ISI
INTERNATIONAL STRATEGY AND INVESTMENT
ISI
MANAGED MUNICIPAL
FUND SHARES
(A Class of Managed Municipal Fund, Inc.)
MUNICIPALS
ANNUAL REPORT
October 31, 1996
<PAGE>
ISI
Managed
Municipal
Fund Shares
- --------------------------------------------------------------------------------
Directors and Officers
Edward S. Hyman Harry Woolf
Chairman Director
Richard T. Hale Nancy Lazar
Vice Chairman Vice President
W. James Price Edward J. Veilleux
Vice Chairman Vice President
R. Alan Medaugh Scott J. Liotta
Director and President Vice President
James J. Cunnane Carrie L. Butler
Director Vice President
John F. Kroeger Joseph A. Finelli
Director Treasurer
Louis E. Levy Edward J. Stoken
Director Secretary
Eugene J. McDonald Laurie D. Collidge
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 through investment in a portfolio consisting
primarily of municipal obligations, the interest on which is exempt from
federal income tax.
INVESTMENT ADVISOR
ISI Inc.
717 Fifth Avenue
New York, NY 10022
(800) 955-7175
SHAREHOLDER SERVICING AGENT
Investment Company Capital Corp.
P.O. Box 419426
Kansas City, MO 64141-6426
(800) 882-8585
DISTRIBUTOR
Armata Financial Corp.
P.O. Box 515
Baltimore, MD 21203
ISI Mutual Funds
717 Fifth Avenue
New York, NY 10022
(800) 955-7175
<PAGE>
INVESTMENT ADVISOR'S REPORT
We are pleased to report on the progress of your Fund for the fiscal year
ended October 31, 1996. In this year of volatile interest rates, the Fund
recorded a total return of 4.7%. From its inception on February 26, 1990 through
October 31, 1996, the Fund posted a cumulative total return of 57.6%, which
translates into an average annual total return of 7.0%. These figures assume the
reinvestment of dividends and capital gains distributions and exclude the impact
of any sales charge.
Overview
In general, yields in the municipal market were unchanged during fiscal
year 1996. The general rise in tax yields did not create a climb in municipal
rates because the value of tax-free income increased when Republican plans for a
big tax cut fell through. The swing in the relationship of municipal yields to
Treasuries this fiscal year shows the extent of the change in sentiment (see
table below).
Top Quality Municipal Yields as a
Percentage of Treasury Yields
Maturity of
AAA-Rated
Municipals 10/95 10/96 Change
---------- ----- ------ -------
15 Years 87.4% 81.7% -5.7%
20 Years 88.8% 83.0% -5.8%
30 Years 88.2% 82.8% -5.4%
Maturity Management
Despite a narrow trading range, there were opportunities for the Fund to
manage maturities because a general change in Treasury yields is typically
reflected in municipal yields. For example, when Treasury rates began to rise
sharply in March, municipal yields also rose. Influenced by high Treasury rates,
municipal rates remained high until July before falling (see chart, top right).
To protect the Fund from rising rates, we held more than 10% in cash reserves
early in the fiscal year, then moved to longer maturities, reducing reserves to
6% by fiscal year-end.
30-Year Municipal AAA General Obligation Yields
[graph below]
DATE YIELD DATE YIELD DATE YIELD
11/ 1 5.55 8/30 5.71 5/31 5.82
8/23 5.61 5/24 5.69
8/16 5.49 5/17 5.73
8/ 9 5.44 5/1O 5.80
8/ 2 5.51 5/ 3 5.86
1O/25 5.62 7/26 5.70 4/26 5.66
10/18 5.57 7/19 5.74 4/19 5.72
10/11 5.55 7/12 5.82 4/12 5.78
10/ 4 5.47 7/ 5 5.94 4/ 5 5.82
9/27 5.60 6/28 5.77 3/29 5.69
9/20 5.69 6/21 5.89 3/22 5.69
9/13 5.64 6/14 5.92 3/15 5.81
9/ 6 5.75 6/ 7 5.97 3/ 8 5.62
3/ 1 5.34
2/23 5.30 11/24 5.53
2/16 5.17 11/17 5.52
2/ 9 5.16 11/10 5.57
2/ 2 5.23 11/ 3 5.54
1/26 5.29
1/19 5.23
1/12 5.32
1/ 5 5.27
12/29 5.28
12/22 5.36
12/15 5.32
12/ 8 5.28
12/ 1 5.39
Source: Bloomberg Inc.
Fund maturity is affected by general moves in interest rates because of the
pressure of early calls, typically 10 years for most long-term municipals. This
year we added new securities with long-call protection to the portfolio. At the
beginning of the fiscal year, the portfolio held only 10.9% of its assets in
issues with calls in 2006 or later. At the end of the fiscal year, long-call
protected issues accounted for 20.4% of the portfolio.
Performance Review
Municipal rates began and ended the fiscal year in roughly the same place.
As a result, unlike Treasuries, longer maturity municipals performed better
than shorter maturity municipals (see table below).
