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Previous: GREAT AMERICAN RESERVE INSURANCE CO, 497, 1997-11-21 |
Next: PIPER INSTITUTIONAL FUNDS INC, NSAR-B, 1997-11-21 |
ISI
NORTH AMERICAN
GOVERNMENT BOND FUND SHARES
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Edward S. Hyman R. Alan Medaugh
Chairman President
Richard T. Hale Nancy Lazar
Vice Chairman Vice President
James J. Cunnane Carrie L. Butler
Director Vice President
John F. Kroeger Margaret M. Beeler
Director Assistant Vice President
Louis E. Levy Keith C. Reilly
Director Assistant Vice President
Eugene J. McDonald Joseph A. Finelli
Director Treasurer
Rebecca W. Rimel Amy M. Olmert
Director Secretary
Laurie D. Collidge
Assistant Secretary
INVESTMENT OBJECTIVE
An open-end mutual fund designed to provide a high level of current
income, consistent with prudent investment risk, by investing primarily
in a portfolio consisting of fixed-income securities issued or
guaranteed by the governments of the United States, Canada and Mexico.
INVESTMENT ADVISOR
ISI Inc.
717 Fifth Avenue
New York, NY 10022
(800) 955-7175
SHAREHOLDER SERVICING AGENT
Investment Company Capital Corp.
P.O. Box 419426
Kansas City, MO 64141-6426
DISTRIBUTOR
ISI Group Inc.
717 Fifth Avenue
New York, NY 10022
(800) 955-7175
<PAGE>
ISI
International Strategy & Investment
ISI
NORTH AMERICAN
GOVERNMENT BOND
FUND SHARES
(A CLASS OF NORTH AMERICAN GOVERNMENT
BOND FUND, INC.)
[NORTH AMERICAN LOGO]
SEMI-ANNUAL REPORT
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<PAGE>
INVESTMENT ADVISOR'S REPORT
We are pleased to report on the progress of your Fund for the six months
ended September 30, 1997.
The Fund seeks a high level of current income consistent with prudent
investment risk by investing in U.S., Canadian and Mexican government
fixed-income securities. We believe that by investing in all three North
American markets, the Fund can generate a higher yield over the long term than
is possible from a portfolio of only U.S. Treasury securities.
The Fund's total return was 9.39% for the first half of its fiscal year and
12.47% for the past 12 months. The principal reasons for these favorable total
returns were 1) a decline in longer term U.S. interest rates; 2) a decline in
longer term Canadian interest rates; and 3) a general stability in the Mexican
peso. Thirty-year U.S. interest rates fell from 7.10% to 6.40% in the first half
of the Fund's fiscal year and from 6.92% to 6.40% over the past 12 months.
Canadian government interest rates also declined from 7.05% to 6.50% in the
first half of the Fund's fiscal year and from 7.93% to 6.50% over the past 12
months. The Mexican peso rose slightly in value versus the U.S. dollar over the
first half of the Fund's fiscal year, from 12.4 cents per peso to 12.8 cents per
peso, but fell slightly over the past 12 months, from 13.2 cents per peso to
12.8 cents per peso. Since its inception on January 15, 1993, the Fund has had a
cumulative total return of 28.39%. Figures for the Fund's performance assume the
reinvestment of dividends and capital gains distributions and exclude the impact
of any sales charge.
PORTFOLIO MANAGEMENT
Our investment approach is to actively manage the portfolio, adjusting the
Fund's average maturity and percentage weighting across the U.S., Canada and
Mexico as we anticipate changes in the market. The following table illustrates
the structure of the portfolio in these two critical areas over the past 12
months.
PORTFOLIO MIX
(% OF INVESTMENT)
9/30/96 3/31/97 9/30/97
------- ------- -------
U.S. 68.1% 76.2% 73.4%
Canada 14.6 11.0 12.3 (Notation appears here:
Mexico 17.3 12.8 14.3 sum of U.S. and Canada 9/30/97
figures equals 26.6%)
9/30/96 3/31/97 9/30/97
------- ------- -------
U.S.* 12.5 11.7 14.4
Canada 22.4 26.9 26.4
Mexico 0.2 0.1 0.2
- -----------------------------------------------
*Including reserves.
During the past six months, we increased the maturity of the U.S. bonds
from 11.7 years to 14.4 years. The investments in Canada and Mexico increased
from a total of 23.8% of the portfolio to 26.6%. The relative size of Canada and
Mexico in the non-U.S. investments section remained roughly the same at 46%
Canadian and 54% Mexican. For more in-depth coverage of the three markets please
see ISI's Outlook for North America that follows this letter.
We would like to welcome our new investors to the Fund and thank those who
have been with us for some time. We appreciate your confidence.
Sincerely,
/s/ R. Alan Medaugh
- -------------------
R. Alan Medaugh
President
October 17, 1997
1
<PAGE>
OUTLOOK FOR NORTH AMERICA
REVIEW OF THE U.S.
PACE OF THE ECONOMY
The U.S. economy has experienced a lull in growth. After a strong July and
August, September and early October were softer, which is shown in our Overall
Company Surveys chart below.
