-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TCOyU0H1OD3+6ripWOK8VVkb9cNgxes7riVgEtKGEklH2W0+0Vq7BgIbZPDSJpoq hcKXggJx2OgM39sWGaCrWQ== 0000820027-99-000068.txt : 19990127 0000820027-99-000068.hdr.sgml : 19990127 ACCESSION NUMBER: 0000820027-99-000068 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990126 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDS SELECTIVE FUND INC CENTRAL INDEX KEY: 0000052407 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 410839316 STATE OF INCORPORATION: MN FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-00499 FILM NUMBER: 99512664 BUSINESS ADDRESS: STREET 1: 80 SOUTH 8TH STREET STREET 2: T33/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6123722772 FORMER COMPANY: FORMER CONFORMED NAME: INVESTORS SELECTIVE FUND INC DATE OF NAME CHANGE: 19841002 N-30D 1 IDS Selective Fund 1998 SEMIANNUAL REPORT (icon of) clock The goals of IDS Selective Fund, Inc. are current income and the preservation of capital by investing in investment grade bonds. Distributed by American Express Financial Advisors Inc. AMERICAN EXPRESS Financial Advisors A Quest for Quality Not all bonds are created equal. A bond's quality depends on the ability of its issuers to make the interest and principal payments owed to the bondholders. The quality is determined by independent rating agencies, which assign a credit rating (in the form of a letter grade) to each bond. Since its establishment in 1945, Selective Fund has concentrated its investments in the four highest investment grades. Along the way, investors have enjoyed a steady stream of interest income with minimum risk to their principal. CONTENTS From the Chairman 3 From the Portfolio Manager 3 Fund Facts 5 The 10 Largest Holdings 6 Financial Statements (Fund) 7 Notes to Financial Statements (Fund) 10 Financial Statements (Portfolio) 16 Notes to Financial Statements (Portfolio) 19 Investments in Securities 24 IDS SELECTIVE FUND From the Chairman (picture of) William R. Pearce William R. Pearce Chairman of the board If you're an experienced investor, you know that the past six months was a highly volatile period in many financial markets. But history tells us that substantial market moves are nothing new. Though they're often unpredictable, declines -- whether they're brief or long-lasting, moderate or substantial -- are always a possibility. The potential for such volatility reinforces the need for investors to review periodically their long-term goals and examine whether their investment program remains on track to achieving them. Your quarterly investment statements are one part of that monitoring process. The other is a meeting with your American Express financial advisor. That becomes even more important if there's a major change in your financial situation or in the financial markets. William R. Pearce From the Portfolio Manager (picture of) Ray Goodner Ray Goodner Portfolio manager Long-term interest rates declined during the past six months, providing solid support for the U.S. bond market and IDS Selective Fund. For the first half of the fiscal year -- June through November 1998 -- the Fund's Class A shares generated a total return, which includes net asset value change and interest income, of 4.15%. The low rate of inflation that has dominated the investment environment in recent years remained in place during the period, providing reassurance for the bond market. But this time the market got an additional boost from another outbreak of the so-called "Asian flu," the financial malady that first struck Asia in the fall of 1997. This past summer it was Russia and Latin America that became infected. The result was a flood of money into the U.S. Treasury bonds, largely from investors who were seeking what they believed to be a safe haven for investment. The buying resulting from this "flight to quality" drove down long-term interest rates until mid-September. 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. (Falling rates inflate bond values, while rising rates depress them.) Performance among all other bond sectors, including corporate and mortgage-backed issues, lagged well behind until late in the period, as investors largely ignored them in their pursuit of the safety and liquidity offered by Treasuries. A BOOST FROM TREASURIES Because Treasuries comprised its largest area of investment, the Fund got its strongest performance from that sector. Holdings among mortgage-backed bonds issued by government agencies and investment-grade, or high-quality, corporate bonds also performed positively, but contributed more to the Fund's interest income than its net asset value gain. Foreign bonds, a relatively small area of investment for the Fund (about 10% of assets for most of the period) and all denominated in U.S. dollars, suffered price declines in the late-summer turmoil overseas. They recovered rapidly in the fall, however. Because I thought interest rates were likely to decline during 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 quite positively. I also maintained a low level of cash reserves; instead, I kept the great majority of assets in bonds, which provided a better return than cash. Looking to the rest of the fiscal year, the low-inflation trend that bonds have enjoyed for some time is still in place. In addition, the Federal Reserve has shown a willingness to reduce short-term interest rates if it appears that the economy may be about to undergo a meaningful slowdown. In light of those favorable factors, I think bond investors