SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT SERIES
SCHEDULE OF INVESTMENTS (UNAUDITED) SEPTEMBER 30, 1995
Market
Face Amount Security Value
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 129.00%
FEDERAL HOME LOAN MORTGAGE CORP. - 48.93% *
FHLMC GOLD:
$24,320,192 7.50%, due 6/1/24 to 7/15/24 .............. $24,509,452
42,000,000 7.50%, due (a) ............................ 42,249,375
48,999,837 8.00%, due 9/1/24 to 5/1/25 ............... 50,134,719
1,769,267 8.50% Balloon, due 3/1/96 to 11/1/96 ...... 1,771,127
FHLMC FLOATING-RATE REMIC (b):
7,172,642 6.64%, due 3/15/24......................... 7,185,777
TOTAL FEDERAL HOME LOAN MORTGAGE CORP.
(Cost $123,966,111)................... 125,850,450
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 13.44% *
FNMA:
31,874,325 7.50%, due 8/01/25 to 9/1/25 .............. 32,092,305
FNMA ARM:
421,795 6.89%, due 12/1/15 ........................ 427,979
551,258 7.50%, due 1/1/18 ......................... 562,046
684,716 7.68%, due 8/25/22 ........................ 698,005
219,863 7.78%, due 12/1/26 ........................ 225,938
FNMA INTEREST ONLY **:
2,173,077 9.00%, due 7/25/21 ........................ 567,448
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(Cost $34,200,562) ................... 34,573,721
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 66.51% *
GNMA:
28,157,240 7.00%, due 11/15/22 to 3/15/24 ............ 27,852,408
1,870,067 9.50%, due 7/15/09 to 4/15/25 ............. 2,004,980
GNMA ARM:
35,970,003 5.50%, due (a) ............................ 35,582,201
40,026,843 6.00%, due 7/20/25 to 9/20/25 ............. 40,126,911
7,612,873 6.50%, due 8/20/25 ........................ 7,716,361
56,656,692 7.00%, due 4/20/25 to 5/20/25.............. 57,807,530
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(Cost $169,552,411) ................. 171,090,391
UNITED STATES TREASURY BILLS - 0.12%
UNITED STATES TREASURY BILL ***
300,000 5.24%, due 12/28/95 ....................... 296,208
TOTAL UNITED STATES TREASURY BILLS
(Cost $296,154) ..................... 296,208
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost $328,015,238) ................. 331,810,770
INTEREST RATE SWAP CONTRACTS - 0.05%
$20,000,000 Contract dated 6/22/93 with Prudential Global Funding,
Expires 6/22/98 ........................... 256,084
20,000,000 Contract dated 8/31/93 with Salomon Swapco,
Expires 8/31/00 ........................... 758,367
20,000,000 Contract dated 12/2/93 with Morgan Guaranty,
Expires 12/2/00 ........................... 442,319
40,000,000 Contract dated 5/15/95 with Salomon Swapco,
Expires 5/15/05 ........................... (1,328,878)
TOTAL INTEREST RATE SWAP CONTRACTS ........ 127,892
THREE MONTH LIBOR INTEREST RATE CAP CONTRACTS - 0.96%
$40,000,000 Contract with Salomon SwapCo, expires 11/1/96,
Strike rate 5.00% ......................... $360,000
40,000,000 Contract with Salomon SwapCo, expires 11/15/97,
Strike rate 5.00% ......................... 787,120
40,000,000 Contract with Morgan Guaranty, expires 10/15/98,
Strike rate 5.00% ......................... 1,323,480
TOTAL THREE-MO. LIBOR INTEREST RATE CAP CONTRACTS
(Cost $2,211,330) ................. 2,470,600
Contracts FUTURES OPTION CONTRACTS - 0.23%
50 Call on UST Note futures, expires 11/95,
strike price $109 ................ 89,063
200 Call on UST Note futures, expires 11/95,
strike price $110 ................ 234,375
150 Call on UST Note futures, expires 11/95,
strike price $111 ................ 107,813
100 Call on UST Bond futures, expires 2/96,
strike price $118 ................ 121,875
200 Put on UST Note futures, expires 11/95,
strike price $106 ................ 15,625
50 Put on UST Note futures, expires 11/95,
strike price $109 ................ 27,344
TOTAL FUTURES OPTION CONTRACTS
(Cost $610,409)................... 596,095
TOTAL INVESTMENTS (Cost $330,836,977) ..... 335,005,357
OTHER LIABILITIES LESS CASH AND OTHER ASSETS -
(30.24%).......................... (77,779,913)
NET ASSETS - 100.00% $257,225,444
* Mortgage-backed obligations are subject to principal
paydowns as a result of prepayments or refinancings of
the underlying mortgage instruments. As a result, the
average life may be substantially less than the original
maturity. The interest rate shown is the rate in effect
at September 30, 1995. ARMs have coupon rates which
adjust periodically. The adjusted rate is determined by
adding a spread to a specified index.
** Represents an interest only stripped mortgage-backed
security.
*** The interest rate shown is the discount rate paid at the
time of purchase by the Fund.
