UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-4363
----------------------------------------------
AMERICAN CENTURY GOVERNMENT INCOME TRUST
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(Exact name of registrant as specified in charter)
4500 MAIN STREET, KANSAS CITY, MISSOURI 64111
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(Address of principal executive offices) (Zip code)
WILLIAM M. LYONS, 4500 MAIN STREET, KANSAS CITY, MISSOURI 64111
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(Name and address of agent for service)
Registrant's telephone number, including area code: 816-531-5575
-----------------------------
Date of fiscal year end: 03-31
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Date of reporting period: 09-30-2006
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ITEM 1. REPORTS TO STOCKHOLDERS.
[front cover]
AMERICAN CENTURY INVESTMENTS
Semiannual Report
September 30, 2006
[photo of Autumn scene]
Ginnie Mae Fund
Government Bond Fund
Inflation-Adjusted Bond Fund
Short-Term Government Fund
[american century investments logo and text logo]
Our Message to You
[photo of James E. Stowers III and James E. Stowers, Jr.]
/s/James E. Stowers, Jr.
James E. Stowers, Jr.
FOUNDER
AMERICAN CENTURY COMPANIES, INC.
/s/James E. Stowers III
James E. Stowers III
CHAIRMAN OF THE BOARD
AMERICAN CENTURY COMPANIES, INC.
We are pleased to provide you with the semiannual report for the American
Century Ginnie Mae, Government Bond, Inflation-Adjusted Bond, and Short-Term
Government funds for the six months ended September 30, 2006. We hope you find
this information helpful in monitoring your investment. Another useful resource
we offer is our website, americancentury.com, where we post quarterly portfolio
commentaries, the views of senior investment officers and analysts, and other
communications about investments, portfolio strategy, personal finance, and the
markets.
In its most recent rankings, Dalbar--which issues customer satisfaction ratings
and rankings based on website functionality--ranked americancentury.com fourth
out of the sites provided by the top 25 fund companies that it believes lead
the industry in web-based technology. Our website earned an "Excellent" rating,
Dalbar's highest designation.
For most of 2006, our website has linked visitors to information explaining our
strategic collaboration with Lance Armstrong and the Lance Armstrong Foundation
(LAF). This campaign, featuring Lance, is designed to encourage investors to
take a more active role in planning their financial futures and make every
investment decision count. To learn more about the collaboration and the LAF,
please visit americancentury.com or www.lanceface.com on the Web and click on
the links to related sites.
With the approach of year end and the 2006 tax season, you can also find out
more about December fund distributions and tax information via a link from our
website. We've posted December distribution estimates for over 50 funds, answers
to frequent distribution questions, and online descriptions of all of the tax
information we provide to investors.
If you haven't visited americancentury.com yet, we encourage you to do so . . .
it's there to serve you. And so are we. As always, we deeply appreciate your
commitment to American Century Investments.
Table of Contents
Market Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
U.S. Fixed-Income Total Returns . . . . . . . . . . . . . . . . . . . . . . 2
GINNIE MAE
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Portfolio Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
GOVERNMENT BOND
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Portfolio Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
INFLATION-ADJUSTED BOND
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Portfolio Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SHORT-TERM GOVERNMENT
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Portfolio Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Shareholder Fee Examples . . . . . . . . . . . . . . . . . . . . . . . . . . .30
FINANCIAL STATEMENTS
Statement of Assets and Liabilities 33
Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Statement of Changes in Net Assets . . . . . . . . . . . . . . . . . . . . . .36
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 38
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
OTHER INFORMATION
Approval of Management Agreements for Ginnie Mae, Government
Bond, Inflation-Adjusted Bond and Short-Term Government . . . . . . . . . . . 56
Share Class Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
Index Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
The opinions expressed in the Market Perspective and each of the Portfolio
Commentaries reflect those of the portfolio management team as of the date of
the report, and do not necessarily represent the opinions of American Century or
any other person in the American Century organization. Any such opinions are
subject to change at any time based upon market or other conditions and American
Century disclaims any responsibility to update such opinions. These opinions may
not be relied upon as investment advice and, because investment decisions made
by American Century funds are based on numerous factors, may not be relied upon
as an indication of trading intent on behalf of any American Century fund.
Security examples are used for representational purposes only and are not
intended as recommendations to purchase or sell securities. Performance
information for comparative indices and securities is provided to American
Century by third party vendors. To the best of American Century's knowledge,
such information is accurate at the time of printing.
Market Perspective
[photo of David MacEwen]
BY DAVID MACEWEN, CHIEF INVESTMENT OFFICER, FIXED INCOME
A TALE OF TWO QUARTERS
The second and third quarters of 2006 were very different in terms of inflation
and interest rate expectations and market performance. In the second quarter, as
core inflation rates remained above the Federal Reserve's 1-2% "comfort zone"
and threatened to go higher, investors feared the Fed would keep raising
interest rates and tip the economy into recession. Uncertainty about how far the
Fed would go, and how successful it would be in containing inflation, created a
defensive attitude in financial markets that resulted in disappointing returns
for broad stock and bond indices.
A FED PAUSE REFRESHED THE MARKETS
But in the third quarter, a 15% drop in oil prices helped take the heat off
inflation pressures, and cut business and consumer costs. Weakness in the
housing market--though hard on many homeowners--turned into a positive factor
for the markets. As home sales and prices declined, the Fed stopped its interest
rate tightening campaign, stepping back to assess the economy's reaction to
previous rate hikes. This combination of falling energy prices and relief from
rising interest rates helped broad U.S. stock and bond markets rebound from
second-quarter losses to post some of their biggest quarterly gains this decade.
LONG-DURATION AND CORPORATE SECURITIES OUTPERFORMED
The bond market especially welcomed a gloomy housing-market forecast,
speculating that it would reduce economic growth, inflation, and interest rates.
This rekindled demand for longer-term fixed-income securities. As a result, the
Treasury yield curve fell for the six months and "inverted", as the two-year
yield (4.69%) remained higher than the 10-year yield (4.63%), and both fell well
below the Fed's 5.25% overnight interest rate target. Mirroring the stock
market's rally, the corporate sectors led the broad taxable market.
U.S. FIXED-INCOME TOTAL RETURNS
For the six months ended September 30, 2006*
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TREASURY SECURITIES
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3-month bill 2.51%
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2-year note 2.53%
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5-year note 3.20%
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10-year note 3.83%
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30-year bond 4.64%
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LEHMAN BROTHERS U.S. BOND MARKET INDICES
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Corporate High-Yield 4.33%
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Corporate Investment-Grade 4.12%
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Aggregate (multi-sector) 3.73%
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Fixed-Rate Mortgage-Backed 3.64%
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Treasury 3.61%
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Agency 3.45%
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*Total returns for periods less than one year are not annualized.
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2
Ginnie Mae - Performance
TOTAL RETURNS AS OF SEPTEMBER 30, 2006
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AVERAGE ANNUAL RETURNS
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SINCE INCEPTION
6 MONTHS(1) 1 YEAR 5 YEARS 10 YEARS INCEPTION DATE
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INVESTOR CLASS 2.90% 3.62% 3.75% 5.58% 7.26% 9/23/85
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CITIGROUP
GNMA INDEX(2) 3.12% 4.04% 4.53% 6.28% 8.11%(3) --
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CITIGROUP
30-YEAR
GNMA INDEX 3.10% 4.04% 4.53% 6.28% 8.12%(3) --
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Advisor Class 2.78% 3.36% 3.50% -- 4.85% 10/9/97
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C Class 6/15/01
No sales charge* 2.39% 2.59% 2.84% -- 3.23% --
With sales
charge* 1.39% 2.59% 2.84% -- 3.23% --
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*Sales charges include contingent deferred sales charges (CDSCs). C Class shares
redeemed within 12 months of purchase are subject to a maximum CDSC of 1.00%.
Please see the Share Class Information page for more about the applicable sales
charges for each share class. The SEC requires that mutual funds provide
performance information net of maximum sales charges in all cases where charges
could be applied.
(1) Total returns for periods less than one year are not annualized.
(2) In August of 2006, the fund's benchmark changed from the Citigroup 30-Year
GNMA Index to the Citigroup GNMA Index. The fund's investment advisor
believes this index better represents the fund's portfolio composition.
(3) Since 9/30/05, the date nearest the Investor Class's inception for which
data are available.
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-2021 or visit
americancentury.com. As interest rates rise, bond values will decline.
Unless otherwise indicated, performance reflects Investor Class shares;
performance for other share classes will vary due to differences in fee
structure. For information about other share classes available, please consult
the prospectus. Data assumes reinvestment of dividends and capital gains, and
none of the charts reflect the deduction of taxes that a shareholder would pay
on fund distributions or the redemption of fund shares. Returns for the indices
are provided for comparison. The fund's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the indices do not.
(continued)
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3
Ginnie Mae - Performance
GROWTH OF $10,000 OVER 10 YEARS
$10,000 investment made September 30, 1996
ONE-YEAR RETURNS OVER 10 YEARS
Periods ended September 30
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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
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Investor Class 9.96% 7.63% 1.65% 6.97% 11.31% 6.91% 2.69% 2.86% 2.76% 3.62%
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Citigroup
GNMA Index 10.13% 8.27% 2.58% 7.73% 11.89% 7.45% 3.33% 4.32% 3.54% 4.04%
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Citigroup
30-Year
GNMA Index 10.18% 8.27% 2.56% 7.73% 11.90% 7.45% 3.30% 4.33% 3.57% 4.04%
- -----------------------------------------------------------------------------------------------
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-2021 or visit
americancentury.com. As interest rates rise, bond values will decline.
Unless otherwise indicated, performance reflects Investor Class shares;
performance for other share classes will vary due to differences in fee
structure. For information about other share classes available, please consult
the prospectus. Data assumes reinvestment of dividends and capital gains, and
none of the charts reflect the deduction of taxes that a shareholder would pay
on fund distributions or the redemption of fund shares. Returns for the indices
are provided for comparison. The fund's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the indices do not.
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4
Ginnie Mae - Portfolio Commentary
PORTFOLIO MANAGERS: HANDO AGUILAR, DAN SHIFFMAN, AND BOB GAHAGAN
PERFORMANCE SUMMARY
Ginnie Mae returned 2.90%* for the six months ended September 30, 2006. By
comparison, the Citigroup GNMA Index returned 3.12%, and the Citigroup 30-Year
GNMA Index returned 3.10%. The portfolio's results reflect operating expenses,
while the index returns do not.
MORTGAGE-MARKET REVIEW
Mortgage-backed securities (MBS) performed relatively well during the six
months. The MBS Fixed-Rate sector of the Lehman Brothers U.S. Aggregate Index
returned 3.64% overall, compared with the 3.73% return of the Aggregate itself.
MBS outperformed the Treasury and agency sectors of the Aggregate (3.61% and
3.45%, respectively), but lagged the corporate sector (4.12%).
Not all MBS returns were equal during the six months. Freddie Mac and Fannie Mae
MBS outperformed GNMAs, which were hobbled by weak overseas demand and
fundamentally rich valuations in the second quarter, making them less
attractive. This was a reversal from 2005, when GNMAs outperformed Fannies and
Freddies.
One positive factor for all MBS was rising interest rates that kept the level of
mortgage refinancing activity low by historical standards. Between March 28 and
June 29, the Federal Reserve raised short-term interest rates by 75 basis
points, helping to push the average rate on fixed-rate 30-year mortgages as high
as 6.86% by the third week of June. Though the Fed put its rate hikes on hold
thereafter, refinancing activity remained relatively low. The Mortgage Bankers
Association Refinancing Index--which fell to 1356 in late June and rebounded to
1970 by the end of September--was still far below levels from just a few years
ago. The MBA index jumped as high as 10,000 in 2003, when U.S. interest rates
were at record lows and homeowners rushed to refinance their mortgages.
PORTFOLIO POSITIONING
The U.S. economy reached an inflection point during the period as data began to
indicate slower growth. In the second quarter of the year, we prepared for a
pause in the Fed's interest rate hikes (and an expected steeper yield curve) by
removing Ginnie Mae's short position in the two-year Treasury sector and
starting to establish a long position. The short position was in place to buffer
PORTFOLIO AT A GLANCE
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AS OF AS OF
9/30/06 3/31/06
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Average Duration
(effective) 4.0 years 4.1 years
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Average Life 6.4 years 6.5 years
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YIELDS AS OF SEPTEMBER 30, 2006
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30-DAY SEC YIELD
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Investor Class 4.71%
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Advisor Class 4.46%
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C Class 3.72%
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*All fund returns referenced in this commentary are for Investor Class shares.
Total returns for periods less than one year are not annualized.
(continued)
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5
Ginnie Mae - Portfolio Commentary
the portfolio from Fed rate hikes. By the end of September, the bond market's
consensus opinion was that the Fed's next move--whenever it came--would be to
cut, rather than raise, interest rates. As a result, we initiated a curve
steepening strategy, using two- and 10-year Treasury futures.
We maintained the portfolio's bias toward premium-coupon GNMAs, though not as
strongly as in the past couple of years. Overall, we felt that GNMA Is offered
better performance potential than GNMA IIs, so we maintained an overweight
position in GNMA Is compared with the Citigroup GNMA Index. (GNMA Is are pools
of GNMA securities from a single issuer. GNMA IIs are pools with multiple
issuers.)
We added value by taking advantage of sector rotation opportunities between the
GNMA I and GNMA II markets. In the second quarter of 2006, we sold
premium-coupon GNMA Is that had performed well, and invested the money in
equivalent-coupon GNMA IIs, which offered better total return potential.
Weakness in the GNMA II market in the third quarter of the year allowed us to
take an overweight position in 6%-coupon GNMA IIs compared with the Citigroup
Index.
We also added incremental return to the portfolio by using floating-rate
discount agency notes and GNMA CMO floaters while managing the portfolio's cash
position.
PORTFOLIO OBJECTIVES AND EXPECTATIONS
Ginnie Mae is designed to be a core bond holding for your portfolio, providing
steady monthly income by investing primarily in government-backed GNMA
certificates. Ginnie Mae combines the relative safety of U.S. government-backed
securities with higher yields than those offered by comparable shorter-duration,
high-quality bond investments.
The fund typically performs best when interest rates are relatively steady, such
as when the Fed is on hold. On the other hand, sharp movements in the Treasury
market can trigger underperformance.
TYPES OF INVESTMENTS IN PORTFOLIO
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% OF FUND % OF FUND
INVESTMENTS INVESTMENTS
AS OF AS OF
9/30/06 3/31/06
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U.S. Government Agency
Mortgage-Backed
Securities (all GNMAs) 73.0% 74.2%
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U.S. Government Agency
Collateralized Mortgage
Obligations (all GNMAs) 11.5% 9.8%
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U.S. Government
Agency Securities 9.1% 10.3%
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U.S. Treasury Securities 1.1% --
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Temporary Cash
Investments 5.3% 5.7%
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6
Ginnie Mae - Schedule of Investments
SEPTEMBER 30, 2006 (UNAUDITED)
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES(1) -- 98.1%
$102,000,000 GNMA, 5.00%, settlement
date 10/20/06(2) $ 99,099,324
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70,000,000 GNMA, 5.50%, settlement
date 10/20/06(2) 69,540,659
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130,000,000 GNMA, 6.00%, settlement
date 10/20/06(2) 131,584,439
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181,122,761 GNMA, 5.00%, 6/15/33
to 3/15/36 176,210,355
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472,840,928 GNMA, 5.50%, 4/15/33
to 4/20/36(3) 469,455,008
- --------------------------------------------------------------------------------
206,402,774 GNMA, 6.00%, 7/20/16
to 10/20/36 208,609,125
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113,491,098 GNMA, 6.50%, 6/15/23
to 10/15/34 116,538,869
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19,224,121 GNMA, 7.00%, 9/15/08
to 12/20/29 19,850,978
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194,338 GNMA, 7.25%, 9/15/22
to 6/15/23 200,495
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15,393,625 GNMA, 7.50%, 5/20/08
to 11/15/31 16,035,776
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158,550 GNMA, 7.65%, 6/15/16
to 12/15/16 165,483
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227,449 GNMA, 7.75%, 9/20/17
to 8/20/25 238,685
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278,197 GNMA, 7.77%, 4/15/20
to 6/15/20(3) 293,037
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38,634 GNMA, 7.85%, 9/20/22 40,616
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16,574 GNMA, 7.89%, 9/20/22 17,442
- --------------------------------------------------------------------------------
194,879 GNMA, 7.98%, 6/15/19
to 6/15/19 206,124
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4,173,064 GNMA, 8.00%, 11/15/07
to 7/20/30 4,419,081
- --------------------------------------------------------------------------------
213,328 GNMA, 8.15%, 1/15/20
to 2/15/21(3) 227,349
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1,027,097 GNMA, 8.25%, 4/15/08
to 5/15/27 1,091,140
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60,531 GNMA, 8.35%, 11/15/20 64,817
- --------------------------------------------------------------------------------
3,889,817 GNMA, 8.50%, 7/15/08
to 12/15/30 4,179,334
- --------------------------------------------------------------------------------
326,052 GNMA, 8.75%, 1/15/17
to 7/15/27 349,184
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2,977,888 GNMA, 9.00%, 8/15/08
to 1/15/25 3,167,380
- --------------------------------------------------------------------------------
423,161 GNMA, 9.25%, 8/15/16
to 8/15/26 457,620
- --------------------------------------------------------------------------------
1,003,419 GNMA, 9.50%, 6/15/09
to 7/20/25 1,087,888
- --------------------------------------------------------------------------------
156,253 GNMA, 9.75%, 8/15/16
to 11/20/21 171,750
- --------------------------------------------------------------------------------
260,569 GNMA, 10.00%, 11/15/09
to 1/15/22 289,248
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 92,074 GNMA, 10.25%, 5/15/12
to 2/15/19 $ 101,302
- --------------------------------------------------------------------------------
106,208 GNMA, 10.50%, 3/15/14
to 7/15/19 118,341
- --------------------------------------------------------------------------------
10,960 GNMA, 10.75%, 12/15/09
to 3/15/10 11,702
- --------------------------------------------------------------------------------
260,399 GNMA, 11.00%, 12/15/09
to 6/15/20 285,109
- --------------------------------------------------------------------------------
2,738 GNMA, 11.25%, 2/20/16 3,046
- --------------------------------------------------------------------------------
49,879 GNMA, 11.50%, 2/15/13
to 8/20/19 55,450
- --------------------------------------------------------------------------------
27,077 GNMA, 12.00%, 10/15/10
to 12/15/12 29,737
- --------------------------------------------------------------------------------
15,151 GNMA, 12.25%, 2/15/14
to 5/15/15 16,754
- --------------------------------------------------------------------------------
73,052 GNMA, 12.50%, 5/15/10
to 12/15/13 80,362
- --------------------------------------------------------------------------------
127,271 GNMA, 13.00%, 1/15/11
to 8/15/15 142,531
- --------------------------------------------------------------------------------
61,456 GNMA, 13.50%, 5/15/10
to 11/15/14 69,282
- --------------------------------------------------------------------------------
8,405 GNMA, 13.75%, 8/15/14 9,476
- --------------------------------------------------------------------------------
3,917 GNMA, 14.00%, 6/15/11
to 7/15/11 4,431
- --------------------------------------------------------------------------------
45,294 GNMA, 14.50%, 10/15/12
to 12/15/12 51,657
- --------------------------------------------------------------------------------
43,804 GNMA, 15.00%, 7/15/11
to 10/15/12 50,228
- --------------------------------------------------------------------------------
5,495 GNMA, 16.00%, 10/15/11
to 12/15/11 6,365
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES
(Cost $1,338,825,933) 1,324,626,979
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY COLLATERALIZED
MORTGAGE OBLIGATIONS(1) -- 15.5%
6,552,162 GNMA, Series 1998-6,
Class FA, VRN, 5.84%,
10/16/06, resets monthly
off the 1-month LIBOR plus
0.51% with a cap of 9.00% 6,626,575
- --------------------------------------------------------------------------------
807,474 GNMA, Series 1998-17,
Class F, VRN, 5.83%,
10/16/06, resets monthly
off the 1-month LIBOR plus
0.50% with no caps 817,086
- --------------------------------------------------------------------------------
525,832 GNMA, Series 2000-22,
Class FG, VRN, 5.53%,
10/16/06, resets monthly
off the 1-month LIBOR plus
0.20% with no caps 526,458
- --------------------------------------------------------------------------------
3,742,996 GNMA, Series 2001-59,
Class FD, VRN, 5.83%,
10/16/06, resets monthly
off the 1-month LIBOR plus
0.50% with no caps 3,794,342
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
7
Ginnie Mae - Schedule of Investments
SEPTEMBER 30, 2006 (UNAUDITED)
Principal Amount Value
- --------------------------------------------------------------------------------
$ 7,791,748 GNMA, Series 2001-62,
Class FB, VRN, 5.83%,
10/16/06, resets monthly
off the 1-month LIBOR plus
0.50% with no caps $ 7,898,519
- --------------------------------------------------------------------------------
4,394,338 GNMA, Series 2002-13,
Class FA, VRN, 5.83%,
10/16/06, resets monthly
off the 1-month LIBOR plus
0.50% with a cap of 8.50% 4,445,400
- --------------------------------------------------------------------------------
7,867,462 GNMA, Series 2002-24,
Class FA, VRN, 5.83%,
10/16/06, resets monthly
off the 1-month LIBOR plus
0.50% with a cap of 8.50% 7,949,275
- --------------------------------------------------------------------------------
2,582,821 GNMA, Series 2002-29,
Class FA SEQ, VRN, 5.68%,
10/20/06, resets monthly
off the 1-month LIBOR plus
0.35% with a cap of 9.00% 2,599,421
- --------------------------------------------------------------------------------
2,124,780 GNMA, Series 2002-31,
Class FW, VRN, 5.73%,
10/16/06, resets monthly
off the 1-month LIBOR plus
0.40% with a cap of 8.50% 2,142,770
- --------------------------------------------------------------------------------
31,641,514 GNMA, Series 2002-50,
Class PD, 6.00%, 5/20/31 31,830,065
- --------------------------------------------------------------------------------
12,084,340 GNMA, Series 2002-57,
Class PD, 6.00%, 6/20/31 12,107,264
- --------------------------------------------------------------------------------
8,346,442 GNMA, Series 2003-7,
Class FA, VRN, 5.78%,
10/16/06, resets monthly
off the 1-month LIBOR plus
0.45% with no caps 8,407,012
- --------------------------------------------------------------------------------
1,169,409 GNMA, Series 2003-10,
Class JC, 6.00%, 4/20/30 1,179,446
- --------------------------------------------------------------------------------
1,730,159 GNMA, Series 2003-14,
Class F, VRN, 5.68%,
10/20/06, resets monthly
off the 1-month LIBOR plus
0.35% with no caps 1,741,386
- --------------------------------------------------------------------------------
4,102,711 GNMA, Series 2003-42,
Class FW, VRN, 5.68%,
10/20/06, resets monthly
off the 1-month LIBOR plus
0.35% with a cap of 7.00% 4,122,691
- --------------------------------------------------------------------------------
7,619,970 GNMA, Series 2004-11,
Class UC, 5.00%, 4/16/26 7,582,792
- --------------------------------------------------------------------------------
5,329,810 GNMA, Series 2004-39,
Class XF SEQ, VRN, 5.58%,
10/16/06, resets monthly
off the 1-month LIBOR plus
0.25% with a cap of 7.50% 5,341,616
- --------------------------------------------------------------------------------
2,421,564 GNMA, Series 2004-42,
Class AB SEQ, 6.00%,
3/20/32 2,423,135
- --------------------------------------------------------------------------------
6,781,955 GNMA, Series 2004-46,
Class QH, 4.50%, 4/20/25 6,741,406
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 47,539,881 GNMA, Series 2004-53,
Class FB SEQ, VRN, 5.73%,
10/16/06, resets monthly
off the 1-month LIBOR plus
0.40% with a cap of 7.50% $ 47,853,787
- --------------------------------------------------------------------------------
24,390,260 GNMA, Series 2004-82,
Class DM, 5.00%, 10/20/27 24,235,821
- --------------------------------------------------------------------------------
17,844,494 GNMA, Series 2005-24,
Class F, VRN, 5.53%,
10/16/06, resets monthly
off the 1-month LIBOR plus
0.20% with a cap of 7.00% 17,844,137
- --------------------------------------------------------------------------------
1,392,759 GNMA, Series 2006-27,
Class QA, 6.00%, 10/20/23 1,392,271
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY
COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $209,742,147) 209,602,675
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
SECURITIES -- 12.3%
40,000,000 FFCB, VRN, 5.22%,
10/3/06 to 10/30/06,
resets monthly off the
1-month LIBOR minus
0.11% with no caps(3) 40,013,899
- --------------------------------------------------------------------------------
44,000,000 FFCB, VRN, 5.23%,
10/1/06 to 10/22/06,
resets monthly off the
1-month LIBOR minus
0.105% with no caps(3) 44,012,056
- --------------------------------------------------------------------------------
29,425,000 FFCB, VRN, 5.26%,
10/24/06 to 10/30/06,
resets monthly off the
1-month LIBOR minus
0.075% with no caps(3) 29,436,908
- --------------------------------------------------------------------------------
27,700,000 FFCB, VRN, 5.27%,
10/10/06 to 10/17/06,
resets monthly off the
1-month LIBOR minus
0.06% with no caps(3) 27,710,035
- --------------------------------------------------------------------------------
15,000,000 FHLB, 4.88%, 8/22/07(3) 14,963,430
- --------------------------------------------------------------------------------
10,000,000 FHLMC, 2.38%, 2/15/07(3) 9,894,320
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY
SECURITIES
(Cost $165,960,868) 166,030,648
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES -- 1.5%
19,975,000 U.S. Treasury Notes, 5.13%,
6/30/08(3)
(Cost $20,050,302) 20,109,212
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
8
Ginnie Mae - Schedule of Investments
SEPTEMBER 30, 2006 (UNAUDITED)
Value
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS -- 7.1%
Repurchase Agreement, Deutsche Bank
Securities, Inc., (collateralized by various
U.S. Treasury obligations, 0.875%, 4/15/10,
valued at $68,761,187), in a joint trading
account at 4.95%, dated 9/29/06, due
10/2/06 (Delivery value $67,427,803)(3) $ 67,400,000
- --------------------------------------------------------------------------------
Repurchase Agreement, Goldman Sachs &
Co., (collateralized by various U.S. Treasury
obligations, 5.25%-6.00%, 2/15/26-2/15/29,
valued at $28,489,276), in a joint trading
account at 4.90%, dated 9/29/06, due
10/2/06 (Delivery value $27,953,410)(3) 27,942,000
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $95,342,000) 95,342,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 134.5%
(Cost $1,829,921,250) 1,815,711,514
- --------------------------------------------------------------------------------
OTHER ASSETS AND
LIABILITIES -- (34.5)% (465,894,521)
- --------------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $1,349,816,993
================================================================================
FUTURES CONTRACTS
Expiration Underlying Face Unrealized
Contracts Purchased Date Amount at Value Gain (Loss)
- --------------------------------------------------------------------------------
706 U.S. Treasury
2-Year Notes December 2006 $144,377,000 $148,411
==================================
Expiration Underlying Face Unrealized
Contracts Sold Date Amount at Value Gain (Loss)
- --------------------------------------------------------------------------------
269 U.S. Treasury
10-Year Notes December 2006 $29,068,813 $(253,433)
==================================
NOTES TO SCHEDULE OF INVESTMENTS
FFCB = Federal Farm Credit Bank
FHLB = Federal Home Loan Bank
FHLMC = Federal Home Loan Mortgage Corporation
GNMA = Government National Mortgage Association
LIBOR = London Interbank Offered Rate
resets = The frequency with which a security's coupon changes, based on current
market conditions or an underlying index. The more frequently a
security resets, the less risk the investor is taking that the coupon
will vary significantly from current market rates.
SEQ = Sequential Payer.
VRN = Variable Rate Note. Interest reset date is indicated. Rate shown is
effective September 30, 2006.
(1) Final maturity indicated, unless otherwise noted.
(2) Forward commitment.
(3) Security, or a portion thereof, has been segregated for forward commitments
and/or futures contracts.
See Notes to Financial Statements.
- ------
9
Government Bond - Performance
TOTAL RETURNS AS OF SEPTEMBER 30, 2006
----------------------------
AVERAGE ANNUAL RETURNS
- --------------------------------------------------------------------------------
SINCE INCEPTION
6 MONTHS(1) 1 YEAR 5 YEARS 10 YEARS INCEPTION DATE
- --------------------------------------------------------------------------------
INVESTOR CLASS 3.38% 3.39% 3.80% 5.71% 7.64% 5/16/80
- --------------------------------------------------------------------------------
CITIGROUP
TREASURY/
MORTGAGE INDEX(2) 3.62% 3.73% 4.47% 6.28% --(3) --
- --------------------------------------------------------------------------------
CITIGROUP U.S.
TREASURY
10+ YEAR INDEX 5.14% 2.44% 6.41% 8.11% 10.16%(4) --
- --------------------------------------------------------------------------------
Advisor Class 3.25% 3.13% 3.54% -- 5.16% 10/9/97
- --------------------------------------------------------------------------------
Performance information prior to September 3, 2002, is that of the American
Century Treasury Fund, all of the net assets of which were acquired by
Government Bond pursuant to a plan of reorganization approved by Treasury
shareholders on August 2, 2002.
(1) Total returns for periods less than one year are not annualized.
(2) When Government Bond merged with the Treasury fund in September 2002, the
fund's benchmark was changed from the Citigroup U.S. Treasury 10+ Year Index
to the Citigroup Treasury/Mortgage Index to better reflect the fund's
broader investment mandate.
(3) Index data not available prior to 1982.
(4) Since 5/31/80, the date nearest the Investor Class's inception for which
data are available.
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-2021 or visit
americancentury.com. As interest rates rise, bond values will decline.
Unless otherwise indicated, performance reflects Investor Class shares;
performance for other share classes will vary due to differences in fee
structure. For information about other share classes available, please consult
the prospectus. Data assumes reinvestment of dividends and capital gains, and
none of the charts reflect the deduction of taxes that a shareholder would pay
on fund distributions or the redemption of fund shares. Returns for the indices
are provided for comparison. The fund's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the indices do not.
(continued)
- ------
10
Government Bond - Performance
GROWTH OF $10,000 OVER 10 YEARS
$10,000 investment made September 30, 1996
ONE-YEAR RETURNS OVER 10 YEARS
Periods ended September 30
- -----------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
- -----------------------------------------------------------------------------------------------
Investor Class 8.22% 12.58% -1.92% 6.41% 13.70% 8.95% 2.66% 1.27% 2.93% 3.39%
- -----------------------------------------------------------------------------------------------
Citigroup
Treasury/
Mortgage Index 9.44% 11.67% -0.07% 7.28% 12.80% 8.78% 3.55% 3.48% 2.91% 3.73%
- -----------------------------------------------------------------------------------------------
Citigroup U.S.
Treasury
10+ Year Index 13.23% 22.10% -7.68% 9.81% 14.03% 14.51% 3.63% 4.97% 6.91% 2.44%
- -----------------------------------------------------------------------------------------------
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-2021 or visit
americancentury.com. As interest rates rise, bond values will decline.
Unless otherwise indicated, performance reflects Investor Class shares;
performance for other share classes will vary due to differences in fee
structure. For information about other share classes available, please consult
the prospectus. Data assumes reinvestment of dividends and capital gains, and
none of the charts reflect the deduction of taxes that a shareholder would pay
on fund distributions or the redemption of fund shares. Returns for the indices
are provided for comparison. The fund's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the indices do not.
