BENHAM
EUROPEAN
GOVERNMENT
BOND FUND
-------------
Semiannual Report
June 30, 1996
[picture of a 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.............................. 6
PORTFOLIO INFORMATION................................ 7
MANAGEMENT DISCUSSION................................ 9
BACKGROUND INFORMATION
The European Union....................................11
The Prospects for Economic
and Monetary Union (EMU)........................13
About the Fund........................................14
INVESTMENT FUNDAMENTALS
Definitions...........................................15
Portfolio Sensitivity Measurements....................16
FINANCIAL INFORMATION (UNAUDITED)
Financial Highlights..................................18
Financial Statements and Notes........................19
Schedule of Investments...............................27
<PAGE>
PERFORMANCE INFORMATION
NAV AND AVERAGE ANNUAL TOTAL RETURNS
For Periods Ended June 30, 1996
AVERAGE ANNUAL TOTAL RETURNS
NET ASSET VALUE RANGE --------------------------------------------------
(1/1/96-6/30/96) 1 YEAR 3 YEARS 5 YEARS LIFE OF FUND
--------------------------------------------------
$11.32-$12.04 4.78% 10.22% N/A 9.28%
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 18.
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
[mountain graph]
[graph data]
Index Fund
7-Jan-92 $10,000 $10,000
Jan-92 9,577 9,850
Feb-92 9,498 9,820
Mar-92 9,386 9,736
Apr-92 9,528 9,866
May-92 9,907 10,227
Jun-92 10,391 10,731
Jul-92 10,608 10,975
Aug-92 11,196 11,513
Sep-92 11,050 11,501
Oct-92 10,495 10,957
Nov-92 10,136 10,710
Dec-92 10,120 10,708
Jan-93 10,293 10,847
Feb-93 10,227 10,804
Mar-93 10,610 11,178
Apr-93 10,894 11,350
May-93 10,945 11,424
Jun-93 10,548 11,114
Jul-93 10,352 10,890
Aug-93 10,908 11,638
Sep-93 11,218 11,991
Oct-93 11,102 11,820
Nov-93 10,992 11,713
Dec-93 11,200 11,970
Jan-94 11,246 12,103
Feb-94 11,159 11,870
Mar-94 11,317 11,871
Apr-94 11,326 11,893
May-94 11,221 11,692
Jun-94 11,528 11,971
Jul-94 11,665 12,073
Aug-94 11,590 11,881
Sep-94 11,749 12,050
Oct-94 12,142 12,484
Nov-94 11,860 12,130
Dec-94 11,863 12,152
Jan-95 12,257 12,469
Feb-95 12,619 12,950
Mar-95 13,543 13,834
Apr-95 13,595 13,881
May-95 13,778 14,071
Jun-95 13,906 14,201
Jul-95 14,288 14,502
Aug-95 13,705 13,985
Sep-95 14,188 14,393
Oct-95 14,497 14,771
Nov-95 14,522 14,759
Dec-95 14,906 15,117
Jan-96 14,616 14,877
Feb-96 14,608 14,801
Mar-96 14,633 14,834
Apr-96 14,449 14,692
May-96 14,551 14,821
Jun-96 14,700 14,881
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
ECONOMIC REVIEW
THE EUROPEAN ECONOMY
by Jeff Tyler, Senior Vice President & Co-Manager
ECONOMIC GROWTH
From a global perspective, Europe remained among the weakest regions for
economic growth in the first half of 1996. Germany experienced two consecutive
quarters of negative growth, meeting the definition of a recession in the U.S.
Growth across the rest of the continent was sluggish at best. Europe as a whole
continues to be plagued by high levels of unemployment and sizable government
deficits. The exception is the United Kingdom, which is in the late stages of an
extended economic recovery.
Though rebounding global economic growth in the second half of the year should
help boost European economies, 1996 growth estimates for most western European
countries have been slashed (see the graph below).+ Germany, historically the
economic powerhouse of the European Union (EU), is expected to grow at a rate of
less than 1% for all of 1996. Growth rates in Italy and France are expected to
slow to only half their 1995 levels, and the United Kingdom is projected to hold
steady with a 2.5% growth rate.
But things may be looking up. Interest rate cuts and a weaker German currency
are expected to enable Germany to begin recovery later this year and into 1997.
The rest of Europe is likely to follow Germany's lead, although the development
of European economic and monetary union (see The Prospects for EMU on page 13)
may continue to weigh on economic growth for the next few years as European
governments strive to meet the criteria set down by the Maastricht Treaty.
+ All economic growth estimates are from Merrill Lynch & Co. International Fixed
Income research.
Annual Economic Growth
[bar graph]
[graph data]
Germany France U.K. Italy
"1994" 2.9 2.9 3.9 2.2
"1995 1.9 2.5 2.7 2.9
"1996 (forecasted)" 0.8 1.1 2.3 1.5
Source: Merrill Lynch
2
ECONOMIC REVIEW
THE EUROPEAN ECONOMY
(Continued from the previous page)
INFLATION
Stagnating economic growth in much of Europe continued to keep inflationary
pressures in check. As Germany struggles to regain its economic equilibrium, its
rate of inflation is falling. Estimates from Merrill Lynch & Co. call for a
German inflation rate of only 1.2% for 1996. The Netherlands, Denmark, Sweden
and Belgium posted inflation rates of 2% or less in the first half of the year.
