A MESSAGE FROM THE PRESIDENT
Dear Shareholder
The Principal Special Markets Fund has now completed two years of operation. The
Fund's two portfolios--Mortgage-Backed Securities Portfolio and International
Securities Portfolio--currently have assets totaling $13.9 million and $17.1
million respectively.
The first half of 1995 has been extremely positive for financial markets.
Interest rates continue to decline, and the equity markets, particularly
domestic, have been strong. Total returns for the Mortgage-Backed Securities
Portfolio were 12.4% for the first six months of 1995, and 13.9% for the
12-month period ending 6/30/95. The International Securities Portfolio returns
were 6.1% and 5.6% for the same period. Besides reporting good returns, the Fund
managers share the following comments:
Marty Schafer--Mortgage-Backed Securities Portfolio
"The performance of discount mortgage securities in the first half propelled the
Fund back among the leaders of their asset class for the previous twelve-month
period. Despite the substantial decline of long-term interest rates, mortgage
securities are performing very well this year. We believe the value of discount
30-year mortgage securities relative to treasuries should persist as they are
powered by fundamental and technical forces. Our continuing approach of
disciplined, controlled duration reaffirms our goal of being a long-term leader
in the industry."
Scott Opsal--International Securities Portfolio
"International stock returns over the last 12 months have benefited from large,
positive foreign exchange effects. A weak dollar contributed positively toward
U.S. dollar-based investor returns, causing most markets to show double-digit
gains, European cyclical stocks have performed well based on strong earning
growth and positive economic news across Europe. Some investors suspect that the
global economic recovery is near its peak, but we believe low stock valuations
and continued earnings growth make these companies attractive investments.
Emerging markets have generally rebounded from the currency devaluation in
Mexico last December, and have contributed to positive overall returns. Our
current strategy favors European cyclicals and Asian growth stocks for continued
outperformance."
We hope that you find the information provided in this report valuable and
informative. Please contact us if you have any questions by calling (800)
521-1502.
Thank you for investing with The Principal.
Sincerely,
Stephan L. Jones
President
<PAGE>
INDEX TO REPORT FOR
PRINCIPAL SPECIAL MARKETS FUND, INC.
Page
Statements of Assets and Liabilities............................. 2
Statements of Operations ........................................ 3
Statements of Changes in Net Assets.............................. 4
Notes to Financial Statements.................................... 5
Schedules of Portfolio Investments .............................. 8
Financial Highlights............................................. 12
<TABLE>
<CAPTION>
June 30, 1995
STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL SPECIAL MARKETS FUND, INC.
(unaudited)
International Mortgage-Backed
Securities Securities
Portfolio Portfolio
Assets
<S> <C> <C>
Investment in securities -- at value (cost -- $15,357,410
and $13,967,650, respectively) (Note 4)....................... $16,712,991 $13,711,676
Cash............................................................. 3,190 2,205
Dividends and interest receivable................................ 63,695 85,635
Other assets..................................................... 560 445
Total Assets 16,780,436 13,799,961
Liabilities
Accrued expenses................................................. 24,973 9,216
Payables:
Dividends to shareholders..................................... -- 79,646
Investment securities purchased............................... 249,673 --
Total Liabilities 274,646 88,862
Net Assets Applicable to Outstanding Shares ................. $16,505,790 $13,711,099
Capital Stock (par value: $.01 a share)
Shares authorized................................................ 100,000,000 100,000,000
Shares issued and outstanding.................................... 1,417,871 1,384,533
Net Asset Value Per Share ..................................... $11.64 $9.90
Net Assets Consist of:
Capital Stock.................................................... $ 14,179 $ 13,845
Additional paid-in capital....................................... 14,509,472 15,028,261
Accumulated undistributed net investment income.................. 56,838 --
Accumulated undistributed net realized gain (loss) from:
Investment transactions....................................... 642,728 (1,075,033)
Foreign currency transactions................................. (74,154) --
Net unrealized appreciation (depreciation) of investments........ 1,355,581 (255,974)
Net unrealized appreciation on translation of assets and
liabilities in foreign currencies............................. 1,146 --
Total Net Assets $16,505,790 $13,711,099
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1995
STATEMENTS OF OPERATIONS
PRINCIPAL SPECIAL MARKETS FUND, INC. (unaudited)
International Mortgage-Backed