have reason to remain optimistic. Ray Goodner IDS SELECTIVE FUND Fund Facts Class A -- 6-month performance (All figures per share) Net asset value (NAV) Nov. 30, 1998 $9.34 May 31, 1998 $9.23 Increase $0.11 Distributions -- June 1, 1998 - Nov. 30, 1998 From income $0.27 From capital gains $ -- Total distributions $0.27 Total return* +4.15%** Class B -- 6-month performance (All figures per share) Net asset value (NAV) Nov. 30, 1998 $9.34 May 31, 1998 $9.23 Increase $0.11 Distributions -- June 1, 1998 - Nov. 30, 1998 From income $0.24 From capital gains $ -- Total distributions $0.24 Total return* +3.75%** Class Y-- 6-month performance (All figures per share) Net asset value (NAV) Nov. 30, 1998 $9.34 May 31, 1998 $9.23 Increase $0.11 Distributions -- June 1, 1998 - Nov. 30, 1998 From income $0.28 From capital gains $ -- Total distributions $0.28 Total return* +4.19%** *The prospectus discusses the effect of sales charges, if any, on the various classes. **The total return is a hypothetical investment in the Fund with all distributions reinvested. SEMIANNUAL REPORT -- 1998
The 10 Largest Holdings Percent Value (of net assets) (as of Nov. 30, 1998) Dayton Hudson 7.88% 2023 1.24% $20,535,233 Tyco Intl Group 6.38% 2005 1.03 17,140,342 New York Telephone 9.38% 2031 .96 15,908,011 Daimler-Benz North America 7.38% 2006 .94 15,632,929 Service Corp Intl 6.50% 2008 .94 15,626,156 PDV America 7.88% 2003 .93 15,487,908 SAFECO Capital 8.07% 2037 .93 15,456,299 Greenpoint Bank 6.70% 2002 .92 15,319,651 ARAMARK Services 6.75% 2004 .91 15,075,045 Time Warner Entertainment 8.38% 2033 .90 14,904,427 Excludes U.S. Treasury and government agencies holdings. For further detail about these holdings, please refer to the section entitled "Investments in securities" herein. (icon of) pie chart The 10 holdings listed here make up 9.70% of net assets IDS SELECTIVE FUND
Financial Statements Statement of assets and liabilities IDS Selective Fund, Inc. Nov. 30, 1998 (Unaudited) Assets Investments in Quality Income Portfolio (Note 1) $1,655,938,943 Other receivables 5 - Total assets 1,655,938,948 ------------- Liabilities Dividends payable to shareholders 1,602,885 Accrued distribution fee 11,102 Accrued service fee 22,167 Accrued transfer agency fee 14,130 Accrued administrative services fee 6,489 Other accrued expenses 31,805 ------ Total liabilities 1,688,578 --------- Net assets applicable to outstanding capital stock $1,654,250,370 ============== Represented by Capital stock-- $.01 par value (Note 1) $ 1,771,584 Additional paid-in capital 1,553,175,708 Undistributed net investment income 299,175 Accumulated net realized gain (loss) 1,772,211 Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 97,231,692 ---------- Total-- representing net assets applicable to outstanding capital stock $1,654,250,370 ============== Net assets applicable to outstanding shares: Class A $1,233,788,906 Class B $ 181,468,865 Class Y $ 238,992,599 Net asset value per share of outstanding capital stock: Class A shares 132,130,335 $ 9.34 Class B shares 19,434,649 $ 9.34 Class Y shares 25,593,382 $ 9.34 See accompanying notes to financial statements. SEMIANNUAL REPORT -- 1998
Statement of operations IDS Selective Fund, Inc. Six months ended Nov. 30, 1998 (Unaudited) Investment income Income: Dividends $ 403,573 Interest 55,091,924 ---------- Total income 55,495,497 ---------- Expenses (Note 2): Expenses allocated from Quality Income Portfolio 4,263,186 Distribution fee-- Class B 623,166 Transfer agency fee 859,986 Incremental transfer agency fee-- Class B 5,697 Service fee Class A 1,067,700 Class B 144,139 Class Y 114,706 Administrative services fees and expenses 400,185 Compensation of board members 4,619 Postage 103,841 Registration fees 84,683 Report to shareholders 16,026 Audit fees 5,000 Other expenses 953 --- Total expenses. 7,693,887 Earnings credits on cash balances (Note 2) (32,153) ------- Total net expenses 7,661,734 --------- Investment income (loss) -- net 47,833,763 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions 9,053,428 Financial futures contracts (713,899) Options contracts written 342,370 ------- Net realized gain (loss) on investments 8,681,899 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 9,630,764 --------- Net gain (loss) on investments and foreign currencies 18,312,663 ---------- Net increase (decrease) in net assets resulting from operations $66,146,426 =========== See accompanying notes to financial statements. IDS SELECTIVE FUND
Statements of changes in net assets IDS Selective Fund, Inc. Nov. 30, 1998 May 31, 1998 Six months ended Year ended (Unaudited) Operations and distributions Investment income (loss)-- net $ 47,833,763 $ 99,041,120 Net realized gain (loss) on investments 8,681,899 (2,534,220) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 9,630,764 59,144,624 --------- ---------- Net increase (decrease) in net assets resulting from operations 66,146,426 155,651,524 ---------- ----------- Distributions to shareholders from: Net investment income Class A (36,785,737) (79,639,635) Class B (4,300,113) (7,660,457) Class Y (6,886,145) (13,462,696) Net realized gain Class A -- (10,132,709) Class B -- (1,113,787) Class Y -- (1,708,554) ---- ---------- Total distributions (47,971,995) (113,717,838) ----------- ------------ Capital share transactions (Note 3) Proceeds from sales Class A shares (Note 2) 83,846,741 98,775,364 Class B shares 46,765,982 53,704,727 Class Y shares 55,164,774 79,769,239 Reinvestment of distributions at net asset value Class A shares 26,529,831 67,101,318 Class B shares 3,758,967 7,945,814 Class Y shares 6,726,461 15,166,571 Payments for redemptions Class A shares (121,674,653) (253,795,109) Class B shares (Note 2) (24,045,818) (38,380,085) Class Y shares (46,661,623) (80,758,805) ----------- ----------- Increase (decrease) in net assets from capital share transactions 30,410,662 (50,470,966) ---------- ----------- Total increase (decrease) in net assets 48,585,093 (8,537,280) Net assets at beginning of period 1,605,665,277 1,614,202,557 ------------- ------------- Net assets at end of period $1,654,250,370 $1,605,665,277 ============== ============== Undistributed net investment income $ 299,175 $ 437,407 -------------- -------------- See accompanying notes to financial statements. SEMIANNUAL REPORT -- 1998
