CUNA Mutual Funds
Nov. 30, 1994
U.S. Government Income Fund
SemiAnnual Report
For yield, price, last transaction, and current balance, call:
1-800-934-FUND (3863)
To request a prospectus for any of the CUNA Mutual Funds, call:
1-800-756-FUND (3863)
CUNA Mutual Funds, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Dear Shareholders
Few bond investors will be sorry to see the end of 1994, one of the most
difficult years for bonds since 1950. The Federal Reserve has steadily pushed
the federal funds rate higher to cool the pace of economic growth and make
sure inflation does not rise. Longer-term bond yields also soared and their
prices fell, reversing several years of solid to spectacular returns. For the
11 months ended November 30, most bond fund returns were negative. While
mortgage-backed securities also fell in price, their overall returns held up
better than those of other high-quality bonds, such as Treasury issues.
During the first half of the summer, longer-term rates fluctuated in a
fairly narrow range, as shown below. Subsequently, they resumed rising in
response to indications of robust economic growth, hints of inflationary
pressures, and the Federal Reserve's sixth and largest increase this year in
the federal funds target rate.
Chart 1 - Yield Comparison
Market Environment
Mortgage-backed securities performed relatively well during the last three-
and six-month periods, and we have added more to your Fund's portfolio. The
market environment for mortgage securities has changed significantly for the
better. A year ago, prepayments were high, and most mortgage-backed securities
were priced at a "premium," or price above face value. (A "prepayment" is an
unscheduled repayment of a mortgage loan's principal balance.) Since mortgages
are always paid off at par, prepayments caused capital losses for investors.
Today, the prepayment rate is extremely low, and about 80% of all mortgages
are selling at discounts, or prices below their par value. Thus, prepayments
provide a capital gain for investors who purchase mortgage securities at a
discount.
Performance and Strategy Review
Reflecting the difficult market conditions, your Fund's share price declined
during the last six months. How-ever, the income generated by portfolio
holdings was slightly larger than the price decline, so the total return was
modestly positive. Your Fund was more successful than funds in its Lipper
group in protecting principal value in a declining market, as you can see in
the table below.
Performance Comparison
Six Months Ended 11/30/94
__________________________
CUNA Mutual U.S. Government
Income Fund 0.12%
Lipper Intermediate U.S. Government
Funds Average -0.39%
In line with our view that the economy will slow down next year and that
the worst of the interest rate rise is behind us, our strategy has been to
increase the Fund's ability to rise in price if interest rates decline. Rather
than sell our older holdings, which are enhancing Fund performance, we have
purchased some lower-coupon, lower-priced securities, which will perform well
if interest rates fall. Some of these securities will be paid for by future
interest and principal payments, which is why our holdings exceed 100% of net
assets, as shown in the sector diversification table following this report. We
have also started to add gradually to our longer-term government agency
securities, primarily Tennessee Valley Authority issues. Along with our new
modest position in Treasury securities, these holdings increase the Fund's
income and will also provide capital appreciation when interest rates begin to
ease.
Outlook
So far the main impact of the higher rates has been on residential and
business construction activity, while the rest of the economy has not been
materially affected. In fact, real GDP growth in the third quarter (after
adjusting for price changes) was revised from 3.4% up to 3.9%. The Federal
Reserve is likely to continue raising the federal funds rate in the coming
months until it sees that economic growth is slowing to its long-term trend of
about 2.5%. Money market rates can be expected to climb in step with increases
in fed funds rates, but bond yields may level off.
Considering their yield advantage and the drop in prepayments,
mortgage-backed securities should continue to perform well compared with other
high-quality bonds. In the coming months, we believe returns on longer-term
bonds will once again be determined primarily by their income and will be more
in line with their positive, long-term levels.