Performance Comparison
Long vs. Short Maturity Municipals
Lehman Bros. Total Return
Municipal Bond Index (10/95-10/96)
- --------------------------------------------------------------------------------
1-2 years 4.4%
4-6 years 4.6%
8-10 years 4.9%
22+ years 7.1%
1
<PAGE>
By extending maturities during the year, the Fund outperformed short
maturity issues but lagged behind the longest section of the municipal bond
universe. Please see our Economic Outlook immediately following this letter.
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 18, 1996
ECONOMIC OUTLOOK FOR 1997
Overview
We expect U.S. economic growth to slow to a 1% pace in the fourth quarter
and to remain slow into mid-1997. This would keep inflation low as capacity
utilization falls and the labor market cools. Slow growth would also be the
catalyst for declining rates and Federal Reserve easing. Near term, we expect
Christmas sales will be adequate but not strong, since early price cutting
is already evident. Please see our forecast table below.
ISI FORECAST
96:1Q 96:2Q 96:3Q 96:4Q* 97:1Q* 97:2Q* 97:3Q*
Real GDP 2.0% 4.7% 2.2% 1.0% 1.0% 1.0% 3.5%
GDP Deflator** 2.2% 1.8% 1.6% 2.0% 1.5% 1.5% 2.0%
30-Year Bond
Yields*** 6.7% 6.9% 6.9% 6.3% 6.0% 5.7% 5.9%
Fed Funds
Rate*** 5.2% 5.2% 5.2% 5.2% 5.0% 4.8% 4.8%
*Estimated.
**A more accurate cost of living barometer than the CPI.
***End of quarter.
Inflation
Inflation has subsided around the industrial world. This means that "real"
interest rates are high so there is room for "nominal" interest rates to fall
(see chart below).
U.S. REAL GOVT. BOND YIELDS
SEP 4.02%
[GRAPH APPEARS BELOW]
REAL GOV BOND YIELDS
74:1 -2.12
74:2 -2.54
74:3 -2.41
74:4 -2.06
74:5 -2.57
74:6 -2.76
74:7 -3.28
74:8 -2.29
74:9 -3.35
74:10 -3.47
74:11 -4.21
74:12 -4.19
75:1 -3.87
75:2 -3.50
75:3 -2.47
75:4 -1.83
75:5 -1.04
75:6 -1.14
75:7 -1.36
75:8 -0.12
75:9 0.66
75:10 0.70
75:11 0.90
75:12 1.10
76:1 1.32
76:2 1.76
76:3 1.91
76:4 2.01
76:5 1.92
76:6 2.05
76:7 2.44
76:8 2.19
76:9 2.29
76:10 2.24
76:11 2.58
76:12 2.26
77:1 2.28
77:2 1.56
77:3 1.37
77:4 0.78
77:5 1.06
77:6 0.94
77:7 0.97
77:8 1.05
77:9 1.22
77:10 1.38
77:11 1.14
77:12 1.26
78:1 1.37
78:2 2.01
78:3 1.85
78:4 1.84
78:5 1.29
78:6 1.06
78:7 0.92
78:8 0.61
78:9 -0.01
78:10 -0.26
78:11 -0.12
78:12 -0.11
79:1 -0.31
79:2 -0.84
79:3 -1.22
79:4 -1.41
79:5 -1.51
79:6 -2.16
79:7 -2.52
79:8 -2.86
79:9 -2.71
79:10 -2.22
79:11 -2.29
79:12 -3.13
80:1 -3.27
80:2 -2.03
80:3 -2.25
80:4 -3.19
80:5 -4.07
80:6 -4.46
80:7 -2.91
80:8 -1.89
80:9 -1.43
80:10 -1.04
80:11 -0.26
80:12 0.05
81:1 0.35
81:2 1.41
81:3 2.08
81:4 3.06
81:5 3.81
81:6 3.26
81:7 2.81
81:8 3.35
81:9 3.70
81:10 4.41
81:11 3.77
81:12 4.54
82:1 5.96
82:2 6.61
82:3 6.65
82:4 6.75
82:5 6.33
82:6 6.74
82:7 6.99
82:8 6 81
82:9 7 13
82:10 6.14
82:11 6.06
82:12 6.71
83:1 6.92
83:2 7.40
83:3 7.04
83:4 6.48
83:5 7.09
83:6 8.46
83:7 9.04
83:8 9.36
83:9 8.87
83:10 8.83
83:11 8.59
83:12 8.09
84:1 7.46
84:2 7.26
84:3 7.49
84:4 8.09
84:5 9.09
84:6 9.11
84:7 8.90
84:8 8.24
84:9 8.01
84:10 7.71
84:11 7.41
84:12 7.48
85:1 7.92
85:2 7.86
85:3 8.02
85:4 7.89
85:5 7.48
85:6 6.79
85:7 7.04
85:8 7.21
85:9 7.36
85:10 7.26
85:11 6.55
85:12 5.75
86:1 5.43
86:2 5.73
86:3 5.81
86:4 5.80
86:5 5.84
86:6 5.80
86:7 5.60
86:8 5.75
86:9 5.86
86:10 6.13
86:11 6.24
86:12 6.18
87:1 5.93
