AMERICAN EXPRESS Financial Direct
Strategist Income Fund, Inc.
1999 Annual Report
Strategist Government Income Fund
Strategist High Yield Fund
Strategist Quality Income Fund
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Table of Contents
From the Portfolio Managers 2
The Fund's Long-term Performance 8
Independent Auditors' Report (Strategist Income Fund, Inc.) 14
Financial Statements (Strategist Income Fund, Inc.) 15
Notes to Financial Statements (Strategist Income Fund, Inc.) 20
Federal Income Tax Information (Strategist Income Fund, Inc.) 27
Independent Auditors' Report (Government Income Portfolio) 30
Financial Statements (Government Income Portfolio) 31
Notes to Financial Statements (Government Income Portfolio) 34
Investments in Securities (Government Income Portfolio) 40
Independent Auditors' Report (High Yield Portfolio) 50
Financial Statements (High Yield Portfolio) 51
Notes to Financial Statements (High Yield Portfolio) 54
Investments in Securities (High Yield Portfolio) 58
Independent Auditors' Report (Quality Income Portfolio) 91
Financial Statements (Quality Income Portfolio) 92
Notes to Financial Statements (Quality Income Portfolio) 95
Investments in Securities (Quality Income Portfolio) 100
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(picture of) James W. Snyder
James W. Snyder
Portfolio manager
From the Portfolio Manager
Strategist Government Income Fund
Strategist Government Income Fund had a productive fiscal year, although rising
interest rates tempered performance during the second half of the period. For
the 12 months as a whole -- June 1998 through May 1999 -- the Portfolio
generated a total return (net asset value change and interest income) of 4.19%.
Continuing the trend of recent years, the inflation rate -- the key influence on
interest rates and, thus, the bond market -- remained remarkably low over the
period. Reinforcing the low-inflation environment was another outbreak of the
so-called "Asian flu," the financial illness that first struck Southeast Asia in
1997. This time, the victims were Russia and Latin America in the late summer
and fall of 1998.
The upshot of the financial turmoil was a "flight to quality" on the part of
many concerned investors, who took refuge in U.S. Treasury securities. Their
heavy buying helped drive down interest rates, which in turn drove up prices for
Treasuries. Investors largely ignored other bond sectors, including
mortgage-backed bonds issued by federal government agencies, but the
interest-rate decline still had a positive effect on their prices.
MOOD SWINGS
By late winter, though, market psychology had changed from worry about a
potential global recession to concern that worldwide growth, led by the
juggernaut U.S. economy, might actually become strong enough to fan the fire of
inflation. So, the selling pressure on bonds increased, pushing up interest
rates and pushing down prices for much of the final four months.
As for the Portfolio, the asset mix was roughly 50/50 -- Treasuries and
mortgage-backed bonds -- when the fiscal year began. As the period progressed, I
shifted more money into mortgage bonds, concentrating on low-coupon issues,
which are generally less vulnerable to mortgage refinancing than higher-yielding
issues and, consequently, a decline in value. By the middle of the period,
mortgage bonds made up close to 80% of the holdings, with Treasuries accounting
for most of the rest.
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Because I thought interest rates were likely to come down, I maintained a
slightly long duration in the Portfolio early in the period. (Duration, a
function of the average maturity of the bonds held in the Portfolio, determines
the approximate sensitivity of the Fund's value to interest-rate changes. In
general, the longer the duration, the greater the sensitivity.) Therefore, when
rates declined late in 1998, the Fund's performance was enhanced somewhat. Late
in the period, I reduced the duration. As is usually the case, I also maintained
investments in two forms of derivatives -- options and interest-rate futures
contracts, which ultimately enhanced the Fund's performance for the period as a
whole.
James W. Snyder
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(picture of) Jack Utter
Jack Utter
Portfolio manager
From the Portfolio Manager
Strategist High Yield Fund
High-yield bonds made a strong comeback in the second half of the fiscal year,
but not enough to prevent Strategist High Yield Fund from experiencing a
modestly negative result for the 12 months as a whole. For the period -- June
1998 through May 1999 -- the Portfolio lost 3.94% on a total return basis (net
asset value change and interest income).
The environment for high-yield bonds was generally good when the period began.
The economy was rolling along, inflation showed no signs of increasing, and the
financial upheaval that struck Asia in the fall of 1997 seemed to have settled
down. But by the mid-summer of 1998, another bout of the "Asian flu" hit, this
time in Russia and, soon after, Latin America.
Here at home, the upshot of the situation for investors was that the possibility
of a global recession appeared considerably greater. The result was a wave of
selling that swamped the high-yield market as investors embarked on a "flight to
quality" whose primary destination was U.S. Treasury bonds, which offered the
safety and liquidity they sought. Although the downturn in the high-yield market
was widespread, the Fund's holdings in the energy, telecommunications and
emerging foreign-market sectors were particularly affected.
