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THE STRONG
ASSET ALLOCATION FUND II
SEMI-ANNUAL REPORT o JUNE 30, 1996
[PHOTO OF MOTHER & DAUGHTER]
[pie chart]
THE FUND SEEKS HIGH TOTAL RETURN
CONSISTENT WITH REASONABLE RISK
OVER THE LONG TERM
[STRONG FUNDS LOGO]
STRONG FUNDS
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THE STRONG
ASSET ALLOCATION FUND II
SEMI-ANNUAL REPORT o JUNE 30, 1996
TABLE OF CONTENTS
INVESTMENT REVIEWS
The Strong Asset Allocation Fund II..................2
FINANCIAL INFORMATION
Schedule of Investments in Securities................4
Statement of Operations..............................4
Statement of Assets and Liabilities..................5
Statement of Changes in Net Assets...................5
Notes to Financial Statements........................6
FINANCIAL HIGHLIGHTS........................................8
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The Strong ASSET ALLOCATION FUND II
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The Strong Asset Allocation Fund II seeks high total return consistent with
reasonable risk over the long term. The Fund allocates its assets globally among
a diversified portfolio of stocks, bonds, and cash.
THE FUND'S BENCHMARK ALLOCATIONS ADJUSTED JULY 1 TO INCREASE EQUITY HOLDINGS
To align the Fund more closely with other funds in its class, and to provide
shareholders with higher return potential, the Board of Directors of the Asset
Allocation Fund II authorized a modification to the Fund to take effect July 1,
1996.
Overall, the Fund's normal benchmark allocations will be changed to allow for a
larger weighting in equities. Currently, the Fund's benchmark allocations to
stocks, bonds and cash are 40%, 40%, and 20%, respectively. The new benchmark
allocations will be 60%, 35%, and 5%. Specifically, the Fund's allowable maximum
and minimum ranges will be modified as follows:
CURRENT RANGES AFTER
RANGES MODIFICATION
...............................................
Stocks 10%-60% 30%-70%
Bonds 20%-60% 20%-70%
Cash 0%-70% 0%-50%
...............................................
This expanded ability to invest in stocks will enhance the Fund's total return
potential versus its previous 40/40/20 benchmark allocation. Of course, this
change may increase the Fund's share price volatility compared to its previous,
more conservative benchmark. However, we expect our greater flexibility in
managing the Fund will enable us to provide shareholders with higher returns
over time while helping to keep potential risk within reasonable limits.
THE FUND HAS PERFORMED WELL SO FAR IN 1996
The Fund performed well over the first half of the year and posted a total
return of 4.90% for the six-month period ended 6-30-96. The Fund's return was in
line with the Lipper Flexible Portfolio Index*, which gained 5.52% over the same
period. 1
BOND PRICES FELL AS STOCKS CONTINUED THEIR UPWARD CLIMB
The bond market experienced some volatility over the last six months as
conflicting data sent mixed signals on the direction of the economy. Early in
the year, the consensus view was for weak economic growth in the U.S., with some
economists even projecting a recession in the first half of the year. The
Federal Reserve Board continued the easing it began last year, and cut the Fed
Funds target rate to 5.25% on January 31. The market prepared itself for further
easing and priced additional rate cuts into Treasury yields.
But the release of stronger-than-expected employment numbers in February and
subsequent months shattered this pessimistic view of the economy. Bond yields
staged an abrupt reversal, which resulted in higher yields across all
maturities. Long-term interest rates rose, as measured by the 30-year U.S.
Treasury bond, whose yield climbed nearly one percentage point over the
six-month period, to end June at 6.87%. Shorter-term rates were also higher.
2
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The stock market continued its strong performance through May--although not at
1995's torrid pace--but slowed considerably in June. The Dow Jones Industrial
Average posted a total return of 11.71% for the six months ended 6-30-96, and
the broader-based S&P 500 gained 10.10%. Equities were supported during this
period by heavy money flows into mutual funds, and a net reduction in the supply
of equities resulting from mergers, acquisitions and company stock buybacks.*
OUR OUTLOOK IS MIXED
We believe that, at some point in the next three to six months, the Federal
Reserve Board will opt to raise short-term interest rates again. The economy
continues to show signs of robust growth, and the stock market has begun to
display some signs of excess speculation. An interest-rate hike in the near-
term would be a prudent way for the Fed to head off overheating in 1997. This,
however, could make investing in equities a challenging proposition.
Going forward, it is our intention to maintain an asset allocation of
approximately 60% stocks and 40% bonds in the Fund. From this position, we will
concentrate on beating the benchmarks within the component portfolios.