(a) To be announced
(b) Real Estate Mortgage Investment Conduit
Portfolio Abbreviations:
ARM - Adjustable-Rate Mortgage
FHLMC - Federal Home Loan Mortgage Corporation
FNMA - Federal National Mortgage Association
GNMA - Government National Mortgage Association
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT SERIES
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
(Unaudited)
ASSETS:
Investments at market value (identified cost $330,836,977)
(Note 1)................................. $335,005,357
Cash ................................................ 503,898
Receivables:
Interest.......................................... 1,902,859
Securities sold................................... 794,548
Prepaid expenses..................................... 30,471
Deferred organization expenses....................... 15,152
TOTAL ASSETS................................. 338,252,285
LIABILITIES:
Variation margin on futures contracts (Note 1)....... 329,838
Reverse repurchase agreement (Note 1)................ 2,850,000
Payables:
Securities purchased.............................. 77,647,344
Swap interest payable............................. 47,272
Due to adviser and accrued expenses (Note 3)...... 152,387
TOTAL LIABILITIES............................... 81,026,841
NET ASSETS:
(Applicable to outstanding shares of 26,208,289
unlimited number of shares of beneficial
interest authorized; no stated par)............... $257,225,444
Net asset value, offering price and redemption
price per share ($257,225,444 / 26,208,289)....... $9.81
SOURCE OF NET ASSETS:
Paid in capital...................................... $263,064,163
Undistributed net investment income.................. 21,227
Accumulated net realized loss on investments......... (7,437,659)
Net unrealized appreciation of investments, interest
rate swap and futures contracts...................... 1,577,713
NET ASSETS...................................... $257,225,444
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT SERIES
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995
(Unaudited)
INVESTMENT INCOME:
Interest and discount earned, net of premium amortization
and interest expense (Note 1) ........................ $9,370,554
EXPENSES:
Advisory fees (Note 2)................................ 889,432
Accounting and pricing services fees.................. 31,089
Custodian fees........................................ 34,698
Audit fees............................................ 28,534
Legal fees............................................ 27,336
Tax preparation fees.................................. 27,335
Amortization of organization expenses (Note 1)........ 4,025
Transfer agent fees................................... 14,845
Registration fees..................................... 10,415
Trustees fees and expenses............................ 32,696
Insurance............................................. 14,333
Other................................................. 23,609
TOTAL EXPENSES BEFORE REIMBURSEMENT............... 1,138,347
Expenses reimbursed by Adviser (Note 3)........... (147,265)
NET EXPENSES...................................... 991,082
NET INVESTMENT INCOME ............................ 8,379,472
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments...................... 3,516,508
Change in unrealized appreciation of investments...... (5,696,847)
Net realized and unrealized loss on investments....... (2,180,339)
Net increase in net assets resulting from operations.. $6,199,133
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT SERIES
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995
(Unaudited)
Six Months Ended Year Ended
September 30, 1995 March 31, 1995
(Unaudited) (Audited)
OPERATIONS:
Net investment income............... $8,347,418 $13,504,268
Net realized gain on investments.... 3,516,508 (1,414,168)
Change in unrealized appreciation of
investments.................. (5,696,847) 1,365,349
Net increase in net assets resulting
from operations.............. 6,167,079 13,455,449
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment
income............................ (8,326,191) (13,504,268)
Dividends in excess of net
investment income................. 0 (90)
Total distributions................. (8,326,191) (13,504,358)
CAPITAL SHARE TRANSACTIONS:
Shares sold......................... 67,763,475 94,549,923
Shares issued on reinvestment of
distributions..................... 2,092,025 4,346,125
Shares redeemed..................... (28,902,609) (98,582,965)
Increase in net assets resulting
from capital share transactions (a) 40,952,891 313,083
TOTAL INCREASE IN NET ASSETS.... 38,793,779 264,174
NET ASSETS:
Beginning of period ................ 218,431,665 218,167,491
End of period....................... $257,225,444 $218,431,665
(a) Transactions in capital shares were as follows:
Shares sold.................... 6,887,803 9,582,171
Shares issued on reinvestment
of distributions............. 213,259 441,809
Shares redeemed................ (2,943,512) (10,018,137)
Net increase................... 4,157,550 5,843
Beginning balance ............. 22,050,739 22,044,896
Ending balance................. 26,208,289 22,050,739
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN SHORT DURATION US GOVERNMENT SERIES
STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended
September 30, 1995
Cash flows from operating activities:
Net increase in net assets resulting from
operations.............................. $6,167,079
Net realized and unrealized loss on investments
and futures contracts................... 2,180,339
Net investment income..................... 8,347,418
Adjustments to reconcile net investment income
to net cash used in operating activities:
Increase in interest receivable............. (757,520)
Interest rate cap and interest-only strip
amortization............................ 246,879
Decrease in other assets.................... 30,403
Increase in other liabilities............... 23,154
Net cash provided by operating activities. 7,890,334
Cash flows from investing activities:
Proceeds from futures variations............ (466,635)
Proceeds from sales of long-term investments 341,739,496
Proceeds from sales of short-term investments 1,626,250
Proceeds from maturities of short-term
investments............................. 254,514,926
Proceeds from paydowns of long-term
investments............................. 7,483,923
Purchases of long-term investments.......... (494,719,425)
Purchases of short-term investments......... (150,204,220)
Net cash used in investing activities..... (40,025,685)
Cash flows from financing activities:
Increase in collateralized borrowings....... 2,850,000
Purchase of shares tendered................. 35,950,517
Dividends from net investment income........ (6,234,165)
Net cash provided by financing activities 32,566,352
Net increase in cash.................... 431,001
Cash at beginning of period.................... 72,897
Cash at end of period.......................... $503,898
Noncash financing activities:
Market value of shares issued to stockholders
through reinvestment of dividends......... $2,092,025
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT SERIES
FINANCIAL HIGHLIGHTS
The following average per share data, ratios and supplemental in
in the financial statements.