- ------
11
Government Bond - Portfolio Commentary
PORTFOLIO MANAGERS: BOB GAHAGAN, HANDO AGUILAR, BRIAN HOWELL, AND DAN SHIFFMAN
PERFORMANCE SUMMARY
Government Bond returned 3.38%* for the six months ended September 30, 2006. By
comparison, its benchmark--the Citigroup Treasury/Mortgage Index--returned
3.62%. The portfolio's results reflected operating expenses, while the index
returns did not.
Though the Fed's interest rate pause and one of the strongest quarterly bond
rallies this decade boosted all sectors of the taxable investment-grade U.S.
bond market in the third quarter of 2006 (and for the full six-month period),
they helped some sectors more than others. Relative performance between sectors,
sector weightings, and maturity and duration positions helped determine the
returns of Government Bond and its benchmark.
SECTOR COMPOSITION OF THE PORTFOLIO AND THE INDEX
Government Bond's benchmark serves as more of a target for duration decisions
than for bond sector allocation (duration measures a portfolio's sensitivity to
interest rate changes). We base sector exposure in the portfolio more on a 33%
Treasury securities, 33% government agency securities, and 33% mortgage-backed
securities (MBS) model, than on the benchmark's allocations (which are typically
roughly 40% Treasury and 60% MBS). We vary from our 33/33/33 model depending on
where we see the most value in the market.
To increase diversification for fund investors and opportunities for us to add
value, the portfolio can also hold Treasury Inflation-Protected Securities
(TIPS), as well as securitized assets other than MBS, including asset-backed
securities (ABS) which are backed by payments from credit card debt, auto loans,
and home-equity lines of credit; and commercial mortgage-backed securities
(CMBS). The portfolio's sector composition is shown in the Types of Investments
table on page 13.
PORTFOLIO STRATEGY
Our investment approach uses a consistent, repeatable framework that seeks to
identify the best relative value among the bond sectors described above. We
actively apply a multi-step process, which includes yield curve/duration
positioning, security selection, portfolio construction, and attribution
analysis. We monitor the portfolio's weighted average maturity and adjust it as
appropriate, taking into account market conditions and other relevant factors.
PORTFOLIO AT A GLANCE
- --------------------------------------------------------------------------------
AS OF AS OF
9/30/06 3/31/06
- --------------------------------------------------------------------------------
Weighted Average
Maturity 4.9 years 6.1 years
- --------------------------------------------------------------------------------
Average Duration
(effective) 4.3 years 4.1 years
- --------------------------------------------------------------------------------
YIELDS AS OF SEPTEMBER 30, 2006
- --------------------------------------------------------------------------------
30-DAY SEC YIELD
- --------------------------------------------------------------------------------
Investor Class 4.70%
- --------------------------------------------------------------------------------
Advisor Class 4.45%
- --------------------------------------------------------------------------------
*All fund returns referenced in this commentary are for Investor Class shares.
Total returns for periods less than one year are not annualized.
(continued)
- ------
12
Government Bond - Portfolio Commentary
Our strategy to underweight Treasurys and overweight "spread product" in 2006
(spread product consists of typically higher-yielding, non-Treasury securities
such as agencies and MBS) benefited the fund. Spread product--in
aggregate--offered higher excess returns than Treasurys during the six-month
period, led primarily by CMBS and MBS.
Duration also played an important role in Government Bond's relative
performance. During the first half of the period, we positioned the portfolio
more conservatively, with its duration about half a year shorter than the
benchmark's. This stance helped buffer Government Bond's returns to some degree
when the bond market suffered declines during the second quarter of 2006. During
the next three months, from July through September, we lengthened the
portfolio's duration, until it was nearly neutral to that of the benchmark. This
helped the portfolio achieve better results when the bond market rallied sharply
in the third quarter. In bond market rallies, long-maturity/duration securities
outperform shorter-maturity/ duration bonds.
PORTFOLIO OBJECTIVES AND EXPECTATIONS
Government Bond is designed to seek high current income without exposing
investors to the potential risks and volatility of the corporate credit market.
It can serve as a core bond holding and a portfolio diversifier for investors
looking for a high-quality bond fund and a fund offering returns that are
negatively correlated with those provided by broad stock market investments.
Government Bond has historically delivered steady monthly income, which can help
cushion the impact of price declines during periods when interest rates are
rising, and its high credit quality means it has the potential to perform well
when the economy falters and interest rates decline.
TYPES OF INVESTMENTS IN PORTFOLIO
- --------------------------------------------------------------------------------
% OF FUND % OF FUND
INVESTMENTS INVESTMENTS
AS OF AS OF
9/30/06 3/31/06
- --------------------------------------------------------------------------------
U.S. Government Agency
Mortgage-Backed
Securities 25.5% 22.5%
- --------------------------------------------------------------------------------
U.S. Government
Agency Securities 21.2% 25.5%
- --------------------------------------------------------------------------------
U.S. Government Agency
Collateralized Mortgage
Obligations 19.3% 18.1%
- --------------------------------------------------------------------------------
U.S. Treasury Securities 15.2% 12.9%
- --------------------------------------------------------------------------------
U.S. Government Agency
Asset-Backed Securities 2.7% 3.0%
- --------------------------------------------------------------------------------
Temporary Cash
Investments 2.5% 1.7%
- --------------------------------------------------------------------------------
Collateral Received for
Securities Lending 13.6% 16.3%
- --------------------------------------------------------------------------------
- ------
13
Government Bond - Schedule of Investments
SEPTEMBER 30, 2006 (UNAUDITED)
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES(1) -- 35.1%
$ 6,055,920 FHLMC, 4.50%, 1/1/19(2) $ 5,852,907
- --------------------------------------------------------------------------------
7,275,415 FHLMC, 5.50%, 10/1/34 7,191,369
- --------------------------------------------------------------------------------
5,243,000 FNMA, 5.00%, settlement
date 10/12/06(3) 5,039,834
- --------------------------------------------------------------------------------
22,774,000 FNMA, 6.00%, settlement
date 10/12/06(3) 22,880,765
- --------------------------------------------------------------------------------
36,921,000 FNMA, 5.50%, settlement
date 10/13/06(3) 36,378,703
- --------------------------------------------------------------------------------
27,700,000 FNMA, 6.50%, settlement
date 10/13/06(3) 28,210,733
- --------------------------------------------------------------------------------
9,794,000 FNMA, 5.50%, settlement
date 10/18/06(3) 9,790,944
- --------------------------------------------------------------------------------
22,040,683 FNMA, 4.50%, 5/1/19 21,302,298
- --------------------------------------------------------------------------------
1,885,973 FNMA, 5.00%, 9/1/20 1,854,340
- --------------------------------------------------------------------------------
962,154 FNMA, 6.50%, 3/1/32(2) 983,685
- --------------------------------------------------------------------------------
899,153 FNMA, 7.00%, 6/1/32(2) 925,717
- --------------------------------------------------------------------------------
1,282,481 FNMA, 6.50%, 8/1/32(2) 1,311,678
- --------------------------------------------------------------------------------
13,679,546 FNMA, 5.50%, 7/1/33 13,519,372
- --------------------------------------------------------------------------------
3,071,025 FNMA, 5.00%, 11/1/33 2,962,311
- --------------------------------------------------------------------------------
3,492,738 FNMA, 5.50%, 9/1/34 3,448,764
- --------------------------------------------------------------------------------
21,128,212 FNMA, 5.50%, 10/1/34 20,862,208
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES
(Cost $184,012,569) 182,515,628
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
SECURITIES -- 29.2%
4,000,000 FHLB, 4.00%, 3/10/08(2) 3,945,064
- --------------------------------------------------------------------------------
42,800,000 FHLMC, 5.25%, 7/18/11(2)(4) 43,446,409
- --------------------------------------------------------------------------------
5,200,000 FHLMC, 5.50%, 3/28/16(2) 5,247,866
- --------------------------------------------------------------------------------
10,000,000 FHLMC, 5.875%, 5/23/16(2) 10,222,470
- --------------------------------------------------------------------------------
17,310,000 FHLMC, 5.30%, 5/12/20(2) 16,741,868
- --------------------------------------------------------------------------------
9,700,000 FNMA, 4.75%, 8/3/07(2) 9,666,322
- --------------------------------------------------------------------------------
20,800,000 FNMA, 5.00%, 9/14/07(2) 20,770,838
- --------------------------------------------------------------------------------
24,800,000 FNMA, 6.625%, 9/15/09(2) 25,971,403
- --------------------------------------------------------------------------------
15,600,000 FNMA, 5.80%, 2/9/26(2) 15,627,690
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY
SECURITIES
(Cost $150,791,435) 151,639,930
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY COLLATERALIZED
MORTGAGE OBLIGATIONS(1) -- 26.6%
2,575,875 FHLMC, Series 2560,
Class FG SEQ, VRN, 5.83%,
10/16/06, resets monthly off
the 1-month LIBOR plus
0.50% with a cap of 8.50% 2,593,481
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 5,055,393 FHLMC, Series 2625,
Class FJ SEQ, VRN, 5.63%,
10/15/06, resets monthly off
the 1-month LIBOR plus
0.30% with a cap of 7.50%(2) $ 5,065,812
- --------------------------------------------------------------------------------
459,426 FHLMC, Series 2689,
Class PY, 4.00%, 2/15/10(2) 458,648
- --------------------------------------------------------------------------------
5,256,046 FHLMC, Series 2779,
Class FM SEQ, VRN, 5.68%,
10/16/06, resets monthly off
the 1-month LIBOR plus
0.35% with a cap of 7.50% 5,280,245
- --------------------------------------------------------------------------------
12,622,705 FHLMC, Series 2780,
Class BD SEQ, 4.50%,
10/15/17 12,463,873
- --------------------------------------------------------------------------------
13,150,592 FHLMC, Series 2812,
Class EF SEQ, VRN, 5.73%,
10/16/06, resets monthly off
the 1-month LIBOR plus
0.40% with a cap of 7.50% 13,216,253
- --------------------------------------------------------------------------------
7,750,619 FHLMC, Series 2831,
Class AF, VRN, 5.63%,
10/15/06, resets monthly off
the 1-month LIBOR plus
0.30% with a cap of 7.50% 7,774,112
- --------------------------------------------------------------------------------
7,763,298 FHLMC, Series 2836,
Class ND, 4.00%, 7/15/13 7,653,913
- --------------------------------------------------------------------------------
13,855,558 FHLMC, Series 2855,
Class FK SEQ, VRN, 5.68%,
10/16/06, resets monthly off
the 1-month LIBOR plus
0.35% with a cap of 7.50% 13,890,489
- --------------------------------------------------------------------------------
5,568,629 FHLMC, Series 2900,
Class PA, 4.50%, 3/15/14 5,515,488
- --------------------------------------------------------------------------------
4,905,578 FNMA, Series 2003-42,
Class FK, VRN, 5.73%,
10/25/06, resets monthly off
the 1-month LIBOR plus
0.40% with a cap of 7.50% 4,937,474
- --------------------------------------------------------------------------------
9,292,211 FNMA, Series 2003-43,
Class LF, VRN, 5.68%,
10/25/06, resets monthly off
the 1-month LIBOR plus
0.35% with a cap of 8.00% 9,339,248
- --------------------------------------------------------------------------------
8,099,353 FNMA, Series 2003-52,
Class KF SEQ, VRN, 5.73%,
10/25/06, resets monthly off
the 1-month LIBOR plus
0.40% with a cap of 7.50%(2) 8,144,506
- --------------------------------------------------------------------------------
9,738,313 FNMA, Series 2003-84,
Class AL, 4.00%, 4/25/13(2) 9,622,495
- --------------------------------------------------------------------------------
18,000,000 FNMA, Series 2003-92,
Class PD, 4.50%, 3/25/17 17,506,422
- --------------------------------------------------------------------------------
7,256,581 FNMA, Series 2003-124,
Class PB, 4.00%, 3/25/31(2) 7,187,426
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
14
Government Bond - Schedule of Investments
SEPTEMBER 30, 2006 (UNAUDITED)
Principal Amount Value
- --------------------------------------------------------------------------------
$ 7,502,957 FNMA, Series 2004 W5,
Class F1, VRN, 5.78%,
10/25/06, resets monthly off
the 1-month LIBOR plus
0.45% with a cap of 7.50% $ 7,550,556
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY
COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $138,286,535) 138,200,441
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES -- 20.9%
31,720,000 U.S. Treasury Bonds, 8.125%,
8/15/21(2)(4) 42,747,680
- --------------------------------------------------------------------------------
10,700,000 U.S. Treasury Bonds, 7.125%,
2/15/23(2) 13,443,555
- --------------------------------------------------------------------------------
12,096,180 U.S. Treasury Inflation
Indexed Notes, 2.00%,
1/15/16(2)(4) 11,822,129
- --------------------------------------------------------------------------------
19,572,000 U.S. Treasury Notes, 4.875%,
4/30/11(2)(4) 19,796,021
- --------------------------------------------------------------------------------
17,700,000 U.S. Treasury Notes, 5.125%,
6/30/11(2)(4) 18,096,179
- --------------------------------------------------------------------------------
2,657,000 U.S. Treasury Notes, 4.875%,
8/15/16(2)(4) 2,708,065
- --------------------------------------------------------------------------------
TOTAL U.S. TREASURY SECURITIES
(Cost $107,543,398) 108,613,629
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
ASSET-BACKED SECURITIES(1) -- 3.7%
3,810,282 FHLMC, Series T19, Class A,
VRN, 5.50%, 10/25/06,
resets monthly off the
1-month LIBOR plus 0.17%
with no caps 3,813,380
- --------------------------------------------------------------------------------
4,241,932 FHLMC, Series T20, Class A7,
VRN, 5.48%, 10/25/06,
resets monthly off the
1-month LIBOR plus 0.15%
with no caps 4,245,975
- --------------------------------------------------------------------------------
8,734,592 FHLMC, Series T21, Class A,
VRN, 5.51%, 10/25/06,
resets monthly off the
1-month LIBOR plus 0.18%
with no caps(2) 8,741,911
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 1,377,568 FHLMC, Series T34, Class A1V,
VRN, 5.45%, 10/25/06,
resets monthly off the
1-month LIBOR plus 0.12%
with no caps $ 1,378,543
- --------------------------------------------------------------------------------
1,235,379 FHLMC, Series T35, Class A,
VRN, 5.47%, 10/25/06,
resets monthly off the
1-month LIBOR plus 0.14%
with no caps(2) 1,236,342
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY
ASSET-BACKED SECURITIES
(Cost $19,412,427) 19,416,151
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS -- 3.5%
Repurchase Agreement, Deutsche Bank
Securities, Inc., (collateralized by various
U.S. Treasury obligations, 0.875%, 4/15/10,
valued at $18,500,228), in a joint trading
account at 4.95%, dated 9/29/06, due
10/2/06 (Delivery value $18,141,480)(2)
(Cost $18,134,000) 18,134,000
- --------------------------------------------------------------------------------
COLLATERAL RECEIVED FOR
SECURITIES LENDING(5) -- 18.7%
Repurchase Agreement, BNP Paribas,
(collateralized by various U.S. Government
Agency obligations in a pooled account at
the lending agent), 5.37%, dated 9/29/06,
due 10/2/06 (Delivery value $25,011,188) 25,000,000
- --------------------------------------------------------------------------------
Repurchase Agreement, UBS AG,
(collateralized by various U.S. Government
Agency obligations in a pooled account at
the lending agent), 5.375%, dated 9/29/06,
due 10/2/06 (Delivery value $71,895,817) 71,863,628
- --------------------------------------------------------------------------------
TOTAL COLLATERAL RECEIVED FOR
SECURITIES LENDING
(Cost $96,863,628) 96,863,628
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 137.7%
(Cost $715,043,992) 715,383,407
- --------------------------------------------------------------------------------
OTHER ASSETS AND
LIABILITIES -- (37.7)% (195,827,903)
- --------------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $ 519,555,504
================================================================================
See Notes to Financial Statements. (continued)
- ------
15
Government Bond - Schedule of Investments
SEPTEMBER 30, 2006 (UNAUDITED)
FUTURES CONTRACTS
Expiration Underlying Face Unrealized
Contracts Purchased Date Amount at Value Gain (Loss)
- --------------------------------------------------------------------------------
125 U.S. Long Bond December 2006 $ 14,050,781 $240,930
- --------------------------------------------------------------------------------
464 U.S. Treasury
2-Year Notes December 2006 94,888,000 122,659
- --------------------------------------------------------------------------------
219 U.S. Treasury
5-Year Notes December 2006 23,107,922 54,616
- --------------------------------------------------------------------------------
$132,046,703 $418,205
==================================
Expiration Underlying Face Unrealized
Contracts Sold Date Amount at Value Gain (Loss)
- --------------------------------------------------------------------------------
705 U.S. Treasury
10-Year Notes December 2006 $76,184,063 $(696,602)
==================================
SWAP AGREEMENTS
Unrealized
Notional Amount Description of Agreement Expiration Date Gain (Loss)
- ----------------------------------------------------------------------------------------------------
INTEREST RATE
- ----------------------------------------------------------------------------------------------------
$8,485,000 Receive semiannually a fixed rate equal to 5.6965% November 2030 $570,505
and pay quarterly a variable rate based on the ===========
3-month LIBOR with Barclays Capital, Inc.
NOTES TO SCHEDULE OF INVESTMENTS
FHLB = Federal Home Loan Bank
FHLMC = Federal Home Loan Mortgage Corporation
FNMA = Federal National Mortgage Association
LIBOR = London Interbank Offered Rate
resets = The frequency with which a security's coupon changes, based on current
market conditions or an underlying index. The more frequently a
security resets, the less risk the investor is taking that the coupon
will vary significantly from current market rates.
SEQ = Sequential Payer
VRN = Variable Rate Note. Interest reset date is indicated. Rate shown is
effective September 30, 2006.
(1) Final maturity indicated, unless otherwise noted.
(2) Security, or a portion thereof, has been segregated for forward commitments,
futures contracts and/or swap agreements.
(3) Forward commitment.
(4) Security, or a portion thereof, was on loan as of September 30, 2006.
(5) Investments represent purchases made by the lending agent with cash
collateral received through securities lending transactions. (See Note 5 in
Notes to Financial Statements.)
See Notes to Financial Statements.
- ------
16
Inflation-Adjusted Bond - Performance
TOTAL RETURNS AS OF SEPTEMBER 30, 2006
----------------------
AVERAGE ANNUAL RETURNS
- --------------------------------------------------------------------------------
SINCE INCEPTION
6 MONTHS(1) 1 YEAR 5 YEARS INCEPTION DATE
- --------------------------------------------------------------------------------
INVESTOR CLASS 3.78% 1.53% 6.54% 6.16% 2/10/97
- --------------------------------------------------------------------------------
CITIGROUP U.S.
INFLATION-LINKED
SECURITIES INDEX 4.11% 1.88% 7.20% 6.93%(2) --
- --------------------------------------------------------------------------------
Institutional Class 3.89% 1.75% -- 5.27% 10/1/02
- --------------------------------------------------------------------------------
Advisor Class 3.65% 1.34% 6.29% 6.60% 6/15/98
- --------------------------------------------------------------------------------
(1) Total returns for periods less than one year are not annualized.
(2) Since 2/28/97, the date nearest the Investor Class's inception for which
data are available.
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-2021 or visit
americancentury.com. As interest rates rise, bond values will decline.
Unless otherwise indicated, performance reflects Investor Class shares;
performance for other share classes will vary due to differences in fee
structure. For information about other share classes available, please consult
the prospectus. Data assumes reinvestment of dividends and capital gains, and
none of the charts reflect the deduction of taxes that a shareholder would pay
on fund distributions or the redemption of fund shares. Returns for the index
are provided for comparison. The fund's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the index do not.
(continued)
- ------
17
Inflation-Adjusted Bond - Performance
GROWTH OF $10,000 OVER LIFE OF CLASS
$10,000 investment made February 10, 1997
ONE-YEAR RETURNS OVER LIFE OF CLASS
Periods ended September 30
- ----------------------------------------------------------------------------------------------------
1997* 1998 1999 2000 2001 2002 2003 2004 2005 2006
- ----------------------------------------------------------------------------------------------------
Investor Class 0.18% 4.70% 1.50% 8.29% 12.43% 13.18% 6.68% 6.68% 4.96% 1.53%
- ----------------------------------------------------------------------------------------------------
Citigroup U.S.
Inflation-Linked
Securities Index 0.96% 5.71% 1.86% 9.11% 13.22% 14.54% 7.39% 7.23% 5.34% 1.88%
- ----------------------------------------------------------------------------------------------------
*From 2/10/97, the Investor Class's inception date. Index data from 2/28/97, the
date nearest the Investor Class's inception for which data are available. Not
annualized.
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-2021 or visit
americancentury.com. As interest rates rise, bond values will decline.
Unless otherwise indicated, performance reflects Investor Class shares;
performance for other share classes will vary due to differences in fee
structure. For information about other share classes available, please consult
the prospectus. Data assumes reinvestment of dividends and capital gains, and
none of the charts reflect the deduction of taxes that a shareholder would pay
on fund distributions or the redemption of fund shares. Returns for the index
are provided for comparison. The fund's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the index do not.
- ------
18
Inflation-Adjusted Bond - Portfolio Commentary
PORTFOLIO MANAGERS: JEREMY FLETCHER AND BOB GAHAGAN
PERFORMANCE SUMMARY
Inflation-Adjusted Bond returned 3.78%* for the six months ended September 30,
2006. By comparison, the Citigroup U.S. Inflation-Linked Securities Index
returned 4.11%. The portfolio's results reflected operating expenses, while the
returns of the index did not.
The relative and absolute performance of the inflation-linked securities
market--which posted moderate gains in a challenging bond environment and
outpaced nearly all other U.S. investment-grade sectors for the reporting
period--dictated portfolio and index returns.
INFLATION-LINKED BOND PERFORMANCE
U.S. inflation-linked securities generated moderate returns for the overall
reporting period, despite some interim volatility. For the full six months,
Treasury Inflation Protected Securities (TIPS) outpaced conventional Treasury
securities by approximately 40 basis points, according to Lehman Brothers. TIPS
outperformed conventional Treasurys by approximately one-half of a percentage
point during the bond market selloff in the first half of the period, but
narrowly trailed during the bond rally in the second half. It's not unusual for
TIPS to outperform during selloffs and underperform during rallies, owing to
their inflation-linked feature and their somewhat shorter
durations--sensitivities to interest rate changes--than that for conventional
Treasury securities.
BREAKEVEN RATES DECLINED
TIPS breakeven rates (representing the gap between TIPS yields and the yields of
their conventional Treasury counterparts, and used as a measure of long-term
inflation expectations) fell. The breakeven rate on 5-year TIPS dropped by 34
basis points (0.34%), breakevens on 10-year TIPS (the biggest slice of the TIPS
market) declined by 14 basis points, and breakeven rates on 30-year TIPS
declined by 13 basis points.
Factors influencing the declines included falling energy prices and moderate
long-term inflation expectations, as stated by the Federal Reserve in its recent
policy statements and expressed by the bond market in Treasury yields that fell
well below the Fed's 5.25% overnight interest rate target.
PORTFOLIO STRATEGY
We continued to focus on our investment approach, which employs a consistent,
repeatable framework that helps us to identify the best relative
PORTFOLIO AT A GLANCE
- --------------------------------------------------------------------------------
AS OF AS OF
9/30/06 3/31/06
- --------------------------------------------------------------------------------
Weighted Average
Maturity 9.0 years 10.7 years
- --------------------------------------------------------------------------------
Average Duration
(effective) 6.4 years 6.3 years
- --------------------------------------------------------------------------------
YIELDS AS OF SEPTEMBER 30, 2006
- --------------------------------------------------------------------------------
30-DAY SEC YIELD
- --------------------------------------------------------------------------------
Investor Class 5.37%
- --------------------------------------------------------------------------------
Institutional Class 5.57%
- --------------------------------------------------------------------------------
Advisor Class 5.11%
- --------------------------------------------------------------------------------
*All fund returns referenced in this commentary are for Investor Class shares.
Total returns for periods less than one year are not annualized.
(continued)
- ------
19
Inflation-Adjusted Bond - Portfolio Commentary
values within the U.S. inflation-linked securities universe. We actively apply a
multi-step process that includes yield-curve/duration positioning, security
selection, portfolio construction, and attribution analysis.
Inflation-Adjusted Bond experienced slight cash outflows over the six months
that were generally met through liquidations of TIPS across a range of
maturities. While making these liquidations toward the end of the six months, we
adjusted the portfolio's bond-maturity structure so that the fund should benefit
if the Treasury yield curve steepens (10-year yields rise above two-year yields;
as of September 30, two-year yields were higher). We accomplished this by
reducing our holdings of bonds maturing within five or fewer years.
We also adjusted the fund's duration. We conservatively positioned the duration
early in the six months, keeping it roughly in line with that of the Citigroup
index as interest-rate uncertainty prevailed in the marketplace. Then, as signs
of moderating economic growth began to support a more bullish outlook, we
conservatively extended the duration, which meant that the fund was better able
to participate in the late-period bond rally.
PORTFOLIO OBJECTIVES AND EXPECTATIONS
Inflation-Adjusted Bond is designed to serve as a supporting/specialty slice of
a portfolio. The fund offers high credit quality, inflation protection, negative
correlations with broad stock indices, and only moderate correlations with broad
bond indices. It is not a steady income producer, owing to the volatile nature
of monthly inflation data and the structure of the fund. Like most other
high-credit-quality bond portfolios, the fund has the potential to perform well
during periods of economic weakness and declining interest rates, and, owing to
its inflation protection feature, it can perform relatively well in bond
selloffs. But if inflation isn't a threat, Inflation-Adjusted Bond can decline
like other bond funds in rising interest rate environments.
PORTFOLIO COMPOSITION BY MATURITY(1)
- --------------------------------------------------------------------------------
% OF FUND % OF FUND
INVESTMENTS INVESTMENTS
AS OF AS OF
9/30/06 3/31/06
- --------------------------------------------------------------------------------
0 - 5-Year Notes(2) 24.3% 27.4%
- --------------------------------------------------------------------------------
5 - 10-Year Notes 45.7% 42.6%
- --------------------------------------------------------------------------------
10 - 30-Year Bonds 30.0% 30.0%
- --------------------------------------------------------------------------------
(1) Excludes collateral received for securities lending.
(2) Includes temporary cash investments.
- ------
20
Inflation-Adjusted Bond - Schedule of Investments
SEPTEMBER 30, 2006 (UNAUDITED)
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES -- 90.6%
$81,536,365 U.S. Treasury Inflation
Indexed Bonds, 2.375%,
1/15/25(1) $ 82,874,132
- --------------------------------------------------------------------------------
89,696,250 U.S. Treasury Inflation
Indexed Bonds, 2.00%,
1/15/26(1) 86,052,430
- --------------------------------------------------------------------------------
68,180,348 U.S. Treasury Inflation
Indexed Bonds, 3.625%,
4/15/28(1) 84,514,382
- --------------------------------------------------------------------------------
69,307,840 U.S. Treasury Inflation
Indexed Bonds, 3.875%,
4/15/29(1)(2) 89,574,977
- --------------------------------------------------------------------------------
28,358,225 U.S. Treasury Inflation
Indexed Bonds, 3.375%,
4/15/32(2) 35,220,717
- --------------------------------------------------------------------------------
268,394 U.S. Treasury Inflation
Indexed Notes, 3.375%,
1/15/07(1) 266,150
- --------------------------------------------------------------------------------
19,898,362 U.S. Treasury Inflation
Indexed Notes, 3.625%,
1/15/08(2) 20,063,936
- --------------------------------------------------------------------------------
35,233,324 U.S. Treasury Inflation
Indexed Notes, 3.875%,
1/15/09(1) 36,255,936
- --------------------------------------------------------------------------------
53,572,433 U.S. Treasury Inflation
Indexed Notes, 4.25%,
1/15/10(1) 56,677,973
- --------------------------------------------------------------------------------
42,314,812 U.S. Treasury Inflation
Indexed Notes, 0.875%,
4/15/10(1) 40,111,480
- --------------------------------------------------------------------------------
30,394,260 U.S. Treasury Inflation
Indexed Notes, 3.50%,
1/15/11(1) 31,845,130
- --------------------------------------------------------------------------------
10,250,600 U.S. Treasury Inflation
Indexed Notes, 2.375%,
4/15/11(1) 10,264,623
- --------------------------------------------------------------------------------
56,088,868 U.S. Treasury Inflation
Indexed Notes, 3.375%,
1/15/12(1) 59,055,464
- --------------------------------------------------------------------------------
70,554,637 U.S. Treasury Inflation
Indexed Notes, 3.00%,
7/15/12(1) 73,225,271
- --------------------------------------------------------------------------------
82,972,722 U.S. Treasury Inflation
Indexed Notes, 1.875%,
7/15/13(1) 80,849,865
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$80,382,490 U.S. Treasury Inflation
Indexed Notes, 2.00%,
1/15/14(1) $ 78,872,183
- --------------------------------------------------------------------------------
79,550,306 U.S. Treasury Inflation
Indexed Notes, 2.00%,
7/15/14(1) 77,990,404
- --------------------------------------------------------------------------------
73,628,814 U.S. Treasury Inflation
Indexed Notes, 1.625%,
1/15/15(1) 70,056,712
- --------------------------------------------------------------------------------
61,897,642 U.S. Treasury Inflation
Indexed Notes, 1.875%,
7/15/15(1) 59,953,723
- --------------------------------------------------------------------------------
41,619,060 U.S. Treasury Inflation
Indexed Notes, 2.00%,
1/15/16(1) 40,676,139
- --------------------------------------------------------------------------------
37,276,390 U.S. Treasury Inflation
Indexed Notes, 2.50%,
7/15/16(1) 38,033,585
- --------------------------------------------------------------------------------
TOTAL U.S. TREASURY SECURITIES
(Cost $1,147,566,956) 1,152,435,212
- --------------------------------------------------------------------------------
CORPORATE BONDS -- 5.4%
26,634,000 SLM Corporation, 1.32%,
1/25/10(2) 25,491,668
- --------------------------------------------------------------------------------
45,117,660 Toyota Motor Credit Corp.
Inflation Indexed Bonds,
1.22%, 10/1/09(2) 43,216,853
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $71,759,031) 68,708,521
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
SECURITIES -- 3.3%
42,377,940 TVA Inflation Indexed Notes,
3.375%, 1/15/07(2)
(Cost $42,657,652) 42,213,514
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS -- 0.1%
Repurchase Agreement, Deutsche Bank
Securities, Inc., (collateralized by various
U.S. Treasury obligations, 0.875%, 4/15/10,
valued at $733,521), in a joint trading
account at 4.95%, dated 9/29/06, due
10/2/06 (Delivery value $719,297)
(Cost $719,000) 719,000
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
21
Inflation-Adjusted Bond - Schedule of Investments
SEPTEMBER 30, 2006 (UNAUDITED)
Value
- --------------------------------------------------------------------------------
COLLATERAL RECEIVED FOR
SECURITIES LENDING(3) -- 32.6%
REPURCHASE AGREEMENTS
- --------------------------------------------------------------------------------
Repurchase Agreement, BNP Paribas,
(collateralized by various U.S. Government
Agency obligations in a pooled account at
the lending agent), 5.37%, dated 9/29/06,
due 10/2/06 (Delivery value $150,067,125) $ 150,000,000
- --------------------------------------------------------------------------------
Repurchase Agreement, Lehman Brothers
Inc., (collateralized by various U.S.