In economically floundering France, inflation is expected to remain well under
control, growing at 1.9% in 1996. Even in Italy and Spain, where inflation rates
have been significantly higher than in core European countries, annual inflation
growth is expected to drop significantly, to 4.3% and 3.7%, respectively.
Slow-to-moderate economic growth and greater fiscal restraint on the part of EU
countries that want to participate in the plan for a single European currency
will likely keep inflation under control going forward.
[mountain graph on right side of page. graph data described below]
INTEREST RATES
The accompanying graph shows movements in the German yield curve over the past
year. We 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. Between June and December 1995, the
curve shifted downward dramatically as slowing economic growth prompted
short-term interest rate cuts by the Bundesbank. As a result, other European
central banks--which had previously lagged the Bundesbank in lowering
rates--were able to cut rates more aggressively. Mixed economic data and the
intermittent revival of inflation fears prompted most of the curve to shift
upward between December 1995 and June 1996. At the same time, the curve
steepened as the Bundesbank continued its stimulative policy and short-term
rates continued to fall. The graph shows a drop of more than 100 basis points (a
basis point equals 0.01%) in German short-term rates between June 1995 and June
1996.
[graph data]
Shifting German Yield Curves
6/30/95--6/30/96
Years to
Maturity 6/30/95 12/31/95 6/30/96
3 Mo. 4.45% 3.67% 3.25%
6 Mo. 4.45 3.58 3.3
4.5 3.58 3.47
1 Yr. 4.55 3.58 3.64
4.73 3.63 3.75
4.9 3.68 3.87
5.08 3.73 3.98
2 Yr. 5.25 3.78 4.09
5.33 3.87 4.22
5.41 3.96 4.35
5.48 4.04 4.47
3 Yr. 5.56 4.13 4.6
5.63 4.23 4.73
5.71 4.32 4.86
5.78 4.42 4.98
4 Yr. 5.85 4.51 5.11
5.88 4.57 5.17
5.92 4.63 5.23
5.95 4.69 5.28
5 Yr. 5.98 4.75 5.34
6.12 4.87 5.46
6.26 5 5.58
6.4 5.12 5.7
6 Yr. 6.54 5.24 5.82
6.6 5.33 5.89
6.66 5.41 5.96
6.72 5.5 6.02
7 Yr. 6.78 5.58 6.09
6.81 5.63 6.13
6.84 5.67 6.17
6.87 5.72 6.2
8 Yr. 6.9 5.76 6.24
6.91 5.8 6.27
6.92 5.83 6.3
6.92 5.87 6.32
9 Yr. 6.93 5.9 6.35
6.9 5.91 6.36
6.88 5.92 6.38
6.85 5.93 6.39
10 Yr. 6.82 5.94 6.4
Sourcce: Bloomberg Financial Markets
3
MARKET SUMMARY
EUROPEAN GOVERNMENT BONDS
by Jeff Tyler, Senior Vice President & Co-Manager
Though most European government bonds posted positive returns in the first half
of 1996, their performance was disappointing. Economic conditions early in the
year--moderate economic growth, low levels of inflation and a bias toward lower
rates on the part of major European central banks--initially boded well for
bonds. But a major shift in market sentiment was signaled in February as
Europe's bond markets sold off. A surprising rebound in U.S. economic growth and
a surge in the German money supply resulted in rising interest rates and falling
bond prices.
In March, U.S. and European bond markets decoupled as economic growth in
Europe--especially Germany--continued to stall. Fading fears of an interest rate
increase by the Bundesbank helped European bonds outperform their U.S.
counterparts. While U.S. 10-year Treasury bonds posted losses for the six-month
period, European bonds, as represented by the J.P. Morgan Securities'
ECU-Weighted European Index, returned 3.15% in local currency terms.
But the strengthening U.S. dollar (see Foreign Exchange Market on page 6) had a
significant negative impact on foreign bond returns for U.S. investors. In U.S.
dollar terms, the total return for the J.P. Morgan Index was -1.38%.
The top performers for the period in terms of total return were the "high-yield"
countries of western Europe (Italy, Spain and Sweden). With their weaker
economies and currencies, these countries have historically offered higher
yields on their bonds to attract investors. But as EMU (see page 13) moves
closer to becoming a reality, European bond yields are converging. The Nominal
10-Year Bond Yield graph at the top of page 5 clearly illustrates this interest
rate convergence. Bond markets in the high-yield countries rallied as their
yields fell, while 10-year bond yields in Germany, Denmark, Belgium, the
Netherlands and the U.K. moved slightly higher.