ISI COMPANY SURVEYS OVERALL AVERAGE
Retailers, Auto Dealers, Manufacturing Companies,
Homebuilders, Banks
0=Weak 100=Strong 4 Wk. Avg. Oct. 10 46.7
[Graph Appears Here -- See Plot Points Below]
RETAILERS
AUTO
MFG
HOME
BANK
4 Wk. Avg.
6 JAN 95 57.6
13 JAN 95 57.8
20 JAN 95 58.3
27 JAN 95 56.5
3 FEB 95 53.3
10 FEB 95 52.6
17 FEB 95 51.9
24 FEB 95 52.8
3 MAR 95 53.6
10 MAR 95 53.7
17 MAR 95 54.0
24 MAR 95 53.8
31 MAR 95 53.8
7 APR 95 54.9
14 APR 95 54.1
21 APR 95 53.3
28 APR 95 52.3
5 MAY 95 50.3
12 MAY 95 49.6
19 MAY 95 49.5
26 MAY 95 50.6
2 JUN 95 52.3
9 JUN 95 53.6
16 JUN 95 53.5
23 JUN 95 53.1
30 JUN 95 52.2
7 JUL 95 52.1
14 JUL 95 52.4
21 JUL 95 52.4
28 JUL 95 53.5
4 AUG 95 53.6
11 AUG 95 53.9
18 AUG 95 53.9
25 AUG 95 52.8
1 SEP 95 52.6
8 SEP 95 52.9
15 SEP 95 53.2
22 SEP 95 53.8
29 SEP 95 53.3
6 OCT 95 51.6
13 OCT 95 49.3
20 OCT 95 47.3
27 OCT 95 45.3
3 NOV 95 44.4
10 NOV 95 45.3
17 NOV 95 46.2
24 NOV 95 48.0
1 DEC 95 47.6
8 DEC 95 46.1
15 DEC 95 43.9
22 DEC 95 41.4
29 DEC 95 42.1
5 JAN 96 43.4
12 JAN 96 44.5
19 JAN 96 45.1
26 JAN 96 45.6
2 FEB 96 45.7
9 FEB 96 45.9
16 FEB 96 48.4
23 FEB 96 49.9
1 MAR 96 51.3
8 MAR 96 53.3
15 MAR 96 52.4
22 MAR 96 50.9
29 MAR 96 50.1
5 APR 96 49.4
12 APR 96 49.0
19 APR 96 49.0
26 APR 96 49.5
3 MAY 96 49.5
10 MAY 96 51.0
17 MAY 96 51.4
24 MAY 96 51.4
31 MAY 96 51.2
7 JUN 96 51.1
14 JUN 96 51.2
21 JUN 96 50.0
28 JUN 96 49.6
5 JUL 96 49.1
12 JUL 96 48.1
19 JUL 96 47.9
26 JUL 96 47.1
2 AUG 96 46.1
9 AUG 96 46.7
16 AUG 96 47.2
23 AUG 96 48.2
30 AUG 96 48.7
6 SEP 96 49.4
13 SEP 96 49.2
20 SEP 96 48.8
27 SEP 96 48.4
4 OCT 96 48.0
11 OCT 96 48.3
18 OCT 96 48.4
25 OCT 96 48.8
1 NOV 96 47.8
8 NOV 96 47.1
15 NOV 96 46.7
22 NOV 96 46.2
29 NOV 96 46.2
6 DEC 96 46.1
13 DEC 96 45.5
20 DEC 96 44.6
27 DEC 96 44.9
3 JAN 97 45.0
10 JAN 97 45.9
17 JAN 97 46.7
24 JAN 97 47.6
31 JAN 97 48.0
7 FEB 97 49.2
14 FEB 97 50.5
21 FEB 97 50.6
28 FEB 97 51.0
7 MAR 97 51.6
14 MAR 97 52.1
21 MAR 97 52.7
28 MAR 97 52.9
4 APR 97 51.8
11 APR 97 51.2
18 APR 97 50.7
25 APR 97 49.6
2 MAY 97 49.1
9 MAY 97 48.4
16 MAY 97 48.1
23 MAY 97 48.5
30 MAY 97 48.6
6 JUN 97 48.9
13 JUN 97 48.8
20 JUN 97 48.7
27 JUN 97 49.3
4 JUL 97 49.6
11 JUL 97 50.7
18 JUL 97 51.4
25 JUL 97 51.9
1 AUG 97 51.9
8 AUG 97 52.0
15 AUG 97 52.1
22 AUG 97 51.9
29 AUG 97 52.1
5 SEP 97 51.3
12 SEP 97 51.0
19 SEP 97 50.0
26 SEP 97 48.9
3 OCT 97 47.8
10 OCT 97 46.7
17 OCT 97 47.0
24 OCT 97 47.5
31 OCT 97 48.8
7 NOV 97 49.7
14 NOV 97 NA
Source: ISI Inc.
One cap on growth is the high consumer debt burden. Consumer installment
debt is now 20.8% of personal disposable income, whereas the ratio was 16.0% in
1993. This has caused consumers to slow their use of installment debt
(predominantly credit and debt). In August, consumer installment debt grew to a
slow 4.9% annual rate. The growth rate was a high 15.0% rate in early 1996.
Retail sales are significantly impacted by a change of this magnitude. Also,
there has been a major return to inventory accumulation. We estimate that
inventories grew at a $70 billion annual rate in the third quarter. In the first
quarter of 1996, inventories only grew at an $8 billion rate. High inventory
levels like those we had over the past six quarters typically add to current
growth but subtract from future growth.
INFLATION
It does not appear that inflation is lifting. The September increase in
producer prices seems a one-shot occurrence in the reported strong areas of
autos, cigarettes and electricity. The durability of low inflation can best be
seen in the manufacturing section. It appears from recent releases that third
quarter overall productivity was about 2.5%, while hours worked increased only
1.1% and average hourly wages remained restrained. This means that unit labor
costs fell by roughly 1.4% in the third quarter, so the meager pricing power of
manufacturers still leaves room for corporate earnings gains with little
inflation. On a global basis, inflation seems to be low and still receding.
China, a major international trading power, has experienced a significant
slowing of domestic inflation (see China Retail Price Index chart on page 3).
The balance of Pacific/Asia seems in the grip of deflation, making for strong
global price competition.
