ISI
International Strategy and Investment
ISI
NORTH AMERICAN
GOVERNMENT BOND
FUND SHARES
(A Class of North American Government
Bond Fund, Inc.)
[NORTH AMERICAN LOGO HERE]
SEMI-ANNUAL REPORT
September 30, 1998
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 Amy M. Olmert
Director Secretary
Joe Hardiman Scott J. Liotta
Director Assistant Secretary
Louis E. Levy Carrie L. Butler
Director Vice President
Eugene J. McDonald Margaret M. Beeler
Director Assistant Vice President
Rebecca W. Rimel Keith C. Reilly
Director Assistant Vice President
Joseph A. Finelli
Treasurer
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 Mutual Funds
717 Fifth Avenue
New York, NY 10022
(800) 955-7175
<PAGE>
Investment Advisor's Report
We are pleased to report on the progress of your Fund for the six months
ended September 30, 1998.
The Fund seeks a high level of current income consistent with prudent
investment risk by investing in government fixed-income securities of the U.S.,
Canada and Mexico. 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.
For the first half of this fiscal year, the Fund's total return was 6.60% and
for the last 12 months it was 11.72%. The principal reason for these favorable
total returns was the major decline in long term U.S. interest rates and the
Fund's large holdings in long maturity Treasuries. Long (thirty year) U.S.
Treasury interest rates fell from 5.93% to 4.98% in the first half of this
fiscal year and from 6.40% to 4.98% over the last twelve months.
The Canadian section was eliminated during the fiscal year (please see below
for more details). Canadian government interest rates were below U.S.rates at
the start of the fiscal year but are now above U.S. rates. The Canadian dollar
also lost value during the six months.
The Mexican section saw rates jump and the currency dip versus the U.S.
dollar. The Asian financial crisis began to impact Brazil and the rest of Latin
America during the last six months.
Since its inception on January 15, 1993, the Fund's total cumulative return
has been 43.44%. 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 Investments)
Change over
9/30/97 3/31/98 9/30/98 the last year
------- ------- ------- -------------
U.S. 73.4% 82.9% 87.5% +14.1%
Canada 12.3 5.4 -- -12.3
Mexico 14.3 11.8 12.5 -1.8
Portfolio Maturity
(In Years)
Change over
9/30/97 3/31/98 9/30/98 the last year
------- ------- ------- -------------
U.S.* 11.3 12.5 13.7 +2.4 years
Canada 26.4 29.2 -- N/A
Mexico 0.2 0.1 1.2 +1.0 years
*Including reserves.
1
<PAGE>
Investment Advisor's Report (continued)
During the last year, the increase in the U.S. section and its long average
maturity were the keys to the Fund's performance. The elimination of the
Canadian section avoided the performance lag that would have otherwise occurred.
We are looking for an opportunity to invest in Canada. Mexico's performance hurt
the overall results. Inflation in Mexico is likely to remain high because of the
peso decline. We have added inflation linked issues to the portfolio extending
the section's maturity from 0.2 years to 1.2 years. For more in depth coverage
of the three markets please see ISI's Outlook for North America which 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 16, 1998
2
<PAGE>
Outlook for North America
Review of U.S.
Overview
We are now forecasting a price recession, with the Gross Domestic Product
(GDP) price deflator declining in the first and second quarters of next year by
- -0.5% each quarter at annual rates. The downward pressures building on the US
economy are likely to fall harder on prices than units for 3 reasons: 1) global
overcapacity, 2) intent of foreign economies on increasing their exports to the
US, and 3) general willingness of managers around the world to cut prices to
boost unit sales.
Slowly, but steadily, the rate of increase in USbusiness activity is slowing.
Companies we survey at the back-end (Manufacturing Companies, Homebuilders,
Banks) of the economy have already seen a significant slowdown. For example, our
manufacturing survey hit a new low. Please see chart below. This weakness in the
back-end of the economy, along with the stock market's decline, is slowly
grinding down the strength in the front-end (Retailers, Auto Dealers).