87:2 5.54
87:3 4.62
87:4 4.48
87:5 5.02
87:6 4.73
87:7 4.62
87:8 4.59
87:9 5.23
87:10 5.16
87:11 4.33
87:12 4.70
88:1 4.70
88:2 4.59
88:3 4.80
88:4 5.05
88:5 5.25
88:6 5.04
88:7 5.01
88:8 5.30
88:9 4.88
88:10 4.63
88:11 4.78
88:12 4.60
89:1 4.45
89:2 4.28
89:3 4.28
89:4 3.91
89:5 3.56
89:6 3.19
89:7 3.02
89:8 3.41
89:9 3.72
89:10 3.42
89:11 3.33
89:12 3.26
90:1 3.07
90:2 3.24
90:3 3.41
90:4 4.05
90:5 4.37
90:6 3.71
90:7 3.69
90:8 3.16
90:9 2.86
90:10 2.49
90:11 2.27
90:12 1.99
91:1 2.63
91:2 2.72
91:3 3.39
91:4 3.40
91:5 3.24
91:6 3.78
91:7 4.09
91:8 4.34
91:9 4.56
91:10 5.08
91:11 4.86
91:12 4.72
92:1 4.91
92:2 5.11
92:3 4.78
92:4 4.78
92:5 4.87
92:6 4.75
92:7 4.44
92:8 4.32
92:9 4.35
92:10 4.25
92:11 4.49
92:12 4.48
93:1 4.16
93:2 3.77
93:3 3.73
93:4 3.70
93:5 3.70
93:6 3.89
93:7 3.79
93:8 3.48
93:9 3.24
93:10 3.19
93:11 3.54
93:12 3.51
94:1 3.77
94:2 4.05
94:3 4.40
94:4 4.91
94:5 5.12
94:6 4.84
94:7 4.81
94:8 4.59
94:9 4.75
94:10 5.33
94:11 5.41
94:12 5.20
95:1 4.98
95:2 4.75
95:3 4.59
95:4 4.31
95:5 3.83
95:6 3.53
95:7 3.96
95:8 4.24
95:9 4.01
95:10 3.56
95:11 3.66
95:12 3.46
96:1 3.33
96:2 3.52
96:3 3.76
96:4 3.89
96:5 3.97
96:6 4.31
96:7 4.08
96:8 3.96
96:9 4.03
96:10 3.82
96:11 NA
96:12 NA
Source: ISI Inc.
2
<PAGE>
ECONOMIC OUTLOOK FOR 1997 (continued)
The major forces behind the decline of inflation are:
(bullet) Global Competition
(bullet) Technology
(bullet) Demographics
The opening up of world trade has meant new plants can be built in low-wage
areas and the products can be exported to high-wage home markets. As a result,
pressure on U.S. real wages and a drive for corporate efficiency have marked the
last 10 years. The declining cost of technology has also been a factor in
boosting capital spending and lowering the world inflation rate. Technology
represents a growing section of the overall economy, so the percentage of the
U.S. economy experiencing deflation has grown over the last 10 years. Finally,
baby boomers have reached the age when they are beginning to save for
retirement. This change from consumption to savings is an important shift in the
economy.
Reduced Government Spending
Growth in federal outlays has been declining since the mid-1980s. The past
five years have seen an unusually low growth rate of 3.3% (see chart below).
FEDERAL OUTLAYS Y/Y %
5 Yr. Avg. 1996 3.3%
[Graph appears below]
68:1 14.6
69:1 14.6
70:1 15.8
71:1 13.8
72:1 11.7
73:1 7.3
74:1 8.1
75:1 11.4
76:1 11.7
77:1 11.7
78:1 12.2
79:1 12.4
80:1 11.1
81:1 12.4
82:1 12.6
83:1 12.0
84:1 11.3
85:1 10.2
86:1 8.4
87:1 6.6
88:1 5.8
89:1 6.2
90:1 6.0
91:1 6.0
92:1 6.5
93:1 6.0
94:1 5.0
95:1 4.0
96:1 3.3
Source: ISI Inc.
The risk of a Presidential landslide vote that would have put Democrats
back in control of Congress has passed, and the prospects of spending controls
on entitlements without large tax cuts are back in place. The 3% level on
outlays would bring the budget into balance by 2000 if we don't have a
recession. The pressure on the capital markets from a large and rising
government deficit has passed, so the growth in overall credit demand has moved
down to a modest 5% pace. Because government spending is over 25% of the GDP,
slow growth here holds down overall growth. Similar constraints on government
spending in Europe places a "fiscal drag" there as well.
