BENHAM
EUROPEAN
GOVERNMENT
BOND FUND
-------------
Annual Report
December 31, 1995
[picture of map of Europe]
[company logo] The Benham Group
Part of the Twentieth Century Family of Mutual Funds
<PAGE>
CONTENTS
PERFORMANCE INFORMATION.............................. 1
ECONOMIC REVIEW....................................... 2
MARKET SUMMARY
European Government Bonds............................ 4
Foreign Exchange Market.............................. 5
PORTFOLIO INFORMATION................................ 6
MANAGEMENT DISCUSSION................................ 8
BACKGROUND INFORMATION
The European Union....................................10
The Prospects for Economic
and Monetary Union (EMU)........................12
About the Fund........................................13
INVESTMENT FUNDAMENTALS
Definitions...........................................14
Portfolio Sensitivity Measurements....................15
FINANCIAL INFORMATION (AUDITED)
Financial Highlights..................................17
Financial Statements and Notes........................18
Schedule of Investments...............................27
<PAGE>
PERFORMANCE INFORMATION
NAV AND AVERAGE ANNUAL TOTAL RETURNS
For Periods Ended December 31, 1995
Net Asset Value Range Average Annual Total Returns
- -------------------------------------------------------------------------------
(1/1/95-12/31/95) 1 Year 3 Years 5 Years Life of Fund
- -------------------------------------------------------------------------------
$10.23-$12.38 24.40% 12.18% N/A 10.95%
NET ASSET VALUE (NAV) RANGE indicates the Fund's share price movements over the
stated period and can be used to gauge the stability of the Fund's share price.
TOTAL RETURN figures show the overall dollar or percentage change in the value
of a hypothetical investment in the Fund and assume that all of the Fund's
distributions are reinvested. AVERAGE ANNUAL TOTAL RETURNS illustrate the
annually compounded returns that would have produced the Fund's cumulative total
returns if the Fund's performance had been constant over the entire period.
Average annual total returns smooth out variations in a fund's return; they are
not the same as year-by-year results. For year-by-year total returns, please
refer to the Fund's "Financial Highlights" on page 17.
The Fund commenced operations on January 7, 1992.
Total returns are based on historical Fund performance and do not guarantee
future results. The Fund's share price and total returns will vary, so that
shares, when redeemed, may be worth more or less than their original cost.
SEC PERFORMANCE COMPARISON
Comparative Performance of $10,000 Invested on 1/31/92
in the Fund and in the J.P. Morgan Securities' ECU-Weighted European Index
[line graph]
Index Fund
7-Jan-92 10000 10000
Jan-92 9577 9850
Feb-92 9498 9820
Mar-92 9386 9736
Apr-92 9528 9866
May-92 9907 10227
Jun-92 10391 10731
Jul-92 10608 10975
Aug-92 11196 11513
Sep-92 11050 11501
Oct-92 10495 10957
Nov-92 10136 10710
Dec-92 10120 10708
Jan-93 10293 10847
Feb-93 10227 10804
Mar-93 10610 11178
Apr-93 10894 11350
May-93 10945 11424
Jun-93 10548 11114
Jul-93 10352 10890
Aug-93 10908 11638
Sep-93 11218 11991
Oct-93 11102 11820
Nov-93 10992 11713
Dec-93 11200 11970
Jan-94 11246 12103
Feb-94 11159 11870
Mar-94 11317 11871
Apr-94 11326 11893
May-94 11221 11692
Jun-94 11528 11971
Jul-94 11665 12073
Aug-94 11590 11881
Sep-94 11749 12050
Oct-94 12142 12484
Nov-94 11860 12130
Dec-94 11863 12152
Jan-95 12257 12469
Feb-95 12619 12950
Mar-95 13543 13834
Apr-95 13595 13881
May-95 13778 14071
Jun-95 13906 14201
Jul-95 14288 14502
Aug-95 13705 13985
Sep-95 14188 14393
Oct-95 14497 14771
Nov-95 14522 14759
Dec-95 14906 15117
Past performance does not guarantee future results.
This graph compares the Fund`s performance with a broad-based index, the J.P.
Morgan Securities` ECU-Weighted European Index, over the life of the Fund.
Although the investment characteristics of the Index are similar to those of the
Fund, the securities owned by the Fund and those composing the Index are likely
to be different, and securities that the Fund and the Index have in common are
likely to have different weightings in the respective portfolios. Investors
cannot invest directly in the Index.
PLEASE NOTE: The line representing the Fund's total return includes operating
expenses (such as transaction costs and management fees) that reduce returns,
while the Index's total return line does not.
1
<PAGE>
ECONOMIC REVIEW
THE EUROPEAN ECONOMY
by Jeff Tyler, Senior Vice President & Co-Manager
ECONOMIC GROWTH
Economic growth in Europe was disappointing in 1995. The strength of the German
currency, the deutschemark, dampened demand for German exports, hurting the
German economy and driving unemployment up to 9.9% in December 1995. The
sluggish performance of the German economy in turn weighed on other European
Union (EU) countries.
Germany, historically the economic powerhouse of the EU, slid from an already
weak 2.9% growth rate in 1994 to 1.9% in 1995 (see the graph below).+ Growth in
France, the United Kingdom, Denmark and Sweden also slowed. Though several
countries--the Netherlands, Belgium, Spain, Finland and Italy--actually
performed better in 1995 than they did in 1994, this trend is not expected to
continue.
In 1996, we expect economic growth for most of the EU countries to slow further.
Potential European economic and monetary union (EMU) participants are likely to
practice considerable fiscal restraint as they strive to meet the criteria set
down by the Maastricht Treaty (see the discussion on page 12). Reductions in
government spending could create a significant drag on European economic growth.
Among the major European economies, only the United Kingdom (which opted out of
EMU) is expected to improve slightly on its 1995 performance. Growth rates in
Italy, the Netherlands, Belgium, Denmark, Sweden and Spain are expected to slow
to between 2.3% and 2.5%. The economies of Germany and France, like that of the
U.S., are projected to grow at a rate of less than 2% in 1996. As a result,
Germany and France are currently working to develop economic stimulus packages
to boost their ailing economies.
+ All economic growth estimates from Merrill Lynch & Co. International Fixed
Income Research.
ANNUAL ECONOMIC GROWTH RATES
[bar chart]
Germany France U.K. Italy
1994 2.9 2.9 3.9 2.2
1995 (forecasted) 1.9 2.5 2.7 2.9
1996 (forecasted) 1.8 1.5 2.8 2.3
Source: Merrill Lynch
2
<PAGE>
ECONOMIC REVIEW
THE EUROPEAN ECONOMY
(Continued from the previous page)
INFLATION
Slow economic growth in Europe kept inflation under control in most western
European countries throughout 1995. According to estimates from Merrill Lynch &
Co., inflation in industrial Europe grew at a modest 3.1% for the year.
Predictably, higher inflation levels were seen in politically and fiscally
troubled Italy and Spain. Italy's inflation level rose from 3.9% in 1994 to 5.4%
in 1995, while Spain`s inflation rate remained at 4.7%.
Inflation rates were significantly lower for most other EU countries; in
Germany, France, the Netherlands, Belgium and Finland, prices rose at a rate of
less than 2.0% in 1995. We believe that greater fiscal restraint on the part of
EU countries--excluding Great Britain--that want to take part in the plan for a
single European currency by 1999 will probably help keep a rein on inflation in
1996.
INTEREST RATES
Slower economic growth and low levels of inflation convinced the central banks
in many countries to cut short-term interest rates in 1995. Germany's short-term
rate cuts in March, September and December paved the way for similar cuts in
Austria, Belgium, France and other western European nations.