Price Recession Now Likely
A slowdown in inflation is one of the most certain developments following a
financial crisis. Along this line, the news is dominated by
disinflation/deflationary reports. For example, the National Association of
Purchasing Manager's (NAPM) new service sector price measure declined to a new
low in September of 44.5 versus its year-ago reading of 51.0. Massive tech
deflation continued with Intel cutting the price of its new (and more powerful)
chip by 27%! USA TODAY REPORTED that telephone charges may deflate to 1 cent per
minute for long-distance calls. Barnes & Noble and Bertelsmann announced a
link-up that will intensify Internet shopping price cutting. Mercedes announced
a -6% effective price cut at the same time GM vowed to press on with an
aggressive $15 billion global investment plan. Wal-Mart vowed to press on with a
new supermarket chain of Wal-Mart Neighborhood Market stores. Commodity prices
continued to weaken with the GSCI off -3.3 points during the first week of
October.
[GRAPH APPEARS HERE - SEE PLOT POINTS BELOW]
ISI MFG COMPANIES SALES SURVEY
0=Weak 100=Strong Oct 9 38.8
OVERALL
SALES
INDEX
7 JAN 94 53.6
14 JAN 94 53.6
21 JAN 94 45.3
28 JAN 94 45.3
4 FEB 94 52.9
11 FEB 94 53.8
18 FEB 94 53.8
25 FEB 94 56.3
4 MAR 94 52.1
11 MAR 94 52.1
18 MAR 94 54.7
25 MAR 94 54.7
1 APR 94 56.1
8 APR 94 57.5
15 APR 94 57.5
22 APR 94 55.0
29 APR 94 58.1
6 MAY 94 58.1
13 MAY 94 58.9
20 MAY 94 58.9
27 MAY 94 54.2
3 JUN 94 50.7
10 JUN 94 51.4
17 JUN 94 53.5
24 JUN 94 53.5
1 JUL 94 50.1
8 JUL 94 56.4
15 JUL 94 57.3
22 JUL 94 57.9
29 JUL 94 57.7
5 AUG 94 57.7
12 AUG 94 57.7
19 AUG 94 55.7
26 AUG 94 55.7
2 SEP 94 57.8
9 SEP 94 57.8
16 SEP 94 57.7
23 SEP 94 58.6
30 SEP 94 58.6
7 OCT 94 58.4
14 OCT 94 58.4
21 OCT 94 59.7
28 OCT 94 59.7
4 NOV 94 62.0
11 NOV 94 62.0
18 NOV 94 63.3
25 NOV 94 63.3
2 DEC 94 65.5
9 DEC 94 65.5
16 DEC 94 65.9
23 DEC 94 65.9
30 DEC 94 63.3
6 JAN 94 62.9
13 JAN 95 59.6
20 JAN 95 59.6
27 JAN 95 59.6
3 FEB 95 59.6
10 FEB 95 59.6
17 FEB 95 59.2
24 FEB 95 59.2
3 MAR 95 60.0
10 MAR 95 60.0
17 MAR 95 60.8
24 MAR 95 60.8
31 MAR 95 57.5
7 APR 95 57.5
14 APR 95 55.4
21 APR 95 55.4
28 APR 95 54.0
5 MAY 95 54.0
12 MAY 95 53.1
19 MAY 95 53.1
26 MAY 95 51.4
2 JUN 95 51.4
9 JUN 95 54.1
16 JUN 95 54.1
23 JUN 95 52.5
30 JUN 95 52.5
7 JUL 95 52.7
14 JUL 95 52.7
21 JUL 95 54.8
28 JUL 95 54.8
4 AUG 95 56.6
11 AUG 95 56.6
18 AUG 95 56.3
25 AUG 95 56.3
1 SEP 95 55.9
8 SEP 95 55.9
15 SEP 95 53.1
22 SEP 95 53.1
29 SEP 95 49.7
6 OCT 95 49.7
13 OCT 95 50.0
20 OCT 95 50.0
27 OCT 95 49.9
3 NOV 95 49.9
10 NOV 95 48.9
17 NOV 95 48.9
24 NOV 95 48.7
1 DEC 95 48.7
8 DEC 95 40.9