Six Months Year Ended Year Ended For the Period
Ended March 31, March 31, March 31, 1992(2)
September 30,1995(1) 1995 1994 to March 31, 1993
Net Asset Value,
Beginning of Period.. $9.90 $9.90 $10.00 $10.00
Income From Investment
Operations
Net investment income.0.352 0.628 0.432 0.552
Net realized and
unrealized gain
(loss) on
investments....... (0.111) - (0.070) 0.002
Total from
investment
operations..... 0.241 0.628 0.362 0.554
Less Distributions
Dividends from net
investment income.. (0.332) (0.628) (0.462) (0.554)
Total
distributions.. (0.332) (0.628) (0.462) (0.554)
Net Asset Value,
End of Period........ $9.81 $9.90 $9.90 $10.00
Total Return ........... 5.03% 6.58% 3.67% 5.67%
Ratios/Supplemental Data
Net assets,
end of period......$257,225,444 $218,431,665 $218,167,491 $48,531,206
Ratio of expenses to
average net assets
(3)............... 0.78% 0.78% 0.78% 0.78%
Ratio of net investment
income to average
net assets (4).... 6.88% 6.33% 4.17% 4.53%
Portfolio turnover
rate.............. 110% 47% 112% 3%
______________________
(1) Unaudited
(2) Commencement of operations.
(3) The annualized operating expense ratios prior to reimbursement of
expenses by the Adviser were 0.92%, 1.00% and 2.58% for the Short
Duration U.S. Government Series for the years ended March 31, 1995,
March 31, 1994, and period ended March 31, 1993, respectively,
and 0.90% annualized for the six months ended September 30, 1995.
Expense ratios include both the direct expenses of the Short
Duration U.S. Government Series, and the indirect expenses incurred
through the Series' investment in the Short Duration U.S.
Government Fund (Note 5).
(4) The annualized net investment income ratios prior to reimbursement
of both direct and indirect expenses by the Adviser were 6.18%,
3.95%, and 2.73% for the Short Duration U.S. Government Series for
years ended March 31, 1995, March 31, 1994, and period ended
March 31, 1993, respectively, and 6.76% annualized for the six
months ended September 30, 1995.
* Annualized
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Breeden Series Fund (the "Fund") is an open-end,
diversified management investment company registered under the
Investment Company Act of 1940, as amended. The Fund offers
shares in two series: Smith Breeden Short Duration U.S.
Government Series (the "Short Series" or "Series") and Smith
Breeden Intermediate Duration U.S. Government Series
("Intermediate Duration Series"). The following is a summary of
significant accounting policies consistently followed by the
Short Series.
A. Security Valuation: Securities are valued at current market
value provided by a pricing service or by a bank or broker/dealer
experienced in such matters, when over-the-counter market
quotations are readily available. Securities and other assets
for which market prices are not readily available are valued at
fair market value as determined in accordance with the procedures
approved by the Board of Trustees.
B. Repurchase Agreements: Repurchase agreements may be entered
into with member banks of the Federal Reserve System having total
assets in excess of $500 million and securities dealers, provided
that such banks or dealers meet the credit guidelines of the
Fund's Board of Trustees. In a repurchase agreement, securities
are acquired from a third party with the commitment that they
will be repurchased by the seller at a fixed price on an
agreed upon date. The custodian maintains control or custody of
securities collateralizing repurchase agreements until maturity
of the repurchase agreements. The value of the collateral will
be monitored daily, and if necessary, additional collateral is
received to ensure that the market value of the underlying assets
remains sufficient to protect the Series in the event of the
seller's default. However, in the event of default or bankruptcy
of the seller, the right to the collateral may be subject to
legal proceedings.
C. Reverse Repurchase Agreements: A reverse repurchase
agreement involves the sale of portfolio assets concurrently with
an agreement to repurchase the same assets at a later date at a
fixed price. Assets will be maintained in a segregated account
with the custodian, which will be marked to market daily,
consisting of cash, U.S. Government securities or other liquid
high-grade debt obligations equal in value to the obligations
under the reverse repurchase agreements. In the event the buyer
of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the use of the proceeds under
the agreement may be restricted pending a determination by the
other party, or its trustee or receiver whether to enforce the
obligation to repurchase the securities. Reverse repurchase
agreement interest expense for the six months ended September 30,
1995 was $32,055.
D. Dollar Roll Agreements: A dollar roll is an agreement to
sell securities for delivery in the current month and
simultaneously contract to repurchase substantially similar (same
type and coupon) securities on a specified future date. During
the roll period, principal and interest paid on these securities
are not received. Compensation under the dollar roll agreement
is represented by the difference between the current sales price
and the forward price for the future purchase (often referred to
as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale.
E. Distributions and Taxes: The Short Series intends to
continue to qualify for and elect the special tax treatment
afforded regulated investment companies under Subchapter
M of the Internal Revenue Code, thereby relieving the Series of
Federal income taxes. To so qualify, the Series intends to
distribute substantially all of its net investment income and
net realized capital gains, if any, less any available capital
loss carry forward. As of March 31, 1995, the Series had a net
capital loss carry forward of $981,362 with $589 expiring on
March 31, 2001 and $75,461 expiring on March 31, 2002 and
$905,312 expiring on March 31, 2003.