Notes to Financial Statements IDS Selective Fund, Inc. (Unaudited as to Nov. 30, 1998) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. The Fund has 10 billion authorized shares of capital stock. The Fund offers Class A, Class B and Class Y shares. o Class A shares are sold with a front-end sales charge. o Class B shares may be subject to a contingent deferred sales charge and automatically convert to Class A shares during the ninth calendar year of ownership. o Class Y shares have no sales charge and are offered only to qualifying institutional investors. All classes of shares have identical voting, dividend and liquidation rights. The distribution fee, transfer agency fee and service fee (class specific expenses) differs among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. Investment in Quality Income Portfolio The Fund invests all of its assets in Quality Income Portfolio (the Portfolio), a series of Income Trust, an open-end investment company that has the same objectives as the Fund. This was accomplished by transferring the Fund's assets to the Portfolio in return for a proportionate ownership interest in the Portfolio. The Portfolio invests primarily in investment-grade bonds. The Fund records daily its share of the Portfolio's income, expenses and realized and unrealized gains and losses. The financial statements of the Portfolio are included elsewhere in this report and should be read in conjunction with the Fund's financial statements. The Fund records its investment in the Portfolio at the value that is equal to the Fund's proportionate ownership interest in the Portfolio's net assets. The percentage of the Portfolio owned by the Fund at Nov. 30, 1998 was 99.95%. Valuation of securities held by the Portfolio is discussed in Note 1 of the Portfolio's "Notes to financial statements" (included elsewhere in this report). Use of estimates Preparing financial statements that conform to generally accepted accounting principles requires management to make estimates (e.g., on assets and liabilities) that could differ from actual results. Federal taxes The Fund's policy is to comply with all sections of the Internal Revenue Code that apply to regulated investment companies and to distribute all of its taxable income to the shareholders. No provision for income or excise taxes is thus required. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of deferred losses on certain futures contracts, the recognition of certain foreign currency gains (losses) as ordinary income (loss) for tax purposes, and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. Dividends to shareholders Dividends from net investment income, declared daily and payable monthly, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. 2. EXPENSES AND SALES CHARGES In addition to the expenses allocated from the Portfolio, the Fund accrues its own expenses as follows: Effective March 20, 1995, the Fund entered into an agreement with American Express Financial Corporation (AEFC) to provide administrative services. Under its Administrative Services Agreement, the Fund pays AEFC a fee for administration and accounting services at a percentage of the Fund's average daily net assets in reducing percentages from 0.05% to 0.025% annually. Additional administrative service expenses paid by the Fund are office expenses, consultants' fees and compensation of officers and employees. Under this agreement, the Fund also pays taxes, audit and certain legal fees, registration fees for shares, compensation of board members, corporate filing fees and any other expenses properly payable by the Fund and approved by the board. Under a separate Transfer Agency Agreement, American Express Client Service Corporation (AECSC) maintains shareholder accounts and records. The Fund pays AECSC an annual fee per shareholder account for this service as follows: o Class A $15.50 o Class B $16.50 o Class Y $15.50 Also effective March 20, 1995, the Fund entered into agreements with American Express Financial Advisors Inc. for distribution and shareholder services. Under a Plan and Agreement of Distribution, the Fund pays a distribution fee at an annual rate of 0.75% of the Fund's average daily net assets attributable to Class B shares for distribution services. Under a Shareholder Service Agreement, the Fund pays a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.175% of the Fund's average daily net assets attributable to Class A and Class B shares and 0.10% of the Fund's average daily net assets attributable to Class Y shares. Sales charges received by American Express Financial Advisors Inc. for distributing Fund shares were $1,181,774 for Class A and $79,212 for Class B for the six months ended Nov. 30, 1998. During the six months ended Nov. 30, 1998, the Fund's transfer agency fees were reduced by $32,153 as a result of earnings credits from overnight cash balances.
3. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the periods indicated are as follows: Six months ended Nov. 30, 1998 Class A Class B Class Y Sold 9,043,393 5,046,455 5,949,901 Issued for reinvested distributions 2,867,886 406,340 727,057 Redeemed (13,148,480) (2,600,424) (5,039,139) ----------- ---------- ---------- Net increase (decrease) (1,237,201) 2,852,371 1,637,819 Year ended May 31, 1998 Class A Class B Class Y Sold 10,726,249 5,833,712 8,657,520 Issued for reinvested distributions 7,309,134 865,445 1,651,867 Redeemed (27,574,808) (4,171,964) (8,780,164) ----------- ---------- ---------- Net increase (decrease) (9,539,425) 2,527,193 1,529,223 4. BANK BORROWINGS The Fund entered into a revolving credit agreement with U.S. Bank, N.A., whereby the Fund is permitted to have bank borrowings for temporary or emergency purposes to fund shareholder redemptions. The Fund must have asset coverage for borrowings not to exceed the aggregate of 333% of advances equal to or less than 5 business days plus 367% of advances over 5 business days. The agreement, which enables the Fund to participate with other IDS Funds, permits borrowings up $200 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to the Federal Funds Rate plus 0.30% or the Eurodollar Rate (Reserve Adjusted) plus 0.20%. Borrowings are payable up to 90 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.05% per annum. The Fund had no borrowings outstanding during the six months ended Nov. 30, 1998. SEMIANNUAL REPORT -- 1998
5. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results. Fiscal period ended May 31, Per share income and capital changesa Class A 1998c 1998 1997 1996b 1995 Net asset value, beginning of period $9.23 $9.00 $9.00 $9.53 $8.57 Income from investment operations: Net investment income (loss) .27 .57 .59 .33 .59 Net gains (losses) (both realized and unrealized) .11 .31 .12 (.52) 1.08 Total from investment operations .38 .88 .71 (.19) 1.67 Less distributions: Dividends from net investment income (.27) (.58) (.58) (.31) (.58) Distributions from realized gains -- (.07) (.13) (.03) (.13) Total distributions (.27) (.65) (.71) (.34) (.71) Net asset value, end of period $9.34 $9.23 $9.00 $9.00 $9.53 Ratios/supplemental data Class A 1998c 1998 1997 1996b 1995 Net assets, end of period (in millions) $1,234 $1,231 $1,286 $1,408 $1,490 Ratio of expenses to average daily net assetsd .87%e .86% .88% .89%e .85% Ratio of net investment income (loss) to average daily net assets 5.91%e 6.20% 6.36% 6.27%e 6.59% Portfolio turnover rate (excluding short-term securities) 12% 20% 31% 18% 26% Total returnf 4.15% 10.15% 8.08% (2.03%) 20.25% a For a share outstanding throughout the period. Rounded to the nearest cent. b The Fund's fiscal year-end was changed from Nov. 30 to May 31, effective 1996. c Six months ended Nov. 30, 1998 (Unaudited). d Effective fiscal year 1996, expense ratio is based on total expenses of the Fund before reduction of earning credits on cash balances. e Adjusted to an annual basis. f Total return does not reflect payment of a sales charge. IDS SELECTIVE FUND
Fiscal period ended May 31, Per share income and capital changesa Class B Class Y 1998d 1998 1997 1996c 1995b 1998d 1998 1997 1996c 1995b Net asset value, beginning of period $9.23 $9.00 $9.00 $9.53 $8.78 $9.23 $9.00 $9.00 $9.53 $8.78 Income from investment operations: Net investment income (loss) .24 .50 .52 .30 .40 .28 .58 .60 .34 .46 Net gains (losses) (both realized and unrealized) .11 .31 .12 (.52) .75 .11 .31 .12 (.52) .75 Total from investment Operations .35 .81 .64 (.22) 1.15 .39 .89 .72 (.18) 1.21 Less distributions: Dividends from net investment income (.24) (.51) (.51) (.28) (.40) (.28) (.59) (.59) (.32) (.46) Distributions from realized gains -- (.07) (.13) (.03) -- -- (.07) (.13) (.03) -- Total distributions (.24) (.58) (.64) (.31) (.40) (.28) (.66) (.72) (.35) (.46) Net asset value, end of period $9.34 $9.23 $9.00 $9.00 $9.53 $9.34 $9.23 $9.00 $9.00 $9.53 Ratios/supplemental data Class B Class Y 1998d 1998 1997 1996c 1995b 1998d 1998 1997 1996c 1995b Net assets, end of period (in millions) $181 $153 $126 $108 $72 $239 $221 $202 $212 $142 Ratio of expenses to average daily net assetse 1.63%f 1.62% 1.64% 1.63%f 1.67%f .80%f .79% .72% .70%f .73%f Ratio of net invesment income (loss) to average daily net assets 5.16%f 5.44% 6.40% 5.56%f 5.68%f 5.99%f 6.27% 7.02% 6.51%f 6.64%f Portfolio turnover rate (excluding short-term securities) 12% 20% 31% 18% 26% 12% 20% 31% 18% 26% Total returng 3.75% 9.32% 7.26% (2.40%) 13.37% 4.19% 10.21% 8.27% (1.96%) 14.09% a For a share outstanding throughout the period. Rounded to the nearest cent. b Inception date was March 20, 1995. c The Fund's fiscal year-end was changed from Nov. 30 to May 31, effective 1996. d Six months ended Nov. 30, 1998 (Unaudited). e Effective fiscal year 1996, expense ratio is based on total expenses of the Fund before reduction of earning credits on cash balances. f Adjusted to an annual basis. g Total return does not reflect payment of a sales charge. SEMIANNUAL REPORT -- 1998