15 DEC 95 40.9
22 DEC 95 46.9
29 DEC 95 46.9
5 JAN 96 45.4
12 JAN 96 45.4
19 JAN 96 42.0
26 JAN 96 42.0
2 FEB 96 43.0
9 FEB 96 43.0
16 FEB 96 43.6
23 FEB 96 43.6
1 MAR 96 44.7
8 MAR 96 44.7
15 MAR 96 40.8
22 MAR 96 40.8
29 MAR 96 41.8
5 APR 96 41.8
12 APR 96 48.2
19 APR 96 48.2
26 APR 96 47.4
3 MAY 96 47.4
10 MAY 96 48.6
17 MAY 96 48.6
24 MAY 96 49.2
31 MAY 96 49.2
7 JUN 96 49.2
14 JUN 96 49.2
21 JUN 96 47.5
28 JUN 96 47.5
5 JUL 96 45.3
12 JUL 96 45.3
19 JUL 96 45.7
26 JUL 96 45.7
2 AUG 96 46.2
9 AUG 96 46.2
16 AUG 96 47.9
23 AUG 96 47.9
30 AUG 96 46.9
6 SEP 96 46.9
13 SEP 96 47.6
20 SEP 96 47.6
27 SEP 96 46.2
4 OCT 96 46.2
11 OCT 96 45.7
18 OCT 96 45.7
25 OCT 96 47.3
1 NOV 96 47.3
8 NOV 96 49.7
15 NOV 96 49.7
22 NOV 96 48.8
29 NOV 96 48.8
6 DEC 96 49.1
13 DEC 96 49.1
20 DEC 96 49.7
27 DEC 96 49.7
3 JAN 97 49.7
10 JAN 97 49.7
17 JAN 97 52.4
24 JAN 97 52.4
31 JAN 97 52.5
7 FEB 97 52.5
14 FEB 97 55.7
21 FEB 97 55.7
28 FEB 97 55.5
7 MAR 97 55.5
14 MAR 97 56.0
21 MAR 97 56.0
28 MAR 97 53.3
4 APR 97 53.3
11 APR 97 54.4
18 APR 97 54.4
25 APR 97 53.9
2 MAY 97 53.9
9 MAY 97 55.5
16 MAY 97 55.5
23 MAY 97 55.7
30 MAY 97 55.7
6 JUN 97 55.6
13 JUN 97 55.6
20 JUN 97 54.9
27 JUN 97 54.9
4 JUL 97 55.3
11 JUL 97 55.3
18 JUL 97 55.9
25 JUL 97 55.9
1 AUG 97 56.2
8 AUG 97 56.2
15 AUG 97 57.4
22 AUG 97 57.4
29 AUG 97 56.5
5 SEP 97 56.5
12 SEP 97 55.0
19 SEP 97 55.0
26 SEP 97 53.6
3 OCT 97 53.6
10 OCT 97 53.0
17 OCT 97 53.0
24 OCT 97 51.7
31 OCT 97 51.7
7 NOV 97 51.6
14 NOV 97 51.6
21 NOV 97 48.9
28 NOV 97 48.9
5 DEC 97 48.5
12 DEC 97 48.5
19 DEC 97 45.4
26 DEC 97 45.4
2 JAN 98 45.5
9 JAN 98 45.5
16 JAN 98 48.7
23 JAN 98 48.7
30 JAN 98 48.6
6 FEB 98 48.6
13 FEB 98 47.8
20 FEB 98 47.8
27 FEB 98 47.7
6 MAR 98 47.7
13 MAR 98 48.5
20 MAR 98 48.5
27 MAR 98 47.5
3 APR 98 47.5
10 APR 98 45.8
17 APR 98 45.8
24 APR 98 45.7
1 MAY 98 45.7
8 MAY 98 45.8
15 MAY 98 45.8
22 MAY 98 44.9
29 MAY 98 44.9
5 JUN 98 45.3
12 JUN 98 45.3
19 JUN 98 44.5
26 JUN 98 44.5
3 JUL 98 43.6
10 JUL 98 43.6
17 JUL 98 43.0
24 JUL 98 43.0
31 JUL 98 41.8
7 AUG 98 41.8
14 AUG 98 41.1
21 AUG 98 41.1
28 AUG 98 39.3
4 SEP 98 39.3
11 SEP 98 39.3
18 SEP 98 39.3
25 SEP 98 40.2
2 OCT 98 40.2
9 OCT 98 38.8
16 OCT 98 38.8
23 OCT 98 36.5
30 OCT 98 36.5
6 NOV 98 37.5
13 NOV 98 37.5
20 NOV 98 NA
We believe these downward pressures are likely to fall harder on prices than
units. So, we are now forecasting a recession in the GDP price deflator, with 2%
real GDP growth. Interest rates are likely to decline with short rates declining
more than long rates. We see corporate profits lower in 1998 and again in 1999
caused by a shrinking of profit margins and slow unit growth.