Government Agency obligations in a pooled
account at the lending agent), 5.36%,
dated 9/29/06, due 10/2/06
(Delivery value $200,089,333) 200,000,000
- --------------------------------------------------------------------------------
Value
- --------------------------------------------------------------------------------
Repurchase Agreement, UBS AG,
(collateralized by various U.S. Government
Agency obligations in a pooled account at
the lending agent), 5.375%, dated 9/29/06,
due 10/2/06 (Delivery value $65,331,435) $ 65,302,185
- --------------------------------------------------------------------------------
TOTAL COLLATERAL RECEIVED FOR
SECURITIES LENDING
(Cost $415,302,185) 415,302,185
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 132.0%
(Cost $1,678,004,824) 1,679,378,432
- --------------------------------------------------------------------------------
OTHER ASSETS AND
LIABILITIES -- (32.0)% (407,535,426)
- --------------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $1,271,843,006
================================================================================
FUTURES CONTRACTS
Expiration Underlying Face Unrealized
Contracts Purchased Date Amount at Value Gain (Loss)
- --------------------------------------------------------------------------------
953 U.S. Treasury
2-Year Notes December 2006 $194,888,500 $217,168
==================================
Expiration Underlying Face Unrealized
Contracts Sold Date Amount at Value Gain (Loss)
- --------------------------------------------------------------------------------
508 U.S. Treasury
10-Year Notes December 2006 $54,895,750 $(310,580)
==================================
NOTES TO SCHEDULE OF INVESTMENTS
TVA = Tennessee Valley Authority
(1) Security, or a portion thereof, was on loan as of September 30, 2006.
(2) Security, or a portion thereof, has been segregated for futures contracts.
(3) Investments represent purchases made by the lending agent with cash
collateral received through securities lending transactions. (See Note 5 in
Notes to Financial Statements.)
See Notes to Financial Statements.
- ------
22
Short-Term Government - Performance
TOTAL RETURNS AS OF SEPTEMBER 30, 2006
----------------------------
AVERAGE ANNUAL RETURNS
- --------------------------------------------------------------------------------
SINCE INCEPTION
6 MONTHS(1) 1 YEAR 5 YEARS 10 YEARS INCEPTION DATE
- --------------------------------------------------------------------------------
INVESTOR CLASS 2.61% 3.71% 2.40% 4.21% 6.00% 12/15/82
- --------------------------------------------------------------------------------
CITIGROUP U.S.
TREASURY/AGENCY
1- TO 3-YEAR
INDEX 2.67% 3.81% 2.94% 4.89% 6.98%(2) --
- --------------------------------------------------------------------------------
Advisor Class 2.49% 3.45% 2.15% -- 3.55% 7/8/98
- --------------------------------------------------------------------------------
(1) Total returns for periods less than one year are not annualized.
(2) Since 12/31/82, the date nearest the Investor Class's inception for which
data are available.
GROWTH OF $10,000 OVER 10 YEARS
$10,000 investment made September 30, 1996
ONE-YEAR RETURNS OVER 10 YEARS
Periods ended September 30
- ----------------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
- ----------------------------------------------------------------------------------------------------
Investor Class 6.19% 7.29% 1.67% 5.78% 9.50% 4.70% 1.90% 0.36% 1.40% 3.71%
- ----------------------------------------------------------------------------------------------------
Citigroup U.S.
Treasury/Agency
1- to 3-Year Index 6.88% 7.92% 3.28% 5.92% 10.59% 5.87% 2.85% 1.13% 1.10% 3.81%
- ----------------------------------------------------------------------------------------------------
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-2021 or visit
americancentury.com. As interest rates rise, bond values will decline.
Unless otherwise indicated, performance reflects Investor Class shares;
performance for other share classes will vary due to differences in fee
structure. For information about other share classes available, please consult
the prospectus. Data assumes reinvestment of dividends and capital gains, and
none of the charts reflect the deduction of taxes that a shareholder would pay
on fund distributions or the redemption of fund shares. Returns for the index
are provided for comparison. The fund's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the index do not.
- ------
23
Short-Term Government - Portfolio Commentary
PORTFOLIO MANAGERS: BOB GAHAGAN, HANDO AGUILAR, BRIAN HOWELL, AND DAN SHIFFMAN
PERFORMANCE SUMMARY
Short-Term Government returned 2.61%* for the six months ended September 30,
2006. By comparison, the Citigroup U.S. Treasury/Agency 1- to 3-Year Index
returned 2.67%. The portfolio's results reflected operating expenses, while the
index returns did not.
Though the Fed's interest rate pause and one of the strongest quarterly bond
rallies this decade boosted all sectors of the taxable investment-grade U.S.
bond market in the third quarter of 2006 (and for the full six-month period),
they helped some sectors more than others. Relative performance between sectors,
sector weightings, and maturity and duration positions (which help determine
portfolio sensitivity to interest rate changes) helped determine the returns of
Short-Term Government and the index.
The relatively short durations of Short-Term Government and the Citigroup index
played an important role in their absolute performance. During the second
quarter, when the bond market sold off, short duration was a boon. But during
the third-quarter bond rally--and ultimately for the entire six-month
period--longer duration was the way to go. The fund's--and the
index's--inherently shorter durations caused them to trail broader bond market
benchmarks such as the Citigroup US Broad Investment-Grade Bond Index (BIG) and
the Lehman Brothers U.S. Aggregate Index. In bond market rallies,
shorter-maturity/duration securities underperform long-maturity/duration bonds.
SECTOR COMPOSITION OF THE PORTFOLIO
Short-Term Government typically invests in Treasurys, government agency
securities, and mortgage-backed securities (MBS). The fund may also hold up to
20% of its assets in U.S. corporate paper and non-U.S. government
mortgage-backed, asset-backed (ABS), commercial mortgage-backed securities
(CMBS), and other fixed-income securities. The portfolio's sector composition is
shown in the Types of Investments table on page 25.
PORTFOLIO STRATEGY
Our investment approach uses a consistent, repeatable framework that seeks to
identify the best relative value among the bond sectors described above. We
actively apply a multi-step process, which includes yield curve/duration
positioning, security selection, portfolio
PORTFOLIO AT A GLANCE
- --------------------------------------------------------------------------------
AS OF AS OF
9/30/06 3/31/06
- --------------------------------------------------------------------------------
Weighted Average
Maturity 1.9 years 2.4 years
- --------------------------------------------------------------------------------
Average Duration
(effective) 1.8 years 1.6 years
- --------------------------------------------------------------------------------
YIELDS AS OF SEPTEMBER 30, 2006
- --------------------------------------------------------------------------------
30-DAY SEC YIELD
- --------------------------------------------------------------------------------
Investor Class 4.48%
- --------------------------------------------------------------------------------
Advisor Class 4.24%
- --------------------------------------------------------------------------------
*All fund returns referenced in this commentary are for Investor Class shares.
Total returns for periods less than one year are not annualized.
(continued)
- ------
24
Short-Term Government - Portfolio Commentary
construction, and attribution analysis. Under normal market conditions, we
maintain a weighted average maturity of three years or less in the portfolio.
Our strategy to underweight Treasurys and overweight "spread product" in 2006
(spread product consists of typically higher-yielding, non-Treasury securities
such as agencies and MBS) benefited the fund during the period, since spread
product had higher excess returns than Treasurys. One of the main drivers behind
Short-Term Government's strong relative performance was its significant
overweight in CMBS, which offered the highest excess returns in the taxable bond
market.
Duration also played a role--though a less important one--in Short-Term
Government's performance versus the Citigroup index. We maintained a slightly
short- to neutral duration stance versus the index. During the first half of the
period, this helped buffer returns to some degree from bond market declines that
occurred between March and June. We lengthened the duration slightly in the
second half, which helped the portfolio achieve better relative results when the
bond market rallied sharply in the latter half of the period.
PORTFOLIO OBJECTIVES AND EXPECTATIONS
Short-Term Government is designed for investors who are looking for higher
income than is typically available from money market funds, and who prefer the
high degree of credit quality provided by U.S Treasury and U.S. government
agency securities. It can serve as a core bond holding and a portfolio
diversifier, offering returns that are negatively correlated with those provided
by broad stock market investments. Because of its relatively short average
maturity and duration, Short-Term Government is subject to less share-price
fluctuation than intermediate- or long-term bond funds. This benefits the fund
during bond market selloffs like we saw in the first half of 2006, but it can
detract from relative performance when the market rallies, as it did in the
third quarter of 2006.
TYPES OF INVESTMENTS IN PORTFOLIO
- --------------------------------------------------------------------------------
% OF FUND % OF FUND
INVESTMENTS INVESTMENTS
AS OF AS OF
9/30/06 3/31/06
- --------------------------------------------------------------------------------
Collateralized Mortgage
Obligations 37.2% 32.4%
- --------------------------------------------------------------------------------
U.S. Government
Agency Securities 27.6% 29.8%
- --------------------------------------------------------------------------------
U.S. Government Agency
Mortgage-Backed
Securities 14.4% 12.7%
- --------------------------------------------------------------------------------
U.S. Treasury Securities
and Equivalents 9.0% 9.0%
- --------------------------------------------------------------------------------
Asset-Backed Securities 3.7% 3.5%
- --------------------------------------------------------------------------------
Temporary Cash
Investments 0.6% 0.3%
- --------------------------------------------------------------------------------
Collateral Received for
Securities Lending 7.5% 12.3%
- --------------------------------------------------------------------------------
- ------
25
Short-Term Government - Schedule of Investments
SEPTEMBER 30, 2006 (UNAUDITED)
Principal Amount Value
- --------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE
OBLIGATIONS(1) -- 43.7%
$ 6,848,031 Bank of America
Commercial Mortgage Inc.,
Series 2004-1, Class A1
SEQ, 3.16%, 11/10/39(2) $ 6,630,517
- --------------------------------------------------------------------------------
9,600,000 Bank of America
Commercial Mortgage Inc.,
Series 2004-2, Class A3
SEQ, 4.05%, 11/10/38(2) 9,208,435
- --------------------------------------------------------------------------------
66,092,255 Bear Stearns Commercial
Mortgage Securities
STRIPS - COUPON, Series
2004 T16, Class X2, VRN,
0.77%, 10/1/06(2) 2,197,832
- --------------------------------------------------------------------------------
74,999,741 Commercial Mortgage
Acceptance Corp. STRIPS -
COUPON, Series 1998 C2,
Class X, VRN, 1.00%,
10/1/06(2) 2,077,418
- --------------------------------------------------------------------------------
1,184,920 FHLMC, Series 2552,
Class HA SEQ, 5.00%,
9/15/16 1,178,219
- --------------------------------------------------------------------------------
10,424,559 FHLMC, Series 2624,
Class FE SEQ, VRN, 5.63%,
10/15/06, resets monthly off
the 1-month LIBOR plus
0.30% with a cap of 8.00% 10,447,243
- --------------------------------------------------------------------------------
8,594,167 FHLMC, Series 2625,
Class FJ SEQ, VRN, 5.63%,
10/15/06, resets monthly off
the 1-month LIBOR plus
0.30% with a cap of 7.50%(2) 8,611,880
- --------------------------------------------------------------------------------
3,362,776 FHLMC, Series 2672,
Class QR, 4.00%, 9/15/10 3,272,482
- --------------------------------------------------------------------------------
8,147,280 FHLMC, Series 2688,
Class DE SEQ, 4.50%,
2/15/20 7,991,251
- --------------------------------------------------------------------------------
1,561,736 FHLMC, Series 2689,
Class PY, 4.00%, 2/15/10 1,559,093
- --------------------------------------------------------------------------------
3,311,903 FHLMC, Series 2699,
Class TG, 4.00%, 5/15/17 3,191,578
- --------------------------------------------------------------------------------
550,474 FHLMC, Series 2706,
Class UA, 3.50%, 4/15/09 549,765
- --------------------------------------------------------------------------------
115,129 FHLMC, Series 2709,
Class PA, 3.75%, 1/15/11 114,989
- --------------------------------------------------------------------------------
13,311,370 FHLMC, Series 2718,
Class FW, VRN, 5.68%,
10/15/06, resets monthly off
the 1-month LIBOR plus
0.35% with a cap of 8.00% 13,384,529
- --------------------------------------------------------------------------------
9,440,059 FHLMC, Series 2743,
Class OK, 4.00%, 4/15/21 9,320,869
- --------------------------------------------------------------------------------
8,270,588 FHLMC, Series 2764,
Class OA, 3.50%, 4/15/10 8,235,033
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 5,256,046 FHLMC, Series 2779,
Class FM SEQ, VRN, 5.68%,
10/16/06, resets monthly off
the 1-month LIBOR plus
0.35% with a cap of 7.50% $ 5,280,245
- --------------------------------------------------------------------------------
21,037,841 FHLMC, Series 2780,
Class BD SEQ, 4.50%,
10/15/17 20,773,122
- --------------------------------------------------------------------------------
11,111,594 FHLMC, Series 2827,
Class F, VRN, 5.68%,
10/15/06, resets monthly off
the 1-month LIBOR plus
0.35% with a cap of 7.50%(2) 11,161,074
- --------------------------------------------------------------------------------
7,622,292 FHLMC, Series 2831,
Class AF, VRN, 5.63%,
10/15/06, resets monthly off
the 1-month LIBOR plus
0.30% with a cap of 7.50% 7,645,395
- --------------------------------------------------------------------------------
9,311,878 FHLMC, Series 2888,
Class GA, 4.00%, 10/15/11 9,227,093
- --------------------------------------------------------------------------------
2,740,463 FHLMC, Series 2890,
Class AB SEQ, 3.75%,
12/15/11 2,663,670
- --------------------------------------------------------------------------------
10,770,901 FHLMC, Series 2900,
Class PA, 4.50%, 3/15/14 10,668,114
- --------------------------------------------------------------------------------
26,784,185 FHLMC, Series 2931,
Class QA, 4.50%, 4/15/15 26,505,951
- --------------------------------------------------------------------------------
14,212,420 FHLMC, Series 2937,
Class KA, 4.50%, 12/15/14 14,078,468
- --------------------------------------------------------------------------------
16,259,094 FHLMC, Series 2941,
Class XA, 5.00%, 2/15/25 16,178,840
- --------------------------------------------------------------------------------
673,449 FHLMC, Series 2943,
Class HA, 5.00%, 9/15/19 670,693
- --------------------------------------------------------------------------------
2,219,195 FNMA, Series 2002-71,
Class UB, 5.00%, 11/25/15 2,205,214
- --------------------------------------------------------------------------------
11,214,649 FNMA, Series 2002-83,
Class GM, 5.00%, 5/25/16 11,140,745
- --------------------------------------------------------------------------------
5,053,606 FNMA, Series 2002-86,
Class KB, SEQ, 5.00%,
5/25/16 5,020,732
- --------------------------------------------------------------------------------
16,753,502 FNMA, Series 2003-17,
Class FN, VRN, 5.63%,
10/25/06, resets monthly off
the 1-month LIBOR plus
0.30% with no caps 16,839,716
- --------------------------------------------------------------------------------
8,787,037 FNMA, Series 2003-24,
Class BF, VRN, 5.68%,
10/25/06, resets monthly off
the 1-month LIBOR plus
0.35% with no caps 8,822,431
- --------------------------------------------------------------------------------
2,425,235 FNMA, Series 2003-3,
Class HA, 5.00%, 9/25/16 2,405,804
- --------------------------------------------------------------------------------
3,781,957 FNMA, Series 2003-35,
Class KC, 4.50%, 4/25/17 3,727,543
- --------------------------------------------------------------------------------
7,358,367 FNMA, Series 2003-42,
Class FK, VRN, 5.73%,
10/25/06, resets monthly off
the 1-month LIBOR plus
0.40% with a cap of 7.50% 7,406,211
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
26
Short-Term Government - Schedule of Investments
SEPTEMBER 30, 2006 (UNAUDITED)
Principal Amount Value
- --------------------------------------------------------------------------------
$ 9,292,210 FNMA, Series 2003-43,
Class LF, VRN, 5.68%,
10/25/06, resets monthly off
the 1-month LIBOR plus
0.35% with a cap of 8.00% $ 9,339,247
- --------------------------------------------------------------------------------
7,502,957 FNMA, Series 2004 W5,
Class F1, VRN, 5.78%,
10/25/06, resets monthly off
the 1-month LIBOR plus
0.45% with a cap of 7.50% 7,550,556
- --------------------------------------------------------------------------------
5,864,431 FNMA, Series 2004-50,
Class MA, 4.50%, 5/25/19 5,829,796
- --------------------------------------------------------------------------------
25,492,621 GMAC Commercial Mortgage
Securities, Inc. STRIPS -
COUPON, Series 2000 C3,
Class X, VRN, 1.06%,
10/1/06 (Acquired 2/22/02,
Cost $1,753,613)(3) 1,036,759
- --------------------------------------------------------------------------------
20,000,000 GMAC Commercial Mortgage
Securities, Inc., Series
2005 C1, Class A2 SEQ,
4.47%, 5/10/43(2) 19,603,791
- --------------------------------------------------------------------------------
13,155,000 Greenwich Capital
Commercial Funding Corp.,
Series 2005 GG3,
Class A2 SEQ, VRN, 4.31%,
10/1/06(2) 12,860,039
- --------------------------------------------------------------------------------
9,000,000 LB-UBS Commercial
Mortgage Trust, Series
2003 C3, Class A3 SEQ,
3.85%, 5/11/27(2) 8,512,785
- --------------------------------------------------------------------------------
15,000,000 LB-UBS Commercial
Mortgage Trust, Series
2004 C4, Class A2, VRN,
4.57%, 10/11/06(2) 14,811,165
- --------------------------------------------------------------------------------
27,250,000 LB-UBS Commercial
Mortgage Trust, Series
2005 C2, Class A2 SEQ,
4.82%, 4/15/30 26,971,804
- --------------------------------------------------------------------------------
10,000,000 Merrill Lynch Mortgage
Trust, Series 2006 C1,
Class A2, VRN, 5.61%,
10/1/06(2) 10,196,800
- --------------------------------------------------------------------------------
6,364,994 Morgan Stanley Capital I,
Series 2004 T13, Class A1
SEQ, 2.85%, 9/13/45(2) 6,163,853
- --------------------------------------------------------------------------------
10,041,210 Washington Mutual, Inc.,
Series 2002 AR19, Class A6,
4.16%, 2/25/33(2) 9,960,208
- --------------------------------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $404,002,477) 403,228,997
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
SECURITIES -- 32.4%
52,950,000 FHLB, 4.25%, 4/16/07(2) 52,664,493
- --------------------------------------------------------------------------------
29,890,000 FHLB, 4.00%, 3/10/08(2) 29,479,491
- --------------------------------------------------------------------------------
23,100,000 FHLMC, 6.625%, 9/15/09(4) 24,166,227
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$18,500,000 FHLMC, 6.00%, 6/27/11(2) $ 18,586,340
- --------------------------------------------------------------------------------
37,000,000 FNMA, 4.75%, 8/3/07(2) 36,871,536
- --------------------------------------------------------------------------------
137,725,000 FNMA, 5.00%, 9/14/07(2) 137,531,909
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY
SECURITIES
(Cost $299,055,247) 299,299,996
- --------------------------------------------------------------------------------
FIXED-RATE U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES(1) -- 15.8%
3,855,272 FHLMC, 5.00%, 6/1/09(2) 3,820,539
- --------------------------------------------------------------------------------
7,690,301 FHLMC, 5.00%, 7/1/09(2) 7,621,019
- --------------------------------------------------------------------------------
265,989 FHLMC, 6.50%, 1/1/11 269,494
- --------------------------------------------------------------------------------
474,843 FHLMC, 6.50%, 5/1/11 482,893
- --------------------------------------------------------------------------------
423,669 FHLMC, 6.50%, 12/1/12 431,212
- --------------------------------------------------------------------------------
1,203,312 FHLMC, 6.00%, 2/1/13 1,213,764
- --------------------------------------------------------------------------------
71,355 FHLMC, 7.00%, 11/1/13 73,270
- --------------------------------------------------------------------------------
55,519 FHLMC, 7.00%, 12/1/14 57,005
- --------------------------------------------------------------------------------
2,070,129 FHLMC, 6.00%, 1/1/15 2,100,133
- --------------------------------------------------------------------------------
847,368 FHLMC, 7.50%, 5/1/16 882,815
- --------------------------------------------------------------------------------
1,824,846 FHLMC, 5.50%, 11/1/17(2) 1,828,970
- --------------------------------------------------------------------------------
16,476,560 FHLMC, 5.50%, 11/1/18(2) 16,507,981
- --------------------------------------------------------------------------------
11,644,592 FHLMC, 4.50%, 6/1/19 11,238,278
- --------------------------------------------------------------------------------
20,760,000 FNMA, 6.00%, settlement
date 10/12/06(5) 20,857,323
- --------------------------------------------------------------------------------
18,360,000 FNMA, 5.50%, settlement
date 10/13/06(5) 18,090,328
- --------------------------------------------------------------------------------
36,175,000 FNMA, 6.50%, settlement
date 10/13/06(5) 36,841,994
- --------------------------------------------------------------------------------
5,468,520 FNMA, 5.50%, settlement
date 10/18/06(5) 5,466,814
- --------------------------------------------------------------------------------
31,333 FNMA, 8.00%, 5/1/12 32,601
- --------------------------------------------------------------------------------
1,762,075 FNMA, 6.50%, 1/1/13(2) 1,799,089
- --------------------------------------------------------------------------------
19,020 FNMA, 6.50%, 3/1/13 19,420
- --------------------------------------------------------------------------------
190,836 FNMA, 6.00%, 6/1/13 193,199
- --------------------------------------------------------------------------------
25,541 FNMA, 6.50%, 6/1/13 26,123
- --------------------------------------------------------------------------------
52,558 FNMA, 6.00%, 1/1/14 53,168
- --------------------------------------------------------------------------------
462,289 FNMA, 6.00%, 7/1/14 469,529
- --------------------------------------------------------------------------------
725,306 FNMA, 5.50%, 4/1/16 727,601
- --------------------------------------------------------------------------------
10,764,465 FNMA, 4.50%, 5/1/19 10,403,845
- --------------------------------------------------------------------------------
1,280,540 FNMA, 7.00%, 5/1/32 1,318,371
- --------------------------------------------------------------------------------
1,977,371 FNMA, 7.00%, 6/1/32 2,035,868
- --------------------------------------------------------------------------------
957,590 FNMA, 7.00%, 8/1/32 985,880
- --------------------------------------------------------------------------------
11,372 GNMA, 5.50%, 1/20/09 11,333
- --------------------------------------------------------------------------------
27,828 GNMA, 9.00%, 12/20/16 29,692
- --------------------------------------------------------------------------------
26,569 GNMA, 9.00%, 8/20/17 28,361
- --------------------------------------------------------------------------------
20,774 GNMA, 9.50%, 11/20/19 22,625
- --------------------------------------------------------------------------------
TOTAL FIXED-RATE U.S. GOVERNMENT
AGENCY MORTGAGE-BACKED
SECURITIES
(Cost $146,981,587) 145,940,537
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
27
Short-Term Government - Schedule of Investments
SEPTEMBER 30, 2006 (UNAUDITED)
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES -- 8.8%
$ 9,533,058 U.S. Treasury Inflation
Indexed Notes, 2.375%,
4/15/11(4) $ 9,546,099
- --------------------------------------------------------------------------------
25,500,000 U.S. Treasury Notes,
4.375%, 12/31/07(4) 25,357,583
- --------------------------------------------------------------------------------
40,000,000 U.S. Treasury Notes,
5.125%, 6/30/08(4) 40,268,760
- --------------------------------------------------------------------------------
5,870,000 U.S. Treasury Notes,
4.875%, 4/30/11(4) 5,937,188
- --------------------------------------------------------------------------------
TOTAL U.S. TREASURY SECURITIES
(Cost $80,874,681) 81,109,630
- --------------------------------------------------------------------------------
ASSET-BACKED SECURITIES(1) -- 4.3%
243,027 Ameriquest Mortgage
Securities Inc., Series
2003-8, Class AV2, VRN,
5.76%, 10/25/06, resets
monthly off the 1-month
LIBOR plus 0.43% with
no caps 244,201
- --------------------------------------------------------------------------------
10,000,000 CNH Equipment Trust,
Series 2005 B, Class A3
SEQ, 4.27%, 1/15/10(2) 9,877,720
- --------------------------------------------------------------------------------
30,000,000 Ford Credit Auto Owner
Trust, Series 2005 A,
Class A4 SEQ, 3.72%,
10/15/09(2) 29,465,760
- --------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost $40,241,153) 39,587,681
- --------------------------------------------------------------------------------
ZERO-COUPON U.S. TREASURY
SECURITIES AND EQUIVALENTS(6) -- 1.7%
15,000,000 BECC, 3.28%, 11/15/11(2) 14,908,650
- --------------------------------------------------------------------------------
382,500 TIGR, 3.21%, 11/15/06 223,643
- --------------------------------------------------------------------------------
1,077,000 TR, 3.23%, 11/15/06(2) 1,070,505
- --------------------------------------------------------------------------------
100,000 U.S. Treasury Corpus,
3.28%, 11/15/06 99,391
- --------------------------------------------------------------------------------
TOTAL ZERO-COUPON U.S. TREASURY
SECURITIES AND EQUIVALENTS
(Cost $16,348,872) 16,302,189
- --------------------------------------------------------------------------------
ADJUSTABLE-RATE U.S GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES(1) -- 1.1%
24,905 FHLMC, 5.97%, 8/1/18 25,230
- --------------------------------------------------------------------------------
91,807 FHLMC, 5.92%, 11/1/18 91,980
- --------------------------------------------------------------------------------
432,905 FHLMC, 6.80%, 9/1/20 442,630
- --------------------------------------------------------------------------------
59,184 FHLMC, 5.375%, 1/1/21 59,288
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 72,201 FHLMC, 7.88%, 3/1/24 $ 73,124
- --------------------------------------------------------------------------------
17,063 FNMA, 7.49%, 8/1/14 17,054
- --------------------------------------------------------------------------------
109,298 FNMA, 6.375%, 4/1/16 110,204
- --------------------------------------------------------------------------------
51,704 FNMA, 6.66%, 1/1/17 52,541
- --------------------------------------------------------------------------------
288,807 FNMA, 5.96%, 5/1/17 292,702
- --------------------------------------------------------------------------------
154,475 FNMA, 5.57%, 7/1/17 154,445
- --------------------------------------------------------------------------------
64,577 FNMA, 5.85%, 7/1/17 65,425
- --------------------------------------------------------------------------------
122,738 FNMA, 5.95%, 2/1/18 123,920
- --------------------------------------------------------------------------------
43,250 FNMA, 7.50%, 2/1/18 44,620
- --------------------------------------------------------------------------------
73,398 FNMA, 6.70%, 5/1/18 73,890
- --------------------------------------------------------------------------------
50,631 FNMA, 6.68%, 6/1/18 51,802
- --------------------------------------------------------------------------------
78,693 FNMA, 6.71%, 8/1/19 79,157
- --------------------------------------------------------------------------------
442,186 FNMA, 6.36%, 9/1/19 443,319
- --------------------------------------------------------------------------------
144,903 FNMA, 6.54%, 1/1/20 147,510
- --------------------------------------------------------------------------------
55,273 FNMA, 6.77%, 3/1/21 55,869
- --------------------------------------------------------------------------------
49,456 FNMA, 5.44%, 8/1/21 49,009
- --------------------------------------------------------------------------------
63,631 FNMA, 5.81%, 5/1/22 64,583
- --------------------------------------------------------------------------------
69,917 FNMA, 6.33%, 5/1/22 70,363
- --------------------------------------------------------------------------------
21,155 FNMA, 6.61%, 1/1/23 21,388
- --------------------------------------------------------------------------------
11,173 FNMA, 7.375%, 6/1/23 11,422
- --------------------------------------------------------------------------------
14,013 FNMA, 7.375%, 7/1/23 14,326
- --------------------------------------------------------------------------------
73,246 FNMA, 6.62%, 8/1/23 74,709
- --------------------------------------------------------------------------------
246,064 FNMA, 6.63%, 8/1/23 250,471
- --------------------------------------------------------------------------------
1,274,156 FNMA, 5.77%, 5/1/25 1,298,428
- --------------------------------------------------------------------------------
16,396 FNMA, 4.97%, 4/1/26 16,451
- --------------------------------------------------------------------------------
18,483 FNMA, 4.70%, 1/1/27 18,547
- --------------------------------------------------------------------------------
16,739 FNMA, 6.47%, 1/1/27 17,010
- --------------------------------------------------------------------------------
35,756 FNMA, 4.97%, 1/1/29 36,309
- --------------------------------------------------------------------------------
5,506,035 FNMA, 4.59%, 10/1/33(2) 5,473,516
- --------------------------------------------------------------------------------
44,950 GNMA, 5.375%, 5/20/17 45,151
- --------------------------------------------------------------------------------
95,398 GNMA, 5.875%, 2/20/21 97,275
- --------------------------------------------------------------------------------
40,885 GNMA, 5.625%, 11/20/21 41,224
- --------------------------------------------------------------------------------
1,133 GNMA, 5.375%, 1/20/22 1,142
- --------------------------------------------------------------------------------
25,528 GNMA, 5.25%, 8/20/26 26,000
- --------------------------------------------------------------------------------
TOTAL ADJUSTABLE-RATE U.S
GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES
(Cost $10,316,441) 10,032,034
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS -- 0.7%
6,321,000 FHLB Discount Notes,
4.75%, 10/2/06(2)(7)
(Cost $6,320,166) 6,321,000
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
28
Short-Term Government - Schedule of Investments
SEPTEMBER 30, 2006 (UNAUDITED)
Value
- --------------------------------------------------------------------------------
COLLATERAL RECEIVED FOR
SECURITIES LENDING(8) -- 8.8%
Repurchase Agreement, UBS AG,
(collateralized by various U.S. Government
Agency obligations in a pooled account at
the lending agent), 5.375%, dated 9/29/06,
due 10/2/06 (Delivery value $81,579,202)
(Cost $81,542,678) $ 81,542,678
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 117.3%
(Cost $1,085,683,302) 1,083,364,742
- --------------------------------------------------------------------------------
OTHER ASSETS AND
LIABILITIES -- (17.3)% (159,864,230)
- --------------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $ 923,500,512
================================================================================
FUTURES CONTRACTS
Expiration Underlying Face Unrealized
Contracts Purchased Date Amount at Value Gain (Loss)
- --------------------------------------------------------------------------------
1,454 U.S. Treasury
2-Year Notes December 2006 $297,343,000 $319,697
==================================
Expiration Underlying Face Unrealized
Contracts Sold Date Amount at Value Gain (Loss)
- --------------------------------------------------------------------------------
865 U.S. Treasury
5-Year Notes December 2006 $ 91,271,016 $(420,462)
- --------------------------------------------------------------------------------
140 U.S. Treasury
10-Year Notes December 2006 15,128,750 (160,002)
$106,399,766 $(580,464)
==================================
NOTES TO SCHEDULE OF INVESTMENTS
BECC = Book Entry Callable Corpus
Equivalent = Security whose principal payments are secured by U.S. Treasurys
FHLB = Federal Home Loan Bank
FHLMC = Federal Home Loan Mortgage Corporation
FNMA = Federal National Mortgage Association
GMAC = General Motors Acceptance Corporation
GNMA = Government National Mortgage Association
LB-UBS = Lehman Brothers Inc. -- UBS AG
LIBOR = London Interbank Offered Rate
resets = The frequency with which a security's coupon changes, based on current
market conditions or an underlying index. The more frequently a
security resets, the less risk the investor is taking that the coupon
will vary significantly from current market rates.
SEQ = Sequential Payer
STRIPS = Separate Trading of Registered Interest and Principal of Securities
TIGR = Treasury Investment Growth Receipts
TR = Treasury Receipts
VRN = Variable Rate Note. Interest reset date is indicated. Rate shown is
effective September 30, 2006.
(1) Final maturity indicated, unless otherwise noted.
(2) Security, or a portion thereof, has been segregated for forward commitments
and/or futures contracts.
(3) Security was purchased under Rule 144A of the Securities Act of 1933 or is a
private placement and, unless registered under the Act or exempted from
registration, may only be sold to qualified institutional investors. The
aggregate value of restricted securities at September 30, 2006 was
$1,036,759, which represented 0.1% of total net assets.
