ISI
North American
Government Bond Fund Shares
- -----------------------------------------------------
Directors and Officers
Edward S. Hyman
Chairman
Richard T. Hale
Vice Chairman
James J. Cunnane
Director
John F. Kroeger
Director
Louis E. Levy
Director
Eugene J. McDonald
Director
Rebecca W. Rimel
Director
R. Alan Medaugh
President
Nancy Lazar
Vice President
Amy M. Olmert
Secretary
Scott J. Liotta
Assistant Secretary
Carrie L. Butler
Vice President
Margaret M. Beeler
Assistant Vice President
Keith C. Reilly
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
ISI
INTERNATIONAL STRATEGY AND INVESTMENT
ISI
NORTH AMERICAN
GOVERNMENT BOND
FUND SHARES
(A Class of North American Government
Bond Fund, Inc.)
NORTH AMERICAN
ANNUAL REPORT
March 31, 1998
<PAGE>
Investment Advisor's Report
We are pleased to report on the progress of your Fund for the fiscal year
ended March 31, 1998.
The Fund seeks a high level of current income consistent with prudent
investment risk by using U.S., Canadian and Mexican government fixed-income
securities. We believe that by actively managing the proportions in each of the
North American markets, the Fund can achieve its overall objectives.
The Fund's total return for the fiscal year ended March 31, 1998 was
14.65%. The performance of the Mexican section and the long maturity orientation
of the U.S. and Canadian sections produced an overall return that surpassed the
U.S. Treasury market as a whole. The positive contribution of the Mexican
section was due to a combination of high local rates (around 20%) and a
relatively stable currency. U.S. interest rates dropped significantly during
fiscal 1998. Long-term Treasury rates dropped from 7.10% in March, 1997 to 5.90%
in March 1998. Long maturity issues in this falling interest rate environment
produce greater capital gains than short maturity issues. Long term Canadian
government interest rates also declined significantly during the Fund's fiscal
year, from 7.35% to 5.70%. Although full year Canadian bond performance was
good, they underperformed U.S. Treasuries in the 2nd half of the fiscal year due
primarily to weakness in the Canadian dollar. The Fund's activity in the 2nd
half reduced the investment weighting in Canada and increased the U.S.
weighting, which helped the Fund's Fiscal Year 1998 performance. Please see the
portfolio management section for more details. Since its inception, on January
15, 1993, the Fund has had a cumulative total return of 34.56%.
Performance Comparisons*
For the year ended March 31, 1998
North American Government Bond Fund 14.65%
Lehman Brothers Intermediate Treasury Index 9.40%
Lehman Brothers Emerging Americas Index: 19.81%
Mexico Section
*These figures assume the reinvestment of dividends and capital gains
distributions but exclude the impact of any sales charge. If the sales charge
were reflected, the performance quoted would be lower. The unmanaged indices
listed above are widely recognized as indicators of performance in their
respective sectors. 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. Please review
the Additional Performance Information on page 7.
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 year.
Portfolio Mix
(% of Investments)
1997 1998
------------------------------- ----
3/31 6/30 9/30 12/31 3/31
----- ----- ----- ----- ----
U.S. 76.2% 74.6% 73.4% 78.3% 81.9%
Canada 11.0 11.8 12.3 6.8 5.4
Mexico 12.8 13.6 14.3 14.9 11.8
Portfolio Maturity
(In Years)
1997 1998
------------------------------- ----
3/31 6/30 9/30 12/31 3/31
---- ---- ---- ----- ----
U.S.* 11.7 12.9 11.3 12.1 12.5
Canada 26.9 26.7 26.4 29.4 29.2
Mexico 0.1 0.4 0.2 0.3 0.1
*Including reserves.
1
<PAGE>
Investment Advisor's Report (concluded)
Review of Fiscal 1998
During the past year, we maintained a relatively long maturity orientation
in the U.S. section as U.S. rates declined from 7.10% to 5.90%. As the Canadian
dollar came under pressure, the Canadian section was reduced from 12.3% in
September to 5.4% at the end of the fiscal year. The Canadian proceeds were
reinvested in the U.S. section. U.S. bonds performed better over the last six
months than did Canadian bonds. Mexican rates (represented by 91 day Cetes)
declined during the fiscal year from 21.3% in March, 1997 to 19.9% in March
1998. The peso came under pressure in the 2nd half of its fiscal year as the
Mexican monthly trade balance moved from positive to negative. The fund's
holdings were reduced and it now has less in Mexico than earlier in the fiscal
year. We look for the opportunity to increase the Mexican weighting. For more on
all three economies and ISI's outlook please see the section below and the
report that follows this letter.
Outlook for Fiscal 1999
At the end of fiscal 1998, the Fund was weighted towards the U.S. The U.S.
domestic economy is strong while inflation is low and declining. Labor market
constraints are real but merger-related layoffs and international competition
have restrained wage growth. Rising interest rates have been delayed by the Asia
financial crisis. As the fiscal year goes on, we expect the U.S. economy will
slow and inflation will remain subdued. Our outlook is for declining rates in
the U.S. With interest rates in Canada now lower than in the U.S. across the
maturity spectrum and the fundamental picture similar to the U.S., we believe
the U.S. should outperform Canada. The Fund's underweighting in Canada is likely
to continue through at least the first half of this fiscal year. In the first
quarter of 1998, Mexico had inflation of 15%, which is above its 1998 target.
The Central Bank indicates they will continue a high real rate policy, which
means 91-day Cete yields of 20% while inflation is 15% or lower. The policy
objective is to move inflation down by restraining the domestic economy through
high interest rates. Some further peso adjustment is likely, reflecting the
trade deficit. Later this fiscal year, Mexican Cetes seem attractive for
additional investment.
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
April 23, 1998
2
<PAGE>
Outlook for North America
Review of U.S.
Perspective on the Asian Financial Crises
The U.S. economy and markets will continue to feel the affects of the Asian
financial crises. A financial crisis that impacts the banking system, such as
the current Pac Rim crisis, tends to have greater economic consequences than the
market expects. These crises, which are caused by the weak link in the economic
chain breaking, indicate that restrictive pressures had built to a critical
level. In the case of the Pac Rim crises, overcapacity and an associated huge
debt built during the 1990s made their economies fragile. That debt burden
cracked under the weight of years of sub-potential growth in Japan and a package
of G-7 fiscal tightenings. The Pac Rim crises and the policy tightenings that
precipitated them will combine to slow global economic growth and inflation.
Historically, following financial crises, monetary/fiscal-easing moves are
required to offset the tightenings that precipitated the crises and to repair
the broken links. As a result of easing moves in the face of slower growth,
financial assets tend to rally, i.e. stock prices rise and bond yields decline.
We expect the Pac Rim economic contraction to continue through the third
quarter, which, from a liquidity viewpoint, should be a support for U.S. bonds.