[line graph in right margin of page. graph data described below]
The accompanying graph illustrates the dramatic downward shift in the German
yield curve between January and December 1995. We typically use the German yield
curve to illustrate European interest rate behavior because of the leadership
role played by the German central bank, the Bundesbank, in European monetary
policy. Over the course of the year, yields on German two-year notes plunged by
more than 200 basis points (a basis point equals 0.01%) as the Bundesbank
shifted to an expansionary policy and moved short-term rates lower. The yield
curve shown above steepened as 10-year rates declined less than two-year rates.
Yields on 10-year notes fell by 159 basis points. We believe that there is room
for further short-term interest rate cuts in 1996 as European governments
attempt to revitalize their economies.
[graph data]
German Yield Curves
1/1/95-12/31/95
12/31/95 1/1/95 6/30/95
3 Mo. 3.67 5.05 4.45
3.58 5.35 4.45
3.6 5.39 4.55
1 Yr. 3.62 5.43 4.65
3.67 5.7 4.82
3.72 5.97 4.99
3.77 6.23 5.16
2 Yr. 3.82 6.5 5.33
3.91 6.61 5.41
4 6.71 5.49
4.08 6.82 5.56
3 Yr. 4.17 6.92 5.64
4.27 6.98 5.71
4.37 7.05 5.79
4.46 7.11 5.86
4 Yr. 4.56 7.17 5.93
4.62 7.21 5.97
4.69 7.24 6
4.75 7.28 6.04
5 Yr. 4.81 7.31 6.07
4.94 7.37 6.22
5.06 7.44 6.36
5.19 7.5 6.51
6 Yr. 5.31 7.56 6.65
5.4 7.58 6.71
5.49 7.6 6.77
5.57 7.62 6.83
7 Yr. 5.66 7.64 6.89
5.71 7.65 6.92
5.76 7.65 6.95
5.8 7.66 6.98
8 Yr. 5.85 7.66 7.01
5.89 7.67 7.02
5.92 7.67 7.03
5.96 7.68 7.04
9 Yr. 5.99 7.68 7.05
6 7.67 7.02
6.01 7.65 7
6.02 7.64 6.97
10 Yr. 6.03 7.62 6.94
Source: Bloomberg Financial Marktets
3
<PAGE>
MARKET SUMMARY
EUROPEAN GOVERNMENT BONDS
by Jeff Tyler, Senior Vice President & Co-Manager
Taking their cue from the soaring U.S. bond market, European government bonds
performed well in 1995. Slow economic growth, low levels of inflation and
falling interest rates in Germany and other European Union (EU) countries were
key factors in the European bond rally (see the "Interest Rates" section on page
3). In local currency terms, European bonds, as represented by the J.P. Morgan
Securities' ECU-Weighted Index, posted a 17.42% total return in 1995. Although
this return was significantly less than the 23.73% return posted by U.S. 10-year
bonds, the U.S. dollar's decline against the German mark and other European
currencies enhanced returns for U.S. investors. In U.S. dollar terms, European
bonds returned an impressive 25.70% in 1995.
Declining interest rates throughout Europe translated to lower bond yields and
higher bond prices. The graph below illustrates the dramatic decline in 10-year
European bond yields during 1995. Declines were significantly larger in
so-called "high-yield" countries (Italy, Spain and Sweden) than in the more
politically and economically stable "core" European countries (Germany, Belgium
and the Netherlands), whose yields were already relatively low.
We believe that continued deceleration of economic growth projected for 1996
(see the discussion on page 2) should provide a favorable backdrop for European
bonds going forward. However, because of the significant impact of U.S. market
performance on European markets, any slowdown in the U.S. bond rally could put
the brakes on European bond performance as well, regardless of underlying
economic factors in Europe.
REAL (INFLATION ADJUSTED) 10-YEAR EUROPEAN BOND YIELDS
AS OF DECEMBER 1994 AND DECEMBER 1995
[bar chart]
Dec-95 Dec-94
Germany 4.53 5.12
France 4.53 6.77
Italy 5.06 8.30
UK 4.22 5.81
Netherlands .43 5.15
Spain .40 7.54
Belgium 5.23 6.46
Denmark 5.44 6.79
Sweden 5.86 8.32
Source: Bloomberg, DRI/McGraw-Hill
4
<PAGE>
MARKET SUMMARY
FOREIGN EXCHANGE MARKET
by Jeff Tyler, Senior Vice President & Co-Manager
After plunging to post-World War II lows against the Japanese yen and the German
mark in April 1995, the U.S. dollar made a significant recovery in the second
half of the year (see the graph below). By the end of 1995, the dollar had
declined by 7.2% versus the mark but had posted a 3.9% gain against the yen. For
much of the year, the dollar was aggressively supported by the Bank of Japan,
whose primary aim was to weaken the yen and boost Japanese exports.
As a result of the dollar's weakness against the mark and other European
currencies, U.S. investors earned higher returns on European investments in
1995.
[line graph in left margin of page. graph data described below]
We think that the dollar`s strength versus European currencies, especially the
German mark, will continue to improve in 1996. The mark`s strength in 1995
stunted demand for German exports and weakened the German economy (see pages
2-3). However, the Bundesbank`s recent efforts to lower short-term interest
rates and spur economic growth has caused the mark to decline against the
dollar. In the first month of 1996, the dollar gained more than 3.5% against the
mark, helped by general expectations that Germany and other European countries
will have to lower interest rates more aggressively than the U.S. to stimulate
their respective economies.
How Currency Returns Affect Fund Performance
For U.S. investors, the total return from European government bonds includes the
effects of currency fluctuations--the movement of European currency values in
relation to the U.S. dollar. Currency exchange rates come into play when
European bond income, gains and losses are converted into U.S. dollars.
Changing currency values may have a greater effect on the Fund's total return
than changing European interest rates and bond prices. When the dollar's value
declines compared to European currencies (such as the deutschemark), as it did
in the first half of 1995, U.S. investors receive higher European bond
returns--the European currencies buy more dollars. Conversely, when the dollar
is stronger, U.S. investors generally receive lower returns (European currencies
buy fewer dollars).
[graph data]
U.S. Dollar Priced in Yen and Deutschemarks
Monthly Averages, 6/94-12/95
Yen/$ DM/$
7/31/94 98.5 1.57086
8/31/94 99.85 1.5646
9/30/94 98.81 1.55089
10/31/94 98.42 1.5184
11/30/94 97.96 1.53869
12/31/94 100.12 1.57228
1/31/95 99.75 1.5324
2/28/95 98.24 1.5018
3/31/95 90.79 1.40656
4/30/95 83.67 1.38059
5/31/95 85.1 1.40766
6/30/95 84.53 1.40032
7/31/95 87.22 1.38936
8/31/95 94.55 1.44511
9/30/95 100.49 1.46227
10/31/95 100.65 1.4143
11/30/95 101.92 1.41648
12/31/95 101.8495 1.44009
Source: International Monetary Fund
5
<PAGE>
PORTFOLIO INFORMATION
BOND HOLDINGS BY COUNTRY
[bar chart]
As of 12/31/95
Fund J.P. Morgan Index
Germany 37.49 33.9
France 15.66 21
Netherlands 10.76 10.7
United Kingdom 9.67 10.6
Belgium 7.09 9.1
Italy 4.68 7.5
Denmark 4.1 2.8
Spain 2.57 4.4
Other 7.98 10
[bar chart]
As of 6/30/95
Fund J.P. Morgan Index
Germany 35.22 36.3
France 19.31 19.9
Netherlands 13.68 14
United Kingdom 8.63 9.1
Belgium 5.78 5.9
Italy 3.64 3.7
Denmark 2.13 2.2
Spain 2.5 2.7
Other 9.11 6.2
The composition of the Fund`s portfolio may change over time.
