Semiannual Report to Shareholders dated June 30, 1996 for:
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Securities Portfolio
Mortgage-Backed Securities Portfolio
<PAGE>
A MESSAGE FROM THE PRESIDENT
Dear Shareholder:
The first half of this year witnessed rising U.S. interest rates and
accompanying stock market jitters. During the same period, most world equity
markets advanced. The Principal Special Markets Fund--Mortgage Backed Securities
Portfolio and International Securities Portfolio--produced divergent returns.
Through June 30, the two portfolios returned -1.39% and 13.02%, respectively.
Marty Schafer--Mortgage-Backed Securities Portfolio
"The Mortgage-Backed Securities Portfolio of the Principal Special Markets Fund
is poised for rewards if interest rates hold steady or decline. As interest
rates rose this year, we continued our strategy of purchasing discount
mortgage-backed securities while maintaining a duration of approximately 6
years. Though much has been said in the financial press about the potential for
increasing inflation and correspondingly higher interest rates, we do not
necessarily agree. To us, the slight pick up in the economy so far this year is
a temporary occurrence and not an indication of any long-term economic trend".
Scott Opsal--International Securities Portfolio
"Year to date, international equities generally rose. However, a strengthened
U.S. dollar worked against many investors. Market opinion remains mixed about
whether the dollar will continue to strengthen. Our reading is that further
dollar strengthening is likely. Because market conditions seem to favor growth
stocks, we continue to look for stable growth companies to add to the portfolio,
replacing some currently held industrial stocks."
Though the investment markets continue to experience volatility, the Principal
Special Markets Fund--Mortgage-Backed Securities Portfolio and International
Securities Portfolio--remains focused on the long-term. We hope that you find
this Semiannual Report useful in monitoring your investment. Should you have any
questions about either of the portfolios, please call us at (800) 521-1502.
Sincerely,
STEPHAN L. JONES
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
<PAGE>
<TABLE>
<CAPTION>
June 30, 1996
STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL SPECIAL MARKETS FUND, INC.
(unaudited)
International Mortgage-Backed
Securities Securities
Portfolio Portfolio
<S> <C> <C>
Investments in Securities -- at cost................................. $16,025,969 $14,694,025
Assets
Investment in securities -- at value (Note 4).................... 19,331,706 14,175,516
Cash............................................................. 19,218 2,292
Dividends and interest receivable................................ 67,964 80,717
Other assets..................................................... 406 326
Total Assets 19,419,294 14,258,851
Liabilities
Accrued expenses................................................. 17,691 5,213
Payables:
Dividends to shareholders..................................... -- 12,417
Investment securities purchased............................... 196,799 --
Total Liabilities 214,490 17,630
Net Assets Applicable to Outstanding Shares ................. $19,204,804 $14,241,221
Capital Stock (par value: $.01 a share)
Shares authorized................................................ 100,000,000 100,000,000
Shares issued and outstanding.................................... 1,480,955 1,467,037
Net Asset Value Per Share ..................................... $ 12.97 $ 9.71
Net Assets Consist of:
Capital Stock.................................................... $ 14,810 $ 14,670
Additional paid-in capital....................................... 15,240,448 15,845,533
Accumulated undistributed net investment income.................. 174,240 --
Accumulated undistributed net realized gain (loss) from:
Investment transactions....................................... 473,162 (1,100,473)
Foreign currency transactions................................. (3,598) --
Net unrealized appreciation (depreciation) of investments........ 3,305,737 (518,509)
Net unrealized appreciation on translation of assets and
liabilities in foreign currencies............................. 5 --
Total Net Assets $19,204,804 $14,241,221
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1996
STATEMENTS OF OPERATIONS
PRINCIPAL SPECIAL MARKETS FUND, INC. (unaudited)
International Mortgage-Backed
Securities Securities
Portfolio Portfolio
Net Investment Income
Income:
<S> <C> <C>
Dividends..................................................... $ 373,228 $ -
Less: Withholding tax on foreign dividends.................... (44,806) -
Interest...................................................... 16,240 492,030