Securities Securities
Portfolio Portfolio
Net Investment Income
<S> <C> <C>
Income:
Dividends..................................................... $313,307 $ -
Withholding tax on foreign dividends.......................... (49,667) -
Interest...................................................... 27,288 488,936
Total Income 290,928 488,936
Expenses:
Management and investment advisory fees (Note 3) .......... 69,141 29,815
Net Investment Income 221,787 459,121
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency
Net realized gain (loss) from:
Investment transactions....................................... 571,789 (299,517)
Foreign currency transactions................................. (3,228) --
Net increase in unrealized appreciation/ depreciation on:
Investments................................................... 162,538 1,381,334
Translation of assets and liabilities in foreign currencies... 573 --
Net Realized and Unrealized Gain on
Investments and Foreign Currency 731,672 1,081,817
Net Increase in Net Assets
Resulting from Operations $953,459 $1,540,938
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1995
STATEMENTS OF CHANGES IN NET ASSETS
PRINCIPAL SPECIAL MARKETS FUND, INC
(unaudited)
International Mortgage-Backed
Securities Securities
Portfolio Portfolio
Six Months Year Six Months Year
Ended Ended Ended Ended
June 30, December 31, June 30, December 31,
1995 1994 1995 1994
Operations
<S> <C> <C> <C>
Net investment income............................................ $ 221,787 $ 153,520 $ 459,121 $ 1,497,893
Net realized gain (loss) from investment transactions............ 571,789 1,155,739 (299,517) (775,513)
Net realized (loss) from foreign currency transactions........... (3,228) (61,574) - -
Net increase (decrease) in unrealized appreciation/depreciation
on investments and translation of assets and liabilities in
foreign currencies............................................ 163,111 (2,325,292) 1,381,334 (1,838,174)
Net Increase (Decrease) in Net Assets
Resulting from Operations 953,459 (1,077,607) 1,540,938 (1,115,794)
Dividends and Distributions to Shareholders
From net investment income....................................... (50,158) (153,520) (459,121) (1,497,893)
Excess distribution of net investment income (Note 1)............ -- (174,931) - -
From net realized gain on investments and
foreign currency transactions................................. (377,156) (680,385) - -
(427,314) (1,008,836) (459,121) (1,497,893)
Capital Share Transactions (Note 5)
Shares sold ..................................................... 100,000 - - 2,500,000
Shares issued in reinvestment of dividends
and distributions............................................. 338,050 790,090 310,773 1,168,333
Shares redeemed ................................................ - - (2,395,236) (10,649,933)
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 438,050 790,090 (2,084,463) (6,981,600)
Total Increase (Decrease) 964,195 (1,296,353) (1,002,646) (9,595,287)
Net Assets
Beginning of period.............................................. 15,541,595 16,837,948 14,713,745 24,309,032
End of period (including undistributed (overdistributed) net
investment income as set forth below)......................... $16,505,790 $15,541,595 $13,711,099 $14,713,745
Undistributed (Overdistributed) Net Investment Income ...... $ 56,838 $ (114,791) $ - $ -
See accompanying notes.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
PRINCIPAL SPECIAL MARKETS FUND, INC.
Note 1 -- Significant Accounting Policies
Principal Special Markets Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as an open-end diversified
management investment company and operates in the mutual fund industry. The Fund
currently consists of two portfolios (known as the International Securities and
Mortgage-Backed Securities Portfolios).
The Fund values securities for which market quotations are readily available at
market value, which is determined using the last reported sale price or, if no
sales are reported, as is regularly the case for some securities traded
over-the-counter, the last reported bid price. When reliable market quotations
are not considered to be readily available, which may be the case, for example,
with respect to certain debt securities and preferred stocks, the investments
are valued by using market quotations, prices provided by market makers or
estimates of market values obtained from yield data and other factors relating
to instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Fund's Board of Directors.
Securities with remaining maturities of 60 days or less are valued at amortized
cost, which approximates market.
With respect to the International Securities Portfolio, the value of foreign
securities in foreign currency amounts is expressed in U.S. dollars at the
closing daily rate of exchange. The identified cost of the portfolio holdings is
translated at approximate rates prevailing when acquired. Income and expense
amounts are translated at approximate rates prevailing when received or paid,
with daily accruals of such amounts reported at approximate rates prevailing at
the date of valuation.