6
<PAGE>
PORTFOLIO INFORMATION
KEY PORTFOLIO STATISTICS
12/31/95 6/30/95
Market Value: $245,105,058 $228,645,059
Number of Issues: 39 35
Average Maturity: 6.6 years 6.4 years
Average Coupon: 7.7% 7.4%
Average Duration: 5.1 years 4.8 years
For definitions of these terms, see page 14.
LIPPER PERFORMANCE COMPARISON
Lipper Analytical Services (Lipper) is an independent mutual fund ranking
service located in Summit, NJ. Rankings are based on AVERAGE ANNUAL TOTAL
RETURNS for the periods ended 12/31/95 for the funds in Lipper's "General World
Income Funds" category.
1 Year 3 Years Life of Fund+
The Fund: 24.40% 12.18% 10.95%
Category Average: 18.05% 8.46% 7.02%
The Fund`s Ranking: 12 out of 135 8 out of 62 1 out of 43
+ from January 9, 1992, through December 31, 1995
Please note that the Lipper "General World Income Funds" category includes funds
that invest in North American, Asian and Australian bonds as well as European
bonds.
Total returns are based on historical performance and do not guarantee future
results.
ONE-YEAR TOTAL RETURN BREAKDOWN
For the Period Ended December 31, 1995
% From % From Asset One-Year
Income + Appreciation = Total Return
7.46% + 16.94% = 24.40%
7
<PAGE>
MANAGEMENT DISCUSSION
QUESTIONS AND ANSWERS
with Jeff Tyler, Senior Vice President & Co-Manager
NOTE: WE SUGGEST THAT YOU REVIEW THE INVESTMENT FUNDAMENTALS, EUROPEAN ECONOMIC
REVIEW, MARKET SUMMARY AND BACKGROUND INFORMATION SECTIONS BEFORE READING THIS
DISCUSSION. TERMS MARKED WITH AN ASTERISK (*) ARE DEFINED IN THE INVESTMENT
FUNDAMENTALS SECTION BEGINNING ON PAGE 14.
Q: How did the Fund perform in 1995?
A: The Fund's total return for the year ended December 31, 1995, was
24.40%, significantly higher than the 18.05% average total return for
its peers. In fact, the Fund has an impressive track record. For the
period from January 9, 1992 (when Lipper began tracking the Fund), to
December 31, 1995, the Fund was ranked #1 out of 43 funds in Lipper`s
"General World Income Funds" category. For the one-year and three-year
periods ended December 31, 1995, the Fund`s Lipper ranking placed it in
the top 10% and top 15%, respectively, of its category (see the Lipper
Performance Comparison on page 7).
Q: Why did the Fund outperform its peer group average in 1995?
A: Primarily because of the Fund's design. The Fund invests in high-grade
European government bonds, with a bias toward the stronger, more stable
"core" European countries such as Germany, whose bonds benefited from
slow growth, low inflation and political stability in 1995. The Fund
also limits its use of currency hedging* strategies to provide more of
a "pure play" on the European bond market. Unlike many of its peers,
the Fund was unhedged when the U.S. dollar plunged against the German
mark in April (see the Foreign Exchange discussion on page 5). Thus the
Fund was well positioned to benefit from the dollar's decline and the
European bond market rally in 1995.
Q: Have there been any significant changes in the Fund's management style?
A: Our style has become more conservative. In the past, we tended to use
duration* strategies to add value to the Fund, lengthening or
shortening the Fund's duration according to our outlook on the
direction interest rates were going to move (see the discussion of
duration on page 15). One drawback to this strategy is that if interest
rates move in the wrong direction, it can significantly lower the
Fund's total return. As a result, we prefer to keep the Fund's duration
very close to that of its benchmark (the J.P. Morgan Securities'
ECU-Weighted European Index). The Fund's duration as of December 31,
1995, was 5.1 years, compared to the 5.0-year duration of the Index.
Instead of changing the Fund`s duration, we use intramarket spread
trades to add value to the Fund.
8
<PAGE>
MANAGEMENT DISCUSSION
QUESTIONS AND ANSWERS
(Continued from the previous page)
Q: Can you elaborate?
A: Intramarket spread trades allow us to take advantage of "yield spreads"
(differences in yields) between German bonds and those of other
European countries. For example, Belgian and German bonds are both
highly rated, but, for various economic or political reasons, there are
times when Belgian bonds may have to offer higher yields because
Germany's credit is considered to be stronger than that of Belgium.
Typically, the "spread" between German and Belgian 10-year bond yields
is around 10-15 basis points.* If Belgian bond yields rise (and their
prices fall), pushing the spread to 40 or 50 basis points, and we
believe that the catalyst for the change is short-term in nature, we
may sell some of the Fund's German bonds and buy Belgian bonds. Then,
when the spread narrows again (Belgian bond prices rise as their yields
fall), we would reverse the trade, selling the Belgian bonds at a
profit and buying German securities. This is a significantly lower-risk
strategy than making alterations in the Fund's duration.
Q: Has the Fund's weighting of investments in specific countries changed
significantly?
A: The Fund is still overweighted in "core" Europe. As of December 31,
1995, approximately 55% of the Fund's assets were invested in German,
Belgian and Dutch bonds (see the graph on page 6). As a result of
social and political upheaval in France, we cut the Fund's holdings in
French securities from around 20% at the beginning of the year to 15.7%
at the end of December. We increased the Fund's investment in Denmark
and Spain because of improving fundamental economic factors in those
countries.
Q: Do you plan any significant changes in management strategy over the
next six months?
A: No. The Fund should continue its concentration in core European
countries, and we plan to continue our use of intramarket trades to
enhance the Fund's returns.
9
<PAGE>
BACKGROUND INFORMATION
THE EUROPEAN UNION
When the Maastricht Treaty became effective in November 1993, the European Union
(EU) was created. The treaty removed all internal barriers to trade and
investment between its member countries and conferred "European citizenship" on
all of its people, allowing them to live and work anywhere within the Union. The
EU evolved from the EC (European Community) and the even older EEC (European
Economic Community), which was formed in 1957 to create a common market and
promote cooperation between Western European nations. The term EC now refers
specifically to only one of the three "pillars" or areas of cooperation of the
EU, namely the market and laws governing competition within the Union. The other
two "pillars" deal with law enforcement, immigration, and military and foreign
policy.
Member nations of the EU include Belgium, France, Germany, Italy, Luxembourg,
the Netherlands, Denmark, Ireland, the United Kingdom, Greece, Portugal, Spain
and three new members--Austria, Finland and Sweden--admitted in January 1995.
As a unit, the EU produces more goods and services than the U.S., its most
important trading partner. The EU is dominated by Germany, which has the largest
and most powerful economy in Europe, and by Germany's central bank, the
Bundesbank. The German currency, the deutschemark, is generally considered the
benchmark European currency. Deutschemark-denominated securities are the
cornerstone of Benham European Government Bond Fund's investment portfolio.
Economists generally divide the EU nations into three tiers. The first tier
consists of Germany and two other so-called "core" countries (the Netherlands
and Belgium) that tend to conduct their fiscal and monetary policies in line
with the Bundesbank. Third-tier countries (also called the "high-yield group")
have the weakest economies and currencies. This group currently includes Italy,
Spain and Sweden. Countries that fall between these two extremes, such as France
and the U.K., make up the second tier.