(4) Security, or a portion thereof, was on loan as of September 30, 2006
(5) Forward commitment.
(6) The rate indicated is the yield to maturity at purchase. These securities
are issued at a substantial discount from their value at maturity.
(7) The rate indicated is the yield to maturity at purchase.
(8) Investments represent purchases made by the lending agent with cash
collateral received through securities lending transactions. (See Note 5 in
Notes to Financial Statements.)
See Notes to Financial Statements.
- ------
29
Shareholder Fee Examples (Unaudited)
Fund shareholders may incur two types of costs: (1) transaction costs, including
sales charges (loads) on purchase payments and redemption/exchange fees; and (2)
ongoing costs, including management fees; distribution and service (12b-1) fees;
and other fund expenses. This example is intended to help you understand your
ongoing costs (in dollars) of investing in your fund and to compare these costs
with the ongoing cost of investing in other mutual funds.
The example is based on an investment of $1,000 made at the beginning of the
period and held for the entire period from April 1, 2006 to September 30, 2006.
ACTUAL EXPENSES
The table provides information about actual account values and actual expenses
for each class. You may use the information, together with the amount you
invested, to estimate the expenses that you paid over the period. First,
identify the share class you own. Then simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number under the heading "Expenses Paid During
Period" to estimate the expenses you paid on your account during this period.
If you hold Investor Class shares of any American Century fund, or Institutional
Class shares of the American Century Diversified Bond Fund, in an American
Century account (i.e., not a financial intermediary or retirement plan account),
American Century may charge you a $12.50 semiannual account maintenance fee if
the value of those shares is less than $10,000. We will redeem shares
automatically in one of your accounts to pay the $12.50 fee. In determining your
total eligible investment amount, we will include your investments in all
PERSONAL ACCOUNTS (including American Century Brokerage accounts) registered
under your Social Security number. PERSONAL ACCOUNTS include individual
accounts, joint accounts, UGMA/UTMA accounts, personal trusts, Coverdell
Education Savings Accounts and IRAs (including traditional, Roth, Rollover,
SEP-, SARSEP- and SIMPLE-IRAs), and certain other retirement accounts. If you
have only business, business retirement, employer-sponsored or American Century
Brokerage accounts, you are currently not subject to this fee. We will not
charge the fee as long as you choose to manage your accounts exclusively online.
If you are subject to the Account Maintenance Fee, your account value could be
reduced by the fee amount.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table also provides information about hypothetical account values and
hypothetical expenses based on the actual expense ratio of each class of your
fund and an assumed rate of return of 5% per year before expenses, which is not
the actual return of a fund's share class. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in your fund and other funds. To do so, compare this
5% hypothetical example with the 5% hypothetical examples that appear in the
shareholder reports of the other funds.
(continued)
- ------
30
Shareholder Fee Examples (Unaudited)
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption/exchange fees. Therefore, the table is useful in
comparing ongoing costs only, and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
- --------------------------------------------------------------------------------
EXPENSES PAID
BEGINNING ENDING DURING PERIOD* ANNUALIZED
ACCOUNT VALUE ACCOUNT VALUE 4/1/06 - EXPENSE
4/1/06 9/30/06 9/30/06 RATIO*
- --------------------------------------------------------------------------------
GINNIE MAE SHAREHOLDER FEE EXAMPLE
- --------------------------------------------------------------------------------
ACTUAL
- --------------------------------------------------------------------------------
Investor Class $1,000 $1,029.00 $2.90 0.57%
- --------------------------------------------------------------------------------
Advisor Class $1,000 $1,027.80 $4.17 0.82%
- --------------------------------------------------------------------------------
C Class $1,000 $1,023.90 $7.97 1.57%
- --------------------------------------------------------------------------------
HYPOTHETICAL
- --------------------------------------------------------------------------------
Investor Class $1,000 $1,022.21 $2.89 0.57%
- --------------------------------------------------------------------------------
Advisor Class $1,000 $1,020.96 $4.15 0.82%
- --------------------------------------------------------------------------------
C Class $1,000 $1,017.20 $7.94 1.57%
- --------------------------------------------------------------------------------
GOVERNMENT BOND SHAREHOLDER FEE EXAMPLE
- --------------------------------------------------------------------------------
ACTUAL
- --------------------------------------------------------------------------------
Investor Class $1,000 $1,033.80 $2.50 0.49%
- --------------------------------------------------------------------------------
Advisor Class $1,000 $1,032.50 $3.77 0.74%
- --------------------------------------------------------------------------------
HYPOTHETICAL
- --------------------------------------------------------------------------------
Investor Class $1,000 $1,022.61 $2.48 0.49%
- --------------------------------------------------------------------------------
Advisor Class $1,000 $1,021.36 $3.75 0.74%
- --------------------------------------------------------------------------------
*Expenses are equal to the class's annualized expense ratio listed in the table
above, multiplied by the average account value over the period, multiplied by
183, the number of days in the most recent fiscal half-year, divided by 365, to
reflect the one-half year period.
(continued)
- ------
31
Shareholder Fee Examples (Unaudited)
- --------------------------------------------------------------------------------
EXPENSES PAID
BEGINNING ENDING DURING PERIOD* ANNUALIZED
ACCOUNT VALUE ACCOUNT VALUE 4/1/06 - EXPENSE
4/1/06 9/30/06 9/30/06 RATIO*
- --------------------------------------------------------------------------------
INFLATION-ADJUSTED BOND SHAREHOLDER FEE EXAMPLE
- --------------------------------------------------------------------------------
ACTUAL
- --------------------------------------------------------------------------------
Investor Class $1,000 $1,037.80 $2.50 0.49%
- --------------------------------------------------------------------------------
Institutional Class $1,000 $1,038.90 $1.48 0.29%
- --------------------------------------------------------------------------------
Advisor Class $1,000 $1,036.50 $3.78 0.74%
- --------------------------------------------------------------------------------
HYPOTHETICAL
- --------------------------------------------------------------------------------
Investor Class $1,000 $1,022.61 $2.48 0.49%
- --------------------------------------------------------------------------------
Institutional Class $1,000 $1,023.61 $1.47 0.29%
- --------------------------------------------------------------------------------
Advisor Class $1,000 $1,021.36 $3.75 0.74%
- --------------------------------------------------------------------------------
SHORT-TERM GOVERNMENT SHAREHOLDER FEE EXAMPLE
- --------------------------------------------------------------------------------
ACTUAL
- --------------------------------------------------------------------------------
Investor Class $1,000 $1,026.10 $2.90 0.57%
- --------------------------------------------------------------------------------
Advisor Class $1,000 $1,024.90 $4.16 0.82%
- --------------------------------------------------------------------------------
HYPOTHETICAL
- --------------------------------------------------------------------------------
Investor Class $1,000 $1,022.21 $2.89 0.57%
- --------------------------------------------------------------------------------
Advisor Class $1,000 $1,020.96 $4.15 0.82%
- --------------------------------------------------------------------------------
*Expenses are equal to the class's annualized expense ratio listed in the table
above, multiplied by the average account value over the period, multiplied by
183, the number of days in the most recent fiscal half-year, divided by 365, to
reflect the one-half year period.
- ------
32
Statement of Assets and Liabilities
SEPTEMBER 30, 2006 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
GOVERNMENT INFLATION- SHORT-TERM
GINNIE MAE BOND ADJUSTED BOND GOVERNMENT
- ---------------------------------------------------------------------------------------------------------
ASSETS
- ---------------------------------------------------------------------------------------------------------
Investment securities, at value
(cost of $1,829,921,250,
$618,180,364, $1,262,702,639,
and $1,004,140,624, respectively) --
including $--, $128,778,540,
$408,640,179, and $82,241,144 of
securities on loan, respectively $1,815,711,514 $618,519,779 $1,264,076,247 $1,001,822,064
- ------------------------------------
Investments made with cash
collateral received for securities
on loan, at value (cost of $--,
$96,863,628, $415,302,185, and
$81,542,678, respectively) -- 96,863,628 415,302,185 81,542,678
- ---------------------------------------------------------------------------------------------------------
Total investment securities, at
value (cost of $1,829,921,250,
$715,043,992, $1,678,004,824,
and $1,085,683,302, respectively) 1,815,711,514 715,383,407 1,679,378,432 1,083,364,742
- ------------------------------------
Receivable for investments sold 23,440 -- 3,617,294 3,775
- ------------------------------------
Receivable for variation
margin on futures contracts -- 28,359 -- --
- ------------------------------------
Unrealized appreciation
on swap agreements -- 570,505 -- --
- ------------------------------------
Interest receivable 6,750,647 3,415,620 8,448,735 4,988,197
- ---------------------------------------------------------------------------------------------------------
1,822,485,601 719,397,891 1,691,444,461 1,088,356,714
- ---------------------------------------------------------------------------------------------------------
LIABILITIES
- ---------------------------------------------------------------------------------------------------------
Payable for collateral received
for securities on loan -- 96,863,628 415,302,185 81,542,678
- ------------------------------------
Disbursements in excess
of demand deposit cash 922,050 513,997 2,854,388 1,735,619
- ------------------------------------
Payable for investments purchased 470,373,002 102,118,147 -- 81,123,967
- ------------------------------------
Payable for variation
margin on futures contracts 8,503 -- 2,908 16,311
- ------------------------------------
Accrued management fees 613,425 199,490 385,496 425,515
- ------------------------------------
Distribution fees payable 25,249 7,923 108,814 6,056
- ------------------------------------
Service fees payable 18,287 7,923 108,814 6,056
- ------------------------------------
Dividends payable 708,092 131,279 838,850 --
- ---------------------------------------------------------------------------------------------------------
472,668,608 199,842,387 419,601,455 164,856,202
- ---------------------------------------------------------------------------------------------------------
NET ASSETS $1,349,816,993 $519,555,504 $1,271,843,006 $ 923,500,512
=========================================================================================================
See Notes to Financial Statements. (continued)
- ------
33
Statement of Assets and Liabilities
SEPTEMBER 30, 2006 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
GOVERNMENT INFLATION- SHORT-TERM
GINNIE MAE BOND ADJUSTED BOND GOVERNMENT
- ---------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------------------------------
Capital paid in $1,427,303,244 $531,576,643 $1,287,404,189 $969,516,106
- ------------------------------------
Accumulated net realized loss
on investment transactions (63,171,493) (12,541,000) (16,841,379) (43,436,267)
- ------------------------------------
Net unrealized appreciation
(depreciation) on investments (14,314,758) 519,861 1,280,196 (2,579,327)
- ---------------------------------------------------------------------------------------------------------
$1,349,816,993 $519,555,504 $1,271,843,006 $923,500,512
=========================================================================================================
INVESTOR CLASS
- ---------------------------------------------------------------------------------------------------------
Net assets $1,260,166,226 $480,998,175 $656,290,968 $893,451,562
- ------------------------------------
Shares outstanding 124,205,115 46,098,868 60,914,925 95,498,504
- ------------------------------------
Net asset value per share $10.15 $10.43 $10.77 $9.36
- ---------------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS
- ---------------------------------------------------------------------------------------------------------
Net assets N/A N/A $93,717,206 N/A
- ------------------------------------
Shares outstanding N/A N/A 8,699,666 N/A
- ------------------------------------
Net asset value per share N/A N/A $10.77 N/A
- ---------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ---------------------------------------------------------------------------------------------------------
Net assets $72,403,642 $38,557,329 $521,834,832 $30,048,950
- ------------------------------------
Shares outstanding 7,136,282 3,695,350 48,464,773 3,211,845
- ------------------------------------
Net asset value per share $10.15 $10.43 $10.77 $9.36
- ---------------------------------------------------------------------------------------------------------
C CLASS
- ---------------------------------------------------------------------------------------------------------
Net assets $17,247,125 N/A N/A N/A
- ------------------------------------
Shares outstanding 1,699,920 N/A N/A N/A
- ------------------------------------
Net asset value per share $10.15 N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
- ------
34
Statement of Operations
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2006 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
GOVERNMENT INFLATION- SHORT-TERM
GINNIE MAE BOND ADJUSTED BOND GOVERNMENT
- ---------------------------------------------------------------------------------------------------------
INVESTMENT INCOME (LOSS)
- ---------------------------------------------------------------------------------------------------------
INCOME:
- ------------------------------------
Interest $36,207,826 $13,915,819 $ 47,352,443 $22,488,243
- ------------------------------------
Securities lending -- 80,384 132,615 63,112
- ---------------------------------------------------------------------------------------------------------
36,207,826 13,996,203 47,485,058 22,551,355
- ---------------------------------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------
Management fees 3,824,942 1,264,499 2,424,285 2,606,387
- ------------------------------------
Distribution fees:
- ------------------------------------
Advisor Class 89,543 49,736 694,923 37,028
- ------------------------------------
C Class 61,229 -- -- --
- ------------------------------------
Service fees:
- ------------------------------------
Advisor Class 89,543 49,736 694,923 37,028
- ------------------------------------
C Class 20,410 -- -- --
- ------------------------------------
Trustees' fees and expenses 26,594 10,336 25,279 17,646
- ------------------------------------
Other expenses 607 236 576 399
- ---------------------------------------------------------------------------------------------------------
4,112,868 1,374,543 3,839,986 2,698,488
- ---------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 32,094,958 12,621,660 43,645,072 19,852,867
- ---------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
- ---------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS) ON:
- ------------------------------------
Investment transactions (3,343,632) (3,737,570) (10,949,597) (2,098,471)
- ------------------------------------
Futures and swaps transactions (74,205) (550,259) (39,321) (190,204)
- ---------------------------------------------------------------------------------------------------------
(3,417,837) (4,287,829) (10,988,918) (2,288,675)
- ---------------------------------------------------------------------------------------------------------
CHANGE IN NET UNREALIZED
APPRECIATION (DEPRECIATION) ON:
- ------------------------------------
Investments 8,132,073 9,554,892 15,335,449 6,390,075
- ------------------------------------
Futures and swaps (10,293) 66,176 (93,412) (556,718)
- ---------------------------------------------------------------------------------------------------------
8,121,780 9,621,068 15,242,037 5,833,357
- ---------------------------------------------------------------------------------------------------------
NET REALIZED AND
UNREALIZED GAIN (LOSS) 4,703,943 5,333,239 4,253,119 3,544,682
- ---------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $36,798,901 $17,954,899 $ 47,898,191 $23,397,549
=========================================================================================================
See Notes to Financial Statements.
- ------
35
Statement of Changes in Net Assets
SIX MONTHS ENDED SEPTEMBER 30, 2006 (UNAUDITED) AND YEAR ENDED MARCH 31, 2006
- ---------------------------------------------------------------------------------------------------------
GINNIE MAE GOVERNMENT BOND
- ---------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS SEPT. 30, 2006 MARCH 31, 2006 SEPT. 30, 2006 MARCH 31, 2006
- ---------------------------------------------------------------------------------------------------------
OPERATIONS
- ---------------------------------------------------------------------------------------------------------
Net investment income (loss) $ 32,094,958 $ 63,287,698 $ 12,621,660 $ 20,787,556
- ------------------------------------
Net realized gain (loss) (3,417,837) (6,864,874) (4,287,829) (3,447,344)
- ------------------------------------
Change in net unrealized
appreciation (depreciation) 8,121,780 (17,729,733) 9,621,068 (7,101,934)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations 36,798,901 38,693,091 17,954,899 10,238,278
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
- ---------------------------------------------------------------------------------------------------------
From net investment income:
- ------------------------------------
Investor Class (31,969,388) (67,469,503) (11,851,604) (19,367,942)
- ------------------------------------
Advisor Class (1,677,551) (3,582,947) (890,389) (1,687,220)
- ------------------------------------
C Class (321,768) (564,273) -- --
- ---------------------------------------------------------------------------------------------------------
Decrease in net assets
from distributions (33,968,707) (71,616,723) (12,741,993) (21,055,162)
- ---------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets from capital
share transactions (125,002,385) (64,452,222) (51,550,159) 89,038,699
- ---------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS (122,172,191) (97,375,854) (46,337,253) 78,221,815
NET ASSETS
- ---------------------------------------------------------------------------------------------------------
Beginning of period 1,471,989,184 1,569,365,038 565,892,757 487,670,942
- ---------------------------------------------------------------------------------------------------------
End of period $1,349,816,993 $1,471,989,184 $519,555,504 $565,892,757
=========================================================================================================
See Notes to Financial Statements. (continued)
- ------
36
Statement of Changes in Net Assets
SIX MONTHS ENDED SEPTEMBER 30, 2006 (UNAUDITED) AND YEAR ENDED MARCH 31, 2006
- ---------------------------------------------------------------------------------------------------------
INFLATION-ADJUSTED BOND SHORT-TERM GOVERNMENT
- ---------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS SEPT. 30, 2006 MARCH 31, 2006 SEPT. 30, 2006 MARCH 31, 2006
- ---------------------------------------------------------------------------------------------------------
OPERATIONS
- ---------------------------------------------------------------------------------------------------------
Net investment income (loss) $ 43,645,072 $ 58,961,317 $ 19,852,867 $ 31,865,544
- ------------------------------------
Net realized gain (loss) (10,988,918) (3,725,149) (2,288,675) (9,751,820)
- ------------------------------------
Change in net unrealized
appreciation (depreciation) 15,242,037 (55,561,367) 5,833,357 (1,355,536)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations 47,898,191 (325,199) 23,397,549 20,758,188
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
- ---------------------------------------------------------------------------------------------------------
From net investment income:
- ------------------------------------
Investor Class (22,682,186) (35,009,404) (19,467,944) (31,389,308)
- ------------------------------------
Institutional Class (3,027,753) (3,630,125) -- --
- ------------------------------------
Advisor Class (17,935,133) (20,321,788) (600,516) (1,159,472)
- ------------------------------------
From net realized gains:
- ------------------------------------
Investor Class -- (2,075,533) -- --
- ------------------------------------
Institutional Class -- (224,717) -- --
- ------------------------------------
Advisor Class -- (1,499,559) -- --
- ---------------------------------------------------------------------------------------------------------
Decrease in net assets
from distributions (43,645,072) (62,761,126) (20,068,460) (32,548,780)
- ---------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets from capital
share transactions (107,594,045) 431,868,846 (28,289,579) (11,639,381)
- ---------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS (103,340,926) 368,782,521 (24,960,490) (23,429,973)
NET ASSETS
- ---------------------------------------------------------------------------------------------------------
Beginning of period 1,375,183,932 1,006,401,411 948,461,002 971,890,975
- ---------------------------------------------------------------------------------------------------------
End of period $1,271,843,006 $1,375,183,932 $923,500,512 $948,461,002
=========================================================================================================
See Notes to Financial Statements.
- ------
37
Notes to Financial Statements
SEPTEMBER 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Government Income Trust (the trust) is
registered under the Investment Company Act of 1940 (the 1940 Act) as an
open-end management investment company. Ginnie Mae Fund (Ginnie Mae), Government
Bond Fund (Government Bond), Inflation-Adjusted Bond Fund (Inflation-Adjusted),
and Short-Term Government Fund (Short-Term Government) (collectively, the funds)
are four funds in a series issued by the trust. The funds are diversified under
the 1940 Act.
Ginnie Mae seeks high current income while maintaining liquidity and safety of
principal by investing primarily in Government National Mortgage Association
securities. In addition, Ginnie Mae may buy other U.S. government securities,
including U.S. Treasury securities and other securities issued or guaranteed by
the U.S. government and its agencies and instrumentalities. Government Bond
seeks high current income and intends to pursue this objective by investing in
U.S. government debt securities, including U.S. Treasury securities and other
securities issued or guaranteed by the U.S. government and its agencies and
instrumentalities. Inflation-Adjusted seeks to provide total return and
inflation protection consistent with investment in inflation-indexed securities
issued by the U.S. Treasury, by other U.S. government agencies and
instrumentalities, and by other non-U.S. government entities such as
corporations. Short-Term Government seeks high current income while maintaining
safety of principal. Short-Term Government intends to pursue its objective by
investing in U.S. government securities, including U.S. Treasury securities and
other securities issued or guaranteed by the U.S. government and its agencies
and instrumentalities. In addition, Short-Term Government may also invest in
investment-grade debt securities of U.S. companies, and non-U.S. government
mortgage-backed, asset-backed and other fixed income securities. The following
is a summary of the funds' significant accounting policies.
MULTIPLE CLASS -- Ginnie Mae is authorized to issue the Investor Class, the
Advisor Class, and the C Class. Government Bond and Short-Term Government are
authorized to issue the Investor Class and the Advisor Class. Inflation-Adjusted
is authorized to issue the Investor Class, the Institutional Class, and the
Advisor Class. The C Class may be subject to a contingent deferred sales charge.
The share classes differ principally in their respective sales charges and
distribution and shareholder servicing expenses and arrangements. All shares of
the funds represent an equal pro rata interest in the assets of the class to
which such shares belong, and have identical voting, dividend, liquidation and
other rights and the same terms and conditions, except for class specific
expenses and exclusive rights to vote on matters affecting only individual
classes. Income, non-class specific expenses, and realized and unrealized
capital gains and losses of the funds are allocated to each class of shares
based on their relative net assets.
SECURITY VALUATIONS -- Debt securities maturing in greater than 60 days are
valued at current market value as provided by a commercial pricing service or at
the mean of the most recent bid and asked prices. Debt securities maturing
within 60 days may be valued at cost, plus or minus any amortized discount or
premium. Securities traded on foreign securities exchanges and over-the-counter
markets are normally completed before the close of business on days that the New
York Stock Exchange (the Exchange) is open and may also take place on days when
the Exchange is not open. If an event occurs after the value of a security was
established but before the net asset value per share was determined that was
likely to materially change the net asset value, that security would be valued
at fair value as determined in accordance with procedures adopted by the Board
of Trustees. If the funds determine that the market price of a portfolio
security is not readily available, or that the valuation methods mentioned above
do not reflect the security's fair value, such security is valued at its fair
value as determined by, or in accordance with procedures adopted by, the Board
of Trustees or its designee if such fair value determination would materially
impact a fund's net asset value. Certain other circumstances may cause the funds
to fair value a security such as: a security has been declared in default; or
trading in a security has been halted during the trading day; or there is a
foreign market holiday and no trading will commence.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the trade
date. Net realized gains and losses are determined on the identified cost basis,
which is also used for federal income tax purposes.
INVESTMENT INCOME -- Interest income is recorded on the accrual basis and
includes paydown gain (loss) and accretion of discounts and amortization of
premiums. Inflation adjustments related to inflation-linked debt securities are
reflected as interest income.
SECURITIES ON LOAN -- Government Bond, Inflation-Adjusted and Short-Term
Government may lend portfolio securities through their lending agent to certain
approved borrowers in order to earn additional income. Government Bond,
Inflation-Adjusted and Short-Term Government
(continued)
- ------
38
Notes to Financial Statements
SEPTEMBER 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
continue to recognize any gain or loss in the market price of the securities
loaned and record any interest earned or dividends declared.
FUTURES CONTRACTS -- The funds may enter into futures contracts in order to
manage the funds' exposure to changes in market conditions. One of the risks of
entering into futures contracts is the possibility that the change in value of
the contract may not correlate with the changes in value of the underlying
securities. Upon entering into a futures contract, the funds are required to
deposit either cash or securities in an amount equal to a certain percentage of
the contract value (initial margin). Subsequent payments (variation margin) are
made or received daily, in cash, by the funds. The variation margin is equal to
the daily change in the contract value and is recorded as unrealized gains and
losses. The funds recognize a realized gain or loss when the contract is closed
or expires. Net realized and unrealized gains or losses occurring during the
holding period of futures contracts are a component of realized gain (loss) on
futures and swaps transactions and unrealized appreciation (depreciation) on
futures and swaps, respectively.
SWAP AGREEMENTS -- The funds may enter into a swap agreement in order to attempt
to obtain or preserve a particular return or spread at a lower cost than
obtaining a return or spread through purchases and/or sales of instruments in
other markets; protect against currency fluctuations; attempt to manage duration
to protect against any increase in the price of securities the funds anticipate
purchasing at a later date; or gain exposure to certain markets in the most
economical way possible. A basic swap agreement is a contract in which two
parties agree to exchange the returns earned or realized on predetermined
investments or instruments. Credit default swaps enable an investor to buy/sell
protection against a credit event of a specific issuer. The seller of credit
protection against a security or basket of securities receives an up-front or
periodic payment to compensate against potential default events. The funds may
enhance returns by selling protection or attempt to mitigate credit risk by
buying protection. The funds will segregate cash, cash equivalents or other
appropriate liquid securities on their records in amounts sufficient to meet
requirements. Unrealized gains are reported as an asset and unrealized losses
are reported as a liability on the Statement of Assets and Liabilities. Swap
agreements are valued daily and changes in value, including the periodic amounts
of interest to be paid or received on swaps, are recorded as unrealized
appreciation (depreciation) on futures and swaps. Realized gain or loss is
recorded upon receipt or payment of a periodic settlement or termination of swap
agreements. The risks of entering into swap agreements include the possible lack
of liquidity, failure of the counterparty to meet its obligations, and that
there may be unfavorable changes in the underlying investments and instruments.
REPURCHASE AGREEMENTS -- The funds may enter into repurchase agreements with
institutions that American Century Investment Management, Inc. (ACIM) (the
investment advisor) has determined are creditworthy pursuant to criteria adopted
by the Board of Trustees. Each repurchase agreement is recorded at cost. Each
fund requires that the collateral, represented by securities, received in a
repurchase transaction be transferred to the custodian in a manner sufficient to
enable each fund to obtain those securities in the event of a default under the
repurchase agreement. ACIM monitors, on a daily basis, the securities
transferred to ensure the value, including accrued interest, of the securities
under each repurchase agreement is equal to or greater than amounts owed to each
fund under each repurchase agreement.
JOINT TRADING ACCOUNT -- Pursuant to an Exemptive Order issued by the Securities
and Exchange Commission, each fund, along with other registered investment
companies having management agreements with ACIM or American Century Global
Investment Management, Inc. (ACGIM), may transfer uninvested cash balances into
a joint trading account. These balances are invested in one or more repurchase
agreements that are collateralized by U.S. Treasury or Agency obligations.
WHEN-ISSUED AND FORWARD COMMITMENTS -- The funds may engage in securities
transactions on a when-issued or forward commitment basis. In these
transactions, the securities' prices and yields are fixed on the date of the
commitment. In a when-issued transaction, the payment and delivery are scheduled
for a future date and during this period, securities are subject to market
fluctuations. In a forward commitment transaction, the funds may sell a security
and at the same time make a commitment to purchase the same security at a future
date at a specified price. Conversely, the funds may purchase a security and at
the same time make a commitment to sell the same security at a future date at a
specified price. These types of transactions are executed simultaneously in what
are known as "roll" transactions. The funds will segregate cash, cash
equivalents or other appropriate liquid securities on their records in amounts
sufficient to meet the purchase price. The funds account for "roll" transactions
as purchases and sales; as such these transactions may increase portfolio
turnover.
(continued)
- ------
39
Notes to Financial Statements
SEPTEMBER 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAX STATUS -- It is each fund's policy to distribute substantially all
net investment income and net realized gains to shareholders and to otherwise
qualify as a regulated investment company under provisions of the Internal
Revenue Code. Accordingly, no provision has been made for federal or state
income taxes.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income for
the funds are declared daily and paid monthly. Distributions from net realized
gains for the funds, if any, are generally declared and paid annually.
INDEMNIFICATIONS -- Under the trust's organizational documents, its officers and
trustees are indemnified against certain liabilities arising out of the
performance of their duties to the funds. In addition, in the normal course of
business, the funds enter into contracts that provide general indemnifications.
The funds' maximum exposure under these arrangements is unknown as this would
involve future claims that may be made against the funds. The risk of material
loss from such claims is considered by management to be remote.
USE OF ESTIMATES -- The financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America, which
may require management to make certain estimates and assumptions at the date of
the financial statements. Actual results could differ from these estimates.
2. FEES AND TRANSACTIONS WITH RELATED PARTIES
MANAGEMENT FEES -- The trust has entered into a Management Agreement with ACIM,
under which ACIM provides the funds with investment advisory and management
services in exchange for a single, unified management fee (the fee) per class.
The Agreement provides that all expenses of the funds, except brokerage
commissions, taxes, interest, fees and expenses of those trustees who are not
considered "interested persons" as defined in the 1940 Act (including counsel
fees) and extraordinary expenses, will be paid by ACIM. The fee is computed and
accrued daily based on the daily net assets of each specific class of shares of
each fund and paid monthly in arrears. The fee consists of (1) an Investment
Category Fee based on the daily net assets of the funds and certain other
accounts managed by the investment advisor that are in the same broad investment
category as each fund and (2) a Complex Fee based on the assets of all the funds
in the American Century family of funds. The rates for the Investment Category
Fee for Ginnie Mae and Short-Term Government range from 0.2425% to 0.3600%, and
for Government Bond and Inflation-Adjusted range from 0.1625% to 0.2800%. The
rates for the Complex Fee (Investor Class and C Class) for the funds range from
0.2500% to 0.3100%. The Institutional Class and the Advisor Class is 0.2000% and
0.2500%, respectively, less at each point within the Complex Fee range.
The effective annual management fee for each class of each fund for the six
months ended September 30, 2006, was as follows:
- --------------------------------------------------------------------------------
GOVERNMENT INFLATION- SHORT-TERM
GINNIE MAE BOND ADJUSTED GOVERNMENT
- --------------------------------------------------------------------------------
Investor Class 0.57% 0.49% 0.49% 0.57%
- --------------------------------------------------------------------------------
Institutional Class N/A N/A 0.29% N/A
- --------------------------------------------------------------------------------
Advisor Class 0.32% 0.24% 0.24% 0.32%
- --------------------------------------------------------------------------------
C Class 0.57% N/A N/A N/A
- --------------------------------------------------------------------------------
DISTRIBUTION AND SERVICE FEES -- The Board of Trustees has adopted a Master
Distribution and Shareholder Services Plan for the Advisor Class and a Master
Distribution and Individual Shareholder Services Plan for the C Class
(collectively, the plans), pursuant to Rule 12b-1 of the 1940 Act. The plans
provide that the Advisor Class and C Class will pay American Century Investment
Services, Inc. (ACIS) the following annual distribution and service fees:
- --------------------------------------------------------------------------------
Advisor C
- --------------------------------------------------------------------------------
Distribution Fee 0.25% 0.75%
- --------------------------------------------------------------------------------
Service Fee 0.25% 0.25%
- --------------------------------------------------------------------------------
(continued)
- ------
40
Notes to Financial Statements
SEPTEMBER 30, 2006 (UNAUDITED)
2. FEES AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
The fees are computed and accrued daily based on each class's daily net assets
and paid monthly in arrears. The distribution fee provides compensation for
expenses incurred by financial intermediaries in connection with distributing
shares of the classes including, but not limited to, payments to brokers,
dealers, and financial institutions that have entered into sales agreements with
respect to shares of the funds. The service fee provides compensation for
shareholder and administrative services rendered by ACIS, its affiliates or
independent third party providers for Advisor Class shares and for individual
shareholder services rendered by broker/dealers or other independent financial
intermediaries for C Class shares. Fees incurred under the plans during the six
months ended September 30, 2006, are detailed in the Statement of Operations.
RELATED PARTIES -- Certain officers and trustees of the trust are also officers
and/or directors, and, as a group, controlling stockholders of American Century
Companies, Inc. (ACC), the parent of the trust's investment advisor, ACIM, the
distributor of the trust, ACIS, and the trust's transfer agent, American Century
Services, LLC. An officer and an interested director of these entities are
officers and directors of unrelated entities and those unrelated entities own
56% of the shares of Short-Term Government.
The funds have a bank line of credit agreement with JPMorgan Chase Bank (JPMCB).