The Real 10-Year Bond Yield graph at the bottom of page 5 gives a slightly
different perspective. After adjusting for local inflation rates, the most
attractive bond yields were found in Sweden, where inflation has dropped below
1%. Following Sweden, the highest real yields were offered by British, Italian
and German bonds. In Spain, bond yields and inflation fell at about the same
rate, leaving real yields nearly unchanged. In France, falling bond yields and
rising inflation caused real yields to plunge.
4
MARKET SUMMARY
EUROPEAN GOVERNMENT BONDS
(Continued from the previous page)
<TABLE>
<CAPTION>
Nominal (stated coupon rate) 10-Year European Bond Yields As of December 1995
and June 1996
[bar graph]
Germany Netherlands France Belgium Denmark UK Sweden Spain Italy
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/95 6.03 6.03 6.63 6.69 7.24 7.42 8.46 9.7 10.86
6/30/96 6.51 6.41 6.49 6.77 7.39 7.89 8.15 8.82 9.41
Source: Bloomberg
Real (inflation-adjusted) 10-Year European Bond Yields
As of December 1995 and June 1996
[bar graph]
Germany Netherlands France Belgium Denmark UK Sweden Spain Italy
12/31/95 4.46 4.36 4.95 5.11 5.35 4.08 6.13 5.18 4.78
6/30/96 5.24 4.53 4 4.88 5.29 5.67 7.29 5.04 5.31
Source: Bloomberg
</TABLE>
5
MARKET SUMMARY
FOREIGN EXCHANGE MARKET
by Jeff Tyler, Senior Vice President & Co-Manager
The U.S. dollar rose steadily during the first half of 1996, gaining more than
6% versus the deutschemark and 7% versus the Japanese yen (see the graph below).
In Japan, a major banking crisis and exceptionally low short-term interest rates
have softened the yen's strength against the dollar and other major currencies.
(Low short-term interest rates tend to make a country's government securities
less attractive to foreign investors, weakening its currency relative to other
world currencies in the process.) The dollar benefited from increased U.S.
exports to Japan, which helped reduce the U.S. trade deficit.
[mountain graph on left side of page. graph data described below]
The German mark also suffered the effects of lower interest rates during the
period. The mark's strength in 1995 versus other major currencies stunted demand
for German exports and weakened the German economy. To stimulate economic
growth, the German central bank instituted a series of short-term interest rate
cuts, the most recent occurring in April of this year. Meanwhile,
stronger-than-expected U.S. economic growth in the first half of the year
fostered expectations of higher U.S. interest rates, helping the dollar
outperform the mark.
It is important to note that the dollar's strength against the mark and other
European currencies over the period reduced U.S. investors' returns on their
European investments.
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, as is required for Fund pricing.
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), 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, 1/95-6/96
Yen/$ (left scale) DM/$ (right scale)
J 99.75 1.5324
F 98.24 1.5018
M 90.79 1.40656
A 83.67 1.38059
M 85.1 1.40766
J 84.53 1.40032
J 87.22 1.38936
A 94.55 1.44511
S 100.49 1.46227
O 100.65 1.4143
N 101.92 1.41648
D 101.81 1.44074
J 105.84 1.46165
F 105.73 1.4661
M 105.82 1.4777
A 107.46 1.50608
M 106.45 1.53336
J 108.96 1.52821
Source: International Monetary Fund
6
PORTFOLIO INFORMATION
BOND HOLDINGS BY COUNTRY
<TABLE>
<CAPTION>
[bar graph]
As of 6/30/96
Germany France Netherlands United Kingdom Italy Spain Belgium Denmark Other
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fund 38.53 12.4 10.1 9.7 7.1 5.8 5.6 2.2 8.7
J.P. Morgan Index 33.4 21 10.5 11.1 8 4.4 8.9 2.7 0
[bar graph]
As of 12/31/95
Germany France Netherlands United Kingdom Belgium Italy Denmark Spain Other
Fund 37.49 15.66 10.76 9.67 7.09 4.68 4.1 2.57 7.98
J.P. Morgan Index 33.9 21 10.7 10.6 9.1 7.5 2.8 4.4 0
</TABLE>
7
PORTFOLIO INFORMATION
KEY PORTFOLIO STATISTICS
6/30/96 12/31/95
Market Value: $227,037,014 $245,105,058
Number of Issues: 34 39
Average Coupon: 6.6% 7.7%
Average Maturity: 5.6 years 6.6 years
Average Duration: 4.5 years 5.1 years
For definitions of these terms, see page 15.
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 6/30/96 for the funds in Lipper's "General World
Income Funds" category.
1 YEAR 3 YEARS LIFE OF FUND+
The Fund: 4.78% 10.22% 9.79%
Category Average: 8.67% 5.82% 6.80%
The Fund`s Ranking: 100 out of 158 3 out of 79 3 out of 51
+ from January 31, 1992, through June 30, 1996
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.
SIX-MONTH TOTAL RETURN BREAKDOWN
For the Period Ended June 30, 1996
% FROM REALIZED
% FROM AND UNREALIZED LOSSES SIX-MONTH
INCOME + ON INVESTMENTS = TOTAL RETURN
2.38% + (3.94)% = (1.56)%
8
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 ON PAGES 15 AND 16.