Financial crises have two aspects, direct and symbolic. The Pac Rim's
direct impacts will be on G7 exports, pricing power, profits, etc. The Pac Rim
crises symbolize global supply exceeding demand. Because of the Pac Rim
financial crises, the odds of another deflationary "event" are high. For
example, the "event" following the 1984 Continental Illinois financial crisis
was the 1985 oil price collapse.
30-YEAR TREASURY YIELD
Apr 24 5.94%
[GRAPH APPEARS HERE - SEE PLOT POINTS BELOW]
30 YEAR
TREASURY
YIELD
- --------------------------
Jan-68 5.39
Feb-68 5.38
Mar-68 5.59
Apr-68 5.46
May-68 5.55
Jun-68 5.40
Jul-68 5.29
Aug-68 5.23
Sep-68 5.28
Oct-68 5.44
Nov-68 5.56
Dec-68 5.88
Jan-69 5.99
Feb-69 6.11
Mar-69 6.22
Apr-69 6.03
May-69 6.11
Jun-69 6.28
Jul-69 6.27
Aug-69 6.22
Sep-69 6.55
Oct-69 6.50
Nov-69 6.74
Dec-69 6.91
Jan-70 6.92
Feb-70 6.67
Mar-70 6.72
Apr-70 6.85
May-70 7.24
Jun-70 7.34
Jul-70 6.92
Aug-70 7.08
Sep-70 6.88
Oct-70 6.88
Nov-70 6.58
Dec-70 6.28
Jan-71 6.18
Feb-71 6.14
Mar-71 5.94
Apr-71 6.00
May-71 6.32
Jun-71 6.38
Jul-71 6.38
Aug-71 6.27
Sep-71 6.05
Oct-71 5.92
Nov-71 5.86
Dec-71 6.00
Jan-72 6.01
Feb-72 6.06
Mar-72 6.06
Apr-72 6.16
May-72 6.07
Jun-72 6.01
Jul-72 6.01
Aug-72 5.94
Sep-72 6.05
Oct-72 6.01
Nov-72 5.79
Dec-72 5.96
Jan-73 6.78
Feb-73 6.88
Mar-73 6.91
Apr-73 6.86
May-73 6.99
Jun-73 7.06
Jul-73 7.29
Aug-73 7.62
Sep-73 7.25
Oct-73 7.18
Nov-73 7.30
Dec-73 7.29
Jan-74 7.48
Feb-74 7.46
Mar-74 7.73
Apr-74 8.01
May-74 8.14
Jun-74 8.10
Jul-74 8.26
Aug-74 8.60
Sep-74 8.60
Oct-74 8.37
Nov-74 7.99
Dec-74 7.91
Jan-75 7.88
Feb-75 7.71
Mar-75 7.99
Apr-75 8.36
May-75 8.22
Jun-75 8.04
Jul-75 8.17
Aug-75 8.50
Sep-75 8.57
Oct-75 8.35
Nov-75 8.28
Dec-75 8.23
Jan-76 8.01
Feb-76 8.03
Mar-76 7.97
Apr-76 7.86
May-76 8.13
Jun-76 8.03
Jul-76 8.00
Aug-76 7.91
Sep-76 7.78
Oct-76 7.70
Nov-76 7.64
Dec-76 7.30
Jan-77 7.48
Feb-77 7.64
Mar-77 7.80
Apr-77 7.73
May-77 7.80
Jun-77 7.64
Jul-77 7.64
Aug-77 7.68
Sep-77 7.64
Oct-77 7.77
Nov-77 7.85
Dec-77 7.94
Jan-78 8.18
Feb-78 8.25
Mar-78 8.23
Apr-78 8.34
May-78 8.43
Jun-78 8.50
Jul-78 8.65
Aug-78 8.47
Sep-78 8.47
Oct-78 8.67
Nov-78 8.75
Dec-78 8.88
Jan-79 8.94
Feb-79 9.00
Mar-79 9.03
Apr-79 9.08
May-79 9.19
Jun-79 8.92
Jul-79 8.93
Aug-79 8.98
Sep-79 9.17
Oct-79 9.85
Nov-79 10.30
Dec-79 10.12
Jan-80 10.60
Feb-80 12.13
Mar-80 12.34
Apr-80 11.40
May-80 10.36
Jun-80 9.81
Jul-80 10.24
Aug-80 11.00
Sep-80 11.34
Oct-80 11.59
Nov-80 12.37
Dec-80 12.40
Jan-81 12.14
Feb-81 12.80
Mar-81 12.69
Apr-81 13.20
May-81 13.60
Jun-81 12.96
Jul-81 13.59
Aug-81 14.17
Sep-81 14.67
Oct-81 14.68
Nov-81 13.35
Dec-81 13.45
Jan-82 14.22
Feb-82 14.22
Mar-82 13.53
Apr-82 13.37
May-82 13.24
Jun-82 13.92
Jul-82 13.55
Aug-82 12.77
Sep-82 12.07
Oct-82 11.17
Nov-82 10.54
Dec-82 10.54
Jan-83 10.63
Feb-83 10.88
Mar-83 10.63
Apr-83 10.48
May-83 10.53
Jun-83 10.93
Jul-83 11.40
Aug-83 11.82
Sep-83 11.63
Oct-83 11.58
Nov-83 11.75
Dec-83 11.88
Jan-84 11.75
Feb-84 11.95
Mar-84 12.38
Apr-84 12.65
May-84 13.43
Jun-84 13.44
Jul-84 13.21
Aug-84 12.54
Sep-84 12.29
Oct-84 11.98
Nov-84 11.56
Dec-84 11.52
Jan-85 11.45
Feb-85 11.47
Mar-85 11.81
Apr-85 11.47
May-85 11.05
Jun-85 10.45
Jul-85 10.50
Aug-85 10.56
Sep-85 10.61
Oct-85 10.50
Nov-85 10.06
Dec-85 9.54
Jan-86 9.40
Feb-86 8.93
Mar-86 7.96
Apr-86 7.39
May-86 7.52
Jun-86 7.57
Jul-86 7.27
Aug-86 7.33
Sep-86 7.62
Oct-86 7.70
Nov-86 7.52
Dec-86 7.37
Jan-87 7.39
Feb-87 7.54
Mar-87 7.55
Apr-87 8.25
May-87 8.78
Jun-87 8.57
Jul-87 8.64
Aug-87 8.97
Sep-87 9.59
Oct-87 9.61
Nov-87 8.95
Dec-87 9.12
Jan-88 8.83
Feb-88 8.43
Mar-88 8.63
Apr-88 8.95
May-88 9.23
Jun-88 9.00
Jul-88 9.14
Aug-88 9.32
Sep-88 9.06
Oct-88 8.89
Nov-88 9.02
Dec-88 9.01
Jan-89 8.93
Feb-89 9.01
Mar-89 9.17
Apr-89 9.03
May-89 8.83
Jun-89 8.27
Jul-89 8.08
Aug-89 8.12
Sep-89 8.15
Oct-89 8.00
Nov-89 7.90
Dec-89 7.90
Jan-90 8.26
Feb-90 8.50
Mar-90 8.56
Apr-90 8.76
May-90 8.73
Jun-90 8.46
Jul-90 8.50
Aug-90 8.86
Sep-90 9.03
Oct-90 8.86
Nov-90 8.54
Dec-90 8.24
Jan-91 8.27
Feb-91 8.03
Mar-91 8.29
Apr-91 8.21
May-91 8.27
Jun-91 8.47
Jul-91 8.45
Aug-91 8.14
Sep-91 7.95
Oct-91 7.93
Nov-91 7.92
Dec-91 7.70
Jan-92 7.58
Feb-92 7.85
Mar-92 7.97
Apr-92 7.96
May-92 7.89
Jun-92 7.84
Jul-92 7.60
Aug-92 7.39
Sep-92 7.34
Oct-92 7.53
Nov-92 7.61
Dec-92 7.44
Jan-93 7.34
Feb-93 7.09
Mar-93 6.82
Apr-93 6.85
May-93 6.92
Jun-93 6.81
Jul-93 6.63
Aug-93 6.32
Sep-93 6.00
Oct-93 5.94
Nov-93 6.21
Dec-93 6.25
Jan-94 6.29
Feb-94 6.49
Mar-94 6.91
Apr-94 7.27
May-94 7.41
Jun-94 7.40
Jul-94 7.58
Aug-94 7.49
Sep-94 7.71
Oct-94 7.94
Nov-94 8.08
Dec-94 7.87
Jan-95 7.85
Feb-95 7.61
Mar-95 7.45
Apr-95 7.36
May-95 6.95
Jun-95 6.57
Jul-95 6.72
Aug-95 6.86
Sep-95 6.55
Oct-95 6.37
Nov-95 6.26
Dec-95 6.06
Jan-96 6.05
Feb-96 6.24
Mar-96 6.60
Apr-96 6.79
May-96 6.93
Jun-96 7.06
Jul-96 7.03
Aug-96 6.84
Sep-96 7.03
Oct-96 6.81
Nov-96 6.48
Dec-96 6.55
Jan-97 6.83
Feb-97 6.69
