SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT SERIES
SCHEDULE OF INVESTMENTS (Unaudited)
SEPTEMBER 30, 1996
Market
Face Amount Security Value
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 144.76%
FEDERAL HOME LOAN MORTGAGE CORP. -61.50% *
FHLMC GOLD:
31,803,609 7.00%, due 5/01/11 to 9/01/11.................. 31,490,534
30,172,082 7.00%, due (a)................................. 30,133,950
23,704,372 7.50%, due 6/01/24 to 7/01/26 ................. 23,458,751
9,100,000 8.00%, due (a) ................................ 9,162,563
997,490 8.00%, due 9/01/24 to 5/01/25.................. 1,007,459
8,757 8.50%, Balloon, due 11/01/96 .................. 8,757
30,052,466 8.50%, due 11/01/24 to 9/01/26 ................ 30,878,640
TOTAL FEDERAL HOME LOAN MORTGAGE CORP
(Cost $125,949,608) ........................ 126,140,654
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 0.27% *
FNMA INTEREST ONLY **:
1,785,352 9.00%, due 7/25/21 ............................ 563,140
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(Cost $286,756) ............................ 563,140
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 82.75% *
GNMA:
26,865,001 8.00%, due 7/01/26 to 9/15/26 ................. 27,139,624
1,498,642 9.50%, due 7/15/09 to 4/15/25 ................. 1,613,193
GNMA ARM:
4,000,000 5.00%, due (a) ................................ 3,848,750
15,350,000 5.50%, due (a) ................................ 15,011,063
62,266,113 5.50%, due 11/20/25 to 12/20/25................ 62,054,716
13,709,000 6.00%, due 4/20/26 to 6/20/26.................. 13,688,256
10,550,000 6.50%, due (a) ................................ 10,573,078
464,899 6.50%, due 3/20/21 ............................ 471,188
341,334 7.00%, due 12/20/22 ........................... 345,938
3,030,166 7.125%, due 4/20/22 to 4/01/24 ................ 3,072,415
1,745,166 7.25%, due 7/20/17 to 7/20/18 ................. 1,778,265
GNMA FRM:
30,000,000 8.00%, due (a) ................................ 30,140,625
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(Cost $169,319,507) ........................ 169,737,111
U.S. GOVERNMENT OBLIGATIONS - 0.24%
U.S. TREASURY BILL
510,000 5.385%, due 5/29/97 ........................... 492,150
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $491,691)............................. 492,150
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost $296,047,562) ........................ 296,933,055
Notional Amount
INTEREST RATE SWAP CONTRACTS - 0.80%
20,000,000 Contract dated 6/22/93 with Prudential Global
Funding, expires 6/22/98 ...................... 238,819
20,000,000 Contract dated 8/31/93 with Salomon Swapco,
Expires 8/31/00 ............................... 831,683
20,000,000 Contract dated 12/2/93 with Morgan Guaranty,
Expires 12/2/00 ............................... 590,303
40,000,000 Contract dated 5/15/95 with Salomon Swapco,
Expires 5/15/05 ............................... (13,712)
TOTAL INTEREST RATE SWAP CONTRACTS ............ 1,647,093
Notional Amount
THREE MONTH LIBOR INTEREST RATE CAP CONTRACTS - 1.41%
40,000,000 Contract with Salomon SwapCo, expires 11/1/96
Strike rate 5.00% ............................. 23,200
40,000,000 Contract with Salomon SwapCo, expires 11/15/97
Strike rate 5.00% ............................. 406,400
40,000,000 Contract with Morgan Guaranty, expires 10/15/98
Strike rate 5.00% ............................. 918,800
50,000,000 Contract with Salomon SwapCo, expires 4/23/03
Strike rate 7.50%.............................. 1,537,000
TOTAL THREE-MO. LIBOR INTEREST RATE CAP
CONTRACTS (Cost $3,013,715) ................ 2,885,400
Contracts FUTURES OPTION CONTRACTS - 0.09%
30 Call on 10 Year UST Note futures,
Expires 11/96, strike price $108 .............. 23,438
50 Call on 10 Year UST Note futures,
Expires 11/96, strike price $109 .............. 22,656
100 Call on 10 Year UST Note futures,
Expires 11/96, strike price $111 .............. 12,500
50 Call on 10 Year UST Note futures,
Expires 11/96, strike price $112 .............. 3,125
100 Put on 10 Year UST Note futures,
Expires 11/96, strike price $102 .............. 7,813
100 Put on 10 Year UST Note futures,
Expires 11/96, strike price $103 .............. 12,500
200 Put on 10 Year UST Bond futures,
Expires 11/96, strike price $104 .............. 43,750
130 Put on 10 Year UST Bond futures,
Expires 11/96, strike price $105 .............. 48,750
TOTAL FUTURES OPTION CONTRACTS (Cost $346,235). 174,532
TOTAL INVESTMENTS
(Cost $299,407,512) (147.06%) .............. 301,640,080
Face Amount REPURCHASE AGREEMENTS - 2.78%:
