ANNUAL REPORT
[american century logo]
American
Century(sm)
December 31, 1996
BENHAM
GROUP
European Government Bond
[front cover]
TABLE OF CONTENTS
Report Highlights ..................................1
Our Message to You .................................2
History of the European Union ......................3
Period Overview ....................................4
Performance & Portfolio Information ................6
Management Q & A ...................................7
Schedule of Investments ...........................10
Statement of Assets and Liabilities ...............12
Statement of Operations ...........................13
Statements of Changes in Net Assets ...............14
Notes to Financial Statements .....................15
Financial Highlights ..............................18
Independent Auditors' Report ......................19
IRA/403(b) Information ............................20
Background Information
Investment Philosophy & Policies .............24
Comparative Indices ..........................24
Lipper Rankings ..............................24
The Fund's Subadvisor ........................24
Portfolio Management Team ....................24
Glossary ..........................................25
American Century Investments offers you nearly 70 fund choices covering
stocks, bonds, money markets, specialty investments and blended portfolios. To
help you find the funds that may meet your needs, American Century funds have
been divided into three groups based on investment style and objectives. These
groups, which appear below, are designed to help simplify your fund decisions.
American Century Investments--Family of Funds
Benham Group American Century Group Twentieth Century Group
MONEY MARKET FUNDS ASSET ALLOCATION &
GOVERNMENT BOND FUNDS BALANCED FUNDS GROWTH FUNDS
DIVERSIFIED BOND FUNDS CONSERVATIVE EQUITY FUNDS INTERNATIONAL FUNDS
MUNICIPAL BOND FUNDS SPECIALTY FUNDS
European
Government Bond
We welcome your comments or questions about this report. See the back cover for
ways to contact us by mail, phone or e-mail.
Twentieth Century and the Benham Group are registered marks of American Century
Services Corporation and Benham Management Corporation, respectively. American
Century is a service mark of American Century Services Corporation.
American Century Investments
REPORT HIGHLIGHTS
Period Overview
o European countries made significant progress toward meeting the entry
requirements for economic and monetary union (EMU) during 1996.
o With European governments focusing on putting their fiscal houses in order
for EMU, economic growth suffered. Europe as a whole grew by only 1.5% for
the year, while unemployment averaged about 11%.
o Interest rates trended lower across Europe because many European central
banks resorted to less strict monetary policies in an effort to stimulate
economic growth.
o Tight fiscal policies and sluggish economic growth meant that inflation
remained in check across the continent during 1996. Inflation is a concern
going forward primarily only in the United Kingdom.
o Tame inflation and sluggish economic growth caused yields on European bonds
to trend lower during 1996.
o European bond yields have been converging dramatically over the past few
years. Yield spread convergence is a direct result of reduced credit risk and
currency risk. With European countries putting their fiscal houses in order
to qualify for EMU, credit risk is less a concern. Similarly, progress toward
a single European currency (the euro) makes currency risk a less significant
factor in determining a security's returns.
European Government Bond
o The fund underperformed its Lipper peer group average but outperformed its
benchmark index, the J.P. Morgan ECU-Weighted European Index. The strong U.S.
dollar reduced the fund's returns for U.S. investors.
o The fund benefited from an overweighting in the "high-yield" countries of
Italy, Spain and Sweden, which performed very well in 1996.
o The fund's returns were mitigated by our investment philosophy, which tends
to favor the more economically and politically stable European countries of
France and Germany.
o The pending economic and monetary union presents important questions for how
the fund will be managed going forward, with the most important issue being
how strong and credible a currency the euro will be.
o EMU, which enjoys solid support from key European political figures, is
thought increasingly likely to occur on schedule; nevertheless, sluggish
economic growth and rising unemployment means support for EMU among the broad
European populace may be flagging.
o With inflation running at low levels and economic growth expected to be
modest, the outlook for European bonds over the next six months is positive.
o Going forward, we believe adjusting the fund's country weightings is a good
way to add value, with the high-yield markets well positioned to continue
benefiting from the trend toward interest rate convergence.
European
Government Bond
Total Returns:AS OF 12/31/96
6 Months 8.07%*
1 Year 6.38%
Net Assets:$252.5 million
(AS OF 12/31/96)
Inception Date: 1/7/92
Ticker Symbol: BEGBX
* Not annualized.
Many of the investment terms in this report are defined in the Glossary on
page 25.
Annual Report Report Highlights 1
OUR MESSAGE TO YOU
[photo of James E. Stowers III and James M. Benham]
1996 was an eventful year, both for the European bond market and for our
company. As Europe moved closer to economic and monetary union, its bond markets
benefited from increased fiscal responsibility and central bank efforts to
resuscitate the sluggish European economies. However, the stronger U.S. dollar
also had a significant impact on European bond returns for U.S. investors. In
the following pages, our investment management team provides further details
about these issues and how your fund was managed during the year.
On the corporate front, we completed the operational integration of Twentieth
Century and The Benham Group in September. As a result, you now have direct
access to a broader spectrum of funds and services.
We also changed the name of our company. On January 1, 1997, we began serving
you under the name American Century Investments, which reflects our expanded
identity and the independent thinking common to Twentieth Century and Benham.
American Century's fund family is divided into three groups--the Benham Group,
the American Century Group and the Twentieth Century Group. The European
Government Bond fund will remain in the Benham Group, reflecting its continued
adherence to the fixed-income approach that we have employed for years.
This report incorporates a new format designed using your input. We hope you
find it more informative and easier to read. Another informative resource is the
American Century Web site. If you use a personal computer and have Internet
access, we've made it easier for you to download information about American
Century funds and access your fund accounts. With a personal access code, you
can view account balances, exchange money between existing accounts and make
additional investments. The Web site address is: www.americancentury.com. We are
one of the first fund companies to offer direct on-line transactions via the
Internet.
These are examples of how we continue to work to provide information and
services that are useful and convenient to investors in our funds. Thank you for
investing with us.
Sincerely,
/s/James E. Stowers III
James E. Stowers III
President and Chief Executive Officer
American Century Companies
/s/James M. Benham
James M. Benham
Vice Chairman
American Century Companies
2 Our Message to You American Century Investments
HISTORY OF THE EUROPEAN UNION
The European Union (EU) was created in November 1993, when the Maastricht
Treaty took effect. The treaty removed all internal barriers to trade and
investment between its member countries and conferred European citizenship on
its residents, allowing them to live and work anywhere within the Union. The EU
evolved from the EC (European Community) and its predecessor, the 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 to
only one of the three "pillars" or areas of cooperation within the EU, namely
the market and laws governing commerce within the Union. The other two pillars
deal with common military and foreign policy and law enforcement and
immigration.