Overweighting or underweighting an asset class will occur in situations where we
perceive large discrepancies in relative values.
Sincerely,
/s/ Bradley C. Tank
Bradley C. Tank
Lead Portfolio Manager
[PHOTO OF BRADLEY C. TANK]
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GROWTH OF AN ASSUMED $10,000 INVESTMENT TOTAL RETURNS 1
from 11-30-95 to 6-30-96 as of 6-30-96
The Strong Asset 6-MONTH
Allocation Fund II S&P 500 Index* 4.90%
11-95 10,000 10,000
12-95 10,019 10,192 SINCE INCEPTION
1-96 10,250 10,539 (on 11-30-95)
2-96 10,200 10,637 5.11%
3-96 10,249 10,739
4-96 10,269 10,898
5-96 10,390 11,179
6-96 10,511 11,222
This graph, prepared in accordance with SEC regulations, compares a $10,000
investment in the Fund, made at the Fund's inception, with a similar investment
in the Standard & Poor's 500 Stock Index ("S&P 500"). Performance is historical
and does not represent future results. Investment returns and principal value
vary, and you may have a gain or loss when you sell shares. Results include the
reinvestment of all dividends and capital gains distributions.
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* The Lipper Flexible Portfolio Index is based on the equally-weighted
performance, adjusted for capital gains distributions and income dividends,
of the 30 largest flexible portfolio funds in this Lipper category. The S&P
500 is an unmanaged index generally representative of the U.S. stock
market. Source of the Lipper index data is Lipper Analytical Services, Inc.
Source of the S&P index data is Micropal.
1 Total returns measure change in the value of an investment in the Fund,
assuming reinvestment of all dividends and capital gains, and are not
annualized. The Fund's return includes the effect of deducting the Fund's
expenses, but does not include charges and expenses attributable to any
particular insurance product. Excluding such fees and expenses from the
Fund's return quotations has the effect of increasing the performance
quoted.
3
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SCHEDULE OF INVESTMENTS IN SECURITIES June 30, 1996 (Unaudited)
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PRINCIPAL VALUE
AMOUNT (NOTE 2)
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UNITED STATES GOVERNMENT AND
AGENCY ISSUES 8.9%
United States Treasury Notes, 5.875%,
Due 11/15/05 (COST $50,591) $ 50,000 $ 47,109
SHORT-TERM INVESTMENTS (a) 86.5%
COMMERCIAL PAPER 7.0%
INTEREST BEARING, DUE UPON DEMAND
General Mills, Inc., 5.14% 18,200 18,200
Wisconsin Electric Power Company, 5.19% 18,480 18,480
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36,680
UNITED STATES GOVERNMENT ISSUES 79.5%
United States Treasury Bills:
Due 7/11/96 (b) 10,000 9,986
Due 8/01/96 395,000 393,415
Due 9/12/96 (b) 15,000 14,848
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418,249
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TOTAL SHORT-TERM INVESTMENTS
(COST $454,815) 454,929
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TOTAL INVESTMENTS IN SECURITIES
(COST $505,406) 95.4% 502,038
Other Assets and Liabilities, Net 4.6% 23,980
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NET ASSETS 100.0% $526,018
========
FUTURES
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UNDERLYING
EXPIRATION FACE AMOUNT UNREALIZED
DATE AT VALUE APPRECIATION
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Purchased:
1 Five-Year U.S. Treasury Note 9/96 $105,750 $ 875
1 S & P 500 9/96 338,400 4,212
PERCENTAGE OF
INDUSTRY DIVERSIFICATION NET ASSETS
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United States Government & Agency ..................... 88.4%
Utilities ............................................. 3.5
Food .................................................. 3.5
Other Assets and Liabilities, Net ..................... 4.6
---
Total 100.0%
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LEGEND
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(a) Short-Term Investments include any security which has a maturity of less
than one year.
(b) Security pledged to cover margin requirements for futures contracts.
Percentages are stated as a percent of net assets.
STATEMENT OF OPERATIONS
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For the Six Months Ended June 30, 1996 (Unaudited)
INTEREST INCOME $12,850
EXPENSES:
Investment Advisory Fees 2,174
Custodian Fees 1,009
Shareholder Servicing Costs 256
Reports to Shareholders 234
Other 457
---
Total Expenses 4,130
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NET INVESTMENT INCOME 8,720
REALIZED AND UNREALIZED GAIN (LOSS):
Net Realized Gain on Futures Contracts 13,326
Change in Unrealized Appreciation/Depreciation on:
Investments (3,895)
Futures Contracts 6,678
-----
NET GAIN 16,109
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $24,829
=======
4
See notes to financial statements.