Government Bond, Inflation-Adjusted and Short-Term Government have a securities
lending agreement with JPMCB. JPMCB is a custodian of the funds and a wholly
owned subsidiary of J.P. Morgan Chase & Co. (JPM). JPM is an equity investor in
ACC.
3. INVESTMENT TRANSACTIONS
Investment transactions, excluding short-term investments, for the six months
ended September 30, 2006, were as follows:
- -----------------------------------------------------------------------------------------------
GOVERNMENT INFLATION- SHORT-TERM
GINNIE MAE BOND ADJUSTED BOND GOVERNMENT
- -----------------------------------------------------------------------------------------------
PURCHASES
- -----------------------------------------------------------------------------------------------
U.S. Treasury & Government
Agency Obligations $3,012,512,272 $843,924,776 $127,489,044 $781,779,900
- -----------------------------------------------------------------------------------------------
Investment securities other
than U.S. Treasury &
Government Agency Obligations -- -- -- $53,870,867
- -----------------------------------------------------------------------------------------------
PROCEEDS FROM SALES
- -----------------------------------------------------------------------------------------------
U.S. Treasury & Government
Agency Obligations $3,082,884,982 $875,345,418 $262,595,080 $894,740,480
- -----------------------------------------------------------------------------------------------
Investment securities other
than U.S. Treasury &
Government Agency Obligations -- -- -- $7,932,275
- -----------------------------------------------------------------------------------------------
(continued)
- ------
41
Notes to Financial Statements
SEPTEMBER 30, 2006 (UNAUDITED)
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the funds were as follows (unlimited number of shares
authorized):
- ----------------------------------------------------------------------------------------------------
GINNIE MAE GOVERNMENT BOND
- ----------------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------
INVESTOR CLASS
- ----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED SEPTEMBER 30, 2006
- -----------------------------------
Sold 5,657,365 $ 56,781,903 3,538,249 $ 36,394,278
- -----------------------------------
Issued in reinvestment
of distributions 2,666,475 26,744,143 1,028,721 10,596,510
- -----------------------------------
Redeemed (20,755,336) (207,961,404) (9,258,931) (95,381,967)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) (12,431,496) $(124,435,358) (4,691,961) $(48,391,179)
====================================================================================================
YEAR ENDED MARCH 31, 2006
- -----------------------------------
Sold 18,321,635 $ 188,449,951 17,507,134 $ 184,259,061
- -----------------------------------
Issued in reinvestment
of distributions 5,572,335 57,300,069 1,663,033 17,494,951
- -----------------------------------
Redeemed (30,721,321) (315,865,549) (10,096,690) (106,178,060)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) (6,827,351) $ (70,115,529) 9,073,477 $ 95,575,952
====================================================================================================
ADVISOR CLASS
- ----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED SEPTEMBER 30, 2006
- -----------------------------------
Sold 1,575,603 $ 15,797,882 490,027 $ 5,044,246
- -----------------------------------
Issued in reinvestment
of distributions 130,414 1,308,246 81,929 843,913
- -----------------------------------
Redeemed (1,885,680) (18,888,923) (879,017) (9,047,139)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) (179,663) $ (1,782,795) (307,061) $(3,158,980)
====================================================================================================
YEAR ENDED MARCH 31, 2006
- ----------------------------------------------------------------------------------------------------
Sold 4,715,457 $ 48,510,368 1,548,903 $ 16,325,310
- -----------------------------------
Issued in reinvestment
of distributions 287,105 2,951,546 155,235 1,635,142
- -----------------------------------
Redeemed (4,707,072) (48,322,096) (2,327,175) (24,497,705)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) 295,490 $ 3,139,818 (623,037) $ (6,537,253)
====================================================================================================
C CLASS
- ----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED SEPTEMBER 30, 2006
- -----------------------------------
Sold 218,526 $ 2,193,628 N/A N/A
- -----------------------------------
Issued in reinvestment
of distributions 30,403 305,023
- -----------------------------------
Redeemed (127,900) (1,282,883)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) 121,029 $ 1,215,768
====================================================================================================
YEAR ENDED MARCH 31, 2006
- -----------------------------------
Sold 484,200 $ 4,992,904 N/A N/A
- -----------------------------------
Issued in reinvestment
of distributions 51,972 534,098
- -----------------------------------
Redeemed (291,811) (3,003,513)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) 244,361 $ 2,523,489
====================================================================================================
(continued)
- ------
42
Notes to Financial Statements
SEPTEMBER 30, 2006 (UNAUDITED)
4. CAPITAL SHARE TRANSACTIONS (CONTINUED)
Transactions in shares of the funds were as follows (unlimited number of shares
authorized):
- ----------------------------------------------------------------------------------------------------
INFLATION-ADJUSTED BOND SHORT-TERM GOVERNMENT
- ----------------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------
INVESTOR CLASS
- ----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED SEPTEMBER 30, 2006
- -----------------------------------
Sold 10,699,036 $ 113,986,600 6,186,892 $ 57,514,907
- -----------------------------------
Issued in reinvestment
of distributions 1,551,942 16,539,300 2,009,702 18,727,348
- -----------------------------------
Redeemed (16,973,900) (180,885,437) (11,310,031) (105,303,751)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) (4,722,922) $ (50,359,537) (3,113,437) $ (29,061,496)
====================================================================================================
YEAR ENDED MARCH 31, 2006
- -----------------------------------
Sold 26,416,556 $ 293,488,995 16,428,852 $ 154,154,897
- -----------------------------------
Issued in reinvestment
of distributions 2,527,181 28,176,716 3,244,147 30,481,127
- -----------------------------------
Redeemed (20,735,882) (229,236,493) (19,408,837) (182,434,011)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) 8,207,855 $ 92,429,218 264,162 $ 2,202,013
====================================================================================================
INSTITUTIONAL CLASS
- ----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED SEPTEMBER 30, 2006
- -----------------------------------
Sold 2,123,822 $ 22,606,817 N/A N/A
- -----------------------------------
Issued in reinvestment
of distributions 206,700 2,202,863
- -----------------------------------
Redeemed (1,259,273) (13,426,386)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) 1,071,249 $ 11,383,294
====================================================================================================
YEAR ENDED MARCH 31, 2006
- -----------------------------------
Sold 3,192,871 $ 35,263,478 N/A N/A
- -----------------------------------
Issued in reinvestment
of distributions 310,232 3,457,002
- -----------------------------------
Redeemed (1,656,463) (18,394,235)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) 1,846,640 $ 20,326,245
====================================================================================================
ADVISOR CLASS
- ----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED SEPTEMBER 30, 2006
- -----------------------------------
Sold 7,016,037 $ 74,692,910 531,947 $ 4,949,073
- -----------------------------------
Issued in reinvestment
of distributions 1,600,516 17,039,073 64,037 596,733
- -----------------------------------
Redeemed (15,054,639) (160,349,785) (512,695) (4,773,889)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) (6,438,086) $ (68,617,802) 83,289 $ 771,917
====================================================================================================
YEAR ENDED MARCH 31, 2006
- -----------------------------------
Sold 38,125,590 $ 423,368,361 1,369,614 $ 12,903,564
- -----------------------------------
Issued in reinvestment
of distributions 1,926,939 21,421,663 123,634 1,159,472
- -----------------------------------
Redeemed (11,381,958) (125,676,641) (2,965,150) (27,904,430)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) 28,670,571 $ 319,113,383 (1,471,902) $(13,841,394)
====================================================================================================
(continued)
- ------
43
Notes to Financial Statements
SEPTEMBER 30, 2006 (UNAUDITED)
5. SECURITIES LENDING
As of September 30, 2006, securities in Government Bond, Inflation-Adjusted, and
Short-Term Government valued at $128,778,540, $408,640,179, and $82,241,144,
respectively, were on loan through the lending agent, JPMCB, to certain approved
borrowers. JPMCB receives and maintains collateral in the form of cash, and/or
acceptable securities as approved by ACIM. Cash collateral is invested in
authorized investments by the lending agent in a pooled account. The value of
cash collateral received at period end is disclosed in the Statement of Assets
and Liabilities and investments made with the cash by the lending agent are
listed in the Schedule of Investments. Any deficiencies or excess of collateral
must be delivered or transferred by the member firms no later than the close of
business on the next business day. The total value of all collateral received,
at this date, was $130,780,488, $415,302,185, and $83,669,255, respectively. The
funds' risks in securities lending are that the borrower may not provide
additional collateral when required or return the securities when due. If the
borrower defaults, receipt of the collateral by the funds may be delayed or
limited.
6. BANK LINE OF CREDIT
The funds, along with certain other funds managed by ACIM or ACGIM, have a
$500,000,000 unsecured bank line of credit agreement with JPMCB. The funds may
borrow money for temporary or emergency purposes to fund shareholder
redemptions. Borrowings under the agreement bear interest at the Federal Funds
rate plus 0.50%. The funds did not borrow from the line during the six months
ended September 30, 2006.
7. FEDERAL TAX INFORMATION
The book-basis 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. These differences reflect the
differing character of paydown losses, certain income items and net realized
gains and losses for financial statement and tax purposes, and may result in
reclassification among certain capital accounts on the financial statements.
As of September 30, 2006, the components of investments for federal income tax
purposes were as follows:
- -----------------------------------------------------------------------------------------------
GOVERNMENT INFLATION- SHORT-TERM
GINNIE MAE BOND ADJUSTED GOVERNMENT
- -----------------------------------------------------------------------------------------------
Federal tax cost
of investments $1,829,921,250 $715,043,992 $1,682,156,150 $1,085,731,324
===============================================================================================
Gross tax appreciation
of investments $ 5,720,550 $ 3,379,549 $ 19,337,642 $ 2,597,619
- -----------------------------
Gross tax depreciation
of investments (19,930,286) (3,040,134) (22,115,360) (4,964,201)
- -----------------------------------------------------------------------------------------------
Net tax appreciation
(depreciation) of investments $(14,209,736) $ 339,415 $ (2,777,718) $(2,366,582)
===============================================================================================
The difference between book-basis and tax-basis cost and unrealized appreciation
(depreciation) is attributable primarily to the tax deferral of losses on wash
sales.
(continued)
- ------
44
Notes to Financial Statements
SEPTEMBER 30, 2006 (UNAUDITED)
7. FEDERAL TAX INFORMATION (CONTINUED)
Following are the capital loss carryovers and capital loss deferral amounts as
of March 31, 2006:
- -----------------------------------------------------------------------------------------------
GOVERNMENT INFLATION- SHORT-TERM
GINNIE MAE BOND ADJUSTED GOVERNMENT
- -----------------------------------------------------------------------------------------------
Accumulated capital losses $(52,583,938) $(3,508,594) $(841,009) $(35,348,539)
- -----------------------------------------------------------------------------------------------
Capital loss deferral $(4,997,921) $(4,313,037) $(2,308,894) $(5,018,929)
- -----------------------------------------------------------------------------------------------
The accumulated capital losses listed above represent net capital loss
carryovers that may be used to offset future realized capital gains for federal
income tax purposes. The capital loss carryovers expire as follows:
- --------------------------------------------------------------------------------------------------------------
2007 2008 2009 2011 2012 2013 2014
- --------------------------------------------------------------------------------------------------------------
Ginnie Mae -- $(7,179,913) $(255,936) $(285,414) $(22,060,955) $(11,922,927) $(10,878,793)
- --------------------------------------------------------------------------------------------------------------
Government
Bond -- -- -- -- -- $(3,508,594) --
- --------------------------------------------------------------------------------------------------------------
Inflation-
Adjusted -- -- -- -- -- -- $(841,009)
- --------------------------------------------------------------------------------------------------------------
Short-Term
Government $(157,838) $(15,890,616) $(3,678,384) -- -- $(8,188,381) $(7,433,320)
- --------------------------------------------------------------------------------------------------------------
The capital loss deferrals represent net capital losses incurred in the
five-month period ended March 31, 2006. The funds have elected to treat such
losses as having been incurred in the following fiscal year for federal income
tax purposes.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
Interpretation of FASB Statement No. 109" (FIN 48). FIN 48 establishes a minimum
threshold for financial statement recognition of the benefit of positions taken
in filing tax returns (including whether an entity is taxable in a particular
jurisdiction), and requires certain expanded tax disclosures. FIN 48 is
effective for fiscal years beginning after December 15, 2006, and is to be
applied to all open tax years as of the date of effectiveness. The FASB issued
Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
(FAS 157), in September 2006, which is effective for fiscal years beginning
after November 15, 2007. FAS 157 defines fair value, establishes a framework for
measuring fair value and expands the required financial statement disclosures
about fair value measurements. Management is currently evaluating the impact of
adopting FIN 48 and FAS 157.
- ------
45
Ginnie Mae - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)
- ---------------------------------------------------------------------------------------------------------
INVESTOR CLASS
- ---------------------------------------------------------------------------------------------------------
2006(1) 2006 2005 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------
PER-SHARE DATA
- ---------------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $10.11 $10.34 $10.61 $10.85 $10.58 $10.63
- ---------------------------------------------------------------------------------------------------------
Income From
Investment Operations
- --------------------------
Net Investment
Income (Loss)(2) 0.23 0.43 0.37 0.29 0.48 0.58
- --------------------------
Net Realized and
Unrealized Gain (Loss) 0.06 (0.18) (0.15) (0.04) 0.35 (0.01)
- ---------------------------------------------------------------------------------------------------------
Total From
Investment Operations 0.29 0.25 0.22 0.25 0.83 0.57
- ---------------------------------------------------------------------------------------------------------
Distributions
- --------------------------
From Net
Investment Income (0.25) (0.48) (0.49) (0.49) (0.56) (0.62)
- ---------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $10.15 $10.11 $10.34 $10.61 $10.85 $10.58
=========================================================================================================
TOTAL RETURN(3) 2.90% 2.47% 2.11% 2.43% 8.03% 5.43%
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 0.57%(4) 0.57% 0.58% 0.59% 0.59% 0.59%
- --------------------------
Ratio of Net Investment
Income (Loss) to
Average Net Assets 4.66%(4) 4.15% 3.58% 2.77% 4.46% 5.42%
- --------------------------
Portfolio Turnover Rate 212% 315% 315% 356% 356% 218%
- --------------------------
Net Assets, End of Period
(in thousands) $1,260,166 $1,382,022 $1,482,999 $1,676,815 $2,100,358 $1,699,876
- ---------------------------------------------------------------------------------------------------------
(1) Six months ended September 30, 2006 (unaudited).
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of net investment income and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized. The total return of the classes may not precisely reflect the
class expense differences because of the impact of calculating the net asset
values to two decimal places. If net asset values were calculated to three
decimal places, the total return differences would more closely reflect the
class expense differences. The calculation of net asset values to two
decimal places is made in accordance with SEC guidelines and does not result
in any gain or loss of value between one class and another.
(4) Annualized.
See Notes to Financial Statements.
- ------
46
Ginnie Mae - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)
- ---------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ---------------------------------------------------------------------------------------------------------
2006(1) 2006 2005 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------
PER-SHARE DATA
- ---------------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $10.11 $10.34 $10.61 $10.85 $10.58 $10.63
- ---------------------------------------------------------------------------------------------------------
Income From
Investment Operations
- --------------------------
Net Investment
Income (Loss)(2) 0.22 0.40 0.35 0.27 0.46 0.55
- --------------------------
Net Realized and
Unrealized Gain (Loss) 0.06 (0.17) (0.16) (0.04) 0.35 (0.01)
- ---------------------------------------------------------------------------------------------------------
Total From
Investment Operations 0.28 0.23 0.19 0.23 0.81 0.54
- ---------------------------------------------------------------------------------------------------------
Distributions
- --------------------------
From Net
Investment Income (0.24) (0.46) (0.46) (0.47) (0.54) (0.59)
- ---------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $10.15 $10.11 $10.34 $10.61 $10.85 $10.58
=========================================================================================================
TOTAL RETURN(3) 2.78% 2.22% 1.85% 2.18% 7.76% 5.17%
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 0.82%(4) 0.82% 0.83% 0.84% 0.84% 0.84%
- --------------------------
Ratio of Net Investment
Income (Loss) to
Average Net Assets 4.41%(4) 3.90% 3.33% 2.52% 4.21% 5.17%
- --------------------------
Portfolio Turnover Rate 212% 315% 315% 356% 356% 218%
- --------------------------
Net Assets, End of Period
(in thousands) $72,404 $73,998 $72,571 $61,288 $75,999 $42,675
- ---------------------------------------------------------------------------------------------------------
(1) Six months ended September 30, 2006 (unaudited).
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of net investment income and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized. The total return of the classes may not precisely reflect the
class expense differences because of the impact of calculating the net asset
values to two decimal places. If net asset values were calculated to three
decimal places, the total return differences would more closely reflect the
class expense differences. The calculation of net asset values to two
decimal places is made in accordance with SEC guidelines and does not result
in any gain or loss of value between one class and another.
(4) Annualized.
See Notes to Financial Statements.
- ------
47
Ginnie Mae - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)
- ---------------------------------------------------------------------------------------------------------
C CLASS
- ---------------------------------------------------------------------------------------------------------
2006(1) 2006 2005 2004 2003 2002(2)
- ---------------------------------------------------------------------------------------------------------
PER-SHARE DATA
- ---------------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $10.11 $10.34 $10.61 $10.85 $10.57 $10.63
- ---------------------------------------------------------------------------------------------------------
Income From
Investment Operations
- --------------------------
Net Investment
Income (Loss)(3) 0.18 0.33 0.28 0.22 0.40 0.37
- --------------------------
Net Realized and
Unrealized Gain (Loss) 0.06 (0.18) (0.17) (0.05) 0.36 (0.02)
- ---------------------------------------------------------------------------------------------------------
Total From
Investment Operations 0.24 0.15 0.11 0.17 0.76 0.35
- ---------------------------------------------------------------------------------------------------------
Distributions
- --------------------------
From Net
Investment Income (0.20) (0.38) (0.38) (0.41) (0.48) (0.41)
- ---------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $10.15 $10.11 $10.34 $10.61 $10.85 $10.57
=========================================================================================================
TOTAL RETURN(4) 2.39% 1.45% 1.10% 1.60% 7.23% 3.41%
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 1.57%(5) 1.57% 1.58% 1.42% 1.33% 1.34%(5)
- --------------------------
Ratio of Net Investment
Income (Loss) to
Average Net Assets 3.66%(5) 3.15% 2.58% 1.94% 3.72% 4.51%(5)
- --------------------------
Portfolio Turnover Rate 212% 315% 315% 356% 356% 218%(6)
- --------------------------
Net Assets, End of Period
(in thousands) $17,247 $15,970 $13,795 $8,257 $5,078 $806
- ---------------------------------------------------------------------------------------------------------
(1) Six months ended September 30, 2006 (unaudited).
(2) June 15, 2001 (commencement of sale) through March 31, 2002.
(3) Computed using average shares outstanding throughout the period.
(4) Total return assumes reinvestment of net investment income and capital gains
distributions, if any, and does not reflect applicable sales charges. Total
returns for periods less than one year are not annualized. The total return
of the classes may not precisely reflect the class expense differences
because of the impact of calculating the net asset values to two decimal
places. If net asset values were calculated to three decimal places, the
total return differences would more closely reflect the class expense
differences. The calculation of net asset values to two decimal places is
made in accordance with SEC guidelines and does not result in any gain or
loss of value between one class and another.
(5) Annualized.
(6) Portfolio turnover is calculated at the fund level. Percentage indicated
was calculated for the year ended March 31, 2002.
See Notes to Financial Statements.
- ------
48
Government Bond - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)
- ---------------------------------------------------------------------------------------------------------
INVESTOR CLASS
- ---------------------------------------------------------------------------------------------------------
2006(1) 2006 2005 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------
PER-SHARE DATA
- ---------------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $10.33 $10.52 $10.93 $11.25 $10.60 $10.76
- ---------------------------------------------------------------------------------------------------------
Income From
Investment Operations
- --------------------------
Net Investment
Income (Loss) 0.24(2) 0.42(2) 0.29(2) 0.28(2) 0.38 0.48
- --------------------------
Net Realized and
Unrealized Gain (Loss) 0.10 (0.19) (0.24) (0.02) 0.99 (0.16)
- ---------------------------------------------------------------------------------------------------------
Total From
Investment Operations 0.34 0.23 0.05 0.26 1.37 0.32
- ---------------------------------------------------------------------------------------------------------
Distributions
- --------------------------
From Net
Investment Income (0.24) (0.42) (0.30) (0.29) (0.38) (0.48)
- --------------------------
From Net Realized Gains -- -- (0.16) (0.29) (0.34) --
- ---------------------------------------------------------------------------------------------------------
Total Distributions (0.24) (0.42) (0.46) (0.58) (0.72) (0.48)
- ---------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $10.43 $10.33 $10.52 $10.93 $11.25 $10.60
=========================================================================================================
TOTAL RETURN(3) 3.38% 2.17% 0.50% 2.42% 13.17% 3.01%
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 0.49%(4) 0.49% 0.50% 0.51% 0.51% 0.51%
- --------------------------
Ratio of Net Investment
Income (Loss) to
Average Net Assets 4.68%(4) 3.94% 2.70% 2.56% 3.34% 4.45%
- --------------------------
Portfolio Turnover Rate 162% 416% 553% 376% 229% 164%
- --------------------------
Net Assets, End of Period
(in thousands) $480,998 $524,557 $438,997 $468,052 $590,433 $421,312
- ---------------------------------------------------------------------------------------------------------
(1) Six months ended September 30, 2006 (unaudited).
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of net investment income and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized. The total return of the classes may not precisely reflect the
class expense differences because of the impact of calculating the net asset
values to two decimal places. If net asset values were calculated to three
decimal places, the total return differences would more closely reflect the
class expense differences. The calculation of net asset values to two
decimal places is made in accordance with SEC guidelines and does not result
in any gain or loss of value between one class and another.
(4) Annualized.
See Notes to Financial Statements.
- ------
49
Government Bond - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)
- ---------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ---------------------------------------------------------------------------------------------------------
2006(1) 2006 2005 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------
PER-SHARE DATA
- ---------------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $10.33 $10.52 $10.93 $11.25 $10.60 $10.76
- ---------------------------------------------------------------------------------------------------------
Income From
Investment Operations
- --------------------------
Net Investment
Income (Loss) 0.23(2) 0.39(2) 0.26(2) 0.25(2) 0.35 0.46
- --------------------------
Net Realized and
Unrealized Gain (Loss) 0.10 (0.19) (0.24) (0.02) 0.99 (0.16)
- ---------------------------------------------------------------------------------------------------------
Total From
Investment Operations 0.33 0.20 0.02 0.23 1.34 0.30
- ---------------------------------------------------------------------------------------------------------
Distributions
- --------------------------
From Net
Investment Income (0.23) (0.39) (0.27) (0.26) (0.35) (0.46)
- --------------------------
From Net Realized Gains -- -- (0.16) (0.29) (0.34) --
- ---------------------------------------------------------------------------------------------------------
Total Distributions (0.23) (0.39) (0.43) (0.55) (0.69) (0.46)
- ---------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $10.43 $10.33 $10.52 $10.93 $11.25 $10.60
=========================================================================================================
TOTAL RETURN(3) 3.25% 1.91% 0.25% 2.16% 12.89% 2.75%
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 0.74%(4) 0.74% 0.75% 0.76% 0.76% 0.76%
- --------------------------
Ratio of Net Investment
Income (Loss) to
Average Net Assets 4.43%(4) 3.69% 2.45% 2.31% 3.09% 4.20%
- --------------------------
Portfolio Turnover Rate 162% 416% 553% 376% 229% 164%
- --------------------------
Net Assets, End of Period
(in thousands) $38,557 $41,336 $48,674 $45,136 $44,456 $42,285
- ---------------------------------------------------------------------------------------------------------
(1) Six months ended September 30, 2006 (unaudited).
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of net investment income and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized. The total return of the classes may not precisely reflect the
class expense differences because of the impact of calculating the net asset
values to two decimal places. If net asset values were calculated to three
decimal places, the total return differences would more closely reflect the
class expense differences. The calculation of net asset values to two
decimal places is made in accordance with SEC guidelines and does not result
in any gain or loss of value between one class and another.
(4) Annualized.
See Notes to Financial Statements.
- ------
50
Inflation-Adjusted Bond - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)
- ---------------------------------------------------------------------------------------------------------
INVESTOR CLASS
- ---------------------------------------------------------------------------------------------------------
2006(1) 2006 2005 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------
PER-SHARE DATA
- ---------------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $10.73 $11.25 $11.45 $10.86 $9.89 $9.87
- ---------------------------------------------------------------------------------------------------------
Income From
Investment Operations
- --------------------------
Net Investment
Income (Loss) 0.36 0.56 0.45 0.39 0.48 0.38
- --------------------------
Net Realized and
Unrealized Gain (Loss) 0.04 (0.49) (0.17) 0.67 1.12 0.02
- ---------------------------------------------------------------------------------------------------------
Total From
Investment Operations 0.40 0.07 0.28 1.06 1.60 0.40
- ---------------------------------------------------------------------------------------------------------
Distributions
- --------------------------
From Net
Investment Income (0.36) (0.56) (0.45) (0.39) (0.48) (0.38)
- --------------------------
From Net ealized Gains -- (0.03) (0.03) (0.08) (0.15) --(2)
- ---------------------------------------------------------------------------------------------------------
Total Distributions (0.36) (0.59) (0.48) (0.47) (0.63) (0.38)
- ---------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $10.77 $10.73 $11.25 $11.45 $10.86 $9.89
=========================================================================================================
TOTAL RETURN(3) 3.78% 0.56% 2.57% 10.04% 16.42% 4.16%
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 0.49%(4) 0.49% 0.50% 0.50% 0.51% 0.51%
- --------------------------
Ratio of Net Investment
Income (Loss) to
Average Net Assets 6.70%(4) 4.85% 3.77% 3.50% 4.20% 3.12%
- --------------------------
Portfolio Turnover Rate 10% 27% 68% 54% 136% 40%
- --------------------------
Net Assets, End of Period
(in thousands) $656,291 $704,447 $646,214 $483,353 $352,315 $185,518
- ---------------------------------------------------------------------------------------------------------
(1) Six months ended September 30, 2006 (unaudited).
(2) Per-share amount was less than $0.005.
(3) Total return assumes reinvestment of net investment income and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized. The total return of the classes may not precisely reflect the
class expense differences because of the impact of calculating the net asset
values to two decimal places. If net asset values were calculated to three
decimal places, the total return differences would more closely reflect the
class expense differences. The calculation of net asset values to two
decimal places is made in accordance with SEC guidelines and does not result
in any gain or loss of value between one class and another.
(4) Annualized.
See Notes to Financial Statements.
- ------
51
Inflation-Adjusted Bond - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)
- --------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS
- --------------------------------------------------------------------------------------------
2006(1) 2006 2005 2004 2003(2)
- --------------------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $10.73 $11.25 $11.45 $10.86 $10.84
- --------------------------------------------------------------------------------------------
Income From
Investment Operations
- --------------------------
Net Investment
Income (Loss) 0.37 0.58 0.47 0.41 0.20
- --------------------------
Net Realized and
Unrealized Gain (Loss) 0.04 (0.49) (0.17) 0.67 0.17
- --------------------------------------------------------------------------------------------
Total From
Investment Operations 0.41 0.09 0.30 1.08 0.37
- --------------------------------------------------------------------------------------------
Distributions
- --------------------------
From Net
Investment Income (0.37) (0.58) (0.47) (0.41) (0.20)
- --------------------------
From Net Realized Gains -- (0.03) (0.03) (0.08) (0.15)
- --------------------------------------------------------------------------------------------
Total Distributions (0.37) (0.61) (0.50) (0.49) (0.35)
- --------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $10.77 $10.73 $11.25 $11.45 $10.86
============================================================================================
TOTAL RETURN(3) 3.89% 0.77% 2.77% 10.24% 3.53%
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 0.29%(4) 0.29% 0.30% 0.30% 0.31%(4)
- --------------------------
Ratio of Net Investment
Income (Loss) to
Average Net Assets 6.90%(4) 5.05% 3.97% 3.70% 3.80%(4)
- --------------------------
Portfolio Turnover Rate 10% 27% 68% 54% 136%(5)
- --------------------------
Net Assets, End of Period
(in thousands) $93,717 $81,860 $65,058 $56,103 $34,196
- --------------------------------------------------------------------------------------------
(1) Six months ended September 30, 2006 (unaudited).
(2) October 1, 2002 (commencement of sale) through March 31, 2003.
(3) Total return assumes reinvestment of net investment income and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized. The total return of the classes may not precisely reflect the
class expense differences because of the impact of calculating the net asset
values to two decimal places. If net asset values were calculated to three
decimal places, the total return differences would more closely reflect the
class expense differences. The calculation of net asset values to two
decimal places is made in accordance with SEC guidelines and does not result
in any gain or loss of value between one class and another.
(4) Annualized.
(5) Portfolio turnover is calculated at the fund level. Percentage indicated
was calculated for the year ended March 31, 2003.
See Notes to Financial Statements.
- ------
52
Inflation-Adjusted Bond - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)
- ---------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ---------------------------------------------------------------------------------------------------------
2006(1) 2006 2005 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------
PER-SHARE DATA
- ---------------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $10.73 $11.25 $11.45 $10.86 $9.89 $9.87
- ---------------------------------------------------------------------------------------------------------
Income From
Investment Operations
- --------------------------
Net Investment
Income (Loss) 0.34 0.54 0.42 0.36 0.45 0.36
- --------------------------
Net Realized and
Unrealized Gain (Loss) 0.04 (0.49) (0.17) 0.67 1.12 0.02
- ---------------------------------------------------------------------------------------------------------
Total From
Investment Operations 0.38 0.05 0.25 1.03 1.57 0.38
- ---------------------------------------------------------------------------------------------------------
Distributions
- --------------------------
From Net
Investment Income (0.34) (0.54) (0.42) (0.36) (0.45) (0.36)
- --------------------------
From Net Realized Gains -- (0.03) (0.03) (0.08) (0.15) --(2)
- ---------------------------------------------------------------------------------------------------------
Total Distributions (0.34) (0.57) (0.45) (0.44) (0.60) (0.36)
- ---------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $10.77 $10.73 $11.25 $11.45 $10.86 $9.89
=========================================================================================================
TOTAL RETURN(3) 3.65% 0.37% 2.33% 9.78% 16.13% 3.88%
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 0.74%(4) 0.74% 0.75% 0.75% 0.76% 0.76%
- --------------------------
Ratio of Net Investment
Income (Loss) to
Average Net Assets 6.45%(4) 4.60% 3.52% 3.25% 3.95% 2.87%
- --------------------------
Portfolio Turnover Rate 10% 27% 68% 54% 136% 40%
- --------------------------
Net Assets, End of Period
(in thousands) $521,835 $588,877 $295,129 $109,053 $41,673 $9,613
- ---------------------------------------------------------------------------------------------------------
(1) Six months ended September 30, 2006 (unaudited).
(2) Per-share amount is less than $0.005.
(3) Total return assumes reinvestment of net investment income and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized. The total return of the classes may not precisely reflect the
class expense differences because of the impact of calculating the net asset
values to two decimal places. If net asset values were calculated to three
decimal places, the total return differences would more closely reflect the
class expense differences. The calculation of net asset values to two
decimal places is made in accordance with SEC guidelines and does not result
in any gain or loss of value between one class and another.
(4) Annualized.
See Notes to Financial Statements.