3
<PAGE>
Outlook for North America (continued)
ISI ECONOMIC FORECAST
98:1Q 98:2Q 98:3Q 98:4Q 99:1Q 99:2Q
- ---------------------------------------------------------------------
Nominal GDP 6.4% 2.7% 3.0% 2.3% 1.5% 1.5%
GDP DEFLATOR 1.1% 0.9% 0.5% 0.0% -0.5% -0.5%
REAL GDP 5.4% 1.8% 2.5% 2.0% 2.0% 2.0%
30-YEAR BOND
YIELDS* 5.9% 5.6% 5.0% 4.9% 4.7% 4.6%
FED FUNDS RATE* 5.5% 5.5% 5.2% 4.7% 4.5% 4.2%
S&P 500 OPERAT-
ING EPS** $46 $47 $46 $45 $44 $43
*End of Quarter
**S&P 500 EPS, seasonally adjusted, annual rate.
Review of Mexico
Overview
The current floating peso policy with rule-based dollar auctions and high
interest rate support is sound and sustainable. The extent of a market reaction
to potential IMF intervention in Brazil along with brazilian fiscal action and
resolution of the Real crisis is something to watch. We also have concerns about
the impact of high interest rates on a weak domestic banking sector, but we
believe the Mexican authorities are dealing with the problem in a constructive
manner.
The Mexican economy continues to be relatively robust in the face of the
international financial crisis; however, some slowdown in activity from last
year will be inevitable with growth declining below earlier official targets for
GDP. The current account balance is still on track to finish the year at or
below US$15 billion, or 3% of GDP. The price declines in petroleum that have
accompanied the Asia crisis have affected Mexican fiscal policy more severely
than the balance of payments. Oil exports account for roughly 8% of Mexico's
total, while oil and energy-related revenue accounts for roughly one-third of
fiscal revenues. Strong fiscal responses by Mexican authorities over the course
of 1998 in reaction to price declines in petroleum have countered the negative
fiscal impact. These cuts, together with high interest rates, can be expected to
reduce growth and import demand. Nevertheless, its close relationship with a
still strong U.S. economy means it should be able to maintain reasonably strong
growth in the face of global and domestic pressures.
Mexico and the Global Crisis
The global contagion shock has primarily affected the Mexican economy through
three channels. First, through terms of trade due to the fall in oil prices; the
loss of competitiveness with Asian exports has been an important channel. A
reduction in capital flows needed to finance the current account deficit has
been the most significant channel of contagion to date. Mexican policy to
confront these difficulties has been a series of successive fiscal adjustments
to maintain the government deficit at 1% of GDP to counteract the impact of oil
prices. Also, the central bank's allowing the peso to absorb the brunt of the
capital flow shock through depreciation has been a central part of its policy.
Third, monetary authorities have ensured that liquidity conditions keep interest
rates high to check the inflationary impact of peso fluctuations and stabilize
the local markets. Inflation recently has risen despite the action. It was up
1.62% in September. Finally, Mexican authorities are proposing legislation for
banking reform and to resolving Fobaproa banking sector scheme. The legislation
resolv-
4
<PAGE>
Outlook for North America (continued)
ing Fobaproa may be completed before the end of October, and banking reform
legislation would allow foreign banks to hold majority stakes in banking
institutions including the nation's top three banks.
