SMITH BREEDEN MARKET TRACKING FUND
SCHEDULE OF INVESTMENTS (UNAUDITED) SEPTEMBER 30, 1995
Market
Face Amount Security Value
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 89.27%
FEDERAL HOME LOAN MORTGAGE CORPORATION - 8.55% *
FHLMC:
$168,269 9.50%, due 7/1/02 ............................. $176,707
62,071 12.50%, due 2/1/14 ............................ 69,658
TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION
(Cost $245,033).............................. 246,365
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 58.94% *
FNMA:
156,482 12.50%, due 9/1/12 ............................ 177,192
111,866 13.50%, due 11/1/14 to 2/1/15 ................. 127,720
FNMA ARM:
400,000 6.00%, due 9/1/25 ............................. 408,281
898,382 7.77%, due 9/1/18 ............................. 924,242
60,123 7.78%, due 12/1/26 ............................ 61,785
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(Cost $1,692,018)............................ 1,699,220
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 17.67% *
GNMA ARM:
345,723 6.75%, due 2/20/16 ............................ 351,868
154,121 7.38%, due 4/20/16 ............................ 157,509
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(Cost $502,604).............................. 509,377
U.S. GOVERNMENT OBLIGATIONS - 4.11%
U.S. TREASURY BILL **
120,000 5.25%, due 12/28/95 ........................... 118,483
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $118,461) ............................. 118,483
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost $2,558,116)............................ 2,573,445
EURODOLLAR PUT OPTIONS - 0.02%
Contracts
5 Expires 12/95, Strike Price $92.25 ............ 125
5 Expires 12/95, Strike Price $92.50 ............ 125
5 Expires 12/95, Strike Price $93.75 ............ 375
TOTAL EURODOLLAR PUT OPTIONS (Cost $11,452).... 625
TOTAL INVESTMENTS (Cost $2,569,568) - 89.29% .. 2,574,070
CASH AND OTHER ASSETS LESS LIABILITIES -
10.71% ...................................... 308,688
NET ASSETS - 100.00% .......................... $2,882,758
* Mortgage backed obligations are subject to principal paydowns as a
result of prepayments or refinancings of the underlying mortgage loans.
As a result, the average life may be substantially less than the
original maturity. The interest rate shown is the rate in effect at
September 30, 1995. ARMs have coupon rates which adjust periodically.
The adjusted rate is determined by adding a spread to a specified index.
** The interest rate shown is the discount rate paid at the time of
purchase by the Fund.
Portfolio Abbreviations:
ARM - Adjustable-Rate Mortgage
FHLMC - Federal Home Loan Mortgage Corporation
FNMA - Federal National Mortgage Association
GNMA - Government National Mortgage Association
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN MARKET TRACKING FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
(Unaudited)
ASSETS:
Investments at market value
(identified cost $2,569,568)(Note 1)............... $2,574,070
Cash.................................................. 88,408
Receivables:
Interest........................................... 19,781
Variation margin on futures contracts (Note 2)..... 4,064
Maturities......................................... 3,529
Securities sold.................................... 192,313
Prepaid expenses...................................... 1,601
Deferred organization expenses (Note 1)............... 50,805
TOTAL ASSETS..................................... 2,934,571
LIABILITIES:
Accrued expenses...................................... 1,391
Due to adviser (Note 3)............................... 50,422
TOTAL LIABILITIES................................ 51,813
NET ASSETS:
(Applicable to outstanding shares of 226,727;
unlimited number of shares of beneficial
interest authorized; no stated par)................ $2,882,758
Net asset value, offering price and redemption
price per share ($2,882,758 / 226,727)............. $12.71
SOURCE OF NET ASSETS:
Paid in capital....................................... $2,414,930
Undistributed net investment income................... 42,064
Accumulated net realized gain on investments.......... 375,674
Net unrealized appreciation of investments,
equity swap and futures contracts.................. 50,090
NET ASSETS....................................... $2,882,758
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN MARKET TRACKING FUND
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995
(Unaudited)
INVESTMENT INCOME:
Interest and discount earned, net of
premium amortization (Note 1)..................... $92,024
EXPENSES:
Accounting and pricing services fees................ 10,417
Amortization of organization expenses (Note 1)...... 11,726
Transfer agent fees................................. 10,330
Audit fees.......................................... 200