- ------
53
Short-Term Government - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)
- ---------------------------------------------------------------------------------------------------------
INVESTOR CLASS
- ---------------------------------------------------------------------------------------------------------
2006(1) 2006 2005 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------
PER-SHARE DATA
- ---------------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $9.32 $9.44 $9.66 $9.69 $9.46 $9.47
- ---------------------------------------------------------------------------------------------------------
Income From
Investment Operations
- --------------------------
Net Investment
Income (Loss) 0.20(2) 0.32(2) 0.19(2) 0.15(2) 0.29 0.45
- --------------------------
Net Realized and
Unrealized Gain (Loss) 0.04 (0.11) (0.21) (0.02) 0.23 (0.01)
- ---------------------------------------------------------------------------------------------------------
Total From
Investment Operations 0.24 0.21 (0.02) 0.13 0.52 0.44
- ---------------------------------------------------------------------------------------------------------
Distributions
- --------------------------
From Net
Investment Income (0.20) (0.33) (0.20) (0.16) (0.29) (0.45)
- ---------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $9.36 $9.32 $9.44 $9.66 $9.69 $9.46
=========================================================================================================
TOTAL RETURN(3) 2.61% 2.22% (0.16)% 1.40% 5.52% 4.68%
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 0.57%(4) 0.57% 0.58% 0.59% 0.59% 0.59%
- --------------------------
Ratio of Net Investment
Income (Loss) to
Average Net Assets 4.25%(4) 3.41% 2.04% 1.54% 2.96% 4.67%
- --------------------------
Portfolio Turnover Rate 105% 292% 283% 232% 185% 165%
- --------------------------
Net Assets, End of Period
(in thousands) $893,452 $919,295 $928,460 $996,677 $957,413 $832,199
- ---------------------------------------------------------------------------------------------------------
(1) Six months ended September 30, 2006 (unaudited).
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of net investment income and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized. The total return of the classes may not precisely reflect the
class expense differences because of the impact of calculating the net asset
values to two decimal places. If net asset values were calculated to three
decimal places, the total return differences would more closely reflect the
class expense differences. The calculation of net asset values to two
decimal places is made in accordance with SEC guidelines and does not result
in any gain or loss of value between one class and another.
(4) Annualized.
See Notes to Financial Statements.
- ------
54
Short-Term Government - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)
- ---------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ---------------------------------------------------------------------------------------------------------
2006(1) 2006 2005 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------
PER-SHARE DATA
- ---------------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $9.32 $9.44 $9.66 $9.69 $9.46 $9.47
- ---------------------------------------------------------------------------------------------------------
Income From
Investment Operations
- --------------------------
Net Investment
Income (Loss) 0.19(2) 0.29(2) 0.17(2) 0.13(2) 0.26 0.42
- --------------------------
Net Realized and
Unrealized Gain (Loss) 0.04 (0.11) (0.21) (0.02) 0.23 (0.01)
- ---------------------------------------------------------------------------------------------------------
Total From
Investment Operations 0.23 0.18 (0.04) 0.11 0.49 0.41
- ---------------------------------------------------------------------------------------------------------
Distributions
- --------------------------
From Net
Investment Income (0.19) (0.30) (0.18) (0.14) (0.26) (0.42)
- ---------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $9.36 $9.32 $9.44 $9.66 $9.69 $9.46
=========================================================================================================
TOTAL RETURN(3) 2.49% 1.96% (0.41)% 1.15% 5.26% 4.42%
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 0.82%(4) 0.82% 0.83% 0.84% 0.84% 0.84%
- --------------------------
Ratio of Net Investment
Income (Loss) to
Average Net Assets 4.00%(4) 3.16% 1.79% 1.29% 2.71% 4.42%
- --------------------------
Portfolio Turnover Rate 105% 292% 283% 232% 185% 165%
- --------------------------
Net Assets, End of Period
(in thousands) $30,049 $29,166 $43,431 $47,135 $68,102 $36,430
- ---------------------------------------------------------------------------------------------------------
(1) Six months ended September 30, 2006 (unaudited).
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of net investment income and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized. The total return of the classes may not precisely reflect the
class expense differences because of the impact of calculating the net asset
values to two decimal places. If net asset values were calculated to three
decimal places, the total return differences would more closely reflect the
class expense differences. The calculation of net asset values to two
decimal places is made in accordance with SEC guidelines and does not result
in any gain or loss of value between one class and another.
(4) Annualized.
See Notes to Financial Statements.
- ------
55
Approval of Management Agreements for Ginnie Mae, Government Bond,
Inflation-Adjusted Bond and Short-Term Government
Under Section 15(c) of the Investment Company Act, contracts for investment
advisory services are required to be reviewed, evaluated and approved by a
majority of a fund's independent directors or trustees (the "Directors") each
year. At American Century, this process is referred to as the "15(c) Process."
As a part of this process, the board reviews fund performance, shareholder
services, audit and compliance information, and a variety of other reports from
the advisor concerning fund operations. In addition to this annual review, the
board of directors oversees and evaluates on a continuous basis at its quarterly
meetings the nature and quality of significant services performed by the
advisor, fund performance, audit and compliance information, and a variety of
other reports relating to fund operations. The board, or committees of the
board, also holds special meetings as needed.
Under a Securities and Exchange Commission rule, each fund is required to
disclose in its annual or semiannual report, as appropriate, the material
factors and conclusions that formed the basis for the board's approval or
renewal of any advisory agreements within the fund's most recently completed
fiscal half-year period.
ANNUAL CONTRACT REVIEW PROCESS
As part of the annual 15(c) Process undertaken during the most recent fiscal
half-year period, the Directors reviewed extensive data and information compiled
by the advisor and certain independent providers of evaluative data (the "15(c)
Providers") concerning Ginnie Mae, Government Bond, Inflation-Adjusted Bond and
Short-Term Government (the "funds") and the services provided to the funds under
the management agreement. The information considered and the discussions held at
the meetings included, but were not limited to:
* the nature, extent and quality of investment management, shareholder services
and other services provided to the funds under the management agreement;
* reports on the advisor's activities relating to the wide range of programs and
services the advisor provides to the funds and its shareholders on a routine
and non-routine basis;
* data comparing the cost of owning the funds to the cost of owning a similar
funds;
* data comparing the funds' performance to appropriate benchmarks and/or a peer
group of other mutual funds with similar investment objectives and strategies;
* financial data showing the profitability of the funds to the advisor and the
overall profitability of the advisor; and
* data comparing services provided and charges to other investment management
clients of the advisor.
In keeping with its practice, the funds' board of directors held two regularly
scheduled meetings and one special meeting to review and discuss the information
provided by the advisor and to complete its negotiations with the advisor
regarding the renewal of the management agreement, including the setting of the
applicable advisory fee. The board also had the benefit of the advice of its
independent counsel throughout the period.
(continued)
- ------
56
Approval of Management Agreements for Ginnie Mae, Government Bond,
Inflation-Adjusted Bond and Short-Term Government
FACTORS CONSIDERED
The Directors considered all of the information provided by the advisor, the
15(c) Providers, and the board's independent counsel, and evaluated such
information for each fund for which the board has responsibility. The Directors
did not identify any single factor as being all-important or controlling, and
each Director may have attributed different levels of importance to different
factors. In deciding to renew the agreement under the terms ultimately
determined by the board to be appropriate, the Directors' decision was based on
the following factors.
NATURE, EXTENT AND QUALITY OF SERVICES -- GENERALLY. Under the management
agreement, the advisor is responsible for providing or arranging for all
services necessary for the operation of the funds. The board noted that under
the management agreement, the advisor provides or arranges at its own expense a
wide variety of services including:
* fund construction and design
* portfolio security selection
* initial capitalization/funding
* securities trading
* custody of fund assets
* daily valuation of the funds' portfolio
* shareholder servicing and transfer agency, including shareholder
confirmations, recordkeeping and communications
* legal services
* regulatory and portfolio compliance
* financial reporting
* marketing and distribution
The Directors noted that many of these services have expanded over time both in
terms of quantity and complexity in response to shareholder demands, competition
in the industry and the changing regulatory environment. In performing their
evaluation, the Directors considered information received in connection with the
annual review, as well as information provided on an ongoing basis at their
regularly scheduled board and committee meetings.
INVESTMENT MANAGEMENT SERVICES. The nature of the investment management services
provided is quite complex and allows fund shareholders access to professional
money management, instant diversification of their investments within an asset
class, the opportunity to easily diversify among asset classes, and liquidity.
In evaluating investment performance, the board expects the advisor to manage
the funds in accordance with its investment objectives and approved strategies.
In providing these services, the advisor utilizes teams of investment
professionals (portfolio managers, analysts, research assistants, and securities
traders) who require extensive information technology, research, training,
compliance and other systems to conduct their business. At each quarterly
meeting the Directors review investment performance information for the funds,
together with comparative information for appropriate benchmarks and peer groups
of funds managed similarly to the funds. The Directors also review detailed
performance information during the 15(c) Process comparing the funds'
performance with that of similar funds not managed by the advisor. If
performance
(continued)
- ------
57
Approval of Management Agreements for Ginnie Mae, Government Bond,
Inflation-Adjusted Bond and Short-Term Government
concerns are identified, the Directors discuss with the advisor the reasons for
such results (e.g., market conditions, security selection) and any efforts being
undertaken to improve performance. Ginnie Mae's performance for the one year
period was above the median for its peer group and fell below the median for the
three year period during part of the past year. Government Bond's performance
fell below the median for both the one and three year periods during part of the
past year. Short-Term Government's performance for the one year period was equal
to the median of its peer group and fell below the median for the three year
period during part of the last year. Inflation-Adjusted Bond's performance was
near its benchmark for both the one and three year periods. The board discussed
the fund's performance with the advisor and was satisfied with the efforts being
undertaken by the advisor.
SHAREHOLDER AND OTHER SERVICES. The advisor provides the funds with a
comprehensive package of transfer agency, shareholder, and other services. The
Directors review reports and evaluations of such services at their regular
quarterly meetings, including the annual meeting concerning contract review, and
reports to the board. These reports include, but are not limited to, information
regarding the operational efficiency and accuracy of the shareholder and
transfer agency services provided, staffing levels, shareholder satisfaction (as
measured by external as well as internal sources), technology support, new
products and services offered to fund shareholders, securities trading
activities, portfolio valuation services, auditing services, and legal and
operational compliance activities. Certain aspects of shareholder and transfer
agency service level efficiency and the quality of securities trading activities
are measured by independent third party providers and are presented in
comparison to other fund groups not managed by the advisor.
COSTS OF SERVICES PROVIDED AND PROFITABILITY TO THE ADVISOR. The advisor
provides detailed information concerning its cost of providing various services
to the funds, its profitability in managing the funds, its overall
profitability, and its financial condition. The Directors have reviewed with the
advisor the methodology used to prepare this financial information. This
financial information regarding the advisor is considered in order to evaluate
the advisor's financial condition, its ability to continue to provide services
under the management agreement, and the reasonableness of the current management
fee.
ETHICS OF THE ADVISOR. The Directors generally consider the advisor's commitment
to providing quality services to shareholders and to conducting its business
ethically. They noted that the advisor's practices generally meet or exceed
industry best practices and that the advisor was not implicated in the industry
scandals of 2003 and 2004.
ECONOMIES OF SCALE. The Directors review reports provided by the advisor on
economies of scale for the complex as a whole and the year-over-year changes in
revenue, costs, and profitability. The Directors concluded that economies of
scale are difficult to measure and predict with precision, especially on a
fund-by-fund basis. This analysis is also complicated by the additional services
and content
(continued)
- ------
58
Approval of Management Agreements for Ginnie Mae, Government Bond,
Inflation-Adjusted Bond and Short-Term Government
provided by the advisor and its reinvestment in its ability to provide and
expand those services. Accordingly, the Directors also seek to evaluate
economies of scale by reviewing other information, such as year-over-year
profitability of the advisor generally, the profitability of its management of
the funds specifically, the expenses incurred by the advisor in providing
various functions to the funds, and the breakpoint fees of competitive funds not
managed by the advisor. The Directors believe the advisor is appropriately
sharing economies of scale through its competitive fee structure, fee
breakpoints as the fund complex and the funds increases in size, and through
reinvestment in its business to provide shareholders additional content and
services. In particular, separate breakpoint schedules based on the size of the
entire fund complex and on the size of the funds reflect the complexity of
assessing economies of scale.
COMPARISON TO OTHER FUNDS' FEES. The funds pay the advisor a single,
all-inclusive (or unified) management fee for providing all services necessary
for the management and operation of the funds, other than brokerage expenses,
taxes, interest, extraordinary expenses, and the fees and expenses of the funds'
independent directors (including their independent legal counsel). Under the
unified fee structure, the advisor is responsible for providing all investment
advisory, custody, audit, administrative, compliance, recordkeeping, marketing
and shareholder services, or arranging and supervising third parties to provide
such services. By contrast, most other funds are charged a variety of fees,
including an investment advisory fee, a transfer agency fee, an administrative
fee, distribution charges and other expenses. Other than their investment
advisory fees and Rule 12b-1 distribution fees, all other components of the
total fees charged by these other funds may be increased without shareholder
approval. The board believes the unified fee structure is a benefit to fund
shareholders because it clearly discloses to shareholders the cost of owning
fund shares, and, since the unified fee cannot be increased without a vote of
fund shareholders, it shifts to the advisor the risk of increased costs of
operating the funds and provides a direct incentive to minimize administrative
inefficiencies. Part of the Directors' analysis of fee levels involves reviewing
certain evaluative data compiled by an independent provider and comparing the
funds' unified fee to the total expense ratio of other funds in the funds' peer
group. The unified fee charged to shareholders of the funds was in the lowest
quartile of the total expense ratios of their peer groups.
COMPARISON TO FEES AND SERVICES PROVIDED TO OTHER CLIENTS OF THE ADVISOR. The
Directors also requested and received information from the advisor concerning
the nature of the services, fees, and profitability of its advisory services to
advisory clients other than the funds. They observed that these varying types of
client accounts require different services and involve different regulatory and
entrepreneurial risks than the management of the funds. The Directors analyzed
this information and concluded that the fees charged and services provided to
the funds were reasonable by comparison.
(continued)
- ------
59
Approval of Management Agreements for Ginnie Mae, Government Bond,
Inflation-Adjusted Bond and Short-Term Government
COLLATERAL BENEFITS DERIVED BY THE ADVISOR. The Directors reviewed information
from the advisor concerning collateral benefits it receives as a result of its
relationship with the funds. They concluded that the advisor's primary business
is managing mutual funds and it generally does not use the fund or shareholder
information to generate profits in other lines of business, and therefore does
not derive any significant collateral benefits from them. The Directors noted
that the advisor receives proprietary research from broker dealers that execute
fund portfolio transactions and concluded that this research is likely to
benefit fund shareholders. The Directors also determined that the advisor is
able to provide investment management services to certain clients other than the
funds, at least in part, due to its existing infrastructure built to serve the
fund complex. The Directors concluded, however, that the assets of those other
clients are not material to the analysis and, in any event, are included with
the assets of the funds to determine breakpoints in the funds' fee schedule,
provided they are managed using the same investment team and strategy.
CONCLUSIONS OF THE DIRECTORS
As a result of this process, the independent directors, in the absence of
particular circumstances and assisted by the advice of legal counsel that is
independent of the advisor, taking into account all of the factors discussed
above and the information provided by the advisor concluded that the investment
management agreement between the funds and the advisor is fair and reasonable in
light of the services provided and should be renewed.
- ------
60
Share Class Information
Three classes of shares are authorized for sale by Ginnie Mae: Investor Class,
Advisor Class, and C Class. Two classes of shares are authorized for sale by
Government Bond and Short-Term Government: Investor Class and Advisor Class.
Three classes of shares are authorized for sale by Inflation-Adjusted Bond:
Investor Class, Institutional Class, and Advisor Class. The total expense ratio
of Institutional Class shares is lower than that of Investor Class shares. The
total expense ratios of Advisor Class and C Class shares are higher than that of
Investor Class shares.
INVESTOR CLASS shares are available for purchase in two ways: 1) directly from
American Century without any commissions or other fees; or 2) through certain
financial intermediaries (such as banks, broker-dealers, insurance companies and
investment advisors), which may require payment of a transaction fee to the
financial intermediary.
INSTITUTIONAL CLASS shares are available to large investors such as endowments,
foundations, and retirement plans, and to financial intermediaries serving these
investors. This class recognizes the relatively lower cost of serving
institutional customers and others who invest at least $5 million ($3 million
for endowments and foundations) in an American Century fund or at least $10
million in multiple funds. In recognition of the larger investments and account
balances and comparatively lower transaction costs, the unified management fee
of Institutional Class shares is 0.20% less than the unified management fee of
Investor Class shares.
ADVISOR CLASS shares are sold primarily through institutions such as investment
advisors, banks, broker-dealers, insurance companies, and financial advisors.
Advisor Class shares are subject to a 0.50% annual Rule 12b-1 distribution and
service fee. The total expense ratio of Advisor Class shares is 0.25% higher
than the total expense ratio of Investor Class shares.
C CLASS shares are sold primarily through employer-sponsored retirement plans
and through institutions such as investment advisors, banks, broker-dealers, and
insurance companies. C Class shares redeemed within 12 months of purchase are
subject to a contingent deferred sales charge (CDSC) of 1.00%. There is no CDSC
on shares acquired through reinvestment of dividends or capital gains. The
unified management fee for C Class shares is the same as for Investor Class
shares. C Class shares also are subject to a Rule 12b-1 distribution and service
fee of 1.00%.
All classes of shares represent a pro rata interest in the funds and generally
have the same rights and preferences.
- ------
61
Additional Information
RETIREMENT ACCOUNT INFORMATION
As required by law, any distributions you receive from an IRA or certain 403(b),
457 and qualified plans [those not eligible for rollover to an IRA or to another
qualified plan] are subject to federal income tax withholding, unless you elect
not to have withholding apply. Tax will be withheld on the total amount
withdrawn even though you may be receiving amounts that are not subject to
withholding, such as nondeductible contributions. In such case, excess amounts
of withholding could occur. You may adjust your withholding election so that a
greater or lesser amount will be withheld.
If you don't want us to withhold on this amount, you must notify us to not
withhold the federal income tax. Even if you plan to roll over the amount you
withdraw to another tax-deferred account, the withholding rate still applies to
the withdrawn amount unless we have received notice not to withhold federal
income tax prior to the withdrawal. You may notify us in writing or in certain
situations by telephone or through other electronic means. You have the right to
revoke your withholding election at any time and any election you make may
remain in effect until revoked by filing a new election.
Remember, even if you elect not to have income tax withheld, you are liable for
paying income tax on the taxable portion of your withdrawal. If you elect not to
have income tax withheld or you don't have enough income tax withheld, you may
be responsible for payment of estimated tax. You may incur penalties under the
estimated tax rules if your withholding and estimated tax payments are not
sufficient.
State tax will be withheld if, at the time of your distribution, your address is
within one of the mandatory withholding states and you have federal income tax
withheld. State taxes will be withheld from your distribution in accordance with
the respective state rules.
PROXY VOTING GUIDELINES
American Century Investment Management, Inc., the funds' investment advisor, is
responsible for exercising the voting rights associated with the securities
purchased and/or held by the funds. A description of the policies and procedures
the advisor uses in fulfilling this responsibility is available without charge,
upon request, by calling 1-800-345-2021. It is also available on American
Century's website at americancentury.com and on the Securities and Exchange
Commission's website at sec.gov. Information regarding how the investment
advisor voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available on the "About Us" page at
americancentury.com. It is also available at sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The funds file their complete schedule of portfolio holdings with the Securities
and Exchange Commission (SEC) for the first and third quarters of each fiscal
year on Form N-Q. The funds' Forms N-Q are available on the SEC's website at
sec.gov, and may be reviewed and copied at the SEC's Public Reference Room in
Washington, DC. Information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330. The funds also make their complete schedule
of portfolio holdings for the most recent quarter of their fiscal year available
on their website at americancentury.com and, upon request, by calling
1-800-345-2021.
- ------
62
Index Definitions
The following indices are used to illustrate investment market, sector, or style
performance or to serve as fund performance comparisons. They are not investment
products available for purchase.
The CITIGROUP 30-YEAR GNMA INDEX is comprised of Government National Mortgage
Association (GNMA) mortgage-backed securities with an aggregate amount
outstanding per coupon of at least $5 billion, an aggregate amount outstanding
per origination year of at least $500 million, and a remaining maturity of at
least one year.
The CITIGROUP GNMA INDEX is a market-capitalization-weighted index of 15- and
30-year fixed-rate securities backed by mortgage pools of the Government
National Mortgage Association (GNMA).
The CITIGROUP TREASURY/MORTGAGE INDEX is comprised of U.S. Treasury securities
with an amount outstanding of at least $1 billion, and mortgage-backed
securities with an aggregate amount outstanding per coupon of at least $5
billion and an aggregate amount outstanding per origination year of at least
$500 million. Both the U.S. Treasury and the mortgage-backed securities included
in the index must have a remaining maturity of at least one year.
The CITIGROUP US BROAD INVESTMENT-GRADE (USBIG) BOND INDEX is a
market-capitalization-weighted index that includes fixed-rate Treasury,
government-sponsored, mortgage, asset-backed, and investment-grade issues with a
maturity of one year or longer.
The CITIGROUP U.S. INFLATION-LINKED SECURITIES INDEX (ILSI)(SM) measures the
return of bonds with fixed-rate coupon payments that adjust for inflation as
measured by the Consumer Price Index (CPI).
The CITIGROUP U.S. TREASURY/AGENCY 1- TO 3-YEAR INDEX is a
market-capitalization-weighted index that includes fixed-rate U.S. Treasury and
government agency issues with maturities between one and three years.
The CITIGROUP U.S. TREASURY 10+ YEAR INDEX is a market-capitalization-weighted
index that includes fixed-rate U.S. Treasury issues with maturities of 10 years
or longer.
The LEHMAN BROTHERS U.S. AGENCY INDEX is composed of those securities included
in the Lehman Brothers U.S. Aggregate Index that are public obligations of U.S.
government agencies, quasi-federal corporations, and corporate or foreign debt
guaranteed by the U.S. government.
The LEHMAN BROTHERS U.S. AGGREGATE INDEX represents securities that are taxable,
registered with the Securities and Exchange Commission, and U.S.
dollar-denominated. The index covers the U.S. investment-grade fixed-rate bond
market, with index components for government and corporate securities, mortgage
pass-through securities, and asset-backed securities.
The LEHMAN BROTHERS U.S. CORPORATE HIGH-YIELD INDEX covers the U.S.
dollar-denominated, non-investment grade, fixed-rate, taxable corporate bond
market.
(continued)
- ------
63
Index Definitions
The LEHMAN BROTHERS U.S. CORPORATE INDEX is composed of those securities
included in the Lehman Brothers U.S. Aggregate Index that are U.S.
dollar-denominated, investment-grade, fixed-rate, taxable securities sold by
industrial, utility and financial issuers.
The LEHMAN BROTHERS U.S. FIXED-RATE MORTGAGE-BACKED SECURITIES (MBS) INDEX is
the MBS Fixed-Rate component of the Lehman Brothers U.S. Aggregate Index. It
covers the mortgage-backed pass-through securities of the Government National
Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA),
and the Federal Home Loan Mortgage Corporation (FHLMC).
The LEHMAN BROTHERS U.S. TREASURY INDEX is composed of those securities included
in the Lehman Brothers U.S. Aggregate Index that are public obligations of the
U.S. Treasury with a remaining maturity of one year or more.
The MORTGAGE BANKERS ASSOCIATION REFINANCING INDEX is a gauge of mortgage
refinancing activity that covers all U.S. mortgage applications to refinance an
existing mortgage. The index includes conventional and government refinances,
regardless of producer coupon rate refinanced into or out of.
- ------
64
[back cover]
CONTACT US
AMERICANCENTURY.COM
AUTOMATED INFORMATION LINE:
1-800-345-8765
INVESTOR SERVICES REPRESENTATIVE:
1-800-345-2021 or 816-531-5575
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1-800-634-4113 or 816-444-3485
AMERICAN CENTURY GOVERNMENT INCOME TRUST
INVESTMENT ADVISOR:
American Century Investment Management, Inc.
Kansas City, Missouri
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
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COMPANIES
The American Century Investments logo, American Century and American Century
Investments are service marks of American Century Proprietary Holdings, Inc.
American Century Investment Services, Inc., Distributor
0611 (c)2006 American Century Proprietary Holdings, Inc.
SH-SAN-51664S All rights reserved.
[front cover]
AMERICAN CENTURY INVESTMENTS
Semiannual Report
September 30, 2006
[photo of Autumn scene]
Capital Preservation Fund
Government Agency Money Market Fund
[american century investments logo and text logo]
Our Message to You
[photo of James E. Stowers III and James E. Stowers, Jr.]
/s/James E. Stowers, Jr.
James E. Stowers, Jr.
FOUNDER
AMERICAN CENTURY COMPANIES, INC.
/s/James E. Stowers III
James E. Stowers III
CHAIRMAN OF THE BOARD
AMERICAN CENTURY COMPANIES, INC.
We are pleased to provide you with the semiannual report for the American
Century Capital Preservation and Government Agency Money Market funds for the
six months ended September 30, 2006. We hope you find this information helpful
in monitoring your investment. Another useful resource we offer is our website,
americancentury.com, where we post quarterly portfolio commentaries, the views
of senior investment officers and analysts, and other communications about
investments, portfolio strategy, personal finance, and the markets.
In its most recent rankings, Dalbar--which issues customer satisfaction ratings
and rankings based on website functionality--ranked americancentury.com fourth
out of the sites provided by the top 25 fund companies that it believes lead the
industry in web-based technology. Our website earned an "Excellent" rating,
Dalbar's highest designation.
For most of 2006, our website has linked visitors to information explaining our
strategic collaboration with Lance Armstrong and the Lance Armstrong Foundation
(LAF). This campaign, featuring Lance, is designed to encourage investors to
take a more active role in planning their financial futures and make every
investment decision count. To learn more about the collaboration and the LAF,
please visit americancentury.com or www.lanceface.com on the Web and click on
the links to related sites.
With the approach of year end and the 2006 tax season, you can also find out
more about December fund distributions and tax information via a link from our
website. We've posted December distribution estimates for over 50 funds, answers
to frequent distribution questions, and online descriptions of all of the tax
information we provide to investors.
If you haven't visited americancentury.com yet, we encourage you to do so . . .
it's there to serve you. And so are we. As always, we deeply appreciate your
commitment to American Century Investments.
Table of Contents
Market Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
U.S. Fixed-Income Total Returns . . . . . . . . . . . . . . . . . . . . . . 2
CAPITAL PRESERVATION
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Portfolio Composition by Maturity . . . . . . . . . . . . . . . . . . . . . 3
Yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Portfolio Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
GOVERNMENT AGENCY MONEY MARKET
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Portfolio Composition by Maturity . . . . . . . . . . . . . . . . . . . . . 6
Yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Portfolio Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Shareholder Fee Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
FINANCIAL STATEMENTS
Statement of Assets and Liabilities . . . . . . . . . . . . . . . . . . . . . 11
Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Statement of Changes in Net Assets . . . . . . . . . . . . . . . . . . . . . .13
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 14
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
OTHER INFORMATION
Approval of Management Agreements for Capital Preservation
and Government Agency Money Market . . . . . . . . . . . . . . . . . . . . . .21
Share Class Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Index Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
The opinions expressed in the Market Perspective and each of the Portfolio
Commentaries reflect those of the portfolio management team as of the date of
the report, and do not necessarily represent the opinions of American Century or
any other person in the American Century organization. Any such opinions are
subject to change at any time based upon market or other conditions and American
Century disclaims any responsibility to update such opinions. These opinions may
not be relied upon as investment advice and, because investment decisions made
by American Century funds are based on numerous factors, may not be relied upon
as an indication of trading intent on behalf of any American Century fund.
Security examples are used for representational purposes only and are not
intended as recommendations to purchase or sell securities. Performance
information for comparative indices and securities is provided to American
Century by third party vendors. To the best of American Century's knowledge,
such information is accurate at the time of printing.
Market Perspective
[photo of David MacEwen]
BY DAVID MACEWEN, CHIEF INVESTMENT OFFICER, FIXED INCOME
A TALE OF TWO QUARTERS
The second and third quarters of 2006 were very different in terms of inflation
and interest rate expectations and market performance. In the second quarter, as
core inflation rates remained above the Federal Reserve's 1-2% "comfort zone"
and threatened to go higher, investors feared the Fed would keep raising
interest rates and tip the economy into recession. Uncertainty about how far the
Fed would go, and how successful it would be in containing inflation, created a
defensive attitude in financial markets that resulted in disappointing returns
for broad stock and bond indices.
A FED PAUSE REFRESHED THE MARKETS
But in the third quarter, a 15% drop in oil prices helped take the heat off
inflation pressures, and cut business and consumer costs. Weakness in the
housing market--though hard on many homeowners--turned into a positive factor
for the markets. As home sales and prices declined, the Fed stopped its interest
rate tightening campaign, stepping back to assess the economy's reaction to
previous rate hikes. This combination of falling energy prices and relief from
rising interest rates helped broad U.S. stock and bond markets rebound from
second-quarter losses to post some of their biggest quarterly gains this decade.
LONG-DURATION AND CORPORATE SECURITIES OUTPERFORMED
The bond market especially welcomed a gloomy housing-market forecast,
speculating that it would reduce economic growth, inflation, and interest rates.
This rekindled demand for longer-term fixed-income securities. As a result, the
Treasury yield curve fell for the six months and "inverted", as the two-year
yield (4.69%) remained higher than the 10-year yield (4.63%), and both fell well
below the Fed's 5.25% overnight interest rate target. Mirroring the stock
market's rally, the corporate sectors led the broad taxable market.
U.S. FIXED-INCOME TOTAL RETURNS
For the six months ended September 30, 2006*
- --------------------------------------------------------------------------------
TREASURY SECURITIES
- --------------------------------------------------------------------------------
3-month bill 2.51%
- --------------------------------------------------------------------------------
2-year note 2.53%
- --------------------------------------------------------------------------------
5-year note 3.20%
- --------------------------------------------------------------------------------
10-year note 3.83%
- --------------------------------------------------------------------------------
30-year bond 4.64%
- --------------------------------------------------------------------------------
LEHMAN BROTHERS U.S. BOND MARKET INDICES
- --------------------------------------------------------------------------------
Corporate High-Yield 4.33%
- --------------------------------------------------------------------------------
Corporate Investment-Grade 4.12%
- --------------------------------------------------------------------------------
Aggregate (multi-sector) 3.73%
- --------------------------------------------------------------------------------
Fixed-Rate Mortgage-Backed 3.64%
- --------------------------------------------------------------------------------
Treasury 3.61%
- --------------------------------------------------------------------------------
Agency 3.45%
- --------------------------------------------------------------------------------
*Total returns for periods less than one year are not annualized.
- ------
2
Capital Preservation - Performance
TOTAL RETURNS AS OF SEPTEMBER 30, 2006
-----------------------------
AVERAGE ANNUAL RETURNS
- --------------------------------------------------------------------------------
SINCE INCEPTION
6 MONTHS(1) 1 YEAR 5 YEARS 10 YEARS INCEPTION DATE
- --------------------------------------------------------------------------------
INVESTOR CLASS 2.21% 4.00% 1.83% 3.34% 4.75% 10/13/72
- --------------------------------------------------------------------------------
90-DAY U.S.
TREASURY
BILL INDEX 2.34% 4.38% 2.20% 3.59% 6.22%(2) --
- --------------------------------------------------------------------------------
LIPPER U.S.
TREASURY MONEY
MARKET FUNDS
AVERAGE
RETURN(3) 2.11% 3.78% 1.57% 3.14% 5.82%(4) --
- --------------------------------------------------------------------------------
Fund's Lipper
Ranking among
U.S. Treasury
Money Market
Funds(3) 20 of 86 19 of 86 8 of 73 7 of 52 1 of 1(4) --
- --------------------------------------------------------------------------------
(1) Total returns for periods less than one year are not annualized.
(2) Since 9/30/72, the date nearest the Investor Class's inception for which
data are available.
