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 811-04363
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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)
CHARLES A. ETHERINGTON, 4500 MAIN STREET, KANSAS CITY, MISSOURI 64111
- --------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 816-531-5575
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Date of fiscal year end: 03-31
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Date of reporting period: 09-30-2008
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ITEM 1. REPORTS TO STOCKHOLDERS.
[front cover]
SEMIANNUAL REPORT
SEPTEMBER 30, 2008
[american century investments logo and text logo®]
AMERICAN CENTURY INVESTMENTS
GINNIE MAE FUND
GOVERNMENT BOND FUND
INFLATION-ADJUSTED BOND FUND
SHORT-TERM GOVERNMENT FUND
PRESIDENT'S LETTER
[photo of Jonathan Thomas]
JONATHAN THOMAS
Dear Investor:
Thank you for taking time to review the following discussions, from our
experienced portfolio management team, of the fund reporting period ended
September 30, 2008. It was a time of enormous upheaval and change. We understand
and appreciate the challenges you have faced during this historic period, and
share your concerns about the economy, the markets, and fund holdings. To help
address these issues, I'd like to provide my perspective on how we have
managed--and continue to manage--your investments in these uncertain times.
As a company, American Century Investments® is well positioned to deal with
market turmoil. We are financially strong and privately held, which allows us to
align our resources with your long-term investment interests. In addition, our
actively managed, team-based approach allows our portfolio teams to identify
attractive investment opportunities regardless of market conditions.
Our seasoned investment professionals have substantial experience and have
successfully navigated previous market crises. These portfolio managers and
analysts continue to use a team approach and follow disciplined investment
processes designed to produce the best possible long-term results for you. For
example, our equity investment teams are working closely with our fixed income
group to monitor and assess credit crisis developments. The fixed income team
anticipated dislocation in the credit markets and--through its disciplined
processes and teamwork--helped reduce our exposure to investments that suffered
substantial losses.
How soon a sustainable recovery will occur is uncertain. But I am certain of
this: Since 1958, we've demonstrated a consistent ability to execute solid,
long-term investment strategies and the discipline to remain focused during
times of volatility or shifts in the markets. We've stayed true to our
principles, especially our belief that your success is the ultimate measure of
our success.
Thank you for your continued confidence in us.
Sincerely,
/s/Jonathan Thomas
Jonathan S. Thomas
President and Chief Executive Officer
American Century Investments
TABLE OF CONTENTS
Market Perspective. . . . . . . . . . . . . . . . . . . . . . . . . . 2
U.S. Fixed-Income Total Returns. . . . . . . . . . . . . . . . . . . 2
GINNIE MAE
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . 4
Portfolio at a Glance. . . . . . . . . . . . . . . . . . . . . . . . 4
Yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Types of Investments in Portfolio. . . . . . . . . . . . . . . . . . 5
GOVERNMENT BOND
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . 7
Portfolio at a Glance. . . . . . . . . . . . . . . . . . . . . . . . 7
Yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Types of Investments in Portfolio. . . . . . . . . . . . . . . . . . 8
INFLATION-ADJUSTED BOND
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . 10
Portfolio at a Glance. . . . . . . . . . . . . . . . . . . . . . . . 10
Yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Portfolio Composition by Effective Maturity. . . . . . . . . . . . . 11
SHORT-TERM GOVERNMENT
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . 13
Portfolio at a Glance. . . . . . . . . . . . . . . . . . . . . . . . 13
Yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Types of Investments in Portfolio. . . . . . . . . . . . . . . . . . 14
Shareholder Fee Examples. . . . . . . . . . . . . . . . . . . . . . . 15
FINANCIAL STATEMENTS
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . 18
Statement of Assets and Liabilities . . . . . . . . . . . . . . . . . 31
Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . 33
Statement of Changes in Net Assets. . . . . . . . . . . . . . . . . . 34
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . 36
Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . 45
OTHER INFORMATION
Approval of Management Agreements for Ginnie Mae, Government Bond,
Inflation-Adjusted Bond and Short-Term Government . . . . . . . . . . 56
Additional Information. . . . . . . . . . . . . . . . . . . . . . . . 61
Index Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 62
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
Investments or any other person in the American Century Investments
organization. Any such opinions are subject to change at any time based upon
market or other conditions and American Century Investments 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
Investments funds are based on numerous factors, may not be relied upon as an
indication of trading intent on behalf of any American Century Investments 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 Investments by third party vendors. To the best of American Century
Investments' knowledge, such information is accurate at the time of printing.
MARKET PERSPECTIVE
[photo of Chief Investment Officer]
By David MacEwen, Chief Investment Officer, Fixed Income
UNPRECEDENTED EVENTS
The six months ended September 30, 2008, were characterized by unprecedented
market turmoil, including the spectacular failure of major financial
institutions and direct U.S. government intervention. In that environment,
investors favored higher-quality securities, while credit-related risk aversion
hurt lower-quality sectors of the market.
The Federal Reserve (the Fed) faced the dual challenges of keeping recession at
bay and fending off inflation. Early in the period, the Fed favored
anti-recessionary measures, cutting the federal funds target rate in April 2008.
But as commodity prices reached record highs in June, the Fed seemed to focus on
inflation, holding interest rates steady during the remainder of the reporting
period. Inflation, as measured by the one-year change in the Consumer Price
Index, ended the period at 4.9%.
Despite the Fed's best efforts, economic prospects dimmed--credit markets seized
up, housing and the consumer took further hits, and the unemployment rate broke
above 6%. With the very health of the financial system at stake, the government
seized several tottering financial giants and began work on a massive bank
recapitalization program.
HIGH-QUALITY BONDS DID BEST
In this schizophrenic environment that pitted worry about inflation against
worry about economic depression, fixed-income returns were disappointing, though
we should point out that longer-term investment-grade bond returns are positive.
For the six months, higher-quality bonds held up better than lower-rated
debt--highly rated government agency mortgages and some Treasury bonds were the
only segments of the taxable bond market to manage positive results. Meanwhile,
corporate bonds tracked the equity markets, posting sharply negative returns
(see table at right).
RATES HIGHER, CURVE LITTLE CHANGED
Sharp volatility and inflation concerns meant bond yields finished the six
months higher. The yield on the two-year Treasury note went from 1.59% to 1.97%,
while the 10-year Treasury yield rose from 3.41% to 3.83%. As a result, the
shape of the yield curve (a graphic representation of bond yields at different
maturities) was little changed--the difference in yield between two- and 10-year
Treasury securities inched up from 182 to 186 basis points (a basis point equals
0.01%).
U.S. Fixed-Income Total Returns
For the six months ended September 30, 2008*
TREASURY SECURITIES
3-Month Bill 0.99%
2-Year Note 0.91%
10-Year Note -1.26%
30-Year Bond 2.36%
CITIGROUP U.S. BOND MARKET INDICES
Mortgage (mortgage-backed) 1.54%
Treasury 0.19%
Agency -0.68%
Broad Investment-Grade (multi-sector) -1.30%
Inflation-Linked Securities -3.86%
Credit (investment-grade corporate) -7.41%
High-Yield Market (corporate) -7.78%
*Total returns for periods less than one year are not annualized.
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2
PERFORMANCE
Ginnie Mae
Total Returns as of September 30, 2008
Average Annual Returns
10 Since Inception
6 months(1) 1 year 5 years years Inception Date
INVESTOR CLASS 0.96%(2) 6.35%(2) 4.04% 4.94% 7.11% 9/23/85
CITIGROUP
GNMA INDEX 1.13% 6.93% 4.82% 5.68% 7.93%(3) --
Institutional
Class 1.06%(2) 6.57%(2) -- -- 6.51%(2) 9/28/07
Advisor Class 0.83%(2) 6.09%(2) 3.79% 4.67% 4.92% 10/9/97
R Class 0.70%(2) 5.83%(2) -- -- 5.78%(2) 9/28/07
(1) Total returns for periods less than one year are not annualized.
(2) Class returns would have been lower if American Century Investments had not
voluntarily waived a portion of its management fee.
(3) Since 9/30/85, 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, 1998
One-Year Returns Over 10 Years
Periods ended September 30
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Investor Class 1.65% 6.97% 11.31% 6.91% 2.69% 2.86% 2.76% 3.62% 4.69%* 6.35%*
Citigroup
GNMA Index 2.58% 7.73% 11.89% 7.45% 3.33% 4.32% 3.54% 4.04% 5.33% 6.93%
*Returns would have been lower, along with the ending value, if a portion of the
class's management fee had not been waived during the period.
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.
- ------
3
PORTFOLIO COMMENTARY
Ginnie Mae
Portfolio Managers: Bob Gahagan, Hando Aguilar, and Dan Shiffman
PERFORMANCE SUMMARY
Ginnie Mae returned 0.96%* for the six months ended September 30, 2008. By
comparison, the Citigroup GNMA Index and Lipper GNMA Funds category average
returns were 1.13% and 0.03%,** respectively. See page 3 for additional
performance comparisons. Portfolio and Lipper group average returns reflect
operating expenses, while Citigroup index returns do not.
The portfolio's performance reflected a period of extreme volatility in interest
rates and returns. Amid significant economic and financial disruptions, few
bonds manage positive returns (see page 2). The key contributing factor to
Ginnie Mae's performance compared with that of its benchmark and peer group
average was its sector allocation.
POSITIVE MORTGAGE RETURNS
The government takeover of troubled mortgage market giants Fannie Mae and
Freddie Mac had important implications for GNMA mortgage-backed securities
(MBS). First, we saw a temporary disruption to supply in agency MBS, while GNMA
issuance increased. That made supply a negative for GNMA MBS in recent months.
Second, GNMA securities typically trade at a premium to agency MBS because they
are backed by the government's "full faith and credit" pledge. But some of that
premium evaporated after the takeover as the spread, or difference in yield,
between agency and GNMA securities narrowed. In that environment, GNMA mortgages
had positive returns for the six months, but lagged agency MBS.
EFFECT OF SECTOR ALLOCATION
The portfolio's overweight position in GNMA collateralized mortgage obligations
(CMOs) relative to traditional GNMA passthroughs contributed to performance.
That's because CMOs offer more predictable cash flows, which were appealing in a
period of sharp interest rate volatility. In addition, our stake in GNMA
adjustable rate mortgages (ARMs) performed well for technical reasons--supply
was down and some traditional ARM buyers returned to the market, helping demand.
Portfolio at a Glance
As of As of
9/30/08 3/31/08
Average Duration (effective) 4.0 years 3.2 years
Weighted Average Life 6.0 years 5.4 years
Yields as of September 30, 2008
30-Day SEC Yield(1)
Investor Class 4.28%
Institutional Class 4.48%
Advisor Class 4.03%
R Class 3.78%
(1) The yields presented reflect the waiver of a portion of the fund's
management fee. Without such waiver, the 30-day yields would have been lower.
* All fund returns referenced in this commentary are for Investor Class shares.
Total returns for periods less than one year are not annualized.