Legal fees.......................................... 500
Registration fees................................... 8,335
Custodian fees...................................... 3,531
Advisory fees (Note 3).............................. 8,814
Trustees fees and expenses.......................... 1,439
Insurance expense................................... 1,219
Other............................................... 1,307
TOTAL EXPENSES BEFORE REIMBURSEMENT............. 57,818
Expenses reimbursed by adviser (Note 3)......... (46,483)
NET EXPENSES.................................... 11,335
NET INVESTMENT INCOME........................... 80,689
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments.................... 414,170
Change in unrealized appreciation of investments,
equity swap and futures contracts................. (54,839)
Net realized and unrealized gain on
investments, equity swap and futures contracts.... 359,331
Net increase in net assets resulting
from operations...................................$440,020
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN MARKET TRACKING FUND
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995
(Unaudited)
Six Months Ended Year Ended
September 30, 1995 March 31, 1995
(unaudited) (audited)
OPERATIONS:
Net investment income.................... $80,689 $140,115
Net realized gain (loss) on investments.. 414,170 (64,050)
Change in unrealized appreciation of
investments, equity swap and
futures contracts...................... (54,839) 229,458
Net increase in net assets resulting
from operations........................ 440,020 305,523
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income..... (38,625) (104,085)
Dividends in excess of net
investment income...................... - (251)
Distributions from net realized
gains on investments................... - (9,133)
Distributions in excess of net
realized gains on investments.......... - (13,962)
Total distributions...................... (38,625) (127,431)
CAPITAL SHARE TRANSACTIONS:
Shares sold.............................. 561,877 200,709
Shares issued on reinvestment of
distributions.......................... 36,589 120,434
Shares redeemed.......................... (224,449) (152,408)
Increase in net assets resulting
from capital share transactions (a).... 374,017 168,735
TOTAL INCREASE IN NET ASSETS......... 775,412 346,827
NET ASSETS:
Beginning of period...................... 2,107,346 1,760,519
End of period............................ $2,882,758 $2,107,346
(a) Transactions in capital shares
were as follows:
Shares sold......................... 48,288 19,300
Shares issued on reinvestment
of distributions.................. 2,974 11,593
Shares redeemed..................... (19,017) (14,689)
Net increase........................ 32,245 16,204
Beginning balance .................. 194,482 178,278
Ending balance...................... 226,727 194,482
The accompanying notes are an integral part of these financial statements.
SMITH BREEDEN MARKET TRACKING FUND
FINANCIAL HIGHLIGHTS
The following average per share data, ratios and supplemental information
has been derived from information provided in the financial statements.
Six Months Year Ended Year Ended Period
Ended March 31, March 31, Ended
September 30, 1995(1) 1995 1994 March 31,1993*
Net Asset Value,
Beginning of Period..... $10.84 $9.88 $10.85 $10.00
Income From Investment
Operations
Net investment income.... 0.366 0.568 0.476 0.355
Net realized and
unrealized gain (loss)on
investments, equity
swaps and futures
contracts.............. 1.684 1.081 (0.216) 1.281
Total from investment
operations........... 2.050 1.649 0.260 1.636
Less Distributions
Dividends from net
investment income...... (0.180) (0.568) (0.472) (0.311)
Dividends in excess of
net investment income.. - (0.001) - -
Distributions from net
realized gains on
investments............ - (0.047) (0.701) (0.420)
Distributions in excess
of net realized gains
on investments......... - (0.073) (0.057) (0.055)
Total distributions.. (0.180) (0.689) (1.230) (0.786)
Net Asset Value,
End of Period........... $12.71 $10.84 $9.88 $10.85
Total Return............... 41.55%** 17.18% 2.19% 22.59%**
Ratios/Supplemental Data
Net assets, end of
period................. $2,882,758 $2,107,346 $1,760,519 $903,846
Ratio of expenses to
average net assets(2).. 0.90%** 0.90% 0.90% 0.57%**
Ratio of net investment
income to average net
assets (3)............. 6.52%** 7.44% 8.02% 5.28%**
Portfolio turnover rate.. 143% 120% 119% 271%
______________________
(1) Unaudited
(2) The annualized ratio of expenses to average net assets prior to
reimbursement of expenses by the Adviser was 7.75%, 7.08%, and
28.48% for the years ended March 31, 1995, March 31, 1994, and the
period ended March 31, 1993, respectively, and 4.65% annualized for
the six months ending September 30, 1995.