Mar-97 6.93
Apr-97 7.09
May-97 6.94
Jun-97 6.77
Jul-97 6.51
Aug-97 6.58
Sep-97 6.50
Oct-97 6.33
Nov-97 6.11
Dec-97 5.99
Jan-98 5.81
Feb-98 5.89
Mar-98 5.95
Apr-98 5.92
U.S. Economy, Money and Markets
Due to continued strong growth in the U.S., odds of Fed tightening will
continue to increase. But they probably won't make it to 100% because Asian
concerns will delay a move until at least the July meeting, and by then, the
Asian problems will probably have precipitated an "event" that will further
delay a tightening. Possible "events" include problems in Russia, the threat of
a yen devaluation, renewed slumps in Asian markets, Pac Rim social upheavals,
another downleg in oil, weaker U.S. corporate profit reports, and/or slower U.S.
growth. It should be noted that perhaps not by chance, six weeks after the Fed
tightened last spring, the Thai financial crisis erupted.
ISI ECONOMIC FORECAST
97:3Q 97:4Q 98:1Q 98:2Q 98:3Q 98:4Q
REAL GDP 3.1% 3.7% 3.0% 3.0% 3.0% 3.0%
GDP DEFLATOR 1.4% 1.4% 1.0% 1.0% 1.0% 1.01%
30-YEAR BOND
YIELDS* 6.4% 5.9% 5.9% 5.7% 5.5% 5.4%
FED FUNDS RATE* 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%
3
<PAGE>
Outlook for North America (continued)
We have recently lowered our inflation forecast from 1.5% to 1%. Oil has
come back down. Our contacts at retailers tell us that their pricing power has
declined to a six-month low. Manufacturing companies tell us that their pricing
power has declined to a four-year low. Our contacts at tech companies tell us
that price deflation in their sector is intensifying. The flood of exports from
the Pac Rim is just starting to pour in. So, their pressure on U.S. prices is
just starting. The dollar is still firm.
The first quarter slowdown in corporate profit growth probably marked a
major turning point, which is unlikely to reverse in the second half of the
year. First, it should be noted that the weak first quarter earnings unfolded
despite a strong economy. In addition, Pac Rim economies are likely to be weaker
in the second half than they were in the first half. The rising value of the
dollar is likely to continue to hurt earnings. The labor-costs vs. pricing-power
squeeze is likely to intensify. Lastly, U.S. economic growth is likely to slow
later this year. On a 12-month sum through March, the Federal budget was already
in surplus by +$27 billion, with receipts up 10% and outlays up just 1%.
Assuming receipts up 9% and outlays up 2.5%, the full-year surplus for FY1998
will swell to +$80 billion. This presents a good supply/demand picture for
U.S. Treasuries.
Review of Mexico
The Mexican Central Bank (Banxico) is committed to reducing inflation. In
this context, the central bank will make every effort to be as close as possible
to its stated 12% inflation target. A consequence of Banxico's commitment to
its inflation target, together with the disappointing start, in which the first
quarter's CPI report was in excess of 15%, is the retention of a high real rate
policy for most of the next year.
Recent statistics showing a trade deficit that is high relative to last
year is likely to continue into the summer. Key factors cited in this respect
are export competition from Asia, which has yet to fully materialize, and a
continuing strong domestic economy which is pulling in foreign goods. Banxico's
estimates of first quarter growth is 6.1%. The IMF estimates Mexico's full year
1998 GDP growth at 4.8%, very near official estimates of 5%. Consequently,
Banxico now estimates that the current account deficit will rise to $15 billion
for 1998, an upward adjustment of $3 billion from the bank's earlier estimate of
$12 billion.
The central bank has reported that capital inflows, especially Foreign
Direct Investment, have picked up recently. In our view, this has caused much of
the recent peso strength, suggesting that long term oriented financial capital
inflows have resumed. Banxico has emphasized that fiscal adjustment is a
continuing issue and will affect future performance. Reform of the institution
charged with sorting out the Mexican financial sector's nonperforming loan
portfolio in the aftermath of the 1995 crisis, will cost 1% of GDP per year
going forward. The fall in oil prices, the event behind two rounds of fiscal
cuts and a potential third, now is estimated to mean the loss of another 1% of
GDP this year. The Mexican federal government's 1998 revenue shortfall points
out
4
<PAGE>
Outlook for North America (continued)
the need to depend less on oil revenues. The best way to increase fiscal
revenue is through broadening income tax collection and better tax compliance.
These fundamental reforms will not be tackled until after the next Presidential
election. In the meantime, a high interest rate policy and close scrutiny of
government spending will be required.