2
<PAGE>
OUTLOOK FOR NORTH AMERICA (CONTINUED)
CHINA RETAIL PRICE INDEX
Y/Y% Sept. 0.0%
[Graph Appears Here -- See Plot Points Below]
CHINA
RETAIL
PRICE
INDEX
Y/Y %
88:1 9.5
88:2 11.2
88:3 11.6
88:4 12.6
88:5 14.7
88:6 16.5
88:7 19.3
88:8 23.2
88:9 25.4
88:10 26.1
88:11 26.0
88:12 26.7
89:1 27.0
89:2 27.9
89:3 26.3
89:4 25.8
89:5 24.3
89:6 21.5
89:7 19.0
89:8 15.2
89:9 11.4
89:10 8.7
89:11 7.1
89:12 6.4
90:1 4.1
90:2 4.1
90:3 3.3
90:4 3.1
90:5 2.6
90:6 0.8
90:7 0.7
90:8 0.4
90:9 0.8
90:10 1.1
90:11 1.6
90:12 2.2
91:1 1.4
91:2 1.0
91:3 0.9
91:4 0.6
91:5 1.6
91:6 3.8
91:7 4.2
91:8 4.4
91:9 4.0
91:10 4.3
91:11 4.3
91:12 4.3
92:1 5.1
92:2 4.9
92:3 5.0
92:4 3.2
92:5 4.1
92:6 4.2
92:7 4.2
92:8 4.8
92:9 5.7
92:10 6.4
92:11 6.6
92:12 6.8
93:1 8.4
93:2 8.7
93:3 10.2
93:4 10.9
93:5 12.5
93:6 13.9
93:7 14.9
93:8 15.1
93:9 14.5
93:10 14.6
93:11 15.1
93:12 17.6
94:1 19.0
94:2 20.9
94:3 20.2
94:4 19.5
94:5 18.9
94:6 20.0
94:7 21.4
94:8 23.5
94:9 24.6
94:10 25.2
94:11 25.0
94:12 23.2
95:1 21.2
95:2 19.7
95:3 18.7
95:4 18.0
95:5 17.6
95:6 15.3
95:7 14.6
95:8 12.3
95:9 11.4
95:10 10.3
95:11 9.2
95:12 8.3
96:1 7.6
96:2 7.5
96:3 7.7
96:4 7.4
96:5 6.5
96:6 5.9
96:7 5.8
96:8 5.8
96:9 5.0
96:10 4.7
96:11 4.6
96:12 4.4
97:1 3.3
97:2 2.9
97:3 1.7
97:4 1.1
97:5 0.8
97:6 0.8
97:7 0.6
97:8 0.1
97:9 0.0
97:10 NA
97:11 NA
Source: ISI Inc.
Please see the table below for ISI's Economic Forecast.
ISI ECONOMIC FORECAST
- -------------------------------------------------------------
97:1Q 97:2Q 97:3Q 97:4Q* 98:1Q* 98:2Q*
- -------------------------------------------------------------
Real GDP 4.9% 3.6% 3.5% 3.0% 3.5% 2.5%
- -------------------------------------------------------------
GDP Deflator** 2.4% 1.5% 1.5% 2.0% 2.0% 1.5%
- -------------------------------------------------------------
30-Year Bond Yields*** 7.1% 6.8% 6.4% 6.3% 6.4% 6.0%
- -------------------------------------------------------------
Fed Funds Rate*** 5.5% 5.5% 5.5% 5.5% 5.7% 5.7%
- -------------------------------------------------------------
S&P 500
Operating EPS**** $45 $45 $47 $47 $47 $48
*Estimated.
**A more accurate cost of living barometer than the CPI.
***End of quarter.
****Standard &Poor's 500 earnings per share, seasonally adjusted, annual rate.
REVIEW OF MEXICO
GENERAL
The devaluation of the peso in 1994 and 1995 spurred exports while it
curtailed domestic demand. The export boom swung the trade balance from negative
to positive (see chart below).
MEXICO EXPORTS
Aug. 9106.8
[Graph Appears Here -- See Plot Points Below]
MEXICO EXPORTS
88:1 2,373.4
88:2 2,569.1
88:3 2,522.2
88:4 2,580.2
88:5 2,637.6
88:6 2,611.0
88:7 2,468.7
88:8 2,813.8
88:9 2,452.5
88:10 2,373.6
88:11 2,659.4
88:12 2,629.9
89:1 2,817.0
89:2 2,838.7
89:3 2,848.3
89:4 3,019.3
89:5 3,006.1
89:6 3,090.7
89:7 2,961.6
89:8 3,017.6
89:9 2,838.1
89:10 2,833.2
89:11 2,926.3
89:12 2,974.2
90:1 3,414.2
90:2 3,223.8
90:3 3,063.4
90:4 2,946.5
90:5 3,058.1
90:6 2,963.1
90:7 3,267.2
90:8 3,645.7
90:9 3,853.9
90:10 3,889.8
90:11 3,831.9
90:12 3,553.3
91:1 3,582.6
91:2 3,310.3
91:3 3,183.2
91:4 3,817.9
91:5 3,653.9
91:6 3,352.1
91:7 3,816.9
91:8 3,486.9
91:9 3,557.5
91:10 3,687.7
91:11 3,626.9
91:12 3,611.6
92:1 3,526.5
92:2 3,576.0
92:3 3,788.5
92:4 3,806.5
92:5 3,729.8
92:6 3,947.4
92:7 4,016.7
92:8 3,852.4
92:9 3,991.2
92:10 3,949.5
92:11 3,866.3
92:12 4,145.0
93:1 3,883.9
93:2 4,067.5
93:3 4,175.0
93:4 4,223.5
93:5 4,072.7
93:6 4,475.8
93:7 4,306.5
93:8 4,315.9
93:9 4,451.9
93:10 4,551.5
93:11 4,636.8
93:12 4,725.0
94:1 4,483.5
94:2 4,798.9
94:3 4,862.6
94:4 4,695.4
94:5 5,005.0
94:6 5,060.1
94:7 4,907.3
94:8 5,289.6
94:9 5,073.1
94:10 5,192.2
94:11 6,141.7
94:12 5,372.7
95:1 6,385.0
95:2 6,368.2
95:3 6,456.0
95:4 5,854.4
95:5 6,876.4
95:6 6,440.4
95:7 6,216.8
95:8 7,146.6
95:9 7,017.8
95:10 6,912.8
95:11 6,977.5
95:12 6,889.7
96:1 7,557.5
96:2 7,439.8
96:3 7,305.3
96:4 7,834.1
96:5 7,878.2
96:6 7,339.8
96:7 8,183.3
96:8 7,932.4
96:9 8,503.9
96:10 8,781.9
96:11 8,558.4
96:12 8,685.1
97:1 8,570.8
97:2 8,432.4
97:3 8,478.7
97:4 9,022.1
97:5 8,583.1
97:6 9,149.8
97:7 9,592.9
97:8 9,106.8
97:9 NA
97:10 NA
97:11 NA
97:12 NA
Source: ISI Inc.