5,700,000 Morgan Stanley, 5.45%, due 10/01/96
dated 9/24/96 ................................. 5,700,000
TOTAL REPURCHASE AGREEMENTS ................... 5,700,000
REVERSE REPURCHASE AGREEMENTS - (1.95%):
4,000,000 FHLMC, 5.33%, due 10/04/96 dated 9/27/96....... (4,000,000)
TOTAL REVERSE REPURCHASE AGREEMENTS ........... (4,000,000)
SHORT SALES - (25.00%)
30,505,739 FHLMC Gold 7.0% due (a)........................ (30,181,616)
21,106,250 GNMA 7.0% due (a).............................. (21,106,250)
TOTAL SHORT SALES (Proceeds $51,156,506)....... (51,287,866)
OTHER LIABILITIES LESS CASH AND OTHER ASSETS -
(22.89%).................................... (46,932,450)
NET ASSETS - 100.00% 205,119,764
* 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, 1996. 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.
(a) To be announced
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.
<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT SERIES
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
(Unaudited)
ASSETS:
Investments at market value
(identified cost $299,407,512)(Note 1)....... $301,640,080
Repurchase agreement (cost $5,700,000) (Note 1). 5,700,000
Receivables:
Subscriptions................................ 68,927
Securities sold.............................. 139,895,356
Interest..................................... 1,601,088
Prepaid expenses................................ 20,475
Deferred organization expenses (Note 1)......... 4,733
TOTAL ASSETS............................... 448,930,659
LIABILITIES:
Reverse repurchase agreement (Note 1)........... 4,000,000
Short sales at market value
(identified proceeds $51,156,506)............ 51,287,866
Payables:
Variation margin on
futures contracts (Note 2)................... 7,175
Redemptions.................................. 276,576
Securities purchased......................... 187,963,383
Swap interest................................ 66,439
Due to adviser (Note 3)...................... 121,936
Bank overdraft............................... 26,120
Accrued expenses............................. 61,400
TOTAL LIABILITIES.......................... 243,810,895
NET ASSETS:
(Applicable to outstanding shares of 20,972,941
unlimited number of shares of beneficial
interest authorized; no stated par).......... $205,119,764
Net asset value, offering price and redemption
price per share ($205,119,764 / 20,972,941).. $ 9.78
SOURCE OF NET ASSETS:
Paid in capital................................. $211,761,244
Overdistributed net investment income........... (809,813)
Accumulated net realized loss on investments.... (7,956,424)
Net unrealized appreciation of investments,
interest rate swaps, short sales
and futures contracts........................ 2,124,757
NET ASSETS................................. $205,119,764
The accompanying notes are an integral part of these financial statements.
<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT SERIES
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996
(Unaudited)
INVESTMENT INCOME:
Interest and discount earned, net of premium
amortization and interest expense (Note 1)...... $ 6,296,496
EXPENSES:
Advisory fees (Note 3).......................... 780,894
Accounting and pricing services fees............ 35,825
Custodian fees.................................. 39,681
Audit and tax preparation fees.................. 33,000
Legal fees...................................... 32,790
Amortization of organization expenses
(Note 1)........................................ 4,815
Transfer agent fees............................. 16,326
Registration fees............................... 12,500
Trustees fees and expenses...................... 50,000
Insurance....................................... 11,185
Other........................................... 6,144
TOTAL EXPENSES BEFORE REIMBURSEMENT............. 1,023,160
Expenses reimbursed by Adviser
(Note 3)........................................ (153,021)
NET EXPENSES.................................... 870,139
NET INVESTMENT INCOME .......................... 5,426,357
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized loss on investments................ (1,520,477)
Change in unrealized appreciation of
investments,interest rate swaps and
futures contracts............................... 3,192,507
Net realized and unrealized gain
on investments.................................. 1,672,030
Net increase in net assets resulting
from operations................................. $ 7,098,387
The accompanying notes are an integral part of these financial statements.