Total Income 344,662 492,030
Expenses:
Management and investment advisory fees (Note 3) .......... 82,496 31,809
Net Investment Income 262,166 460,221
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency
Net realized gain (loss) from:
Investment transactions....................................... 473,094 (25,440)
Foreign currency transactions................................. (3,598) -
Net increase (decrease) in unrealized appreciation/
depreciation on:
Investments................................................... 1,492,240 (646,085)
Translation of assets and liabilities in foreign currencies... (602) -
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency 1,961,134 (671,525)
Net Increase (Decrease) in Net Assets
Resulting from Operations $ 2,223,300 $(211,304)
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1996
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,
1996 1995 1995 1995
Operations
<S> <C> <C> <C> <C>
Net investment income............................................ $ 262,16 $ 290,053 $ 460,221 $ 909,265
Net realized gain (loss) from investment transactions............ 73,094 962,249 (25,440) 299,517)
Net realized (loss) from foreign currency transactions........... (3,598) (3,282) - -
Net increase (decrease) in unrealized appreciation/depreciation
on investments and translation of assets and liabilities in
foreign currencies............................................ 1,491,638 620,488 (646,085) 1,764,884
Net Increase (Decrease) in Net Assets
Resulting from Operations 2,223,300 1,869,508 (211,304) 2,374,632
Dividends and Distributions to Shareholders
From net investment income....................................... (63,684) (142,902) (460,221) (909,265)
Excess distribution of net investment income (Note 1)............ - (97,960) - -
From net realized gain on investments and
foreign currency transactions................................. (275,521) (1,015,198) - -
(339,205) (1,256,060) (460,221) (909,265)
Capital Share Transactions (Note 5)
Shares sold ..................................................... - 100,000 - -
Shares issued in reinvestment of dividends
and distributions............................................. 272,186 996,091 389,698 739,171
Shares redeemed ................................................ (202,611) - - (2,395,235)
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 69,575 1,096,091 389,698 (1,656,064)
Total Increase (Decrease) 1,953,670 1,709,539 (281,827) (190,697)
Net Assets
Beginning of period.............................................. 17,251,134 15,541,595 14,523,048 14,713,745
End of period (including undistributed (overdistributed) net
investment income as set forth below)......................... $19,204,804 $17,251,134 $ 14,241,221 $14,523,048
Undistributed (Overdistributed) Net Investment Income............ $ 473,162 $ (97,960) $ - $ -
See accompanying notes.
</TABLE>
<PAGE>
June 30, 1996
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. The Fund records dividend income on the ex-dividend date, except
dividend income from foreign securities whereby the ex-dividend date has passed;
such dividends are recorded as soon as the Fund is informed of the ex-dividend
date. 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.
Dividends and distributions to shareholders from net investment income and net
realized gain from investment 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. Reclassifications made for the year ended December 31, 1995
were not material.
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.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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.
No brokerage commissions were paid to an affiliate by the International
Securities Portfolio during the six months ended June 30, 1996. Brokerage
commissions were paid to an affiliate in the amount of $2,888 during the year
ended December 31, 1995.
At June 30, 1996, Principal Mutual Life Insurance Company owned shares of the
Fund's portfolios as follows:
International Securities Portfolio 1,186,538
Mortgage-Backed Securities Portfolio 1,220,165
Note 4 -- Investment Transactions
For the year ended June 30, 1996, 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
International Securities Portfolio $2,375,171 $2,382,029
Mortgage-Backed Securities Portfolio 484,500 2,207,924
At June 30, 1996, net unrealized appreciation of investments by the Fund was
composed of the following:
<TABLE>
<CAPTION>
Net Unrealized
Gross Unrealized Appreciation
(Depreciation)
Appreciation (Depreciation) of Investments
<S> <C> <C> <C>
International Securities Portfolio $4,248,751 $(943,014) $3,305,737
Mortgage-Backed Securities Portfolio 8,401 (526,910) (518,509)
</TABLE>
At June 30, 1996, 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.