**The Lipper GNMA Funds category average returns were 5.51%, 3.71%, and 4.70%
for the one-, five-, and 10-year periods ended September 30, 2008, respectively.
Data provided by Lipper Inc. -- A Reuters Company. © 2008 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.
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
Ginnie Mae
The portfolio also benefited from an overweight position in GNMA IIs, which
looked cheap on a relative value basis after a period of underperformance
compared with GNMA Is. GNMA IIs cheapened up relative to GNMA Is early in the
period because the flight to quality favored the more liquid, on-the-run GNMA
Is. Just as Fannie and Freddie MBS outperformed GNMA Is on the conservatorship
of these two agencies by the U.S. government, so too did GNMA IIs outperform
GNMA Is in recent months.
TRIMMING CURVE TRADE
In addition, the portfolio benefited modestly from a yield curve steepening
trade intended to profit from changes in the shape of the yield curve (the trade
was based on the expectation that the yield difference between two- and 10-year
Treasury notes would widen, which it did). We put this trade on more than a year
ago when the yield curve was inverted (two-year note yields exceeded those on
longer-term notes and bonds), a rare occurrence. But in recent months we began
to take some profits from that trade as the yield curve continued to move back
toward its typical, upward-sloping shape.
OUTLOOK
"Our economic outlook is negative--we're experiencing the worst housing market
since the Great Depression and greatest unwinding of leverage ever," said
Portfolio Manager Bob Gahagan. "We're encouraged by the government's attempts to
restore confidence in the system; nevertheless, we don't see any compelling
reasons for consumers to begin spending again."
"One positive of the unprecedented economic and market events is that yield
spreads on MBS are very attractive," added Portfolio Manager Hando Aguilar.
"We're looking for the best risk/reward opportunities in the market to put to
work the profits from our yield curve trade, as well as the cash we've
accumulated from coupon payments and bond maturities."
Types of Investments in Portfolio
% of fund % of fund
investments investments
as of as of
9/30/08 3/31/08
U.S. Government Agency Mortgage-Backed
Securities (all GNMAs) 74.5% 72.2%
U.S. Government Agency Collateralized
Mortgage Obligations (all GNMAs) 16.3% 18.2%
U.S. Government Agency Securities 2.3% 2.4%
Adjustable-Rate U.S. Government Agency
Mortgage-Backed Securities (all GNMAs) 1.7% 2.1%
Temporary Cash Investments 5.2% 5.1%
- ------
5
PERFORMANCE
Government Bond
Total Returns as of September 30, 2008
Average Annual Returns
10 Since Inception
6 months(1) 1 year 5 years years Inception Date
INVESTOR CLASS 0.17% 7.77% 4.11% 4.96% 7.57% 5/16/80
CITIGROUP TREASURY/
MORTGAGE INDEX 0.81% 7.74% 4.66% 5.51% --(2) --
Advisor Class 0.04% 7.51% 3.85% 4.70% 5.36% 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) Index data not available prior to 1982.
Growth of $10,000 Over 10 Years
$10,000 investment made September 30, 1998
One-Year Returns Over 10 Years
Periods ended September 30
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Investor Class -1.92% 6.41% 13.70% 8.95% 2.66% 1.27% 2.93% 3.39% 5.33% 7.77%
Citigroup
Treasury/
Mortgage Index -0.07% 7.28% 12.80% 8.78% 3.55% 3.48% 2.91% 3.73% 5.51% 7.74%
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.
- ------
6
PORTFOLIO COMMENTARY
Government Bond
Portfolio Managers: Bob Gahagan, Jim Platz, Brian Howell, Hando Aguilar, Dan
Shiffman, and Seth Plunkett
PERFORMANCE SUMMARY
Government Bond returned 0.17%* for the six months ended September 30, 2008. By
comparison, the Citigroup Treasury/Mortgage Index and Lipper Intermediate U.S.
Government Funds category average returns were 0.81% and -0.90%,** respectively.
See page 6 for additional performance comparisons. Portfolio and Lipper group
average returns reflect operating expenses, while Citigroup index returns do
not.
The portfolio's performance reflected a period of extreme volatility in interest
rates and returns. Amid significant economic and financial market disruptions,
few bonds managed positive returns (see page 2). The key factor explaining
Government Bond's performance compared with that of its benchmark and peer group
average was its sector allocation.
EFFECT OF SECTOR ALLOCATION
Relative to the peers and benchmark, the portfolio held an overweight position
in high-quality agency mortgage-backed securities (MBS). These "collateralized"
bonds outperformed both Treasuries and traditional (non-mortgage) government
agency debt. Indeed, mortgage securities were the best-performing segment of the
market for the six months despite volatility in interest rates and the housing
market. As a result, this positioning made the leading contribution to absolute
and relative results--MBS were one of only two sectors to manage positive
returns for the six months; Treasuries were the other.
However, not all of our sector allocation decisions worked as well. In
particular, it hurt performance relative to the index that some of our mortgage
exposure was in collateralized mortgage obligations (CMOs). CMOs are structured
mortgage securities, which we liked for their more stable cash flows during a
period of sharp interest rate volatility. Nevertheless, non-agency CMOs
underperformed for the period. What's more, a portion of the Treasuries we held
were Treasury inflation-protected securities (TIPS). Falling commodity prices
and ebbing inflation hurt TIPS for the six months.
Portfolio at a Glance
As of As of
9/30/08 3/31/08
Average Duration (effective) 4.6 years 4.1 years
Weighted Average Life 5.8 years 6.3 years
Yields as of September 30, 2008
30-Day SEC Yield
Investor Class 4.16%
Advisor Class 3.91%
* All fund returns referenced in this commentary are for Investor Class shares.
Total returns for periods less than one year are not annualized.
**The Lipper Intermediate U.S. Government Funds category average returns were
4.47%, 3.12%, and 4.32% for the one-, five-, and 10-year periods ended September
30, 2008, respectively.
Data provided by Lipper Inc. -- A Reuters Company. © 2008 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.
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.
- ------
7
Government Bond
FINDING ATTRACTIVE VALUES
In addition, the portfolio benefited modestly from a yield curve steepening
trade intended to profit from changes in the shape of the yield curve (the trade
was based on the expectation that the yield difference between two- and 10-year
Treasury notes would widen, which it did). We put this trade on more than a year
ago when the yield curve was inverted (two-year note yields exceeded those on
longer-term notes and bonds), a rare occurrence.
We should point out that in recent months we began to take some profits from
this position as the yield difference between two- and 10-year notes moved
closer to its historical spread. This is part of a larger move to take profits
from some long-running trades and look for opportunities in a measured way to
add high-quality agency, mortgage-, and asset-backed securities offering
compelling risk/reward profiles. From the point of view of a long-term investor,
we think these types of securities offer significant upside relative to their
risk. And in the short run, they have extremely low likelihood of default even
in these volatile markets.
OUTLOOK
"Our economic outlook is negative--we're experiencing the worst housing market
since the Great Depression and greatest unwinding of leverage ever," said
Portfolio Manager Bob Gahagan. "We're encouraged by the government's attempts to
restore confidence in the system; nevertheless, we don't see any compelling
reasons for consumers to begin spending again."
"While we're being cautious in our approach, the economic and market disruptions
caused by the credit crisis are presenting us with some compelling buying
opportunities. For example, we're looking closely at adding to our agency
exposure. These bonds sold off sharply, and there's still not a lot of liquidity
in that market; as a result, we're seeing some very attractive values," Gahagan
concluded.
Types of Investments in Portfolio
% of fund % of fund
investments investments
as of as of
9/30/08 3/31/08
U.S. Government Agency
Mortgage-Backed Securities 50.0% 30.4%
U.S. Treasury Securities 27.2% 36.5%
U.S. Government Agency Collateralized
Mortgage Obligations 15.1% 13.6%
U.S. Government Agency Securities 3.0% 1.4%
U.S. Government Agency
Asset-Backed Securities 0.9% 1.0%
Temporary Cash Investments 3.8% 3.5%
Temporary Cash Investments -
Securities Lending Collateral -- 13.6%
- ------
8
PERFORMANCE
Inflation-Adjusted Bond
Total Returns as of September 30, 2008
Average Annual Returns
6 5 10 Since Inception
months(1) 1 year years years Inception Date
INVESTOR CLASS -3.83% 6.16% 4.70% 6.50% 5.99% 2/10/97
CITIGROUP US
INFLATION-LINKED
SECURITIES INDEX -3.86% 6.22% 5.10% 7.10% 6.70%(2) --
Institutional Class -3.73% 6.37% 4.91% -- 5.32% 10/1/02
Advisor Class -3.95% 5.82% 4.45% 6.24% 6.27% 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.
Growth of $10,000 Over 10 Years
$10,000 investment made September 30, 1998
One-Year Returns Over 10 Years
Periods ended September 30
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Investor Class 1.50% 8.29% 12.43% 13.18% 6.68% 6.68% 4.96% 1.53% 4.27% 6.16%
Citigroup US
Inflation-Linked
Securities Index 1.86% 9.11% 13.22% 14.54% 7.39% 7.23% 5.34% 1.88% 4.91% 6.22%
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.
- ------
9
PORTFOLIO COMMENTARY
Inflation-Adjusted Bond
Portfolio Managers: Brian Howell, Jim Platz, Seth Plunkett, and Bob Gahagan
PERFORMANCE SUMMARY
Inflation-Adjusted Bond returned -3.83%* for the six months ended September 30,
2008. By comparison, the fund's benchmark, the Citigroup US Inflation-Linked
Securities Index, returned -3.86%. Portfolio returns reflect operating expenses,
while the index returns do not.
CREDIT CRISIS TRUMPED OTHER CONCERNS
Battling the double-whammy of a weak economy and rising inflation, the Federal
Reserve (the Fed) seemed to shift to a slight anti-inflation bias when, after
steadily cutting rates between September 2007 and April 2008, it held the
federal funds rate target steady at 2% at its June, August and September policy
meetings. But greater challenges were brewing, as the persistent credit crunch
turned into a full-blown financial crisis.
Long-standing concerns about economic growth, inflation (which actually eased on
a severe selloff in the commodities market late in the period) and the tumbling
housing market took a back seat to fallout from the U.S. government's takeover
of mortgage lender IndyMac and mortgage giants Fannie Mae and Freddie Mac,
Lehman Brothers' bankruptcy filing, the Fed's rescue plan for AIG, and other
extraordinary events in the financial sector. Businesses and consumers faced
stringent borrowing standards, banks stopped lending to each other, and a large
institutional money market fund "broke the buck." The stress culminated with a
massive taxpayer-funded recapitalization plan for financial companies.
GLOBAL SLOWDOWN, FALLING OIL PRICES TAMED INFLATION
During the first half of the reporting period, the lingering threat of
stagflation (stalled economic growth and rising inflation) worried investors and
kept Treasury inflation-protected securities (TIPS) in favor. The scenario
changed dramatically in the second half of the period. Inflation expectations
subsided due to the softening global economy, which sent commodity prices
tumbling. Most notable, oil prices sank late in the period from a record-high
$147 a barrel in July to $101 by the end of September, due to waning global
demand.