Since the carrying amount of the foreign securities of the International
Securities Portfolio is determined based on the exchange rate and market values
at the close of the period, it is not practicable to isolate that portion of the
results of operations arising as a result of changes in the foreign exchange
rates from the fluctuations arising from changes in the market prices of
securities during the period.
The Fund records investment transactions generally one day after the trade date.
The identified cost basis has been used in determining the net realized gain or
loss from investment transactions and unrealized appreciation or depreciation of
investments. Dividends are taken into income on an accrual basis as of the
ex-dividend date and interest income is recognized on an accrual basis.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amount of dividends and foreign withholding taxes recorded on the portfolio's
books and the U.S. dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gains and losses arise from changes in the value
of assets and liabilities other than investments in securities at fiscal year
end, resulting from changes in the exchange rate.
With respect to the Mortgage-Backed Securities Portfolio, all net investment
income is declared as a dividend daily to shareholders of record as of that day
and all distributions of realized gains from investment transactions are
recorded on the ex-dividend date. Dividends and distributions to shareholders of
the International Securities Portfolio are recorded on the ex-dividend date.
Effective January 1, 1994, the Fund adopted Statement of Position 93-2,
"Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies." The
amount of dividends and distributions to shareholders from net investment income
and net realized gain on investments and foreign currency transactions is
determined in accordance with federal income tax regulations, which may differ
from generally accepted accounting principles. To the extent these "book/tax"
differences are permanent in nature (i.e. that they result from other than
timing of recognition - "temporary"), such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. The reclassifications did not
materially impact the financial statements and did not affect net investment
income or net realized gain (loss) for the six months ended June 30, 1995 or net
assets at June 30, 1995.
Due to the timing of dividend distributions and the differences in accounting
for income and realized gains (losses) for financial statement and federal
income tax purposes, the fiscal year in which amounts are distributed may differ
from the year in which the income and realized gains (losses) are recorded for
financial statement purposes by the portfolio. The differences between the
income and gains distributed on a book versus tax basis are shown as excess
distributions of net investment income and net realized gain on investments in
the accompanying Statements of Changes in Net Assets.
Note 2 -- Federal Income Taxes
No provision for federal income taxes is considered necessary because the Fund
is qualified as a "regulated investment company" under the Internal Revenue Code
and intends to distribute each year substantially all of its net investment
income and realized capital gains to shareholders. The cost of investments for
federal income tax reporting purposes is approximately the same as that for
financial reporting purposes.
Note 3 -- Management Agreement and Transactions With Affiliates
The Fund has agreed to pay investment advisory and management fees to Princor
Management Corporation (wholly owned by Princor Financial Services Corporation,
a subsidiary of Principal Mutual Life Insurance Company) (the "Manager") and to
Invista Capital Management, Inc. ("Invista"), an indirect wholly-owned
subsidiary of Principal Mutual Life Insurance Company, pursuant to a
sub-advisory agreement. Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Fund in return for the
advisory fee paid by the Fund and to reimburse the Manager for the other costs
it incurs under the management agreement. The annual rate used in this
calculation for the International Securities Portfolio and the Mortgage-Backed
Securities Portfolio is .90% and .45%, respectively, of the average daily value
of each portfolio's net assets.
Brokerage commissions were paid to an affiliate by the International Securities
Portfolio in the amount of $1,860 during the six months ended June 30, 1995. No
brokerage commissions were paid to this affiliate during the year ended December
31, 1994.
At June 30, 1995, Principal Mutual Life Insurance Company owned shares of the
Fund's portfolios as follows:
International Securities Portfolio 1,108,422
Mortgage-Backed Securities Portfolio 1,137,661
<TABLE>
<CAPTION>
Note 4 -- Investment Transactions
For the six months ended June 30, 1995, the cost of investment securities
purchased and proceeds from investment securities sold (not including short-term
investments and U.S. government securities) by the Fund were as follows:
Purchases Sales
<S> <C> <C>
International Securities Portfolio $5,095,376 $5,043,188
Mortgage-Backed Securities Portfolio 585,944 118,449
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1995, net unrealized appreciation (depreciation) of investments by
the Fund was composed of the following:
Net Unrealized
Gross Unrealized Appreciation (Depreciation)
Appreciation (Depreciation) of Investments
<S> <C> <C> <C>
International Securities Portfolio $2,480,494 $(1,124,913) $1,355,581
Mortgage-Backed Securities Portfolio 59,044 (315,018) (255,974)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1995, Principal Special Markets Fund, Inc. - International
Securities Portfolio held the following securities which may require
registration under the Securities Act of 1933 or an exemption therefrom in order
to effect a sale in the ordinary course of business.