(3) Data provided by Lipper Inc. - A Reuters Company. (c)2006 Reuters. All
rights reserved. Any copying, republication or redistribution of Lipper
content, including by caching, framing or similar means, is expressly
prohibited without the prior written consent of Lipper. Lipper shall not be
liable for any errors or delays in the content, or for any actions taken in
reliance thereon.
Lipper Fund Performance -- Performance data is total return, and is
preliminary and subject to revision.
Lipper Rankings -- Rankings are based only on the universe shown and are
based on average annual total returns. This listing might not represent the
complete universe of funds tracked by Lipper.
The data contained herein has been obtained from company reports, financial
reporting services, periodicals and other resources believed to be reliable.
Although carefully verified, data on compilations is not guaranteed by
Lipper and may be incomplete. No offer or solicitations to buy or sell any
of the securities herein is being made by Lipper.
(4) Since 10/31/72, the date nearest the Investor Class's inception for which
data are available.
PORTFOLIO COMPOSITION BY MATURITY
- --------------------------------------------------------------------------------
% OF FUND % OF FUND
INVESTMENTS INVESTMENTS
AS OF AS OF
9/30/06 3/31/06
- --------------------------------------------------------------------------------
1-30 days 8% 12%
- --------------------------------------------------------------------------------
31-90 days 38% 41%
- --------------------------------------------------------------------------------
91-180 days 54% 43%
- --------------------------------------------------------------------------------
More than 180 days -- 4%
- --------------------------------------------------------------------------------
YIELDS AS OF SEPTEMBER 30, 2006
- --------------------------------------------------------------------------------
7-DAY CURRENT YIELD
- --------------------------------------------------------------------------------
4.59%
- --------------------------------------------------------------------------------
7-DAY EFFECTIVE YIELD
- --------------------------------------------------------------------------------
4.70%
- --------------------------------------------------------------------------------
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. To obtain performance data current to the most recent month end, please
call 1-800-345-2021 or visit americancentury.com.
An investment in the fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the fund.
The 7-day current yield more closely reflects the current earnings of the fund
than the total return.
- ------
3
Capital Preservation - Portfolio Commentary
PORTFOLIO MANAGERS: LYNN PASCHEN AND STEVEN PERMUT
PERFORMANCE SUMMARY
Capital Preservation returned 2.21%* for the six months ended September 30,
2006, surpassing the 2.11% average return of the 86 funds in Lipper Inc.'s U.S.
Treasury money market funds category. The fund's six-month return ranked in the
top 24% of the Lipper category, and its longer-term performance rankings were
even better (see the previous page).
HIGHER BUT MORE STABLE MONEY MARKET RATES
Money market rates continued to rise over the past six months. Responding to
higher-than-expected inflation figures, the Federal Reserve raised short-term
interest rates in May and June, boosting the federal funds rate to 5.25%, a
level not seen since March 2001. The three-month Treasury bill yield--a common
benchmark for money market rates--tracked the Fed rate hikes, rising from 4.6%
to just over 5% by the end of June.
However, after 17 consecutive rate increases between June 2004 and June 2006,
the Fed chose to keep short-term interest rates steady at its policy meetings in
August and September. The Fed made note of slowing economic activity and
expectations of moderating inflation, borne out by a decline in energy and
commodity prices. With the Fed on hold, money market rates stabilized and
trended slightly lower; the three-month Treasury bill yield ended the period at
4.9%.
PORTFOLIO STRATEGY
Capital Preservation's seven-day current yield increased from 3.98% to 4.59%
during the six-month period. The seven-day yield peaked at 4.63%, its highest
point since April 2001.
For most of the period, we maintained a relatively short average maturity of 50
to 60 days, which allowed the fund's yield to reflect higher rates more quickly.
The exceptions included April, when yields moderated as strong tax receipts
reduced supply in the Treasury market, and September, when it became clear the
Fed was taking a prolonged hiatus from raising interest rates. At the end of the
period, the fund's average maturity had lengthened to 85 days.
Toward the end of the period, we increased the fund's holdings of very
short-term securities known as "dollar rolls." In a dollar roll transaction, we
buy Treasury bills and then agree to sell them back the following day at a
specific price. Dollar rolls offered better yields than three- or six-month
Treasury bills. To balance the short maturity of the dollar rolls, we added more
six-month Treasury bills to the portfolio.
LOOKING AHEAD
Based on historical averages, the Fed typically begins cutting short-term rates
about nine months after its final rate hike; the question is whether the Fed's
latest rate hike in June was the final one in the cycle. Economic and inflation
data in the coming months will provide some clues, and we believe money market
rates will remain relatively stable in the meantime.
Keep in mind that a money market fund like Capital Preservation can help
preserve capital and add stability to a diversified portfolio in any market
environment.
*Total returns for periods less than one year are not annualized.
- ------
4
Capital Preservation - Schedule of Investments
SEPTEMBER 30, 2006 (UNAUDITED)
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY BILLS(1) -- 57.4%
$ 55,000,000 U.S. Treasury Bills,
4.90%, 10/5/06 $ 54,970,075
- --------------------------------------------------------------------------------
115,000,000 U.S. Treasury Bills,
4.71%, 10/26/06 114,643,670
- --------------------------------------------------------------------------------
125,000,000 U.S. Treasury Bills,
4.92%, 11/9/06 124,325,002
- --------------------------------------------------------------------------------
225,000,000 U.S. Treasury Bills,
4.73%, 11/16/06 223,641,497
- --------------------------------------------------------------------------------
50,000,000 U.S. Treasury Bills,
4.97%, 11/30/06 49,585,833
- --------------------------------------------------------------------------------
100,000,000 U.S. Treasury Bills,
4.72%, 12/7/06 99,122,486
- --------------------------------------------------------------------------------
54,000,000 U.S. Treasury Bills,
5.11%, 1/18/07 53,163,879
- --------------------------------------------------------------------------------
130,000,000 U.S. Treasury Bills,
4.86%, 2/1/07 127,843,571
- --------------------------------------------------------------------------------
150,000,000 U.S. Treasury Bills,
4.96%, 2/8/07 147,312,160
- --------------------------------------------------------------------------------
50,000,000 U.S. Treasury Bills,
4.99%, 2/22/07 49,002,800
- --------------------------------------------------------------------------------
65,000,000 U.S. Treasury Bills,
4.97%, 3/1/07 63,645,257
- --------------------------------------------------------------------------------
100,000,000 U.S. Treasury Bills,
4.93%, 3/8/07 97,835,510
- --------------------------------------------------------------------------------
100,000,000 U.S. Treasury Bills,
4.93%, 3/15/07 97,739,271
- --------------------------------------------------------------------------------
205,000,000 U.S. Treasury Bills,
4.82%, 3/29/07 200,091,522
- --------------------------------------------------------------------------------
TOTAL U.S. TREASURY BILLS 1,502,922,533
- --------------------------------------------------------------------------------
U.S. TREASURY NOTES(1) -- 16.1%
175,000,000 U.S. Treasury Notes,
2.625%, 11/15/06 174,483,326
- --------------------------------------------------------------------------------
50,000,000 U.S. Treasury Notes,
2.875%, 11/30/06 49,808,570
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 25,000,000 U.S. Treasury Notes,
3.125%, 1/31/07 $ 24,819,639
- --------------------------------------------------------------------------------
100,000,000 U.S. Treasury Notes,
2.25%, 2/15/07 98,932,831
- --------------------------------------------------------------------------------
25,000,000 U.S. Treasury Notes,
6.25%, 2/15/07 25,090,368
- --------------------------------------------------------------------------------
50,000,000 U.S. Treasury Notes,
3.375%, 2/28/07 49,659,424
- --------------------------------------------------------------------------------
TOTAL U.S. TREASURY NOTES 422,794,158
- --------------------------------------------------------------------------------
ZERO-COUPON U.S. TREASURY
SECURITIES(2) -- 1.9%
25,000,000 STRIPS - COUPON,
5.18%, 2/15/07 24,530,082
- --------------------------------------------------------------------------------
25,000,000 STRIPS - PRINCIPAL,
5.15%, 11/15/06 24,845,809
- --------------------------------------------------------------------------------
TOTAL ZERO-COUPON U.S. TREASURY
SECURITIES 49,375,891
- --------------------------------------------------------------------------------
TOTAL INVESTMENT
SECURITIES -- 75.4% 1,975,092,582
- --------------------------------------------------------------------------------
OTHER ASSETS AND
LIABILITIES -- 24.6% 643,493,106
- --------------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $2,618,585,688
================================================================================
NOTES TO SCHEDULE OF INVESTMENTS
STRIPS = Separate Trading of Registered Interest and Principal of Securities
(1) The rates for U.S. Treasury Bills are the yield to maturity at purchase. The
rates for U.S. Treasury Notes are the stated coupon rates.
(2) Security is a zero-coupon bond. The rate indicated is the yield to maturity
at purchase. Zero-coupon securities are issued at a substantial discount
from their value at maturity.
See Notes to Financial Statements.
- ------
5
Government Agency Money Market - Performance
TOTAL RETURNS AS OF SEPTEMBER 30, 2006
-----------------------------
AVERAGE ANNUAL RETURNS
- --------------------------------------------------------------------------------
SINCE INCEPTION
6 MONTHS(1) 1 YEAR 5 YEARS 10 YEARS INCEPTION DATE
- --------------------------------------------------------------------------------
INVESTOR CLASS 2.31% 4.23% 1.94% 3.50% 4.09% 12/5/89
- --------------------------------------------------------------------------------
90-DAY U.S.
TREASURY
BILL INDEX 2.34% 4.38% 2.20% 3.59% 4.17%(2) --
- --------------------------------------------------------------------------------
LIPPER U.S.
GOVERNMENT
MONEY MARKET
FUNDS AVERAGE
RETURN(3) 2.16% 3.91% 1.63% 3.28% 3.86%(4) --
- --------------------------------------------------------------------------------
Fund's Lipper
Ranking among
U.S. Government
Money Market
Funds(3) 20 of 122 16 of 119 9 of 103 10 of 76 5 of 36(4) --
- --------------------------------------------------------------------------------
Advisor Class 2.18% 3.97% 1.69% -- 2.75% 4/12/99
- --------------------------------------------------------------------------------
(1) Total returns for periods less than one year are not annualized.
(2) Since 11/30/89, the date nearest the Investor Class's inception for which
data are available.
(3) Data provided by Lipper Inc. - A Reuters Company. (c)2006 Reuters. All
rights reserved. Any copying, republication or redistribution of Lipper
content, including by caching, framing or similar means, is expressly
prohibited without the prior written consent of Lipper. Lipper shall not be
liable for any errors or delays in the content, or for any actions taken in
reliance thereon.
Lipper Fund Performance -- Performance data is total return, and is
preliminary and subject to revision.
Lipper Rankings -- Rankings are based only on the universe shown and are
based on average annual total returns. This listing might not represent the
complete universe of funds tracked by Lipper.
The data contained herein has been obtained from company reports, financial
reporting services, periodicals and other resources believed to be reliable.
Although carefully verified, data on compilations is not guaranteed by
Lipper and may be incomplete. No offer or solicitations to buy or sell any
of the securities herein is being made by Lipper.
(4) Since 12/31/89, the date nearest the Investor Class's inception for which
data are available.
PORTFOLIO COMPOSITION BY MATURITY
- --------------------------------------------------------------------------------
% OF FUND % OF FUND
INVESTMENTS INVESTMENTS
AS OF AS OF
9/30/06 3/31/06
- --------------------------------------------------------------------------------
1-30 days 47% 54%
- --------------------------------------------------------------------------------
31-90 days 34% 34%
- --------------------------------------------------------------------------------
91-180 days 16% 5%
- --------------------------------------------------------------------------------
More than 180 days 3% 7%
- --------------------------------------------------------------------------------
YIELDS AS OF SEPTEMBER 30, 2006
- --------------------------------------------------------------------------------
7-DAY CURRENT YIELD
- --------------------------------------------------------------------------------
Investor Class 4.75%
- --------------------------------------------------------------------------------
Advisor Class 4.50%
- --------------------------------------------------------------------------------
7-DAY EFFECTIVE YIELD
- --------------------------------------------------------------------------------
Investor Class 4.87%
- --------------------------------------------------------------------------------
Advisor Class 4.60%
- --------------------------------------------------------------------------------
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. To obtain performance data current to the most recent month end, please
call 1-800-345-2021 or visit americancentury.com.
An investment in the fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the fund.
The 7-day current yield more closely reflects the current earnings of the fund
than the total return.
- ------
6
Government Agency Money Market - Portfolio Commentary
PORTFOLIO MANAGERS: DENISE LATCHFORD AND STEVEN PERMUT
PERFORMANCE SUMMARY
Government Agency Money Market returned 2.31%* for the six months ended
September 30, 2006, outpacing the 2.16% average return of the 122 funds in
Lipper Inc.'s U.S. government money market funds category. The fund's six-month
return ranked in the top 17% of the Lipper group, and its longer-term
performance rankings were even better (see the previous page).
HIGHER BUT MORE STABLE MONEY MARKET RATES
Money market rates continued to rise over the past six months. Responding to
higher-than-expected inflation figures, the Federal Reserve raised short-term
interest rates in May and June, boosting the federal funds rate to 5.25%, a
level not seen since March 2001. The three-month Treasury bill yield--a common
benchmark for money market rates--tracked the Fed rate hikes, rising from 4.6%
to just over 5% by the end of June.
However, after 17 consecutive rate increases between June 2004 and June 2006,
the Fed chose to keep short-term interest rates steady at its policy meetings in
August and September. The Fed made note of slowing economic activity and
expectations of moderating inflation, borne out by a decline in energy and
commodity prices. With the Fed on hold, money market rates stabilized and
trended slightly lower; the three-month Treasury bill yield ended the period at
4.9%.
PORTFOLIO STRATEGY
Government Agency Money Market's seven-day current yield increased from 4.17% to
4.75% during the six-month period. The seven-day yield peaked at 4.78%, its
highest point since April 2001.
We maintained an average maturity of 40 to 60 days for the portfolio throughout
the six months. We generally kept the average maturity toward the shorter end of
this range, extending only when market conditions warranted. For example, in May
we lengthened the fund's average maturity when an unusually high number of
longer-term government agency securities became money market-eligible, boosting
yields. We also extended the average maturity in September, when it became clear
the Fed was taking a prolonged hiatus from raising interest rates.
Toward the end of the period, strong demand for short-term government agency
notes kept their yields relatively low, so we increased our position in callable
agency securities, which offered more attractive yields.
LOOKING AHEAD
Based on historical averages, the Fed typically begins cutting short-term rates
about nine months after its final rate hike; the question is whether the Fed's
latest rate hike in June was the final one in the cycle. Economic and inflation
data in the coming months will provide some clues, and we believe money market
rates will remain relatively stable in the meantime.
Keep in mind that a money market fund like Government Agency Money Market can
help preserve capital and add stability to a diversified portfolio in any market
environment.
*All fund returns, rankings, and yields referenced in this commentary are for
Investor Class shares. Total returns for periods less than one year are not
annualized.
- ------
7
Government Agency Money Market - Schedule of Investments
SEPTEMBER 30, 2006 (UNAUDITED)
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
DISCOUNT NOTES(1) -- 54.0%
$10,000,000 FFCB Discount Notes, 5.06%,
12/12/06 $ 9,898,801
- --------------------------------------------------------------------------------
12,000,000 FFCB Discount Notes, 5.21%,
1/30/07 11,789,864
- --------------------------------------------------------------------------------
25,000,000 FHLB Discount Notes, 5.20%,
10/4/06 24,989,177
- --------------------------------------------------------------------------------
15,250,000 FHLB Discount Notes, 5.13%,
10/6/06 15,239,134
- --------------------------------------------------------------------------------
43,953,000 FHLB Discount Notes, 5.17%,
10/11/06 43,889,871
- --------------------------------------------------------------------------------
52,711,000 FHLB Discount Notes, 5.15%,
10/18/06 52,582,913
- --------------------------------------------------------------------------------
29,000,000 FHLB Discount Notes, 5.13%,
10/20/06 28,921,483
- --------------------------------------------------------------------------------
31,870,000 FHLB Discount Notes, 5.19%,
11/1/06 31,727,648
- --------------------------------------------------------------------------------
36,100,000 FHLB Discount Notes, 5.15%,
11/3/06 35,929,578
- --------------------------------------------------------------------------------
13,500,000 FHLB Discount Notes, 5.15%,
11/10/06 13,422,750
- --------------------------------------------------------------------------------
424,000 FHLB Discount Notes, 5.16%,
11/22/06 420,840
- --------------------------------------------------------------------------------
2,200,000 FHLB Discount Notes, 5.10%,
11/29/06 2,181,612
- --------------------------------------------------------------------------------
5,000,000 FHLB Discount Notes, 5.15%,
12/1/06 4,956,368
- --------------------------------------------------------------------------------
15,000,000 FHLB Discount Notes, 5.15%,
12/15/06 14,839,219
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY
DISCOUNT NOTES 290,789,258
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
SECURITIES -- 45.3%
1,000,000 FFCB, 3.625%, 10/26/06 998,737
- --------------------------------------------------------------------------------
20,000,000 FFCB, 3.90%, 1/23/07 19,911,764
- --------------------------------------------------------------------------------
1,500,000 FFCB, 3.25%, 6/15/07 1,479,889
- --------------------------------------------------------------------------------
16,000,000 FFCB, VRN, 5.00%, 10/3/06,
resets weekly off the 3-month
T-Bill plus 0.10% with no caps 15,996,148
- --------------------------------------------------------------------------------
10,000,000 FFCB, VRN, 5.05%, 10/3/06,
resets weekly off the 3-month
T-Bill plus 0.15% with no caps 10,000,000
- --------------------------------------------------------------------------------
3,300,000 FHLB, 2.10%, 10/13/06 3,296,557
- --------------------------------------------------------------------------------
200,000 FHLB, 2.02%, 10/16/06 199,724
- --------------------------------------------------------------------------------
8,250,000 FHLB, 2.85%, 11/6/06 8,229,679
- --------------------------------------------------------------------------------
3,280,000 FHLB, 2.75%, 11/15/06 3,270,638
- --------------------------------------------------------------------------------
3,000,000 FHLB, 3.125%, 11/15/06 2,991,144
- --------------------------------------------------------------------------------
3,870,000 FHLB, 4.125%, 11/15/06 3,867,297
- --------------------------------------------------------------------------------
2,500,000 FHLB, 4.875%, 11/15/06 2,499,567
- --------------------------------------------------------------------------------
950,000 FHLB, 6.50%, 11/15/06 951,039
- --------------------------------------------------------------------------------
1,500,000 FHLB, 2.625%, 11/28/06 1,493,541
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 1,000,000 FHLB, 3.75%, 11/30/06 $ 998,036
- --------------------------------------------------------------------------------
1,750,000 FHLB, 3.875%, 12/1/06 1,745,598
- --------------------------------------------------------------------------------
8,500,000 FHLB, 3.10%, 12/4/06 8,465,623
- --------------------------------------------------------------------------------
11,950,000 FHLB, 3.875%, 12/20/06 11,907,824
- --------------------------------------------------------------------------------
10,000,000 FHLB, 3.20%, 12/22/06 9,953,836
- --------------------------------------------------------------------------------
10,000,000 FHLB, 5.20%, 12/26/06 10,000,000
- --------------------------------------------------------------------------------
1,000,000 FHLB, 3.75%, 1/16/07 995,237
- --------------------------------------------------------------------------------
5,000,000 FHLB, 5.00%, 1/29/07 5,000,000
- --------------------------------------------------------------------------------
2,000,000 FHLB, 4.625%, 1/30/07 1,994,800
- --------------------------------------------------------------------------------
4,860,000 FHLB, 5.55%, 2/14/07 4,862,535
- --------------------------------------------------------------------------------
8,995,000 FHLB, 2.875%, 2/15/07 8,924,813
- --------------------------------------------------------------------------------
6,155,000 FHLB, 3.375%, 2/15/07 6,118,870
- --------------------------------------------------------------------------------
10,000,000 FHLB, 2.625%, 2/16/07 9,902,636
- --------------------------------------------------------------------------------
2,000,000 FHLB, 5.125%, 2/20/07 1,997,764
- --------------------------------------------------------------------------------
2,000,000 FHLB, 3.53%, 2/22/07 1,985,051
- --------------------------------------------------------------------------------
5,000,000 FHLB, 4.80%, 2/23/07 5,000,000
- --------------------------------------------------------------------------------
6,000,000 FHLB, 5.25%, 2/26/07 5,996,661
- --------------------------------------------------------------------------------
1,500,000 FHLB, 2.57%, 2/28/07 1,483,087
- --------------------------------------------------------------------------------
9,500,000 FHLB, 4.00%, 3/30/07 9,439,707
- --------------------------------------------------------------------------------
1,700,000 FHLB, 4.50%, 4/17/07 1,693,510
- --------------------------------------------------------------------------------
7,000,000 FHLB, 5.50%, 8/21/07 7,004,161
- --------------------------------------------------------------------------------
38,500,000 FHLB, VRN, 5.07%, 10/4/06,
resets weekly off the 3-month
T-Bill plus 0.17% with no caps 38,496,805
- --------------------------------------------------------------------------------
10,000,000 FHLB, VRN, 5.35%, 10/10/06,
resets quarterly off the
3-month LIBOR minus 0.16%
with no caps 9,996,720
- --------------------------------------------------------------------------------
5,000,000 FHLB, VRN, 5.50%, 10/27/06(2) 5,000,000
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY
SECURITIES 244,148,998
- --------------------------------------------------------------------------------
TOTAL INVESTMENT
SECURITIES -- 99.3% 534,938,256
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- 0.7% 3,549,990
- --------------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $538,488,246
================================================================================
NOTES TO SCHEDULE OF INVESTMENTS
FFCB = Federal Farm Credit Bank
FHLB = Federal Home Loan Bank
LIBOR = London Interbank Offered Rate
resets = The frequency with which a security's coupon changes, based on current
market conditions or an underlying index. The more frequently a
security resets, the less risk the investor is taking that the coupon
will vary significantly from current market rates.
VRN = Variable Rate Note. Interest reset date is indicated. Rate shown is
effective September 30, 2006.
(1) The rate indicated is the yield to maturity at purchase.
(2) Step-coupon security. Coupon increases quarterly at a predetermined rate.
Rate shown is effective September 30, 2006.
See Notes to Financial Statements.
- ------
8
Shareholder Fee Examples (Unaudited)
Fund shareholders may incur two types of costs: (1) transaction costs, including
sales charges (loads) on purchase payments and redemption/exchange fees; and (2)
ongoing costs, including management fees; distribution and service (12b-1) fees;
and other fund expenses. This example is intended to help you understand your
ongoing costs (in dollars) of investing in your fund and to compare these costs
with the ongoing cost of investing in other mutual funds.
The example is based on an investment of $1,000 made at the beginning of the
period and held for the entire period from April 1, 2006 to September 30, 2006.
ACTUAL EXPENSES
The table provides information about actual account values and actual expenses
for each class. You may use the information, together with the amount you
invested, to estimate the expenses that you paid over the period. First,
identify the share class you own. Then simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number under the heading "Expenses Paid During
Period" to estimate the expenses you paid on your account during this period.
If you hold Investor Class shares of any American Century fund, or Institutional
Class shares of the American Century Diversified Bond Fund, in an American
Century account (i.e., not a financial intermediary or retirement plan account),
American Century may charge you a $12.50 semiannual account maintenance fee if
the value of those shares is less than $10,000. We will redeem shares
automatically in one of your accounts to pay the $12.50 fee. In determining your
total eligible investment amount, we will include your investments in all
PERSONAL ACCOUNTS (including American Century Brokerage accounts) registered
under your Social Security number. PERSONAL ACCOUNTS include individual
accounts, joint accounts, UGMA/UTMA accounts, personal trusts, Coverdell
Education Savings Accounts and IRAs (including traditional, Roth, Rollover,
SEP-, SARSEP- and SIMPLE-IRAs), and certain other retirement accounts. If you
have only business, business retirement, employer-sponsored or American Century
Brokerage accounts, you are currently not subject to this fee. We will not
charge the fee as long as you choose to manage your accounts exclusively online.
If you are subject to the Account Maintenance Fee, your account value could be
reduced by the fee amount.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table also provides information about hypothetical account values and
hypothetical expenses based on the actual expense ratio of each class of your
fund and an assumed rate of return of 5% per year before expenses, which is not
the actual return of a fund's share class. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in your fund and other funds. To do so, compare this
5% hypothetical example with the 5% hypothetical examples that appear in the
shareholder reports of the other funds.
(continued)
- ------
9
Shareholder Fee Examples (Unaudited)
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption/exchange fees. Therefore, the table is useful in
comparing ongoing costs only, and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
- --------------------------------------------------------------------------------
EXPENSES PAID
BEGINNING ENDING DURING PERIOD* ANNUALIZED
ACCOUNT VALUE ACCOUNT VALUE 4/1/06 - EXPENSE
4/1/06 9/30/06 9/30/06 RATIO*
- --------------------------------------------------------------------------------
CAPITAL PRESERVATION SHAREHOLDER FEE EXAMPLE
- --------------------------------------------------------------------------------
ACTUAL
- --------------------------------------------------------------------------------
Investor Class $1,000 $1,022.10 $2.43 0.48%
- --------------------------------------------------------------------------------
HYPOTHETICAL
- --------------------------------------------------------------------------------
Investor Class $1,000 $1,022.66 $2.43 0.48%
- --------------------------------------------------------------------------------
GOVERNMENT AGENCY MONEY MARKET SHAREHOLDER FEE EXAMPLES
- --------------------------------------------------------------------------------
ACTUAL
- --------------------------------------------------------------------------------
Investor Class $1,000 $1,023.10 $2.43 0.48%
- --------------------------------------------------------------------------------
Advisor Class $1,000 $1,021.80 $3.70 0.73%
- --------------------------------------------------------------------------------
HYPOTHETICAL
- --------------------------------------------------------------------------------
Investor Class $1,000 $1,022.66 $2.43 0.48%
- --------------------------------------------------------------------------------
Advisor Class $1,000 $1,021.41 $3.70 0.73%
- --------------------------------------------------------------------------------
*Expenses are equal to the class's annualized expense ratio listed in the table
above, multiplied by the average account value over the period, multiplied by
183, the number of days in the most recent fiscal half-year, divided by 365, to
reflect the one-half year period.
- ------
10
Statement of Assets and Liabilities
SEPTEMBER 30, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
CAPITAL GOVERNMENT
PRESERVATION AGENCY
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
Investment securities, at value
(amortized cost and cost for
federal income tax purposes) $1,975,092,582 $534,938,256
- ------------------------------------------
Cash 3,028,638 1,502,440
- ------------------------------------------
Receivable for investments sold 634,857,774 --
- ------------------------------------------
Interest receivable 6,625,399 2,257,881
- --------------------------------------------------------------------------------
2,619,604,393 538,698,577
- --------------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------------
Payable for capital shares redeemed 3,403 --
- ------------------------------------------
Accrued management fees 1,015,302 203,029
- ------------------------------------------
Distribution fees payable -- 3,651
- ------------------------------------------
Service fees payable -- 3,651
- --------------------------------------------------------------------------------
1,018,705 210,331
- --------------------------------------------------------------------------------
NET ASSETS $2,618,585,688 $538,488,246
================================================================================
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Capital paid in $2,618,622,469 $538,501,277
- ------------------------------------------
Accumulated net realized loss
on investment transactions (36,781) (13,031)
- --------------------------------------------------------------------------------
$2,618,585,688 $538,488,246
================================================================================
INVESTOR CLASS
- --------------------------------------------------------------------------------
Net assets $2,618,585,688 $520,697,023
- ------------------------------------------
Shares outstanding 2,618,622,469 520,709,014
- ------------------------------------------
Net asset value per share $1.00 $1.00
- --------------------------------------------------------------------------------
ADVISOR CLASS
- --------------------------------------------------------------------------------
Net assets -- $17,791,223
- ------------------------------------------
Shares outstanding -- 17,791,359
- ------------------------------------------
Net asset value per share -- $1.00
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- ------
11
Statement of Operations
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
CAPITAL GOVERNMENT
PRESERVATION AGENCY
- --------------------------------------------------------------------------------
INVESTMENT INCOME
- --------------------------------------------------------------------------------
INCOME:
- ------------------------------------------
Interest $63,608,223 $13,128,421
- --------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------------
Management fees 6,201,385 1,205,605
- ------------------------------------------
Distribution fees -- Advisor Class -- 21,485
- ------------------------------------------
Service fees -- Advisor Class -- 21,485
- ------------------------------------------
Trustees' fees and expenses 49,349 9,590
- ------------------------------------------
Other expenses 5,398 --
- --------------------------------------------------------------------------------
6,256,132 1,258,165
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 57,352,091 11,870,256
- --------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS) ON
INVESTMENT TRANSACTIONS 270,221 (14)
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $57,622,312 $11,870,242
================================================================================
See Notes to Financial Statements.
- ------
12
Statement of Changes in Net Assets
SIX MONTHS ENDED SEPTEMBER 30, 2006 (UNAUDITED) AND YEAR ENDED MARCH 31, 2006
- ----------------------------------------------------------------------------------------------------
CAPITAL PRESERVATION GOVERNMENT AGENCY
- ----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS SEPT. 30, 2006 MARCH 31, 2006 SEPT. 30, 2006 MARCH 31, 2006
- ----------------------------------------------------------------------------------------------------
OPERATIONS
- ----------------------------------------------------------------------------------------------------
Net investment income $ 57,352,091 $ 80,482,895 $ 11,870,256 $ 15,885,143
- ---------------------------------
Net realized gain (loss) 270,221 (92,042) (14) (138)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations 57,622,312 80,390,853 11,870,242 15,885,005
- ----------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
- ----------------------------------------------------------------------------------------------------
From net investment income:
- ---------------------------------
Investor Class (57,352,091) (80,482,895) (11,498,942) (15,450,341)
- ---------------------------------
Advisor Class -- -- (371,314) (434,802)
- ----------------------------------------------------------------------------------------------------
Decrease in net assets
from distributions (57,352,091) (80,482,895) (11,870,256) (15,885,143)
- ----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
- ----------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets from capital
share transactions (29,398,744) (113,993,592) 35,696,451 11,902,379
- ----------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS (29,128,523) (114,085,634) 35,696,437 11,902,241
NET ASSETS
- ----------------------------------------------------------------------------------------------------
Beginning of period 2,647,714,211 2,761,799,845 502,791,809 490,889,568
- ----------------------------------------------------------------------------------------------------
End of period $2,618,585,688 $2,647,714,211 $538,488,246 $502,791,809
====================================================================================================
See Notes to Financial Statements.
- ------
13
Notes to Financial Statements
SEPTEMBER 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Government Income Trust (the trust) is
registered under the Investment Company Act of 1940 (the 1940 Act) as an
open-end management investment company. Capital Preservation Fund (Capital
Preservation) and Government Agency Money Market Fund (Government Agency)
(collectively, the funds) are two funds in a series issued by the trust. Capital
Preservation seeks maximum safety and liquidity and intends to pursue its
investment objective by investing in short-term money market securities issued
by the U.S. Treasury that are guaranteed by the direct full faith and credit
pledge of the U.S. government. Government Agency seeks maximum safety and
liquidity and intends to pursue its investment objective by investing in
short-term money market securities issued by the U.S. government and its
agencies and instrumentalities. The following is a summary of the funds'
significant accounting policies.
MULTIPLE CLASS -- Capital Preservation is authorized to issue the Investor
Class. Government Agency is authorized to issue the Investor Class and the
Advisor Class. The share classes differ principally in their respective
distribution and shareholder servicing expenses and arrangements. All shares of
the funds represent an equal pro rata interest in the net assets of the class to
which such shares belong, and have identical voting, dividend, liquidation and
other rights and the same terms and conditions, except for class specific
expenses and exclusive rights to vote on matters affecting only individual
classes. Income, non-class specific expenses, and realized and unrealized
capital gains and losses of the funds are allocated to each class of shares
based on their relative net assets.