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STATEMENT OF ASSETS AND LIABILITIES
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June 30, 1996 (Unaudited)
ASSETS:
Investments in Securities, at Value (Cost of $505,406) $ 502,038
Interest Receivable 568
Other Assets 24,243
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Total Assets 526,849
ACCRUED OPERATING EXPENSES AND OTHER LIABILITIES 831
---
NET ASSETS $ 526,018
============
Capital Shares
Authorized 300,000,000
Outstanding 51,047
NET ASSET VALUE PER SHARE $ 10.30
============
STATEMENT OF CHANGES IN NET ASSETS
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<CAPTION>
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For the Six Months Ended June 30, 1996 (Unaudited) and the Period Ended December 31, 1995 (Note 1)
JUNE 30, 1996 DEC. 31, 1995
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OPERATIONS:
<S> <C> <C>
Net Investment Income $ 8,720 $ 1,896
Net Realized Gain 13,326 63
Change in Unrealized Appreciation/Depreciation 2,783 (1,065)
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Increase in Net Assets Resulting from Operations 24,829 894
CAPITAL SHARE TRANSACTIONS 10,717 500,000
DISTRIBUTIONS:
From Net Investment Income (8,449) (1,896)
In Excess of Net Investment Income -- (77)
----- ------
TOTAL INCREASE IN NET ASSETS 27,097 498,921
NET ASSETS:
Beginning of Period 498,921 --
-------- --------
End of Period $526,018 $498,921
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5
See notes to financial statements.
</TABLE>
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NOTES TO FINANCIAL STATEMENTS
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June 30, 1996 (Unaudited)
1. ORGANIZATION
The Strong Asset Allocation Fund II commenced operations on November 30,
1995, and is a diversified series of the Strong Variable Insurance Funds,
Inc., an open-end management investment company registered under the
Investment Company Act of 1940.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements.
(A) Security Valuation-- Portfolio securities traded primarily on a
principal securities exchange are valued at the last reported sales
price or the mean between 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 the last
reported sales price. Debt securities not traded on a principal
securities exchange are valued through valuation obtained from a
commercial pricing service, otherwise sale or bid prices are used.
Securities for which market quotations are not readily available are
valued at fair value as determined in good faith under consistently
applied procedures established by and under the general supervision of
the Board of Directors. Securities which are purchased within 60 days
of their stated maturity are valued at amortized cost, which
approximates current value.
The Fund may own certain investment securities which are restricted as
to resale. These securities are valued after giving due consideration
to pertinent factors, including recent private sales, market
conditions and the issuer's financial performance. The Fund generally
bears the costs, if any, associated with the disposition of restricted
securities.
(B) Federal Income and Excise Taxes and Distributions to Shareholders --
It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its taxable income to its
shareholders in a manner which results in no tax cost to the Fund.
Therefore, no Federal income or excise tax provision is required.
The character of distributions made during the year from net
investment income or net realized gains may differ from the
characterization for Federal income tax purposes due to differences in
the recognition of income and expense items for financial statement
and tax purposes. Where appropriate, reclassifications between net
asset accounts are made for such differences that are permanent in
nature.
(C) Realized Gains and Losses on Investment Transactions -- Gains or
losses realized on investment transactions are determined by comparing
the identified cost of the security lot sold with the net sales
proceeds.
(D) Futures -- Upon entering into a futures contract, the Fund pledges to
the broker cash, U.S. government securities or other liquid,
high-grade debt obligations equal to the minimum "initial margin"
requirements of the exchange. The Fund also receives from or pays to
the broker an amount of cash equal to the daily fluctuation in the
value of the contract. Such receipts or payments are known as
"variation margin," and are recorded as unrealized gains or losses.
When the futures contract is closed, a realized gain or loss is
recorded 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.
(E) Options -- Premiums received by the Fund upon writing put or call
options are recorded as an asset with a corresponding liability which
is subsequently adjusted to the current market value of the option.
When an option expires, is exercised, or is closed, the Fund realizes
a gain or loss, and the liability is eliminated. The Fund continues to
bear the risk of adverse movements in the price of the underlying
asset during the period of the option, although any potential loss
during the period would be reduced by the amount of the option premium
received.
(F) Foreign Currency Translation -- Investment securities and other assets
and liabilities initially expressed in foreign currencies are
converted to U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investment securities and income are converted to
U.S. dollars based upon currency exchange rates prevailing on the
respective dates of such transactions. The effect of changes in
foreign exchange rates on realized and unrealized security gains or
losses is reflected as a component of such gains or losses.