EU member nations include Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain,
Sweden and the United Kingdom. The EU is dominated by Germany, which has the
largest economy in Europe, and by Germany's central bank, the Bundesbank. The
German currency, the deutschemark, is generally considered Europe's primary
currency.
Economists generally divide the EU 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. At the other end of the spectrum are the third-tier countries
(also called the "high-yield group"), which have the weakest economies and least
stable 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, ERM, and 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
(European Currency Unit). The ECU 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 exchange rates between the individual
currencies. For example, if one deutschemark were determined to be worth two
ECUs, and one French franc worth one ECU, then the exchange rate between the
French and German currencies would be fixed at 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 other ERM countries to keep their interest rates undesirably high
and ultimately led to a recession in Europe. Italy and the U.K. dropped out of
the ERM in September 1992 so they could cut interest rates and boost their
economies. (Italy was readmitted to the ERM in November 1996.)
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% in relation to the ECU. At
the time, it was felt that the 15% tolerance would be more than adequate;
nevertheless, 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 Portugese escudo (because
the Spanish and Portugese economies are so closely linked).
Currency fluctuations among ERM member countries have stabilized as European
central banks attempt to keep their currencies within narrow trading bands as
the January 1999 date for the permanent fixing of exchange rates approaches.
Annual Report History of the European Union 3
PERIOD OVERVIEW
Progress Toward European Economic and Monetary Union
European Union countries made significant strides in 1996 in the long uphill
battle toward a single European currency. The accompanying graphs illustrate the
progress being made toward meeting the deficit and debt limits required for
membership in economic and monetary union (EMU). The criteria set forth in the
1993 Maastricht Treaty, which also include inflation, interest rate and currency
stability standards, grew out of the need for European countries to address the
long-standing problems caused by mounting national debt burdens. EMU entry
requirements also serve a political purpose: Germany, Europe's economic and
political powerhouse, will accept nothing less than a fiscally responsible union
as the price for surrendering the leadership role of the mark (its currency) and
the Bundesbank (the German central bank).
Nevertheless, the threshold for EMU admission may be lowered for countries
that demonstrate marked progress in putting their financial houses in order.
Italy and Spain, for example, have made huge strides toward reining in
government debt over the last several years. Though these two may not qualify
for early entry in 1999, they are likely to enter EMU by 2002. The countries in
line for early admittance are Austria, Belgium, Finland, France, Germany,
Ireland, Luxembourg and the Netherlands.
[dot graphs - data described below]
Economic Growth
With European governments straining to bring their budget deficits under
control, economic growth suffered. According to estimates by J.P. Morgan, Europe
as a whole experienced economic growth of 1.5% during 1996. Germany's economy
expanded by just 1.3%; Italy's by 1.8%. France, racked by worker unrest during
1996, saw its economy grow by only 1.2%. In Spain, where government employees
went on a one-day strike to protest wage freezes, the economy is estimated to
have expanded by 2.2%.
As growth stagnated during 1996, unemployment rose. France now suffers from
an unemployment rate of 12.6%, the highest in its history. Spain endures an
unemployment rate of more than 22%, twice the EU average. German unemployment,
too, is in double figures. Belgium and the Netherlands are faring much better,
with unemployment rates of around 6%.
Though fiscal policy should remain tight, lower interest rates and improving
prospects for international trade ought to boost Europe's economies during 1997.
Growth forecasts by J.P. Morgan call for the economies of Western Europe to
expand by 2.4% on average. France and Italy, however, are expected to continue
to struggle in the coming year because of rising unemployment and further fiscal
tightening.
[dot graph data]
EMU QUALIFICATION--1995
Deficit as a % of GDP Gross Public Debt as a % of GDP
Austria 6.2% 69.4%
Belgium 4.1% 133.5%
Finland 5.2% 59.4%
France 5% 52.9%
Germany 3.5% 58.1%
Ireland 2.1% 84.8%
Italy 7.1% 124.9%
Luxembourg -0.4% 6.3%
Netherlands 3.8% 79%
Portugal 5.2% 71.7%
Spain 6.9% 65.7%
Denmark 1.6% 72%
Sweden 8.1% 78.7%
U.K. 5.5% 47.2%
Greece 9.2% 111.7%
EMU QUALIFICATION--1997
Deficit as a % of GDP Gross Public Debt as a % of GDP
Austria 3% 73.8%
Belgium 3% 129.6%
Finland 0.5% 61.5%
France 3% 57.3%
Germany 2.5% 61.8%
Ireland 0.9% 76.3%
Italy 5.4% 122.8%
Luxembourg -0.5% 6.8%
Netherlands 2.6% 77.3%
Portugal 3% 70.7%
Spain 3% 67.1%
Denmark 0.8% 69.5%
Sweden 2.6% 78.5%
U.K. 3.1% 50.8%
Greece 4.2% 106.2%
Source: IMF & Morgan Stanely
4 Period Overview American Century Investments
PERIOD OVERVIEW
Interest Rates
European interest rates trended lower during 1996. Many European central
banks cut short-term lending rates in an effort to stimulate economic growth.
Expectations for continued slow growth in 1997 hold out the prospect of further
rate decreases. Our expectation for steady to lower rates on the continent in
the near future assumes that the U.S. Federal Reserve does not raise interest
rates, which could drag European rates higher.
The United Kingdom is a notable exception to our general expectation for
lower European rates. Strong economic growth in the U.K. in 1996 caused the
government to raise short-term interest rates in October to head off inflation.
With many forecasts calling for the economy to continue powering ahead, higher
rates are a distinct possibility for the U.K. in 1997.
Inflation
Tight fiscal policies and sluggish economic growth kept inflation in check
across Europe in 1996. According to estimates by J.P. Morgan, the German
inflation rate expanded by just 1.4% over the course of the year. Inflation in
Belgium and the Netherlands expanded by 2.1% and 2.0%, respectively. In France,
where economic growth is stagnant and unemployment hovers at an all-time high,
prices rose by 2.0% for the year. Portugal and Spain experienced price increases
of 3.1% and 3.6%, respectively. Even Italy, noted for its historically high
inflation rates, witnessed inflation of slightly less than 4% in 1996. Going
forward, the tight fiscal policies of countries pursuing EMU membership are
expected to keep inflation under control. Only in the U.K. is inflation a
concern in the near term.