High Federal Funds Policy
The Federal Reserve moved its key short-term rate up from 3% to 6% in 1993
and 1994. In 1995, the Fed trimmed this rate a bit to 5.25%. Inflation, as
measured by the Consumption Price Deflator, has recently dipped below 2% but the
Fed has maintained a 5.25% Fed Funds rate. This high rate policy has caused
growth in two key areas of the economy to stall. Real construction spending and
vehicle sales have both seen little growth since 1994. The policy emphasis on
fighting inflation has encouraged long-term rates to fall recently. The
flattening of the yield curve implies weak economic growth because of no
monetary stimulus. In part, the modest 125 basis point (1.25%) yield gap between
the Fed Funds rate and long-term Treasury bonds indicates only 1% real economic
growth lies ahead. It has also caused investors to build up their short maturity
investments, with individual investors currently building a $1.5 trillion money
mountain. If slow economic growth allowed the Fed to cut money market rates
there might well be a great deal of investment activity in longer maturity notes
and bonds.
3
<PAGE>
PORTFOLIO DIVERSIFICATION BY STATE
[Map appears here]
State Allocation
% of % of
Municipal Municipal
Bonds Bonds
Texas 20.2% Minnesota 3.0%
Florida 17.0 Washington 2.6
Maryland 9.7 Ohio 2.1
North Carolina 6.5 Delaware 1.7
Virginia 4.9 Utah 1.7
South Carolina 4.6 Colorado 1.7
Illinois 4.3 Missouri 1.7
Tennessee 4.0 Hawaii 1.6
Kansas 3.9 Oregon 1.3
Arizona 3.2 Indiana 1.3
Georgia 3.0 Total 100.0%
4
<PAGE>
ADDITIONAL PERFORMANCE INFORMATION
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. To further
assist in this evaluation, the Securities and Exchange Commission (SEC) requires
that we include, on an annual basis, a line graph comparing the Fund's
performance to that of an appropriate market index. This graph must measure the
growth of a $10,000 hypothetical investment from the Fund's inception on
February 26, 1990 through the most recent fiscal year-end and must reflect the
impact of the Fund's total expenses and its currently effective 4.45% maximum
sales charge.
While the following chart is required by SEC rules, such comparisons are of
limited utility since the indices shown are not adjusted for sales charges and
ongoing management, distribution and operating expenses applicable to the Fund.
An investor who wished to replicate the total return of these indices would have
had to own the securities that they represent. Acquiring these securities would
require a considerable amount of money and would incur expenses that are not
reflected in the index results.
The SEC also requires that we report the Fund's total returns, according to
a standardized formula, for various time periods through the end of the most
recent calendar quarter. The SECtotal return figures differ from those we
reported because the time periods may be different and because the
SECcalculation includes the impact of the currently effective maximum sales
charge. These total returns correspond to those experienced by individual
shareholders only if their shares were purchased on the first day of each time
period and the maximum sales charge was paid. Any performance figures shown are
for the full period indicated. Since investment return and principal value will
fluctuate, an investor's shares may be worth more or less than their original
cost when redeemed.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN*
% Return with
Periods ended 9/30/96: Sales Charge**
- --------------------------------------------------------------------------------
One Year 0.67%
Five Years 5.40%
Since Inception (2/26/90) 5.89%
CHANGE IN VALUE OF A $10,000 INVESTMENT*
February 26, 1990--October 31, 1996
[Graph appears here -- plot points are listed below]
Lehman Lehman
ISI Brothers Brothers Consumer
Managed General Prerefunded Price
Municipal Obligation Municipal Index
Fund Index (G.O.) Index (CPI)
2/90 $9,555 $10,000 $10,000 $10,000
10/90 $9,916 $10,346 $10,413 $10,420
10/91 $10,992 $11,510 $11,462 $10,722
10/92 $11,658 $12,448 $12,380 $11,065
10/93 $13,332 $14,126 $13,658 $11,375
10/94 $12,466 $13,627 $13,453 $11,671
10/95 $14,388 $15,513 $14,872 $11,998
10/96 $15,060 $16,372 $15,555 $12,358
* These figures assume the reinvestment of dividends and capital gains
distributions. The Lehman Brothers indices listed above are unmanaged. Although
the G.O. Index reflects general municipal market performance, the Prerefunded
Index is a better indicator of the Fund due to its higher quality
characteristics. The Fund is invested entirely in AA-rated or better issues.
Management is not aware of any single index that contains securities with
substantially the same characteristics as those of the Fund. The CPIis a widely
used measure of inflation. Past performance is not an indicator of future
results.
**Assumes maximum sales charge of 4.45%.
5
<PAGE>
MANAGED MUNICIPAL FUND, INC.