F. Determination of Gains or Losses on Sales of Securities:
Gains or losses on the sale of securities are calculated for
accounting and tax purposes on the identified cost basis.
G. Deferred Organization Expenses: Deferred organization
expenses are being amortized on a straight-line basis over five
periods.
H. Securities Transactions and Investment Income: Interest
income is accrued daily on both long-term bonds and short-term
investments. Interest income also includes net amortization from
the purchase of fixed-income securities. Transactions are
recorded on the first business day following the trade date.
Realized gains and losses from security transactions are
determined and accounted for on the basis of identified cost.
2. FINANCIAL INSTRUMENTS
Derivative Financial Instruments Held or Issued for Purposes
other than Trading: Interest rate futures, swaps, caps and
options contracts are used for risk management purposes in
order to reduce fluctuations in net asset value relative to the
targeted option-adjusted duration.
A. Futures Contracts: Upon entering into a futures contract,
either cash or securities in an amount (initial margin) equal to
a certain percentage of the contract value is required
to be deposited in a segregated account. Subsequent payments
(variation margin) are made or received each day. The variation
margin payments are equal to the daily changes in the contract
value and are recorded as unrealized gains or losses. A realized
gain or loss is recognized when the contract is closed or
expires equal to the difference between the value of the contract
at the time it was opened and the value at the time it was
closed.
The following were open futures contracts as of the close of
business on September 30, 1995:
Principal Expiration Unrealized
Type Amount Position Month Loss
5 Year
Treasury
Note $ 2,200,000 Short December, 1995 $ (19,693)
3 Month
Treasury
Bill $ 70,000,000 Long December, 1995 (14,315)
3 month
Eurodollar
CD $ 172,000,000 Long December, 1995 (57,224)
3 month
Eurodollar
CD $ 118,000,000 Short March, 1996 (128,531)
3 month
Eurodollar
CD $ 202,000,000 Short March, 1997 (91,384)
3 month
Eurodollar
CD $ 166,000,000 Short March, 1998 (273,097)
3 month
Eurodollar
CD $ 164,000,000 Short March, 1999 (194,888)
3 month
Eurodollar
CD $ 162,000,000 Short March, 2000 (498,531)
3 month
Eurodollar
CD $ 168,000,000 Short March, 2001 (506,424)
3 month
Eurodollar
CD $ 172,000,000 Short March, 2002 (347,860)
3 month
Eurodollar
CD $ 160,000,000 Short March, 2003 (458,720)
$(2,590,667)
Futures transactions involve costs and may result in losses. The
effective use of futures strategies depends on the Series'
ability to terminate futures positions at times when the Series'
investment adviser deems it desirable to do so. The use of
futures also involves the risk of imperfect correlation among
movements in the values of the securities underlying the futures
purchased and sold by the Series, of the futures contract itself,
and of the securities which are the subject of a hedge.
The aggregate market value of instruments pledged to cover margin
requirements for the open positions at September 30, 1995 was
$296,208.
B. Interest Rate Swap Contracts: Interest rate swaps involve
the exchange by one party with another party of their respective
commitments to pay or receive interest. As of September 30,
1995, the Short Series has open three interest rate swap
contracts. In each of the contracts, the Short Series has agreed
to pay a fixed rate and receive a floating rate. The floating
rate on the three contracts resets quarterly and is the three
month London Interbank Offered Rate ("LIBOR"). Interest rate
swap contracts will not be entered into unless the unsecured
commercial paper, unsecured senior debt or the claims-paying
ability of the other party thereto is rated either AA or A-1 or
better by Standard & Poor's Corporation or Aa or P-1 or better by
Moody's Investors Service, Inc. (or is otherwise acceptable to
either agency) at the time of entering into such transaction. If
there is a default by the other party to the swap transaction,
the Short Series will be limited to contractual remedies pursuant
to the agreements related to the transaction. There is no
assurance that interest rate swap contract counterparties will be
able to meet their obligations pursuant to the swap contracts or
that, in the event of default, the Short Series will succeed in
pursuing contractual remedies. The Short Series thus assumes the
risk that it may be delayed in, or prevented from, obtaining
payments owed to it pursuant to the swap contracts.
The Short Series' interest receivable on the interest rate swap
contracts was $16,029. Interest payable on the interest rate
swap contracts was $47,272. No collateral is required
to be maintained on these contracts.
C. Interest Rate Cap Contracts: The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified
index exceeds a predetermined interest rate, to receive payments
of interest on a notional principal amount from the party selling
such interest rate caps. The Short Series' interest receivable
on the interest rate cap contracts at September 30, 1995 was
$173,611.
3. TRANSACTIONS WITH AFFILIATES
Smith Breeden Associates, Inc. (the "Adviser"), a registered
investment adviser, provides the Series with investment
management services. As compensation for these services, the
Short Series pays the Adviser a fee computed daily and payable
monthly, at an annual rate equal to 0.70% of the Series average
daily net asset value.
The Adviser has voluntarily agreed to reimburse normal business
expenses of the Short Series through March 31, 1996 so that total
direct and indirect operating expenses would not exceed 0.78% of
its average net assets. This voluntary agreement may be
terminated at any time by the Adviser in its sole discretion.
The Adviser has also agreed to reduce its fees payable (to the
extent of such fees) by the amount the Series' direct and
indirect expenses would, absent the fee reduction, exceed the
applicable expenses limitations imposed by state securities
administrators. For the period ended September 30, 1995, the
Adviser received fees of $889,432 and reimbursed the Short Series
$147,265.