SECURITY VALUATIONS -- Securities are generally valued at amortized cost, which
approximates current market value. When such valuations do not reflect market
value, securities may be valued as determined in accordance with procedures
adopted by the Board of Trustees.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the trade
date. Net realized gains and losses are determined on the identified cost basis,
which is also used for federal income tax purposes.
INVESTMENT INCOME -- Interest income is recorded on the accrual basis and
includes accretion of discounts and amortization of premiums.
WHEN-ISSUED AND FORWARD COMMITMENTS -- The funds may engage in securities
transactions on a when-issued or forward commitment basis. In these
transactions, the securities' prices and yields are fixed on the date of the
commitment. In a when-issued transaction, the payment and delivery are scheduled
for a future date and during this period, securities are subject to market
fluctuations. In a forward commitment transaction, the funds may sell a security
and at the same time make a commitment to purchase the same security at a future
date at a specified price. Conversely, the funds may purchase a security and at
the same time make a commitment to sell the same security at a future date at a
specified price. These types of transactions are executed simultaneously in what
are known as "roll" transactions. The funds will segregate cash, cash
equivalents or other appropriate liquid securities on their records in amounts
sufficient to meet the purchase price.
INCOME TAX STATUS -- It is each fund's policy to distribute substantially all
net investment income and net realized gains to shareholders and to otherwise
qualify as a regulated investment company under provisions of the Internal
Revenue Code. Accordingly, no provision has been made for federal or state
income taxes.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income and
short-term capital gains, if any, are declared daily and paid monthly. The funds
do not expect to realize any long-term capital gains, and accordingly, do not
expect to pay any capital gains distributions.
INDEMNIFICATIONS -- Under the trust's organizational documents, its officers and
trustees are indemnified against certain liabilities arising out of the
performance of their duties to the funds. In addition, in the normal course of
business, the funds enter into contracts that provide general indemnifications.
The funds' maximum exposure under these arrangements is unknown as this would
involve future claims that may be made against the funds. The risk of material
loss from such claims is considered by management to be remote.
USE OF ESTIMATES -- The financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America, which
may require management to make certain estimates and assumptions at the date of
the financial statements. Actual results could differ from these estimates.
(continued)
- ------
14
Notes to Financial Statements
SEPTEMBER 30, 2006 (UNAUDITED)
2. FEES AND TRANSACTIONS WITH RELATED PARTIES
MANAGEMENT FEES -- The trust has entered into a Management Agreement with
American Century Investment Management, Inc. (ACIM) (the investment advisor),
under which ACIM provides the funds with investment advisory and management
services in exchange for a single, unified management fee (the fee) per class.
The Agreement provides that all expenses of the funds, except brokerage
commissions, taxes, interest, fees and expenses of those trustees who are not
considered "interested persons" as defined in the 1940 Act (including counsel
fees) and extraordinary expenses, will be paid by ACIM. The fee is computed and
accrued daily based on the daily net assets of each specific class of shares of
each fund and paid monthly in arrears. The fee consists of (1) an Investment
Category Fee based on the daily net assets of the funds and certain other
accounts managed by the investment advisor that are in the same broad investment
category as each fund and (2) a Complex Fee based on the assets of all the funds
in the American Century family of funds. The rates for the Investment Category
Fee range from 0.1370% to 0.2500% and the rates for the Complex Fee (Investor
Class) range from 0.2500% to 0.3100%. The Advisor Class is 0.2500% less at each
point within the Complex Fee range. For the six months ended September 30, 2006,
the effective annual Investor Class management fee for the funds was 0.48% and
the effective annual Advisor Class management fee for Government Agency was
0.23%.
DISTRIBUTION AND SERVICE FEES -- The Board of Trustees has adopted a Master
Distribution and Shareholder Services Plan (the plan) for the Advisor Class,
pursuant to Rule 12b-1 of the 1940 Act. The plan provides that the Advisor Class
will pay American Century Investment Services, Inc. (ACIS) an annual
distribution fee equal to 0.25% and an annual service fee equal to 0.25%. The
fees are computed and accrued daily based on the Advisor Class's daily net
assets and paid monthly in arrears. The distribution fee provides compensation
for expenses incurred by financial intermediaries in connection with
distributing shares of the Advisor Class including, but not limited to, payments
to brokers, dealers, and financial institutions that have entered into sales
agreements with respect to shares of the funds. The service fee provides
compensation for shareholder and administrative services rendered by ACIS, its
affiliates or independent third party providers. Fees incurred under the plan
during the six months ended September 30, 2006, are detailed in the Statement of
Operations.
RELATED PARTIES -- Certain officers and trustees of the trust are also officers
and/or directors, and, as a group, controlling stockholders of American Century
Companies, Inc. (ACC), the parent of the trust's investment advisor, ACIM, the
distributor of the trust, ACIS, and the trust's transfer agent, American Century
Services, LLC. JPMorgan Chase Bank is a custodian of the funds and a wholly
owned subsidiary of J.P. Morgan Chase & Co. (JPM). JPM is an equity investor in
ACC.
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the funds were as follows (unlimited number of shares
authorized):
- ----------------------------------------------------------------------------------------------------
CAPITAL PRESERVATION GOVERNMENT AGENCY
- ----------------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------
INVESTOR CLASS
- ----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
SEPTEMBER 30, 2006
- ------------------------------
Sold 485,353,420 $ 485,353,420 146,754,907 $ 146,754,907
- ------------------------------
Issued in reinvestment
of distributions 55,442,560 55,442,560 11,181,652 11,181,652
- ------------------------------
Redeemed (570,194,724) (570,194,724) (123,060,270) (123,060,270)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) (29,398,744) $ (29,398,744) 34,876,289 $ 34,876,289
====================================================================================================
YEAR ENDED MARCH 31, 2006
- ------------------------------
Sold 1,031,251,888 $ 1,031,251,888 246,368,848 $ 246,368,848
- ------------------------------
Issued in reinvestment
of distributions 78,257,468 78,257,468 15,192,805 15,192,805
- ------------------------------
Redeemed (1,223,502,948) (1,223,502,948) (254,149,656) (254,149,656)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) (113,993,592) $ (113,993,592) 7,411,997 $ 7,411,997
====================================================================================================
(continued)
- ------
15
Notes to Financial Statements
SEPTEMBER 30, 2006 (UNAUDITED)
3. CAPITAL SHARE TRANSACTIONS (CONTINUED)
- --------------------------------------------------------------------------------
GOVERNMENT AGENCY
- --------------------------------------------------------------------------------
SHARES AMOUNT
- --------------------------------------------------------------------------------
ADVISOR CLASS
- --------------------------------------------------------------------------------
SIX MONTHS ENDED SEPTEMBER 30, 2006
- ---------------------------------------------
Sold 6,578,019 $ 6,578,019
- ---------------------------------------------
Issued in reinvestment of distributions 367,227 367,227
- ---------------------------------------------
Redeemed (6,125,084) (6,125,084)
- --------------------------------------------------------------------------------
Net increase (decrease) 820,162 $ 820,162
================================================================================
YEAR ENDED MARCH 31, 2006
- ---------------------------------------------
Sold 18,109,211 $ 18,109,211
- ---------------------------------------------
Issued in reinvestment of distributions 434,280 434,280
- ---------------------------------------------
Redeemed (14,053,109) (14,053,109)
- --------------------------------------------------------------------------------
Net increase (decrease) 4,490,382 $ 4,490,382
================================================================================
4. FEDERAL TAX INFORMATION
The book-basis 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. These differences reflect the
differing character of certain income items and net realized gains and losses
for financial statement and tax purposes, and may result in reclassification
among certain capital accounts on the financial statements.
Following are the capital loss carryovers and capital loss deferral amounts as
of March 31, 2006:
- --------------------------------------------------------------------------------
CAPITAL GOVERNMENT
PRESERVATION AGENCY
- --------------------------------------------------------------------------------
Accumulated capital losses $(301,682) $(13,005)
- --------------------------------------------------------------------------------
Capital loss deferrals $(19,700) $(12)
- --------------------------------------------------------------------------------
The accumulated capital losses listed above represent net capital loss
carryovers that may be used to offset future realized capital gains for federal
income tax purposes. The capital loss carryovers expire as follows:
- --------------------------------------------------------------------------------
2012 2013 2014
- --------------------------------------------------------------------------------
Capital Preservation $(6,263) $(84,926) $(210,493)
- --------------------------------------------------------------------------------
Government Agency $(10,411) $(2,278) $(316)
- --------------------------------------------------------------------------------
The capital loss deferrals represent net capital losses incurred in the
five-month period ended March 31, 2006. The funds have elected to treat such
losses as having been incurred in the following fiscal year for federal income
tax purposes.
(continued)
- ------
16
Notes to Financial Statements
SEPTEMBER 30, 2006 (UNAUDITED)
5. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
Interpretation of FASB Statement No. 109" (FIN 48). FIN 48 establishes a minimum
threshold for financial statement recognition of the benefit of positions taken
in filing tax returns (including whether an entity is taxable in a particular
jurisdiction), and requires certain expanded tax disclosures. FIN 48 is
effective for fiscal years beginning after December 15, 2006, and is to be
applied to all open tax years as of the date of effectiveness. The FASB issued
Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
(FAS 157), in September 2006, which is effective for fiscal years beginning
after November 15, 2007. FAS 157 defines fair value, establishes a framework for
measuring fair value and expands the required financial statement disclosures
about fair value measurements. Management is currently evaluating the impact of
adopting FIN 48 and FAS 157.
- ------
17
Capital Preservation - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)
- ---------------------------------------------------------------------------------------------------
INVESTOR CLASS
- ---------------------------------------------------------------------------------------------------
2006(1) 2006 2005 2004 2003 2002
- ---------------------------------------------------------------------------------------------------
PER-SHARE DATA
- ---------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- ---------------------------------------------------------------------------------------------------
Income From
Investment Operations
- -------------------------
Net Investment Income 0.02 0.03 0.01 0.01 0.01 0.03
- ---------------------------------------------------------------------------------------------------
Distributions
- -------------------------
From Net
Investment Income (0.02) (0.03) (0.01) (0.01) (0.01) (0.03)
- ---------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===================================================================================================
TOTAL RETURN(2) 2.21% 3.06% 1.14% 0.60% 1.19% 2.84%
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 0.48%(3) 0.48% 0.48% 0.48% 0.48% 0.47%
- -------------------------
Ratio of Net Investment
Income to Average
Net Assets 4.36%(3) 3.01% 1.12% 0.59% 1.18% 2.76%
- -------------------------
Net Assets, End of Period
(in thousands) $2,618,586 $2,647,714 $2,761,800 $2,928,299 $3,270,852 $3,333,519
- ---------------------------------------------------------------------------------------------------
(1) Six months ended September 30, 2006 (unaudited).
(2) Total return assumes reinvestment of net investment income and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(3) Annualized.
See Notes to Financial Statements.
- ------
18
Government Agency Money Market - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)
- ---------------------------------------------------------------------------------------------------
INVESTOR CLASS
- ---------------------------------------------------------------------------------------------------
2006(1) 2006 2005 2004 2003 2002
- ---------------------------------------------------------------------------------------------------
PER-SHARE DATA
- ---------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- ---------------------------------------------------------------------------------------------------
Income From
Investment Operations
- -------------------------
Net Investment Income 0.02 0.03 0.01 0.01 0.01 0.03
- ---------------------------------------------------------------------------------------------------
Distributions
- -------------------------
From Net
Investment Income (0.02) (0.03) (0.01) (0.01) (0.01) (0.03)
- ---------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===================================================================================================
TOTAL RETURN(2) 2.31% 3.27% 1.27% 0.67% 1.25% 2.96%
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 0.48%(3) 0.48% 0.48% 0.48% 0.48% 0.47%
- -------------------------
Ratio of Net Investment
Income to Average
Net Assets 4.57%(3) 3.22% 1.26% 0.67% 1.24% 2.91%
- -------------------------
Net Assets, End of Period
(in thousands) $520,697 $485,821 $478,409 $489,633 $591,702 $614,223
- ---------------------------------------------------------------------------------------------------
(1) Six months ended September 30, 2006 (unaudited).
(2) Total return assumes reinvestment of net investment income and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(3) Annualized.
See Notes to Financial Statements.
- ------
19
Government Agency Money Market - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)
- ---------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ---------------------------------------------------------------------------------------------------
2006(1) 2006 2005 2004 2003 2002
- ---------------------------------------------------------------------------------------------------
PER-SHARE DATA
- ---------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- ---------------------------------------------------------------------------------------------------
Income From
Investment Operations
- -------------------------
Net Investment Income 0.02 0.03 0.01 --(2) 0.01 0.03
- ---------------------------------------------------------------------------------------------------
Distributions
- -------------------------
From Net
Investment Income (0.02) (0.03) (0.01) --(2) (0.01) (0.03)
- ---------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===================================================================================================
TOTAL RETURN(3) 2.18% 3.01% 1.02% 0.42% 0.99% 2.71%
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 0.73%(4) 0.73% 0.73% 0.73% 0.73% 0.72%
- -------------------------
Ratio of Net Investment
Income to Average
Net Assets 4.32%(4) 2.97% 1.01% 0.42% 0.99% 2.66%
- -------------------------
Net Assets, End of Period
(in thousands) $17,791 $16,971 $12,481 $248 $236 $219
- ---------------------------------------------------------------------------------------------------
(1) Six months ended September 30, 2006 (unaudited).
(2) Per-share amount was less than $0.005.
(3) Total return assumes reinvestment of net investment income and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
See Notes to Financial Statements.
- ------
20
Approval of Management Agreements for Capital Preservation and Government Agency
Money Market
Under Section 15(c) of the Investment Company Act, contracts for investment
advisory services are required to be reviewed, evaluated and approved by a
majority of a fund's independent directors or trustees (the "Directors") each
year. At American Century, this process is referred to as the "15(c) Process."
As a part of this process, the board reviews fund performance, shareholder
services, audit and compliance information, and a variety of other reports from
the advisor concerning fund operations. In addition to this annual review, the
board of directors oversees and evaluates on a continuous basis at its quarterly
meetings the nature and quality of significant services performed by the
advisor, fund performance, audit and compliance information, and a variety of
other reports relating to fund operations. The board, or committees of the
board, also holds special meetings as needed.
Under a Securities and Exchange Commission rule, each fund is required to
disclose in its annual or semiannual report, as appropriate, the material
factors and conclusions that formed the basis for the board's approval or
renewal of any advisory agreements within the fund's most recently completed
fiscal half-year period.
ANNUAL CONTRACT REVIEW PROCESS
As part of the annual 15(c) Process undertaken during the most recent fiscal
half-year period, the Directors reviewed extensive data and information compiled
by the advisor and certain independent providers of evaluative data (the "15(c)
Providers") concerning Capital Preservation and Government Agency Money Market
(the "funds") and the services provided to the funds under the management
agreement. The information considered and the discussions held at the meetings
included, but were not limited to:
* the nature, extent and quality of investment management, shareholder services
and other services provided to the funds under the management agreement;
* reports on the advisor's activities relating to the wide range of programs and
services the advisor provides to the funds and their shareholders on a routine
and non-routine basis;
* data comparing the cost of owning the funds to the cost of owning a similar
funds;
* data comparing the funds' performance to appropriate benchmarks and/or a peer
group of other mutual funds with similar investment objectives and strategies;
* financial data showing the profitability of the funds to the advisor and the
overall profitability of the advisor; and
* data comparing services provided and charges to other investment management
clients of the advisor.
In keeping with its practice, the funds' board of directors held two regularly
scheduled meetings and one special meeting to review and discuss the information
provided by the advisor and to complete its negotiations with the advisor
regarding the renewal of the management agreement, including the setting of the
applicable advisory fee. The board also had the benefit of the advice of its
independent counsel throughout the period.
(continued)
- ------
21
Approval of Management Agreements for Capital Preservation and Government Agency
Money Market
FACTORS CONSIDERED
The Directors considered all of the information provided by the advisor, the
15(c) Providers, and the board's independent counsel, and evaluated such
information for each fund for which the board has responsibility. The Directors
did not identify any single factor as being all-important or controlling, and
each Director may have attributed different levels of importance to different
factors. In deciding to renew the agreement under the terms ultimately
determined by the board to be appropriate, the Directors' decision was based on
the following factors.
NATURE, EXTENT AND QUALITY OF SERVICES -- GENERALLY. Under the management
agreement, the advisor is responsible for providing or arranging for all
services necessary for the operation of the funds. The board noted that under
the management agreement, the advisor provides or arranges at its own expense a
wide variety of services including:
* fund construction and design
* portfolio security selection
* initial capitalization/funding
* securities trading
* custody of fund assets
* daily valuation of the funds' portfolios
* shareholder servicing and transfer agency, including shareholder
confirmations, recordkeeping and communications
* legal services
* regulatory and portfolio compliance
* financial reporting
* marketing and distribution
The Directors noted that many of these services have expanded over time both in
terms of quantity and complexity in response to shareholder demands, competition
in the industry and the changing regulatory environment. In performing their
evaluation, the Directors considered information received in connection with the
annual review, as well as information provided on an ongoing basis at their
regularly scheduled board and committee meetings.
INVESTMENT MANAGEMENT SERVICES. The nature of the investment management services
provided is quite complex and allows fund shareholders access to professional
money management, instant diversification of their investments within an asset
class, the opportunity to easily diversify among asset classes, and liquidity.
In evaluating investment performance, the board expects the advisor to manage
the funds in accordance with their investment objectives and approved
strategies. In providing these services, the advisor utilizes teams of
investment professionals (portfolio managers, analysts, research assistants, and
securities traders) who require extensive information technology, research,
training, compliance and other systems to conduct their business. At each
quarterly meeting, the Directors review investment performance information for
the funds, together with comparative information for appropriate benchmarks and
peer groups of funds managed similarly to the funds. The Directors also review
detailed performance information during the 15(c) Process comparing the funds'
performance with that of similar funds not managed by the advisor. If
performance concerns are identified, the Directors
(continued)
- ------
22
Approval of Management Agreements for Capital Preservation and Government Agency
Money Market
discuss with the advisor the reasons for such results (e.g., market conditions,
security selection) and any efforts being undertaken to improve performance.
Capital Preservation's performance for both the one and three year periods was
above the median for its peer group. Government Agency Money Market's
performance was near the median for the one year period and equal to the median
for the three year period.
SHAREHOLDER AND OTHER SERVICES. The advisor provides the funds with a
comprehensive package of transfer agency, shareholder, and other services. The
Directors review reports and evaluations of such services at their regular
quarterly meetings, including the annual meeting concerning contract review, and
reports to the board. These reports include, but are not limited to, information
regarding the operational efficiency and accuracy of the shareholder and
transfer agency services provided, staffing levels, shareholder satisfaction (as
measured by external as well as internal sources), technology support, new
products and services offered to fund shareholders, securities trading
activities, portfolio valuation services, auditing services, and legal and
operational compliance activities. Certain aspects of shareholder and transfer
agency service level efficiency and the quality of securities trading activities
are measured by independent third party providers and are presented in
comparison to other fund groups not managed by the advisor.
COSTS OF SERVICES PROVIDED AND PROFITABILITY TO THE ADVISOR. The advisor
provides detailed information concerning its cost of providing various services
to the funds, its profitability in managing the funds, its overall
profitability, and its financial condition. The Directors have reviewed with the
advisor the methodology used to prepare this financial information. This
financial information regarding the advisor is considered in order to evaluate
the advisor's financial condition, its ability to continue to provide services
under the management agreement, and the reasonableness of the current management
fee.
ETHICS OF THE ADVISOR. The Directors generally consider the advisor's commitment
to providing quality services to shareholders and to conducting its business
ethically. They noted that the advisor's practices generally meet or exceed
industry best practices and that the advisor was not implicated in the industry
scandals of 2003 and 2004.
ECONOMIES OF SCALE. The Directors review reports provided by the advisor on
economies of scale for the complex as a whole and the year-over-year changes in
revenue, costs, and profitability. The Directors concluded that economies of
scale are difficult to measure and predict with precision, especially on a
fund-by-fund basis. This analysis is also complicated by the additional services
and content provided by the advisor and its reinvestment in its ability to
provide and expand those services. Accordingly, the Directors also seek to
evaluate economies of scale by reviewing other information, such as
year-over-year profitability of the advisor generally, the profitability of its
management of the funds specifically, the expenses incurred by the advisor in
providing various functions to the funds, and the breakpoint fees of competitive
funds not managed by the
(continued)
- ------
23
Approval of Management Agreements for Capital Preservation and Government Agency
Money Market
advisor. The Directors believe the advisor is appropriately sharing economies of
scale through its competitive fee structure, fee breakpoints as the fund complex
and the funds increases in size, and through reinvestment in its business to
provide shareholders additional content and services. In particular, separate
breakpoint schedules based on the size of the entire fund complex and on the
size of the funds reflect the complexity of assessing economies of scale.
COMPARISON TO OTHER FUNDS' FEES. The funds pay the advisor a single,
all-inclusive (or unified) management fee for providing all services necessary
for the management and operation of the funds, other than brokerage expenses,
taxes, interest, extraordinary expenses, and the fees and expenses of the funds'
independent directors (including their independent legal counsel). Under the
unified fee structure, the advisor is responsible for providing all investment
advisory, custody, audit, administrative, compliance, recordkeeping, marketing
and shareholder services, or arranging and supervising third parties to provide
such services. By contrast, most other funds are charged a variety of fees,
including an investment advisory fee, a transfer agency fee, an administrative
fee, distribution charges and other expenses. Other than their investment
advisory fees and Rule 12b-1 distribution fees, all other components of the
total fees charged by these other funds may be increased without shareholder
approval. The board believes the unified fee structure is a benefit to fund
shareholders because it clearly discloses to shareholders the cost of owning
fund shares, and, since the unified fee cannot be increased without a vote of
fund shareholders, it shifts to the advisor the risk of increased costs of
operating the funds and provides a direct incentive to minimize administrative
inefficiencies. Part of the Directors' analysis of fee levels involves reviewing
certain evaluative data compiled by an independent provider and comparing the
funds' unified fee to the total expense ratio of other funds in the funds' peer
groups. The unified fee charged to shareholders of the funds was in the lowest
quartile of the total expense ratios of their peer groups.
COMPARISON TO FEES AND SERVICES PROVIDED TO OTHER CLIENTS OF THE ADVISOR. The
Directors also requested and received information from the advisor concerning
the nature of the services, fees, and profitability of its advisory services to
advisory clients other than the funds. They observed that these varying types of
client accounts require different services and involve different regulatory and
entrepreneurial risks than the management of the funds. The Directors analyzed
this information and concluded that the fees charged and services provided to
the funds were reasonable by comparison.
COLLATERAL BENEFITS DERIVED BY THE ADVISOR. The Directors reviewed information
from the advisor concerning collateral benefits it receives as a result of its
relationship with the funds. They concluded that the advisor's primary business
is managing mutual funds and it generally does not use the funds or shareholder
information to generate profits in other lines of business, and therefore does
not derive any significant collateral benefits from them. The Directors noted
that the advisor receives
(continued)
- ------
24
Approval of Management Agreements for Capital Preservation and Government Agency
Money Market
proprietary research from broker dealers that execute fund portfolio
transactions and concluded that this research is likely to benefit fund
shareholders. The Directors also determined that the advisor is able to provide
investment management services to certain clients other than the funds, at least
in part, due to its existing infrastructure built to serve the fund complex. The
Directors concluded, however, that the assets of those other clients are not
material to the analysis and, in any event, are included with the assets of the
funds to determine breakpoints in the funds' fee schedules, provided they are
managed using the same investment team and strategy.
CONCLUSIONS OF THE DIRECTORS
As a result of this process, the independent directors, in the absence of
particular circumstances and assisted by the advice of legal counsel that is
independent of the advisor, taking into account all of the factors discussed
above and the information provided by the advisor concluded that the investment
management agreement between the funds and the advisor is fair and reasonable in
light of the services provided and should be renewed.
- ------
25
Share Class Information
One class of shares is authorized for sale by Capital Preservation: Investor
Class. Two classes of shares are authorized for sale by Government Agency:
Investor Class and Advisor Class. The expense ratio for Advisor Class shares is
higher than that of Investor Class shares.
INVESTOR CLASS shares are available for purchase in two ways: 1) directly from
American Century without any commissions or other fees; or 2) through certain
financial intermediaries (such as banks, broker-dealers, insurance companies and
investment advisors), which may require payment of a transaction fee to the
financial intermediary.
ADVISOR CLASS shares are sold primarily through institutions such as investment
advisors, banks, broker-dealers, insurance companies, and financial advisors.
Advisor Class shares are subject to a 0.50% annual Rule 12b-1 distribution and
service fee. The total expense ratio of Advisor Class shares is 0.25% higher
than the total expense ratio of Investor Class shares.
- ------
26
Additional Information
RETIREMENT ACCOUNT INFORMATION
As required by law, any distributions you receive from an IRA or certain 403(b),
457 and qualified plans [those not eligible for rollover to an IRA or to another
qualified plan] are subject to federal income tax withholding, unless you elect
not to have withholding apply. Tax will be withheld on the total amount
withdrawn even though you may be receiving amounts that are not subject to
withholding, such as nondeductible contributions. In such case, excess amounts
of withholding could occur. You may adjust your withholding election so that a
greater or lesser amount will be withheld.
If you don't want us to withhold on this amount, you must notify us to not
withhold the federal income tax. Even if you plan to roll over the amount you
withdraw to another tax-deferred account, the withholding rate still applies to
the withdrawn amount unless we have received notice not to withhold federal
income tax prior to the withdrawal. You may notify us in writing or in certain
situations by telephone or through other electronic means. You have the right to
revoke your withholding election at any time and any election you make may
remain in effect until revoked by filing a new election.
Remember, even if you elect not to have income tax withheld, you are liable for
paying income tax on the taxable portion of your withdrawal. If you elect not to
have income tax withheld or you don't have enough income tax withheld, you may
be responsible for payment of estimated tax. You may incur penalties under the
estimated tax rules if your withholding and estimated tax payments are not
sufficient.
State tax will be withheld if, at the time of your distribution, your address is
within one of the mandatory withholding states and you have federal income tax
withheld. State taxes will be withheld from your distribution in accordance with
the respective state rules.
PROXY VOTING GUIDELINES
American Century Investment Management, Inc., the funds' investment advisor, is
responsible for exercising the voting rights associated with the securities
purchased and/or held by the funds. A description of the policies and procedures
the advisor uses in fulfilling this responsibility is available without charge,
upon request, by calling 1-800-345-2021. It is also available on American
Century's website at americancentury.com and on the Securities and Exchange
Commission's website at sec.gov. Information regarding how the investment
advisor voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available on the "About Us" page at
americancentury.com. It is also available at sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The funds file their complete schedule of portfolio holdings with the Securities
and Exchange Commission (SEC) for the first and third quarters of each fiscal
year on Form N-Q. The funds' Forms N-Q are available on the SEC's website at
sec.gov, and may be reviewed and copied at the SEC's Public Reference Room in
Washington, DC. Information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330. The funds also make their complete schedule
of portfolio holdings for the most recent quarter of their fiscal year available
on their website at americancentury.com and, upon request, by calling
1-800-345-2021.
- ------
27
Index Definitions
The following indices are used to illustrate investment market, sector, or style
performance or to serve as fund performance comparisons. They are not investment
products available for purchase.
The 90-DAY U.S. TREASURY BILL INDEX is derived from secondary market interest
rates as published by the Federal Reserve Bank and includes three-month,
six-month, and one-year instruments.
The LEHMAN BROTHERS U.S. AGENCY INDEX is composed of those securities included
in the Lehman Brothers U.S. Aggregate Index that are public obligations of U.S.
government agencies, quasi-federal corporations, and corporate or foreign debt
guaranteed by the U.S. government.
The LEHMAN BROTHERS U.S. AGGREGATE INDEX represents securities that are taxable,
registered with the Securities and Exchange Commission, and U.S.
dollar-denominated. The index covers the U.S. investment-grade fixed-rate bond
market, with index components for government and corporate securities, mortgage
pass-through securities, and asset-backed securities.
The LEHMAN BROTHERS U.S. CORPORATE INDEX is composed of those securities
included in the Lehman Brothers U.S. Aggregate Index that are U.S.
dollar-denominated, investment-grade, fixed-rate, taxable securities sold by
industrial, utility and financial issuers.
The LEHMAN BROTHERS U.S. CORPORATE HIGH-YIELD INDEX covers the U.S.
dollar-denominated, non-investment grade, fixed-rate, taxable corporate bond
market.
The LEHMAN BROTHERS U.S. FIXED-RATE MORTGAGE-BACKED SECURITIES (MBS) INDEX is
the MBS Fixed-Rate component of the Lehman Brothers U.S. Aggregate Index. It
covers the mortgage-backed pass-through securities of the Government National
Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA),
and the Federal Home Loan Mortgage Corporation (FHLMC).
The LEHMAN BROTHERS U.S. TREASURY INDEX is composed of those securities included
in the Lehman Brothers U.S. Aggregate Index that are public obligations of the
U.S. Treasury with a remaining maturity of one year or more.
- ------
28
[back cover]
CONTACT US
AMERICANCENTURY.COM
AUTOMATED INFORMATION LINE:
1-800-345-8765
INVESTOR SERVICES REPRESENTATIVE:
1-800-345-2021 or 816-531-5575
BUSINESS, NOT-FOR-PROFIT,
EMPLOYER-SPONSORED RETIREMENT PLANS:
1-800-345-3533
BANKS AND TRUST COMPANIES, BROKER-DEALERS,
FINANCIAL PROFESSIONALS, INSURANCE COMPANIES:
1-800-345-6488
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113 or 816-444-3485
AMERICAN CENTURY GOVERNMENT INCOME TRUST
INVESTMENT ADVISOR:
American Century Investment Management, Inc.
Kansas City, Missouri
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
American Century Investments PRSRT STD
P.O. Box 419200 U.S. POSTAGE PAID
Kansas City, MO 64141-6200 AMERICAN CENTURY
COMPANIES
The American Century Investments logo, American Century and American Century
Investments are service marks of American Century Proprietary Holdings, Inc.
American Century Investment Services, Inc., Distributor
0611 (c)2006 American Century Proprietary Holdings, Inc.
SH-SAN-51663S All rights reserved.
ITEM 2. CODE OF ETHICS.
Not applicable for semiannual report filings.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable for semiannual report filings.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable for semiannual report filings.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
The schedule of investments is included as part of the report to stockholders
filed under Item 1 of this Form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the reporting period, there were no material changes to the procedures by
which shareholders may recommend nominees to the registrant's board.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal financial
officer have concluded that the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company Act of
1940) are effective based on their evaluation of these controls and
procedures as of a date within 90 days of the filing date of this report.
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the Investment Company Act of
1940) that occurred during the registrant's second fiscal quarter of the
period covered by this report that have materially affected, or are
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable for semiannual report filings.
(a)(2) Separate certifications by the registrant's principal executive officer
and principal financial officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment
Company Act of 1940, are filed and attached hereto as Exhibit
99.302CERT.
(a)(3) Not applicable.
(b) A certification by the registrant's chief executive officer and chief
financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, is furnished and attached hereto as Exhibit 99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Registrant: AMERICAN CENTURY GOVERNMENT INCOME TRUST
By: /s/ William M. Lyons
-------------------------------------------------------
Name: William M. Lyons
Title: President
Date: November 28, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ William M. Lyons
-------------------------------------------------------
Name: William M. Lyons
Title: President
(principal executive officer)
Date: November 28, 2006
By: /s/ Robert J. Leach
-------------------------------------------------------
Name: Robert J. Leach
Title: Vice President, Treasurer, and
Chief Financial Officer
(principal financial officer)
Date: November 28, 2006