Statement of Net Assets October 31, 1996
<TABLE>
<CAPTION>
Rating* Market
(Moody's/ Par Value
Issuer S&P) (000) (Note A)
- ----------------------------------------------------------------------------------------------------
<S> <C>
MUNICIPAL BONDS--93.4%
General Obligation--61.2%
Arlington, Texas, Independent School District, 5.75%, 2021 Aaa/NR $5,000 $ 5,015,850
Charlotte, NC:
5.30%, 2011 Aaa/AAA 1,590 1,598,220
5.30%, 2012 Aaa/AAA 1,120 1,119,014
5.30%, 2012 Aaa/AAA 2,325 2,322,954
5.80%, 2016 Aaa/AAA 2,500 2,590,025
Dallas, TX, 5.00%, 2010 Aa1/AAA 1,750 1,692,128
Delaware State, Series "A", 5.125%, 2016 Aa1/AA+ 2,150 2,056,905
DuPage County, IL, Jail Project, 5.60%, 2021 Aaa/AAA 1,600 1,595,664
Florida Board of Education, Refunding Public Education:
6.125%, 2012 Aa/AA 2,250 2,339,258
5.50%, 2021 Aa/AA 2,000 1,957,700
5.125%, 2022 Aa/AA 5,000 4,653,250
Franklin County, OH:
5.45%, 2009 Aaa/AAA 1,500 1,520,730
5.50%, 2013 Aaa/AAA 1,000 1,003,490
Georgia State, Series "D":
5.25%, 2009 Aaa/AA+ 1,580 1,584,234
5.00%, 2010 Aaa/AA+ 2,000 1,953,220
Grand Prairie, TX, School District, 5.20%, 2018 Aaa/AAA 2,000 1,891,540
Henrico County, VA:
5.20%, 2008 Aaa/AAA 1,200 1,208,592
5.25%, 2009 Aaa/AAA 1,000 1,004,550
Maryland State & Local Facilities, Second Series, 5.125%, 2010 Aaa/AAA 3,000 2,971,920
Minneapolis, MN, Sports Arena:
5.00%, 2011 Aaa/AAA 1,710 1,650,646
5.00%, 2012 Aaa/AAA 1,920 1,840,570
Missouri State Building, Series "A", 5.00%, 2010 Aaa/AAA 2,000 1,957,040
Montgomery County, MD:
5.60%, 2004 Aaa/AAA 1,000 1,059,290
5.00%, 2009 Aaa/AAA 1,500 1,476,120
5.00%, 2010 Aaa/AAA 1,500 1,464,675
Plano, TX, Independent School District, 5.00%, 2011 Aaa/AAA 3,000 2,864,070
Salt Lake County, UT, 5.25%, 2010 Aaa/AA+ 2,000 1,995,920
South Carolina Capital Improvement, 5.00%, 2009 Aaa/AAA 2,700 2,655,909
South Carolina State Highway, Series "B", 5.625%, 2014 Aaa/AAA 2,700 2,747,169
State of Tennessee:
Series "A", 5.50%, 2009 Aaa/AA+ 1,535 1,564,656
Series "A", 5.55%, 2010 Aaa/AA+ 1,000 1,019,550
Series "B", 6.00%, 2005 Aaa/AA+ 2,000 2,170,260
</TABLE>
6
<PAGE>
MANAGED MUNICIPAL FUND, INC.
Statement of Net Assets (continued) October 31, 1996
<TABLE>
<CAPTION>
Rating* Market
(Moody's/ Par Value
Issuer S&P) (000) (Note A)
- ----------------------------------------------------------------------------------------------------
<S> <C>
General Obligation (continued)
State of Texas:
5.25%, 2013 Aa/AA $3,250 $ 3,147,203
6.00%, 2014 Aa/AA 2,000 2,062,460
State of Virginia, 5.375%, 2016 Aaa/AAA 2,500 2,484,900
State of Washington:
Series "A", 5.60%, 201 0 Aa/AA 1,500 1,518,630
Series "B", 5.50%, 2008 Aa/AA 1,500 1,523,475
Washington Suburban Sanitary District, MD, 5.375%, 2010 Aa1/AA 1,810 1,817,945
-----------
77,099,732
-----------
Electric and Gas Utility Revenue--5.4%
Jacksonville Electric Authority Revenue, FL, St. John's
River Power, 5.25%, 2028 Aa1/AA 2,000 1,890,680
San Antonio, TX, Electric & Gas Revenue:
Series "A", 4.90%, 2008 Aa1/AA 4,000 3,869,320
Series "A", 6.50%, 2012 Aa1/AA 1,000 1,043,130
-----------
6,803,130
-----------
Pre-refunded Issues--8.4%
Arizona Highway Transportation Board, 6.00%, 2010 Aaa/AAA 3,480 3,703,381
Florida Board of Education, Refunding Public Education,
6.50%, 2012 Aaa/AA 2,500 2,761,225
Howard County, MD, Consolidated Public Improvements,
Series "A", 6.90%, 2002 Aaa/AAA 1,000 1,083,810
Jacksonville, FL, Electric Authority Revenue, Scherer 4-1-A,
6.75%, 2021 Aaa/AA 1,000 1,098,580
State of Hawaii, General Obligation:
7.00%, 2006 Aaa/AA 750 814,478
6.125%, 2010 NR/AA 1,000 1,069,020
-----------
10,530,494
-----------
Transportation Revenue--8.5%
Florida Transportation Revenue, 5.80%, 2018 Aa/AA 2,000 2,020,440
Kansas Transportation Revenue:
5.40%, 2009 Aa/AA 2,000 2,012,640
5.40%, 2009 Aa/AA 2,500 2,515,800
Maryland State Department of Transportation, 5.375%, 2006 Aa/AA 1,500 1,545,240
Portland, OR, Metro, 5.25%, 2007 Aa/AA+ 1,500 1,517,865
Virginia State Transportation Authority, 6.00%, 2010 Aa/AA 1,000 1,025,780
-----------
10,637,765
-----------
</TABLE>
7
<PAGE>
MANAGED MUNICIPAL FUND, INC.