Headline inflation (as measured by the 12-month change in the Consumer Price
Index) hit a high of 5.6% in July, before falling to 4.9% in September, after
back-to-back declines in the index's energy component in August and September.
Sagging commodity prices combined with dismal prospects for global economic
growth and a strengthening U.S. dollar caused the market's inflation
expectations to decline sharply during the period.
Portfolio at a Glance
As of As of
9/30/08 3/31/08
Average Duration (effective) 5.8 years 6.1 years
Weighted Average Maturity 8.8 years 6.7 years
Yields as of September 30, 2008
30-Day SEC Yield
Investor Class 7.90%
Institutional Class 8.11%
Advisor Class 7.63%
*All fund returns referenced in this commentary are for Investor Class shares.
Total returns for periods less than one year are not annualized.
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10
Inflation-Adjusted Bond
TIPS UNDERPERFORMED
We continued to invest most of the portfolio in TIPS (approximately 90% as of
September 30, 2008). On an absolute basis, TIPS generally declined in value and
underperformed the broad taxable investment-grade bond market for the period.
This occurred as inflation expectations diminished.
The portfolio held small allocations to non-Treasury sectors, including
corporate, municipal, mortgage, and agency securities. Although non-Treasury
sectors generally underperformed Treasuries for the six-month period, we expect
these higher-yielding securities to add value in the long run.
Our bias toward a steeper yield curve, through the use of Treasury futures,
contributed positively to performance during the period. Investors swarmed to
shorter-term, lower-risk Treasuries as the financial crisis worsened, causing
the Treasury yield curve to steepen slightly.
OUTLOOK
After peaking at 2.6 percentage points in July, the yield difference (breakeven)
between 10-year TIPS and nominal 10-year Treasuries fell to 1.58 percentage
points at the end of September. The breakeven rate represents investors'
expectations for inflation for the next decade--expectations we believe are
unreasonably low, given historical inflation patterns and the amount of
inflationary economic stimulus now in the pipeline.
Headline inflation is likely to subside during the next several months, as oil
and other commodity prices decline, demand wanes, wages fall, and the
unemployment rate rises. Yet, on a longer-term basis, inflation is likely to
reignite. The Fed has shown a strong willingness to provide fiscal and monetary
support to avoid a severe economic downturn. Ultimately, the Fed's actions may
lead to significantly higher inflation. This factor, combined with an unusually
low breakeven rate, suggest TIPS currently represent good long-term value.
Portfolio Composition by Effective Maturity(1)
% of fund % of fund
investments investments
as of as of
9/30/08 3/31/08
0 - 5-Year Notes(2) 31.8% 29.7%
5 - 10-Year Notes 40.7% 40.8%
10 - 35-Year Bonds 27.5% 29.5%
(1) Excludes securities lending collateral.
(2) Includes temporary cash investments.
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11
PERFORMANCE
Short-Term Government
Total Returns as of September 30, 2008
Average Annual Returns
5 10 Since Inception
6 months(1) 1 year years years Inception Date
INVESTOR CLASS 0.59% 5.13% 3.15% 3.91% 5.93% 12/15/82
CITIGROUP US
TREASURY/AGENCY
1- TO 3-YEAR INDEX 0.63% 6.09% 3.56% 4.61% 6.89%(2) --
Advisor Class 0.47% 4.87% 2.89% 3.65% 3.82% 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, 1998
One-Year Returns Over 10 Years
Periods ended September 30
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Investor Class 1.67% 5.78% 9.50% 4.70% 1.90% 0.36% 1.40% 3.71% 5.27% 5.13%
Citigroup US
Treasury/Agency 1-
to 3-Year Index 3.28% 5.92% 10.59% 5.87% 2.85% 1.13% 1.10% 3.81% 5.76% 6.09%
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.
- ------
12
PORTFOLIO COMMENTARY
Short-Term Government
Portfolio Managers: Bob Gahagan, Jim Platz, Brian Howell, Hando Aguilar, Dan
Shiffman, and Seth Plunkett
PERFORMANCE SUMMARY
Short-Term Government returned 0.59%* for the six months ended September 30,
2008. By comparison, the Citigroup 1- to 3-year Treasury/Agency Index and Lipper
Short U.S. Government Funds category average returns were 0.63% and 0.05%,**
respectively. See page 12 for additional performance comparisons. Portfolio and
Lipper group average returns reflect operating expenses, while Citigroup index
returns do not.
The portfolio's performance reflected a period of extreme volatility in interest
rates and returns. Amid significant economic and financial market disruptions,
few bonds managed positive returns (see page 2). The key factor explaining
Short-Term Government's performance compared with that of its benchmark and peer
group average was its sector allocation.
EFFECT OF SECTOR ALLOCATION
Relative to the benchmark, the portfolio was underweight in both Treasury and
government agency bonds. We preferred to hold an overweight position in
high-quality agency mortgage-backed securities. These "collateralized" bonds
outperformed both Treasuries and traditional (non-mortgage) government agency
debt. Indeed, mortgage securities were the best-performing segment of the market
for the six months despite volatility in interest rates and the housing market.
However, not all of our sector allocation decisions worked as well. In
particular, it hurt performance that a portion of the Treasuries we held were
Treasury inflation-protected securities (TIPS). Falling commodity prices and
ebbing inflation hurt TIPS. Similarly, some of our mortgage exposure was in
collateralized mortgage obligations (CMOs). CMOs are structured mortgage
securities, which we liked for their more stable cash flows during a period of
sharp interest rate volatility. Nevertheless, non-agency CMOs underperformed for
the period.
Portfolio at a Glance
As of As of
9/30/08 3/31/08
Average Duration (effective) 1.7 years 1.6 years
Weighted Average Life 2.4 years 2.6 years
Yields as of September 30, 2008
30-Day SEC Yield
Investor Class 3.23%
Advisor Class 3.01%
* All fund returns referenced in this commentary are for Investor Class shares.
Total returns for periods less than one year are not annualized.
**The Lipper Short U.S. Government Funds category average returns were 3.33%,
2.65%, and 3.74% for the one-, five-, and 10-year periods ended September 30,
2008, respectively.
Data provided by Lipper Inc. -- A Reuters Company. © 2008 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.
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.
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13
Short-Term Government
CURVE TRADE HELPED
In addition, the portfolio continued to benefit from a yield curve steepening
trade intended to profit from changes in the shape of the yield curve (the trade
was based on the expectation that the yield difference between two- and
five-year Treasury notes would widen, which it did). We put this trade on more
than a year ago when the yield curve was inverted (two-year note yields exceeded
those on longer-term notes and bonds), a rare occurrence.
We should point out that in recent months we began to take some profits from
this position as the yield difference between two- and five-year notes moved
closer to its historical spread. This is part of a larger move to take profits
on some of our long-running trades. As these trades move closer to maturity,
we're looking for opportunities to build positions in select, high-quality
bonds--such as mortgage-related debt and agency bonds--that we believe have been
oversold in the current crisis. From the point of view of a long-term investor,
we think these types of securities offer significant upside relative to their
risk. And in the short run, they have extremely low likelihood of default even
in these volatile markets.
OUTLOOK
"Our economic outlook is negative--we're experiencing the worst housing market
since the Great Depression and greatest unwinding of leverage ever," said
Portfolio Manager Bob Gahagan. "We're encouraged by the government's attempts to
restore confidence in the system; nevertheless, we don't see any compelling
reasons for consumers to begin spending again."
"While we're being cautious in our approach, the economic and market disruptions
caused by the credit crisis are presenting us with some compelling buying
opportunities. For example, we're looking closely at adding to our agency
exposure. These bonds sold off sharply, and there's still not a lot of liquidity
in that market; as a result, we're seeing some very attractive values," Gahagan
concluded.
Types of Investments in Portfolio
% of fund % of fund
investments investments
as of as of
9/30/08 3/31/08
U.S. Treasury Securities 46.7% 42.4%
Collateralized Mortgage Obligations &
Commercial Mortgage-Backed Securities 31.4% 34.3%
U.S. Government Agency Securities 10.1% 8.9%
U.S. Government Agency
Mortgage-Backed Securities 8.3% 7.4%
Municipal Securities 1.4% 1.3%
Asset-Backed Securities --(1) 1.7%
Temporary Cash Investments 2.1% 4.0%
(1) Category is less than 0.05% of total investments.
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14
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, 2008 to September 30, 2008.
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 Investments fund, or
Institutional Class shares of the American Century Diversified Bond Fund, in an
American Century Investments account (i.e., not a financial intermediary or
retirement plan account), American Century Investments 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
Investments 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 Investments 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.
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.
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15
Beginning
Account Ending Expenses Paid Annualized
Value Account During Period(1) Expense
4/1/08 Value 9/30/08 4/1/08 - 9/30/08 Ratio(1)
Ginnie Mae
ACTUAL
Investor Class
(after waiver)(2) $1,000 $1,009.60 $2.57 0.51%
Investor Class
(before waiver) $1,000 $1,009.60(3) $2.87 0.57%
Institutional Class
(after waiver)(2) $1,000 $1,010.60 $1.56 0.31%
Institutional Class
(before waiver) $1,000 $1,010.60(3) $1.86 0.37%
Advisor Class (after
waiver)(2) $1,000 $1,008.30 $3.83 0.76%
Advisor Class
(before waiver) $1,000 $1,008.30(3) $4.13 0.82%
R Class
(after waiver)(2) $1,000 $1,007.00 $5.08 1.01%
R Class
(before waiver) $1,000 $1,007.00(3) $5.38 1.07%
HYPOTHETICAL
Investor Class
(after waiver)(2) $1,000 $1,022.51 $2.59 0.51%
Investor Class
(before waiver) $1,000 $1,022.21 $2.89 0.57%
Institutional Class
(after waiver)(2) $1,000 $1,023.51 $1.57 0.31%
Institutional Class
(before waiver) $1,000 $1,023.21 $1.88 0.37%
Advisor Class (after
waiver)(2) $1,000 $1,021.26 $3.85 0.76%
Advisor Class
(before waiver) $1,000 $1,020.96 $4.15 0.82%
R Class (after
waiver)(2) $1,000 $1,020.00 $5.11 1.01%
R Class
(before waiver) $1,000 $1,019.70 $5.42 1.07%
(1) 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.
(2) During the six months ended September 30, 2008, the investment advisor
waived a portion of the class's management fee.
(3) Ending account value assumes the return earned after waiver. The return
would have been lower had fees not been waived and would have resulted in a
lower ending account value.
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16
Beginning Ending
Account Account Expenses Paid Annualized
Value Value During Period(1) Expense
4/1/08 9/30/08 4/1/08 - 9/30/08 Ratio(1)
Government Bond
ACTUAL
Investor Class $1,000 $1,001.70 $2.46 0.49%
Advisor Class $1,000 $1,000.40 $3.71 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%
Inflation-Adjusted Bond
ACTUAL
Investor Class $1,000 $961.70 $2.41 0.49%
Institutional Class $1,000 $962.70 $1.43 0.29%
Advisor Class $1,000 $960.50 $3.64 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
ACTUAL
Investor Class $1,000 $1,005.90 $2.87 0.57%
Advisor Class $1,000 $1,004.70 $4.12 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%
(1) 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.