THE EMS, THE ERM AND THE ECU
The European Monetary System (EMS) was created in 1979 to encourage European
monetary unity and stability. Its ultimate goal is to allow the EU to adopt a
single common currency by the end of the century.
The Exchange Rate Mechanism (ERM), the principal tool of the EMS, was designed
to keep the currencies of member nations trading within a narrow target range of
2.25% above or below their assigned values in relation to the ECU. The ECU
(European Currency Unit) is an artificially created unit of value by which the
official value of each member nation's currency is defined. This valuation in
turn creates official prices between the individual currencies. For example, if
one deutschemark were determined to be worth two ECUs, and one French franc
worth one ECU, the exchange rate between those two countries' currencies would
be two francs to a deutschemark.
10
<PAGE>
BACKGROUND INFORMATION
THE EUROPEAN UNION
(Continued from the previous page)
The ERM succeeded in establishing a tight trading range between currencies, but
at significant economic cost. In the early 1990s, Germany feared inflation
because of the high cost of reunification and refused to cut its interest rates.
This forced all ERM countries to keep their interest rates undesirably high and
ultimately led to a painful recession in Europe. As economic conditions
worsened, Italy and the U.K. dropped out of the ERM so they could cut interest
rates and boost their economies (Italy has since rejoined). But interest rate
cuts led to currency crises in the summers of 1992 and 1993. Finally, in August
1993, the EU's currency grid was realigned, allowing currencies to fluctuate in
value by as much as 15% against one another. When currencies reach this 15%
limit, their central banks must buy or sell the currencies to keep them within
the allowed range. At the time, it was felt that this 15% tolerance would be
more than adequate, but events in 1995 brought that assumption into question.
In March 1995, the EMS received another setback when the Spanish peseta slid to
dangerously low levels against the deutschemark. The EU held an emergency
meeting of its Monetary Committee, resulting in another realignment of the
currency grid, lowering the ERM value of the Spanish peseta as well as that of
the Portuguese escudo (because the Spanish and Portuguese economies are so
closely linked).
11
<PAGE>
BACKGROUND INFORMATION
THE PROSPECTS FOR EMU
The adoption of a single European currency--the final stage of European economic
and monetary union (EMU)--is scheduled to take place by the end of 1999.
However, recent events in Europe have brought into serious question whether EMU
can possibly begin on time, or even at all. Some economic analysts believe it
will have to be delayed until 2000 or 2001; a growing number suggest that it
will be delayed far longer or ultimately abandoned.
Most of the problems stem from the rigorous conditions set by the Maastricht
Treaty in 1991 for membership in EMU. The three most important criteria for
countries aspiring to EMU membership are:
* Inflation can be no more than 1.5 percentage points higher than the average of
the lowest three member countries
* The national budget deficit cannot exceed 3% of the national economy
* Total government debt cannot exceed 60% of the national economy
Sluggish economic growth, runaway social-services costs and high unemployment in
most European countries have made it difficult for European governments to take
the unpopular measures necessary to allow their countries to qualify for EMU.
Forecasts by J.P. Morgan indicate that by 1997, only Luxembourg will meet all
three of the criteria. Currently, even Germany--which has been the most
insistent on strict adherence to the Maastricht criteria--does not qualify.
It is very likely that decreased government spending will create a drag on
already slowing economic growth, but it may also help keep a lid on inflation in
the coming year (see discussion on pages 2 and 3). In the face of stringent
fiscal reforms that will be necessary to qualify for EMU, support for a single
currency is crumbling in many European countries. Among these are the two most
powerful proponents of EMU, Germany and France. Germans fear that the new
European currency will not have the strength and stability of the deutschemark.
In a recent survey by the German newspaper Die Woche, 84% of Germans polled felt
that EMU should be delayed, and half of these felt the plan should be abandoned
entirely. In France, President Jacques Chirac's attempts to cut government
spending by instituting a wage freeze for public-sector workers triggered a
massive strike--the largest public demonstration in that country in a decade.
Some European countries have simply refused to adhere to EMU guidelines. Great
Britain and Denmark, determining that their economies could not function
effectively under the restraint imposed by the Maastricht criteria, have opted
out of EMU (while still retaining their EU membership). In spite of the fact
that German Chancellor Helmut Kohl and French President Chirac are determined
that Europe should achieve monetary union, the growing lack of popular support
could pave the way for the ultimate failure of EMU.
12
<PAGE>
BACKGROUND INFORMATION
ABOUT THE FUND
THE FUND'S SUBADVISOR
J.P. Morgan Investment Management, Inc. (J.P. Morgan) is the subadvisor to the
Fund and makes the Fund's investment decisions. J.P. Morgan is a leading manager
of pension funds, institutional accounts and private accounts with approximately
$139 billion in assets under management. The subadvisor is a wholly owned
subsidiary of J.P. Morgan & Co., Inc.
The Fund is designed to be a diversification tool and seeks to provide a
long-term hedge against declines in the U.S. dollar. With this in mind, the
Fund's prospectus directs J.P. Morgan to maximize long-term total return, with
less emphasis on addressing short-term currency fluctuations. The Fund normally
remains fully invested in European bonds. However, the Fund may invest--or
"hedge"--up to 25% of its assets into U.S. securities when the U.S. dollar
appears to be strengthening.
When J.P. Morgan adopts a neutral investment position for the Fund (i.e., when
J.P. Morgan considers all European government bond opportunities roughly equal),
the Fund's asset mix is virtually identical to the J.P. Morgan Securities'
ECU-Weighted European Index (shown in the SEC performance comparison graph at
the bottom of page 1 and in the "Bond Holdings by Country" charts on page 6).
The charts help show that more often than not, J.P. Morgan diverges from the
Index in managing the Fund to increase exposure to countries expected to perform
well and to reduce exposure to countries whose performance is expected to lag.
THE FUND'S MANAGERS
Robert P. Browne has primary responsibility for the day-to-day operations of the
Fund. He is a vice president of J.P. Morgan and transferred to the London
Fixed-Income Group in April 1994. He was previously located in the Tokyo office
and managed domestic and foreign fixed income as well as overall currency
exposure for J.P. Morgan Trust Bank's international portfolios. Mr. Browne
joined J.P. Morgan Investment in June 1989 and transferred to Tokyo in February
1990.
Jeffrey R. Tyler oversees Mr. Browne's operation of the Fund. Mr. Tyler is a
senior vice president with The Benham Group and heads the investment team in
Benham's portfolio management group that manages all U.S. government money
market and bond funds, mortgage-backed bond funds, international stock and bond
funds, and asset allocation funds. He joined Benham in 1987.
13
<PAGE>
INVESTMENT FUNDAMENTALS
DEFINITIONS
INVESTMENT TERMS
Average Coupon--a weighted average of all coupons held in a Fund`s portfolio.
The coupon is the stated interest rate on a bond.
Average Duration--a weighted average of all bond durations held in a Fund`s
portfolio. See also page 15.
Average Maturity--a weighted average of all bond maturities held in a Fund`s
portfolio. See also page 15.
Basis Points--A basis point equals one one-hundredth of a percentage point (or
0.01%). Therefore, 100 basis points equals one percentage point (or 1%). Basis
points are used to clearly describe interest rate changes. For example, if a
news report says that interest rates rose 1%, does that mean 1% of the previous
rate, or one percentage point? It is more accurate to state that interest rates
rose by 100 basis points.
Hedge, hedging--a strategy used to offset or eliminate fluctuations in the value
of a security or currency. For example, Benham European Government Bond Fund
offers better returns to U.S. investors when the U.S. dollar is weak compared to
European currencies. Conversely, the Fund will tend to underperform in the face
of a strong dollar. If we expect the dollar to strengthen against European
currencies, we might choose to invest or "hedge" a portion of the Fund's
securities back into U.S. dollars to offset losses caused when the Fund's
foreign assets are translated back into U.S. dollars. (See the Background
Information section on page 13 and the Forward Foreign Currency Exchange
Contracts section on page 23 for details on the Fund's hedge policy.)