Statement of Net Assets (concluded) October 31, 1996
<TABLE>
<CAPTION>
Rating* Market
(Moody's/ Par Value
Issuer S&P) (000) (Note A)
- ----------------------------------------------------------------------------------------------------
<S> <C>
Water and Sewer Utility Revenue--5.4%
Chicago, IL, 6.30%, 2009 Aa/AA $1,000 $ 1,076,530
DuPage, IL, Water Commission, 5.25%, 2011 Aa1/AA 2,500 2,433,250
Orlando, FL, Utility Commission, 5.125%, 2019 Aa1/AA 3,500 3,252,585
------------
6,762,365
------------
Other Revenue--4.5%
Indianapolis, IN, Local Public Improvement Board,
6.00%, 2018 Aaa/AA+ 1,500 1,515,300
Lower Colorado River Authority, Jr. Lien, 4th Supply,
5.25%, 2015 Aaa/AAA 2,000 1,963,120
University of Texas, 6.50%, 2011 Aaa/AAA 2,000 2,199,020
------------
5,677,440
------------
Total Municipal Bonds
(Cost $115,733,425) 117,510,926
------------
REPURCHASE AGREEMENT--5.4%
Goldman Sachs & Co., 5.45%
Dated 10/31/96, to be repurchased on 11/1/96, collateralized
by U.S. Treasury Notes with a market value of $7,000,891.
(Cost $6,863,000) 6,863 6,863,000
------------
Total Investment in Securities--98.8%
(Cost $122,596,425)** 124,373,926
Other Assets in Excess of Liabilities, Net--1.2% 1,530,225
------------
Net Assets--100.0% $125,904,151
============
Net Asset Value and Redemption Price Per:
ISI Class Share
($84,711,606 / 8,010,842 shares outstanding) $10.58
======
Flag Investors Class A Share
($41,192,545 / 3,894,438 shares outstanding) $10.58
======
Maximum Offering Price Per:
ISI Class Share
($10.58 / .9555) $11.07
======
Flag Investors Class A Share
($10.58 / .955) $11.08
======
- ----------------------------------------------------------------------------------------------------
</TABLE>
*The Moody's or Standard & Poor's ratings indicated are believed to be the most
recent ratings available as of October 31, 1996. Ratings of issues have not been
audited by Coopers & Lybrand L.L.P.
**Also aggregate cost for federal tax purposes.
See Notes to Financial Statements.
8
<PAGE>
MANAGED MUNICIPAL FUND, INC.
Statement of Operations For the Year Ended October 31, 1996
<TABLE>
- --------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME (NOTE A):
Interest $6,948,446
----------
EXPENSES:
Investment advisory fee (Note B) 516,180
Distribution fee (Note B) 322,613
Administration fees (Note B) 258,090
Printing andpostage 63,994
Accounting fee (Note B) 59,356
Transfer agent fee (Note B) 54,959
Registration fees (Note A) 46,384
Audit 40,132
Legal 28,676
Custodian fee 25,543
Miscellaneous 22,018
Directors' fees 10,808
Insurance 3,561
----------
Total expenses 1,452,314
Less: Fees waived (Note B) (290,917)
----------
Net expenses 1,161,397
----------
Net investment income 5,787,049
----------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain from security transactions 281,659
Change in unrealized appreciation or depreciation of investments (272,341)
----------
Net gain on investments 9,318
----------
Net Increase in net assets resulting from operations $5,796,367
==========
- --------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
MANAGED MUNICIPAL FUND, INC.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended October 31,
----------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C>
INCREASE/(DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 5,787,049 $ 6,268,902
Net realized gain from security transactions 281,659 599,805
Change in appreciation or depreciation
of investments (272,341) 12,223,598
------------ ------------
Net increase in net assets
resulting from operations 5,796,367 19,092,305
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income:
ISI Class Shares (3,828,729) (2,270,726)
Flag Investors Class A Shares (1,958,320) (3,998,176)
Net realized short-term gains:
ISI Class Shares (545,496) (471,717)
Flag Investors Class A Shares (286,075) (267,415)
Net realized long-term gains:
ISI Class Shares (82,292) (691,139)
Flag Investors Class A Shares (43,313) (418,234)
------------ ------------
Total distributions (6,744,225) (8,117,407)
------------ ------------
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of shares 8,278,327 11,188,171
Value of shares issued in reinvestment of dividends 3,789,940 4,794,976
Cost of shares repurchased (17,488,342) (28,195,599)
------------ ------------
Decrease in net assets derived from capital share
transactions (5,420,075) (12,212,452)
------------ ------------
Total decrease in net assets (6,367,933) (1,237,554)
NET ASSETS:
Beginning of year 132,272,084 133,509,638
------------ ------------
End of year $125,904,151 $132,272,084
============ ============
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
MANAGED MUNICIPAL FUND, INC.