Value at Value as a
Date of June 30, Percentage of
Security Description Acquisition Cost 1995 Net Assets
<S> <C> <C> <C> <C>
Koninklijke KNP BT NV 4/27/93 $64,770 $108,197 .66%
Royal Plastics Group 11/23/94 58,057 97,543 .59%
205,740 1.25%
The Mortgage-Backed Securities Portfolio's investments are with various issuers;
while the International Securities Portfolio's investments are with various
issuers in various industries. The Schedules of Investments contained herein
summarize the concentration of credit risk for Mortgage-Backed Securities
Portfolio by issuers and International Securities Portfolio by country, industry
and issuer. </TABLE> <PAGE> <TABLE> <CAPTION>
Note 5 -- Capital Share
Transactions
Transactions in Capital Stock by portfolio were as follows:
International Mortgage-Backed
Securities Portfolio Securities Portfolio
<S> <C> <C>
Six Months Ended June 30, 1995:
Shares sold ................................... 9,107 --
Shares issued in reinvestment of
dividends and distributions .................. 32,288 32,599
Shares redeemed ............................... -- (262,636)
Net Increase (Decrease) 41,395 (230,037)
Year Ended December 31, 1994:
Shares sold ................................... -- 246,548
Shares issued in reinvestment of
dividends and distributions .................. 67,888 123,599
Shares redeemed ............................... -- (1,161,754)
Net Increase (Decrease) 67,888 (791,607)
</TABLE>
Note 6 -- Line of Credit
The Fund has an unsecured line of credit with a bank which allows each portfolio
to borrow up to $500,000. Borrowings are made solely to facilitate the handling
of unusual and/or unanticipated short-term cash requirements. Interest is
charged to each portfolio, based on its borrowings, at a rate equal to the
bank's prime rate. Additionally, a commitment fee is charged at the annual rate
of .25% on the line of credit. At June 30, 1995, the Fund had no outstanding
borrowings under the line of credit.
<PAGE>
June 30, 1995
SCHEDULES OF INVESTMENTS
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Securities Portfolio
Shares
Held Value
Common Stocks (97.37%)
AUSTRALIA (4.57%)
Commercial Banks (2.19%)
National Australia Bank, Ltd. 45,928 $ 362,014
Crude Petroleum &
Natural Gas (0.63%)
Ampolex Ltd. 45,600 103,432
Gas Production &
Distribution (0.81%)
Australia Gas & Light 42,000 133,076
Miscellaneous Food & Kindred
Products (0.93%)
Burns, Philp & Co., Ltd. 73,998 154,209
752,731
AUSTRIA (1.57%)
Airports, Flying Fields, &
Services (0.84%)
Flughafen Wien AG 2,600 138,364
Railroad Equipment (0.73%)
Vae Eisenbahnsysteme AG 1,200 120,817
259,181
CANADA (3.28%)
Coal Mining Services (0.44%)
Morgan Hydrocarbons, Inc. 25,000(a) 72,787
Communications Equipment (1.07%)
Newbridge Networks Corp. 5,000(a) 176,250
Iron & Steel Foundries (1.17%)
Dofasco, Inc. 15,400 193,358
Miscellaneous Plastics Products,
NEC (0.59%)
Royal Plastics Group 7,100(a)(b) 97,543
539,938
CHILE (0.64%)
Telephone Communication (0.64%)
Compania De
Telecomunicaciones ADR 1,300 105,787
DENMARK (0.98%)
Telephone Communication (0.98%)
Tele Danmark B 2,900 161,349
FINLAND (4.00%)
Forest Products (0.65%)
Metsa-Serla 2,400 $ 106,604
Miscellaneous Wood
Products (0.89%)
Enso-Gutzeit 16,300 147,471
Pulp Mills (1.51%)
Kymmene 8,000 248,742
Sugar & Confectionary