Mexican Banks and Global Credit Crunch
In the aftermath of the 1995 Mexican peso crisis and the Fobaproa support
program, the Mexican banking sector has remained weak. A consequence has been
that real credit growth in the Mexican economy has actually been negative over
the period. Despite the lack of bank financing, however, the Mexican economy has
shown remarkably strong growth in the past two years. This is due to the fact
that Mexican companies fund investment out of retained earnings and, in the case
of larger corporates, through access to U.S. banks and credit markets. The
continued increasing integration of the Mexican economy with the U.S. economy
has been a significant driver of growth as well. Therefore, we expect
difficulties in the Mexican banking sector and the high interest rate
environment to have a relatively small impact on the Mexican private sector. A
sharp slowdown or persistent credit crunch in the U.S. will have a relatively
larger economic impact on the Mexican economy
Monetary and Interest Rate Policy
To date, the floating peso policy has functioned well as a shock absorber for
the economy. While in principal a floating exchange rate would allow the economy
to absorb a balance of payments shock without an interest rate rise, the recent
interest increases (1-year Cetes currently yield 38%) can be seen in two lights.
First, the tight monetary policy in the aftermath of peso policy is required to
keep inflation in check, since peso devaluation historically has a large impact
on domestic inflation. Second, the effect of high interest rates also acts as a
check on domestic demand and moderates the peso depreciation. Thus, in Mexico's
case, the current account adjustment that the global liquidity reduction is
imposing on emerging markets will be accomplished through both a reduction in
absorption and a change in real terms of trade.
Weakness in the banking sector has become a concern during the interest rate
defense. Over the past 7-8 weeks, the central bank has introduced an interest
rate swap facility for the Mexican banking sector. This has allowed banks to
swap their fixed rate exposure for floating rates, in effect putting the
financial burden of the interest rate adjustment to the global crisis on the
central bank and protecting the banks. The tight liquidity policy of the central
bank can be seen in both interest rates and the ratio of reserves to monetary
aggregates, which has been increasing steadily despite recent dollar sales.
Canada
Overview
The Canadian economy is downshifting due to a slowing world economy
(including the U.S.), falling commodity prices, and higher interest rates. Real
GDP is forecasted to grow only 1.9% in 1999, its lowest rate since 1996. This
will push up the unemployment rate, which will creep back up to roughly 9%
during 1999. Consumer price inflation is likely to remain subdued, helped by low
commodity
5
<PAGE>
Outlook for North America (continued)
prices. The weak Canadian dollar will clearly increase import price inflation
significantly, though, causing CPI inflation to rise to 2.0% in 1999. But this
will not cause an inflationary spiral because of the country's slack labor
markets. The labor slackness will persist, due to the weaker economy. Labor
costs will thus rise only slowly, and will not put upward pressure on CPI
inflation. The federal surplus is stabilizing as the economy slows. The surplus
will reach $11.7 billion for fiscal 1998-99, or 1.1% or GDP. The total
government sector picture looks even rosier, because six of the provincial
governments are also projected to run surpluses for the 1998-99 fiscal year. At
the end of August, the Bank of Canada (BoC) raised interest rates by 100 basis
points in order to defend the currency. More recently, the BoC followed the
Federal Reserve interest rate cut of 25 bp. The Canadian three-month T-bill rate
still exceeds the comparable U.S. rate, unlike most of the last 2 years when it
was lower. The Canadian dollar gained more than 3 U.S. cents after the rate
hike, but much of the improvement was worked out by the rate cut.
Inflation and Interest Rates
Canada has experienced inflation of less than 2.5% for more than six years
now, a feat unprecedented in the past 35 years. Low and stable inflation has
paid off in a dramatic downturn in long-term interest rates over the past four
years. Low long-term interest rates are good for investment and GDP growth, and
will also help fiscal balances. This implies that Canada's medium-term growth
will be strong as the economy returns to its potential.