Q: How did the Fund perform?
A: The Fund's total return for the year ended June 30, 1996, was 4.78%,
compared to the 8.67% average total return for the 158 funds in
Lipper's "General World Income Funds" category for the same period (see
the Lipper Performance Comparison on page 8). For the six months ended
June 30, the Fund's total return was -1.56%.
Q: Why did the Fund underperform its category average?
A: The strong performance of the U.S. dollar in foreign exchange markets
(see page 6) was a key factor in the Fund's underperformance relative
to its peer group. It is our policy to limit the use of currency
hedging* strategies to provide more of a "pure play" on the European
bond market. This strategy, which produced impressive returns when the
dollar plunged against the German mark in 1995, worked against the Fund
over the last six months as the dollar steadily climbed against other
major currencies. Over the long term, the Fund's performance is more
impressive. For the three-year and Life of Fund periods ended June 30,
the Fund strongly outperformed the Lipper category average, placing
third in the Lipper rankings.
Though the Fund benefited from heavier-than-usual weightings in Spain
and Italy (see the graphs on page 7), its performance was hurt by its
strong bias toward the more economically stable "core" European
countries, such as Germany, which lagged the performance of "high
yield" Italy and Spain over the first half of the year. The Spanish and
Italian markets were boosted by lower inflation, falling fiscal
deficits and optimism over the countries' prospects for EMU membership.
Q: What changes did you make in the Fund's structure over the six-month
period?
A: In anticipation of rising interest rates early in the year, we
shortened the Fund's duration* to a neutral position relative to that
of its benchmark. This proved beneficial, limiting the impact of
falling European bond prices when interest rates rose in response to
signs of stronger economic growth in Germany and the U.S. (see the
discussion on page 4). In light of France's ongoing economic and social
ills, (continued on next page)
9
MANAGEMENT DISCUSSION
QUESTIONS AND ANSWERS
(Continued from the previous page)
we continued to reduce the Fund's holdings in French bonds. The Fund's
weighting in French bonds dropped from 19% to 12% over the past 12
months. We also shifted more of the Fund's assets away from Denmark,
Belgium and the Netherlands toward the better-performing markets of
Spain and Italy. Holdings in the Spanish and Italian bonds were reduced
at the end of May, when we sold some of those securities at a profit.
Q: What is the outlook for European bonds going forward?
A: That depends on the performance of the European and U.S. economies. If
European economic growth stalls in the second half of the year, bonds
could get a boost from lower interest rates. However, we think it more
likely that growth will accelerate in the third and fourth quarters,
and we expect to see higher yields, flattening yield curves and lower
bond prices in Europe. Regardless of what happens in Europe, if U.S.
economic growth stalls in the second half of the year (which we
consider unlikely), the resulting drop in U.S. interest rates could
spark lower interest rates--and higher bond prices--in Europe as well.
Q: Given this outlook, what are your current plans for the Fund?
A: Barring a significant change in the interest-rate outlook, we plan to
keep the Fund defensively positioned, with its duration slightly
shorter than that of its benchmark. We also plan to shift more of the
Fund's assets from core Europe toward the high-yield countries. If the
current trend toward interest rate convergence (discussed on page 4)
continues in Europe, these markets have the potential to continue
outperforming the core countries. We also plan to take advantage of
intramarket spread trades when possible. These trades allow us to add
value to the Fund using the periodic widening and narrowing of yield
gaps between German bonds and those of other European countries.
10
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,
Austria, Finland and Sweden.
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 INTER-GOVERNMENTAL CONGRESS
On March 29th, 1996, representatives of all 15 member nations of the European
Union met in Turin, Italy, to begin the task of overhauling the Union's somewhat
dated rules and institutions. One important goal of this "inter-governmental
conference" (IGC) is to pave the way for the integration of ex-communist bloc
eastern European states into the western-European economic and political arena.
Current EU members will discuss potential candidates for future EU membership,
including Estonia, Latvia, Lithuania, Poland, the Czech Republic, Slovakia,
Hungary, Romania, Bulgaria and Slovenia.
Other key topics of discussion will be: the voting powers of member countries,
European defense, the Union's presidency (which currently rotates on a six-month
schedule), the European Parliament and the European Court of Justice.
11
BACKGROUND INFORMATION
THE EUROPEAN UNION
(Continued from the previous page)
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 (the euro) 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.
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 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).
So far in 1996, there have been no further realignments. Recently, currency
fluctuations, especially among ERM member countries, have stabilized as European
central banks attempt to keep their currencies within narrow trading bands as
the target date for the permanent fixing of exchange rates approaches.
12
BACKGROUND INFORMATION
THE PROSPECTS FOR EMU
The final phase of European economic and monetary union (EMU) will be the
adoption of a single European currency (the euro). The introduction of the euro
is scheduled to take place by the end of 1999. In spite of growing opposition to
the single-currency plan on the part of Europe's citizens, European
leaders--most notably Germany's Helmut Kohl and France's Jacques Chirac--are
determined to push EMU through.