(3) The annualized ratio of net investment income to average net assets
prior to reimbursement of expenses by the Adviser was 0.59%, 1.84%,
and (22.63%) for the years ended March 31, 1995, March 31, 1994, and
the period ended March 31, 1993, respectively, and 2.74% annualized
for the six months ending September 30, 1995.
* The Smith Breeden Market Tracking Fund commenced operations
June 30, 1992.
** Annualized
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Breeden Market Tracking Fund (the "Fund") is a series of
Smith Breeden Trust (the "Trust"), an open-end, diversified
management investment company registered under the Investment
Company Act of 1940, as amended. The following is a summary of
significant accounting policies consistently followed by the
Fund.
A. Security Valuation: Portfolio securities are valued at
current market value provided by a pricing service or by a bank
or broker/dealer experienced in such matters, when over-
the-counter market quotations are readily available. Securities
and other assets for which market prices are not readily
available are valued at fair market value as determined in
accordance with procedures approved by the Board of Trustees.
B. Distributions and Taxes: The Fund intends to continue to
qualify for and elect the special tax treatment afforded
regulated investment companies under Subchapter M of the
Internal Revenue Code, thereby relieving the Fund of federal
income taxes. To so qualify, the Fund intends to distribute
substantially all of its net investment income and net realized
capital gains, if any, less any available capital loss carry
forward. As of March 31, 1995, the Fund had no net capital loss
carry forward.
C. Repurchase Agreements: The Fund may enter into repurchase
agreements with member banks of the Federal Reserve System having
total assets in excess of $500 million and securities dealers,
provided that such banks or dealers meet the credit guidelines of
the Fund's Board of Trustees. In a repurchase agreement, the Fund
acquires securities from a third party with the commitment that
they will be repurchased by the seller at a fixed price on an
agreed upon date. The Fund's custodian maintains control or
custody of these securities which collateralize the repurchase
agreements until maturity of the repurchase agreements. The
value of the collateral is monitored daily, and if necessary,
additional collateral is received to ensure that the market value
of the underlying assets remains sufficient to protect the Fund
in the event of the seller's default. However, in the event of
default or bankruptcy of the seller, the Fund's right to the
collateral may be subject to legal proceedings.
D. Reverse Repurchase Agreements: A reverse repurchase
agreement involves the sale by the Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same
assets at a later date at a fixed price. The Fund will maintain
a segregated account with its custodian, which will be marked to
market daily, consisting of cash, U.S. Government securities or
other liquid high-grade debt obligations equal in value to its
obligations under reverse repurchase agreements. In the event
the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, the Fund's use
of the proceeds of the agreement may be restricted pending a
determination by the other party, or its trustee or receiver
whether to enforce the Fund's obligation to repurchase the
securities.
E. Determination Of Gains Or Losses On Sales Of Securities:
Gains or losses on the sale of securities are calculated for
accounting and tax purposes on the identified cost basis.
F. Deferred Organization Expenses: Deferred organization
expenses are being amortized on a straight-line basis over five
years.
G. Securities Transactions and Investment Income: Interest
income is accrued daily on both long-term bonds and short-term
investments. Interest income also includes net amortization from
the purchase of fixed-income securities. Transactions are
recorded on the first business day following the trade date.
Realized gains and losses from security transactions are
determined and accounted for on the basis of identified cost.
2. FINANCIAL INSTRUMENTS
A. Derivative Financial Instruments Held or Issued for Purposes
other than Trading: The Fund uses interest rate futures contracts
for risk management purposes in order to manage the Fund's
interest-rate risk relative to its benchmark. Upon entering into
a futures contract, the Fund is required to deposit either cash
or securities in an amount (initial margin) equal to a certain
percentage of the contract value. Subsequent payments (variation
margin) are made or received by the Fund each day. The variation
margin payments are equal to the daily changes in the contract
value and are recorded as unrealized gains or losses. The Fund
recognizes a realized gain or loss when the contract is closed or
expires equal to the difference between the value of the contract
at the time it was opened and the value at the time it was
closed.
Futures contracts involve costs and may result in losses. The
effective use of futures strategies depends on the Fund's ability
to terminate futures positions at times when the Fund's
investment adviser deems it desirable to do so. The use of
futures also involves the risk of imperfect correlation among
movements in the values of the securities underlying the
futures purchased and sold by the Fund, of the futures contract
itself, and of the securities which are the subject of a hedge.