Financial Statements Statement of assets and liabilities Quality Income Portfolio Nov. 30, 1998 (Unaudited) Assets Investments in securities, at value (Note 1) (identified cost $1,516,912,022) $1,614,439,961 Dividends and accrued interest receivable 23,308,184 Receivable for investment securities sold 21,072,424 ---------- Total assets 1,658,820,569 ------------- Liabilities Disbursements in excess of cash on demand deposit 327,736 Accrued investment management services fee 68,980 Other accrued expenses 49,369 Options contracts written, at value (premium received $1,427,252) (Note 4) 1,686,000 --------- Total liabilities 2,132,085 --------- Net assets $1,656,688,484 ============== See accompanying notes to financial statements. IDS SELCTIVE FUND
Statement of operations Quality Income Portfolio Six months ended Nov. 30, 1998 (Unaudited) Investment income Income: Dividends $ 403,750 Interest 55,119,268 ---------- Total income 55,523,018 ---------- Expenses (Note 2): Investment management services fee 4,188,850 Compensation of board members 5,846 Custodian fees 46,051 Audit fees 15,000 Other 10,748 ------ Total expenses 4,266,495 Earnings credits on cash balances (Note 2) (1,406) ------ Total net expenses 4,265,089 --------- Investment income (loss) -- net 51,257,929 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) 9,056,819 Financial futures contracts (714,219) Options contacts written 342,500 ------- Net realized gain (loss) on investments 8,685,100 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 9,636,060 --------- Net gain (loss) on investments and foreign currencies 18,321,160 ---------- Net increase (decrease) in net assets resulting from operations $69,579,089 =========== See accompanying notes to financial statements. SEMIANNUAL REPORT -- 1998
Statements of changes in net assets Quality Income Portfolio Nov. 30, 1998 May 31, 1998 Six months ended Year ended (Unaudited) Operations Investment income (loss)-- net $ 51,257,929 $ 105,079,943 Net realized gain (loss) on investments 8,685,100 (2,535,432) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 9,636,060 59,167,525 --------- ---------- Net increase (decrease) in net assets resulting from operations 69,579,089 161,712,036 Net contributions (withdrawals) from partners (19,807,045) (170,449,665) ----------- ------------ Total increase (decrease) in net assets 49,772,044 (8,737,629) Net assets at beginning of period (Note 1) 1,606,916,440 1,615,654,069 ------------- ------------- Net assets at end of period $1,656,688,484 $1,606,916,440 ============== ============== See accompanying notes to financial statements. IDS SELECTIVE FUND
Notes to Financial Statements Quality Income Portfolio (Unaudited as to Nov. 30, 1998) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Quality Income Portfolio (the Portfolio) is a series of Income Trust (the Trust) and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. Quality Income Portfolio invests primarily in investment-grade bonds. The Declaration of Trust permits the Trustees to issue non-transferable interests in the Portfolio. The Portfolio's significant accounting policies are summarized below: Use of estimates Preparing financial statements that conform to generally accepted accounting principles requires management to make estimates (e.g., on assets and liabilities) that could differ from actual results. Valuation of securities All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. Option transactions To produce incremental earnings, protect gains and facilitate buying and selling of securities for investments the Portfolio may buy and write options traded on any U.S. or foreign exchange or in the over-the-counter market where completing the obligation depends upon the credit standing of the other party. The Portfolio also may buy and sell put and call options and write covered call options on portfolio securities as well as write cash-secured put options. The risk in writing a call option is that the Portfolio gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the Portfolio may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Portfolio pays a premium whether or not the option is exercised. The Portfolio also has the additional risk of being unable to enter into a closing transaction if a liquid secondary market does not exist. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Portfolio will realize a gain or loss when the option transaction expires or closes. When options on debt securities or futures are exercised, the Portfolio will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. Futures transactions To gain exposure to or protect itself from market changes, the Portfolio may buy and sell financial futures contracts traded on any U.S. or foreign exchange. The Portfolio also may buy and write put and call options on these futures contracts. Risks of entering into futures contracts and related options include the possibility of an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the Portfolio is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Portfolio each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The Portfolio recognizes a realized gain or loss when the contract is closed or expires. Foreign currency translations and foreign currency contracts Securities and other assets and liabilities denominated in foreign currencies are translated daily into U.S. dollars at the closing rate of exchange. Foreign currency amounts related to the purchase or sale of securities and income and expenses are translated at the exchange rate on the transaction date. The effect of changes in foreign exchange rates on realized and unrealized security gains or losses is reflected as a component of such gains or losses. In the statement of operations, net realized gains or losses from foreign