Products (0.95%)
Huhtamake I Free 4,800 157,101
659,918
FRANCE (1.23%)
Drugs (1.23%)
Roussel-Uclaf 1,300 203,011
GERMANY (4.55%)
Flat Glass (0.63%)
Weru AG 180 104,037
Industrial Inorganic
Chemicals (1.80%)
Bayer AG 1,200 297,980
Miscellaneous Chemical
Products (2.12%)
Hoechst AG 1,620 349,369
751,386
HONG KONG (6.34%)
Communications Equipment(0.47%)
ABC Communications Holdings Ltd. 278,000 77,247
Electric Services (0.72%)
CEP-A Consolidated Electric
Power-Asia 51,200 118,777
Electronic Components
& Accessories (0.50%)
Varitronix 47,000 82,307
Highway & Street
Construction (0.46%)
Wai Kee Holdings, Ltd. 400,000 75,994
Holding Offices (1.76%)
First Pacific Co., Ltd. 327,349 289,801
Office Furniture (0.31%)
Lamex Holdings 382,000 51,838
Personal Credit
Institutions (0.84%)
Manhattan Card Co. 341,000 138,824
Security Brokers &
Dealers (1.27%)
Peregrine Investment Holdings 148,000 210,404
1,045,192
INDONESIA (1.79%)
Miscellaneous Furniture
& Fixtures (0.25%)
PT Surya Toto 22,200 41,370
Photographic Equipment
& Supplies (0.43%)
PT Modern Photo Film Co. 13,000 70,633
Pulp Mills (1.11%)
Asia Pacific Resources 20,000(a) 182,500
294,503
ITALY (2.83%)
Metalworking Machinery (0.23%)
Danieli & Co.-DR 12,400 37,685
Telephone Communication (2.60%)
Telecom Italia-DI 203,000 429,065
466,750
JAPAN (1.11%)
Computer & Office
Equipment (0.20%)
Canon, Inc. 2,000 32,509
Electronic Components
& Accessories (0.46%)
Murata Mfg. 2,000 75,618
Engines & Turbines (0.45%)
Mabuchi Motor 1,100 75,665
183,792
KOREA (2.24%)
Concrete Work (0.66%)
HanilCemet 1,800 109,199
Construction & Related
Machinery (0.70%)
Keumkang 1,300 115,556
Electric Services (0.88%)
Korea Electric Power Corp. 3,900 146,073
370,828
MALAYSIA (0.96%)
Holding Offices (0.68%)
C. I. Holdings 27,000 111,854
Nonclassifiable
Establishments (0.28%)
Malaysian Pacific Industries 18,666 46,704
158,558
MEXICO (1.90%)
Aircraft & Parts (0.17%)
Tolmex SA 7,300 28,495
Cement, Hydraulic (0.48%)
Apasco SA 20,000(a) 79,667
Department Stores (0.19%)
Sears Roebuck De Mexico SA 13,200(a) 31,675
Foreign Banks, Branches
& Agencies (0.26%)
Grupo Financiero Bancomer;
Series B 141,000(a) 40,602
Grupo Financiero Bancomer;
Series L 5,222(a) 1,345
41,947
Miscellaneous Food Kindred
Products (0.08%)
Grupo Herdez SA 45,000(a) 13,965
Telephone Communication (0.72%)
Telefonos De Mexico SA ADR 4,000 118,500
314,249
NETHERLANDS (14.89%)
Beer, Wine, & Distilled
Beverages (0.41%)
Heineken Holdings 460 63,786
Heineken Holdings 25% Bonus Issue 115(a) 3,968
67,754
Communications Services,
NEC (2.06%)
KPN Royal PTT Nederland 9,472 340,270
Electric Light & Wiring
Equipment (0.64%)
Otra 500 104,643
Electronic Distribution
Equipment (2.15%)
Phillips Electronics 8,400 355,394
Foreign Banks, Branches
& Agencies (1.77%)
ABN-AMRO Holdings NV 7,570 291,971
Grocery Stores (1.27%)
Koninklijke Ahold NV 5,845 209,220
Meat Products (2.32%)
Unilever NV 2,950 383,565
Miscellaneous Durable
Goods (1.81%)
Hagemeyer NV 6,700 298,593
Miscellaneous Transporation
Services (0.79%)
Koninklijke Pakhoed NV 4,253 130,017
Paperboard Containers &
Boxes (0.66%)
Koninklijke KNP BT NV 3,600(b) 108,197
Special Industry
Machinery (1.01%)
IHC Caland NV 5,900 167,429
2,457,053
NEW ZEALAND (0.61%)
Miscellanesous Manufacturers (0.61%)
Carter Holt Harvey Ltd. 41,000 100,278