The upward push of export business has produced economic winners and
losers. Those businesses with export avenues have flourished while those in the
domestic economy have suffered a major setback (see Mexico Real Retail Sales
chart on page 4).
3
<PAGE>
OUTLOOK FOR NORTH AMERICA (CONTINUED)
MEXICO REAL RETAIL SALES
July 38.0
[Graph Appears Here -- See Plot Points Below]
MEXICO
REAL
RETAIL
SALES
88:1 155.3
88:2 150.6
88:3 139.7
88:4 131.3
88:5 138.1
88:6 135.3
88:7 130.5
88:8 130.8
88:9 130.5
88:10 137.0
88:11 135.9
88:12 138.6
89:1 136.4
89:2 137.4
89:3 128.5
89:4 141.6
89:5 138.3
89:6 138.1
89:7 137.8
89:8 135.6
89:9 147.5
89:10 138.3
89:11 136.4
89:12 143.2
90:1 133.3
90:2 123.9
90:3 130.8
90:4 127.0
90:5 131.3
90:6 132.8
90:7 129.9
90:8 127.4
90:9 128.9
90:10 124.4
90:11 137.3
90:12 127.0
91:1 133.7
91:2 128.1
91:3 120.0
91:4 133.3
91:5 130.6
91:6 126.1
91:7 129.8
91:8 133.8
91:9 123.7
91:10 127.7
91:11 127.2
91:12 122.2
92:1 126.4
92:2 137.0
92:3 135.7
92:4 133.1
92:5 125.2
92:6 124.2
92:7 123.8
92:8 112.9
92:9 121.4
92:10 152.4
92:11 110.1
92:12 104.2
93:1 115.6
93:2 113.6
93:3 113.2
93:4 102.2
93:5 110.4
93:6 110.0
93:7 107.5
93:8 102.1
93:9 98.5
93:10 97.4
93:11 90.9
93:12 92.5
94:1 96.3
94:2 98.5
94:3 98.1
94:4 103.1
94:5 103.4
94:6 103.5
94:7 101.4
94:8 100.5
94:9 103.1
94:10 98.0
94:11 96.3
94:12 98.0
95:1 89.7
95:2 79.6
95:3 77.1
95:4 62.4
95:5 58.6
95:6 56.6
95:7 55.0
95:8 54.6
95:9 53.0
95:10 50.1
95:11 50.0
95:12 47.8
96:1 46.5
96:2 46.3
96:3 44.6
96:4 44.1
96:5 44.3
96:6 43.1
96:7 42.5
96:8 41.4
96:9 39.8
96:10 39.6
96:11 38.8
96:12 36.6
97:1 35.4
97:2 35.7
97:3 34.6
97:4 38.5
97:5 38.3
97:6 37.9
97:7 38.0
97:8 NA
97:9 NA
97:10 NA
97:11 NA
97:12 NA
Source: ISI Inc.
The effects of the peso devaluation are still being felt in the domestic
economy many years after the peak in the currency crisis. The recent Lower House
election, which was won by a majority from the opposition parties, was the most
notable political fallout from severe domestic retrenchment. The ruling party
now must negotiate with the opposition to reach agreement on critical items such
as the 1998 federal budget. The political aspects of declining domestic
purchasing power will shape the all-important outcome of the Presidential
election in the year 2000. Negotiations and power sharing are new to Mexico's
politics, but all sides need to keep the process from reaching an impasse
because the side labeled the cause of a Constitutional crisis will see its
political future cut short. In the near term, spending is likely to rise and
taxes are likely to be cut. Difficult issues such as significant cutting in the
size of the large federal government will await the new President.
OUTLOOK
There seems to be some economic leeway to stimulate the domestic economy
without major market repercussions. Some economic stimulus is required because
of the extent of the pain visible in the Real Retail chart to the left. Debt
coverage, capital spending, inflation, etc. must be closely monitored to gauge
potential foreign exchange flows. The issue to watch is whether or not the
system is again building to another crisis. So far, it has not reached a
critical stage, and peso stability along with high real interest rates still
make Mexican debt a good investment.
REVIEW OF CANADA
GENERAL
The "sea" change in the government's budget from a sizable deficit to
virtual balance in four years was the most significant accomplishment of the
Liberal government's first term (see chart below).