Certain officers and trustees of the Fund are also officers and
directors of the Adviser.
The Adviser is permitted to compensate investment dealers and
other persons involved in servicing shareholder accounts for
services provided and expenses incurred in promoting the
sale of shares of the Series, reducing redemptions, or otherwise
maintaining or improving services provided to shareholders by
such dealers or other persons. The Plan provides for
payments by the Adviser, out of the advisory fee paid to it by
the Series to dealers and other persons at the annual rate of up
to 0.25% of the Series' average net assets subject to the
authority the Trustees of the Series to reduce the amount of
payments permitted under the Plan or to suspend the Plan for such
periods as they may determine. Subject to these limitations, the
amount of such payments and the purposes for which they are made
shall be determined by the Adviser.
4. INVESTMENT TRANSACTIONS
During the period ended September 30, 1995, purchases and
proceeds from sales of securities, other than short-term
investments, aggregated $422,089,100 and $325,161,794
respectively for the Series.
The cost of securities assigned by the Series for federal income
tax purposes at September 30, 1995, is $330,836,977. Net
unrealized appreciation consists of:
Gross unrealized appreciation. $ 5,948,620
Gross unrealized depreciation. (4,370,907)
Net unrealized appreciation. . $ 1,577,713
5. LIQUIDATION OF THE SHORT FUND
From its inception until March 31, 1995, the Short Series sought
to achieve its investment objective by investing all of its
assets in Smith Breeden Short Duration U.S. Government
Fund (the "Short Fund"), an open-end, diversified management
investment company having the same investment objective as the
Series. However, at the close of business on March 31, 1995,
pursuant to a plan of liquidation adopted March 1, 1995 by the
Board of Trustees of the Short Fund, and approved by the Board of
Trustees of the Short Series, the Short Series redeemed in-kind
its shares of the Short Fund. The assets of the Short Fund were
transferred in proportion to the Short Series' ownership of the
Short Fund in cancellation of its shares.
SMITH BREEDEN INTERMEDIATE DURATION
U.S. GOVERNMENT SERIES
SCHEDULE OF INVESTMENTS (UNAUDITED) SEPTEMBER 30, 1995
Market
Face Amount Security Value
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 123.79%
FEDERAL HOME LOAN MORTGAGE CORP. - 18.63% *
FHLMC GOLD:
$6,690,474 8.00%, due 8/1/09 to 5/1/25 ....................... $6,849,685
TOTAL FEDERAL HOME LOAN MORTGAGE CORP.
(Cost $6,714,216) ............................... 6,849,685
FEDERAL NATIONAL MORTGAGE ASSOC. - 51.24% *
FNMA ARM:
1,600,000 6.002%, due 9/1/25 ................................ 1,633,124
171,179 7.677%, due 8/25/22 ............................... 174,501
FNMA:
3,577,725 7.00%, due 8/1/23 to 6/1/24 ....................... 3,531,817
9,972,228 7.50%, due 8/1/25 ................................. 10,040,426
1,432,001 8.50%, due 9/1/24 to 2/1/25 ....................... 1,482,234
1,846,794 9.50%, due 7/1/16 to 5/1/22 ....................... 1,969,617
TOTAL FEDERAL NATIONAL MORTGAGE ASSOC.
(Cost $18,410,117) .............................. 18,831,719
GOVERNMENT NATIONAL MORTGAGE ASSOC. - 53.71% *
GNMA ARM:
10,358,666 6.00%, due 7/20/25 to 9/20/25 ..................... 10,384,563
GNMA:
7,557,965 7.00%, due 12/15/23 to 3/15/24 .................... 7,476,142
1,820,540 8.00%, due 12/15/06 ............................... 1,879,661
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOC.
(Cost $19,292,776) .............................. 19,740,366
UNITED STATES TREASURY BILLS - 0.21% **
80,000 5.24% due 12/28/95 ................................ 78,989
TOTAL UNITED STATES TREASURY BILLS (Cost $78,974) . 78,989
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost $44,496,083).............................. 45,500,759
TOTAL INVESTMENTS (Cost $44,496,083) - 123.79% .... 45,500,759
CASH AND OTHER ASSETS LESS LIABILITIES - (23.79%) . (8,745,401)
NET ASSETS - 100.00% ..............................$36,755,358
* Mortgage-backed obligations are subject to principal paydowns as a
result of prepayments or refinancings of the underlying securities
instruments. As a result, the average life may be substantially less
than the original maturity. The interest rate shown is the rate in
effect at September 30, 1995. ARMs have coupon rates which adjust
periodically. The adjusted rate is determined by adding a spread
to a specified index.