Strong seasonal improvement in the Mexican trade balance should help the
peso strengthen by late summer. The current peso level is 8.52 pesos to the U.S.
dollar. Over the near term, having the peso adjustment recently from 7.9 to 8.5
versus the U.S. dollar has helped Mexican trade competitiveness and capped the
trade red ink. Later this year, we expect the peso to weaken modestly versus the
dollar because of the arrival of the Asian import wave. In our view, rates
around 20% and a somewhat weaker peso make for a good medium term investment.
MEXICAN PESO
Mar 31 8.52
[GRAPH APPEARS HERE - SEE PLOT POINTS BELOW]
MEXICAN
PESO
- -------------------------
03-Mar-97 7.99
04-Mar-97 7.97
05-Mar-97 8.05
06-Mar-97 8.01
07-Mar-97 8.00
10-Mar-97 7.95
11-Mar-97 7.98
12-Mar-97 7.96
13-Mar-97 8.00
14-Mar-97 7.98
17-Mar-97 7.99
18-Mar-97 7.95
19-Mar-97 7.92
20-Mar-97 7.94
21-Mar-97 7.92
24-Mar-97 7.90
25-Mar-97 7.89
26-Mar-97 7.91
27-Mar-97 7.91
28-Mar-97 7.93
31-Mar-97 7.93
01-Apr-97 7.92
02-Apr-97 7.93
03-Apr-97 7.97
04-Apr-97 7.95
07-Apr-97 7.90
08-Apr-97 7.89
09-Apr-97 7.89
10-Apr-97 7.91
11-Apr-97 7.92
14-Apr-97 7.91
15-Apr-97 7.88
16-Apr-97 7.90
17-Apr-97 7.89
18-Apr-97 7.88
21-Apr-97 7.87
22-Apr-97 7.87
23-Apr-97 7.88
24-Apr-97 7.86
25-Apr-97 7.79
28-Apr-97 7.93
29-Apr-97 7.97
30-Apr-97 7.95
01-May-97 7.95
02-May-97 7.92
05-May-97 7.91
06-May-97 7.88
07-May-97 7.92
08-May-97 7.92
09-May-97 7.90
12-May-97 7.93
13-May-97 7.91
14-May-97 7.89
15-May-97 7.90
16-May-97 7.90
19-May-97 7.89
20-May-97 7.89
21-May-97 7.87
22-May-97 7.87
23-May-97 7.89
26-May-97 7.89
27-May-97 7.93
28-May-97 7.91
29-May-97 7.91
30-May-97 7.92
02-Jun-97 7.91
03-Jun-97 7.91
04-Jun-97 7.93
05-Jun-97 7.95
06-Jun-97 7.99
09-Jun-97 7.99
10-Jun-97 7.97
11-Jun-97 7.97
12-Jun-97 7.97
13-Jun-97 7.97
16-Jun-97 7.96
17-Jun-97 7.94
18-Jun-97 7.92
19-Jun-97 7.91
20-Jun-97 7.96
23-Jun-97 7.98
24-Jun-97 7.94
25-Jun-97 7.95
26-Jun-97 7.96
27-Jun-97 7.95
30-Jun-97 7.95
01-Jul-97 7.93
02-Jul-97 7.95
03-Jul-97 7.95
04-Jul-97 7.95
07-Jul-97 7.91
08-Jul-97 7.92
09-Jul-97 7.90
10-Jul-97 7.88
11-Jul-97 7.85
14-Jul-97 7.87
15-Jul-97 7.89
16-Jul-97 7.92
17-Jul-97 7.86
18-Jul-97 7.90
21-Jul-97 7.89
22-Jul-97 7.86
23-Jul-97 7.84
24-Jul-97 7.84
25-Jul-97 7.77
28-Jul-97 7.78
29-Jul-97 7.80
30-Jul-97 7.77
31-Jul-97 7.83
01-Aug-97 7.82
04-Aug-97 7.83
05-Aug-97 7.81
06-Aug-97 7.78
07-Aug-97 7.79
08-Aug-97 7.83
11-Aug-97 7.80
12-Aug-97 7.78
13-Aug-97 7.78
14-Aug-97 7.77
15-Aug-97 7.76
18-Aug-97 7.77
19-Aug-97 7.76
20-Aug-97 7.77
21-Aug-97 7.76
22-Aug-97 7.78
25-Aug-97 7.76
26-Aug-97 7.76
27-Aug-97 7.76
28-Aug-97 7.77
29-Aug-97 7.79
01-Sep-97 7.79
02-Sep-97 7.78
03-Sep-97 7.77
04-Sep-97 7.79
05-Sep-97 7.81
08-Sep-97 7.79
09-Sep-97 7.78
10-Sep-97 7.78
11-Sep-97 7.78
12-Sep-97 7.78
15-Sep-97 7.77
16-Sep-97 7.77
17-Sep-97 7.75
18-Sep-97 7.77
19-Sep-97 7.75
22-Sep-97 7.73
23-Sep-97 7.77
24-Sep-97 7.82
25-Sep-97 7.82
26-Sep-97 7.83
29-Sep-97 7.82
30-Sep-97 7.78
01-Oct-97 7.76
02-Oct-97 7.76
03-Oct-97 7.75
06-Oct-97 7.76
07-Oct-97 7.75
08-Oct-97 7.76
09-Oct-97 7.77
10-Oct-97 7.76
13-Oct-97 7.76
14-Oct-97 7.75
15-Oct-97 7.74
16-Oct-97 7.75
17-Oct-97 7.75
20-Oct-97 7.73
21-Oct-97 7.72
22-Oct-97 7.72
23-Oct-97 7.76
24-Oct-97 7.84
27-Oct-97 8.14
28-Oct-97 8.35
29-Oct-97 8.15
30-Oct-97 8.30
31-Oct-97 8.41
03-Nov-97 8.23
04-Nov-97 8.25
05-Nov-97 8.18
06-Nov-97 8.38
07-Nov-97 8.38
10-Nov-97 8.28
11-Nov-97 8.28
12-Nov-97 8.35
13-Nov-97 8.38
14-Nov-97 8.33
17-Nov-97 8.25
18-Nov-97 8.25
19-Nov-97 8.29
20-Nov-97 8.24
21-Nov-97 8.19
24-Nov-97 8.24
25-Nov-97 8.24
26-Nov-97 8.22
27-Nov-97 8.22
28-Nov-97 8.22
01-Dec-97 8.19
02-Dec-97 8.16
03-Dec-97 8.13
04-Dec-97 8.11
05-Dec-97 8.15
08-Dec-97 8.12
09-Dec-97 8.11
10-Dec-97 8.14
11-Dec-97 8.21
12-Dec-97 8.17
15-Dec-97 8.14
16-Dec-97 8.09
17-Dec-97 8.08
18-Dec-97 8.07
19-Dec-97 8.13
22-Dec-97 8.12
23-Dec-97 8.13
24-Dec-97 8.19
25-Dec-97 8.19
26-Dec-97 8.19
29-Dec-97 8.08
30-Dec-97 8.07