CANADA BUDGET DEFICIT
12 Mo. Sum June -5
[Graph Appears Here -- See Plot Points Below]
CANADA
BUDGET
DEFICIT
12 Mo. Sum
87:1 -31.0
87:2 -31.4
87:3 -30.6
87:4 -29.7
87:5 -29.6
87:6 -29.4
87:7 -29.8
87:8 -29.3
87:9 -28.4
87:10 -28.8
87:11 -27.9
87:12 -27.7
88:1 -25.8
88:2 -27.2
88:3 -28.1
88:4 -28.2
88:5 -27.5
88:6 -26.9
88:7 -26.0
88:8 -26.6
88:9 -27.3
88:10 -27.0
88:11 -28.0
88:12 -28.1
89:1 -29.9
89:2 -29.4
89:3 -28.7
89:4 -28.4
89:5 -28.4
89:6 -29.4
89:7 -29.9
89:8 -30.8
89:9 -31.1
89:10 -30.4
89:11 -30.8
89:12 -29.8
90:1 -28.9
90:2 -28.3
90:3 -29.0
90:4 -27.9
90:5 -27.4
90:6 -26.1
90:7 -26.6
90:8 -27.2
90:9 -26.0
90:10 -27.0
90:11 -27.7
90:12 -29.1
91:1 -32.0
91:2 -32.5
91:3 -30.6
91:4 -33.1
91:5 -34.1
91:6 -36.2
91:7 -37.5
91:8 -38.3
91:9 -38.0
91:10 -38.9
91:11 -38.9
91:12 -38.1
92:1 -38.1
92:2 -36.6
92:3 -33.4
92:4 -32.8
92:5 -32.8
92:6 -32.9
92:7 -34.1
92:8 -33.0
92:9 -34.0
92:10 -34.4
92:11 -33.7
92:12 -34.6
93:1 -34.7
93:2 -35.5
93:3 -41.0
93:4 -43.0
93:5 -44.7
93:6 -44.6
93:7 -43.9
93:8 -43.2
93:9 -43.5
93:10 -43.5
93:11 -43.0
93:12 -42.7
94:1 -41.3
94:2 -40.6
94:3 -36.1
94:4 -35.1
94:5 -34.1
94:6 -33.0
94:7 -32.1
94:8 -31.9
94:9 -31.0
94:10 -30.4
94:11 -31.1
94:12 -29.3
95:1 -29.7
95:2 -29.9
95:3 -31.1
95:4 -31.3
95:5 -31.2
95:6 -30.9
95:7 -29.8
95:8 -30.3
95:9 -29.8
95:10 -29.5
95:11 -28.3
95:12 -27.8
96:1 -26.8
96:2 -26.5
96:3 -24.4
96:4 -23.1
96:5 -22.5
96:6 -20.5
96:7 -20.3
96:8 -19.0
96:9 -16.7
96:10 -14.2
96:11 -13.2
96:12 -11.2
97:1 -10.7
97:2 -8.9
97:3 -9.6
97:4 -9.0
97:5 -7.0
97:6 -4.9
97:7 NA
97:8 NA
97:9 NA
97:10 NA
97:11 NA
97:12 NA
Source: ISI Inc.
4
<PAGE>
OUTLOOK FOR NORTH AMERICA (CONTINUED)
As a result of this change, long Canadian interest rates have dropped 150
basis points (1.50%) more than U.S. rates since mid-1993, while Canadian
treasury bill rates have fallen 400 basis points (4.00%) more than U.S. rates.
The virtuous circle caused by declining rates, a stronger economy and declining
interest expense have reinforced the budget both on the receipts and
expenditures sides. In the second Liberal government term, the "problems" of
spending the surplus will make for good political theater. The early Liberal
government proposal to do something for each avenue -- tax cuts, spending
increases and debt paydowns -- will probably get the most mileage out of what
will begin as only a small surplus. The reaction to a surplus is most likely
already reflected in prices, but the long run positives that come from
redirecting domestic savings from supporting government spending to supporting
private investments will continue to benefit the Canadian economy for years
ahead.
OUTLOOK
The drop in Canadian inflation from the "bad old days" of 11% to less
than 1% today has yet to fully flow through to rates (see chart, top right).
CANADA GDP DEFLATOR
Y/Y % 97: 2Q 0.9%
[Graph Appears Here -- See Plot Points Below]
CANADA
GDP
DEFLATOR
Y/Y %
68:1 4.0
68:2 3.5
68:3 3.8
68:4 3.3
69:1 3.7
69:2 4.7
69:3 4.7
69:4 4.9
70:1 5.1
70:2 4.5
70:3 4.4
70:4 4.5
71:1 3.1
71:2 3.1
71:3 3.1
71:4 3.5
72:1 5.0
72:2 5.1
72:3 6.0
72:4 6.3
73:1 5.8
73:2 8.1
73:3 9.9
73:4 11.5
74:1 14.1
74:2 15.0
74:3 14.9
74:4 13.7
75:1 11.3
75:2 9.5
75:3 9.3
75:4 9.6
76:1 9.6
76:2 10.1
76:3 7.7
76:4 7.5
77:1 6.8
77:2 5.9
77:3 6.8
77:4 5.4
78:1 5.5
78:2 5.2
78:3 6.0
78:4 7.4
79:1 8.1
79:2 10.4
79:3 10.5
79:4 11.0
80:1 11.2
80:2 10.0
80:3 10.8
80:4 10.5
81:1 11.3
81:2 11.0
81:3 10.7
81:4 10.3
82:1 9.6
82:2 9.1
82:3 8.2
82:4 8.0
83:1 6.2
83:2 5.2
83:3 4.6
83:4 4.0
84:1 4.3
84:2 3.5
84:3 2.7
84:4 2.0
85:1 1.6
85:2 2.7
85:3 3.1
85:4 2.8
86:1 2.5
86:2 2.0
86:3 2.0
86:4 3.1
87:1 4.2
87:2 4.8
87:3 4.9
87:4 4.9
88:1 4.9
88:2 4.0
88:3 4.9
88:4 4.9
89:1 4.6
89:2 5.6
89:3 5.0
89:4 4.2
90:1 3.9
90:2 3.1
90:3 2.7
90:4 2.9
91:1 3.6
91:2 3.3
91:3 2.8
91:4 1.9
92:1 1.0
92:2 0.7
92:3 1.4
92:4 1.8
93:1 1.2
93:2 1.5
93:3 0.7
93:4 0.9
94:1 1.0
94:2 0.5
94:3 1.0
94:4 0.4
95:1 1.1
95:2 1.6
95:3 1.6
95:4 1.8
96:1 1.3
96:2 1.0
96:3 1.1
96:4 1.7
97:1 1.7
97:2 0.9
97:3 NA
97:4 NA
Source: ISI Inc.