<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT SERIES
STATEMENT OF CHANGES IN NET ASSETS
Six Months
Ended
September 30, Year Ended
1996 March 31, 1996
(Unaudited)
OPERATIONS:
Net investment income...... $5,426,357 $15,412,781
Net realized gain (loss) on
investments................ (1,520,477) 4,639,312
Change in unrealized
appreciation (depreciation)
of investments and
futures contracts.......... 3,192,507 (8,342,309)
Net increase in net assets
resulting from operations.. 7,098,387 11,709,784
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net
investment income.......... (5,426,357) (15,412,781)
Dividends in excess of net
investment income.......... (809,814) (269,331)
Total distributions........ (6,236,171) (15,682,112)
CAPITAL SHARE TRANSACTIONS:
Shares sold................ 28,531,630 93,214,276
Shares issued on
reinvestment of
distributions.............. 1,734,384 3,773,450
Shares redeemed............ (47,833,602) (89,621,927)
Increase (decrease) in net
assets resulting from
capital share
transactions (a)........... (17,567,588) 7,365,799
TOTAL INCREASE (DECREASE)
IN NET ASSETS.............. (16,705,372) 3,393,471
NET ASSETS:
Beginning of period........ 221,825,136 218,431,665
End of period..............$205,119,764 $221,825,136
(a) Transactions in capital
shares were as follows:
Shares sold........... 2,925,098 9,500,348
Shares issued on
reinvestment of
distributions......... 178,432 386,101
Shares redeemed....... (4,900,045) (9,167,732)
Net increase decrease) (1,796,515) 718,717
Beginning balance .... 22,769,456 22,050,739
Ending balance........ 20,972,941 22,769,456
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT SERIES
FINANCIAL HIGHLIGHTS <F5>
The following average per share data, ratios and supplemental information have been derived
from information provided in the financial statements.
<CAPTION>
Six Months
Ended Year Year Year For the Period
September 30, Ended Ended Ended March 31,
1996 March 31, March 31 March 31, 1992 <F1> To
(Unaudited) 1996 1995 1994 March 31, 1993
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period. 9.74 9.90 9.90 10.00 10.00
Income From Investment Operations
Net investment income.............. 0.233 0.621 0.628 0.432 0.552
Net realized and unrealized
gain (loss) on investments........ 0.079 (0.148) - (0.070) 0.002
Total from investment operations.. 0.312 0.473 0.628 0.362 0.554
Less Distributions
Dividends from
net investment income............. (0.233) (0.621) (0.628) (0.462) (0.554)
Dividends in excess
of investment income.............. (0.039) (0.012) - - -
Total distributions................ (0.272) (0.633) (0.628) (0.462) (0.554)
Net Asset Value, End of Period....... 9.78 9.74 9.90 9.90 10.00
Total Return ........................ 6.60% <F4> 4.95% 6.58% 3.67% 5.67%
Ratios/Supplemental Data
Net assets, end of period.......... $205,119,764 $221,825,136 $218,431,665 $218,167,491 $ 48,531,206
Ratio of expenses to
average net assets <F2>............ 0.78% <F4> 0.78% 0.78% 0.78% 0.78%
Ratio of net investment income
to average net assets <F3> 4.92% <F4> 6.29% 6.33% 4.17% 4.53%
Portfolio turnover rate............ 262% 225% 47% 112% 3%
<FN>
<F1>
Commencement of operations.
<F2>
The annualized operating expense ratios prior to reimbursement of expenses by the Adviser
were 0.92%, 0.93%, 0.92%, 1.00%, and 2.58% for the Short Duration U.S. Government Series
for the six months ended September 30, 1996, and for the years ended March 31, 1996, March 31, 1995,
March 31, 1994, and the period ended March 31, 1993, respectively. Through March 31, 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 1).