[line graph - data described below]
European Government Bonds
Declining interest rates and low levels of inflation meant that yields on
European bonds generally fell during 1996. However, yields fell much more
sharply among the so-called "high-yield" countries of Italy, Spain and Sweden
than in the "core" countries of Germany, Belgium and the Netherlands. The
accompanying graph dramatically illustrates the extent to which yields have
converged since 1995. For example, the spread between German and Italian 10-year
notes has narrowed from a premium of more than 400 basis points to about 150
basis points in the past two years.
This bond-yield convergence is a direct result of the progress made toward
EMU. European bonds have traditionally been measured against German debt issues
in terms of creditworthiness and currency strength. Italy, Spain and Sweden,
with their weaker economies and less stable currencies, have historically
offered higher yields to attract investors. But as they put their fiscal houses
in order to qualify for EMU, credit risk becomes less of a concern. Even more
important, however, is that as they progress toward EMU and a single European
currency (the euro), currency risk becomes a less significant factor in
determining a security's returns. EMU members' currency values will be
irrevocably fixed after 1999, and euros will become the sole European currency
after 2002. That means that between 1999 and 2002, coupon and principal payments
on European debt will be made in local currencies at set exchange rates; after
2002, European bondholders will be paid in euros. Reduced currency risk is
primarily responsible for the convergence of yields on European government debt.
[line graph data]
CONVERGING 10-YEAR NOTE YIELDS, 1995-1996
Germany Spain Italy
1/27/95 7.41% 11.77% 12.32%
2/24/95 7.39% 11.61% 12.65%
3/31/95 7.19% 12.27% 13.57%
4/28/95 7.05% 12.05% 13.17%
5/26/95 6.70% 11.33% 12.51%
6/30/95 6.94% 11.79% 12.68%
7/28/95 6.79% 11.20% 12.07%
8/25/95 6.69% 10.92% 11.57%
9/29/95 6.61% 10.93% 11.92%
10/27/95 6.48% 10.94% 12.02%
11/24/95 6.26% 10.30% 11.60%
12/29/95 6.04% 9.73% 10.89%
1/26/96 5.88% 9.66% 10.42%
2/23/96 6.30% 9.70% 10.66%
3/29/96 6.44% 9.72% 10.91%
4/26/96 6.31% 9.06% 9.83%
5/31/96 6.53% 9.23% 9.70%
6/28/96 6.57% 8.88% 9.47%
7/26/96 6.34% 8.75% 9.50%
8/30/96 6.38% 8.85% 9.56%
9/27/96 6.06% 7.85% 8.55%
10/25/96 5.99% 7.72% 8.11%
11/29/96 5.64% 6.99% 7.52%
12/27/96 5.79% 6.92% 7.64%
Source: Bloomberg Financial Markets
Annual Report Period Overview 5
PERFORMANCE & PORTFOLIO INFORMATION
<TABLE>
6 MONTHS(1) 1 YEAR 3 YEARS LIFE OF FUND(2)
AVERAGE ANNUAL RETURNS (as of December 31, 1996)
<S> <C> <C> <C> <C>
European Government Bond 8.07% 6.38% 10.34% 10.48%
J.P. Morgan ECU-Weighted European Index 7.47% 5.99% 12.15% 10.71%(4)
Average International Income Fund(3) 7.36% 8.75% 8.32% 9.13%(4)
Fund's Ranking Among International Income Funds(3) -- 26 out of 44 4 out of 17 3 out of 11
(1) Not annualized.
(2) Inception date was January 7, 1992.
(3) According to Lipper Analytical Services.
(4) For the period from 1/31/92 (the date nearest the fund's inception for which data are available) to 12/31/96.
</TABLE>
See pages 24-25 for more information about returns, the comparative index and
Lipper fund rankings.
[mountain graph data]
GROWTH OF $10,000 OVER THE LIFE OF THE FUND
Value on 12/31/96
J.P. Morgan
ECU-Weighted
European Index
$16,496
European
Government
Bond
$16,327
European Government Bond J.P. Morgan ECU-Weighted European Index
Jan-92 $10000 $10000
Feb-92 9970 9918
Mar-92 9884 9801
Apr-92 10016 9949
May-92 10383 10345
Jun-92 10894 10850
Jul-92 11142 11077
Aug-92 11688 11690
Sep-92 11677 11538
Oct-92 11124 10959
Nov-92 10863 10584
Dec-92 10871 10567
Jan-93 11012 10748
Feb-93 10969 10679
Mar-93 11349 11079
Apr-93 11523 11375
May-93 11599 11429
Jun-93 11284 11014
Jul-93 11056 10809
Aug-93 11816 11390
Sep-93 12174 11713
Oct-93 12000 11592
Nov-93 11892 11478
Dec-93 12152 11695
Jan-94 12287 11743
Feb-94 12051 11652
Mar-94 12052 11816
Apr-94 12075 11826
May-94 11871 11717
Jun-94 12154 12037
Jul-94 12257 12180
Aug-94 12062 12102
Sep-94 12233 12268
Oct-94 12674 12678
Nov-94 12314 12384
Dec-94 12337 12387
Jan-95 12659 12799
Feb-95 13147 13176
Mar-95 14044 14141
Apr-95 14093 14196
May-95 14286 14386
Jun-95 14418 14520
Jul-95 14723 14919
Aug-95 14198 14311
Sep-95 14613 14814
Oct-95 14996 15137
Nov-95 14984 15163
Dec-95 15348 15565
Jan-96 15104 15261
Feb-96 15027 15254
Mar-96 15060 15280
Apr-96 14916 15087
May-96 15047 15194
Jun-96 15108 15349
Jul-96 15626 15897
Aug-96 15666 15957
Sep-96 15727 15930
Oct-96 16021 16283
Nov-96 16221 16462
Dec-96 16327 16496
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost. This chart begins on 1/31/92 because it is the date closest to
the fund's 1/7/92 inception date for which index return data are available. 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.
PORTFOLIO AT A GLANCE
12/31/96 12/31/95
Number of Issues 34 39
Weighted Average Maturity 6.5 years 6.6 years
Average Duration 5.0 years 5.1 years
Expense Ratio 0.83% 0.82%
6 Performance & Portfolio Information American Century Investments
MANAGEMENT Q&A
An interview with Jeff Tyler, senior vice president and portfolio manager on
the European Government Bond management team.
How did the fund perform?