Market Value--the market value of a fund's investments on a given date.
Number of Issues--the number of different securities issuances held by a fund on
a given date.
THE YIELD CURVE
The yield curve is a graphic representation of the relationship between bond
risks and returns at a point in time. Yield curve graphs plot lengthening bond
maturities (which represent risk because longer maturities increase risk) along
the horizontal axis and rising yields (which represent return) on the vertical
axis. Therefore, the lower left corners of yield curve graphs have the lowest
risks and the lowest potential returns, while the upper right corners have the
highest risks and the highest potential returns. (See page 3 for examples of
yield curves.)
14
<PAGE>
INVESTMENT FUNDAMENTALS
PORTFOLIO SENSITIVITY MEASUREMENTS
DURATION
Duration measures the price sensitivity of a bond or bond fund to changes in
interest rates. Specifically, duration represents the approximate percentage
change in the price of a bond or bond fund if interest rates move up or down by
100 basis points (a basis point equals 0.01%). For example, as of December 31,
1995, the Fund's duration was approximately five years. If interest rates were
to rise by 100 basis points, the Fund's share price would be expected to decline
by 5% if currency values remain stable. Conversely, if interest rates were to
fall by 100 basis points, the Fund's share price would be expected to increase
by 5% in a stable currency environment.
The longer the duration, the more bond or bond fund prices will move in response
to interest rate changes. Therefore, portfolio managers generally want durations
to be as long as possible when interest rates fall (to maximize bond price
increases) and as short as possible when interest rates rise (to minimize bond
price declines), taking into account the objectives of the portfolio.
Duration, measured in years, also approximates (but understates) the weighted
average life of a bond or bond portfolio. To calculate duration, the future
interest and principal payments are added together and weighted in proportion to
their time value (early payments are valued more than later payments because
early payments can be reinvested and compound additional returns).
AVERAGE MATURITY
Average maturity is another measurement of the interest rate sensitivity of a
bond portfolio. Average maturity measures the average amount of time that will
pass until a bond portfolio receives its principal payments from matured bonds.
The longer a portfolio's average maturity is, the more interest rate exposure
and interest rate sensitivity it has. For example, a portfolio with a ten-year
average maturity has much more potential exposure to interest rate changes than
a portfolio with a one-year average maturity.
Portfolio managers generally lengthen average maturities when interest rates
fall (to maximize exposure and capture as much price appreciation as possible)
and reduce average maturities when interest rates rise (to minimize exposure and
avoid as much price depreciation as possible), as long as this strategy is
compatible with the objectives of the portfolio. Reducing the average maturity
in a rising interest rate environment also allows the portfolio manager to more
quickly reinvest matured assets in higher-yielding securities.
The Fund's bond portfolio will normally have an average maturity of between two
and ten years.
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders
Benham International Funds:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investment securities, of Benham European Government Bond Fund
(a series of Benham International Funds) (the Trust) as of December 31, 1995,
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the periods presented herein. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of
Benham European Government Bond Fund (a series of Benham International Funds) as
of December 31, 1995, the results of its operations, the changes in its net
assets and its financial highlights for the periods indicated above, in
conformity with generally accepted accounting principles.
/s/KPMG Peat Markwick LLP
KPMG Peat Marwick LLP
San Francisco, California
February 5, 1996
16
<PAGE>
<TABLE>
<CAPTION>
BENHAM EUROPEAN GOVERNMENT BOND FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED DECEMBER 31 (EXCEPT AS NOTED)
1995 1994 1993 1992+
---- ----- ----- -----
PER-SHARE DATA
- ------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $10.36 10.82 10.01 10.00
Income From Investment Operations
Net Investment Income .61 .78 .69 .79
Net Realized and Unrealized Gains
(Losses) on Investments an
and Foreign Currency Contracts and Transactions 1.88 (.63) .49 .38
-------- -------- -------- --------
Total Income From Investment Operations 2.49 .15 1.18 1.17
-------- -------- -------- --------
Less Distributions
Dividends from Net Investment Income (.90) (.60) (.37) (.66)
Distributions from Net Realized Gains on Investments and
Foreign Currency Contracts and Transactions 0 (.01) 0 (.50)
-------- -------- -------- --------
Total Distributions (.90) (.61) (.37) (1.16)
-------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $11.95 10.36 10.82 10.01
====== ===== ===== =====
TOTAL RETURN* 24.40% 1.52% 11.79% 7.08%
- ----------------
SUPPLEMENTAL DATA AND RATIOS
- -------------------------------------
Net Assets at End of Period (in thousands of dollars) $252,247 194,301 355,615 337,043
Ratio of Expenses to Average Daily Net Assets++ .82% .86% .85% .51%**
Ratio of Net Investment Income to Average Daily Net Assets 6.14% 6.09% 6.27% 7.59%**
Portfolio Turnover Rate 167% 166% 310% 252%
- ---------------------------------------------------------------------------------------------------------------
+ From January 7, 1992 (commencement of operations), to December 31, 1992.
++ The ratio for the year ended December 31, 1995, includes expenses paid
through expense offset arrangements. * Total return figures assume reinvestment
of dividends and capital gain distributions and are not annualized.