<PAGE>
<TABLE>
<CAPTION>
Value at Value as a
Date of June 30, Percentage of
Security Description Acquisition Cost 1996 Net Assets
<S> <C> <C> <C> <C>
Alfa SA; Convertible
Subordinated Debentures 9/26/95 $199,250 $213,500 1.11%
Royal Plastics Group 11/23/94 58,057 107,881 .56%
Voest-Alpine Stahl 10/27/95 103,583 114,896 .60%
01/11/96 54,207 57,448 .30%
03/27/96 55,366 57,448 .30%
551,173 2.87%
</TABLE>
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 industry and
issuer.
Note 5 -- Capital Share Transactions
<TABLE>
<CAPTION>
Transactions in Capital Stock by portfolio were as follows:
International Mortgage-Backed
Securities Portfolio Securities Portfolio
Year Ended June 30, 1996:
<S> <C> <C>
Shares sold ................................... -- --
Shares issued in reinvestment of
dividends and distributions .................. 23,067 39,599
Shares redeemed ............................... (16,274) --
Net Increase 6,793 39,599
Year Ended December 31, 1995:
Shares sold ................................... 9,107 --
Shares issued in reinvestment of
dividends and distributions .................. 88,579 75,504
Shares redeemed ............................... -- (262,636)
Net Increase (Decrease) 97,686 (187,132)
</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 Fed Funds Unsecured Rate plus 100 basis points. Additionally, a
commitment fee is charged at the annual rate of .25% on the line of credit. At
June 30, 1996, the Fund had no outstanding borrowings under the line of credit.
<PAGE>
June 30, 1996
SCHEDULES OF INVESTMENTS
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Securities Portfolio
Shares
Held Value
Common Stocks (96.64%)
Aircraft & Parts (0.19%)
Cemex SA 9,928 $ 35,954
Beverages (1.17%)
Lion Nathan 86,000 224,469
Blast Furnace & Basic
Steel Products (1.20%)
Voest-Alpine Stahl 6,800(b) 229,792
Broadwoven Fabric Mills,
Cotton (0.59%)
Roda Vivatex 150,000 112,786
Cement, Hydraulic (0.57%)
Apasco SA 20,000 110,030
Central Reserve Depositories (0.63%)
Ergo Bank 2,200 121,081
Combination Utility Services (1.86%)
ABB AG 170 210,252
Iberdrola 1 SA 14,300 146,669
356,921
Commercial Banks (8.75%)
ABN-AMRO Holdings NV 7,746 415,667
Bank of Ireland 28,528 195,042
Christiana Bank Ordinary Shares 52,000 122,469
Grupo Financiero Bancomer;
Series B 141,000(a) 61,387
Series L 5,222(a) 1,729
Korea Housing Bank 1,290 30,056
National Australia Bank Ltd. 23,654 218,758
Siam City Bank 278,000 298,257
Svenska Handelsbanken AB Free 17,050 337,892
1,681,257
Communications Equipment (0.31%)
ABC Communications Holdings Ltd. 278,000 60,696
Communication Services, NEC (1.87%)
KPN Royal PTT Nederland 9,472 358,465
Computer & Office Equipment (0.21%)
Canon, Inc. 2,000 41,575
Concrete Work (0.49%)
Hanil Cemet 1,800 93,198
Construction & Related Machinery (1.15%)
Keumkang 1,300 82,695
Powerscreen International PLC 19,400 137,456
220,151
Consumer Products (1.06%)
Imasco Ltd. 10,000 204,303
Copper Ores (0.65%)
Reliance Industries 9,600(a) 124,800
Crude Petroleum & Natural Gas (1.28%)
Hardy Oil & Gas 63,000 245,703
Department Stores (0.78%)
Vendex International 4,300 149,885
Drugs (5.15%)
Galencia Holdings AG 350 142,613
Roussel-Ucalf 1,150 275,879
Sandoz AG 280 320,124
Teva Pharmaceutical ADR 6,600 249,975