The fund's total return for the fiscal year ended December 31, 1996, was
6.38%, compared with the 8.75% average return of the 44 "International Income
Funds" tracked by Lipper Analytical Services. The fund's longer-term returns are
quite strong relative to the peer group average, however. Also, the fund
outperformed its benchmark, the J.P. Morgan ECU-Weighted European Index, which
returned 5.99% during the year. (See the Average Annual Returns table on the
previous page for comparisons of the fund's performance relative to its
benchmark and Lipper peer group average over time.)
Why did the fund underperform its Lipper category average?
Primarily because we make only very limited use of currency hedging
strategies, to provide our investors with a pure play on the European bond
market. Our competitors, however, often hedge as much as 30% to 40% of their
portfolios against currency risk. As a result, the fund tends to outperform its
peers when the dollar is weak, as it was in 1995, but will often underperform
when the dollar is strong, as was the case in 1996. Also, the fund invests in
only the highest-quality European government debt securities, while many of our
peers hold emerging market debt, which performed extremely well last year.
[bar chart data]
EUROPEAN GOVERNMENT BOND
FISCAL YEAR-BY-YEAR RETURNS (Periods ended December 31)
Benham European Government Bond J.P. Morgan Index
'92* 8.71% 5.67%
'93 11.79% 10.67%
'94 1.52% 5.92%
'95 24.40% 25.65%
'96 6.38% 5.99%
This chart illustrates the historical year-by-year volatility of the fund's
returns since its inception and compares them with the index's returns. The
fund's total returns include operating expenses, while the index's returns do
not. See page 24 for a description of the index. * Return from 1/31/92 to
12/31/92.
Annual Report Management Q&A 7
MANAGEMENT Q&A
How was the fund positioned during the period?
We added value to the fund primarily by adjusting its country weightings. We
overweighted the fund in the "high-yield" countries of Italy and Spain, whose
bonds performed very well in 1996 because of the increasing likelihood these
countries will meet the requirements for EMU membership. Italian bonds, for
example, appreciated by about 23% during the year. Italian bonds were also
attractive because the lira held its own against the strong U.S. dollar, which
eroded the dollar-adjusted returns of many European bonds during 1996. We also
kept the fund's duration long relative to its benchmark. With many European
countries relying on relaxed monetary policies such as lower interest rates to
boost their economies, it made sense to extend the fund's duration.
On the other hand, the fund's performance was hurt by its bias toward the
more economically and politically stable "core" countries of Europe, such as
Germany and France. About 50% of the fund's assets were in German and French
debt securities, which returned only around 1% for the year on a dollar-adjusted
basis.
What are the implications of the pending European economic and monetary union
for the fund?
We're working hard to determine what the fund's going to look like in 1999 by
focusing on EMU's potential impact. A key question we're trying to evaluate is
what the euro will be worth. Germany is working to ensure that the euro will be
a strong, credible currency by backing the "stability pact," which stipulates
that member countries violating EMU debt limits will face steep fines of up to
0.5% of gross domestic product (GDP).
Another unresolved question about EMU is the role to be played by the
European central bank. While the bank will control the money supply (electing
when to issue euros), it's uncertain whether or not the new bank will be
independent of European political control (which Germany would prefer), or if it
will be subject to political influence (which France would prefer). The less
independent the European central bank, the more likely it will be to follow lax
monetary policies, which may devalue the euro. One thing is certain: the fund
won't provide the same degree of currency and country diversification after
1999, and certainly not after 2002.
In your opinion, is EMU likely to become a reality?
In a relatively short time, conventional wisdom moved from a position that
EMU was unlikely to a view that EMU will definitely happen. That sea change in
attitude is one reason the dollar rose tremendously over the last year relative
to European currencies, particularly the German mark. The mark is generally
adversely affected by indications that EMU will take place because the mark
would then be replaced by the euro as Europe's primary currency.
[bar graph data]
BOND HOLDINGS BY COUNTRY (as of 12/31/96)
European Government Bond J.P. Morgan ECU-Weighted Index
Germany 39% 33%
France 14% 21%
Netherlands 10% 10%
U.K. 11% 12%
Italy 8% 8%
Spain 8% 4%
Belgium 5% 9%
Other 5% 3%
8 Management Q&A American Century Investments
MANAGEMENT Q&A
Economic and monetary union enjoys very strong support among Europe's key
political figures. Germany's Helmut Kohl is perhaps EMU's staunchest proponent,
and newly elected governments in Spain and France both reneged on electoral
promises to stimulate growth at the expense of pursuing EMU austerity measures.
However, support for EMU among the broad European populace is much less certain.
European unemployment rates are high and rising, and consumer confidence is very
low. Many Europeans blame efforts to qualify for EMU for their economic
hardships. There is also tension between the fiscal restraint policies being
pushed by Germany and the less restrained policies advocated by France in hopes
of stimulating economic growth. If growth doesn't pick up in 1997 and ease the
tensions caused by rising unemployment, the possibility exists that EMU may not
go off as planned.
What is the outlook for European bonds going forward?
European bonds will likely continue to outperform U.S. bonds moving forward,
though that outlook depends upon the relative performance of the European and
U.S. economies. Projections call for European economies to grow less than 2%
during 1997. European countries face something of a catch-22 --they need GDP
growth to help get their deficits under control, but growth is being constrained
by the need to control spending and reduce deficits to meet the entry
requirements for EMU. On the positive side, weaker currencies should make
European capital goods more attractive to U.S. buyers. Trade has a relatively
marginal influence on growth, however. To be meaningful, growth must come from
domestic demand, and with unemployment running at 12% or more in many European
countries, it's hard to generate broad-based demand. The outlook for the U.S.
bond market is less clear, but if the U.S. economy continues to power ahead the
Federal Reserve may raise rates to preempt inflation, which would likely send
European rates higher.
Given this outlook, how will you position the fund over the next six months?
We'll likely keep the fund's duration long relative to its benchmark; with
little risk of inflation apparent, it pays to extend out. We'll also continue to
focus on adding value to the fund by adjusting its country weightings, which
should help the fund capitalize on the trend toward European interest rate
convergence (see page 5). In particular, we think the "high-yield" markets of
Italy, Spain and Sweden have the potential to outperform the "core" European
countries.