** Annualized.
See the accompanying notes to financial statements.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
BENHAM EUROPEAN GOVERNMENT BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
ASSETS
<S> <C> <C>
Investment securities at value (cost $230,327,721) (Notes 1 and 4) ......................... $245,105,058
Cash denominated in foreign currencies (cost $2,292,689) ................................... 2,304,498
Net unrealized appreciation on forward foreign currency exchange
contracts held, at value (Notes 1 and 5) ................................................ 420,703
Interest receivable ........................................................................ 8,599,595
Receivable for fund shares sold ............................................................ 813,054
Prepaid expenses and other assets .......................................................... 35,028
------------
Total assets ........................................................................... 257,277,936
------------
LIABILITIES
Bank overdraft ............................................................................. 4,216,895
Payable for securities purchased ........................................................... 7,748
Payable for fund shares redeemed ........................................................... 619,918
Accrued expenses and other liabilities ..................................................... 36,058
Payable to affiliates (Note 2) ............................................................. 150,262
------------
Total liabilities ...................................................................... 5,030,881
------------
NET ASSETS .................................................................................... $252,247,055
============
Net assets consist of:
Capital paid in ............................................................................ $234,636,969
Undistributed net investment income ........................................................ (3,997,106)
Undistributed net realized gain (loss) from:
Investments ................................................................ (3,272,005)
Foreign currency contracts and transactions ................................ 9,672,984 6,400,979
----------
Net unrealized appreciation on:
Investments ................................................................ 13,252,265
Foreign currency contracts and transactions ................................ 1,953,948 15,206,213
---------- ------------
NET ASSETS .................................................................................... $252,247,055
============
Net asset value, offering and redemption price per share based on 21,105,444
shares of beneficial interest,
outstanding (unlimited number of shares authorized) ........................................ $11.95
======
- ------------------------------
See the accompanying notes to financial statements.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
BENHAM EUROPEAN GOVERNMENT BOND FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
INVESTMENT INCOME
<S> <C> <C>
Interest (net of $41,534 of foreign taxes withheld) .......................................... $15,876,625
------------
EXPENSES
Investment advisory fees ..................................................................... 1,017,677
Transfer agency fees ......................................................................... 264,019
Administrative fees .......................................................................... 222,006
Printing and postage ......................................................................... 72,060
Custodian fees ............................................................................... 89,724
Auditing and legal fees ...................................................................... 77,530
Registration and filing fees ................................................................. 45,134
Directors' fees and expenses ................................................................. 24,701
Other operating expenses ..................................................................... 55,164
------------
Total expenses ........................................................................... 1,868,015
Custodian earnings credits (Note 6) .......................................................... (20,993)
------------
Net expenses ............................................................................. 1,847,022
------------
Net investment income ................................................................ 14,029,603
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY CONTRACTS AND
TRANSACTIONS (NOTES 1, 4, AND 5) Net realized gain on:
Investments ....................................................................... 4,048,600
Foreign currency contracts and transactions ....................................... 10,657,792 14,706,392
----------
Net unrealized appreciation during the period on:
Investments ....................................................................... 16,642,651
Foreign currency contracts and transactions ....................................... 479,157 17,121,808
---------- ------------
Net realized and unrealized gain on investments and foreign currency
contracts and transactions ................................................................ 31,828,200
------------
Net increase in net assets resulting from operations ............................................ $45,857,803
============
- --------------------------
See the accompanying notes to financial statements.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
BENHAM EUROPEAN GOVERNMENT BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
-------- -------
FROM INVESTMENT ACTIVITIES:
<S> <C> <C>
Net investment income ............................................................................ $ 14,029,603 15,373,619
Net realized gain (loss)on investments and foreign currency contracts and
transactions ................................................................................... 14,706,392 (10,604,839)
Net unrealized appreciation (depreciation) on investments and
foreign currency contracts and transactions ...................................................... 17,121,808 (2,745,025)
------------ ------------
Change in net assets derived from investment activities ...................................... 45,857,803 2,023,755
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ............................................................................ (17,950,830) (12,592,345)
Net realized gain on investments and foreign currency contracts
and transactions .............................................................................. 0 (272,065)
------------ ------------
Total distributions to shareholders .......................................................... (17,950,830) (12,864,410)
------------ ------------
FROM CAPITAL SHARE TRANSACTIONS (NOTE 3):
Proceeds from sales of shares .................................................................... 174,898,551 79,774,087
Net asset value of dividends reinvested .......................................................... 16,023,639 10,686,970
Cost of shares redeemed .......................................................................... (160,882,703)(239,638,756)
Net equalization debits .......................................................................... 0 (1,296,418)
------------ ------------
Change in net assets derived from capital share transactions ................................. 30,039,487 (150,474,117)
------------ ------------
Net increase (decrease) in net assets ........................................................ 57,946,460 (161,314,772)
NET ASSETS:
Beginning of year ................................................................................ 194,300,595 355,615,367
------------ ------------
End of year ...................................................................................... $ 252,247,055 194,300,595
============ ============
- ------------------------
See the accompanying notes to financial statements.
</TABLE>
20
<PAGE>
BENHAM EUROPEAN GOVERNMENT BOND FUND
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
(1) SIGNIFICANT ACCOUNTING POLICIES
Benham European Government Bond Fund is an open-end, non-diversified management
investment company, registered under the Investment Company Act of 1940. It is
currently the sole Fund of Benham International Funds (BIF). Benham European
Government Bond Fund seeks over the long term as high a level of total return as
is consistent with investment in the highest-quality European government debt
securities. Significant accounting policies followed by the Fund are summarized
below.
VALUATION OF INVESTMENT SECURITIES--Securities are valued on the basis of market
value as provided by an independent pricing service approved by the board of
trustees. Foreign securities are valued at the closing price in the principal
market where they are traded. Foreign security prices are converted to U.S.
dollars daily based on currency exchange rates prevailing at the time the Fund's
net asset value is determined. Security transactions are recorded on the date
the order to buy or sell is executed. Debt obligations with remaining maturities
of sixty days or less at the time of purchase are valued at amortized cost,
which approximates market value. Securities for which market quotations are not
readily available are valued at fair market value as determined in good faith by
or under the direction of the board of trustees. Realized gains and losses from
security transactions are determined on the basis of identified cost.
SHARE VALUATION--The Fund's net asset value per share is computed by dividing
the value of its total assets, less its liabilities, by the total number of
shares outstanding at the beginning of each business day. Net asset values
fluctuate daily in response to changes in the market value of investments and
foreign currency translations.
DIVIDENDS AND OTHER DISTRIBUTIONS--Interest income, including amortization of
bond discounts and premiums, and Fund expenses are accrued daily. Net investment
income dividends to shareholders, if any, are distributed quarterly on the
ex-dividend date. In addition, net realized gains, if any, are distributed
annually. Distributions are paid in cash or reinvested in additional shares.
The character of distributions made during the year from net investment income
or net realized gains may differ from their ultimate characterization for
federal income tax purposes. On the Statement of Assets and Liabilities for the
Fund, as a result of permanent book-to-tax differences, a reclassification
adjustment has been made for
21
<PAGE>
equalization to decrease undistributed net investment income and increase
capital.
INCOME TAXES--The Fund intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code (IRC). By complying with these
provisions, the Fund will not be subject to federal or state income or franchise
taxes to the extent that it distributes substantially all of its net investment
income and realized capital gains. Under applicable foreign tax law, a
withholding tax may be imposed on interest at various rates.
Net realized capital gain (loss) on investments and foreign currency contracts
and transactions differ for financial statement and tax purposes primarily
because of IRC section 988 foreign exchange gain (loss) reclassifications to
ordinary income, deferrals of net post-October losses on investments and foreign
curency contracts and acquisitions, and IRC section 1256 contracts mark to
market requirements. The character of distributions made during the year from
net investment income or net realized gains for financial statement purposes may
therefore differ from their ultimate characterizations for federal income tax
purposes. Due to the timing of dividend distributions, the fiscal year in which
amounts are distributed may differ from the year that the income or realized
gains (losses) were recorded by the Fund. Also, the Fund utilizes equalization
debits when determining the required dividend distributions for federal income
tax purposes. As of December 31, 1995, the Fund had a tax capital loss carryover
of $2,287,194. Loss carryovers not offset by realized gains will expire eight
years after the fiscal year in which they are realized. The Fund's capital loss
carryover will expire by December 31, 2002. No capital gain distributions will
be made by the Fund until all of its loss carryover has been offset or expired.
FOREIGN CURRENCY TRANSLATIONS--The functional currency of the Fund is the U.S.
dollar. Securities and other assets and liabilities denominated in foreign
currencies are converted to U.S. dollars daily based on currency exchange rates
prevailing at the time the Fund's net asset value is determined. Foreign
currency amounts related to the purchase or sale of securities, income, and
expenses are translated at the exchange rate on the transaction date, as accrued
or when incurred, respectively.
Net realized gains on foreign currency contracts and transactions represent net
foreign exchange gains and losses from sales and maturities of securities,
holdings of foreign currencies, forward foreign currency exchange contracts,
exchange gains or losses realized between the trade and settlement dates on
security transactions, and the difference between the amounts of interest
recorded on the Fund's books and the U.S. dollar equivalent of the amounts
actually received or paid.