(G) Forward Foreign Currency Exchange Contracts -- Forward foreign
currency exchange contracts are valued at the forward rate and are
marked-to-market daily. The change in market value is recorded as an
unrealized gain or loss. When the contract is closed, the Fund records
an exchange gain or loss 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.
6
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(H) Additional Investment Risk -- The use of futures contracts, options,
foreign denominated assets and forward foreign currency exchange
contracts for purposes of hedging the Fund's investment portfolio
involves, to varying degrees, elements of market risk in excess of the
amount recognized in the statement of assets and liabilities. The
predominant risk with futures contracts is an imperfect correlation
between the value of the contracts and the underlying securities.
Foreign denominated assets and forward foreign currency exchange
contracts may involve greater risks than domestic transactions,
including currency, political and economic, regulatory and market
risks.
(I) Other -- Investment security transactions are recorded as of the trade
date. Dividend income and distributions to shareholders are recorded
on the ex-dividend date. Interest income is recorded on the accrual
basis and includes amortization of premium and discounts.
3. NET ASSETS
Net assets as of June 30, 1996 were as follows:
Capital Stock $510,717
Undistributed Net Investment Income 193
Undistributed Net Realized Gain 13,389
Net Unrealized Appreciation 1,719
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$526,018
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4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund for the six months ended June 30, 1996
and the period ended December 31, 1995 were as follows :
1996 1995
---- ----
SHARES DOLLARS SHARES DOLLARS
------ ------- ------ -------
Shares Sold 14,052 $144,821 50,000 $500,000
Dividends Reinvested 113 1,158 -- --
Shares Redeemed (13,118) (135,262) -- --
------- -------- ------ --------
1,047 $ 10,717 50,000 $500,000
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5. RELATED PARTY TRANSACTIONS
Strong Capital Management, Inc. (the "Advisor"), with whom certain officers
and directors of the Fund are affiliated, provides investment advisory
services to the Fund. Investment advisory fees, which are established by
terms of the Advisory Agreement, are based on an annualized rate of 0.85%
of the first $35 million and 0.80% thereafter of the average daily net
assets of the Fund. Advisory fees are subject to reimbursement by the
Advisor if the Fund's operating expenses exceed certain levels.
The amount payable to the Advisor at June 30, 1996 and unaffiliated
directors' fees for 1996 were $346 and $750, respectively.
6. INVESTMENT TRANSACTIONS
There were no purchases or sales of long-term securities for the six months
ended June 30, 1996.
7. INCOME TAX INFORMATION
At June 30, 1996, the investment cost and gross unrealized appreciation and
depreciation on investments for Federal income tax purposes were as
follows:
Aggregate Investment Cost $505,406
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Aggregate Unrealized:
Appreciation $ ----
Depreciation (3,368)
------
($ 3,368)
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7
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FINANCIAL HIGHLIGHTS
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The following presents information relating to a share of capital stock of the
Fund, outstanding for the entire period.
1996(a) 1995(b)
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NET ASSET VALUE, BEGINNING OF PERIOD $ 9.98 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net Investment Income 0.17 0.04
Net Realized and Unrealized Gains
(Losses) on Investments 0.32 (0.02)
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TOTAL FROM INVESTMENT OPERATIONS 0.49 0.02
LESS DISTRIBUTIONS
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From Net Investment Income (0.17) (0.04)
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TOTAL DISTRIBUTIONS (0.17) (0.04)
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NET ASSET VALUE, END OF PERIOD $ 10.30 $ 9.98
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Total Return +4.9% +0.2%
Net Assets, End of Period (In Thousands) $ 526 $ 499
Ratio of Expenses to Average Net Assets 1.6%* 1.6%*
Ratio of Net Investment Income to Average Net Assets 3.4%* 4.3%*
Portfolio Turnover Rate 0.0% 0.0%
Average Commission Rate Paid(c) $0.0000
* Calculated on an annualized basis.
(a) For the six months ended June 30, 1996 (Unaudited). Total return and
portfolio turnover rate are not annualized.
(b) Inception date is November 30, 1995. Total return and portfolio turnover
rate are not annualized.
(c) Disclosure required, effective for reporting periods beginning after
September 1, 1995.
8
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[STRONG FUNDS LOGO]
STRONG FUNDS DISTRIBUTORS, INC.
P.O. Box 2936
Milwaukee, Wisconsin 53201
http://www.strong-funds.com
Strong Funds offered by prospectus only
3250G960
