholders 9
- --------------------------------------------------------------------------------------------------------
Trustees' fees and other 43
- --------------------------------------------------------------------------------------------------------
Total expenses 481
- --------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 4,310
- --------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on sales of investments 201
- --------------------------------------------------------------------------------------------------------
Net realized gain from futures transactions 166
- --------------------------------------------------------------------------------------------------------
Net realized gain 367
- --------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments (3,105)
- --------------------------------------------------------------------------------------------------------
Net loss on investments (2,738)
- --------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,572
- --------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
MAY 31, NOVEMBER 30,
1996 1995
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
<S> <C> <C>
Net investment income $ 4,310 8,704
- ---------------------------------------------------------------------------------------------------------
Net realized gain (loss) 367 (262)
- ---------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (3,105) 6,961
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,572 15,403
- ---------------------------------------------------------------------------------------------------------
Distribution from net investment income (4,294) (8,542)
- ---------------------------------------------------------------------------------------------------------
Proceeds from shares issued in reinvestment of dividends
41 shares and 25 shares, respectively) 508 294
- ---------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (2,214) 7,155
- ---------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of period 127,844 120,689
- ---------------------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed net investment income of
$384 and $368, respectively) $125,630 127,844
- ---------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES DESCRIPTION OF FUND. The Fund is registered under
the Investment Company Act of 1940 as a
non-diversified, closed-end management investment
company.
INVESTMENT VALUATION. Investments are stated at
value. Fixed income securities are valued by using
market quotations, or independent pricing services
that use prices provided by market makers or
estimates of market values obtained from yield data
relating to instruments or securities with similar
characteristics. Exchange traded options are valued
at the last sale price unless there is no sale
price, in which event prices provided by market
makers are used. Over-the-counter traded options
are valued based upon prices provided by market
makers. Financial futures and options thereon are
valued at the settlement price established each day
by the board of trade or exchange on which they are
traded. Other securities and assets are valued at
fair value as determined in good faith by the Board
of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Interest income is recorded on the
accrual basis and includes premium and original
issue discount amortization on fixed income
securities. Realized gains and losses from
investment transactions are reported on an
identified cost basis.
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies for the six
months ended May 31, 1996. The accumulated net
realized loss on sales of investments for federal
income tax purposes at May 31, 1996, amounting to
approximately $288,000, is available to offset
future taxable gains. If not applied, the loss
carryover expires during the period 2002 through
2004.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income monthly and
any net realized capital gains annually, which are
recorded on the ex-dividend date. Dividends are
determined in accordance with income tax principles
which may treat certain transactions differently
from generally accepted accounting principles.
- --------------------------------------------------------------------------------
2 TRANSACTIONS
WITH AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Zurich Kemper Investments, Inc.
(ZKI) (formerly known as Kemper Financial Services,
Inc.), and pays a management fee at an annual rate
of .60% of average weekly net assets. The Fund
incurred a management fee of $380,000 for the six
months ended May 31, 1996.
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Fund. Under the agreement,
KSvC received shareholder services fees of $12,000
for the six months ended May 31, 1996.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the six months ended May 31, 1996,
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
the Fund made no direct payments to its officers
and incurred trustees' fees of $12,000 to
independent trustees.
- --------------------------------------------------------------------------------
3 INVESTMENT
TRANSACTIONS For the six months ended May 31, 1996, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $27,170
Proceeds from sales 26,046
16
<PAGE> 17
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, ------------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $12.19 11.54 12.36 11.86 11.65
- -------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .41 .83 .83 .83 .84
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.25) .64 (.80) .58 .30
- -------------------------------------------------------------------------------------------------------------------
Total from investment operations .16 1.47 .03 1.41 1.14
- -------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .41 .82 .82 .89 .83
- -------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- .03 .02 .10
- -------------------------------------------------------------------------------------------------------------------
Total dividends .41 .82 .85 .91 .93
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $11.94 12.19 11.54 12.36 11.86
- -------------------------------------------------------------------------------------------------------------------
Market value, end of period $12.00 12.13 11.63 12.38 12.13
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED)
Based on net asset value 1.32% 13.09 .12 12.32 10.14
- -------------------------------------------------------------------------------------------------------------------
Based on market value 2.27% 11.77 .71 9.51 7.86
- -------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses .75% .76 .75 .74 .77
- -------------------------------------------------------------------------------------------------------------------
Net investment income 6.80% 6.97 6.92 6.87 7.17
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $125,630 127,844 120,689 128,564 122,035
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 42% 8 11 8 10
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return based on net asset value reflects changes in the Fund's net
asset value during the period. Total return based on market value reflects
changes in market value. Each figure includes reinvestment of dividends. These
figures will differ depending upon the level of any discount from or premium to
net asset value at which the Fund's shares trade during the period.
17
<PAGE> 18
SHAREHOLDERS' MEETING
ANNUAL SHAREHOLDERS' MEETING
On May 29, 1996, an annual shareholders' meeting was held. Kemper Strategic
Municipal Income Trust shareholders were asked to vote on two separate issues:
re-election of the eight members to the Board of Trustees and ratification of
Ernst & Young LLP as independent auditors. We are pleased to report that all
nominees were elected and the selection of Ernst & Young LLP as the fund's
auditors was ratified. Following are the results for each issue:
1) Re-election of Trustees:
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
James E. Akins 8,125,773 245,272
Arthur R. Gottschalk 8,160,095 210,950
Frederick T. Kelsey 8,143,353 227,692
Dominique P. Morax 8,134,144 236,901
Fred B. Renwick 8,134,144 236,901
Stephen B. Timbers 8,171,814 199,231
John B. Tingleff 8,170,140 200,905
John G. Weithers 8,171,814 199,231
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the fund:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
8,224,494 61,662 84,889
</TABLE>
18
<PAGE> 19
NOTES
19
<PAGE> 20
TRUSTEES AND OFFICERS
TRUSTEES OFFICERS
STEPHEN B. TIMBERS J. PATRICK BEIMFORD, JR. CHARLES F. CUSTER
President and Trustee Vice President Vice President and
Assistant Secretary
JAMES E. AKINS DALE R. BURROW
Trustee Vice President JEROME L. DUFFY
Treasurer
ARTHUR R. GOTTSCHALK CHRISTOPHER J. MIER
Trustee Vice President
FREDERICK T. KELSEY JOHN E. NEAL
Trustee Vice President
DOMINIQUE P. MORAX JOHN E. PETERS
Trustee Vice President
FRED B. RENWICK STEPHEN R. WILLSON
Trustee Vice President
JOHN B. TINGLEFF PHILIP J. COLLORA
Trustee Vice President
and Secretary
JOHN G. WEITHERS
Trustee
- --------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 419066
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
120 South LaSalle Street
Chicago, IL 60603
http://www.Kemper.com
[LOGO]
Printed on recycled paper. [KEMPER FUNDS LOGO]
1018230
KSMIT-3 (7/96) Printed in the U.S.A.