<F3>
The annualized net investment income ratios prior to reimbursement of both direct and indirect
expenses by the Adviser were 4.78%, 6.13%, 6.18%, 3.95% and 2.73% for the Short Duration
U.S. Government Series for the six months ended September 30, 1996, and for the years ended
March 31, 1996, March 31, 1995, March 31, 1994, and the period ended March 31, 1993, respectively.
<F4>
Annualized
<F5>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
SMITH BREEDEN SHORT DURATION U.S. GOVERNMENT SERIES
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
The 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: the Smith Breeden
Short Duration U.S. Government Series (the "Short Series" or "Series") and
the Smith Breeden Intermediate Duration U.S. Government Series ("Intermediate
Duration Series"). Prior to April 1, 1995, the Short Series sought to
achieve its investment objective by investing all of its assets in the 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.
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 Funds' 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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (cont.)(Unaudited)
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 carryforward. As of
March 31, 1996, the Series had a net capital loss carryforward of $2,340,576,
with $589 expiring on March 31, 2001, $75,461 expiring on March 31, 2002,
$905,312 expiring on March 31, 2003, and $1,359,214 expiring on March 31, 2004.
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 years.
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, swap, cap and option contracts are used
for risk management purposes in order to reduce fluctuations in net asset
value relative to the Series' 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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS(cont.)(Unaudited)
The Short Series had the following open futures contracts as of September 30,
1996:
Notional Expiration Unrealized
Type Amount Position Month Gain/(Loss)
3 Month
Treasury $ 70,000,000 Long December, 1996 $ 11,935
5 Year
Treasury 21,800,000 Long December, 1996 100,457
10 Year
Treasury 18,600,000 Short December, 1996 (109,618)
3 Month
Eurodollar 382,000,000 Long December, 1996 223,681
3 Month
Eurodollar 128,000,000 Long March, 1997 72,024
3 Month
Eurodollar 44,000,000 Long March, 1998 6,402
3 Month
Eurodollar 29,000,000 Short March, 1999 (19,706)
3 Month
Eurodollar 107,000,000 Short March, 2000 (192,682)
3 Month
Eurodollar 58,000,000 Short March, 2001 (62,011)
3 Month
Eurodollar 62,000,000 Short March, 2002 (37,279)
3 Month
Eurodollar 60,000,000 Short March, 2003 46,980
3 Month
Eurodollar 30,000,000 Short March, 2004 (16,635)
Total $23,548
Futures transactions involve costs and may result in losses. The effective
use of strategies using futures 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.
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. The Series' interest rate swap contracts have been
entered into on a net basis, i.e., the two payment streams are netted out,
with the Short Series receiving or paying, as the case may be, only the net
amount of the two payments. As of September 30, 1996, the Short Series had
four open 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 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 payable on the interest rate swap contracts as of
September 30, 1996 was $66,439, and swap contract interest receivable was
$8,110. No collateral is required to be maintained on these contracts.
<PAGE>
NOTES TO FINANCIAL STATEMENTS(cont.)(Unaudited)
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 its four interest rate cap contracts at
September 30, 1996 was $132,292.
3. TRANSACTIONS WITH AFFILIATES
Smith Breeden Associates, Inc. (the "Adviser"), a registered investment
adviser, provides the Short Series with investment management services.
The Adviser has voluntarily agreed to reimburse normal business expenses of
the Short Series through March 31, 1997 so that total direct and indirect
operating expenses 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 after March 31, 1997. 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 six months ended September 30, 1996, the Adviser received $780,894
in fees and reimbursed the Short Series $153,021.
Certain officers and trustees of the Fund are also officers and directors of
the Adviser.