AN IMPROVED ENVIRONMENT
Things improved markedly over the winter and early spring, however, as U.S.
economic data stayed remarkably strong, inflation remained well under control
and a measure of calm returned to smaller foreign economies. For the Portfolio,
this resulted in solid gains in four of the final five months of the period.
Leading the way in the rebound were holdings in the telecommunications,
paper/packaging, media and emerging-market sectors, which, when combined,
represented a substantial portion of the portfolio.
Looking at other factors in the high-yield market, occasional periods of heavy
supply of new issues hampered bond prices at times. Demand, on the other hand,
remained reasonably good.
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As the new fiscal year begins, the investment environment has been clouded by
concern over the possibility that the Federal Reserve will find it necessary to
raise short-term interest rates to head off a potential spike in inflation. In
fact, in anticipation of that possibility, long-term interest rates crept higher
during the final few months of the past fiscal year. My view is that inflation
is unlikely to show signs of a meaningful pickup and, therefore, should the Fed
act, it won't need to raise rates substantially. If that scenario plays out and
the economy remains healthy, I think high-yield bonds are in position to deliver
good performance in the months ahead, especially in relation to other bond
sectors.
Jack Utter
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(picture of) Ray Goodner
Ray Goodner
Portfolio manager
From the Portfolio Manager
Strategist Quality Income Fund
A rise in long-term interest rates hampered performance in the second half of
the fiscal year, but Strategist Quality Income Fund still generated positive
results for the period as a whole. For the 12 months -- June 1998 through May
1999 -- the Portfolio generated a total return, which includes net asset value
change and interest income, of 3.38%.
The low rate of inflation that has dominated the investment environment in
recent years remained in place during the period. But the U.S. bond market got
an additional boost from another outbreak of the financial malady known as the
"Asian flu," which, by last summer, had spread to Russia and Latin America. The
result was a flood of money into the U.S. Treasury bonds from investors who were
seeking what they believed to be a safe haven for investment. The buying
resulting from this "flight to quality" drove long-term interest rates down and
bond prices up until late in 1998.
The major beneficiaries of this trend were long-term U.S. Treasury bonds, which
experienced a sharp price increase thanks to their high sensitivity to changes
in interest rates. Performance among all other bond sectors, including corporate
and mortgage-backed issues, lagged well behind, as investors largely ignored
them in their pursuit of the safety and liquidity offered by Treasuries.
By late winter, though, the environment had changed markedly. With the U.S.
economy continuing to show remarkably robust growth and a sense of calm
returning to foreign markets, investors began to worry about the possibility of
rising inflation. The result was an upturn in interest rates that sent bond
prices, especially Treasuries, tumbling over the final few months of the period.
In the early stage of the upturn in interest rates, I emphasized higher-yielding
mortgage-backed and corporate issues, whose value declined more slowly than
Treasuries. But as the downturn progressed, I began to sell those corporates
that I felt would fare the worst should the Federal Reserve raise rates. In the
process, I also raised cash reserves and employed bond futures contracts to
cushion the decline in bond prices.
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Because I thought interest rates were likely to decline, early in the period I
positioned the Portfolio with a relatively long duration. (A function of the
average maturity of the bonds in the portfolio, duration determines how
sensitive the Fund's net asset value is to interest-rate changes. The longer the
duration, the greater the sensitivity.) Therefore, when rates came down, the
Fund responded positively. Beginning in the winter, I lowered the duration to
provide some cushion for the Fund in the event of an ongoing interest-rate rise.
At this writing (mid-June), long-term interest rates are still well above what
they were several months ago, a reflection of investors' heightened concern that
inflation could soon become a problem. My view is that inflation is unlikely to
get out of hand and, if so, interest rates may actually work their way somewhat
lower as the market anticipates an economic slow down next year. That, in turn,
would lead to an improving environment for bonds.
Ray Goodner
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The Fund's Long-term Performance
How your $10,000 has grown in Strategist Government Income Fund
$20,000
Lehman Brothers
Aggregate Bond Index
$12,036
$10,000 Strategist
Merrill Lynch 1-5 Year Government
Government Index Income Fund
6/30/96 9/96 1/97 5/97 9/97 1/98 5/98 9/98 1/99 5/99
Average Annual Total Return (as of May 31, 1999)
1 year 5 years 10 years
+4.19% +6.85% +7.20%
Assumes: Holding period from 6/30/96 to 5/31/99. Returns do not reflect taxes
payable on distributions. Reinvestment of all income and capital gain
distributions for the Fund, with a value of $2,259. Also see "Past Performance"
in the Fund's current prospectus.