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17
SCHEDULE OF INVESTMENTS
Ginnie Mae
SEPTEMBER 30, 2008 (UNAUDITED)
Principal Amount Value
U.S. Government Agency Mortgage-Backed Securities(1) -- 96.5%
$140,500,000 GNMA, 5.50%, settlement date 10/22/08(2) $ 140,105,196
227,500,000 GNMA, 6.00%, settlement date 10/22/08(2) 230,607,056
160,630,072 GNMA, 5.00%, 6/15/33 to 5/20/36 157,728,599
446,514,493 GNMA, 5.50%, 4/15/33 to 8/20/38(3) 447,153,185
205,684,501 GNMA, 6.00%, 7/20/16 to 9/20/38(3) 208,916,634
58,298,453 GNMA, 6.50%, 6/15/23 to 7/20/38 59,933,202
12,704,383 GNMA, 7.00%, 5/15/17 to 12/20/29 13,393,721
65,847 GNMA, 7.25%, 4/15/23 to 6/15/23 70,467
10,020,843 GNMA, 7.50%, 6/15/13 to 11/15/31 10,815,265
101,475 GNMA, 7.65%, 6/15/16 to 12/15/16 109,690
71,665 GNMA, 7.75%, 11/15/22 to 6/20/23 77,855
253,990 GNMA, 7.77%, 4/15/20 to 6/15/20 276,522
35,461 GNMA, 7.85%, 9/20/22 38,579
15,345 GNMA, 7.89%, 9/20/22 16,711
100,836 GNMA, 7.98%, 6/15/19 to 6/15/19 110,242
2,942,481 GNMA, 8.00%, 2/20/17 to 7/20/30 3,227,169
183,666 GNMA, 8.15%, 1/15/20 to 2/15/21 201,085
608,486 GNMA, 8.25%, 10/20/16 to 5/15/27 665,296
50,763 GNMA, 8.35%, 11/15/20 55,834
2,512,025 GNMA, 8.50%, 1/20/13 to 12/15/30 2,770,032
242,431 GNMA, 8.75%, 1/15/17 to 7/15/27 265,005
1,576,551 GNMA, 9.00%, 11/15/08 to 1/15/25 1,726,981
276,338 GNMA, 9.25%, 8/15/16 to 3/15/25 305,264
563,321 GNMA, 9.50%, 6/15/09 to 7/20/25 627,482
145,738 GNMA, 9.75%, 8/15/17 to 11/20/21 165,523
152,914 GNMA, 10.00%, 11/15/09 to 1/15/22 174,507
60,459 GNMA, 10.25%, 5/15/12 to 2/15/19 67,356
Principal Amount Value
$ 89,678 GNMA, 10.50%, 3/15/14 to 4/20/19 $102,161
111,310 GNMA, 11.00%, 12/15/09 to 6/15/20 124,194
2,370 GNMA, 11.25%, 2/20/16 2,724
8,056 GNMA, 11.50%, 2/15/13 to 10/20/18 9,232
12,210 GNMA, 12.00%, 3/15/11 to 12/15/12 13,507
4,924 GNMA, 12.25%, 2/15/14 5,688
39,082 GNMA, 12.50%, 5/15/10 to 12/15/13 43,060
81,912 GNMA, 13.00%, 1/15/11 to 8/15/15 94,500
35,452 GNMA, 13.50%, 5/15/10 to 8/15/14 41,138
6,394 GNMA, 13.75%, 8/15/14 7,651
2,473 GNMA, 14.00%, 6/15/11 to 7/15/11 2,819
16,641 GNMA, 14.50%, 10/15/12 to 12/15/12 19,417
26,785 GNMA, 15.00%, 7/15/11 to 10/15/12 30,954
--------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(Cost $1,287,320,573) 1,280,101,503
--------------
U.S. Government Agency Collateralized Mortgage Obligations(1) -- 21.1%
4,568,508 GNMA, Series 1998-6, Class FA, VRN, 3.00%,
10/16/08, resets monthly off the 1-month
LIBOR plus 0.51% with a cap of 9.00% 4,594,937
548,369 GNMA, Series 1998-17, Class F, VRN, 2.99%,
10/16/08, resets monthly off the 1-month
LIBOR plus 0.50% with no caps 552,229
297,180 GNMA, Series 2000-22, Class FG, VRN, 2.69%,
10/16/08, resets monthly off the 1-month
LIBOR plus 0.20% with no caps 296,394
2,591,536 GNMA, Series 2001-59, Class FD, VRN, 2.99%,
10/16/08, resets monthly off the 1-month
LIBOR plus 0.50% with no caps 2,617,480
5,384,810 GNMA, Series 2001-62, Class FB, VRN, 2.99%,
10/16/08, resets monthly off the 1-month
LIBOR plus 0.50% with no caps 5,434,528
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18
Ginnie Mae
Principal Amount Value
$ 3,046,520 GNMA, Series 2002-13, Class FA, VRN, 2.99%,
10/16/08, resets monthly off the 1-month
LIBOR plus 0.50% with a cap of 8.50% $ 3,072,428
5,380,002 GNMA, Series 2002-24, Class FA, VRN, 2.99%,
10/16/08, resets monthly off the 1-month
LIBOR plus 0.50% with a cap of 8.50% 5,413,773
1,588,546 GNMA, Series 2002-29, Class FA SEQ, VRN,
3.54%, 10/20/08, resets monthly off the
1-month LIBOR plus 0.35% with a cap of 9.00% 1,593,751
1,455,250 GNMA, Series 2002-31, Class FW, VRN, 2.89%,
10/16/08, resets monthly off the 1-month
LIBOR plus 0.40% with a cap of 8.50% 1,451,306
1,886,140 GNMA, Series 2002-47, Class PX, 6.00%, 5/20/31 1,888,023
8,653,557 GNMA, Series 2002-50, Class PD, 6.00%, 5/20/31 8,727,857
2,565,415 GNMA, Series 2002-57, Class PD, 6.00%, 6/20/31 2,577,491
692,975 GNMA, Series 2002-60, Class PE, 6.00%, 7/20/31 698,622
5,295,397 GNMA, Series 2002-66, Class FA, VRN, 2.84%,
10/16/08, resets monthly off the 1-month
LIBOR plus 0.35% with a cap of 8.00% 5,234,690
6,044,690 GNMA, Series 2003-7, Class FA, VRN, 2.94%,
10/16/08, resets monthly off the 1-month
LIBOR plus 0.45% with no caps 5,987,253
318,718 GNMA, Series 2003-10, Class JC, 6.00%, 4/20/30 320,981
683,949 GNMA, Series 2003-14, Class F, VRN, 3.54%,
10/20/08, resets monthly off the 1-month
LIBOR plus 0.35% a cap of 7.50% 682,564
12,272,254 GNMA, Series 2003-35, Class CF, VRN, 2.79%,
10/16/08, resets monthly off the 1-month
LIBOR plus 0.30% with a cap of 8.00% 12,097,510
Principal Amount Value
$ 2,690,825 GNMA, Series 2003-42, Class FW, VRN, 3.54%,
10/20/08, resets monthly off the 1-month
LIBOR plus 0.35% with a cap of 7.00% $ 2,703,510
15,668,776 GNMA, Series 2003-46, Class PA, 5.00%, 5/20/29 15,758,151
17,783,763 GNMA, Series 2003-55, Class PG, 5.00%, 6/20/29 17,894,590
17,650,000 GNMA, Series 2003-66, Class EH, 5.00%, 5/20/32 17,276,685
5,981,816 GNMA, Series 2003-66, Class HF, VRN, 3.64%,
10/20/08, resets monthly off the 1-month
LIBOR plus 0.45% with a cap of 7.50% 5,786,821
5,107,998 GNMA, Series 2003-85, Class A SEQ, 4.50%,
9/20/27 5,127,418
1,766,098 GNMA, Series 2003-85, Class BM SEQ, 5.00%,
2/20/24 1,773,823
1,766,098 GNMA, Series 2003-85, Class BX SEQ, 5.50%,
2/20/24 1,785,412
24,638,885 GNMA, Series 2003-86, Class BD SEQ, 5.50%,
4/20/30 25,065,704
3,650,382 GNMA, Series 2003-110, Class HA SEQ, 5.00%,
5/20/29 3,689,503
517,260 GNMA, Series 2004-11, Class UC, 5.00%, 4/16/26 517,087
22,223,224 GNMA, Series 2004-30, Class PD, 5.00%, 2/20/33 21,615,196
3,594,046 GNMA, Series 2004-39, Class XF SEQ, VRN,
2.74%, 10/16/08, resets monthly off the
1-month LIBOR plus 0.25% with a cap of 7.50% 3,601,780
6,161,072 GNMA, Series 2004-46, Class BG SEQ, 5.00%,
5/20/25 6,205,974
32,030,709 GNMA, Series 2004-53, Class FB SEQ, VRN,
2.89%, 10/16/08, resets monthly off the
1-month LIBOR plus 0.40% with a cap of 7.50% 31,326,192
7,068,755 GNMA, Series 2004-82, Class DM, 5.00%,
10/20/27 7,087,947
13,697,686 GNMA, Series 2004-87, Class LA, 3.63%,
12/20/28 13,628,444
- ------
19
Ginnie Mae
Principal Amount Value
$ 12,189,134 GNMA, Series 2005-24, Class F, VRN, 2.69%,
10/16/08, resets monthly off the 1-month
LIBOR plus 0.20% with a cap of 7.00% $ 11,876,312
8,446,922 GNMA, Series 2007-6, Class LA, 5.50%, 10/20/30 8,580,163
14,726,271 GNMA, Series 2007-33, Class LA, 5.50%, 4/20/31 14,991,388
--------------
TOTAL U.S. GOVERNMENT AGENCY COLLATERALIZED
MORTGAGE OBLIGATIONS
(Cost $280,135,280) 279,533,917
--------------
U.S. Government Agency Securities -- 3.0%
40,000,000 FHLB, VRN, 2.67%, 11/24/08, resets quarterly
off the 3-month LIBOR minus 0.14% with no caps
(Cost $40,000,000) 39,922,440
--------------
Adjustable-Rate U.S. Government Agency Mortgage-Backed Securities(1) -- 2.3%
3,338,773 GNMA, 4.00%, 11/20/35 3,321,605
18,620,597 GNMA, 5.00%, 7/20/36 18,721,520
8,127,440 GNMA, 4.50%, 12/20/36 8,140,899
--------------
TOTAL ADJUSTABLE-RATE U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES
(Cost $29,912,593) 30,184,024
--------------
Principal Amount Value
Temporary Cash Investments -- 6.7%
$ 22,511,000 FHLB Discount Notes, 0.01%, 10/1/08(4) $ 22,511,000
Repurchase Agreement, Bank of America Securities, LLC,
(collateralized by various U.S. Treasury obligations, 3.00%,
7/15/12, valued at $67,865,844), in a joint trading account at
0.03%, dated 9/30/08, due 10/1/08 (Delivery value $66,698,056) 66,698,000
--------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $89,209,000) 89,209,000
--------------
TOTAL INVESTMENT SECURITIES -- 129.6%
(Cost $1,726,577,446) 1,718,950,884
--------------
OTHER ASSETS AND LIABILITIES -- (29.6)% (392,705,562)
--------------
TOTAL NET ASSETS -- 100.0% $1,326,245,322
==============
Futures Contracts
Underlying Face Unrealized
Contracts Purchased Expiration Date Amount at Value Gain (Loss)
412 U.S. Treasury
2-Year Notes December 2008 $87,936,250 $507,636
============== ==============
Underlying Face Unrealized
Contracts Sold Expiration Date Amount at Value Gain (Loss)
38 U.S. Long Bond December 2008 $ 4,452,531 $ (6,023)
221 U.S. Treasury
5-Year Notes December 2008 24,803,797 7,589
240 U.S. Treasury
10-Year Notes December 2008 27,510,000 130,710
-------------- --------------
$56,766,328 $132,276
============== ==============
Notes to Schedule of Investments
FHLB = Federal Home Loan Bank
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, 2008.