Pursuant to Rule 12b-1 under the Investment Company Act of 1940 ("1940 Act"),
the Series adopted, effective August 1, 1994, a Distribution and Services
Plan (the "Plan"). The purpose of the Plan is to permit the Adviser 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 Short 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 Short Series, to dealers and other persons at
the annual rate of up to 0.25% of the Short Series' average net assets,
subject to the authority the Trustees of the Short 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 six months ended September 30, 1996, purchases and proceeds from
sales of securities, other than short-term investments, aggregated
$771,105,675 and $785,498,139 respectively for the Series. The cost of the
Short Series' securities for federal income tax purposes at September 30,
1996, is $ 299,407,512. Net unrealized appreciation of investments,
short sales and futures contracts consists of:
Gross unrealized appreciation............. $ 4,209,757
Gross unrealized depreciation............. (2,085,000)
Net unrealized appreciation............... $ 2,124,757
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT SERIES
SCHEDULE OF INVESTMENTS (Unaudited) SEPTEMBER 30, 1996
Market
Face Amount Security Value
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 139.16%
FEDERAL HOME LOAN MORTGAGE CORP. - 53.09% *
FHLMC GOLD:
$2,988,306 7.00%, due 7/12/11 ........................ $2,958,889
2,958,422 7.00%, due (a) ............................ 2,922,366
4,000,000 7.50%, due (a) ............................ 3,947,500
2,224,978 8.00%, due 8/01/09 to 9/01/24 ............. 2,255,938
2,600,000 8.00%, due (a) ............................ 2,617,875
2,997,808 8.50%, due 8/22/26 ........................ 3,080,221
1,848,732 9.00%, due 4/01/25 ........................ 1,929,043
TOTAL FEDERAL HOME LOAN MORTGAGE CORP.
(Cost $19,650,834)......................... 19,711,832
FEDERAL NATIONAL MORTGAGE ASSOC. - 25.87% *
FNMA:
3,328,251 7.00%, due 1/11/24 to 6/01/24 ............. 3,231,906
3,625,034 7.50%, due 9/01/26 ....................... 3,582,911
1,224,182 8.50%, due 9/01/24 to 2/01/25 ............. 1,257,303
1,430,349 9.50%, due 7/01/16 to 5/01/22.............. 1,534,682
TOTAL FEDERAL NATIONAL MORTGAGE ASSOC.
(Cost $9,379,401).......................... 9,606,802
GOVERNMENT NATIONAL MORTGAGE ASSOC. - 59.78% *
GNMA:
4,000,000 8.00%, due (a) ............................ 4,018,750
8,482,526 8.00%, due 8/26/07 to 9/01/26 ............. 8,593,849
GNMA ARM:
4,190,335 5.50%, due 12/20/25 ....................... 4,176,109
2,200,000 5.50%, due (a) ............................ 2,151,500
1,951,620 6.50%, due 12/20/23 ....................... 1,957,523
568,905 7.125%, due 4/20/22........................ 579,336
703,495 7.250%, due 8/20/17 ....................... 716,762
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOC.
(Cost $22,045,278)......................... 22,193,829
UNITED STATES TREASURY BILLS - 0.42% **
160,000 5.39%, due 5/29/97 ........................ 154,400
TOTAL UNITED STATES TREASURY BILLS
(Cost $154,256)............................ 154,400
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost $51,229,769)......................... 51,666,863
Contracts FUTURES OPTION CONTRACTS- 0.03%
20 Call on 10 Year UST Note futures, expires 11/96,
strike price $111.......................... 2,500
20 Call on 10 Year UST Note futures, expires 11/96,
strike price $112.......................... 1,250
20 Put on 10 Year UST Note futures, expires 11/96,
strike price $104.......................... 4,375
10 Put on 10 Year UST Note futures, expires 11/96,
strike price $105.......................... 3,750
TOTAL FUTURES OPTION CONTRACTS (Cost $39,221) 11,875
TOTAL INVESTMENTS (Cost $51,268,990) -
139.19%.................................... 51,678,738
Face Amount REPURCHASE AGREEMENTS - 2.96%:
1,100,000 Morgan Stanley, 5.45%, due 10/01/96
dated 9/24/96 ............................. 1,100,000
TOTAL REPURCHASE AGREEMENTS ............... 1,100,000
SHORT SALES - (15.64%)
2,958,422 FHLMC Gold 7.0%, due (a)................... (2,926,989)
3,000,000 GNMA 7.0%, due (a)......................... (2,878,125)
TOTAL SHORT SALES (Proceeds $5,785,606).... (5,805,114)
CASH AND OTHER ASSETS LESS LIABILITIES -
(26.51%) .................................. (9,845,822)
NET ASSETS - 100.00% ...................... $37,127,802
* 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,
1996. 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.
(a) To be announced
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.