Respectfully submitted,
Peter Van Dyke
President and Chairman of the
Investment Advisory Committee
December 19, 1994
Statistical Highlights
CUNA Mutual U.S. Government Income Fund / November 30, 1994
Key Statistics
Period Ended
Dividend Yield* 11/30/94
________________________________ ____________
6 Months 7.40%
Dividend Per Share
________________________________
6 Months $0.34
Change in Price Per Share
________________________________
6 Months (From $9.54 to $9.21) -$0.33
*Dividends earned and reinvested for the period indicated are annualized and
divided by the average daily net asset values per share for the same period.
Income return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
Quality Diversification
Percent of Net Assets
_______________________
TRPA Quality Rating* 5/31/94 11/30/94
_____________________ __________ __________
1 83% 82%
2 17 18
3 0 0
4 0 0
____________________________________________________________________________
Weighted Average 1.2 1.2
*On a scale of 1 to 10, with Grade 1 representing highest quality.
Maturity Diversification*
Percent of Net Assets
_______________________
Range 5/31/94 11/30/94
___________________________ ___________ ___________
Short-Term (0 to 1 Year) 5% -4%
Short Intermediate-
Term (1+ to 5 Years) 60 1
Long Intermediate-
Term (5+ to 10 Years) 18 58
Long-Term (Over 10 Years) 17 45
____________________________________________________________________________
Weighted Average Maturity 12.7 yrs. 14.8 yrs.
*Based on prepayment-adjusted life of GNMA securities.
Sector Diversification
Percent of Net Assets
______________________
5/31/94 11/30/94
__________ __________
GNMA Securities 75% 84%
Other Government Agencies 17 18
U.S. Treasury Securities 0 5
Agency-Backed Stripped Mortgages 4 3
Agency-Backed CMO 1 0
Other Assets Less Liabilities 3 -10
____________________________________________________________________________
100% 100%
Statement of Net Assets
CUNA Mutual U.S. Government Income Fund / November 30, 1994 (Unaudited)
U.S. Government Mortgage-Backed Securities - 104.6%
Face Amount Value
______________ ______________
U.S. GOVERNMENT GUARANTEED OBLIGATIONS - 83.3%
Government National Mortgage Assn.,
I, 7.00%, 7/15/20. . . . . . . . . . . $ 300,000 $ 266,970
7.50%, 6/15/22 - 9/15/23 . . . . . . 387,477 357,044
8.00%, 5/15/17 . . . . . . . . . . . 55,937 54,768
8.50%, 12/15/16 - 10/15/21 . . . . . 123,238 121,860
9.00%, 8/15/16 - 3/15/21 . . . . . . 183,110 185,832
9.50%, 6/15/16 - 2/15/20 . . . . . . 192,258 200,389
10.00%, 5/15/16 - 5/15/19. . . . . . 300,191 320,703
10.50%, 11/15/15 - 7/15/19 . . . . . 400,931 434,024
1,941,590
U.S. GOVERNMENT AGENCY OBLIGATIONS - 18.3%
Federal National Mortgage Assn.,
9.25%, 4/25/19 . . . . . . . . . . . 8,277 8,282
Tennessee Valley Authority,
6.875%, 12/15/43 . . . . . . . . . . 200,000 158,794
7.25%, 7/15/43 . . . . . . . . . . . 310,000 258,407
425,483
STRIPPED MORTGAGE SECURITIES - 3.0%
Federal National Mortgage Assn., CMO,
Interest Only,
6.50%, 10/1/23** . . . . . . . . . . . 96,202 35,113
Interest Only,
8.50%, 4/1/22**. . . . . . . . . . . 92,409 33,383
68,496
____________________________________________________________________________
Total U.S. Government Mortgage-Backed
Securities (Cost - $2,571,560) . . . . 2,435,569
U.S. Government Obligations - 5.3%
U.S. Treasury Notes,
4.625%, 8/15/95. . . . . . . . . . . . 105,000 103,539
5.875%, 5/15/95. . . . . . . . . . . 20,000 19,969
___________________________________________________________________________
Total U.S. Government Obligations
(Cost - $123,882). . . . . . . . . . 123,508
Total Investments in Securities - 109.9%
(Cost - $2,695,442). . . . . . . . . 2,559,077
Payable for Investments
Purchased - (11.5)%. . . . . . . . . (267,171)
Other Assets Less
Liabilities - 1.6% . . . . . . . . . 37,099
_________
Net Assets Consisting of:
Accumulated net investment income
- net of distributions . . . . . . . 3,107
Accumulated realized gains/losses
- net of distributions . . . . . . . (47,585)
Net unrealized loss. . . . . . . . . . (136,365)
Paid-in-capital applicable to
252,930 shares of $0.0001 par value
capital stock outstanding;
1,000,000,000 shares
authorized . . . . . . . . . . . . . 2,509,848
_________
Net Assets - 100.0%. . . . . . . . . . $2,329,005
_________
_________
Net Asset Value Per Share. . . . . . . $ 9.21
_____
_____
** - For Interest Only securities, face amount represents notional principal,
on which the Fund receives interest.