[bar graph data]
BOND HOLDINGS BY COUNTRY (as of 6/30/96)
European Government Bond J.P. Morgan ECU-Weighted Index
Germany 39% 33%
France 12% 21%
Netherlands 10% 11%
U.K. 10% 11%
Italy 7% 8%
Spain 6% 4%
Belgium 6% 9%
Other 10% 3%
Annual Report Management Q&A 9
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
Principal Amount Value
- --------------------------------------------------------------------------------
GOVERNMENT BONDS
BELGIUM--4.6%
BEF 333,000,000 Kingdom of Belgium, 7.00%,
5-15-06 $11,330,277
-----------
FRANCE--7.2%
FRF 24,000,000 French Treasury, 4.75%,
4-12-99 4,737,001
24,000,000 Government of France, 6.50%,
10-25-06 4,884,113
36,200,000 Societe Nationale des Chemins
des Fers, 8.60%, 3-9-04 8,219,283
----------
17,840,397
----------
GERMANY--39.4%
DEM 4,500,000 Autobahnen und Schnellstr
Finance, 7.125%, 12-22-99 3,157,305
5,000,000 European Investment Bank,
7.50%, 11-4-02 3,590,909
9,000,000 FNMA Global Bond, 6.00%,
8-23-00 6,148,087
9,900,000 German Federal Republic,
5.75%, 8-22-00 6,735,214
64,780,000 German Federal Republic,
7.50%, 11-11-04 47,024,391
3,300,000 German Federal Republic,
7.375%, 1-3-05 2,378,143
9,000,000 German Federal Republic,
6.875%, 5-12-05 6,292,403
5,000,000 Inter American Development
Bank, 7.50%, 12-16-02 3,594,201
7,600,000 Kredit Fuer Wiederaufbau
International Finance, 6.75%,
6-20-05 5,181,818
7,100,000 Sudwestdeutsche Landesbank,
6.25%, 10-21-03 4,787,885
11,610,000 Treuhandanstalt, 7.125%,
1-29-03 8,275,518
----------
97,165,874
----------
Principal Amount Value
- --------------------------------------------------------------------------------
ITALY--6.2%
ITL8,900,000,000 Buoni Poliennali del Tesoro,
8.25%, 7-1-01 $ 6,245,719
5,200,000,000 European Investment Bank,
10.875%, 12-14-05 4,206,156
7,000,000,000 Inter American Development
Bank, 7.70%, 2-3-04 4,775,130
----------
15,227,005
----------
NETHERLANDS--9.6%
NLG 17,000,000 Bank Nederland Gemeenten,
7.625%, 12-16-02 11,010,124
3,600,000 Bank Nederland Gemeenten,
7.00%, 3-10-03 2,258,252
15,400,000 Government of the Netherlands,
8.50%, 3-15-01 10,242,608
----------
23,510,984
----------
SPAIN--7.6%
ESP 620,000,000 European Investment Bank,
10.125%, 10-20-00 5,422,926
770,000,000 Government of Spain, 10.50%,
10-30-03 7,206,783
760,000,000 Kredit Fuer Wiederaufbau
International Finance,
7.375%, 8-1-00 6,151,746
----------
18,781,455
----------
SWEDEN--3.8%
SEK 8,200,000 Kingdom of Sweden, 10.25%,
5-5-00 1,384,136
56,000,000 Kingdom of Sweden, 6.00%,
2-9-05 7,930,568
---------
9,314,704
---------
UNITED KINGDOM--11.0%
GBP 6,500,000 Bayerische Landesbank Giro,
8.50%, 2-26-03 11,570,748
4,860,000 Republic of Austria, 9.00%,
7-22-04 8,976,371
945,000 United Kingdom Treasury,
7.50%, 12-7-06 1,619,323
2,800,000 United Kingdom Treasury,
8.00%, 12-7-15 4,974,809
---------
27,141,251
----------
TOTAL GOVERNMENT BONDS--89.4% 220,311,947
-----------
(Cost $213,421,346)
See Notes to Financial Statements
10 Schedule of Investments American Century Investments
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
Principal Amount Value
- --------------------------------------------------------------------------------
CORPORATE BONDS
FRANCE--7.2%
FRF 44,000,000 Caisse Autonome de
Refinancement, 7.75%,
12-6-99 $ 9,345,244
41,000,000 CETELEM EOS, 6.30%,
11-24-99 8,373,796
----------
17,719,040
----------
ITALY--2.0%
ITL7,000,000,000 DSL Finance, 8.375%,
3-30-04 4,896,233
----------
TOTAL CORPORATE BONDS--9.2% 22,615,273
(Cost $21,593,943) ----------
COMMERCIAL PAPER
UNITED STATES--1.4%
$3,500,000 Koch Industries, 6.80%,
1-2-97 3,499,339
(Cost $3,499,339) -----------
TOTAL INVESTMENT SECURITIES--100.0% $246,426,559
(Cost $238,514,628) ============
FORWARD FOREIGN CURRENCY CONTRACTS
Contracts Settlement Unrealized
to Sell Dates Value Gain (Loss)
30,998,750 DEM 1-30-97 $20,184,303 $382,211
10,202,026,175 ITL 1-30-97 6,714,189 (129,655)
19,121,630 NLG 1-30-97 11,097,303 265,955
63,029,494 SEK 1-30-97 9,253,750 307,001
618,672,616 ESP 4-23-97 4,755,173 (38,602)
6,025,480 FRF 4-23-97 1,169,158 (7,059)
----------- ---------
$53,173,876 $779,851
=========== =========
(Value on Settlement Dates $53,953,727)
Contracts Settlement Unrealized
to Buy Dates Value Gain (Loss)
329,960,559 BEF 1-30-97 $10,422,240 $(150,455)
6,304,457 DKK 1-30-97 6,304,457 (240,924)
1,274,424,492 ESP 1-30-97 9,808,829 (121,589)
68,029,906 FRF 1-30-97 13,134,946 52,244
952,663 GBP 1-30-97 1,631,113 (248,149)
9,534,721,300 ITL 4-23-97 6,255,980 57,276
----------- ----------
$47,557,565 $(651,597)
=========== ==========
(Value on Settlement Dates $48,209,162)
Notes to Schedule of Investments
BEF = Belgian Franc
DEM = German Mark
DKK = Danish Krone
ESP = Spanish Peseta
FNMA = Federal National Mortgage Association
FRF = French Franc
GBP = British Pound
ITL = Italian Lira
NLG = Netherlands Guilder
SEK = Swedish Krona
See Notes to Financial Statements
Annual Report Schedule of Investments 11
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
ASSETS
<S> <C>
Investment securities, at value (identified cost of $238,514,628) (Note 3) ....................... $246,426,559
Foreign currency holdings, at value (identified cost of $3,023,620) .............................. 3,050,615
Receivable for forward foreign currency exchange contracts ....................................... 1,064,687
Receivable for capital shares sold ............................................................... 147,737
Interest receivable .............................................................................. 6,922,530
Prepaid expenses and other assets ................................................................ 5,387
-----
257,617,515
-----------
LIABILITIES
Disbursements in excess of demand deposit cash ................................................... 684,899
Bank overdraft ................................................................................... 3,186,246
Payable for forward foreign currency exchange contracts .......................................... 936,433
Payable for capital shares redeemed .............................................................. 169,823
Payable to affiliates (Note 2) ................................................................... 178,818
Accrued expenses and other liabilities ........................................................... 5,570
-----
5,161,789
---------
Net Assets Applicable to Outstanding Shares ...................................................... $252,455,726
============
CAPITAL SHARES
Outstanding (unlimited number of shares authorized) .............................................. 21,415,792
==========
Net Asset Value Per Share ........................................................................ $11.79
======
NET ASSETS CONSIST OF:
Capital paid in .................................................................................. $242,442,147
Distributions in excess of net investment income ................................................. (167,924)
Accumulated undistributed net realized gain from investments
and foreign currency transactions .............................................................. 2,044,125
Net unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies (Note 3) ....................................... 8,137,378
---------
$252,455,726
============
</TABLE>
See Notes to Financial Statements
12 Statement of Assets and Liabilities American Century Investments