31-Dec-97 8.07
01-Jan-98 8.07
02-Jan-98 8.06
05-Jan-98 8.04
06-Jan-98 8.04
07-Jan-98 8.50
08-Jan-98 8.08
09-Jan-98 8.09
12-Jan-98 8.30
13-Jan-98 8.17
14-Jan-98 8.20
15-Jan-98 8.30
16-Jan-98 8.20
19-Jan-98 8.20
20-Jan-98 8.22
21-Jan-98 8.28
22-Jan-98 8.33
23-Jan-98 8.30
26-Jan-98 8.28
27-Jan-98 8.27
28-Jan-98 8.38
29-Jan-98 8.48
30-Jan-98 8.46
02-Feb-98 8.45
03-Feb-98 8.43
04-Feb-98 8.41
05-Feb-98 8.42
06-Feb-98 8.42
09-Feb-98 8.45
10-Feb-98 8.50
11-Feb-98 8.46
12-Feb-98 8.46
13-Feb-98 8.47
16-Feb-98 8.47
17-Feb-98 8.47
18-Feb-98 8.55
19-Feb-98 8.55
20-Feb-98 8.59
23-Feb-98 8.63
24-Feb-98 8.61
25-Feb-98 8.58
26-Feb-98 8.56
27-Feb-98 8.53
02-Mar-98 8.50
03-Mar-98 8.53
04-Mar-98 8.59
05-Mar-98 8.61
06-Mar-98 8.60
09-Mar-98 8.62
10-Mar-98 8.63
11-Mar-98 8.67
12-Mar-98 8.58
13-Mar-98 8.56
16-Mar-98 8.59
17-Mar-98 8.59
18-Mar-98 8.56
19-Mar-98 8.57
20-Mar-98 8.58
23-Mar-98 8.54
24-Mar-98 8.54
25-Mar-98 8.53
26-Mar-98 8.52
27-Mar-98 8.53
30-Mar-98 8.54
31-Mar-98 8.52
01-Apr-98 8.60
02-Apr-98 8.52
03-Apr-98 8.55
06-Apr-98 8.52
07-Apr-98 8.53
08-Apr-98 8.51
09-Apr-98 8.50
10-Apr-98 8.50
13-Apr-98 8.52
14-Apr-98 8.49
15-Apr-98 8.47
16-Apr-98 8.50
17-Apr-98 8.49
20-Apr-98 8.48
21-Apr-98 8.46
22-Apr-98 8.46
23-Apr-98 8.47
24-Apr-98 8.48
27-Apr-98 8.52
28-Apr-98 8.49
29-Apr-98 8.51
30-Apr-98 8.49
01-May-98 8.50
04-May-98 8.48
05-May-98 8.48
06-May-98 8.48
07-May-98 8.50
08-May-98 8.48
11-May-98 8.47
12-May-98 8.51
13-May-98 8.52
14-May-98 8.51
15-May-98 8.52
18-May-98 8.54
19-May-98 8.58
20-May-98 8.64
21-May-98 8.64
22-May-98 8.65
Review of Canada
A near-term pause in economic activity is likely. In part, this is due to
the negative impact of a severe ice storm that affected Quebec and Eastern
Ontario, which could shave as much as 1/2% off real GDP growth in 1998's first
quarter. Another reason to be somewhat cautious about growth prospects during
the first half of this year is the negative impact arising from Asian economic
woes. The associated weakness in commodity prices, especially energy, could push
the current account deficit beyond 4% of GDP and shave roughly 1/2% off growth
during the first half of the year.
Some weakness in the Canadian dollar is warranted in light of the
deterioration in the country's external balances. A 2% decline in the value of
the dollar (to about $C1.45) appears sufficient to offset the 6% fall in
(trade-weighted) commodity prices that occurred recently.
CANADIAN DOLLAR
Mar 31 1.42
[GRAPH APPEARS HERE-SEE PLOT POINTS BELOW]
CANADIAN
DOLLAR
- --------------------------
03-Mar-97 1.37
04-Mar-97 1.37
05-Mar-97 1.37
06-Mar-97 1.36
07-Mar-97 1.37
10-Mar-97 1.37
11-Mar-97 1.37
12-Mar-97 1.36
13-Mar-97 1.36
14-Mar-97 1.36
17-Mar-97 1.37
18-Mar-97 1.37
19-Mar-97 1.38
20-Mar-97 1.38
21-Mar-97 1.38
24-Mar-97 1.38
25-Mar-97 1.38
26-Mar-97 1.37
27-Mar-97 1.38
28-Mar-97 1.38
31-Mar-97 1.38
01-Apr-97 1.39
02-Apr-97 1.39
03-Apr-97 1.39
04-Apr-97 1.39
07-Apr-97 1.39
08-Apr-97 1.39
09-Apr-97 1.39
10-Apr-97 1.39
11-Apr-97 1.40
14-Apr-97 1.40
15-Apr-97 1.40
16-Apr-97 1.40
17-Apr-97 1.40
18-Apr-97 1.40
21-Apr-97 1.40
22-Apr-97 1.40
23-Apr-97 1.39
24-Apr-97 1.39
25-Apr-97 1.40
28-Apr-97 1.40
29-Apr-97 1.40
30-Apr-97 1.40
01-May-97 1.39
02-May-97 1.38
05-May-97 1.38
06-May-97 1.38
07-May-97 1.38
08-May-97 1.38
09-May-97 1.39
12-May-97 1.39
13-May-97 1.39
14-May-97 1.39
15-May-97 1.38
16-May-97 1.37
19-May-97 1.37
20-May-97 1.38
21-May-97 1.37
22-May-97 1.37
23-May-97 1.38
26-May-97 1.38
27-May-97 1.38
28-May-97 1.38
29-May-97 1.38
30-May-97 1.38
02-Jun-97 1.38
03-Jun-97 1.37
04-Jun-97 1.38
05-Jun-97 1.38
06-Jun-97 1.38
09-Jun-97 1.39
10-Jun-97 1.39
11-Jun-97 1.39
12-Jun-97 1.38
13-Jun-97 1.38
16-Jun-97 1.38
17-Jun-97 1.39
18-Jun-97 1.39
19-Jun-97 1.39
20-Jun-97 1.39
23-Jun-97 1.39
24-Jun-97 1.39
25-Jun-97 1.39
26-Jun-97 1.38
27-Jun-97 1.38
30-Jun-97 1.38
01-Jul-97 1.38
02-Jul-97 1.38
03-Jul-97 1.37
04-Jul-97 1.37
07-Jul-97 1.38
08-Jul-97 1.37