988,591
Electric Light & Wiring
Equipment (1.00%)
Clipsal Industries Holdings 20,000 56,200
Otra NV 5,900 135,837
192,037
Electric Services (4.17%)
CEP-A Consolidated Electric
Power-Asia 51,200 84,666
Korea Electric Power Corp. 4,800 166,869
Korea Mobil Telecommunications Corp. 290 228,804
Northern Ireland Electric 49,100 321,188
801,527
Electronic Components &
Accessories (3.28%)
Amtek Engineering 94,500 170,730
Elec & Eltek International 96,000 286,080
Murata Mfg. 2,000 75,673
Varitronix 47,000 98,062
630,545
Electronic Distribution
Equipment (1.42%)
Phillips Electronics 8,400 273,115
Engines & Turbines (0.36%)
Mabuchi Motor 1,100 70,003
Finance Services (0.92%)
MBF Capital Berhad 129,900 177,843
Flat Glass (0.35%)
Weru AG 180 67,524
Forest Products (0.44%)
Metsa-Serla 12,000 85,236
Functions Closely Related
to Banking (1.02%)
Liechtenstein Global Trust AG 400 194,944
Gas Production & Distribution (2.25%)
Australia Gas & Light 43,109 179,488
Hafslund ASA 3,113 19,647
OMV AG 2,300 232,956
432,091
Holding Offices (1.35%)
First Pacific Co., Ltd. 168,892 259,650
Household Appliances (0.92%)
Fisher & Paykel 55,000 176,336
Household Audio & Video
Equipment (0.79%)
SKF 'B' Free 6,400 151,911
Industrial Inorganic Chemicals (2.20%)
Bayer AG 12,000 422,169
Investment Offices (0.58%)
Invesco PLC 31,000 111,268
Meat Products (3.77%)
Orkla B Ordinary Shares 6,100 296,721
Unilever NV 2,950 426,866
723,587
Medical Instruments & Supplies (0.22%)
Nycomed 3,113 43,127
Miscellaneous Chemical Products (3.49%)
Ciba Geigy AG-REG 190 231,496
Hoechst AG 13,000 438,988
670,484
Miscellaneous Durable Goods (1.39%)
Hagemeyer NV 3,751 267,210
Miscellaneous Food &
Kindred Products (0.81%)
Burns, Philp & Co., Ltd. 73,998 139,777
Grupo Herdez SA 45,000 15,139
154,916
Miscellaneous Furniture &
Fixtures (0.25%)
Pt Surya Toto 22,200 47,692
Miscellaneous Manufacturers (0.49%)
Carter Holt Harvey Ltd. 41,000 93,532
Miscellaneous Non-Durable
Goods (1.67%)
Grand Metropolitan PLC 48,300 320,458
Miscellaneous Plastics
Products, NEC (0.56%)
Royal Plastics Group 7,100(a)(b) 107,881
Miscellaneous Textile Goods (0.36%)
Espirit Asia 220,000 69,634
Miscellaneous Transportation
Equipment (0.68%)
Autoliv AB 4,300 130,902
Miscellaneous Transportation
Services (0.58%)
Koninklijke Pakhoed NV 4,253 110,874
Miscellaneous Wood Products (0.66%)
Enso OY 16,300 126,656
Motor Vehicles & Equipment (1.39%)
Volvo AB 11,700 266,251
Non-Classifiable Establishments (1.40%)
Thailand International Fund 8 268,000
Office Furniture (0.69%)
Lamex Holdings 382,000 133,247
Oil & Gas Field Services (2.19%)
Repsol Petroleo SA 12,100 420,444
Personal Credit Institutions (0.65%)
Manhattan Card Co. 263,000 125,715
Plastic Materials & Synthetics (1.41%)
Astra AB 6,200 270,033
Primary Nonferrous Metals (1.24%)
British Steel PLC 93,000 237,708
Pulp Mills (1.41%)
Babcock International Group 27,740 38,361
UPM-Kymmene OY 11,200 231,671
270,032
Railroad Equipment (0.59%)
Vae AG 1,200 113,141
Sand & Gravel (0.27%)
Bardon Group PLC 87,700 51,441
Security Brokers & Dealers (1.12%)
Peregrine Investment Holdings 148,000 213,190
Peregrine Investment - Warrants 14,800(a) 1,702
214,892
Security & Commodity Services (1.70%)
Corporacion Bancaria de Espania SA 7,500 327,000