Many Europeans feel that efforts to qualify for EMU have resulted in unfair
economic hardships. EMU has likely exacerbated some of the economic sacrifices
that have been made. But the fact remains that the problems currently being
addressed by EMU candidates--including soaring budget deficits and crippling
national debt--would inevitably have had to be dealt with in any case.
The key criteria set by the Maastricht Treaty in 1991 for EMU membership are:
o Inflation can be no more than 1.5 percentage points higher than the average of
the lowest three member countries
o The national budget deficit cannot exceed 3% of the national economy
o 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 been major stumbling blocks to meeting these
requirements. And while slower growth has brought inflation down to acceptable
levels in most countries, only Luxembourg currently meets all three of the
Maastricht criteria.
Though there has been talk of delaying or even abandoning the plan for EMU, the
general consensus at present seems to be that there is still a good chance that
EMU will proceed as planned, with a limited number of countries qualifying for
the first wave of EMU membership. Given political maneuvering and a certain
latitude provided by the wording of some of the Maastricht criteria, it is
expected that Germany, France, Austria, the Netherlands, Belgium, Luxembourg,
Finland and Ireland are likely to make the first cut. Spain, Portugal, Italy and
Sweden are uncertain but may still manage to qualify. The United Kingdom and
Denmark, both of which opted out of EMU while mired in economic woes, and
Greece, which does not currently meet any of the three criteria, are highly
unlikely to join in 1999.
If Europe keeps to its current EMU schedule, by early 1998 countries qualifying
for EMU will be chosen on the basis of their previous two years' economic
performance. At that time, the European Central Bank and a number of national
central banks will be established. In January 1999, exchange rates for member
country currencies will be permanently "fixed" against the euro, and the new
currency will be used by central banks and foreign exchange markets. All new
government debt will be issued in euros. In early 2002, euros will be issued to
the general public. By July of 2002, all old currencies will be recalled, and
the euro will become the sole legal currency of the member nations.
13
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 managed 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.
It is important to remember that international investing involves special risks.
The Fund's performance may be affected by political or economic instability in
countries in which the Fund is invested. Currency fluctuations (discussed on
page 6) will also impact the Fund's performance.
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 7).
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.
14
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 16.
Average Maturity--a weighted average of all bond maturities held in a Fund`s
portfolio. See also page 16.
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 14 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.)
15
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 June 30, 1996,
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.
16
[THIS PAGE INTENTIONALLY LEFT BLANK]
17
<TABLE>
<CAPTION>
BENHAM EUROPEAN GOVERNMENT BOND FUND
FINANCIAL HIGHLIGHTS
For a Share Outstanding Throughout the Six Months Ended June 30, 1996 (Unaudited),
and Years Ended December 31 (except as noted)
JUNE 30, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1996 1995 1994 1993 1992+
----- ----- ----- ----- -----
PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD............................... $11.95 10.36 10.82 10.01 10.00
Income From Investment Operations
Net Investment Income............................................. .32 .61 .78 .69 .79
Net Realized and Unrealized Gains (Losses) on Investments
and Foreign Currency Transactions............................... (.51) 1.88 (.63) .49 .38
-------- -------- -------- -------- --------
Total Income From Investment Operations......................... (.19) 2.49 .15 1.18 1.17
-------- -------- -------- -------- --------
Less Distributions
Dividends from Net Investment Income.............................. (.39) (.90) (.60) (.37) (.66)
Distributions from Net Realized Gains on Investments and
Foreign Currency Transactions................................... 0 0 (.01) 0 (.50)
-------- -------- -------- -------- --------
Total Distributions............................................. (.39) (.90) (.61) (.37) (1.16)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD..................................... $11.37 11.95 10.36 10.82 10.01
======== ======== ======== ======== ========
TOTAL RETURN*........................................................ (1.56)% 24.40% 1.52% 11.79% 7.08%
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period (in thousands of dollars)................ $236,815 252,247 194,301 355,615 337,043
Ratio of Expenses to Average Daily Net Assets++...................... 0.84%** 0.82% 0.86% 0.85% .51%**
Ratio of Net Investment Income to Average Daily Net Assets........... 5.60%** 6.14% 6.09% 6.27% 7.59%**
Portfolio Turnover Rate.............................................. 146% 167% 166% 310% 252%
- -------------------
+ From January 7, 1992 (commencement of operations), to December 31, 1992.
++ The ratios for the periods beginning with the year ended December 31, 1995,
include expenses paid through expense offset arrangements.
* Total return figures assume reinvestment of dividends and capital gain
distributions and are not annualized.
** Annualized.
</TABLE>
See the accompanying notes to financial statements.