On the graph above you can see how the Fund's total return compared to two
widely cited performance indexes, the Lehman Brothers Aggregate Bond Index and
the Merrill Lynch 1-5 Year Government Index. Your investment and return values
fluctuate so that your shares, when redeemed, may be worth more or less than the
original cost. This was a period of widely fluctuating security prices. Past
performance is no guarantee of future results.
On June 10, 1996, AXP Federal Income Fund (the predecessor fund) converted to a
master/feeder structure and transferred all of its assets to Government Income
Portfolio. The performance information, prior to June 10, 1996, in the total
return table represents performance of the corresponding predecessor fund prior
to March 20, 1995 and Class A shares of the corresponding predecessor fund from
March 20, 1995 through June 10, 1996, adjusted to reflect the absence of sales
charges on shares of the Fund. The historical performance has not been adjusted
for any difference between the estimated aggregate fees and expenses of the Fund
and historical fees and expenses of the predecessor fund.
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Lehman Brothers Aggregate Bond Index is an unmanaged index, made up of a
representative list of government, corporate, asset-backed and mortgage backed
securities. The index is frequently used as a general measure of bond market
performance. The index reflects reinvestment of all distributions and changes in
market prices, but excludes brokerage commissions or other fees. However, the
securities used to create the index may not be representative of the debt
securities held in the Portfolio.
Merrill Lynch 1 to 5 Year Government Index is an unmanaged index, made up of a
representative list of government bonds. The index is frequently used as a
general measure of government bond performance. However, the securities used to
create the index may not be representative of the debt securities held in the
Portfolio.
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The Fund's Long-term Performance
How your $10,000 has grown in Strategist High Yield Fund
$20,000
Merrill Lynch High
Yield Bond Index
$12,140
$10,000 Strategist High
Lehman Brothers Income Fund
Aggregate Bond Index
6/30/96 9/96 1/97 5/97 9/97 1/98 5/98 9/98 1/99 5/99
Average Annual Total Return (as of May 31, 1999)
1 year 5 years 10 years
-3.94% +8.72% +9.40%
Assumes: Holding period from 6/30/96 to 5/31/99. Returns do not reflect taxes
payable on distributions. Reinvestment of all income and capital gain
distributions for the Fund, with a value of $2,946. Also see "Past Performance"
in the Fund's current prospectus.
On the graph above you can see how the Fund's total return compared to two
widely cited performance indexes, the Lehman Brothers Aggregate Bond Index and
the Merrill Lynch High Yield Bond Index. Your investment and return values
fluctuate so that your shares, when redeemed, may be worth more or less than the
original cost. This was a period of widely fluctuating security prices. Past
performance is no guarantee of future results.
On June 10, 1996, AXP Extra Income Fund (the predecessor fund) converted to a
master/feeder structure and transferred all of its assets to High Yield
Portfolio. The performance information, prior to June 10, 1996, in the total
return table represents performance of the corresponding predecessor fund prior
to March 20, 1995 and Class A shares of the corresponding predecessor fund from
March 20, 1995 through June 10, 1996, adjusted to reflect the absence of sales
charges on shares of the Fund. The historical performance has not been adjusted
for any difference between the estimated aggregate fees and expenses of the Fund
and historical fees and expenses of the predecessor fund.
<PAGE>
Lehman Brothers Aggregate Bond Index is an unmanaged index, made up of a
representative list of government, corporate, asset-backed and mortgage-backed
securities. The index is frequently used as a general measure of bond market
performance. The index reflects reinvestment of all distributions and changes in
market prices, but excludes brokerage commissions or other fees. However, the
securities used to create the index may not be representative of the debt
securities held in the Portfolio.
Merrill Lynch High Yield Bond Index provides a broad-based measure of
performance of the non-investment grade U.S. domestic bond market. The index
currently captures close to $200 billion of the outstanding debt of domestic
market issuers rated below investment grade but not in default. The index is
"rule-based," which means there is a defined list of criteria that a bond must
meet in order to qualify for inclusion in the index.
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The Fund's Long-term Performance
How your $10,000 has grown in Strategist Government Income Fund
$20,000
Lehman Brothers
Aggregate Bond Index
$12,153
$10,000 Strategist Quality
Income Fund
6/30/96 9/96 1/97 5/97 9/97 1/98 5/98 9/98 1/99 5/99
Average Annual Total Return (as of May 31, 1999)
1 year 5 years 10 years
+3.38% +7.73% +8.53%
Assumes: Holding period from 6/30/96 to 5/31/99. Returns do not reflect taxes
payable on distributions. Reinvestment of all income and capital gain
distributions for the Fund, with a value of $2,098. Also see "Past Performance"
in the Fund's current prospectus.
On the graph above you can see how the Fund's total return compared to a widely
cited performance measure, the Lehman Brothers Aggregate Bond Index. Your
investment and return values fluctuate so that your shares, when redeemed, may
be worth more or less than the original cost. This was a period of widely
fluctuating security prices. Past performance is no guarantee of future results.