09-Jul-97 1.37
10-Jul-97 1.37
11-Jul-97 1.37
14-Jul-97 1.37
15-Jul-97 1.37
16-Jul-97 1.37
17-Jul-97 1.38
18-Jul-97 1.37
21-Jul-97 1.37
22-Jul-97 1.38
23-Jul-97 1.38
24-Jul-97 1.38
25-Jul-97 1.38
28-Jul-97 1.39
29-Jul-97 1.39
30-Jul-97 1.38
31-Jul-97 1.38
01-Aug-97 1.39
04-Aug-97 1.38
05-Aug-97 1.38
06-Aug-97 1.39
07-Aug-97 1.39
08-Aug-97 1.39
11-Aug-97 1.39
12-Aug-97 1.39
13-Aug-97 1.39
14-Aug-97 1.39
15-Aug-97 1.39
18-Aug-97 1.39
19-Aug-97 1.40
20-Aug-97 1.39
21-Aug-97 1.40
22-Aug-97 1.39
25-Aug-97 1.39
26-Aug-97 1.40
27-Aug-97 1.39
28-Aug-97 1.39
29-Aug-97 1.39
01-Sep-97 1.39
02-Sep-97 1.38
03-Sep-97 1.38
04-Sep-97 1.39
05-Sep-97 1.38
08-Sep-97 1.38
09-Sep-97 1.38
10-Sep-97 1.38
11-Sep-97 1.39
12-Sep-97 1.39
15-Sep-97 1.39
16-Sep-97 1.39
17-Sep-97 1.39
18-Sep-97 1.39
19-Sep-97 1.39
22-Sep-97 1.39
23-Sep-97 1.39
24-Sep-97 1.39
25-Sep-97 1.38
26-Sep-97 1.38
29-Sep-97 1.38
30-Sep-97 1.38
01-Oct-97 1.38
02-Oct-97 1.37
03-Oct-97 1.37
06-Oct-97 1.37
07-Oct-97 1.37
08-Oct-97 1.37
09-Oct-97 1.37
10-Oct-97 1.38
13-Oct-97 1.38
14-Oct-97 1.38
15-Oct-97 1.39
16-Oct-97 1.39
17-Oct-97 1.39
20-Oct-97 1.39
21-Oct-97 1.39
22-Oct-97 1.39
23-Oct-97 1.39
24-Oct-97 1.39
27-Oct-97 1.40
28-Oct-97 1.41
29-Oct-97 1.40
30-Oct-97 1.41
31-Oct-97 1.41
03-Nov-97 1.41
04-Nov-97 1.40
05-Nov-97 1.40
06-Nov-97 1.40
07-Nov-97 1.41
10-Nov-97 1.41
11-Nov-97 1.41
12-Nov-97 1.41
13-Nov-97 1.41
14-Nov-97 1.41
17-Nov-97 1.41
18-Nov-97 1.41
19-Nov-97 1.42
20-Nov-97 1.42
21-Nov-97 1.42
24-Nov-97 1.42
25-Nov-97 1.42
26-Nov-97 1.42
27-Nov-97 1.42
28-Nov-97 1.42
01-Dec-97 1.42
02-Dec-97 1.42
03-Dec-97 1.42
04-Dec-97 1.42
05-Dec-97 1.42
08-Dec-97 1.42
09-Dec-97 1.42
10-Dec-97 1.42
11-Dec-97 1.42
12-Dec-97 1.42
15-Dec-97 1.42
16-Dec-97 1.42
17-Dec-97 1.42
18-Dec-97 1.42
19-Dec-97 1.43
22-Dec-97 1.43
23-Dec-97 1.44
24-Dec-97 1.44
25-Dec-97 1.44
26-Dec-97 1.44
29-Dec-97 1.44
30-Dec-97 1.44
31-Dec-97 1.43
01-Jan-98 1.43
02-Jan-98 1.43
05-Jan-98 1.43
06-Jan-98 1.43
07-Jan-98 1.43
08-Jan-98 1.43
09-Jan-98 1.43
12-Jan-98 1.43
13-Jan-98 1.44
14-Jan-98 1.43
15-Jan-98 1.44
16-Jan-98 1.44
19-Jan-98 1.44
20-Jan-98 1.44
21-Jan-98 1.44
22-Jan-98 1.45
23-Jan-98 1.46
26-Jan-98 1.45
27-Jan-98 1.45
28-Jan-98 1.46
29-Jan-98 1.46
30-Jan-98 1.46
02-Feb-98 1.45
03-Feb-98 1.45
04-Feb-98 1.45
05-Feb-98 1.44
06-Feb-98 1.43
09-Feb-98 1.44
10-Feb-98 1.43
11-Feb-98 1.44
12-Feb-98 1.44
13-Feb-98 1.44
16-Feb-98 1.44
17-Feb-98 1.44
18-Feb-98 1.44
19-Feb-98 1.42
20-Feb-98 1.42
23-Feb-98 1.42
24-Feb-98 1.42
25-Feb-98 1.42
26-Feb-98 1.42
27-Feb-98 1.42
02-Mar-98 1.43
03-Mar-98 1.42
04-Mar-98 1.42
05-Mar-98 1.42
06-Mar-98 1.42
09-Mar-98 1.41
10-Mar-98 1.41
11-Mar-98 1.41
12-Mar-98 1.41
13-Mar-98 1.41
16-Mar-98 1.41
17-Mar-98 1.42
18-Mar-98 1.42
19-Mar-98 1.42
20-Mar-98 1.42
23-Mar-98 1.42
24-Mar-98 1.42
25-Mar-98 1.41
26-Mar-98 1.41
27-Mar-98 1.41
30-Mar-98 1.42
31-Mar-98 1.42
01-Apr-98 1.42
02-Apr-98 1.42
03-Apr-98 1.42
06-Apr-98 1.42
07-Apr-98 1.42
08-Apr-98 1.42
09-Apr-98 1.43
10-Apr-98 1.43
13-Apr-98 1.43
14-Apr-98 1.43
15-Apr-98 1.44
16-Apr-98 1.44
17-Apr-98 1.43
20-Apr-98 1.43
21-Apr-98 1.43
22-Apr-98 1.43
23-Apr-98 1.43
24-Apr-98 1.44
27-Apr-98 1.44
28-Apr-98 1.44
29-Apr-98 1.44
30-Apr-98 1.43
01-May-98 1.43
04-May-98 1.44
05-May-98 1.44
06-May-98 1.44
07-May-98 1.44
08-May-98 1.44
11-May-98 1.43
12-May-98 1.43
13-May-98 1.44
14-May-98 1.45
15-May-98 1.45
18-May-98 1.45
19-May-98 1.45
20-May-98 1.45
21-May-98 1.45
22-May-98 1.45
5
<PAGE>
Outlook for North America (concluded)
The external sector of the economy should see some improvement beyond
mid-year, as the Asian impact wanes and import growth slows. Also, much of the
recent deterioration in Canada's current account balance can be traced to a
sharp surge in demand in the country's interest rate-sensitive sectors, notably
retail and housing. The 175 basis points increase in overnight interest rates
seen since mid-1997 should help to cool domestic demand.