18
<TABLE>
<CAPTION>
BENHAM EUROPEAN GOVERNMENT BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996
(Unaudited)
ASSETS
<S> <C>
Investment securities at value (cost $226,546,705) (Notes 1 and 4).................... $227,037,014
Cash.................................................................................. 2,333,432
Cash denominated in foreign currencies (cost $709,999)................................ 714,326
Receivable for forward foreign currency exchange contracts held (Notes 1 and 5)....... 1,588,609
Interest receivable................................................................... 6,258,510
Receivable for fund shares sold....................................................... 500,332
Prepaid expenses and other assets..................................................... 38,597
------------
Total assets..................................................................... 238,470,820
------------
LIABILITIES
Payable for fund shares redeemed...................................................... 206,895
Accrued expenses and other liabilities................................................ 8,678
Payable to affiliates (Note 2)........................................................ 124,919
Payable for forward foreign currency exchange contracts held (Notes 1 and 5).......... 1,315,521
------------
Total liabilities................................................................ 1,656,013
------------
NET ASSETS............................................................................... $236,814,807
============
Net assets consist of:
Capital paid in....................................................................... $235,458,345
Undistributed net investment loss..................................................... (183,777)
Accumulated undistributed net realized gain from investments and foreign
currency transactions............................................................. 820,953
Net unrealized appreciation on investments and
translation of assets and liabilities in foreign currencies....................... 719,286
------------
Net assets............................................................................... $236,814,807
============
Net asset value, offering and redemption price per share based on 20,837,057
shares of beneficial interest outstanding (unlimited number of shares authorized)..... $11.37
======
- -------------------
See the accompanying notes to financial statements.
</TABLE>
19
<TABLE>
<CAPTION>
BENHAM EUROPEAN GOVERNMENT BOND FUND
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1996
(Unaudited)
INVESTMENT INCOME
<S> <C>
Interest (net of $31,777 of foreign taxes withheld)....................... $ 7,906,644
------------
EXPENSES
Investment advisory fees.................................................. 539,207
Transfer agency fees...................................................... 112,201
Administrative fees....................................................... 145,432
Printing and postage...................................................... 51,082
Custodian fees............................................................ 75,346
Auditing and legal fees................................................... 23,923
Registration and filing fees.............................................. 33,782
Directors' fees and expenses.............................................. 26,916
Other operating expenses.................................................. 25,568
------------
Total expenses....................................................... 1,033,457
Custodian earnings credits (Note 6)....................................... (2,735)
------------
Net expenses......................................................... 1,030,722
------------
Net investment income........................................... 6,875,922
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS (NOTES 1, 4, AND 5) Net realized gain (loss) on:
Investments............................................................... 6,279,557
Foreign currency transactions............................................. (3,171,407) 3,108,150
----------
Net unrealized depreciation during the period on:
Investments............................................................... (11,327,839)
Foreign currency transactions............................................. (3,159,088) (14,486,927)
---------- ------------
Net realized and unrealized loss on investments and foreign
currency transactions............................................. (11,378,777)
------------
Net decrease in net assets resulting from operations......................... $ (4,502,855)
============
- -------------------
See the accompanying notes to financial statements.
</TABLE>
20
<TABLE>
<CAPTION>
BENHAM EUROPEAN GOVERNMENT BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Six Months Ended June 30, 1996 (Unaudited), and Year Ended December 31, 1995
1996 1995
-------- -------
FROM INVESTMENT ACTIVITIES:
<S> <C> <C>
Net investment income......................................................... $ 6,875,922 14,029,603
Net realized gain on investments and foreign currency transactions............ 3,108,150 14,706,392
Net unrealized appreciation (depreciation) on investments and translation of
assets and liabilities in foreign currencies.............................. (14,486,927) 17,121,808
------------ ------------
Change in net assets derived from investment activities.................. (4,502,855) 45,857,803
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income......................................................... (8,388,739) (17,950,830)
------------ ------------
FROM CAPITAL SHARE TRANSACTIONS (NOTE 3):
Proceeds from sales of shares................................................. 84,361,170 174,898,551
Net asset value of dividends reinvested....................................... 7,601,895 16,023,639
Cost of shares redeemed....................................................... (94,503,719) (160,882,703)
------------ ------------
Change in net assets derived from capital share transactions............. (2,540,654) 30,039,487
------------ ------------
Net increase (decrease) in net assets.................................... (15,432,248) 57,946,460
NET ASSETS:
Beginning of period........................................................... 252,247,055 194,300,595
------------ ------------
End of period (including undistributed net investment losses of $183,777
and $3,997,106, respectively)............................................ $236,814,807 252,247,055
============ ============
- -------------------
See the accompanying notes to financial statements.
</TABLE>
21
BENHAM EUROPEAN GOVERNMENT BOND FUND
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
(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. Security transactions are recorded on the date the
order to buy or sell is executed. Short-term securities 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.
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 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.
22
Net realized gain (loss) on investments and foreign currency 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 currency 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.
The Fund isolates that portion of the results of operations resulting from
changes in the foreign exchange rates on investments from the fluctuations
arising from changes in the market prices of securities held.
Net realized gains or losses on foreign currency transactions represent net
foreign exchange gains or losses from sales of portfolio securities, sales of
foreign currencies, and the difference between asset and liability amounts
initially stated in foreign currencies and the U.S. dollar value of the amounts
actually received or paid. Net unrealized foreign currency gains and losses from
valuing foreign-currency-denominated assets and liabilities at period-end
exchange rates are reflected as a component of net unrealized appreciation
(depreciation) on investments and translation of assets and liabilities in
foreign currencies.