(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.
(4) The rate indicated is the yield to maturity at purchase.
See Notes to Financial Statements.
- ------
20
SCHEDULE OF INVESTMENTS
Government Bond
SEPTEMBER 30, 2008 (UNAUDITED)
Principal Amount Value
Fixed-Rate U.S. Government Agency Mortgage-Backed Securities(1) -- 56.6%
$ 4,417,128 FHLMC, 4.50%, 1/1/19 $ 4,348,031
29,036,376 FHLMC, 5.00%, 5/1/23(2) 28,813,522
6,130,952 FHLMC, 5.50%, 10/1/34 6,111,883
76,383,664 FHLMC, 5.50%, 4/1/38 76,050,555
646,995 FHLMC, 6.50%, 7/1/47 653,061
28,000,000 FNMA, 5.50%, settlement date 10/14/08(3) 27,925,632
15,170,000 FNMA, 6.50%, settlement date 10/14/08(3) 15,556,365
90,343,486 FNMA, 6.00%, settlement date 11/13/08(3) 91,345,758
16,173,367 FNMA, 4.50%, 5/1/19(2) 15,890,042
1,270,482 FNMA, 5.00%, 9/1/20 1,266,921
675,057 FNMA, 6.50%, 3/1/32 697,606
587,100 FNMA, 7.00%, 6/1/32 617,153
883,978 FNMA, 6.50%, 8/1/32 914,335
10,712,756 FNMA, 5.50%, 7/1/33 10,716,259
11,249,167 FNMA, 5.00%, 11/1/33(2) 10,998,243
2,914,617 FNMA, 5.50%, 9/1/34 2,912,836
16,432,695 FNMA, 5.50%, 10/1/34(2) 16,422,654
9,731,269 FNMA, 5.00%, 8/1/35(2) 9,499,003
37,961,269 FNMA, 5.50%, 1/1/36 37,921,030
4,423,603 FNMA, 5.00%, 2/1/36 4,318,020
13,352,806 FNMA, 5.50%, 4/1/36(2) 13,336,302
12,981,441 FNMA, 5.50%, 12/1/36 12,959,308
45,925,091 FNMA, 5.50%, 2/1/37 45,846,789
7,721,481 FNMA, 6.50%, 8/1/37(2) 7,879,663
314,882 FNMA, 6.50%, 6/1/47 317,834
762,573 FNMA, 6.50%, 8/1/47 769,723
1,054,711 FNMA, 6.50%, 8/1/47 1,064,599
129,672 FNMA, 6.50%, 9/1/47 130,888
1,258,574 FNMA, 6.50%, 9/1/47 1,270,373
1,790,029 FNMA, 6.50%, 9/1/47 1,806,810
1,033,147 FNMA, 6.50%, 9/1/47 1,042,832
892,901 FNMA, 6.50%, 9/1/47 901,272
9,975,666 FNMA, 6.00%, 4/1/48 9,903,966
30,000,000 GNMA, 5.50%, settlement date 10/22/08(3) 29,915,700
--------------
TOTAL FIXED-RATE U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES
(Cost $489,805,951) 490,124,968
--------------
Principal Amount Value
U.S. Treasury Securities -- 32.2%
$14,720,000 U.S. Treasury Bonds, 8.125%, 8/15/21(2) $ 20,205,511
10,700,000 U.S. Treasury Bonds, 7.125%, 2/15/23(2) 13,775,415
4,500,000 U.S. Treasury Bonds, 6.625%, 2/15/27(2) 5,724,846
28,077,867 U.S. Treasury Inflation Indexed Notes, 3.00%,
7/15/12(2) 29,205,390
20,353,104 U.S. Treasury Inflation Indexed Notes, 2.00%,
1/13/14(2) 20,294,284
10,000,000 U.S. Treasury Notes, 2.625%, 5/31/10(2) 10,117,970
20,000,000 U.S. Treasury Notes, 4.625%, 10/31/11(2) 21,356,260
19,750,000 U.S. Treasury Notes, 4.125%, 8/30/12(2) 20,840,891
15,000,000 U.S. Treasury Notes, 3.50%, 5/31/13(2) 15,383,205
27,000,000 U.S. Treasury Notes, 3.125%, 8/31/13(2) 27,227,826
18,270,000 U.S. Treasury Notes, 4.00%, 2/14/14(2) 19,196,362
4,500,000 U.S. Treasury Notes, 10.625%, 8/15/15(2) 6,470,159
14,538,000 U.S. Treasury Notes, 4.875%, 8/14/16(2) 15,740,801
28,950,000 U.S. Treasury Notes, 4.75%, 8/15/17(2) 31,010,430
10,000,000 U.S. Treasury Notes, 3.875%, 5/15/18(2) 10,055,470
12,085,000 U.S. Treasury Notes, 4.00%, 8/15/18(2) 12,251,181
--------------
TOTAL U.S. TREASURY SECURITIES
(Cost $277,295,780) 278,856,001
--------------
U.S. Government Agency Collateralized Mortgage Obligations(1) -- 17.9%
1,210,545 FHLMC, Series 2560, Class FG SEQ, VRN, 2.99%,
10/15/08, resets monthly off the 1-month LIBOR
plus 0.50% with a cap of 8.50% 1,206,353
3,308,645 FHLMC, Series 2625, Class FJ SEQ, VRN, 2.79%,
10/15/08, resets monthly off the 1-month LIBOR
plus 0.30% with a cap of 7.50% 3,312,139
- ------
21
Government Bond
Principal Amount Value
$ 7,098,228 FHLMC, Series 2706, Class EB, 5.00%, 9/15/20(2) $7,167,465
3,549,002 FHLMC, Series 2779, Class FM SEQ, VRN, 2.84%,
10/15/08, resets monthly off the 1-month LIBOR
plus 0.35% with a cap of 7.50% 3,502,166
6,190,400 FHLMC, Series 2780, Class BD SEQ, 4.50%,
10/15/17 6,208,760
7,519,147 FHLMC, Series 2812, Class EF SEQ, VRN, 2.89%,
10/15/08, resets monthly off the 1-month LIBOR
plus 0.40% with a cap of 7.50% 7,445,451
5,229,582 FHLMC, Series 2831, Class AF, VRN, 2.79%,
10/15/08, resets monthly off the 1-month LIBOR
plus 0.30% with a cap of 7.50% 5,141,688
2,000,781 FHLMC, Series 2836, Class ND, 4.00%, 7/15/13 2,002,884
9,557,469 FHLMC, Series 2855, Class FK SEQ, VRN, 2.84%,
10/15/08, resets monthly off the 1-month LIBOR
plus 0.35% with a cap of 7.50% 9,417,997
4,055,472 FHLMC, Series 2892, Class A, 5.00%, 5/15/21 4,090,864
1,362,016 FHLMC, Series 2900, Class PA, 4.50%, 3/15/14 1,365,227
10,000,000 FHLMC, Series 3203, Class VN SEQ, 5.00%,
6/15/22(2) 9,550,660
14,142,768 FHLMC, Series 3316, Class EA, 5.50%,
10/15/29(2) 14,461,687
3,373,833 FHLMC, Series R005, Class AB SEQ, 5.50%,
12/15/18 3,427,443
3,274,926 FNMA, Series 2002-5, Class PJ, 6.00%, 10/25/21 3,368,120
623,910 FNMA, Series 2002-89, Class CA SEQ, 5.00%,
4/25/16 627,474
3,720,258 FNMA, Series 2003-10, Class HW SEQ, 5.00%,
11/25/16 3,750,322
1,441,641 FNMA, Series 2003-14, Class LA SEQ, 5.00%,
8/25/16 1,452,555
Principal Amount Value
$ 3,456,252 FNMA, Series 2003-42, Class FK, VRN, 3.61%,
10/25/08, resets monthly off the 1-month LIBOR
plus 0.40% with a cap of 7.50% $ 3,408,452
6,132,297 FNMA, Series 2003-43, Class LF, VRN, 3.56%,
10/27/08, resets monthly off the 1-month LIBOR
plus 0.35% with a cap of 8.00% 6,067,319
5,393,821 FNMA, Series 2003-52, Class KF SEQ, VRN,
3.61%, 10/25/08, resets monthly off the
1-month LIBOR plus 0.40% with a cap of 7.50% 5,334,435
268,116 FNMA, Series 2003-84, Class AL, 4.00%, 4/25/13 267,697
18,000,000 FNMA, Series 2003-92, Class PD, 4.50%,
3/25/17(2) 17,918,064
5,253,426 FNMA, Series 2004 W5, Class F1, VRN, 3.66%,
10/25/08, resets monthly off the 1-month LIBOR
plus 0.45% with a cap of 7.50% 5,256,347
1,318,655 FNMA, Series 2005-47, Class AN SEQ, 5.00%,
12/25/16 1,330,080
5,793,933 FNMA, Series 2005-63, Class HA SEQ, 5.00%,
4/25/23(2) 5,815,388
10,012,733 FNMA, Series 2006-44, Class OA, 5.50%, 12/25/26 10,181,748
12,000,000 GNMA, Series 2004-30, Class PD, 5.00%, 2/20/33 11,671,680
--------------
TOTAL U.S. GOVERNMENT AGENCY COLLATERALIZED
MORTGAGE OBLIGATIONS
(Cost $154,263,643) 154,750,465
--------------
U.S. Government Agency Securities -- 3.5%
8,800,000 FHLMC, 5.00%, 6/11/09 8,906,814
8,000,000 FHLMC, 4.125%, 9/27/13 8,071,440
5,800,000 FHLMC, 5.00%, 1/29/14 6,015,012
7,250,000 FNMA, 5.00%, 2/13/17 7,423,282
--------------
TOTAL U.S. GOVERNMENT AGENCY SECURITIES
(Cost $30,349,347) 30,416,548
--------------
- ------
22
Government Bond
Principal Amount Value
Adjustable-Rate U.S. Government Agency Mortgage-Backed Securities(1) -- 2.6%
$ 4,427,434 FHLMC, 6.79%, 8/1/36 $ 4,533,010
3,404,520 FNMA, 6.49%, 5/1/36 3,474,891
2,347,077 FNMA, 6.42%, 9/1/36 2,419,270
2,823,280 FNMA, 6.46%, 9/1/36 2,905,813
3,069,403 FNMA, 5.95%, 6/1/37 3,129,487
5,870,772 FNMA, 5.71%, 1/1/38 5,961,235
--------------
TOTAL ADJUSTABLE-RATE U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES
(Cost $22,439,433) 22,423,706
--------------
U.S. Government Agency Asset-Backed Securities(1) -- 1.0%
2,546,084 FHLMC, Series T20, Class A7, VRN, 3.86%,
10/27/08, resets monthly off the 1-month LIBOR
plus 0.15% with no caps 2,354,245
5,161,781 FHLMC, Series T21, Class A, VRN, 3.57%,
10/27/08, resets monthly off the 1-month LIBOR
plus 0.18% with no caps 4,849,534
Principal Amount Value
$ 750,862 FHLMC, Series T34, Class A1V, VRN, 3.45%,
10/27/08, resets monthly off the 1-month LIBOR
plus 0.12% with no caps $698,899
637,314 FHLMC, Series T35, Class A, VRN, 3.49%,
10/27/08, resets monthly off the 1-month LIBOR
plus 0.14% with no caps 596,771
569,204 FHLMC, Series T7, Class A5 SEQ, 7.27%, 8/25/28 541,355
--------------
TOTAL U.S. GOVERNMENT AGENCY ASSET-BACKED SECURITIES
(Cost $9,670,579) 9,040,804
--------------
Temporary Cash Investments -- 4.5%
38,826,000 FHLB Discount Notes, 0.01%, 10/1/08(2)(4)
(Cost $38,826,000) 38,826,000
--------------
TOTAL INVESTMENT SECURITIES -- 118.3%
(Cost $1,022,650,733) 1,024,438,492
--------------
OTHER ASSETS AND LIABILITIES -- (18.3)% (158,366,354)
--------------
TOTAL NET ASSETS -- 100.0% $ 866,072,138
==============
Futures Contracts
Underlying Face Unrealized Gain
Contracts Purchased Expiration Date Amount at Value (Loss)
1,035 U.S. Treasury
2-Year Notes December 2008 $220,907,813 $1,275,249
============== ==============
Underlying Face Unrealized Gain
Contracts Sold Expiration Date Amount at Value (Loss)
640 U.S. Treasury
10-Year Notes December 2008 $73,360,000 $348,560
============== ==============
Notes to Schedule of Investments
FHLB = Federal Home Loan Bank
FHLMC = Federal Home Loan Mortgage Corporation
FNMA = Federal National Mortgage Association
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, 2008.