The federal government's recent fiscal performance has been nothing short
of spectacular. In 1997, the deficit fell to its lowest level in nearly 30
years, financing requirements were negative for the first time since 1970, and
the debt-to-GDP ratio posted its first decline in over 10 years. In the current
fiscal year, the federal government appears poised to balance its budget a full
two years ahead of schedule. An international comparison only serves to
illustrate the speed of Canada's fiscal turnaround. As a percentage of GDP,
Canada's 1997 national accounts deficit was more than 2% below the 1997 average
of the G-7 countries versus 3% above the G-7 average only four years ago.
The federal government has paid-down over $10 billion of outstanding debt
through the first eight months of fiscal 1998. And market fluctuations have
become increasingly dependent on supply issues, particularly in the money market
where treasury-bill supply has fallen by $26 billion in 1997. Debt reduction and
low interest rates will help contain spending. While a fall in supply need not
have a marked impact on bond yields over a longer term horizon, the impact could
be quite significant in the transition to this new regime. To meet existing
demand, capital substitution from public to private debt will probably be the
most important aspect of this transition. This substitution already appears to
be underway, with corporate bond issuance outpacing government of supply in
1997.
The rapid improvement in the fiscal balances also has the federal
government facing an unusual question: how should a surplus be allocated? In its
throne speech and mid-year fiscal review, the Liberal government argued in favor
of a 50-50 allocation rule whereby 50% of a surplus goes towards program
spending, 25% to tax cuts, and the final 25% to debt reduction. This allocation
is actually in contrast to voter preferences. According to a November Angus Reid
poll, 47% of Canadians believe that debt reduction should be the top priority,
followed by 37% in favor of tax cuts and only 16% in support of increased
program spending.
The political picture has improved over the last year. The Liberal
government won a national election and continues to have no nationally based
opposition. The Federal Tories have lost their leader, Mr. Charest, to the
Quebec Provincial Liberal Party. This greatly reduces the risk of an immediate
separation test in Quebec. Provincial elections, the first step in another
separation dance, were anticipated for this Spring but because of Mr. Charest
are now likely next Spring.
Looking ahead, a competitive yield picture versus the U.S. seems
unlikely prior to the second half of the fiscal year. The Canadian dollar
probably faces another test of its recently set 100 + year lows and seems
unlikely to strengthen until later this year. As a result, the Fund's Canadian
investment weighting should remain low over the near term.
6
<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. To further
assist in this evaluation, the Securities and Exchange Commission (SEC) requires
that we include, on an annual basis, a line graph comparing the Fund's
performance to that of an appropriate market index. This graph must measure the
growth of a $10,000 hypothetical investment from the Fund's inception through
the most recent fiscal year-end and must reflect the impact of the Fund's total
expenses and its currently effective 3.0% maximum sales charge.
While this table is required by SEC rules, such comparisons are of limited
utility since the indices shown are not adjusted for sales charges and ongoing
management, distribution and operating expenses applicable to the Fund. An
investor who wished to replicate the total return of these indices would have
had to own the securities that they represent. Acquiring these securities would
require a considerable amount of money and would incur expenses that are not
reflected in the index results.
The SEC also requires that we report the Fund's total returns, 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 currently effective maximum sales charge.
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.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN*
% Return With
Periods ended 3/31/98: Sales Charge(1)
- --------------------------------------------------------------------------------
One Year 11.21%
- --------------------------------------------------------------------------------
Since Inception (1/15/93) 5.25%
CHANGE IN VALUE OF A $10,000 INVESTMENT*
ISI North
American Lehman Brothers Consumer Lehman Brothers
Government Intermediate Price Emerging Americas
Bond Fund Treasury Index Index Index: Mexico Section
---------- -------------- ----- ---------------------
1/93 9,700 10,000 10,000 10,000
3/93 9,911 10,186 10,049 10,322
3/94 10,186 10,425 10,301 11,097
3/95 9,339 10,867 10,596 8,616
3/96 10,550 11,856 10,897 12,590
3/97 11,384 12,407 11,198 14,949
3/98 13,052 13,573 11,355 17,910
(1) Assumes maximum sales charge of 3.0%.
* These figures assume the reinvestment of dividends and capital gains
distributions. The indices listed above are unmanaged and are widely
recognized as indicators of performance in their respective sectors. The
Lehman Brothers Intermediate Treasury Index is a performance indicator of
the intermediate-term U.S. Treasury market, the CPI is a general indicator
of inflation and the Lehman Brothers Emerging Americas Index: Mexico Section
is an indicator of the interest rate structure of Mexican government and
private corporate debt. Management is not aware of any single index that is
truly representative of the Fund since the Fund's assets are allocated
across three different countries and each country's weighting is
periodically adjusted to reflect the advisor's outlook on current market
conditions. Past performance is not an indicator of future results.
7
<PAGE>
North American Government Bond Fund, Inc.
Statement of Net Assets
March 31, 1998
<TABLE>
<CAPTION>
Interest Maturity Principal Market
Security Rate Date Value Value
- ---------------------------------------------------------------------------------------------------
<S><C>
CANADIAN SECURITIES -- 5.37%
Government of Canada, Deb. 8.00% 6/1/27 C$ 3,000,000 $ 2,794,080
-----------
Total Canadian Securities
(Cost $2,701,270) 2,794,080
-----------
MEXICAN SECURITIES(1) -- 11.84%
Mexican Treasury Cete 20.92* 4/30/98 P$ 42,362,120 4,893,663
Mexican Treasury Cete 21.27* 6/11/98 11,177,420 1,260,831
-----------
Total Mexican Securities
(Cost $6,273,274) 6,154,494
-----------
U.S. TREASURY SECURITIES -- 74.10%
U.S. Treasury Bond 10.375 11/15/09 $8,000,000 9,985,000
U.S. Treasury Bond 10.375 11/15/12 4,000,000 5,308,124
U.S. Treasury Bond 12.000 8/15/13 5,250,000 7,716,681
U.S. Treasury Bond 8.125 8/15/19 9,500,000 11,891,331
U.S. TREASURY BOND 8.750 8/15/20 1,000,000 1,333,750
U.S. Treasury Bond 7.250 8/15/22 2,000,000 2,311,562
-----------
Total U.S. Treasury Securities
(Cost $38,318,392) 38,546,448
-----------
REPURCHASE AGREEMENT -- 8.01%
Goldman Sachs & Co., 5.75%
Dated 3/31/98 to be repurchased on
4/1/98, collateralized by U.S. Treasury
Bonds with a market value of $4,252,089.