22
<PAGE>
Net unrealized currency gains and losses from valuing
foreign-currency-denominated assets and liabilities at period-end exchange rates
are reflected as a component of unrealized appreciation (depreciation) on
foreign currency contracts and transactions.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS--A forward foreign currency exchange
contract is a commitment to purchase or sell a foreign currency at a future date
at a negotiated forward rate. In connection with purchases and sales of Fund
securities denominated in a foreign currency, the Fund may enter into forward
foreign currency exchange contracts. Additionally, the Fund may enter into
contracts in order to hedge its exposure to changes in foreign currency exchange
rates on its foreign portfolio holdings or to increase or shift its exposure to
a currency other than U.S. dollars. These hedging strategies, while reducing
exchange rate risk, will also reduce the potential for share price appreciation
in the event the hedged currency increases in value. Certain risks may arise
upon entering into these contracts from the potential inability of
counterparties to meet the terms prescribed. Contracts are recorded at market
value, which fluctuates with changes in currency exchange rates. When the
contracts are closed, realized gains and losses arising from the difference
between the original contracts and the closing of such contracts are included in
net realized gain (loss) on foreign currency contracts and transactions. Since
the economics of entering into offsetting contracts with the same settlement
date effectively closes a portion of the existing open contracts, purchase and
sale contracts with the same counterparty are presented net in Note 5 to the
financial statements. The Fund will not enter into forward contracts or maintain
a net exposure to forward contracts when the value of the contract would
obligate the Fund to deliver an amount of a currency in excess of the value of
its securities or other assets denominated in that currency.
PREPAID EXPENSES--Expenditures of the Fund that have future value are amortized
on a straight-line basis over the period in which the benefit is expected to be
realized.
ORGANIZATION COSTS--Costs incurred by the Fund in connection with the
organization, initial registration and public offering of shares are being
amortized on a straight-line basis over a five-year period ending December 1996.
(2) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Benham Management Corporation (BMC) is a wholly owned subsidiary of Twentieth
Century Companies, Inc. (TCC). BMC's former parent company, Benham Management
International, Inc., merged into TCC on June 1, 1995. The Fund pays BMC, as
investment advisor, a
23
<PAGE>
monthly investment advisory fee equal to the following annual percentages of
the Fund's average daily net assets.
0.45% of the first $200 million
0.40% of the next $300 million
0.35% of the next $1 billion
0.34% of the next $1 billion
0.33% of the next $1 billion
0.32% of the next $1 billion
0.31% of the next $1 billion
0.30% of the next $1 billion
0.29% of net assets over $6.5 billion
BMC provides the Fund with all investment advice. Twentieth Century Services,
Inc. pays all compensation of Fund officers and trustees who are officers or
directors of TCC or any of its subsidiaries. In addition, promotion and
distribution expenses are paid by BMC.
BMC has entered into a subadvisory agreement with J.P. Morgan Investment
Management (JPMIM) on behalf of the Fund. The subadvisor makes investment
decisions for the Fund in accordance with the Fund's investment objectives,
policies, and restrictions under the supervision of the advisor and the board of
trustees. BMC pays all costs associated with retaining JPMIM as the subadvisor
to the Fund.
The subadvisor is a wholly owned subsidiary of J.P. Morgan & Co., Incorporated.
The Fund's custodian switched from Morgan Guaranty Trust Company of New York, a
wholly owned subsidiary of J.P. Morgan & Co., Incorporated, to State Street Bank
and Trust.
The Fund has an Administrative Services and Transfer Agency Agreement with
Benham Financial Services, Inc. (BFS), a wholly owned subsidiary of TCC. Under
the agreement, BFS provides administrative service and transfer agency functions
necessary to operate the Fund. Fees for these services are based on transaction
volume, number of accounts, and average net assets of all funds in The Benham
Group.
The Fund has an additional agreement with BMC pursuant to which BMC established
a contractual expense guarantee that limits Fund expenses (excluding
extraordinary expenses such as brokerage commissions and taxes) to .90% of the
Fund's average daily net assets. The agreement provides further that BMC may
recover amounts (representing expenses in excess of the Fund's expense guarantee
rate) absorbed during the preceding 11 months, if, and to the extent that, for
any given month, the Fund's expenses are less than the expense guarantee rate in
effect at that time. The expense guarantee rate is effective through May 31,
1996, and is subject to annual renewal.
24
<PAGE>
The payables to affiliates as of December 31, 1995, based on the above
agreements were as follows:
Investment Advisor ............................................... $ 93,045
Administrative Services .......................................... 20,307
Transfer Agent ................................................... 36,910
-------
$150,262
=======
The Fund has a distribution agreement with Benham Distributors, Inc. (BDI),
which is responsible for promoting sales of and distributing the Trust's shares.
BDI is a wholly owned subsidiary of TCC.
(3) SHARE TRANSACTIONS
Transactions for the years ended December 31, 1995 and 1994, were as follows:
1995 1994
----------- ----------
Shares sold .................................... 14,908,717 7,496,470
Reinvestment of dividends ...................... 1,365,380 1,022,110
------------ ----------
16,274,097 8,518,580
Less shares redeemed ........................... (13,915,468) (22,638,601)
------------ ----------
Net increase (decrease) in shares .............. 2,358,629 (14,120,021)
============ ==========
(4) INVESTMENT SECURITIES--PURCHASES, SALES AND/OR MATURITIES
Purchases and sales of investment securities (at cost), excluding short-term
securities, for the year ended December 31, 1995, were as follows:
Purchases .................................................... $378,809,631
===========
Sales proceeds ............................................... $355,542,593
===========
As of December 31, 1995, unrealized appreciation (depreciation) on investment
securities was as follows:
Appreciated securities ....................................... $14,799,340
Depreciated securities ....................................... (22,003)
-----------
Net unrealized appreciation .................................. $14,777,337
===========
For financial reporting and federal income tax purposes, the cost of securities
is the same.
25
<PAGE>
(5) FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT COMMITMENTS
As of December 31, 1995, the Fund had entered into the following forward foreign
currency exchange contracts. Net unrealized appreciation of $420,703 on these
contracts is shown as an asset on the statement of assets and liabilities and is
reflected as net unrealized appreciation (depreciation) on forward foreign
currency contracts.
<TABLE>
<CAPTION>
Net
Unrealized
Currency to be Delivered Currency to be Received Appreciation
- ------------------------------- --------------------------------- Settlement (Depreciation)
Amount US$ Value Amount US$ Value Date (US$)
------- ------- --------- ---------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
US$ 3,491,469 $ 3,491,469 DM 5,811,889 $4,047,478 01/24/96 $ 556,009
DM 33,453,349 23,397,635 US$ 23,473,617 23,473,617 04/23/96 75,982
DKr 64,990,463 11,709,262 US$ 11,765,854 11,765,854 01/24/96 56,592
US$ 8,606,795 8,606,795 Dkr 47,942,151 8,652,238 04/23/96 45,443
US$ 3,748,066 3,748,066 Esp 483,843,700 3,967,688 01/24/96 219,622
US$ 7,236,384 7,236,384 Lit 11,559,070,452 7,249,430 01/24/96 13,046
Lit 3,252,512,930 2,017,096 US$ 1,998,226 1,998,226 04/23/96 (18,869)
Fl 14,182,285 8,828,423 US$ 9,004,651 9,004,651 01/24/96 176,228
US$ 6,913,478 6,913,478 Fl 11,017,408 6,891,113 04/23/96 (22,365)
US$ 4,122,494 4,122,494 sterling
pound 2,648,418 4,103,161 01/24/96 (19,334)
US$ 237,168 237,266 sterling
pound 221,168 341,880 04/23/96 104,614
Bfr 187,853,627 6,376,227 US$ 5,915,669 5,915,669 01/24/96 (460,557)
US$ 9,813,279 9,813,279 Bfr 274,553,189 9,319,424 04/23/96 (493,855)
US$ 13,799,687 13,799,687 Ffr 68,244,960 13,919,305 01/24/96 119,617
Ffr 18,284,124 3,733,157 US$ 3,801,686 3,801,687 04/23/96 68,530
----------- ----------- ---------
$ 114,030,718 $114,451,421 $ 420,703
=========== =========== =========
</TABLE>
(6) EXPENSE OFFSET ARRANGEMENTS
The Fund's Statement of Operations reflects custodial earnings credits. These
amounts are used to offset the custody fees payable by the Fund to the custodian
bank. The credits are earned when the Fund maintains a balance of uninvested
cash at the custodian bank. Beginning with the year ending December 31, 1995,
the ratio of expenses to average daily net assets shown in the Financial
Highlights is calculated as if these credits had not been earned.