Politics and the Currency
Over the past two years, higher yields on U.S three-month T-bills than on the
Canadian three-month T-bills have made U.S. dollar assets more attractive,
adding to the downward pressure on the Canadian dollar from declining commodity
prices. The dollar should appreciate somewhat over the course of 1999 as the
global financial crisis abates. However, because of our deflationary outlook, we
do not expect commodity prices to strengthen, and Quebec politics will also have
an impact on the nation's currency. The Quebec election is likely to be this
year and a referendum, if held, would be mid-1999. Should the Parti Quebecois
(PQ) win the next provincial election, there is the possibility of another
referendum on independence. If the Liberals win, the threat of secession would
become dormant.
Trade and the Currency
Over 85% of Canada's exports are destined for the United States. Consequently
the pace of U.S. economic growth will determine the growth of Canadian exports.
Weakening foreign demand, especially in Asia, will temper canadian export growth
to that region, although the relatively weak Canadian dollar will offset this
somewhat by limiting the slowdown in shipments to the United States. An
undervalued Canadian dollar will help the current account improve over the
coming years, from a deficit of $15 billion this year to zero by 2001. In the
short run, the current account balance will worsen as rising import prices push
up the value of imports faster than trade volumes.
6
<PAGE>
North American Government Bond Fund, Inc.
Statement of Net Assets
September 30, 1998
(Unaudited)
Interest Maturity Principal Market
Security Rate Date Value(+) Value
- --------------------------------------------------------------------------------
MEXICAN SECURITIES -- 12.53%
Mexican Treasury Cete(1) 24.81%* 3/11/99 P$ 49,868,140 $ 4,314,438
Mexican Udibonos(2) 6.00 11/23/00 93,033,000 1,956,505
Mexican Udibonos(2) 6.50 5/24/01 42,196,000 889,518
-----------
Total Mexican Securities
(Cost $8,606,980) 7,160,461
-----------
U.S. SECURITIES -- 79.43%
U.S. Treasury Bond 10.375 11/15/2009 $8,000,000 10,473,752
U.S. Treasury Bond 10.375 11/15/2012 2,000,000 2,834,062
U.S. Treasury Bond 7.50 11/15/2016 6,700,000 8,560,295
U.S. Treasury Bond 8.875 2/15/2019 7,750,000 11,361,020
U.S. Treasury Bond 7.875 2/15/2021 4,800,000 6,602,251
U.S. Canadian Global Bond 6.75 8/28/2006 2,750,000 3,071,461
U.S. Treasury Strip 5.612*** 5/15/2017 6,500,000 2,385,877
-----------
Total U.S. Treasury Securities
(Cost $43,103,163) 45,288,718
-----------
REPURCHASE AGREEMENT -- 6.80%
Goldman Sachs & Co., 5.40%
Dated 9/30/98 to be repurchased on
10/1/98, collateralized by U.S. Treasury
Bonds with a market value of $3,962,498.
(Cost $3,884,000) $3,884,000 3,884,000
-----------
Total Investment in Securities -- 98.76%
(Cost $55,594,143) ** 56,333,180
Other Assets Less Liabilities, Net-- 1.24% 810,377
-----------
Net Assets-- 100.00% $57,143,557
===========
Net Asset Value and Redemption Price Per Share
($57,143,557 / 6,388,948 shares outstanding) $8.94
=====
Offering Price Per Share
($8.94 / .970) $9.22
=====
- --------------------------------------------------------------------------------
(1) Cetes are short-term Mexican government debt securities.
(2) Udibonos are securities issued by the Mexican Government that pay a fixed
rate over inflation every 182 days.
* Yield as of September 30, 1998.
** Also aggregate cost for federal tax purposes.
*** Zero Coupon, Security Yield as of September 30, 1998.
(+) Principal value is shown in local currency: Mexican new pesos (P$) and U.S.
dollars ($).
See accompanying Notes to Financial Statements.
7
<PAGE>
North American Government Bond Fund, Inc.