currency transactions, if any, may arise from sales of foreign currency, closed forward contracts, exchange gains or losses realized between the trade date and settlement date on securities transactions, and other translation gains or losses on dividends, interest income and foreign withholding taxes. The Portfolio may enter into forward foreign currency exchange contracts for operational purposes and to protect against adverse exchange rate fluctuation. The net U.S. dollar value of foreign currency underlying all contractual commitments held by the Portfolio and the resulting unrealized appreciation or depreciation are determined using foreign currency exchange rates from an independent pricing service. The Portfolio is subject to the credit risk that the other party will not complete its contract obligations. Illiquid securities As of Nov. 30, 1998, investments in securities included issues that are illiquid which the Portfolio currently limits to 10% of net assets, at market value, at the time of purchase. The aggregate value of such securities at Nov. 30, 1998 was $12,260,769 representing 0.74% of net assets. According to board guidelines, certain unregistered securities are determined to be liquid and are not included within the 10% limitation specified above. Federal taxes For federal income tax purposes the Portfolio qualifies as a partnership and each investor in the Portfolio is treated as the owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Portfolio. As a "pass-through" entity, the Portfolio therefore does not pay any income dividends or capital gain distributions. Other Security transactions are accounted for on the date securities are purchased or sold. Dividend income is recognized on the ex-dividend date. For U.S. dollar denominated bonds, interest income includes level-yield amortization of premium and discount. For foreign bonds, except for original issue discount, the Portfolio does not amortize premium and discount. Interest income, including level-yield amortization of premium and discount, is accrued daily. 2. FEES AND EXPENSES The Trust, on behalf of the Portfolio, has entered into an Investment Management Services Agreement with AEFC for managing its portfolio. Under this agreement, AEFC determines which securities will be purchased, held or sold. The management fee is a percentage of the Portfolio's average daily net assets in reducing percentages from 0.52% to 0.395% annually. Under the agreement, the Trust also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees, audit and certain legal fees, fidelity bond premiums, registration fees for units, office expenses, consultants' fees, compensation of trustees, corporate filing fees, expenses incurred in connection with lending securities of the Portfolio and any other expenses properly payable by the Trust or Portfolio and approved by the board. During the six months ended Nov. 30, 1998, the Portfolio's custodian fees were reduced by $1,406 as a result of earnings credit from overnight cash balances. According to a Placement Agency Agreement, American Express Financial Advisors Inc. acts as placement agent of the Trust's units. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $187,464,335 and $223,205,768, respectively, for the six months ended Nov. 30, 1998. For the same period, the portfolio turnover rate was 12%. Realized gains and losses are determined on an identified cost basis. Income from securities lending amounted to $30,661 for the six months ended Nov. 30, 1998. The risks to the Portfolio of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. 4. OPTIONS CONTRACTS WRITTEN Contracts and premium amounts associated with options contracts written are as follows: Six months ended Nov. 30, 1998 Calls Contracts Premium Balance May 31, 1998 -- $ -- Opened 1,050 1,769,752 Expired (250) (342,500) ---- -------- Balance Nov. 30, 1998 800 $1,427,252 See "Summary of significant accounting policies." SEMIANNUAL REPORT -- 1998
Investments in Securities Quality Income Portfolio Nov. 30, 1998 (Unaudited) (Percentages represent value of investments compared to net assets) Bonds (92.3%) Issuer Coupon Principal Value(a) rate amount Government obligations (34.4%) Overseas Private Investment U.S. Govt Guaranty Series 1996A 01-15-09 6.99% $10,000,000 $10,591,300 People's Republic of China (U.S. Dollar) 01-15-96 9.00 10,000,000(b) 10,686,941 Resolution Funding Corp Zero Coupon 01-15-06 8.94 25,000,000(c) 17,498,953 10-15-06 8.95 68,000,000(c) 46,019,374 01-15-14 8.21 48,000,000(c) 20,635,555 07-15-14 8.27 10,000,000(c) 4,180,758 04-15-16 8.05 47,000,000(c) 17,492,972 U.S. Treasury 07-31-99 6.88 60,000,000 60,844,253 02-15-00 5.88 25,000,000 25,356,210 08-15-00 6.00 11,400,000 11,656,267 11-15-01 7.50 109,000,000 117,546,058 02-15-04 5.88 8,000,000 8,474,460 05-15-04 7.25 25,000,000 28,035,908 08-15-04 7.25 26,800,000 30,154,818 11-15-16 7.50 105,395,000 132,037,644 11-15-21 8.00 15,000,000(j) 20,242,638 TIPS 01-15-07 3.38 8,050,000(l) 8,092,538 Total 569,546,647 Mortgage-backed securities (8.9%) Federal Home Loan Mtge Corp 07-01-16 8.00 436 452 01-01-17 8.00 4,877 5,057 03-01-17 8.50 133,624 140,346 06-01-17 8.50 108,270 113,987 04-01-20 9.00 1,893,044 2,000,115 04-01-21 9.00 1,243,454 1,316,892 03-01-22 8.50 2,960,149 3,118,340 08-01-22 8.50 2,681,251 2,809,441 06-01-24 7.50 11,277,571 11,591,200 02-01-25 8.00 5,515,131 5,711,580 Collateralized Mtge Obligation 09-01-19 8.50 186,487 196,102 Federal Housing Admin 01-01-24 7.43 8,826,851 9,342,671 Federal Natl Mtge