(1) Final maturity indicated, unless otherwise noted.
(2) Security, or a portion thereof, has been segregated for forward commitments
and/or futures contracts.
(3) Forward commitment.
(4) The rate indicated is the yield to maturity at purchase.
See Notes to Financial Statements.
- ------
23
SCHEDULE OF INVESTMENTS
Inflation-Adjusted Bond
SEPTEMBER 30, 2008 (UNAUDITED)
Principal Amount Value
U.S. Treasury Securities -- 87.8%
$ 93,921,765 U.S. Treasury Inflation Indexed Bonds, 2.375%,
1/14/25 $ 90,788,631
84,212,560 U.S. Treasury Inflation Indexed Bonds, 2.00%,
1/14/26(1) 76,699,284
54,282,126 U.S. Treasury Inflation Indexed Bonds, 2.375%,
1/15/27 52,305,931
82,345,793 U.S. Treasury Inflation Indexed Bonds, 1.75%,
1/15/28(1) 71,582,951
56,021,700 U.S. Treasury Inflation Indexed Bonds, 3.625%,
4/14/28 64,188,655
56,722,720 U.S. Treasury Inflation Indexed Bonds, 3.875%,
4/14/29(1) 67,517,791
23,582,268 U.S. Treasury Inflation Indexed Bonds, 3.375%,
4/14/32 26,909,584
73,332,237 U.S. Treasury Inflation Indexed Notes, 4.25%,
1/14/10(1) 75,446,332
55,490,542 U.S. Treasury Inflation Indexed Notes, 0.875%,
4/15/10(1) 54,489,160
20,849,565 U.S. Treasury Inflation Indexed Notes, 3.50%,
1/15/11 21,673,790
67,422,409 U.S. Treasury Inflation Indexed Notes, 2.375%,
4/15/11 68,149,357
37,435,778 U.S. Treasury Inflation Indexed Notes, 3.375%,
1/15/12 39,252,012
42,159,820 U.S. Treasury Inflation Indexed Notes, 2.00%,
4/12/12 42,248,777
73,347,389 U.S. Treasury Inflation Indexed Notes, 3.00%,
7/15/12(1) 76,292,800
31,943,350 U.S. Treasury Inflation Indexed Notes, 0.625%,
4/14/13 30,126,604
26,852,368 U.S. Treasury Inflation Indexed Notes, 1.875%,
7/15/13 26,762,171
133,544,928 U.S. Treasury Inflation Indexed Notes, 2.00%,
1/13/14(1) 133,158,984
90,654,921 U.S. Treasury Inflation Indexed Notes, 2.00%,
7/15/14(1) 90,329,198
Principal Amount Value
$ 96,518,326 U.S. Treasury Inflation Indexed Notes, 1.625%,
1/15/15(1) $ 93,909,339
67,190,065 U.S. Treasury Inflation Indexed Notes, 1.875%,
7/15/15(1) 66,066,781
86,982,710 U.S. Treasury Inflation Indexed Notes, 2.00%,
1/15/16(1) 85,725,549
38,904,525 U.S. Treasury Inflation Indexed Notes, 2.50%,
7/15/16 39,719,108
17,437,895 U.S. Treasury Inflation Indexed Notes, 2.375%,
1/14/17 17,545,521
11,778,543 U.S. Treasury Inflation Indexed Notes, 2.625%,
7/15/17 12,110,745
91,094,660 U.S. Treasury Inflation Indexed Notes, 1.625%,
1/14/18 86,084,544
40,182,878 U.S. Treasury Inflation Indexed Notes, 1.375%,
7/15/18 37,031,054
--------------
TOTAL U.S. TREASURY SECURITIES
(Cost $1,583,418,218) 1,546,114,653
--------------
Corporate Bonds -- 4.2%
CONSUMER FINANCE -- 4.2%
1,500,000 John Deere Capital Corp., 4.90%, 9/9/13 1,452,620
28,789,500 SLM Corp., 1.32%, 1/25/10 23,939,621
48,769,140 Toyota Motor Credit Corp. Inflation Indexed
Bonds, 1.22%, 10/1/09 48,744,755
--------------
TOTAL CORPORATE BONDS
(Cost $79,055,452) 74,136,996
--------------
Municipal Securities -- 2.4%
10,220,000 California Infrastructure & Economic
Development Bank Rev., Series 2003 A, (Bay
Area Toll Bridges Seismic Retrofit), 5.00%,
1/1/28, Prerefunded at 100% of Par (Ambac)(2) 10,113,303
15,150,000 California Infrastructure & Economic
Development Bank Rev., Series 2003 A, (Bay
Area Toll Bridges Seismic Retrofit), 5.00%,
1/1/28, Prerefunded at 100% of Par (Ambac)(2) 14,991,834
- ------
24
Inflation-Adjusted Bond
Principal Amount Value
$ 6,000,000 Georgia GO, Series 2008 B, 5.00%, 7/1/18 $ 6,324,000
10,800,000 Massachusetts Health & Educational Facilities
Auth. Rev., Series 2002 K, (Massachusetts
Institute of Technology), 5.50%, 6/30/32 (GO
of Institute) 11,148,192
--------------
TOTAL MUNICIPAL SECURITIES
(Cost $45,043,737) 42,577,329
--------------
U.S. Government Agency Mortgage-Backed Securities(3) -- 2.3%
40,000,000 FHLMC, 5.50%, 4/1/38
(Cost $40,387,500) 39,825,560
--------------
Commercial Mortgage-Backed Securities(3) -- 1.6%
12,000,000 Credit Suisse Mortgage Capital Certificates,
Series 2007 TF2A, Class A1, VRN, 2.67%,
10/15/08, resets monthly off the 1-month LIBOR
plus 0.18% with no caps(4) 11,003,268
7,780,750 GMAC Commercial Mortgage Securities, Inc.,
Series 2005 C1, Class A2 SEQ, 4.47%, 5/10/43 7,635,219
Principal Amount Value
$ 10,268,995 Lehman Brothers Floating Rate Commercial
Mortgage Trust, Series 2007 LLFA, Class A1,
VRN, 2.79%, 10/15/08, resets monthly off the
1-month LIBOR plus 0.30% with no caps(4) $ 9,491,006
--------------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES
(Cost $29,987,845) 28,129,493
--------------
U.S. Government Agency Securities -- 0.7%
2,000,000 FHLMC, 4.125%, 9/27/13 2,017,860
10,000,000 FHLMC, 4.50%, 4/2/14 10,140,620
--------------
TOTAL U.S. GOVERNMENT AGENCY SECURITIES
(Cost $12,195,234) 12,158,480
--------------
Temporary Cash Investments -- 1.1%
Repurchase Agreement, Bank of America Securities, LLC,
(collateralized by various U.S. Treasury obligations, 3.00%,
7/15/12, valued at $18,999,954), in a joint trading account at
0.03%, dated 9/30/08, due 10/1/08 (Delivery value $18,673,016)
(Cost $18,673,000) 18,673,000
--------------
TOTAL INVESTMENT SECURITIES -- 100.1%
(Cost $1,808,760,986) 1,761,615,511
--------------
OTHER ASSETS AND LIABILITIES -- (0.1)% (2,565,473)
--------------
TOTAL NET ASSETS -- 100.0% $1,759,050,038
==============
Futures Contracts
Underlying Face Unrealized
Contracts Purchased Expiration Date Amount at Value Gain (Loss)
1,896 U.S. Treasury
2-Year Notes December 2008 $404,677,500 $ 2,336,109
746 U.S. Treasury
5-Year Notes December 2008 83,726,844 231,447
-------------- --------------
$488,404,344 $ 2,567,556
============== ==============
Underlying Face Unrealized
Contracts Sold Expiration Date Amount at Value Gain (Loss)
128 U.S. Long Bond December 2008 $ 14,998,000 $ (20,288)
952 U.S. Treasury
10-Year Notes December 2008 109,123,000 360,983
-------------- --------------
$124,121,000 $ 340,695
============== ==============
- ------
25
Inflation-Adjusted Bond
Swap Agreements
Unrealized
Notional Amount Description of Agreement Expiration Date Gain (Loss)
TOTAL RETURN
$44,200,000 Pay a fixed rate equal to January 2012 $ 739,604
1.13% and receive the return
of the U.S. CPI Urban
Consumers NSA Index upon the
termination date with
Barclays Bank plc.