Statement of Operations
For the Six Months Ended September 30, 1998
(Unaudited)
- -------------------------------------------------------------------------------
NET INVESTMENT INCOME:
Interest $1,887,191
----------
EXPENSES:
Investment advisory fees 108,638
Distribution fee 108,638
Administration fee 54,319
Accounting fee 26,909
Transfer agent fee 14,640
Legal 11,708
Printing and postage 7,137
Miscellaneous 6,076
Audit 1,830
Insurance 522
----------
Total expenses 340,417
Less: Fees waived (929)
----------
Net expenses 339,488
----------
Net investment income 1,547,703
----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain on investments 1,599,565
Net realized foreign exchange loss (156,976)
Change in net unrealized appreciation/depreciation of investments 536,951
Change in net unrealized appreciation/depreciation on translation
of assets and liabilities denominated in foreign currencies (1,573)
----------
Net gain on investments 1,977,967
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,525,670
==========
- -------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
8
<PAGE>
North American Government Bond Fund, Inc.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Six
Months Ended For the Year
Sept. 30, 1998 Ended
(Unaudited) March 31, 1998
- -----------------------------------------------------------------------------------------------
<S><C>
INCREASE/(DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 1,547,703 $ 3,741,189
Net realized gain from security and
foreign currency transactions 1,442,589 1,775,432
Change in unrealized appreciation/depreciation
of investments 536,951 1,644,223
Change in net unrealized appreciation/
depreciation on translation of assets and
liabilities denominated in foreign currencies (1,573) 2,956
------------ ------------
Net increase in net assets resulting
from operations 3,525,670 7,163,800
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income (1,490,822) (3,741,189)
Distribution from long term capital gains (732,504) --
Distribution in excess of net investment income -- (629,176)
------------ ------------
Total distribution (2,223,326) (4,370,365)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of 874,333 and 916,292
shares, respectively 7,605,716 7,908,494
Value of 107,793 and 231,643 shares issued in
reinvestment of dividends, respectively 937,233 1,980,041
Cost of 561,420 and 1,469,520 shares
repurchased, respectively (4,720,139) (12,629,368)
------------ ------------
Total increase/(decrease) in net assets derived from capital
share transactions 3,822,810 (2,740,833)
------------ ------------
Total increase in net assets 5,125,154 52,602
NET ASSETS:
Beginning of period 52,018,403 51,965,801
------------ ------------
End of period (Including undistributed net investment
income of $56,881, and $-0- for the six month and
twelve months periods ended September 30, 1998
and March 31, 1998, respectively.) $ 57,143,557 $ 52,018,403
============ ============
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
9
<PAGE>
North American Government Bond Fund, Inc.
Financial Highlights
(For shares outstanding throughout each period)
<TABLE>
<CAPTION>
For the six
months ended For the Years Ended March 31,
September 30, -------------------------------------------
1998* 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S><C>
Per Share Operating
Performance:
Net asset value at
beginning of period $ 8.74 $ 8.29 $ 8.37 $ 8.06 $ 9.53 $ 10.14
------- ------- ------- ------- ------- -------
Income from Investment
Operations:
Net investment income 0.31 0.61 0.75 0.81 0.63 0.89
Net realized and unrealized
gain/(loss) on investments 0.25 0.56 (0.11) 0.22 (1.38) (0.58)
------- ------- ------- ------- ------- -------
Total from investment operations 0.56 1.17 0.64 1.03 (0.75) 0.31
Less Distributions:
Dividends from net investment
income and short-term gain (0.36) (0.67) (0.26) -- (0.45) (0.92)
Distribution in excess of net
investment income -- (0.05) -- -- -- --
Return of capital -- -- (0.46) (0.72) (0.27) --
------- ------- ------- ------- ------- -------
Total distributions (0.36) (0.72) (0.72) (0.72) (0.72) (0.92)
------- ------- ------- ------- ------- -------
Net asset value at end of period $ 8.94 $ 8.74 $ 8.29 $ 8.37 $ 8.06 $ 9.53
======= ======= ======= ======= ======= =======
Total Return* 6.60% 14.65% 7.90% 12.97% (8.31)% 2.77%
Ratios to Average Daily Net Assets:
Expenses**(+) 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%
Net investment income***(+) 5.70% 7.17% 8.99% 9.49% 7.04% 7.04%
Supplemental Data:
Net assets at end of the
period (000) $57,144 $52,018 $51,966 $60,860 $66,292 $93,622
Portfolio turnover rate 144% 125% 46% 125% 104% 219%
- -----------------------------------------------------------------------------------------------
</TABLE>
(+) Unaudited.