** The interest rate shown is the discount rate paid at the time of
purchase by the Fund
Portfolio Abbreviations:
ARM - Adjustable-Rate Mortgage
FHLMC - Federal Home Loan Mortgage Corporation
FNMA - Federal National Mortgage Association
GNMA - Government National Mortgage Association
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN INTERMEDIATE DURATION
U.S. GOVERNMENT SERIES
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
(Unaudited)
ASSETS:
Investments at market value
(identified cost $44,496,083)(Note 1).............. $45,500,759
Cash and cash equivalents.............................. 181,553
Interest receivable.................................... 265,433
Securities sold receivable............................. 13,957
Prepaid expenses....................................... 8,055
Deferred organization expenses (Note 1)................ 15,646
TOTAL ASSETS...................................... 45,985,403
LIABILITIES:
Variation margin on futures contracts.................. 26,234
Reverse repurchase agreement (Note 1).................. 9,020,000
Accrued expenses....................................... 40,046
Distributions payable.................................. 143,765
TOTAL LIABILITIES................................. 9,230,045
NET ASSETS:
(Applicable to outstanding shares of 3,604,244;
unlimited number of shares of beneficial
interest authorized; no stated par)................. $36,755,358
Net asset value, offering price and redemption
price per share ($36,755,358 / 3,604,244)........... $ 10.20
SOURCE OF NET ASSETS:
Paid in capital........................................ $35,922,352
Overdistributed net investment income.................. (109,925)
Accumulated net realized gain on investments........... 194,956
Net unrealized appreciation of investments and futures 747,975
NET ASSETS........................................ $36,755,358
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN INTERMEDIATE DURATION
U.S. GOVERNMENT SERIES
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995
(Unaudited)
INVESTMENT INCOME:
Interest and discount earned, net of premium
amortization and interest expense (Note 1) ................ $1,344,703
EXPENSES:
Advisory fees (Note 3) .................................... 126,371
Accounting and pricing services fees ...................... 16,123
Custodian fees ............................................ 9,663
Audit & tax preparation fees .............................. 1,043
Legal fees ................................................ 3,737
Amortization of organization expenses (Note 1) ............ 3,941
Transfer agent fees ....................................... 12,116
Registration fees ......................................... 8,335
Trustees fees ............................................. 4,540
Insurance ................................................. 1,578
Other ..................................................... 5,644
TOTAL EXPENSES BEFORE REIMBURSEMENT ................... 193,091
Expenses reimbursed by Adviser (Note 3) ............... (30,625)
NET EXPENSES .......................................... 162,466
NET INVESTMENT INCOME ................................. 1,182,237
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments .......................... 1,026,144
Change in unrealized appreciation of
investments and futures contracts.......................... 260,090
Net realized and unrealized gain on investments ........... 1,286,234
Net increase in net assets resulting from operations ...... $2,468,471
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN INTERMEDIATE DURATION
U.S. GOVERNMENT SERIES
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995
(Unaudited)
Six Months Ended Year Ended
September 30, 1995 March 31, 1995
OPERATIONS: (Unaudited) (Audited)
Net investment income.................... $1,182,237 $1,346,839
Net realized gain (loss) on investments.. 1,026,144 (248,302)
Change in unrealized appreciation of
investments and futures contracts...... 260,090 778,903
Net increase in net assets
resulting from operations.............. 2,468,471 1,877,440
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income..... (1,182,237) (1,346,839)
Dividends in excess of net
investment income.... ................. - (140,634)
Distributions from net realized
capital gains.......................... - -
Distributions in excess of net
realized capital gains................. - (28,444)
Total distributions...................... (1,182,237) (1,515,917)
CAPITAL SHARE TRANSACTIONS:
Shares sold.............................. 593,206 31,506,439
Shares issued on reinvestment of
distributions.......................... 295,420 669,611
Shares redeemed.......................... (216,998) (4,519,742)
Increase in net assets resulting
from capital share transactions (a).... 671,628 27,656,308
TOTAL INCREASE IN NET ASSETS......... 1,957,862 28,017,831
NET ASSETS:
Beginning of period ..................... 34,797,496 6,779,665
End of period............................ $36,755,358 34,797,496
(a) Transactions in capital shares were
as follows:
Shares sold......................... 58,266 3,257,497
Shares issued on reinvestment
of distributions.................. 29,193 68,948
Shares redeemed..................... (21,498) (465,316)
Net increase........................ 65,961 2,861,129
Beginning balance .................. 3,538,283 677,154
Ending balance...................... 3,604,244 3,538,283
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN INTERMEDIATE DURATION US GOVERNMENT SERIES
STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended
September 30, 1995
Cash flows from operating activities:
Net increase in net assets resulting from operations...... $2,468,471
Net realized and unrealized gain on investments and
futures contracts...................................... (1,286,234)
Net investment income................................... 1,182,237
Adjustments to reconcile net investment income
to net cash used in operating activities:
Increase in interest receivable........................... (66,810)
Decrease in other assets.................................. 24,967
Decrease in other liabilities............................. (1,775)
Net cash provided by operating activities............... 1,138,619
Cash flows from investing activities:
Proceeds from futures variations.......................... 104,883
Proceeds from sales of long-term investments.............. 42,567,386
Proceeds from maturities of short-term investments........ 77,967,910
Proceeds from paydowns of long-term investments........... 1,454,894
Purchases of long-term investments........................ (56,761,152)
Purchases of short-term investments....................... (77,993,848)
Net cash used in investing activities................... (12,659,927)
Cash flows from financing activities:
Increase in collateralized borrowings..................... 9,020,000
Purchase of shares tendered............................... 376,208
Dividends from net investment income ..................... (890,858)
Net cash provided by financing activities............. 8,505,350
Net decrease in cash.................................. (3,015,958)
Cash at beginning of period.................................. 3,197,511
Cash at end of period........................................ $181,553
Noncash financing activities:
Market value of shares issued to stockholders
through reinvestment of dividends....................... $295,420
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN INTERMEDIATE DURATION
U.S. GOVERNMENT SERIES
FINANCIAL HIGHLIGHTS
The following average per share data, ratios and supplemental information
have been derived from information provided in the financial statements.