Financial Highlights-- ISI Class and Flag Investors Class A Shares (For a share
outstanding throughout each year)(1)
<TABLE>
<CAPTION>
For the Year Ended October 31,
-------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of year $ 10.65 $ 9.81 $ 11.10 $ 10.31 $ 10.36
------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income 0.48 0.48 0.46 0.50 0.50
Net realized and unrealized gain/(loss)
on investments -- 0.98 (1.15) 0.94 0.22
------- ------- ------- ------- -------
Total from Investment Operations 0.48 1.46 (0.69) 1.44 0.72
Less Distributions:
Dividends from net investment income
and short-term gains (0.54) (0.54) (0.56) (0.61) (0.65)
Distributions from net realized
long-term gains (0.01) (0.08) (0.04) (0.04) (0.12)
------- ------- ------- ------- -------
Total distributions (0.55) (0.62) (0.60) (0.65) (0.77)
------- ------- ------- ------- -------
Net asset value at end of year $ 10.58 $ 10.65 $ 9.81 $ 11.10 $ 10.31
======= ======= ======= ======= =======
Total Return(2) 4.67% 15.42% (6.49)% 14.36% 6.06%
Ratios to Average Daily Net Assets:
Expenses(3) 0.90% 0.90% 0.90% 0.90% 0.90%
Net investment income(4) 4.48% 4.72% 4.37% 4.38% 4.78%
Supplemental Data:
Net assets at end of year:
ISI Class Shares $84,712 $86,292 $83,607 $88,378 $51,420
Flag Investors Class A Shares $41,193 $45,980 $49,903 $53,486 $45,536
Portfolio turnover rate 32% 55% 37% 68% 95%
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Computed based upon average shares outstanding.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory and administration fees (Note B), the ratio
of expenses to average daily net assets would have been 1.13%, 1.10%,
1.11%, 1.14% and 1.27% for the years ended October 31, 1996, 1995, 1994,
1993 and 1992, respectively.
(4) Without the waiver of advisory and administration fees (Note B), the ratio
of net investment income to average daily net assets would have been
4.25%, 4.52%, 4.16%, 4.14% and 4.41% for the years ended October 31, 1996,
1995, 1994, 1993 and 1992, respectively.
See Notes to Financial Statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
A. Significant Accounting Policies -- Managed Municipal Fund, Inc. (the "Fund")
was organized as a Maryland Corporation on January 15, 1990 and commenced
operations on February 26, 1990. The Fund is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment
company. At October 31, 1996, the Fund consisted of two classes of shares:
ISI Managed Municipal Fund Shares ("ISI Class") and Flag Investors Managed
Municipal Fund Class A Shares ("Flag Investors Class A").
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant accounting policies are as follows:
Security Valuation -- Municipal bonds are valued on the basis of quotations
provided by a pricing service, which uses information with respect to
transactions on bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining value. Securities or other assets for which market quotations
are not readily available are valued at their face value so determined in
good faith by the Investment Advisor under procedures established and
monitored by the Board of Directors. Short-term obligations with maturities
of 60 days or less are valued at amortized cost which approximates market.
Repurchase Agreements -- The Fund may agree to enter into tri-party
repurchase agreements. Securities held as collateral for tri-party
repurchase agreements are maintained by the broker's custodial bank in a
segregated account until maturity of the repurchase agreement. The agreement
ensures that the market value of the collateral, including accrued interest
thereon, is sufficient in the event of default. If the counterparty defaults
and the value of the collateral declines or if the counterparty enters into
an insolvency proceeding, realization of the collateral by the Fund may be
delayed or limited.
Federal Income Tax -- No provision is made for federal income taxes as it is
the Fund's intention to continue to qualify as a regulated investment
company and to make requisite distributions to the shareholders that will be
sufficient to relieve it from all or substantially all federal income and
excise taxes. The Fund's policy is to distribute to shareholders
substantially all of its taxable net investment income and net realized
capital gains.
Distributions are determined in accordance with income tax regulations,
which may differ from generally accepted accounting principles. Accordingly,
periodic reclassifications are made within the Fund's capital accounts to
reflect income and capital gains available for distribution under income tax
regulations.
Other -- Security transactions are accounted for on the trade date and the
cost of investments sold or redeemed is determined by use of the specific
identification method for both financial reporting and income tax purposes.
Interest income is recorded on an accrual basis.