Long rates based on 0.9% inflation have a high 5.4% real return. The market
is not yet confident that inflation below 2% is here to stay. As the market
gains that confidence, long rates have the potential to move lower, producing
capital gains for bond investors.
5
<PAGE>
ADDITIONAL PERFORMANCE INFORMATION
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. The Securities
and Exchange Commission (SEC) requires that when we report such figures, we
also include the Fund's total return, according to a standardized formula,
for various time periods through the end of the most recent calendar quarter.
The SEC total return figures differ from those we reported because the time
periods may be different and because the SEC calculation includes the impact of
the Fund's currently effective 3.00% maximum sales charge.
- ------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
% Return with
Periods ended 9/30/97: Sales Charge
- ------------------------------------------------------------
One Year 9.10%
- ------------------------------------------------------------
Since Inception (1/15/93) 4.77%
- ------------------------------------------------------------
These total returns correspond to those experienced by individual
shareholders only if their shares were purchased on the first day of each time
period and the maximum sales charge was paid.
Any performance figures shown are for the full period indicated. Since
investment return and principal value will fluctuate, an investor's shares may
be worth more or less than their original cost when redeemed. Past performance
is not an indicator of future results.
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the ISI Funds, including
charges and expenses, obtain a prospectus from your investment representative or
directly from the Fund at 1-800-955-7175. Read it carefully before you invest.
6
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
STATEMENT OF NET ASSETS
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
INTEREST MATURITY PRINCIPAL VALUE
SECURITY RATE DATE AMOUNT+ (NOTE A)
- ---------------------------------------------------------------------------------------------------
<S><C>
CANADIAN SECURITIES -- 12.24%
Government of Canada, Deb. 9.750% 6/1/21 C$ 2,000,000 $ 2,062,102
GOVERNMENT OF CANADA, DEB. 9.000 6/1/25 4,500,000 4,395,447
-----------
TOTAL CANADIAN SECURITIES
(Cost $5,592,264) 6,457,549
-----------
MEXICAN SECURITIES(1) -- 14.30%
Mexican Treasury Cete 19.520* 12/4/97 Ps 47,442,030 5,912,430
Mexican Treasury Cete 20.650* 2/19/98 13,667,200 1,632,226
-----------
TOTAL MEXICAN SECURITIES
(Cost $7,378,760) 7,544,656
-----------
U.S. TREASURY SECURITIES -- 57.62%
U.S. Treasury Bond 10.375 11/15/09 $8,000,000 9,883,752
U.S. Treasury Bond 10.375 11/15/12 4,000,000 5,201,252
U.S. Treasury Bond 11.750 11/15/14 3,000,000 4,356,093
U.S. Treasury Bond 7.500 11/15/16 2,000,000 2,226,250
U.S. Treasury Bond 7.250 8/15/22 2,000,000 2,186,250
U.S. Treasury Bond 7.625 11/15/22 5,750,000 6,555,897
-----------
TOTAL U.S. TREASURY SECURITIES
(Cost $30,358,517) $30,409,494
-----------
- ---------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
STATEMENT OF NET ASSETS (CONCLUDED)
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT+ (NOTE A)
- ---------------------------------------------------------------------------------------------------
<S><C>
REPURCHASE AGREEMENT -- 14.16%
GOLDMAN SACHS & CO., 6.05%
Dated 9/30/97, to be repurchased on
10/1/97, collateralized by U.S. Treasury
Bonds with a market value of $7,620,937.
(Cost $7,471,000) $7,471,000 $ 7,471,000
-----------
TOTAL INVESTMENT IN SECURITIES -- 98.32%
(Cost $50,800,541)** 51,882,699
OTHER ASSETS IN EXCESS OF LIABILITIES, NET-- 1.68% 889,012
-----------
NET ASSETS-- 100.00% $52,771,711
===========
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($52,771,711 / 6,074,346 shares outstanding) $8.69
=====
MAXIMUM OFFERING PRICE PER SHARE
($8.69 / 0.970) $8.96
=====
- ---------------------------------------------------------------------------------------------------
(1) Cetes are short-term Mexican government debt securities.
* Yields as of September 30, 1997.
** Also aggregate cost for federal tax purposes.
+ Principal amount is shown in local currency: Canadian dollars (C$), Mexican
pesos (Ps) and U.S. dollars ($).
See Notes to Financial Statements.