Ship & Boat Building &
Repairing (0.77%)
Unitor Ships Service 9,100 147,083
Special Industry Machinery (3.19%)
Bobst SA 120 173,053
IHC Caland NV 5,900 290,338
Sulzer AG 250 149,803
613,194
Sugar & Confectionary Products (3.03%)
Huhtamake I Free 4,800 160,141
Nestle 370 422,429
582,570
Telephone Communication (8.62%)
Cable & Wireless PLC 14,900 98,626
Compania deTelecomunicaciones ADR 1,300 127,563
Nokia Corp. Class A ADR 6,800 251,600
Tele Danmark B 2,900 145,176
Telecom Italia-DI 203,000 350,262
Telecom Italia Mobile 203,000 276,767
Telefonica de Espana SA 14,700 270,585
Telefonos de Mexico SA ADR 4,000 134,000
1,654,579
Water Supply (1.01%)
Wessex Water PLC 35,011 194,212
Water Transportation of
Freight, NEC (2.07%)
Argonaut AB 'B' Free 25,000(a) 51,617
ICB Shipping AB 'B' Free 28,666 345,609
397,226
Total Common Stock 18,559,577
Preferred Stocks (0.64%)
Highway & Street Construction (0.64%)
BAU Holdings AG 2,430 123,629
Principal
Amount Value
Bonds (1.11%)
Fire, Marine & Casualty
Insurance (1.11%)
Alfa SA Convertible Subordinated
Debentures; 8.00%; 9/15/00 $200,000(b) $ 213,500
Commercial Paper (2.27%)
Personal Credit Institutions (2.27%)
Associates Corp. of North America;
5.55%; 7/1/96 435,000 435,000
Total Portfolio Investments (100.66%) 19,331,706
Liabilities, net of cash, receivables
and other assets (-0.66%) (126,902)
Total Net Assets (100.00%) $19,204,804
(a) Non-income producing security - No dividend paid during the period.
(b) Restricted security - See Notes 4 to the financial statements.
International Securities Portfolio
Investments by Country
Total Market Percentage of Total
Country Value Market Value
Australia $ 538,023 2.78%
Austria 699,517 3.62
Canada 312,184 1.61
Denmark 145,176 0.75
Finland 603,704 3.12
France 275,879 1.43
Germany 928,680 4.80
Greece 121,081 0.63
Hong Kong 1,046,563 5.41
Indonesia 160,478 0.83
Italy 627,029 3.24
Japan 187,251 0.97
Korea 601,623 3.11
Malaysia 177,843 0.92
Mexico 224,240 1.16
Netherlands 2,428,256 12.56
New Zealand 494,337 2.56
Norway 629,048 3.26
Singapore 170,730 0.88
Spain 1,164,698 6.03
Sweden 1,554,215 8.04
Switzerland 1,844,714 9.54
Thailand 298,257 1.54
United Kingdom 1,951,462 10.10
United States 2,146,718 11.11
Total Market Value $19,331,706 100.00%
Mortgage-Backed Securities Portfolio
Description of Issue
_________________________________ Principal
Type Rate Maturity Amount Value
________________________________________________________________
Federal National Mortgage Association (FNMA)
Certificates (37.37%)
FNMA 6.00% 11/1/23-3/1/26 $1,211,615 $ 1,104,735
FNMA 7.00 8/1/23 3,463,583 3,346,133
FNMA 7.50 6/1/23 879,799 871,344
Total FNMA Certificates 5,322,212
Government National Mortgage Association (GNMA)
Certificates (54.08%)
GNMA I 6.00 11/20/23-5/20/26 4,163,048 3,753,288
GNMA I 6.50 12/15/23 869,841 815,293
GNMA II 6.50 1/15/24-10/20/25 2,226,520 2,084,419
GNMA II 7.50 6/15/23-9/15/23 1,058,320 1,048,689
Total GNMA Certificates 7,701,689
Federal Home Loan Mortgage Corporation
(FHLMC) Certificates (6.37%)
FHLMC Gold 5.50 2/1/24-3/1/24 763,643 677,630
FHLMC Gold 6.00 4/1/24 250,901 228,985
Total FHLMC Certificates 906,615
Federal Agency Short-Term Obligations (1.72%)
Principal
Amount Value
Federal Home Loan Mortgage Corp.;