B. Investment Advisory Fees, Transactions with Affiliates and Other Fees --
International Strategy & Investment Inc. ("ISI") serves as the Fund's
advisor and Investment Company Capital Corp. ("ICC") serves as the Fund's
administrator. As compensation for its advisory services, ISI receives from
the Fund an
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
annual fee, calculated daily and paid monthly, at the annual rate of .40%
of average daily net assets. As compensation for its administrative
services, ICC receives from the Fund an annual fee, calculated daily and
paid monthly, at the annual rate of .20% of the average daily net assets.
ISI and ICC have agreed to reduce their respective annual fees
proportionately, if necessary, so that ordinary expenses of the Fund for any
fiscal year do not exceed .90% of the Fund's average daily net assets. For
the year ended October 31, 1996, ISI and ICC waived fees of $192,777 and
$98,140, respectively.
As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, based on the Fund's average
daily net assets. ICC received $59,356 for accounting services for the year
ended October 31, 1996.
As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated and paid monthly. ICC received $54,959 for
transfer agent services for the year ended October 31, 1996.
As compensation for providing distribution services, Armata Financial Corp.
receives from the Fund an annual fee, calculated daily and paid monthly, at
the annual rate of .25% of the average daily net assets of the ISI
ClassShares. Alex. Brown & Sons Incorporated receives from the Fund an
annual fee, calculated daily and paid monthly, at an annual rate equal to
.25% of the average daily net assets of the Flag Investors Class A Shares.
For the year ended October 31, 1996, distribution fees were $322,613, of
which $213,366 were allocated to ISI Class Shares and $109,247 were
allocated to Flag Investors Class A Shares.
The fund complex of which the Fund is a part has adopted a retirement plan
for eligible Directors. The actuarially computed pension expense allocated
to the Fund for the period January 1, 1996 through October 31, 1996 was
approximately $4,543, and the accrued liability was approximately $17,863.
C. Capital Share Transactions -- The Fund is authorized to issue up to 40
million shares of capital stock, par value, $.001 per share, all of which
shares are designated as common stock (20 million ISI Class, 15 million
Flag Investors Class A, 2.5 million Flag Investors Class B, 500,000 Flag
Investors Class D and 2 million undesignated). Transactions in shares of the
Fund were as follows:
ISI Class Shares
-----------------------------------
For the For the
Year Ended Year Ended
Oct. 31, 1996 Oct. 31, 1995
--------------- --------------
Shares sold 585,014 794,506
Shares issued to share-
holders on reinvest-
ment of dividends 246,345 314,194
Shares redeemed (924,026) (1,531,414)
----------- ------------
Net decrease in shares
outstanding (92,667) (422,714)
=========== ============
Proceeds from sale
of shares $ 6,198,720 $ 7,981,927
Value of reinvested
dividends 2,588,981 3,165,983
Cost of shares
redeemed (9,754,108) (15,420,090)
----------- ------------
Net decrease from
capital share
transactions $ (966,407) $ (4,272,180)
=========== ============
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
Flag Investors Class A Shares
-----------------------------------
For the For the
Year Ended Year Ended
Oct. 31, 1996 Oct. 31, 1995
------------- -------------
Shares sold 200,140 323,698
Shares issued to share-
holders on reinvest-
ment of dividends 114,250 161,945
Shares redeemed (736,822) (1,256,958)
----------- ------------
Net decrease in shares
outstanding (422,432) (771,315)
=========== ============
Proceeds from sale
of shares $ 2,079,607 $ 3,206,244
Value of reinvested
dividends 1,200,959 1,628,993
Cost of shares
redeemed (7,734,234) (12,775,509)
----------- ------------
Net decrease from
capital share
transactions $(4,453,668) $ (7,940,272)
=========== ============
D. Investment Transactions -- Purchases and sales of investment securities,
other than short-term obligations, aggregated $37,410,967 and $37,816,283,
respectively, for the year ended October 31, 1996.
At October 31, 1996, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost was
$2,651,116 and aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over market value was $873,615.
E. Net Assets -- At October 31, 1996, net assets consisted of:
Paid-in capital:
ISI Class Shares $ 84,239,302
Flag Investors
Class A Shares 39,693,227
Undistributed net realized
short-term gains from
security transactions 194,121
Unrealized appreciation of
investments 1,777,501
------------
$125,904,151
============
This report is prepared for the general information of shareholders. It
is authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the ISI Funds, including
charges and expenses, obtain a prospectus from your investment representative
or directly from the Fund at 1-800-955-7175. Read it carefully before you
invest.
14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
Managed Municipal Fund, Inc.:
We have audited the accompanying statement of net assets of Managed
Municipal Fund, Inc. as of October 31, 1996, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the five years in the 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 audit to obtain
reasonable assurance about whether the financial statements and 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 investments owned as of
October 31, 1996, by correspondence with the custodian. 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, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Managed Municipal Fund, Inc. as of October 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and its financial highlights for the
period then ended, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
December 2, 1996
15