Assn 11-01-02 10.00 97 101 10-01-23 6.50 9,668,282 9,737,797 11-01-26 8.00 8,676,297 8,982,657 04-01-27 7.50 10,427,629 10,717,620 06-01-27 7.50 12,922,432 13,281,805 07-01-27 8.00 9,583,283 9,923,028 08-01-27 7.50 57,622 59,225 09-01-28 6.00 14,847,201 14,652,405 Collateralized Mtge Obligation 10-25-19 8.50 1,448,659 1,590,622 01-25-21 8.00 614,815 612,909 Principal Only 09-01-18 9.50 653,532(e) 580,607 01-25-20 9.89 789,961(e) 766,813 Trust Series Z 02-25-24 6.00 22,477,520(d) 20,968,603 Govt Natl Mtge Assn 07-15-24 8.00 393,204 409,424 10-15-24 9.00 91,090 97,153 02-15-25 9.00 458 489 05-15-26 7.50 15,200,625 15,699,357 Prudential Bache Collateralized Mtge Obligation 04-01-19 7.97 2,631,060 2,708,567 Total 147,135,365 Automotive & related (1.4%) Daimler-Benz North America Company Guaranty Medium-term Nts Series A 09-15-06 7.38 14,000,000 15,632,929 General Motors 05-15-03 8.88 7,050,000 7,965,758 Total 23,598,687 Banks and savings & loans (9.5%) ABN-Amro Bank (U.S. Dollar) Sub Nts Series B 05-15-23 7.75 12,000,000(b) 13,016,186 Banco General (U.S. Dollar) 08-01-02 7.70 6,400,000(b,g) 6,182,499 BankAmerica Sub Nts Series B 12-31-26 7.70 5,000,000(g) 5,349,738 BankBoston Capital Company Guaranty Series B 12-15-26 8.25 5,000,000 5,362,343 Bayerische Landesbank (U.S. Dollar) Deposit Nts 02-26-01 5.63 13,750,000(b) 13,896,297 Cullen/Frost Capital Series A 02-01-27 8.42 10,000,000 10,785,420 Dao Heng Bank (U.S. Dollar) Sub Nts 01-24-07 7.75 7,000,000(b,g) 5,591,250 First Chicago Sr Sub Nts 06-15-99 9.00 7,900,000 8,056,888 Firstar Capital Company Guaranty Series B 12-15-26 8.32 10,000,000 11,119,059 Greenpoint Bank Sr Nts 07-15-02 6.70 15,000,000 15,319,651 Korea Development Bank (U.S. Dollar) 05-15-06 7.25 4,600,000(b) 3,913,908 Morgan (JP) Sr Sub Medium-term Nts Series A 02-15-12 4.00 9,350,000(h) 8,369,279 NationsBank Sub Nts 11-01-01 9.25 8,950,000 9,919,392 NCNB Sub Nts 10-15-01 9.13 10,000,000 11,073,876 Swiss Bank Sub Deb 09-01-26 7.75 11,369,000 12,831,275 US Bancorp Sub Nts 09-15-07 6.88 8,550,000 9,156,375 Washington Mutual Capital Company Guaranty 06-01-27 8.38 5,800,000(g) 6,528,109 Total 156,471,545 Building materials & construction (1.0%) Tyco Intl Group (U.S. Dollar) Company Guaranty 06-15-05 6.38 17,000,000(b) 17,140,342 Chemicals (1.6%) Dow Chemical 09-15-21 8.85 10,000,000 12,786,032 USA Waste Services Sr Nts 10-01-07 7.13 11,900,000 12,907,625 Total 25,693,657 Communications equipment & services (1.7%) BellSouth Telecommunications 12-01-95 7.00 10,000,000 11,161,295 TCI Telecommunications Sr Nts 02-15-28 7.13 10,000,000 10,928,370 Telekom Malaysia (U.S. Dollar) 08-01-25 7.88 10,000,000(b,g) 6,874,300 Total 28,963,965 Computers & office equipment (0.3%) Hewlett-Packard Zero Coupon Cv Sub Nts 10-15-17 3.13 10,000,000(c,g) 5,425,000 Electronics (0.7%) Harris 12-01-18 10.38 3,900,000 4,113,771 Hyundai Semiconductor (U.S. Dollar) Sr Nts 05-15-07 8.63 10,800,000(b,g) 7,742,825 Total 11,856,596 Energy (3.9%) PDV America Sr Nts 08-01-03 7.88 16,500,000 15,487,908 Perez Companc (U.S. Dollar) 07-15-07 8.13 5,000,000(b,g) 4,476,861 Petronas (U.S. Dollar) 08-15-15 7.75 10,000,000(b) 7,586,299 Phillips Petroleum 03-15-28 7.13 12,000,000 12,617,083 Texaco Capital Gtd Deb 03-01-43 7.50 12,000,000 13,638,127 USX-Marathon Group 05-15-22 9.38 9,200,000 10,939,877 Total 64,746,155 Energy equipment & services (0.4%) Foster Wheeler 11-15-05 6.75 5,850,000 5,859,327 Financial services (3.2%) GMAC Medium-term Nts 03-01-00 7.00 14,300,000 14,561,553 Greyhound Financial Medium-term Nts Series A 07-02-99 7.95 9,600,000 9,740,701 KFW Intl Finance (U.S. Dollar) Medium-term Nts 12-15-99 8.50 10,000,000(b) 10,307,187 Railcar Leasing 01-15-13 7.13 12,150,000(g) 13,292,991 Salomon Sr Nts 05-15-00 7.75 5,000,000 5,143,999 Total 53,046,431 Food (0.1%) Gruma (U.S. Dollar) Sr Nts 10-15-07 7.63 2,000,000(b) 1,830,693 Health care (1.6%) Baxter Intl 02-15-28 6.63 12,000,000 12,516,380 Lilly (Eli) 01-01-36 6.77 13,300,000 14,353,770 Total 26,870,150 Health care services (2.7%) AETNA Services 08-15-03 6.38 13,650,000 14,084,257 HEALTHSOUTH 06-15-08 7.00 15,000,000 14,233,275 Service Corp Intl 03-15-08 6.50 15,350,000 15,626,156 Total 43,943,688 Industrial equipment & services (1.6%) ARAMARK Services 08-01-04 6.75 15,000,000 15,075,045 Deere & Co 06-15-19 8.95 10,000,000 12,232,682 Total 27,307,727 Insurance (4.7%) American United Life Insurance 03-30-26 7.75 11,175,000(k) 12,260,769 Arkwright CSN Trust 08-15-26 9.63 11,000,000(g) 13,161,402 Conseco Financing Trust Company Guaranty 11-15-26 8.70 6,600,000 6,870,035 Equitable Life Assurance 12-01-15 7.70 5,000,000(g) 5,386,187 Nationwide CSN Trust 02-15-25 9.88 11,500,000(g) 14,343,346 SAFECO Capital Company Guaranty 07-15-37 8.07 15,000,000 15,456,299 SunAmerica 02-01-12 9.95 8,000,000 10,431,869 Total 77,909,907 Media (0.9%) Time Warner Entertainment Sr Nts 07-15-33 8.38 12,000,000 14,904,427 Metals (0.6%) Alcan Aluminum (U.S. Dollar) 01-15-22 8.88 9,600,000(b) 10,675,063 Miscellaneous (0.7%) Jasmine Submarine Telecom (U.S. Dollar) Sr Nts 05-30-11 8.48 3,022,740(b,g) 2,176,373 Provident Companies Sr Nts 03-15-28 7.25 10,027,000 10,061,817 Total 12,238,190 Multi-industry conglomerates (0.7%) Hutchison Whampoa Finance (U.S. Dollar) Company Guaranty 08-01-27 7.50 14,025,000(b,g) 11,724,499 Retail (1.9%) Dayton Hudson 06-15-23 7.88 18,850,000 20,535,233 Wal-Mart CRAVE Trust 07-17-06 7.00 10,280,161(g) 10,675,845 Total 31,211,078 Transportation (1.2%) Burlington Northern Santa Fe 12-15-25 7.00 10,000,000 10,308,455 