CMO - Collateralized Mortgage Obligation.
The accompanying notes are an integral part of these financial statements.
Statement of Operations
CUNA Mutual U.S. Government Income Fund / Six Months Ended November 30, 1994
(Unaudited)
INVESTMENT INCOME
Interest income. . . . . . . . . . . . $ 98,759
Expenses
Investment management and
administrative fees. . . . . . . . $ 11,553
12b-1 fees . . . . . . . . . . . . . 2,888
_________
Total expenses . . . . . . . . . . . 14,441
________
Net investment income. . . . . . . . . 84,318
REALIZED AND UNREALIZED LOSS
Net realized loss. . . . . . . . . . . (31,984)
Change in net unrealized gain or loss. (49,181)
_________
Net loss . . . . . . . . . . . . . . . (81,165)
________
INCREASE IN NET ASSETS FROM
OPERATIONS . . . . . . . . . . . . . $ 3,153
________
________
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Net Assets
CUNA Mutual U.S. Government Income Fund (Unaudited)
Dec. 30, 1993
(Commencement
Six Months Ended of Operations) to
Nov. 30, 1994 May 31, 1994
_______________ ______________
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income. . . . . . . . $ 84,318 $ 58,305
Net realized loss. . . . . . . . . . (31,984) (15,601)
Change in net unrealized gain
or loss. . . . . . . . . . . . . . (49,181) (87,184)
_________ _________
Increase (decrease) in net assets
from operations. . . . . . . . . . . 3,153 ( 44,480)
_________ _________
Distributions to shareholders
Net investment income. . . . . . . . (84,178) (58,553)
_________ _________
Capital share transactions
Sold 77,604 and
224,270 shares . . . . . . . . . . 720,268 2,238,779
Distributions reinvested
of 7,070 and 5,389 shares. . . . . 66,462 52,880
Redeemed 63,938 and
466 shares . . . . . . . . . . . . (590,795) (4,531)
_________ _________
Increase in net assets from capital
share transactions . . . . . . . . . 195,935 2,287,128
_________ _________
Total increase . . . . . . . . . . . . 114,910 2,184,095
NET ASSETS
Beginning of period. . . . . . . . . 2,214,095 30,000
_________ _________
End of period. . . . . . . . . . . . $2,329,005 $2,214,095
_________ _________
_________ _________
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
CUNA Mutual U.S. Government Income Fund / November 30,1994 (Unaudited)
Note 1 - Significant Accounting Policies
CUNA Mutual Funds Inc. (the Corporation) is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
The CUNA Mutual U.S. Government Income Fund (the Fund), is one of the
portfolios established by the Corporation.
A) Security valuation - Debt securities are generally traded in the
over-the-counter market. Investments in securities with remaining maturities
of one year or more are stated at fair value as furnished by dealers who make
markets in such securities or by an independent pricing service, which
considers yield or price of bonds of comparable quality, coupon, maturity, and
type, as well as prices quoted by dealers who make markets in such securities.