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME
Income:
Interest (net of foreign taxes withheld of $118,077) .............. $15,630,749
-----------
Expenses (Note 2):
Investment advisory fees .......................................... 1,060,306
Administrative fees ............................................... 263,533
Transfer agency fees .............................................. 239,896
Custodian fees. ................................................... 187,911
Printing and postage .............................................. 114,950
Registration and filing fees ...................................... 56,987
Directors' fees and expenses ...................................... 52,395
Auditing and legal fees ........................................... 50,835
Other operating expenses .......................................... 37,668
------
Total expenses .................................................. 2,064,481
Custodian earnings credits (Note 4) ............................... (7,386)
------
Net expenses .................................................... 2,057,095
---------
Net investment income ............................................. 13,573,654
----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN CURRENCY (NOTE 3)
Net realized gain (loss) on:
Investments ....................................................... 10,974,608
Foreign currency transactions. .................................... (3,182,287)
----------
7,792,321
---------
Change in net unrealized appreciation (depreciation) on:
Investments ....................................................... (4,719,892)
Translation of assets and liabilities in foreign currencies ....... (2,348,943)
----------
(7,068,835)
----------
Net realized and unrealized gain on
investments and foreign currency .................................. 723,486
-------
Net Increase in Net Assets
Resulting from Operations ......................................... $14,297,140
===========
See Notes to Financial Statements
Annual Report Statement of Operations 13
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1996
AND DECEMBER 31, 1995
Increase in Net Assets 1996 1995
OPERATIONS
<S> <C> <C>
Net investment income .......................................................... $ 13,573,654 $14,029,603
Net realized gain on investments and foreign currency transactions ............. 7,792,321 14,706,392
Change in net unrealized appreciation (depreciation) on investments
and translation of assets and liabilities in foreign currencies .............. (7,068,835) 17,121,808
---------- ----------
Net increase in net assets resulting from operations ........................... 14,297,140 45,857,803
---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ..................................................... (14,902,694) (17,950,830)
In excess of net investment income ............................................. (469,390) --
From net realized gains on investments and foreign currency transactions ....... (3,159,533) --
---------- -----------
Decrease in net assets from distributions ...................................... (18,531,617) (17,950,830)
----------- -----------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ...................................................... 127,499,231 174,898,551
Proceeds from reinvestment of distributions .................................... 16,233,620 16,023,639
Payments for shares redeemed ................................................... (139,289,703) (160,882,703)
------------ ------------
Net increase in net assets from capital share transactions ..................... 4,443,148 30,039,487
--------- ----------
Net increase in net assets ..................................................... 208,671 57,946,460
NET ASSETS
Beginning of year .............................................................. 252,247,055 194,300,595
----------- -----------
End of year .................................................................... $252,455,726 $252,247,055
============ ============
TRANSACTIONS IN SHARES OF THE FUND
Sold ........................................................................... 10,867,890 14,908,717
Issued in reinvestment of distributions ........................................ 1,406,608 1,365,380
Redeemed ....................................................................... (11,964,150) (13,915,468)
----------- -----------
Net increase ................................................................... 310,348 2,358,629
======= =========
</TABLE>
See Notes to Financial Statements
14 Statements of Changes in Net Assets American Century Investments
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. Organization and Summary of Significant Accounting Policies
Organization--American Century International Bond Funds (the Trust) is
registered under the Investment Company Act of 1940 as an open-end
non-diversified management investment company. American Century-Benham European
Government Bond Fund (the Fund) is the sole fund issued by the Trust. The Fund's
investment objective is to seek over the long-term as high a level of total
return as is consistent with investment in the highest-quality European
government debt securities. The following significant accounting policies,
related to the Fund, are in accordance with accounting policies generally
accepted in the investment company industry.
Security Valuations--Portfolio securities traded primarily on a principal
securities exchange are valued at the last reported sales price, or the mean of
the latest bid and asked prices where no last sales price is available.
Securities traded over-the-counter are valued at the mean of the latest bid and
asked prices or, in the case of certain foreign securities, at the last reported
sales price, depending on local convention or regulation. When valuations are
not readily available, securities are valued at fair value as determined in
accordance with procedures adopted by the Board of Trustees.
Security Transactions--Security transactions are accounted for on the date
purchased or sold. Net realized gains and losses are determined on the
identified cost basis, which is also used for federal income tax purposes.
Investment Income--Interest income less foreign taxes withheld (if any) is
recorded on the accrual basis and includes amortization of discounts and
premiums.
Foreign Currency Transactions--The accounting records of the Fund are
maintained in U.S. dollars. All assets and liabilities initially expressed in
foreign currencies are converted into U.S. dollars at prevailing exchange rates.
Purchases and sales of investment securities, dividend and interest income, and
certain expenses are translated at the rates of exchange prevailing on the
respective dates of such transactions.
Net realized foreign currency exchange gains or losses arise 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 exchange gains or losses arise from changes in the value of portfolio
securities and other assets and liabilities resulting from changes in the
exchange rates.
Net realized and unrealized foreign currency exchange gains or losses
occurring during the holding period of investments are a component of realized
gain (loss) on foreign currency transactions and unrealized appreciation
(depreciation) on translation of assets and liabilities in foreign currencies,
respectively.