5.52%; 7/1/96 $ 245,000 $ 245,000
Total Portfolio Investments (99.54%) 14,175,516
Cash, receivables and other assets,
net of liabilities (0.46%) 65,705
Total Net Assets (100.00%) $14,241,221
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Securities Portfolio
Six Months Year Year Period
Ended Ended Ended Ended
June 30, December 31, December 31, December 31,
1996 1995 1994 1993(a)
<S> <C> <C> <C> <C>
Net Asset Value at Beginning of Period................... $ 11.70 $ 11.29 $ 12.87 $ 10.01
Income from Investment Operations:
Net Investment Income................................. .07 .19 .13 .07
Net Realized and Unrealized Gains (Losses)
on Investments and Foreign Currency................ 1.20 1.11 (.95) 2.91
Total from Investment Operations 1.27 1.30 (.82) 2.98
Less Distributions:
Dividends (from net investment income)................ -- (.10) (.12) (.10)
Excess distribution of net investment income.......... -- (.07) (.13) --
Distributions (from capital gains).................... -- (.72) (.51) (.02)
Total Distributions -- (.89) (.76) (.12)
Net Asset Value at End of Period......................... $ 12.97 $ 11.70 $ 11.29 $ 12.87
Total Return............................................. 13.02%(c) 12.02% (6.45)% 29.95%(c)
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands).............. $ 19,205 $ 17,251 $ 15,542 $ 16,838
Ratio of Expenses to Average Net Assets............... .90%(b) .90% .90% .90%
Ratio of Net Investment Income to Average
Net Assets......................................... 2.86%(b) 1.79% .94% 1.21%(b)
Portfolio Turnover Rate............................... 26.20%(b) 46.0% 37.0% 6.9%
Average Commission Rate Paid.......................... $ .0222 -- -- --
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<CAPTION>
PRINCIPAL SPECIAL MARKETS FUND, INC.
Mortgage-Backed Securities Portfolio
Six Months Year Year Period
Ended Ended Ended Ended
June 30, December 31, December 31, December 31,
1996 1995 1994 1993(a)
<S> <C> <C> <C> <C>
Net Asset Value at Beginning of Period................... $10.17 $ 9.11 $ 10.10 $ 10.01
Income from Investment Operations:
Net Investment Income................................. .32 .65 .63 .34
Net Realized and Unrealized Gains (Losses)
on Investments and Foreign Currency................ (.46) 1.06 (.99) .09
Total from Investment Operations (.14) 1.71 (.36) .43
Less Distributions:
Dividends (from net investment income)................ (.32) (.65) (.63) (.34)
Net Asset Value at End of Period......................... $ 9.71 $ 10.17 $ 9.11 $ 10.10
Total Return............................................. (1.39)%(c) 19.26% (3.60)% 4.47%(c)
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands).............. $14,241 $ 14,253 $ 14,714 $ 24,309
Ratio of Expenses to Average Net Assets............... .45%(b) .45% .45% .45%(b)
Ratio of Net Investment Income to Average
Net Assets......................................... 6.53%(b) 6.66% 6.56% 5.23%(b)
Portfolio Turnover Rate............................... 51.0%(b) 9.9% 41.8% 9.6%(b)
<FN>
(a)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.
(b)Computed on an annualized basis.
(c)Total return amounts have not been annualized.
</FN>
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