Enterprise Rent-A-Car USA Finance 02-15-08 6.80 10,000,000 9,818,000 Total 20,126,455 Utilities -- electric (4.6%) AEP Generating Series F 12-07-22 9.82 4,968,432 5,341,950 Arizona Public Service 1st Mtge Sale Lease-backed Obligation 12-30-15 8.00 9,000,000 10,300,981 Cajun Electric Power Mtge Trust 03-15-19 8.92 4,960,000 5,253,962 Commonwealth Edison 1st Mtge 04-15-00 6.50 9,000,000 9,163,602 Indiana & Michigan Power Sale Lease-backed Obligation Series F 12-07-22 9.82 4,968,426 5,341,944 Israel Electric (U.S. Dollar) Sr Nts 12-15-26 7.88 9,000,000(b,g) 9,098,190 Korea Electric Power (U.S. Dollar) 07-01-02 8.00 9,000,000(b) 8,205,230 (U.S. Dollar) Zero Coupon 04-01-16 10.07 35,000,000 (b,f) 3,382,719 Salton Sea Funding Series C 05-30-10 7.84 10,000,000 11,115,897 Wisconsin Electric Power 12-01-95 6.88 8,000,000 8,499,684 Total 75,704,159 Utilities -- telephone (4.0%) AT&T 01-15-25 8.35 5,000,000 5,790,366 12-01-31 8.63 10,000,000 11,211,080 GTE 11-01-20 10.25 6,050,000 6,739,168 GTE Florida 02-01-28 6.86 12,450,000 13,426,500 New York Telephone 07-15-31 9.38 14,000,000 15,908,011 WorldCom Sr Nts 08-15-28 6.95 12,000,000 12,921,365 Total 65,996,490 Total bonds (Cost: $1,432,950,804) $1,529,926,243 Preferred stock (0.5%) Issuer Shares Value(a) Salomon Income Financing Trust 2.38% 2026 340,000 $9,052,500 Total preferred stock (Cost: $8,500,000) $9,052,500
Short-term securities (4.6%) Issuer Annualized Amount Value(a) yield on date payable at of purchase maturity U.S. government agencies (1.8%) Federal Home Loan Mtge Corp Disc Nts 12-10-98 4.83% $8,800,000 $8,789,418 12-17-98 5.07 8,900,000 8,880,024 12-22-98 4.82 7,400,000 7,379,237 Federal Natl Mtge Assn Disc Nt 12-18-98 5.01 3,400,000 3,392,004 Total 28,440,683 Commercial paper (2.8%) BMW US Capital 12-18-98 4.88 3,800,000 3,791,261 CAFCO 12-30-98 4.92 2,100,000(i) 2,091,711 Ciesco LP 12-08-98 5.11 5,200,000 5,194,863 Daimler-Benz 12-02-98 5.15 7,000,000 6,999,003 Natl Rural Utilities 12-08-98 5.05 6,300,000 6,293,838 NBD Bank Canada 12-30-98 4.91 3,800,000 3,785,031 Paccar Financial 12-03-98 5.17 2,200,000 2,199,371 Pioneer Hi-Bred 12-02-98 5.21 500,000 499,928 12-08-98 5.21 4,400,000 4,395,551 Reed Elsevier 12-07-98 5.15 1,900,000(i) 1,898,376 12-15-98 5.17 4,400,000(i) 4,391,187 Sysco 12-18-98 5.10 1,600,000(i) 1,596,177 Xerox 12-31-98 4.87 3,900,000 3,884,238 Total 47,020,535 Total short-term securities (Cost: $75,461,218) $75,461,218 Total investments in securities (Cost: $1,516,912,022)(m) $1,614,439,961 See accompanying notes to investments in securities. IDS SELECTIVE FUND
Notes to investments in securities (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. As of Nov. 30, 1998, the value of foreign securities represented 9.33% of net assets. (c) For zero coupon bonds, the interest rate disclosed represents the annualized effective yield on the date of acquisition. (d) This security is a collateralized mortgage obligation that pays no interest or principal during its initial accrual period until payment of a previous series within the trust have been paid off. Interest is accrued at an effective yield; similar to a zero coupon bond. (e) Principal-only represents securities that entitle holders to receive only principal payments on the underlying mortgages. The yield to maturity of a principal-only is sensitive to the rate of principal payments on the underlying mortgage assets. A slow (rapid) rate of principal repayments may have an adverse (positive) effect on yield to maturity. Interest rate disclosed represents current yield based upon the current cost basis and estimated timing of future cash flows. (f) For those zero coupon bonds that become coupon paying at a future date, the interest rate disclosed represents the annualized effective yield from the date of acquisition to interest reset date disclosed. (g) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the board. (h) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Nov. 30, 1998. (i) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the board.
(j) At Nov. 30, 1998, securities valued at $13,495,092 were held to cover open call options written as follows: Issuer Shares Exercise Expiration Value(a) price date U.S. Treasury Bond Nov. 98 30,000 $130 Feb. 1999 $607,875 U.S. Treasury Bond Nov. 98 50,000 130 Feb. 1999 1,078,125 Total $1,686,000 (k) Identifies issues considered to be illiquid as to their marketability (see Note 1 to the financial statements). Information concerning such security holdings at Nov. 30, 1998, is as follows: Security Acquisition date Cost American United Life Insurance* 7.75% 2026 02-13-96 thru 11-05-98 $11,314,931 *Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. (l) U.S. Treasury inflation-protection securities (TIPS) are securities in which the principal amount is adjusted for inflation and the semiannual interest payments equal a fixed percentage of the inflation-adjusted principal amount. (m) At Nov. 30, 1998, the cost of securities for federal income tax purposes was approximately $1,516,715,000 and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation..........................................$117,901,000 Unrealized depreciation...........................................(20,176,000) Net unrealized appreciation.......................................$97,725,000 IDS SELECTIVE FUND
BULK RATE U.S. POSTAGE PAID Permit No. 85 Spencer, IA S-6385 M (1/99) IDS Selective Fund IDS Tower 10 Minneapolis, MN 55440-0010 AMERICAN EXPRESS Financial Advisors -----END PRIVACY-ENHANCED MESSAGE-----