Six Months Year Ended Year Ended Period Ended
Ended March 31, March 31, March 31,
September 30,1995(1) 1995 1994 1993 **
Net Asset Value,
Beginning of Period...... $9.83 $10.01 $10.62 $10.00
Income From Investment
Operations
Net investment income...... 0.332 0.664 1.050 0.826
Net gain (loss) on
securities (both
realized and unrealized). 0.370 (0.049) (0.601) 0.621
Total from investment
operations............ 0.702 0.615 0.449 1.447
Less Distributions
Dividends from net
investment income........ (0.332) (0.664) (1.044) (0.826)
Dividends in excess of
net investment income.... - (0.108) - -
Distributions from net
realized gains on
investments.............. - - (0.015) -
Distributions in excess of
net realized gains on
investments.............. - (0.022) - -
Total distributions.... (0.332) (0.794) (1.059) (0.826)
Net Asset Value,
End of Period............ $10.20 $9.83 $10.01 $10.62
Total Return............... 14.95% 6.10% 4.11% 14.93%
Ratios/Supplemental Data
Net assets, end of period..$36,755,358 $34,797,496 $6,779,666 $2,923,913
Ratio of expenses to
average net assets (2)... 0.90% 0.90% 0.90% 0.82%
Ratio of net investment
income to average
net assets (3)........... 6.67% 6.20% 7.74% 8.18%
Portfolio turnover rate.... 98% 557% 84% 42%
______________________
(1) Unaudited
(2) The annualized ratio of expenses to average net assets prior to
reimbursement of expenses by the Adviser was 2.33%, 2.34%, and 17.52% for
the years ended March 31, 1995 and March 31, 1994, and for the period
ended March 31, 1993, respectively, and 1.07% annualized for the six
months ending September 30, 1995. Expense ratios include both the direct
expenses of the Intermediate Duration U.S. Government Series, and the
indirect expenses incurred through the Series' investment in the
Institutional Intermediate Duration U.S. Government Fund (Note 5).
(3) The annualized ratio of net investment income to average net assets prior
to reimbursement of both direct and indirect expenses by the Adviser was
4.77%, 6.30% and (8.52)% for the years ended March 31, 1995 and
March 31, 1994, and for the period ended March 31, 1993, respectively,
and 6.50% annualized for the six months ending September 30, 1995.
* Annualized
** The Intermediate Duration U.S. Government Series comme
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Breeden Series Fund (the "Fund") is an open-end, diversified
management investment company registered under the Investment
Company Act of 1940, as amended. The Fund offers shares in two
series: Smith Breeden Short Duration U.S. Government Series and the
Smith Breeden Intermediate Duration U.S. Government Series
("Intermediate Series" or "Series"). The following is a summary of
significant accounting policies consistently followed by the
Intermediate Series.
A. Security Valuation: Portfolio securities are valued at current
market value provided by a pricing service or by a bank or
broker/dealer experienced in such matters, when over-the-counter
market quotations are readily available. Securities and other
assets for which market prices are not readily available are valued
at fair market value as determined in accordance with procedures
approved by the Board of Trustees.
B. Distributions and Taxes: The Intermediate Series intends to
continue to qualify for and elect the special tax treatment
afforded regulated investment companies under Subchapter M of the
Internal Revenue Code, thereby relieving the Series of Federal
income taxes. To so qualify, the Series intends to distribute
substantially all of its net investment income and net realized
capital gains, if any, less any available capital loss carry
forward. As of March 31, 1995, the Series had a capital loss carry
forward of $659,858 of which $484,264 expires March 31, 2002,
and $175,594 expires March 31, 2003.
C. Repurchase Agreements: The Intermediate Series may enter into
repurchase agreements with member banks of the Federal Reserve
System having total assets in excess of $500 million and securities
dealers, provided that such banks or dealers meet the credit
guidelines of the Series' Board of Trustees. In a repurchase
agreement, the Series acquires securities from a third party with
the commitment that they will be repurchased by the seller at a
fixed price on an agreed upon date. The Intermediate Series'
custodian maintains control or custody of these securities
collateralizing the repurchase agreements until maturity of the
repurchase agreements. The value of the collateral is monitored
daily, and if necessary, additional collateral is received to
ensure that the market value of the underlying assets remains
sufficient to protect the Series in the event of the seller's
default. However, in the event of default or bankruptcy of the
seller, the Series' right to the collateral may be subject to legal
proceedings.
D. Reverse Repurchase Agreements: A reverse repurchase agreement
involves the sale by the Intermediate Series of portfolio assets
concurrently with an agreement by the Series to repurchase the same
assets at a later date at a fixed price. The Series will maintain
a segregated account with its custodian, which will be marked to
market daily, consisting of cash, U.S. Government securities or
other liquid high-grade debt obligations equal in value to its
obligations under reverse repurchase agreements. In the event the
buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Series' use of the proceeds of
the agreement may be restricted pending a determination by the
other party, or its trustee or receiver whether to enforce the
Series' obligation to repurchase the securities. Reverse repurchase
agreement interest expense for the six months ended September 30,
1995 was $44,967.
E. Dollar Roll Agreements: The Intermediate Series may enter into
dollar rolls in which the Series sells securities for delivery in
the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a
specified future date. During the roll period, the Series
foregoes principal and interest paid on these securities. The
Series is compensated by the difference between the current sales
price and the forward price for the future purchase (often referred
to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale.