<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT SERIES
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
(Unaudited)
ASSETS:
Investments at market value (identified cost
$51,268,990)(Note 1).......................... $51,678,738
Repurchase agreement (cost $1,100,000) (Note 1) 1,100,000
Cash.......................................... 265,404
Receivables:
Variation margin on futures contracts (Note 2) 3,084
Interest................................... 271,103
Subscriptions.............................. 10,000
Securities sold............................ 18,501,896
Prepaid expenses.............................. 5,257
Deferred organization expenses (Note 1)....... 5,445
TOTAL ASSETS............................. 71,840,927
LIABILITIES:
Short sales at market value (proceeds
$5,785,606)................................... 5,805,114
Payables:
Securities purchased....................... 28,415,312
Distributions.............................. 452,261
Due to advisor (Note 3).................... 21,300
Accrued expenses.............................. 19,138
TOTAL LIABILITIES........................ 34,713,125
NET ASSETS:
(Applicable to outstanding shares of 3,758,477;
unlimited number of shares of beneficial
interest authorized; no stated par).......... 37,127,802
Net asset value, offering price and redemption
price per share ($37,127,802 / 3,758,477).... $9.88
SOURCE OF NET ASSETS:
Paid in capital............................... 37,471,013
Overdistributed net investment income......... (96,591)
Accumulated net realized loss on investments.. (571,065)
Net unrealized appreciation of investments.... 324,445
NET ASSETS............................... $37,127,802
The accompanying notes are an integral part of these financial statements.
<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT SERIES
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996
(Unaudited)
INVESTMENT INCOME:
Interest and discount earned, net of premium
amortization and interest expense (Note 1) ... $1,259,521
EXPENSES:
Advisory fees (Note 3) ....................... 128,191
Accounting and pricing services fees ......... 19,499
Custodian fees ............................... 11,997
Audit & tax preparation fees ................. 8,500
Legal fees ................................... 4,932
Amortization of organization expenses (Note 1) 4,714
Transfer agent fees .......................... 14,687
Registration fees ............................ 10,000
Trustees fees and expenses ................... 6,412
Insurance .................................... 5,285
Other ........................................ 449
TOTAL EXPENSES BEFORE REIMBURSEMENT ...... 214,666
Expenses reimbursed by Adviser (Note 3) .. (51,087)
NET EXPENSES ............................. 163,579
NET INVESTMENT INCOME .................... 1,095,942
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments ............. (155,227)
Change in unrealized appreciation of investments 94,006
Net realized and unrealized loss on investments (61,221)
Net increase in net assets resulting from
operations ................................... $1,034,721
The accompanying notes are an integral part of these financial statements.
<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT SERIES
STATEMENTS OF CHANGES IN NET ASSETS
Six Months Ended
September 30,
1996 Year Ended
(Unaudited) March 31, 1996
OPERATIONS:
Net investment income....... $1,095,942 $2,369,671
Net realized gain (loss) on
investments................. (155,227) 1,227,064
Change in unrealized appreciation
(depreciation) of investments 94,006 (257,447)
Net increase in net assets
resulting from operations... 1,034,721 3,339,288
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment
income...................... (1,093,843) (2,358,436)
Distributions from net realized
capital gains............... (444,607) (367,107)
Total distributions......... (1,538,450) (2,725,543)
CAPITAL SHARE TRANSACTIONS:
Shares sold................. 840,716 1,030,079
Shares issued on reinvestment
of distributions............ 433,935 702,855
Shares redeemed............. (90,060) (697,235)
Increase in net assets resulting
from capital share
transactions (a)............ 1,184,591 1,035,699
TOTAL INCREASE IN NET ASSETS 680,862 1,649,444
NET ASSETS:
Beginning of period......... 36,446,940 34,797,496
End of period............... $37,127,802 $36,446,940
(a) Transactions in capital shares
were as follows:
Shares sold............ 84,400 100,992
Shares issued on reinvestment
of distributions....... 43,795 69,235
Shares redeemed........ (9,046) (69,182)
Net increase........... 119,149 101,045
Beginning balance...... 3,639,328 3,538,283
Ending balance......... 3,758,477 3,639,328
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT SERIES
FINANCIAL HIGHLIGHTS <F5>
The following average per share data, ratios and supplemental information have been derived
from information provided in the financial statements.