Securities with remaining maturities less than one year are stated at fair
value which is determined by using a matrix system that establishes a value
for each security based on money market yields.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by, or under the supervision of, the officers of
the Fund, as authorized by the Board of Directors.
B) Premiums and Discounts - Except for mortgage-backed securities, premiums
and discounts on debt securities are amortized for both financial and tax
reporting purposes.
C) Other - Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on an identified cost basis. Distributions to shareholders are
recorded by the Fund on the ex-dividend date. Income and capital gain
distributions are determined in accordance with federal income tax regulations
which may differ from generally accepted accounting principles.
Note 2 - Portfolio Transactions
Purchases and sales of U.S. Government securities, other than short-term,
aggregated $1,226,000 and $693,000 respectively, for the six months ended
November 30, 1994.
Note 3 - Federal Income Taxes
No provision for federal income taxes is required since the Fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income.
At November 30, 1994, the aggregate cost of investments for federal income
tax and financial reporting purposes was $2,695,000 and net unrealized losses
aggregated $136,000 of which $11,000 related to appreciated investments and
$147,000 to depreciated investments.
Note 4 - Related Party Transactions
The Fund is managed by CMC-T. Rowe Price Management, L.L.C. (the "Joint
Venture"), which is a joint venture of subsidiaries of CUNA Mutual Insurance
Society, Credit Union National Association, Inc. and T. Rowe Price Associates,
Inc., under a joint venture agreement. The investment management and
administrative agreement between the Fund and the Joint Venture provides for
an all-inclusive investment management fee, computed daily and paid monthly,
based on the Fund's daily net assets. The effective annual all-inclusive fee
rate is 1.00%. Services provided under the agreement include investment
management, shareholder servicing, transfer agency, fund accounting and
investment custody. The agreement provides that the Fund pay its own
interest, taxes, brokerage commissions and extraordinary expenses.
The distribution plan adopted by the Fund provides for a distribution fee
(12b-1 fee), computed daily and paid monthly, based on the Fund's daily net
assets. The effective annual 12b-1 fee rate is 0.25%.
Financial Highlights
CUNA Mutual U.S. Government Income Fund (Unaudited)
For a share outstanding
throughout each period
_________________________________
Dec. 30, 1993
(Commencement
Six Months Ended of Operations) to
Nov. 30, 1994 May 31, 1994
_______________ _____________
NET ASSET VALUE,
BEGINNING OF PERIOD. . . . . . . . . $ 9.54 $ 10.00
_______ _______
Investment Activities
Net investment income. . . . . . . . 0.34 0.27
Net realized and unrealized
loss . . . . . . . . . . . . . . . (0.33) (0.46)
_______ _______
Total from Investment
Activities . . . . . . . . . . . . 0.01 (0.19)
Distributions
Net investment income. . . . . . . . (0.34) (0.27)
_______ _______
NET ASSET VALUE, END
OF PERIOD. . . . . . . . . . . . . . $ 9.21 $ 9.54
_______ _______
_______ _______
RATIOS/SUPPLEMENTAL DATA
Total Return . . . . . . . . . . . . . 0.12% (1.93)%
Ratio of Expenses to Average
Net Assets . . . . . . . . . . . . . 1.25%! 1.25%!
Ratio of Net Investment Income
to Average Net Assets. . . . . . . . 7.30%! 6.67%!
Portfolio Turnover Rate. . . . . . . . 57.6%! 195.5%!
Net Assets, End of Period
(in thousands). . . . . . . . . . . . $ 2,329 $2,214
! Annualized.
Chart 1 - Yield Comparison
Line graph for CUNA U.S. Government Income Fund report (Nov. 30, 1994)
Entitled "Yield Comparison": shows yields on Current Coupon GNMA and 10-Year
Treasury Note from 5/31/94 through 11/30/94