NORWAY (3.12%)
Commercial Banks (0.73%)
Christiana Bank 52,000 120,616
Drugs (0.44%)
Hafslund Nycomed 3,113 71,955
Meat Products (1.00%)
Orkla B 3,900 165,110
Ship & Boat Building &
Repairing (0.95%)
Unitor Ships Service 9,100 157,940
515,621
SINGAPORE (1.40%)
Air Transportation, Scheduled (0.56%)
Singapore International Airlines 10,000 92,307
Electric Light & Wiring
Equipment (0.28%)
Clipsal Industries Holdings 20,000 46,200
Electronic Components &
Accessories (0.56%)
Amtek Engineering 63,000 91,964
230,471
SPAIN (5.94%)
Combination Utility
Services (1.31%)
Iberdrola 1 SA 28,600 215,403
Commercial Banks (1.51%)
Banco Popular 1,675 248,988
Oil & Gas Field Services ( 1.98%)
Repsol Petroleo, SA 10,400 327,228
Telephone Communication (1.14%)
Telefonica De Espana, SA 14,700 189,380
980,999
SWEDEN (7.80%)
Carpentry & Floor Work (0.49%)
Skane-Gripen AB 'B' Free 9,300 81,740
Foreign Banks, Branches &
Agencies (1.45%)
Svenska Handelsbanken AB Free 17,050 $ 240,006
Household Audio & Video
Equipment (0.78%)
SKF 'B' Free 6,400 129,202
Miscellaneous Transporation
Equipment (0.70%)
Autoliv AB 2,150 114,858
Motor Vehicles & Equipment (1.35%)
Volvo AB 11,700 222,540
Plastic Materials &
Synthetics (1.13%)
Astra AB 6,200 186,470
Water Transporation of
Freight, NEC (1.90%)
Argonaut AB 'B' Free 37,000(a) 60,976
ICB Shipping AB 'B' Free 28,666 251,953
312,929
1,287,745
SWITZERLAND (11.11%)
Combination Utility
Services (1.06%)
BBC AG (Brown Boveri) 170 175,885
Drugs (2.54%)
Galenica Holdings AG 350 123,035
Immuno International AG 130 61,157
Sandoz AG 340 234,317
418,509
Functions Closely Related
To Banking (1.36%)
BIL GT Group 400 224,630
Plumbing & Heating, Except
Electric (0.31%)
Elco Holdings 138 51,146
Pulp Mills (0.97%)
Attisholz AG 200 159,706
Special Industry
Machinery (2.54%)
Bobst SA 170 258,221
Sulzer AG 250 161,659
419,880
Sugar & Confectionary
Products (2.33%)
Nestle 370 385,057
1,834,813
THAILAND (2.75%)
Commercial Banks (1.13%)
Bangkok Bank 17,000 187,320
Non-Classifiable
Establishments (1.62%)
Thailand International Fund 8 268,000
455,320
UNITED KINGDOM (11.76%)
Commerical Banks (0.73%)
Bank of Ireland 21,000 120,272
Construction & Related
Machinery (1.93%)
Powerscreen International PLC 62,400 318,167
Crude Petroleum &
Natural Gas (0.98%)
Hardy Oil & Gas 63,000 161,866
Electric Services (1.70%)
Northern Ireland Electric 49,100 281,207
Miscellaneous Non-Durable
Goods (1.80%)
Grand Metropolitan PLC 48,300 296,220
Primary Nonferrous Metals (1.54%)
British Steel PLC 93,000 254,111
Pulp Mills (0.39%)
Babcock International Group 138,700 65,094
Sand & Gravel (0.25%)
Bardon Group PLC 87,700 41,857
Telephone Communication (1.24%)
Cable & Wireless PLC 29,900 204,542
Water Supply (1.20%)
Wessex Water PLC 42,014 197,847
1,941,183
Total Common Stocks 16,070,656
Preferred Stocks (0.71%)
AUSTRIA (0.71%)
Highway & Street
Construction (0.71%)
BAU Holdings AG 2,430 117,335
Principal
Amount Value
Federal Agency Short-Term
Obligations (3.18%)
Federal Home Loan Morgage
Corporation 6.10%; 7/3/95 $525,000 525,000
Total Portfolio Investments (101.26%) 16,712,991
Liabilities, net of cash, receivables
and other assets (-1.26%) (207,201)
Total Net Assets (100.00%) $16,505,790
(a) Non-income producing security - No dividend paid during the past
twelve months.