</TABLE>
8
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
- ---------------------------------------------------------------------------------------------------
<S><C>
NET INVESTMENT INCOME (NOTE A):
Interest $2,266,164
----------
EXPENSES:
Investment advisory fee (Note B) 104,070
Distribution fee (Note B) 104,070
Administration fee (Note B) 52,035
Accounting fee 26,452
Transfer agent fee 16,078
Legal 11,142
Printing and postage 8,631
Organizational expenses 5,263
Miscellaneous 4,020
Audit 2,680
Insurance 973
Registration fees-- State 823
Directors' fees 247
----------
Total expenses 336,484
Less: Fees waived (Note B) (11,268)
----------
Net expenses 325,216
----------
Net investment income 1,940,948
----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain on investments 261,125
Net realized foreign exchange loss (62,141)
Change in net unrealized appreciation or depreciation of investments 2,524,295
Change in net unrealized appreciation or depreciation on translation
of assets and liabilities denominated in foreign currencies 2,790
----------
NET GAIN ON INVESTMENTS 2,726,069
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,667,017
==========
- ---------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
SEPT. 30, 1997 FOR THE YEAR
(UNAUDITED) ENDED MARCH 31, 1997
- -----------------------------------------------------------------------------------------------------
<S><C>
INCREASE/(DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 1,940,948 $ 5,251,856
Net realized gain/(loss) from security and
foreign currency transactions 198,984 (1,197,393)
Change in unrealized appreciation or depreciation
of investments 2,524,295 540,125
Change in net unrealized appreciation or
depreciation on translation of assets and
liabilities denominated in foreign currencies 2,790 (3,190)
----------- ------------
Net increase in net assets resulting
from operations 4,667,017 4,591,398
----------- ------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income and short-term gains (2,208,312) (1,823,953)
Return of capital-tax -- (3,191,763)
----------- ------------
Total distributions (2,208,312) (5,015,716)
----------- ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of 406,902 and 695,687
shares, respectively 3,447,733 5,848,278
Value of 121,452 and 306,356 shares issued in
reinvestment of dividends, respectively 1,021,353 2,564,081
Cost of 725,474 and 1,997,507 shares
repurchased, respectively (6,121,881) (16,882,467)
----------- ------------
Total decrease in net assets derived from capital
share transactions (1,652,795) (8,470,108)
----------- ------------
Total increase/(decrease) in net assets 805,910 (8,894,426)
NET ASSETS:
Beginning of period 51,965,801 60,860,227
----------- ------------
End of period $52,771,711 $ 51,965,801
=========== ============
- -----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
NORTH AMERICAN GOVERNMENT BOND FUND, INC.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
FOR THE SIX FOR THE PERIOD
MONTHS ENDED FOR THE YEAR ENDED MARCH 31, JAN. 15, 1993(1)
SEPT. 30, 1997 ----------------------------------- THROUGH
(UNAUDITED) 1997 1996 1995 1994 MARCH 31, 1993
- -----------------------------------------------------------------------------------------------------------
<S><C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning
of period $ 8.29 $ 8.37 $ 8.06 $ 9.53 $ 10.14 $ 10.00
------ ------ ------ -------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.32 0.75 0.81 0.63 0.89 0.10
Net realized and unrealized
gain/(loss) on investments 0.44 (0.11) 0.22 (1.38) (0.58) 0.12
------ ------ ------ -------- ------- -------
Total from Investment
Operations 0.76 0.64 1.03 (0.75) 0.31 0.22
LESS DISTRIBUTIONS:
Distributions from net investment
income and short-term gains (0.36) (0.26) -- (0.45) (0.92) (0.08)
Return of capital -- (0.46) (0.72) (0.27) -- --
------ ------ ------ -------- ------- -------
Total distributions (0.36) (0.72) (0.72) (0.72) (0.92) (0.08)
------ ------ ------ -------- ------- -------
Net asset value at end of period $ 8.69 $ 8.29 $ 8.37 $ 8.06 $ 9.53 $ 10.14
====== ====== ====== ======== ====== =======
TOTAL RETURN(2) 9.39% 7.90% 12.97% (8.31)% 2.77% 2.18%
RATIOS TO AVERAGE DAILY NET ASSETS:
Expenses(3) 1.25%(5) 1.25% 1.25% 1.25% 1.25% 1.25%(5)
Net investment income(4) 7.46%(5) 8.99% 9.49% 7.04% 7.04% 7.62%(5)
SUPPLEMENTAL DATA:
Net assets at end of period (000) $52,772 $51,966 $60,860 $66,292 $93,622 $40,937
Portfolio turnover rate 156%(5) 46% 125% 104% 219% 104%(5)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory fees (Note B), the ratio of expenses to
average daily net assets would have been 1.29% (annualized), 1.58%, 1.47%,
1.45%, 1.44% and 2.19% (annualized) for the six months ended September 30,
1997 and the years ended March 31, 1997, 1996, 1995, 1994 and 1993,
respectively.
(4) Without the waiver of advisory fees (Note B), the ratio of net investment
income to average daily net assets would have been 7.42% (annualized),
8.66%, 9.27%, 6.84%, 6.85% and 6.68% (annualized) for the six months ended
September 30, 1997 and the years ended March 31, 1997, 1996, 1995, 1994 and
1993, respectively.
(5) Annualized.
See Notes to Financial Statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
A. SIGNIFICANT ACCOUNTING POLICIES -- North American Government Bond Fund, Inc.
(the "Fund"), which was organized as a Maryland Corporation on October 19,
1992, commenced operations January 15, 1993. The Fund is registered under
the Investment Company Act of 1940 as a diversified, open-end Investment
Management Company. It is designed to provide a high level of current
income, consistent with prudent investment risk, by investing primarily in a
portfolio consisting of fixed-income securities issued or guaranteed by the
governments of the United States, Canada and Mexico.
The Fund consists of one share class, the ISI Shares, which are subject to a
3.00% maximum front-end sales charge and a 0.40% distribution fee.
When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles.
These estimates affect 1) the assets and liabilities that we report at the
date of the financial statements; 2) the contingent assets and liabilities
that we disclose at the date of the financial statements; and 3) the
revenues and expenses that we report for the period. Our estimates could be
different from the actual results. The Fund's significant accounting
policies are:
SECURITY VALUATION -- Debt securities are generally traded in the
over-the-counter market. When there is an available market quotation, the
Fund values a debt security by using the most recent price provided by an
investment dealer. The Fund may also value a debt security by using a price
from an independent pricing service that the Investment Advisor has
determined reflects the obligation's fair market value. When a market
quotation is unavailable, the Investment Advisor determines a fair value
using procedures that the Board of Directors establishes and monitors. The
Fund values short-term obligations with maturities of 60 days or less at
amortized cost.