F. Determination Of Gains Or Losses On Sales Of Securities: Gains
or losses on the sale of securities are calculated for accounting
and tax purposes on the identified cost basis.
G. Deferred Organizational Expenses: Deferred organizational
expenses are being amortized on a straight-line basis over five
periods.
H. Securities Transactions and Investment Income: Interest income
is accrued daily on both long-term bonds and short-term
investments. Interest income also includes net amortization from
the purchase of fixed-income securities. Transactions are recorded
on the first business day following the trade date. Realized gains
and losses from security transactions are determined and accounted
for on the basis of identified cost.
2. FINANCIAL INSTRUMENTS
A. Derivative Financial Instruments Held or Issued for Purposes
other than Trading: The Intermediate Series uses interest rate
futures contracts for risk management purposes in order to reduce
fluctuation of the Series' net asset value relative to its targeted
option-adjusted duration. Upon entering into a futures contract,
the Series is required to deposit either cash or securities in an
amount (initial margin) equal to a certain percentage of the
contract value. Subsequent payments (variation margin) are made or
received by the Series each day. The variation margin payments are
equal to the daily changes in the contract value and are recorded
as unrealized gains or losses. The Series recognizes a realized
gain or loss when the contract is closed or expires equal to the
difference between the value of the contract at the time it was
opened and the value at the time it was closed.
The Intermediate Series had the following open futures contracts as
of September 30, 1995:
Principal Expiration Unrealized
Type Amount Position Month Gain/(Loss)
10 Year
Treasury
Note $3,700,000 Short December, 1995 $ (57,792)
5 Year
Treasury
Note $900,000 Long December, 1995 8,397
3 month
Eurodollar
CD $22,000,000 Short March, 1998 (99,007)
3 month
Eurodollar
CD $6,000,000 Short March, 1999 (29,427)
3 month
Eurodollar
CD $16,000,000 Short March, 2000 (78,872)
$ (256,701)
Futures transactions involve costs and may result in losses. The
effective use of futures strategies depends on the Series' ability
to terminate futures positions at times when the Series' investment
adviser deems it desirable to do so. The use of futures also
involves the risk of imperfect correlation among movements in the
values of the securities underlying the futures purchased and sold
by the Series, of the futures contract itself, and of the
securities which are the subject of a hedge.
The aggregate market value of investments pledged to cover margin
requirements for the open positions at September 30, 1995 was
$78,989.
3. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Smith Breeden Associates, Inc. (the "Adviser"), a registered
investment adviser, provides the Series with investment management
services. As compensation for these services, the Intermediate
Series pays the Adviser a fee computed daily and payable monthly,
at an annual rate equal to 0.70% of the Series' average daily net
asset value.
The Adviser has voluntarily agreed to reduce or otherwise limit
other expenses of the Intermediate Series (excluding advisory fees
and litigation, indemnification and other extraordinary expenses)
to 0.90% of the Series' average daily net assets. This voluntary
agreement may be terminated or modified at any time by the Adviser
in its sole discretion. The Adviser has agreed to reduce the fees
payable (to the extent of such fees) by the amount the Series'
expenses would, absent the fee reduction, exceed the applicable
expense limitations imposed by state securities administrators.
For the period ended September 30, 1995, the Adviser received fees
of $126,371 and reimbursed the Series $30,625.
Pursuant to Rule 12b-1 under the Investment Company Act of 1940,
the Intermediate Series adopted a distribution plan (the "Plan")
pursuant to which the Adviser is permitted to compensate investment
dealers and other persons involved in servicing shareholder
accounts for services provided and expenses incurred in promoting
the sale of shares of the Series, reducing redemptions, or
otherwise maintaining or improving services provided to
shareholders by such dealers or other persons. The Plan provides
for payments by the Adviser, out of its advisory fee, to dealers
and other persons at the annual rate of up to 0.25% of the
Intermediate Series' average net assets subject to the authority of
the Trustees of the Series to reduce the amount of payments
permitted under the Plan or to suspend the Plan for such periods as
they may determine. Subject to these limitations, the amount of
such payments and the purposes for which they are made shall be
determined by the Adviser.
Certain officers and trustees of the Series are also officers and
directors of the Adviser.
4. INVESTMENT TRANSACTIONS
During the period ended September 30, 1995, purchases and proceeds
from sales of securities, other than short-term investments,
aggregated $42,970,839 and $39,423,134, respectively. The purchases
and proceeds shown above do not include dollar roll agreements
which are considered borrowings by the Intermediate Series. The
cost of securities for federal income tax purposes is $44,496,083.
Net unrealized appreciation of investments and futures contracts
consists of:
Gross unrealized appreciation ...... $1,037,120
Gross unrealized depreciation ...... (289,145)
Net unrealized appreciation ........ $747,975
5. LIQUIDATION OF THE INSTITUTIONAL INTERMEDIATE FUND
From its inception until August 1, 1994, the Intermediate Series
sought to achieve its investment obective by investing all of its
assets in Smith Breeden Institutional Intermediate Duration U.S.
Government Fund (the "Institutional Fund"), an open-end,
diversified management investment company having the same
investment objective as the Series. However, at the close of
business on August 1, 1994, pursuant to a plan of liquidation
adopted by the Trustees of the Institutional Fund, and approved by
the Trustees of the Intermediate Series, the Intermediate Series
redeemed in-kind its shares of the Institutional Fund. The assets
of the Institutional Fund were transferred in proportion to the
Intermediate Series' ownership of the Institutional Fund in
cancellation of its shares.