24,000,000 Pay a fixed rate equal to April 2017 (202,764)
1.31% and receive the return
of the U.S. CPI Urban
Consumers NSA Index upon the
termination date with
Barclays Bank plc.
58,300,000 Pay a fixed rate equal to December 2027 (3,664,066)
2.895% and receive the
return of the U.S. CPI Urban
Consumers NSA Index upon the
termination date with
Barclays Bank plc.
--------------
$(3,127,226)
==============
Notes to Schedule of Investments
Ambac = Ambac Assurance Corporation
CPI = Consumer Price Index
FHLMC = Federal Home Loan Mortgage Corporation
GMAC = General Motors Acceptance Corporation
GO = General Obligation
LIBOR = London Interbank Offered Rate
NSA = Not Seasonally Adjusted
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, 2008.
(1) Security, or a portion thereof, has been segregated for futures contracts
and/or swap agreements.
(2) Escrowed to maturity in U.S. government securities or state and local
government securities.
(3) Final maturity indicated, unless otherwise noted.
(4) 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 these securities at September 30, 2008 was $20,494,274, which
represented 1.2% of total net assets.
See Notes to Financial Statements.
- ------
26
SCHEDULE OF INVESTMENTS
Short-Term Government
SEPTEMBER 30, 2008 (UNAUDITED)
Principal Amount Value
U.S. Treasury Securities -- 46.7%
$91,756,098 U.S. Treasury Inflation Indexed Notes, 3.00%,
7/15/12(1) $ 95,440,750
5,772,664 U.S. Treasury Inflation Indexed Notes, 2.00%,
1/13/14(1) 5,755,981
40,000,000 U.S. Treasury Notes, 3.625%, 10/31/09(1) 40,771,880
75,000,000 U.S. Treasury Notes, 4.75%, 2/15/10(1) 77,976,600
84,900,000 U.S. Treasury Notes, 2.625%, 5/31/10(1) 85,901,565
25,000,000 U.S. Treasury Notes, 2.875%, 6/30/10(1) 25,435,550
57,300,000 U.S. Treasury Notes, 2.00%, 9/29/10 57,349,278
35,000,000 U.S. Treasury Notes, 4.50%, 2/28/11(1) 37,045,330
25,000,000 U.S. Treasury Notes, 4.50%, 9/30/11(1) 26,601,575
18,000,000 U.S. Treasury Notes, 4.75%, 1/31/12(1) 19,300,788
10,000,000 U.S. Treasury Notes, 4.875%, 8/14/16(1) 10,827,350
--------------
TOTAL U.S. TREASURY SECURITIES
(Cost $483,215,605) 482,406,647
--------------
Collateralized Mortgage Obligations(2) -- 21.1%
U.S. GOVERNMENT AGENCY -- 20.6%
1,603,806 FHLMC, Series 2522, Class XA SEQ, 5.00%,
8/15/16 1,616,648
512,912 FHLMC, Series 2552, Class HA SEQ, 5.00%,
9/15/16 516,476
7,174,823 FHLMC, Series 2624, Class FE SEQ, VRN, 2.79%,
10/15/08, resets monthly off the 1-month LIBOR
plus 0.30% with a cap of 8.00% 7,183,986
5,624,697 FHLMC, Series 2625, Class FJ SEQ, VRN, 2.79%,
10/15/08, resets monthly off the 1-month LIBOR
plus 0.30% with a cap of 7.50% 5,630,636
18,447,961 FHLMC, Series 2631, Class PC, 4.50%, 3/15/16 18,518,062
2,900,397 FHLMC, Series 2672, Class QR, 4.00%, 9/15/10 2,986,835
Principal Amount Value
$ 5,357,887 FHLMC, Series 2688, Class DE SEQ, 4.50%,
2/15/20 $ 5,373,242
2,274,971 FHLMC, Series 2699, Class TG, 4.00%, 5/15/17 2,258,564
12,835,500 FHLMC, Series 2709, Class PC, 5.00%, 9/15/18 12,959,824
9,361,886 FHLMC, Series 2718, Class FW, VRN, 2.84%,
10/15/08, resets monthly off the 1-month LIBOR
plus 0.35% with a cap of 8.00% 9,255,180
384,716 FHLMC, Series 2743, Class OK, 4.00%, 4/15/21 384,314
2,467,831 FHLMC, Series 2763, Class PB, 4.50%, 6/15/14 2,473,088
3,549,002 FHLMC, Series 2779, Class FM SEQ, VRN, 2.84%,
10/15/08, resets monthly off the 1-month LIBOR
plus 0.35% with a cap of 7.50% 3,502,166
10,317,333 FHLMC, Series 2780, Class BD SEQ, 4.50%,
10/15/17 10,347,934
7,026,241 FHLMC, Series 2827, Class F, VRN, 2.84%,
10/15/08, resets monthly off the 1-month LIBOR
plus 0.35% with a cap of 7.50% 6,923,328
5,142,995 FHLMC, Series 2831, Class AF, VRN, 2.79%,
10/15/08, resets monthly off the 1-month LIBOR
plus 0.30% with a cap of 7.50% 5,056,557
1,328,508 FHLMC, Series 2890, Class AB SEQ, 3.75%,
12/15/11 1,321,574
2,634,426 FHLMC, Series 2900, Class PA, 4.50%, 3/15/14 2,640,636
9,909,432 FHLMC, Series 2931, Class QA, 4.50%, 4/15/15 9,931,956
3,762,448 FHLMC, Series 2937, Class KA, 4.50%, 12/15/14 3,771,022
7,356,134 FHLMC, Series 2941, Class XA, 5.00%, 2/15/25 7,393,430
5,279,154 FHLMC, Series 2984, Class NA, 5.50%, 4/15/26 5,355,660
521,307 FHLMC, Series 3108, Class DA SEQ, 5.125%,
10/15/15 522,314
3,274,926 FNMA, Series 2002-5, Class PJ, 6.00%, 10/25/21 3,368,120
- ------
27
Short-Term Government
Principal Amount Value
$ 816,495 FNMA, Series 2002-71, Class UB, 5.00%, 11/25/15 $820,538
5,971,000 FNMA, Series 2002-74, Class PD, 5.00%, 11/25/15 6,004,396
5,010,718 FNMA, Series 2002-83, Class GM, 5.00%, 5/25/16 5,043,152
2,335,702 FNMA, Series 2002-86, Class KB SEQ, 5.00%,
5/25/16 2,350,417
1,284,713 FNMA, Series 2003-3, Class HA, 5.00%, 9/25/16 1,294,864
11,378,642 FNMA, Series 2003-17, Class FN, VRN, 3.51%,
10/27/08, resets monthly off the 1-month LIBOR
plus 0.30% with no caps 11,199,314
5,030,755 FNMA, Series 2003-24, Class BF, VRN, 3.56%,
10/27/08, resets monthly off the 1-month LIBOR
plus 0.35% with no caps 4,992,180
2,983,710 FNMA, Series 2003-29, Class L SEQ, 5.00%,
9/25/30 2,990,955
2,411,083 FNMA, Series 2003-35, Class KC, 4.50%, 4/25/17 2,415,944
5,184,377 FNMA, Series 2003-42, Class FK, VRN, 3.61%,
10/25/08, resets monthly off the 1-month LIBOR
plus 0.40% with a cap of 7.50% 5,112,677
6,132,296 FNMA, Series 2003-43, Class LF, VRN, 3.56%,
10/27/08, resets monthly off the 1-month LIBOR
plus 0.35% with a cap of 8.00% 6,067,319
5,253,426 FNMA, Series 2004 W5, Class F1, VRN, 3.66%,
10/25/08, resets monthly off the 1-month LIBOR
plus 0.45% with a cap of 7.50% 5,256,347
3,766,398 FNMA, Series 2005-53, Class WC SEQ, 5.00%,
8/25/18 3,799,592
3,289,031 FNMA, Series 2006-4, Class A SEQ, 6.00%,
11/25/22 3,357,176
10,995,632 GNMA, Series 2003-46, Class PA, 5.00%, 5/20/29 11,058,351
11,855,842 GNMA, Series 2003-55, Class PG, 5.00%, 6/20/29 11,929,727
--------------
212,984,501
--------------
Principal Amount Value
PRIVATE SPONSOR -- 0.5%
$ 5,578,782 J.P. Morgan Mortgage Trust, Series 2004 A4,
Class 2A2, VRN, 4.61%, 11/25/08 $ 5,055,732
--------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $217,718,451) 218,040,233
--------------
Commercial Mortgage-Backed Securities(2) -- 10.2%
22,600,000 Banc of America Commercial Mortgage Inc.,
Series 2004-2, Class A3 SEQ, 4.05%, 11/10/38 21,855,171
56,721,711 Bear Stearns Commercial Mortgage Securities
Trust STRIPS - COUPON, Series 2004 T16, Class
X2, VRN, 0.72%, 10/1/08 1,283,329
14,107,153 Commercial Mortgage Acceptance Corp. STRIPS -
COUPON, Series 1998 C2, Class X, VRN, 1.52%,
10/1/08 814,716
24,416,804 GMAC Commercial Mortgage Securities, Inc.