On June 10, 1996, AXP Selective Fund (the predecessor fund) converted to a
master/feeder structure and transferred all of its assets to Quality Income
Portfolio. The performance information, prior to June 10, 1996, in the total
return table represents performance of the corresponding predecessor fund prior
to March 20, 1995 and Class A shares of the corresponding predecessor fund from
March 20, 1995 through June 10, 1996, adjusted to reflect the absence of sales
charges on shares of the Fund. The historical performance has not been adjusted
for any difference between the estimated aggregate fees and expenses of the Fund
and historical fees and expenses of the predecessor fund.
<PAGE>
Lehman Brothers Aggregate Bond Index is an unmanaged index, made up of a
representative list of government, corporate, asset-backed and mortgage-backed
securities. The index is frequently used as a general measure of bond market
performance. The index reflects reinvestment of all distributions and changes in
market prices, but excludes brokerage commissions or other fees. However, the
securities used to create the index may not be representative of the debt
securities held in the Portfolio.
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Federal Income Tax Information
The Funds are required by the Internal Revenue Code of 1986 to tell their
shareholders about the tax treatment of the dividends they pay during their
fiscal year. The dividends listed below are reported to you on Form 1099-DIV,
Dividends and Distributions. Shareholders should consult a tax advisor on how to
report distributions for state and local purposes.
Strategist Government Income Fund
Fiscal year ended May 31, 1999
Income distributions taxable as dividend income, none qualifying for deduction
by corporations.
Payable date Per share
June 26, 1998 $0.02429
July 29, 1998 0.02568
Aug. 27, 1998 0.02244
Sept. 24, 1998 0.02171
Oct. 27, 1998 0.02644
Nov. 25, 1998 0.02461
Dec. 22, 1998 0.10023
Jan. 25, 1999 0.02534
Feb. 25, 1999 0.02186
March 24, 1999 0.02006
April 26, 1999 0.02213
May 27, 1999 0.02286
Total $0.35765
Capital gain distribution taxable as long-term capital gain.
Payable date Per share
Dec. 22, 1998 $0.00827
Total distributions $0.36592
The distribution of $0.10850 per share, payable Dec. 22, 1998, consisted of
$0.02021 derived from net investment income, $0.08002 from net short-term
capital gains (a total of $0.10023 taxable as dividend income) and $0.00827 from
net long-term capital gains.
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Strategist High Yield Fund
Fiscal year ended May 31, 1999
Income distributions taxable as dividend income, 2.22% qualifying for deduction
by corporations.
Payable date Per share
June 26, 1998 $0.03545
July 29, 1998 0.03701
Aug. 27, 1998 0.03700
Sept. 24, 1998 0.03863
Oct. 27, 1998 0.03801
Nov. 25, 1998 0.03301
Dec. 22, 1998 0.04708
Jan. 25, 1999 0.03249
Feb. 25, 1999 0.03299
March 24, 1999 0.03350
April 26, 1999 0.03451
May 27, 1999 0.03200
Total $0.43168
Capital gain distribution taxable as long-term capital gain.
Payable date Per share
Dec. 22, 1998 $0.02510
Total distributions $0.45678
The distribution of $0.07218 per share, payable Dec. 22, 1998, consisted of
$0.03000 derived from net investment income, $0.01708 from net short-term
capital gains (a total of $0.04708 taxable as dividend income) and $0.02510 from
net long-term capital gains.
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Strategist Quality Income Fund
Fiscal year ended May 31, 1999
Income distributions taxable as dividend income, 0.84% qualifying for deduction
by corporations.
Payable date Per share
June 25, 1998 $0.03844
July 27, 1998 0.04375
Aug. 26, 1998 0.04555
Sept. 24, 1998 0.04530
Oct. 26, 1998 0.04941
Nov. 24, 1998 0.04544
Dec. 22, 1998 0.04914
Jan. 25, 1999 0.04758
Feb. 25, 1999 0.04338
March 24, 1999 0.03813
April 26, 1999 0.04744
May 27, 1999 0.04451
Total $0.53807
Capital gain distribution taxable as long-term capital gain.
Payable date Per share
Dec. 22, 1998 $0.05779
Total distributions $0.59586
The distribution of $0.10693 per share, payable Dec. 22, 1998, consisted of
$0.04262 derived from net investment income, $0.00652 from net short-term
capital gains (a total of $0.04914 taxable as dividend income) and $0.05779 from
net long-term capital gains.
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The financial statements contained in Post-Effective Amendment #5 to
Registration Statement No. 33-60323 filed on or about July 28, 1999, are
incorporated herein by reference.
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American Express Service Corporation, Distributor
S-6148 D (7/99)