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
23
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 transactions.
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 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
24
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 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 renewed annually in June.
The payables to affiliates as of June 30, 1996, based on the above agreements
were as follows:
Investment Advisor ........................................ $84,982
Administrative Services ................................... 18,431
Transfer Agent ............................................ 21,506
-------
$ 124,919
=======
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 six months ended June 30, 1996, and the year ended December
31, 1995, were as follows:
June 30, Dec. 31,
1996 1995
----------- ----------
Shares sold ................................ 7,225,745 14,908,717
Reinvestment of dividends .................. 663,266 1,365,380
----------- ----------
7,889,011 16,274,097
Less shares redeemed ....................... (8,157,398) (13,915,468)
----------- ----------
Net increase (decrease) in shares .......... (268,387) 2,358,629
=========== ==========
25
(4) INVESTMENT SECURITIES--PURCHASES, SALES AND/OR MATURITIES
Investment transactions, excluding short-term securities, for the six months
ended June 30, 1996, were as follows:
Purchases ........................................... $332,137,644
============
Sales proceeds ...................................... $343,897,819
============
As of June 30, 1996, unrealized appreciation (depreciation) on investment
securities, based on the aggregate cost of investments for tax purposes
($227,602,178), was as follows:
Appreciated securities ................................. $ 4,302,540
Depreciated securities ................................. (4,867,704)
-----------
Net unrealized appreciation ............................ $ (565,164)
===========
(5) FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT COMMITMENTS
As of June 30, 1996, the Fund had entered into the following forward foreign
currency exchange contracts.
<TABLE>
<CAPTION>
Net
Unrealized
Currency to be Delivered Currency to be Received Appreciation
- ----------------------------- ----------------------- Settlement (Depreciation)
Amount US$ Value Amount US$ Value Date (US$)
------ --------- ------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
US$ 3,910,157 $3,910,157 Bfr 119,023,102 $ 3,808,695 07/24/96 $ (101,462)
US$ 4,904,256 4,904,256 Bfr 152,620,450 4,912,240 10/25/96 7,984
DM 1,617,276 1,065,282 US$ 1,754,385 1,754,385 07/24/96 689,103
DM 18,576,580 12,305,761 US$ 12,277,956 12,277,956 10/25/96 (27,805)
Dkr 29,068,640 5,325,701 US$ 4,806,458 4,806,458 07/24/96 (519,243)
US$ 6,239,652 6,239,652 Dkr 37,032,333 6,355,262 10/25/96 115,610
Esp 763,348,274 5,954,737 US$ 6,294,245 6,294,245 07/24/96 339,508
US$ 3,219,394 3,219,394 Esp 415,195,577 3,226,194 10/25/96 6,800
US$ 14,441,440 14,441,440 Ffr 72,403,025 14,153,548 10/25/96 (287,892)
US$ 4,104,921 4,104,921 (pound) 2,732,284 4,242,308 07/24/96 137,387
US$ 1,975,236 1,975,236 Lit 3,262,532,016 2,125,040 07/24/96 149,804
US$ 443,996 443,996 Lit 730,992,486 472,982 10/25/96 28,986
NLG 1,536,955 908,749 US$ 684,638 684,638 10/25/96 (224,111)
SEK 47,652,578 7,195,811 US$ 7,040,803 7,040,803 07/24/96 (155,008)
US$ 7,184,512 7,184,512 SEK 48,330,211 7,297,939 10/25/96 113,427
----------- ----------- ---------
$79,179,605 $79,452,693 $ 273,088
=========== =========== =========
</TABLE>
(6) EXPENSE OFFSET ARRANGEMENTS
The Fund's Statement of Operations reflects custodian 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
<TABLE>
<CAPTION>
BENHAM EUROPEAN GOVERNMENT BOND FUND
Schedule of Investment Securities
June 30, 1996
(Unaudited)
Percent
Value in of Total
Maturity Face US$ Investment
Issue Date Rate Currency Amount (Note 1) Securities
- ------------------------------------------------------ -------- ---- -------- ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BELGIUM GOVERNMENT BONDS
Kingdom of Belgium 12/22/00 7.750% Bfr 70,000,000 $ 2,426,601 1.07%
Kingdom of Belgium 04/29/04 7.250 305,000,000 10,177,203 4.48
------------ ------
Total Belgium 12,603,804 5.55
------------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
DENMARK GOVERNMENT BOND
Kingdom of Denmark 05/15/03 8.000 Dkr 27,800,000 5,010,438 2.21
------------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
FRANCE GOVERNMENT BONDS
Credit Local de France 12/07/99 9.250 Ffr 14,000,000 3,046,634 1.34