(Cost $4,168,000) $4,168,000 4,168,000
-----------
Total Investments in Securities -- 99.32%
(Cost $51,460,936) ** 51,663,022
Other Assets in Excess of Liabilities, Net-- 0.68% 355,381
-----------
Net Assets-- 100.00% $52,018,403
===========
Net Asset Value and Redemption Price Per Share
($52,018,403 / 5,949,881 SHARES OUTSTANDING) $8.74
=====
Offering Price Per Share
($8.74 / .970) $9.01
=====
</TABLE>
- --------------------------------------------------------------------------------
(1) Cetes are short-term Mexican government debt securities.
* Yields as of March 31, 1998.
** Also aggregate cost for federal tax purposes.
(dagger) Principal value is shown in local currency: Canadian dollars (C$),
Mexican new pesos (P$) and U.S. dollars ($).
See accompanying Notes to Financial Statements.
8
<PAGE>
North American Government Bond Fund, Inc.
Statement of Operations
For the Year Ended March 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S><C>
NET INVESTMENT INCOME:
INTEREST $4,393,354
----------
EXPENSES:
Investment advisory fee 208,693
Distribution fee 208,693
Administration fee 104,346
Accounting fee 52,871
Transfer agent fee 30,638
Printing and postage 51,964
Miscellaneous 8,381
Director's fees 249
----------
Total expenses 665,835
Less: Fees waived (13,670)
----------
Net expenses 652,165
----------
Net investment income 3,741,189
----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain on investments 2,482,408
Net realized loss from foreign currency related transactions (706,976)
Change in net unrealized appreciation/depreciation of investments 1,644,223
Change in net unrealized appreciation/depreciation on translation
of assets and liabilities denominated in foreign currencies 2,956
----------
Net gain on investments 3,422,611
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $7,163,800
==========
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
9
<PAGE>
North American Government Bond Fund, Inc.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended March 31,
----------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------
<S><C>
INCREASE/(DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 3,741,189 $ 5,251,856
Net realized gain (loss) from investment and
foreign currency related transactions 1,775,432 (1,197,393)
Change in unrealized appreciation/depreciation
of investments 1,644,223 540,125
Change in net unrealized appreciation/
depreciation on translation of assets and
liabilities denominated in foreign currencies 2,956 (3,190)
------------ ------------
Net increase in net assets resulting
from operations 7,163,800 4,591,398
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income (3,741,189) (1,823,953)
Distribution in excess of net investment income (629,176) --
Return of capital-tax -- (3,191,763)
------------ ------------
Total distribution (4,370,365) (5,015,716)
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of 916,292 and 695,687
shares, respectively 7,908,494 5,848,278
Value of 231,643 and 306,356 shares issued in
reinvestment of dividends, respectively 1,980,041 2,564,081
Cost of 1,469,520 and 1,997,507 shares
repurchased, respectively (12,629,368) (16,882,467)
------------ ------------
Total decrease in net assets derived from capital
share transactions (2,740,833) (8,470,108)
------------ ------------
Total increase (decrease) in net assets 52,602 (8,894,426)
NET ASSETS:
Beginning of period 51,965,801 60,860,227
------------ ------------
End of period $ 52,018,403 $ 51,965,801
============ ============
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying 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 Year Ended March 31,
-----------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S><C>
Per Share Operating Performance:
Net asset value at beginning of period $ 8.29 $ 8.37 $ 8.06 $ 9.53 $ 10.14
------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income 0.61 0.75 0.81 0.63 0.89
Net realized and unrealized gain/(loss)
on investments 0.56 (0.11) 0.22 (1.38) (0.58)
------- ------- ------- -------- --------
Total from Investment Operations 1.17 0.64 1.03 (0.75) 0.31
Less Distributions:
Dividends from net investment income
and short-term gains (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 (0.72) (0.72) (0.72) (0.72) (0.92)
------- ------- ------- ------- -------
Net asset value at end of period $ 8.74 $ 8.29 $ 8.37 $ 8.06 $ 9.53
======= ======= ======= ======= =======
Total Return* 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%
Net investment income*** 7.17% 8.99% 9.49% 7.04% 7.04%
Supplemental Data:
Net assets at end of the period (000) $52,018 $51,966 $60,860 $66,292 $93,622
Portfolio turnover rate 125% 46% 125% 104% 219%
- ------------------------------------------------------------------------------------------------
</TABLE>
*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 1.28%, 1.58%, 1.47%, 1.45% and 1.44%, for
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 7.14%, 8.66%, 6.84%, 6.85% and
6.68%, for the years ended March 31, 1998, 1997, 1996, 1995, and 1994,
respectively.
See accompanying 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 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-
<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 $208,693 for advisory services
for the year ended March 31, 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%. The Fund paid ICC $104,346 for administrative services
for the year ended March 31, 1998.
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 year ended March 31, 1998, ISI waived fees
of $9,113 and ICC waived fees of $4,557.
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 $52,871 for accounting services for the year ended
March 31, 1998.
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 $30,638
for transfer agent services for the year ended March 31, 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 year ended March 31, 1998, distribution fees aggregated
$208,693.
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the year ended
March 31, 1998 was approximately $1,405, and the accrued liability was
approximately $10,461.
Effective September 22, 1997, Bankers Trust Company, a subsidiary of Bankers
Trust Corporation, became the Fund's custodian. Prior to September 22, 1997,
PNC Bank served as the Fund's custodian.
C. Capital Share Transactions-- The Fund is authorized to issue up to 25 million
shares of $.001 par value capital stock.
13
<PAGE>
Notes to Financial Statements (concluded)
D. Investment Transactions -- Excluding short-term and U.S. government
obligations, purchases of investment securities aggregated $3,605,028 and
sales of investment securities aggregated $7,563,098 for the year ended March
31, 1998. Purchases of U.S. government obligations aggregated $54,656,711 and
sales of U.S. government obligations aggregated $49,026,420 for the period.
On March 31, 1998, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost was $552,986 and aggregate
gross unrealized depreciation of all securities in which there is an excess
of tax cost over value was $350,900.
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 March 31, 1998.
F. Net Assets -- On March 31, 1998, net assets consisted of:
Paid-in capital $51,154,279
Accumulated net realized gain
from security and foreign
currency transactions 661,627
Unrealized appreciation of
investments 202,086
Unrealized gain on translation of
assets and liabilities
denominated in foreign
currencies 411
-----------
$52,018,403
===========
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.
<PAGE>
Report of Independent Accountants
To the Shareholders and Directors of
North American Government Bond Fund, Inc.:
We have audited the accompanying statement of net assets of North American
Government Bond Fund, Inc. as of March 31, 1998, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the respective periods presented. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
March 31, 1998 by correspondence with the custodians. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
North American Government Bond Fund, Inc. as of March 31, 1998 and the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and its financial highlights for
each of the respective periods presented, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
May 1, 1998
15