The Fund had the following open futures contracts, held for
purposes other than trading, as of September 30, 1995:
Principal Expiration Unrealized
Type Amount Position Month (Loss)
Eurodollar $3,000,000 Long December, 1995 $(1,438)
Eurodollar $3,000,000 Short September, 1996 (1,039)
Eurodollar $3,000,000 Short September, 1997 (1,364)
Eurodollar $3,000,000 Short September, 1998 (5,838)
Eurodollar $2,000,000 Short September, 1999 (4,958)
$ (14,637)
B. Derivative Financial Instruments Held or Issued for Trading
Purposes: The Fund invests in a combination of Equity Swap
Contracts and Futures Contracts on the S&P 500 Index whose return
is expected to track movements in the S&P 500 Index.
The counterparty to an Equity Swap Contract will typically be a
bank, investment banking firm or broker/dealer. The counterparty
will generally agree to pay the Fund the amount, if any, by which
the notional amount of the Equity Swap Contract would have
increased in value had it been invested in the stocks comprising
the S&P 500 Index in proportion to the composition of the Index,
plus the dividends that would have been received on those stocks.
The Fund will agree to pay to the counterparty a floating rate of
interest (typically the London Interbank Offered Rate plus a
spread) on the notional amount of the Equity Swap Contract plus
the amount, if any, by which that notional amount would have
decreased in value had it been invested in such stocks. Payments
under the Equity Swap Contracts may be made at the conclusion of
the contract or periodically during its term. If there is a
default by the counterparty to an Equity Swap Contract, the Fund
will be limited to contractual remedies pursuant to agreements
related to the transaction. There is no assurance that
Equity Swap Contract counterparties will be able to meet their
obligations pursuant to Equity Swap Contracts or that, in the
event of default, the Fund will succeed in pursuing contractual
remedies. The Fund thus assumes the risk that it may be delayed
in, or prevented from, obtaining payments owed to it pursuant to
Equity Swap Contracts. The Fund will closely monitor the credit
quality of Equity Swap Contract counterparties in order
to minimize this risk. The Fund had no outstanding equity swap
contracts as of September 30, 1995.
The Fund had ten open futures contracts on the S&P 500 Index as
of September 30, 1995:
Principal Expiration Unrealized
Type Amount Position Month Gain
S&P 500 $2,922,050 Long December, 1995 $60,225
The aggregate market value of investments pledged to cover margin
requirements for the open positions at September 30, 1995 was
$118,483.
3. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH
AFFILIATES
Smith Breeden Associates, Inc. (the "Adviser"), a registered
investment adviser, provides the Fund with investment management
services. As compensation for these services, the Fund pays the
Adviser a fee computed daily and payable monthly, at an annual
rate equal to 0.70% of the Fund's average daily net asset value.
The Adviser has voluntarily agreed to limit the expenses of the
Fund to 0.90% of the Fund's average daily net assets. This
voluntary agreement may be terminated or modified at any time by
the Adviser in its sole discretion, except that the Adviser has
agreed to limit expenses of the Fund to 0.90% through March 31,
1996. For the period ended September 30, 1995, the Adviser
received fees of $8,814 and reimbursed the Fund $46,483.
Effective August 1, 1994, the Fund adopted a Distribution and
Services Plan (the "Plan") pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plan is to
permit the Adviser to compensate investment dealers and other
persons involved in servicing shareholder accounts for services
provided and expenses incurred in promoting the sale of shares of
the Fund, reducing redemptions, or otherwise maintaining or
improving services provided to shareholders by such dealers or
other persons. The Plan provides for payments by the Adviser,
out of its advisory fee paid to it by the Fund, to dealers and
other persons at the annual rate of up to 0.25% of the Fund's
average net assets subject to the authority the Trustees of the
Fund to reduce the amount of payments permitted under the
Plan or to suspend the Plan for such periods as they may
determine. Subject to these limitations, the amount of such
payments and the purposes for which they are made shall
be determined by the Adviser.
Certain officers and trustees of the Fund are also officers and
directors of the Adviser.
4. INVESTMENT TRANSACTIONS
During the period ended September 30, 1995, purchases and
proceeds from sales of securities, other than short-term
investments, aggregated $3,510,498 and $2,833,533, respectively.
The cost of securities for federal income tax purposes is
$2,569,568. Net unrealized appreciation of investments, equity
swaps and futures contracts consists of:
Gross unrealized appreciation....... $76,438
Gross unrealized depreciation....... (26,348)
Net unrealized appreciation......... $50,090