<CAPTION>
Six Months
Ended
September 30, Year Year Year Period
1996 Ended Ended Ended Ended
(Unaudited) March 31, 1996 March 31, 1995 March 31, 1994 March 31,1993 <F3>
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period. $10.01 $9.83 $10.01 $10.62 $10.00
Income From Investment
Operations
Net investment
income............ 0.298 0.660 0.664 1.050 0.826
Net gain (loss) on
securities (both
realized and
unrealized)....... (0.012) 0.277 (0.049) (0.601) 0.621
Total from
investment
operations...... 0.286 0.937 0.615 0.449 1.447
Less Distributions
Dividends from net
investment income. (0.297) (0.656) (0.664) (1.044) (0.826)
Dividends in excess
of net investment
income............ - - (0.108) - -
Distributions from
net realized gains
on investments.... (0.119) (0.101) - (0.015) -
Distributions in
excess of net
realized gains
on investments.... - - (0.022) - -
Total
distributions.. (0.416) (0.757) (0.794) (1.059) (0.826)
Net Asset Value,
End of Period..... $9.88 $10.01 $9.83 $10.01 $10.62
Total Return........ 5.90% <F4> 9.69% 6.10% 4.11% 14.93%
Ratios/Supplemental Data
Net assets,
end of period..... 37,127,802 36,446,940 34,797,496 6,779,666 2,923,913
Ratio of expenses
to average
net assets <F1>... 0.89% <F4> 0.90% 0.90% 0.90% 0.82%
Ratio of net
investment income
to average net
assets <F2>....... 6.07% <F4> 6.49% 6.20% 7.74% 8.18%
Portfolio turnover
rate.............. 262% 193% 557% 84% 42%
______________________
<FN>
<F1>
The annualized ratio of expenses to average net assets prior to reimbursement of expenses by the Adviser was
1.18%, 1.14%, 2.33%, 2.34%, and 17.52% for the six months ended September 30, 1996, and the years ended
March 31, 1996, March 31, 1995 and March 31, 1994, and for the period ended March 31, 1993, respectively.
Through August 1, 1994, 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).
<F2>
The annualized ratio of net investment income to average net assets prior to reimbursement of both direct
and indirect expenses by the Adviser was 5.79%, 6.26%, 4.77%, 6.30% and (8.52)% for the six months ended
September 30, 1996, and the years ended March 31, 1996, March 31, 1995 and March 31, 1994, and for the
period ended March 31, 1993, respectively.
<F3>
The Intermediate Duration U.S. Government Series commenced operations on March 31, 1992.
<F4>
Annualized
<F5>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
SMITH BREEDEN INTERMEDIATE DURATION U.S. GOVERNMENT SERIES
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
The 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: the 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 carryforward.
As of March 31, 1996, the Series had no capital loss carryforward.
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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (cont.) (Unaudited)
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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (cont.) (Unaudited)
The Intermediate Series had the following open futures contracts as of
September 30 1996:
Notional Expiration Unrealized
Type Amount Position Month Gain/(Loss)
5 Year
Treasury 1,700,000 Long December, 1996 7,362
10 Year
Treasury 1,600,000 Short December, 1996 (5,885)
3 Month
Eurodollar 8,000,000 Short March, 1998 (35,036)
3 Month
Eurodollar 8,000,000 Short March, 2000 (32,236)
Total ($65,795)
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, 1996 was $154,400.
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 0.88% 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 six
months ended September 30, 1996, the Adviser received fees of $128,191 and
reimbursed the Series $51,087.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (cont.) (Unaudited)
Effective August 1, 1994, the Series adopted a Distribution and Services Plan
(the "Plan") pursuant to Rule 12b-1 under the 1940 Act. The purpose of the
Plan is to permit the Adviser 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 six months ended September 30, 1996, purchases and proceeds from
sales of securities, other than short-term investments, aggregated $121,775,659
and $137,337,997, 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 $51,268,990. Net unrealized appreciation of investments, short sales and
futures contracts consists of:
Gross unrealized appreciation .................. $ 506,807
Gross unrealized depreciation .................. (182,362)
Net unrealized appreciation .................... $ 324,445
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 the 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.