Forward Foreign Currency Exchange Contracts--The Fund may enter into forward
foreign currency exchange contracts for the purpose of settling specific
purchases or sales of securities denominated in a foreign currency or to hedge
the Fund's exposure to foreign currency exchange rate fluctuations. When
required, the Fund will segregate assets in an amount sufficient to cover its
obligations under the hedge contracts. The net U.S. dollar value of foreign
currency underlying all contractual commitments held by the Fund and the
resulting unrealized appreciation or depreciation are determined daily using
prevailing exchange rates. Forward contracts involve elements of market risk in
excess of the amount reflected in the Statement of Assets and Liabilities. The
Fund bears the risk of an unfavorable change in the foreign currency exchange
rate underlying the forward contract. Additionally, losses may arise if the
counterparties do not perform under the contract terms.
Repurchase Agreements--The Fund may enter into repurchase agreements with
institutions that the Fund's investment advisor, Benham Management Corporation
(BMC), has determined are creditworthy pursuant to criteria adopted by the Board
of Trustees. Each repurchase agreement is recorded at cost. The Fund requires
that the securities purchased in a repurchase transaction be transferred to the
custodian in a manner sufficient to enable the Fund to obtain those securities
in the event of a default under the repurchase agreement. BMC monitors, on a
daily basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each repurchase agreement.
Income Tax Status--It is the policy of the Fund to distribute all taxable
income and capital gains to shareholders and to otherwise qualify as a regulated
investment company under provisions of the Internal Revenue Code. Accordingly,
no provision has been made for federal income taxes.
Distributions to Shareholders--Distributions to shareholders are recorded on
the ex-dividend date. Distributions from net investment income are declared and
paid quarterly. Distributions from net realized gains are declared and paid
annually.
Annual Report Notes to Financial Statements 15
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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. These differences are primarily due to differing
treatments for foreign currency transactions and wash sales.
Supplementary Information--Certain officers and directors of the Trust are
also officers and/or directors, and, as a group, controlling stockholders of
American Century Companies, Inc. (ACC), the parent of the Trust's investment
advisor, BMC, the Trust's distributor, American Century Investment Services,
Inc. (ACIS), and the Trust's transfer agent, American Century Services
Corporation (ACSC).
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of increases and decreases in net assets
from operations during the reporting period. Actual results could differ from
those estimates.
Organization Costs--Costs incurred by the Fund in connection with the
organization, initial registration, and public offering of shares were amortized
on a straight-line basis over a five-year period ending December 1996.
- --------------------------------------------------------------------------------
2. Transactions with Related Parties
The Trust has entered into an Investment Advisory Agreement with BMC that
provides the Fund with investment advisory services in exchange for an
investment advisory fee. ACSC pays all compensation of Trust officers and
trustees who are officers or directors of ACC or any of its subsidiaries. In
addition, promotion and distribution expenses are paid by BMC. The investment
advisory fee is paid monthly based on the Fund's average daily closing net
assets during the previous month. The annual investment advisory fee is as
follows:
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 the average daily net assets over $6.5 billion
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 BMC and the Board of
Trustees. BMC pays all costs associated with retaining JPMIM as the subadvisor
of the Fund.
The Trust has entered into an Administrative Services and Transfer Agency
Agreement with ACSC. The Agreement was formerly with Benham Financial Services,
Inc. Under the Agreement, ACSC 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 daily closing net
assets of all funds advised by BMC.
The Trust has an additional agreement with BMC pursuant to which BMC
established a contractual expense guarantee that limits Fund expenses (excluding
expenses such as brokerage commissions, taxes, interest, custodian earnings
credits and extraordinary expenses) to .90% of the Fund's average daily closing
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 payable to affiliates as of December 31, 1996, based on the above
agreements was as follows:
Investment Advisor ...................... $ 70,854
Administrative Services ................. 85,134
Transfer Agent .......................... 22,830
--------
$178,818
========
The Trust has a Distribution Agreement with ACIS, which is responsible for
promoting sales of and distributing the Fund's shares. This Agreement was
formerly with Benham Distributors, Inc.
16 Notes to Financial Statements American Century Investments
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
3. Investment Transactions
The aggregate cost of investment securities purchased (excluding short-term
investments) for the year ended December 31, 1996, totaled $564,530,121.
Proceeds from investment securities sold (excluding short-term investments)
totaled $552,650,648. On December 31, 1996, accumulated net unrealized
appreciation on investments, based on the aggregate cost of investments of
$238,521,421 for federal income tax purposes, was $7,905,138, consisting of
unrealized appreciation of $9,381,142 and unrealized depreciation of $1,476,004.
- --------------------------------------------------------------------------------
4. Expense Offset Arrangements
The Fund's Statement of Operations reflects custodian earnings credits.
This amount is used to offset the custodian 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 ended December 31, 1995, the ratios of operating expenses to
average net assets shown in the Financial Highlights are calculated as
if these credits had not been earned.
- --------------------------------------------------------------------------------
5. Subsequent Events
<TABLE>
The following name changes became effective January 1, 1997:
NEW NAMES FORMER NAMES
<S> <C> <C>
Fund's Issuer: American Century International Bond Funds Benham International Funds
Fund: American Century - Benham European Government Bond Fund Benham European Government Bond Fund
Parent Company: American Century Companies, Inc. Twentieth Century Companies, Inc.
Distributor: American Century Investment Services, Inc. Twentieth Century Securities, Inc.
Transfer Agent: American Century Services Corporation Twentieth Century Services, Inc.
</TABLE>
Annual Report Notes to Financial Statements 17
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
For a Share Outstanding Throughout the Years Ended December 31 (except as noted)
1996 1995 1994 1993 1992(1)
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Period ............................. $11.95 $10.36 $10.82 $10.01 $10.00
------ ------ ------ ------ ------
Income from Investment Operations
Net Investment Income ......................... .69 .61 .78 .69 .79
Net Realized and Unrealized Gain (Loss)
on Investment Transactions .................... .03 1.88 (.63) .49 .38
------ ------ ------ ------ ------
Total from
Investment Operations ......................... .72 2.49 .15 1.18 1.17
------ ------ ------ ------ ------
Distributions
From Net
Investment Income ............................. (.71) (.90) (.60) (.37) (.66)
In Excess of Net Investment Income ............ (.02) -- -- -- --
From Net Realized Gains on
Investment Transactions ....................... (.15) -- (.01) -- (.50)
------ ------ ------ ------ ------
Total Distributions ........................... (.88) (.90) (.61) (.37) (1.16)
------ ------ ------ ------ ------
Net Asset Value, End of Period .................. $11.79 $11.95 $10.36 $10.82 $10.01
====== ====== ====== ====== ======
Total Return(2) ............................... 6.38% 24.40% 1.52% 11.79% 7.08%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets(3) ...................... .83% .82% .86% .85% .51%(4)
Ratio of Net Investment Income
to Average Net Assets. ........................ 5.48% 6.14% 6.09% 6.27% 7.59%(4)
Portfolio Turnover Rate ....................... 242% 167% 166% 310% 252%
Net Assets, End
of Period (in thousands) ...................... $252,456 $252,247 $194,301 $355,615 $337,043
(1) January 7, 1992 (Inception) to December 31, 1992.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(3) The ratios for the periods subsequent to December 31, 1994, include expenses
paid through expense offset arrangements.