* Total return excludes the effect of sales loads.
** Without the waiver of advisory fees (Note B), the ratio of expenses to
average net assets would have been 1.25%, 1.28%, 1.58%, 1.47%, 1.45% and
1.44%, for the six months ended September 30, 1998 and the years ended March
31, 1998, 1997, 1996, 1995, and 1994, respectively.
*** Without the waiver of advisory fees (Note B), the ratio of net investment
income to average net assets would have been 5.70%, 7.14%, 8.66%, 6.84%,
6.85% and 6.68%, for the six months ended September 30, 1998 and the years
ended March 31, 1998, 1997, 1996, 1995, and 1994, respectively.
(+) Annualized.
See accompanying Notes to Financial Statements.
10
<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 has to make
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 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 invest-
11
<PAGE>
Notes to Financial Statements (continued)
ment 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 determines its distributions according to income tax regulations,
which may be different from generally accepted accounting principles. As a
result, the Fund occasionally makes reclassifications within its capital
accounts to reflect income and gains that are available for distribution
under income tax regulations.
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 scientific amortization of
premiums and accretion of discounts when appropriate. Dividend distributions
to shareholders are recorded on the ex-dividend date.
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., a subsidiary of Bankers Trust
Corporation. ("ICC") is the Fund's administrator. As compensation for its
advisory services, the Fund pays ISI an annual fee. This fee is based on the
Fund's average daily net assets and is calculated daily and paid monthly at
the annual rate of 0.40%. The Fund paid ISI $108,638 for advisory services
for the six months ended September 30, 1998. As compensation for its
administrative services, the Fund pays ICC an annual fee. This fee is based
on the Fund's average daily net assets and is calculated daily and paid
monthly at the annual rate of 0.20%. At September 30, 1998, the Fund owed
$18,318 and $9,159 for advisory and administrative services, respectively.
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, 1998, ISI
waived fees of $619 and ICC waived fees of $310. At September 30, 1998 waived
expenses owed to the Fund amounted to $359.
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. At September 30, 1998, the Fund owed ICC $4,462 for accounting
services.
As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund owed $5,947 for
transfer agent services at September 30, 1998.
As compensation for providing distribution services for the ISIClass of
shares, the Fund pays ISI Group, Inc. ("ISI Group"), which is affiliated with
ISI, an annual fee that is calculated daily and paid monthly. This fee is
paid at an annual rate equal to 0.40% of the ISI Class' average daily net
assets. For the six months ended September 30, 1998, distribution fees
aggregated $108,638.
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the six months
ended September 30, 1998 was approximately $705, and the accrued liability
was approximately $11,033.
C. Capital Share Transactions -- The Fund is authorized to issue up to 25
million shares of $.001 par value capital stock.
12
<PAGE>
Notes to Financial Statements (concluded)
D. Investment Transactions -- Excluding short-term and U.S. government
obligations, purchases of investment securities aggregated $6,253,126 and
sales of investment securities aggregated $2,757,938 for the six months ended
September 30, 1998. Purchases of U.S. government obligations aggregated
$49,325,814 and sales of U.S. government obligations aggregated $48,872,922
for the period.
On September 30, 1998, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $2,185,555
and aggregate gross unrealized depreciation of all securities in which there
is an excess of tax cost over value was $1,446,518.
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, 1998.
F. Net Assets -- On September 30, 1998, net assets consisted of:
Paid-in capital $54,977,089
Accumulated net realized gain
from security and foreign
currency transactions 1,371,711
Unrealized appreciation of
investments 739,037
Undistributed net investment
income 56,881
Unrealized loss on translation of
assets and liabilities
denominated in foreign
currencies (1,161)
-----------
$57,143,557
===========
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.
13
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