26
<PAGE>
<TABLE>
<CAPTION>
BENHAM EUROPEAN GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENT SECURITIES
DECEMBER 31, 1995
Value in Percent
Maturity Face US$ of Net
Issue Date Rate Currency Amount (Note 1) Assets
- -------------------------------------------------- ------ ------ ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
BELGIUM GOVERNMENT BONDS
Government of Belgium 12/22/00 7.750% Bfr 70,000,000 $ 2,599,280 1.03%
Kingdom of Belgium 04/29/04 7.250 305,000,000 10,820,243 4.29
Kingdom of Belgium 03/31/05 6.500 133,000,000 4,455,604 1.77
------------ ------
Total Belgium 17,875,127 7.09
------------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
DENMARK GOVERNMENT BOND
Kingdom of Denmark 05/15/03 8.000 Dkr 31,500,000 6,029,573 2.39
Kingdom of Denmark 12/15/04 7.000 24,000,000 4,304,003 1.71
------------ ------
Total Denmark 10,333,576 4.10
------------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
FRANCE GOVERNMENT BONDS
Credit Local de France 03/31/04 7.500 Ffr 11,500,000 2,465,063 .98
Credit Local de France 12/07/99 9.250 14,000,000 3,182,142 1.26
Credit Local de France 03/04/01 9.875 30,000,000 7,097,900 2.81
------------ ------
12,745,105 5.05
------------ ------
CORPORATE BONDS
Caisse Autonome de Refinancement 12/06/99 7.750 22,000,000 4,780,756 1.90
CETELEM 11/24/01 6.500 27,000,000 5,586,862 2.22
Electricite de France 04/09/04 8.600 43,400,000 9,917,725 3.93
France Telecom 12/10/99 9.000 23,400,000 5,282,948 2.09
Societe Nationale des
Chemins des Fers 03/09/04 8.600 5,200,000 1,183,635 .47
------------ ------
26,751,926 10.61
------------ ------
Total France 39,497,031 15.66
------------ ------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENT SECURITIES--BENHAM EUROPEAN GOVERNMENT BOND FUND (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
Value in Percent
Maturity Face US$ of Net
Issue Date Rate Currency Amount (Note 1) Assets
- ----------------------------------------------------- ------ ------ ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
GERMANY GOVERNMENT BONDS
Autobahnen und Schnellstr Finance 12/22/99 7.125% DM 4,500,000 $ 3,364,047 1.33%
Bayerische Landesbank 05/20/98 6.250 5,000,000 3,624,826 1.44
European Investment Bank 11/04/02 7.500 5,000,000 3,798,679 1.51
German Federal Republic 07/15/04 6.750 6,600,000 4,821,488 1.91
German Federal Republic 10/20/00 9.000 29,180,000 23,640,264 9.37
German Federal Republic 07/22/02 8.000 4,950,000 3,885,647 1.54
German Federal Republic 01/03/05 7.375 29,320,000 22,281,569 8.83
Kredit Fuer Wiederaufbau 03/04/99 8.000 7,000,000 5,344,924 2.12
Kredit Fuer Wiederaufbau 06/20/05 6.750 7,600,000 5,483,310 2.18
LKB Baden Wurttemberg Finance 06/22/05 6.750 2,880,000 2,067,271 .82
RaboBank Nederland 10/11/99 6.750 10,000,000 7,413,074 2.94
Republic of Austria 04/03/00 6.875 5,170,000 3,864,557 1.53
Sudwestdeutsche Landesbank 10/21/03 6.250 7,100,000 4,976,912 1.97
------------ ------
Total Germany 94,566,568 37.49
------------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
ITALY GOVERNMENT BOND
Buoni Poliennali del Tesoro 01/01/05 8.312 Lit 20,020,000,000 11,804,049 4.68
------------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
NETHERLANDS GOVERNMENT BONDS
Bank Neder Gemeenten 12/16/02 7.625 Fl 17,000,000 11,611,560 4.60
Bank Neder Gemeenten 03/10/03 7.000 3,600,000 2,366,066 .94
Energie Beheer Nederland 11/13/98 8.750 5,000,000 3,443,132 1.36
Government of the Netherlands 11/15/05 6.750 9,770,000 6,396,952 2.54
Inter American Development Bank 04/15/99 7.250 2,500,000 1,665,631 .66
International Bank for
Reconstruction 06/01/99 7.125 2,500,000 1,670,292 .66
------------ ------
& Development
Total Netherlands 27,153,633 10.76
------------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
SPAIN GOVERNMENT BOND
Government of Spain 02/28/05 10.000 Esp 778,270,000 6,470,657 2.57
------------ ------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENT SECURITIES--BENHAM EUROPEAN GOVERNMENT BOND FUND (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
Value in Percent
Maturity Face US$ of Net
Issue Date Rate Currency Amount (Note 1) Assets
- --------------------------------------------------- ------ ------ ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
UNITED
KINGDOM GOVERNMENT BONDS
Bayerische Landesbank Giro 02/26/03 8.500% sterling 6,500,000 $ 10,547,265 4.18%
pound
Republic of Austria 07/22/04 9.000 3,260,000 5,450,924 2.16
United Kingdom Treasury 12/07/05 8.500 2,200,000 3,664,683 1.45
United Kingdom Treasury 09/08/06 7.750 3,000,000 4,741,545 1.88
------------ ------
Total United Kingdom 24,404,417 9.67
------------ ------
- -----------------------------------------------------------------------------------------------------------------------------------
UNITED
STATES SHORT-TERM INVESTMENT
Deutsche Bank Fixed Deposit 01/02/96 5.790 US $5,000,000 5,000,000 1.98
Repurchase Agreement with 01/02/96 5.850 8,000,000 8,000,000 3.17
------------ ------
Daiwa Securities in the 13,000,000 5.15
------------ ------
amount of 3,003,900.
Collateralized by $6,940,000
in U.S. Treasury Notes
7.500%, due 11/15/16,
(cost $8,000,000)
Total investment securities (cost $230,327,721) 245,105,058 97.17
Other assets less liabilities 7,141,997 2.83
------------ ------
Net assets equivalent to $11.95 per share
on 21,105,444 shares outstanding $252,247,055 100.00%
============ ======
29
</TABLE>
<PAGE>
TRUSTEES
James M. Benham
Albert A. Eisenstat
Ronald J. Gilson
Myron S. Scholes
Kenneth E. Scott
Ezra Solomon
Isaac Stein
James E. Stowers, III
Jeanne D. Wohlers
OFFICERS
James M. Benham
Chairman of the Board
John T. Kataoka
President and Chief Executive Officer
Bruce R. Fitzpatrick
Vice President
Maryanne Roepke
Treasurer
Douglas A. Paul
Vice President, Secretary
and General Counsel
Ann N. McCoid
Controller
[company logo] The Benham Group
Part of the Twentieth Century Family of Mutual Funds
1665 Charleston Road
Mountain View, CA 94043
1-800-321-8321
Not authorized for distribution unless preceded or
accompanied by a current fund prospectus.
Benham Distributors, Inc. 2/96 Q072