(4) Annualized
</TABLE>
See Notes to Financial Statements
18 Financial Highlights American Century Investments
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders
American Century International Bond Funds:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investment securities, of American Century-Benham
European Government Bond Fund (a series of American Century International Bond
Funds) (the Trust) as of December 31, 1996, the related statement of operations
for the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the periods presented. 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, 1996, 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 American Century-Benham European Government Bond Fund (a series of
American Century International Bond Funds) as of December 31, 1996, 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 Marwick LLP
Kansas City, Missouri
February 7, 1997
Annual Report Independent Auditors' Report 19
IMPORTANT NOTICE FOR
ALL IRA AND 403(b) SHAREHOLDERS
As required by law, any distributions you receive from an IRA and certain
403(b) distributions [not eligible for rollover to an IRA or to another 403(b)]
are subject to federal income tax withholding at the rate of 10% of the total
amount withdrawn, unless you elect not to have withholding apply. If you don't
want us to withhold on this amount, you may send us a written notice not to have
the federal income tax withheld. Your written notice is valid for six months
from the date of receipt at American Century. Even if you plan to roll over the
amount you withdraw to another tax-deferred account, the withholding rate still
applies to the withdrawn amount, unless we have received a written notice not to
withhold federal income tax within six months prior to the withdrawal.
When you plan to withdraw, you may make your election by completing our
Conversions/ Redemptions form or an IRS Form W-4P. Call American Century for
either form. Your written election is valid for only six months from the date of
receipt at American Century. You may revoke your election at any time by sending
a written notice to us.
Remember, even if you elect not to have income tax withheld, you are liable
for paying income tax on the taxable portion of your withdrawal. If you elect
not to have income tax withheld or you don't have enough income tax withheld,
you may be responsible for payment of estimated tax. You may incur penalties
under the estimated tax rules if your withholding and estimated tax payments are
not sufficient.
20 Important Notice American Century Investments
NOTES
Annual Report Notes 21
NOTES
22 Notes American Century Investments
NOTES
Annual Report Notes 23
BACKGROUND INFORMATION
Investment Philosophy & Policies
American Century Investments offers 41 fixed-income funds, ranging from money
market funds to long-term bond funds and including both taxable and tax-exempt
funds.
Benham European Government Bond 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.
There can be no assurance that the fund will achieve its investment
objective.
Comparative Indices
The index listed below is used in the report to serve as a fund performance
comparison. It is not an investment product available for purchase.
The J.P. Morgan ECU-Weighted European Index comprises the weighted return,
expressed in ECUs, of Belgium, Denmark, France, Germany, Italy, the Netherlands,
Spain, Sweden and the United Kingdom.
Lipper Rankings
Lipper Analytical Services, Inc. (Lipper) is an independent mutual fund
ranking service. Rankings are based on average annual returns for each fund in
the appropriate Lipper category for the periods indicated. For Benham European
Government Bond, the Lipper category is International Income Funds, which
includes funds that invest primarily in U.S. dollar and non-U.S. dollar debt
securities of issuers located in at least three countries (excluding the United
States, except in periods of market weakness).
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 $206 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 up to 25%
of its assets in U.S. securities when the U.S. dollar appears to be
strengthening.
The fund is not intended to serve as a complete investment program by itself.
PORTFOLIO MANAGEMENT TEAM
Senior Vice President and Portfolio Manager Jeff Tyler
Vice President and Portfolio Manager,
J.P. Morgan Investment Management, Inc. Brian Morriss
24 Background Information American Century Investments
GLOSSARY
How Currency Returns Affect the Fund
For U.S. investors, the total returns from European government bonds include
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 or 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--the European currencies buy fewer dollars.
Returns
Total Return figures show the overall 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 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 returns smooth out
variations in a fund's return; they are not the same as year-by-year results.
For fiscal year-by-year total returns, please refer to the "Financial
Highlights" on page 18.
Investment Terms
Basis Point--a basis point equals one one-hundredth of a percentage point (or
0.01%). Therefore, 100 basis points equals one percentage point (or 1%).
Coupon--the stated interest rate of a security.
Hedge, Hedging--a strategy used to offset or eliminate fluctuations in the
value of a security or currency. For example, Benham European Government Bond
offers better returns to 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 into U.S. dollars to offset currency losses.
Statistical Terminology
Number of Issues--the number of different securities held by a fund on a
given date.
Weighted Average Maturity (WAM)--a measurement of the sensitivity of a
fixed-income portfolio to interest rate changes, indicating the average time
until the principal in the portfolio is expected to be repaid, weighted by
dollar amount. The longer the WAM, the more interest rate exposure and
sensitivity the portfolio has.
Duration--a measure of the sensitivity of a fixed-income portfolio to changes
in interest rates. As the duration of a portfolio increases, the impact of a
change in interest rates on the value of the portfolio also increases.
Expense Ratio--the operating expenses of the fund, expressed as a percentage
of average net assets. Shareholders pay an annual fee to the investment advisor
for investment advisory and management services. (The expenses and fees are
deducted from fund income, not from each shareholder.) The annual fee has a
contractual expense limit guarantee based on the terms of the Investment
Advisory Agreement. (See Note 2 in the Notes to Financial Statements.)
Annual Report Glossary 25
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American
Century(sm)
P.O. Box 419200
Kansas City, Missouri
64141-6200
Person-to-Person Assistance:
1-800-345-2021 or 816-531-5575
Automated Information Line:
1-800-345-8765
Telecommunications Device for the Deaf:
1-800-634-4113 or 816-753-1865
Fax: 816-340-7962
Internet: www.americancentury.com
American Century International Bond Funds
Investment Manager
Benham Management Corporation
This report and the statements it contains are submitted for the general
information of our shareholders. The report is not authorized for distribution
to prospective investors unless preceded or accompanied by an effective
prospectus.
American Century Investment Services, Inc.
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