French Treasury 04/12/99 4.750 48,000,000 9,269,447 4.08
Societe Nationale des
Chemins des Fers 03/09/04 8.600 5,200,000 1,136,636 0.50
------------ ------
13,452,717 5.92
------------ ------
CORPORATE BONDS
Caisse Autonome de
Refinancement 12/06/99 7.750 44,000,000 9,188,907 4.05
CETELEM EOS 11/24/00 6.500 27,000,000 5,405,238 2.38
------------ ------
14,594,145 6.43
------------ ------
Total France 28,046,862 12.35
------------ ------
</TABLE>
27
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENT SECURITIES - BENHAM EUROPEAN GOVERNMENT BOND FUND (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Percent
Value in of Total
Maturity Face US$ Investment
Issue Date Rate Currency Amount (Note 1) Securities
- ------------------------------------------------------ -------- ---- -------- ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
GERMANY GOVERNMENT BONDS
Autobahnen und Schnellstr Finance 12/22/99 7.125% DM 4,500,000 $ 3,115,612 1.37%
European Economic Communities 03/10/00 6.500 5,000,000 3,407,675 1.50
European Investment Bank 11/04/02 7.500 5,000,000 3,494,916 1.54
FNMA Global Bond 08/23/00 6.000 9,000,000 6,025,472 2.65
German Federal Republic 02/20/98 6.000 14,300,000 9,664,342 4.26
German Federal Republic 08/22/00 5.750 9,900,000 6,598,485 2.91
German Federal Republic 01/05/06 6.000 53,880,000 33,939,629 14.95
Inter American Development Bank 12/16/02 7.500 5,000,000 3,535,697 1.56
Kredit Fuer Wiederaufbau
International Finance 06/20/05 6.750 7,600,000 5,045,064 2.22
Sudwestdeutsche Landesbank 10/21/03 6.250 7,100,000 4,620,007 2.04
Treuhandanstalt 01/29/03 7.125 11,610,000 8,020,000 3.53
------------ ------
Total Germany 87,466,899 38.53
------------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
ITALY GOVERNMENT BONDS
Inter American Development Bank 02/03/04 7.700 Lit 7,000,000,000 4,241,042 1.87
Buoni Poliennali del Tesoro 04/01/00 10.500 5,350,000,000 3,688,537 1.62
Buoni Poliennali del Tesoro 07/15/00 10.500 5,350,000,000 3,698,994 1.63
------------ ------
11,628,573 5.12
------------ ------
CORPORATE BOND
DSL Finance 03/30/04 8.375 7,000,000,000 4,443,402 1.96
------------ ------
Total Italy 16,071,975 7.08
------------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
NETHERLANDS GOVERNMENT BONDS
Bank Nederland Gemeenten 12/16/02 7.625 NLG 17,000,000 10,753,641 4.74
Bank Nederland Gemeenten 03/10/03 7.000 3,600,000 2,208,172 0.97
Government of the Netherlands 03/15/01 8.500 6,900,000 4,542,288 2.00
Government of the Netherlands 01/15/06 6.000 9,500,000 5,395,391 2.38
------------ ------
Total Netherlands 22,899,492 10.09
------------ ------
</TABLE>
28
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENT SECURITIES--BENHAM EUROPEAN GOVERNMENT BOND FUND (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Percent
Value in of Total
Maturity Face US$ Investment
Issue Date Rate Currency Amount (Note 1) Securities
- ------------------------------------------------------ -------- ---- -------- ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
SPAIN GOVERNMENT BONDS
European Investment Bank 10/20/00 10.125% Esp 310,000,000 $ 2,598,095 1.14%
Government of Spain 02/28/01 10.100 684,000,000 5,728,834 2.52
Government of Spain 01/31/06 10.150 580,000,000 4,884,542 2.15
------------ ------
Total Spain 13,211,471 5.81
------------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
UNITED
KINGDOM GOVERNMENT BONDS
Bayerische Landesbank Giro 02/26/03 8.500 (pound) 6,500,000 10,346,971 4.56
Republic of Austria 07/22/04 9.000 3,260,000 5,339,910 2.35
United Kingdom Treasury 11/26/04 6.750 4,290,000 6,239,192 2.75
------------ ------
Total United Kingdom 21,926,073 9.66
------------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
UNITED
STATES SHORT-TERM INVESTMENT
$19,800,000 par value FHLMC
Discount Notes, 5.52%, 07/01/96 19,800,000 8.72
------------ ------
Total Investment Securities $227,037,014 100.00%
(Cost $226,546,705) ============ ======
FHLMC = Federal Home Loan Mortgage Corporation
FNMA = Federal National Mortgage Association
</TABLE>
Foreign Currency Symbols
------------------------
Bfr Belgian Franc Frf French Franc
Dkr Danish Kroner Lit Italian Lira
DM Deutschemark NLG Netherlands Guilder
Esp Spanish Peseta SEK Swedish Krona
(pound) British Pound
29
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
Maryanne Roepke
Treasurer and Chief Financial Officer
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
1-800-345-2021
Not authorized for distribtion unless preceded or
accompanied by a current fund prospectus.
Benham Distributors, Inc. 8/96 Q072