(b) Restricted Securities - See Note 4 to the financial statements.
Mortgage-Backed Securities Portfolio
Description of Issue Principal
Type Rate Maturity Amount Value
Federal National Mortgage Association (FNMA)
Certificates (53.18%)
FNMA 6.00% 11/01/23 $ 750,903 $ 703,387
FNMA 7.00 8/01/23 2,862,316 2,814,028
FNMA 7.00 8/01/23 781,314 768,133
FNMA 7.50 6/01/23 977,657 980,795
FNMA 8.00 7/01/19 877,829 898,677
FNMA 8.00 3/01/23 601,033 612,308
FNMA 8.50 1/01/25 498,255 514,025
Total FNMA Certificates 7,291,353
Government National Mortgage Association (GNMA)
Certificates (41.11%)
GNMA I 6.00 12/15/23 999,742 935,119
GNMA I 6.50 1/15/24 1,922,146 1,847,163
GNMA I 7.50 6/15/23 701,041 704,974
GNMA I 7.50 9/15/23 482,818 485,526
GNMA I 8.00 5/15/23 744,088 762,214
Total GNMA Certificates 5,636,811
Federal Home Loan Mortgage Corporation
(FHLMC) Certificates (4.40%)
FHLMC Gold 5.50 3/01/24 395,541 365,250
FHLMC Gold 6.00 4/01/24 254,167 238,262
Total FHLMC Certificates 603,512
Federal Agency Short-Term Obligations (1.31%)
Federal Home Loan Mortgage Corporation;
6.10%; 7/3/95 180,000 180,000
Total Portfolio Investments (100.00%) 13,711,676
Liabilities, net of cash, receivables
and other assets (0.00%) (577)
Total Net Assets (100.00%) $13,711,099
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Securities Mortgage-Backed Securities
Portfolio Portfolio
Period Year Period Period Year Period
Ended Ended Ended Ended Ended Ended
June 30, Dec. 31, Dec. 31, June 30, Dec. 31, Dec. 31,
1995 1994 1993(1) 1995 1994 1993(1)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value at Beginning of Period....... $11.29 $12.87 $10.01 $9.11 $10.10 $10.01
Income from Investment Operations:
Net Investment Income..................... .16 .13 .07 .33 .63 .34
Net Realized and Unrealized Gains (Losses)
on Investments and Foreign Currency..... .50 (.95) 2.91 .79 (.99) .09
Total from Investment Operations .66 (.82) 2.98 1.12 (.36) .43
Less Distributions:
Dividends (from net investment income).... (.04) (.25) (.10) (.33) (.63) (.34)
Distributions (from capital gains)........ (.27) (.51) (.02) -- -- --
Total Distributions (.31) (.76) (.12) (.33) (.63) (.34)
Net Asset Value at End of Period............. $11.64 $11.29 $12.87 $9.90 $ 9.11 $10.10
Total Return................................. 6.14%(3) (6.45)% 29.95%(3) 12.44%(3) (3.63) 4.47%(3)
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands).. $16,506 $15,542 $16,838 $13,711 $14,714 $24,309
Ratio of Expenses to Average Net Assets... .90%(2) .90% .90%(2) .45%(2) .45% .45%(2)
Ratio of Net Investment Income to Average
Net Assets.............................. 2.89%(2) .94% 1.21%(2) 6.93%(2) 6.56% 5.23%(2)
Portfolio Turnover Rate................... 68.9%(2) 37.0% 6.9%(2) 9.1%(2) 41.8% 9.6%(2)
<FN>
(1)Period from May 7, 1993, date shares first offered to the public, through
December 31, 1993. Net investment income, aggregating $.01 per share for the
International Securities Portfolio and $.01 per share for the Mortgage-Backed
Securities Portfolio for the period from the initial purchase of shares on
April 26, 1993 through May 6, 1993, was recognized, none of which was
distributed from the International Securities Portfolio and all of which was
distributed from the Mortgage-Backed Securities Portfolio to the sole
shareholder, Principal Mutual Life Insurance Company, during the period.
Additionally, the Mortgage-Backed Securities Portfolio incurred unrealized
gains on investments of $.01 per share during the intitial interim period.
This represented activities of each portfolio prior to the initial offering.
(2)Computed on an annualized basis.
(3)Total return amounts have not been annualized.
</FN>
</TABLE>