REPURCHASE AGREEMENTS -- The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase agreement is
a short-term investment in which the Fund buys a debt security that the
broker agrees to repurchase at a set time and price. The third party, which
is the broker's custodial bank, holds the collateral in a separate account
until the repurchase agreement matures. The agreement ensures that the
collateral's market value, including any accrued interest, is sufficient if
the broker defaults. The Fund's access to the collateral may be delayed or
limited if the broker defaults and the value of the collateral declines or
if the broker enters into an insolvency proceeding.
FOREIGN CURRENCY TRANSLATION -- The Fund separates realized gains or losses
resulting from foreign exchange rate changes and realized gains or losses
resulting from market price changes.
Net realized foreign exchange rate gains or losses occur due to 1) sales of
portfolio securities; 2) sales and maturities of short-term securities; 3)
sales of foreign currencies; 4) currency gains or losses realized between
the trade and settlement dates on securities transactions; and 5)
differences between interest recorded on the Fund's books and the U.S.
dollar equivalent of interest that the Fund actually receives or pays.
The Fund does not separate its unrealized appreciation or depreciation
resulting from foreign exchange rate changes and its unrealized appreciation
or depreciation resulting from market price changes.
FEDERAL INCOME TAX -- The Fund determines its distributions according to
income tax regulations, which may be different from generally accepted
accounting principles. As a result, the
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Fund occasionally makes reclassifications within its capital accounts to
reflect income and gains that are available for distribution under income
tax regulations.
The Fund is organized as a regulated investment company. As long as it
maintains this status and distributes to its shareholders substantially all
of its taxable net investment income and net realized capital gains, it will
be exempt from most, if not all, federal income and excise taxes. As a
result, the Fund has made no provisions for federal income taxes.
The Fund has a $1,031,544 capital loss carryforward that may be carried
forward to offset any taxable capital gains. This capital loss carryforward
begins to expire in the year 2004 if it is not used.
SECURITY TRANSACTIONS, INVESTMENT INCOME, DISTRIBUTIONS AND OTHER -- The
Fund uses the trade date to account for security transactions and the
specific identification method for financial reporting and income tax
purposes to determine the cost of investments sold or redeemed. Income and
expenses are recorded on an accrual basis. Income includes pro rata
scientific method for amortization of premiums and accretion of discounts
when appropriate. Distributions to shareholders are recorded on the
ex-dividend date. The Fund has deferred the costs incurred by its
organization and the initial public offering of shares. These costs are
being amortized on the straight-line method over a five-year period, which
began when the Fund commenced investment activities.
B. INVESTMENT ADVISORY FEES, TRANSACTIONS WITH AFFILIATES AND OTHER FEES --
International Strategy & Investment Inc. ("ISI") is the Fund's investment
advisor and Investment Company Capital Corp. ("ICC") is the Fund's
administrator. As compensation for its advisory services, the Fund pays ISI
an annual fee based on the Fund's average daily net assets. This fee is
calculated daily and paid monthly at the annual rate of 0.40%. The Fund paid
ISI$104,070 for advisory services for the six months ended September 30,
1997. As compensation for its administrative services, the Fund pays ICC an
annual fee based on the Fund's average daily net assets. This fee is
calculated daily and paid monthly at the annual rate of 0.20%. The Fund paid
ICC$52,035 for administrative services for the six months ended September
30, 1997.
ISI and ICC have agreed to reduce their fees proportionately when necessary
so that the Fund's annual expenses are no more than 1.25% of the Fund's
average daily net assets. For the six months ended September 30, 1997, ISI
waived fees of $7,512 and ICC waived fees of $3,756.
As compensation for its accounting services, the Fund pays ICC an annual fee
that is calculated daily and paid monthly from the Fund's average daily net
assets. The Fund paid ICC $26,452 for accounting services for the six months
ended September 30, 1997.
As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund paid ICC $16,078
for transfer agent services for the six months ended September 30, 1997.
As compensation for providing distribution services, the Fund pays ISI Group
Inc. an annual fee that is calculated daily and paid monthly at an annual
rate equal to 0.40% of the Fund's average daily net assets. For the six
months ended September 30, 1997, distribution fees were $104,070. Prior to
April 1, 1997, Armata Financial Corp. served as the Fund's distributor.
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the period
April 1, 1997 through September 30, 1997 was approximately $700, and the
accrued liability was approximately $9,900.
13
<PAGE>
C. CAPITAL SHARE TRANSACTIONS-- The Fund is authorized to issue up to 25
million shares of $.001 par value capital stock.
D. INVESTMENT TRANSACTIONS -- Excluding short-term and U.S. government
obligations, purchases of investment securities aggregated $9,922,636 and
there were no sales of investment securities for the six months ended
September 30, 1997. Purchases of U.S. government obligations aggregated
$18,335,839 and sales of U.S. government obligations aggregated $19,273,057
for the period.
On September 30, 1997, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $1,228,790
and aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $146,632.
E. FORWARD CURRENCY EXCHANGE CONTRACTS -- Forward currency exchange contracts
carry certain risks. These risks include the counterparties' possible
inability to meet the contract terms and the movements in currency values.
There were no outstanding contracts as of September 30, 1997.
F. NET ASSETS -- On September 30, 1997, net assets consisted of:
Paid-in capital $52,892,894
Accumulated net realized loss
from security and foreign
currency transactions (936,222)
Undistributed net investment
income (267,364)
Unrealized appreciation of
investments 1,082,158
Unrealized translation gain 245
-----------
$52,771,711
===========
14
<PAGE>
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