STRIPS - COUPON, Series 2000 C3, Class X, VRN,
1.30%, 10/1/08(3) 490,753
19,451,875 GMAC Commercial Mortgage Securities, Inc.,
Series 2005 C1, Class A2 SEQ, 4.47%, 5/10/43 19,088,047
13,155,000 Greenwich Capital Commercial Funding Corp.,
Series 2005 GG3, Class A2 SEQ, 4.31%, 8/10/42 12,899,596
18,456,000 LB-UBS Commercial Mortgage Trust, Series 2003
C3, Class A3 SEQ, 3.85%, 5/15/27 17,411,464
11,325,000 LB-UBS Commercial Mortgage Trust, Series 2004
C1, Class A2 SEQ, 3.62%, 1/15/29 11,150,029
21,329,082 LB-UBS Commercial Mortgage Trust, Series 2005
C2, Class A2 SEQ, 4.82%, 4/15/30 20,949,403
--------------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES
(Cost $107,409,734) 105,942,508
--------------
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28
Short-Term Government
Principal Amount Value
U.S. Government Agency Securities -- 10.1%
$ 5,000,000 FHLMC, 2.875%, 6/28/10 $ 4,979,885
10,000,000 FHLMC, 3.25%, 7/16/10 10,024,910
5,000,000 FHLMC, 3.875%, 6/29/11 5,072,890
34,000,000 FNMA, 5.375%, 8/15/09 34,654,704
15,000,000 FNMA, 3.25%, 2/9/10 15,023,460
25,000,000 FNMA, 2.50%, 4/9/10 24,766,850
9,975,000 FNMA, 2.875%, 10/12/10 9,936,177
--------------
TOTAL U.S. GOVERNMENT AGENCY SECURITIES
(Cost $103,893,356) 104,458,876
--------------
Adjustable-Rate U.S. Government Agency Mortgage-Backed Securities(2) -- 5.8%
28,920 FHLMC, 7.00%, 11/1/18 29,165
237,239 FHLMC, 5.47%, 9/1/20 239,581
53,842 FHLMC, 4.375%, 1/1/21 54,171
68,134 FHLMC, 5.88%, 3/1/24 68,626
11,205,978 FHLMC, 6.36%, 8/1/36 11,575,418
7,969,380 FHLMC, 6.79%, 8/1/36 8,159,419
4,607,575 FHLMC, 5.80%, 12/1/36 4,709,545
13,754 FNMA, 7.49%, 8/1/14 13,754
44,148 FNMA, 4.875%, 4/1/16 44,039
30,144 FNMA, 6.12%, 1/1/17 30,752
220,028 FNMA, 6.91%, 5/1/17 223,993
106,004 FNMA, 6.17%, 7/1/17 105,868
50,313 FNMA, 6.59%, 7/1/17 50,948
11,626 FNMA, 5.25%, 2/1/18 11,716
63,380 FNMA, 5.83%, 2/1/18 63,941
64,696 FNMA, 4.83%, 5/1/18 64,647
27,931 FNMA, 5.47%, 6/1/18 28,035
253,701 FNMA, 5.36%, 9/1/19 257,453
92,686 FNMA, 5.16%, 1/1/20 93,279
32,404 FNMA, 5.50%, 3/1/21 32,558
43,842 FNMA, 4.47%, 8/1/21 43,933
64,700 FNMA, 5.20%, 5/1/22 66,406
19,230 FNMA, 5.81%, 5/1/22 19,708
19,272 FNMA, 4.94%, 1/1/23 19,455
110,870 FNMA, 5.17%, 8/1/23 114,875
55,417 FNMA, 5.57%, 8/1/23 56,794
863,816 FNMA, 6.38%, 5/1/25 890,282
16,364 FNMA, 5.86%, 1/1/27 16,444
7,387 FNMA, 6.50%, 1/1/27 7,646
21,761 FNMA, 5.03%, 1/1/29 22,072
2,244,646 FNMA, 4.52%, 3/1/33 2,261,629
9,257,671 FNMA, 5.80%, 3/1/36 9,398,195
6,128,136 FNMA, 6.49%, 5/1/36 6,254,804
Principal Amount Value
$ 4,218,394 FNMA, 6.42%, 9/1/36 $ 4,348,148
5,054,582 FNMA, 6.46%, 9/1/36 5,202,343
5,416,594 FNMA, 5.95%, 6/1/37 5,522,624
19,178 GNMA, 5.375%, 5/20/17 19,454
87,018 GNMA, 5.875%, 2/20/21 87,751
32,591 GNMA, 5.625%, 11/20/21 33,194
697 GNMA, 5.375%, 1/20/22 703
20,484 GNMA, 6.125%, 8/20/26 21,171
--------------
TOTAL ADJUSTABLE-RATE U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES
(Cost $60,087,895) 60,264,539
--------------
Fixed-Rate U.S. Government Agency Mortgage-Backed Securities(2) -- 2.4%
2,181,395 FHLMC, 5.00%, 6/1/09 2,202,406
4,468,945 FHLMC, 5.00%, 7/1/09 4,537,151
86,791 FHLMC, 6.50%, 1/1/11 89,927
153,176 FHLMC, 6.50%, 5/1/11 158,714
198,181 FHLMC, 6.50%, 12/1/12 207,757
567,657 FHLMC, 6.00%, 2/1/13 584,552
36,313 FHLMC, 7.00%, 11/1/13 38,244
32,351 FHLMC, 7.00%, 12/1/14 34,140
1,215,646 FHLMC, 6.00%, 1/1/15 1,238,203
448,804 FHLMC, 7.50%, 5/1/16 473,167
1,280,884 FHLMC, 5.50%, 11/1/17 1,302,110
9,786,473 FHLMC, 5.50%, 1/1/38 9,745,322
21,864 FNMA, 8.00%, 5/1/12 23,088
846,398 FNMA, 6.50%, 1/1/13 878,566
7,537 FNMA, 6.50%, 3/1/13 7,824
97,421 FNMA, 6.00%, 6/1/13 99,604
8,664 FNMA, 6.50%, 6/1/13 8,997
28,662 FNMA, 6.00%, 1/1/14 29,343
243,000 FNMA, 6.00%, 7/1/14 248,773
428,350 FNMA, 5.50%, 4/1/16 436,520
561,433 FNMA, 7.00%, 5/1/32 590,172
553,219 FNMA, 7.00%, 5/1/32 581,537
960,386 FNMA, 7.00%, 6/1/32 1,009,547
229,390 FNMA, 7.00%, 6/1/32 241,191
430,822 FNMA, 7.00%, 8/1/32 452,875
656 GNMA, 5.50%, 1/20/09 664
23,053 GNMA, 9.00%, 8/20/17 25,210
9,820 GNMA, 9.50%, 11/20/19 10,883
--------------
TOTAL FIXED-RATE U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES
(Cost $24,928,931) 25,256,487
--------------
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29
Short-Term Government
Principal Amount Value
Municipal Securities -- 1.4%
$13,695,000 City of Lincoln Electric System Rev., 5.25%,
9/1/11, Prerefunded at 100% of Par(4)
(Cost $14,804,027) $ 14,546,281
--------------
Asset-Backed Securities(2)(5)
243,027 Ameriquest Mortgage Securities Inc., Series
2003-8, Class AV2, VRN, 4.14%, 10/25/08,
resets monthly off the 1-month LIBOR plus
0.43% with no caps
(Cost $243,027) 205,823
--------------
Principal Amount Value
Temporary Cash Investments -- 2.0%
$21,161,000 FHLB Discount Notes, 0.10%, 10/1/08(6)
(Cost $21,160,941) $ 21,161,000
--------------
TOTAL INVESTMENT SECURITIES -- 99.7%
(Cost $1,033,461,967) 1,032,282,394
--------------
OTHER ASSETS AND LIABILITIES -- 0.3% 2,989,059
--------------
TOTAL NET ASSETS -- 100.0% $1,035,271,453
==============
Futures Contracts
Underlying Face Unrealized
Contracts Purchased Expiration Date Amount at Value Gain (Loss)
1,526 U.S. Treasury
2-Year Notes December 2008 $325,705,625 $1,880,223
============== ==============
Underlying Face Unrealized
Contracts Sold Expiration Date Amount at Value Gain (Loss)
709 U.S. Treasury
10-Year Notes December 2008 $81,269,125 $402,546
============== ==============
Notes to Schedule of Investments
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
VRN = Variable Rate Note. Interest reset date is indicated. Rate shown is
effective September 30, 2008.
(1) Security, or a portion thereof, has been segregated for futures contracts.
(2) Final maturity indicated, unless otherwise noted.
(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 these securities at September 30, 2008 was $490,753, which
represented less than 0.05% of total net assets.
(4) Escrowed to maturity in U.S. government securities or state and local
government securities.
(5) Category is less than 0.05% of total net assets.
(6) The rate indicated is the yield to maturity at purchase.
See Notes to Financial Statements.
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30
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2008 (UNAUDITED)
Inflation-Adjusted Short-Term
Ginnie Mae Government Bond Bond Government
ASSETS
Investment securities,
at
value (cost of
$1,726,577,446,
$1,022,650,733,
$1,808,760,986 and
$1,033,461,967,
respectively) $1,718,950,884 $1,024,438,492 $1,761,615,511 $1,032,282,394
Cash 82,379 4,181,824 4,517,058 3,304,553
Receivable for
investments sold -- 7,092,533 -- 319,848
Receivable for capital
shares sold 56,659 -- 447,750 --
Receivable for
variation margin on
futures contracts 348,994 34,937 461,029 --
Unrealized appreciation
on
swap agreements -- -- 739,604 --
Interest receivable 6,585,120 4,696,693 9,405,625 5,295,092
-------------- -------------- -------------- --------------
1,726,024,036 1,040,444,479 1,777,186,577 1,041,201,887
-------------- -------------- -------------- --------------
LIABILITIES
Payable for investments
purchased 398,546,084 173,772,407 13,477,401 5,013,206
Payable for variation
margin on futures
contracts -- -- -- 364,687
Unrealized depreciation
on
swap agreements -- -- 3,866,830 --
Accrued management fees 591,274 338,933 680,423 493,569
Distribution and
service fees payable 21,359 24,486 111,885 8,418
Dividends payable 619,997 236,515 -- 50,554
-------------- -------------- -------------- --------------
399,778,714 174,372,341 18,136,539 5,930,434
-------------- -------------- -------------- --------------
NET ASSETS $1,326,245,322 $ 866,072,138 $1,759,050,038 $1,035,271,453
============== ============== ============== ==============
See Notes to Financial Statements.
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31
SEPTEMBER 30, 2008 (UNAUDITED)
Inflation-Adjusted Short-Term
Ginnie Mae Government Bond Bond Government
NET ASSETS CONSIST OF:
Capital paid in $1,386,378,272 $855,925,336 $1,819,708,662 $1,061,831,293
Accumulated
undistributed net
investment income (loss) -- -- 5,473,978 (5,332)
Accumulated
undistributed net
realized gain (loss) on
investment transactions (53,146,300) 6,735,234 (18,768,152) (27,657,704)
Net unrealized
appreciation
(depreciation) on
investments (6,986,650) 3,411,568 (47,364,450) 1,103,196
-------------- -------------- -------------- --------------
$1,326,245,322 $866,072,138 $1,759,050,038 $1,035,271,453
============== ============== ============== ==============
INVESTOR CLASS
Net assets $1,214,535,671 $747,556,929 $1,058,086,540 $986,851,010
Shares outstanding 118,205,996 69,029,702 97,930,321 103,635,089
Net asset value
per share $10.27 $10.83 $10.80 $9.52
INSTITUTIONAL CLASS
Net assets $7,049,645 N/A $164,816,254 N/A
Shares outstanding 686,145 N/A 15,269,218 N/A
Net asset value
per share $10.27 N/A $10.79 N/A
ADVISOR CLASS
Net assets $104,633,556 $118,515,209 $536,147,244 $48,420,443
Shares outstanding 10,183,576 10,943,719 49,713,835 5,084,924
Net asset value
per share $10.27 $10.83 $10.78 $9.52
R CLASS
Net assets $26,450 N/A N/A N/A
Shares outstanding 2,576 N/A N/A N/A
Net asset value
per share $10.27 N/A N/A N/A
See Notes to Financial Statements.
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32
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
Inflation-Adjusted Short-Term
Ginnie Mae Government Bond Bond Government
INVESTMENT INCOME (LOSS)
INCOME:
Interest $ 30,985,428 $ 19,068,428 $ 77,699,154 $ 23,532,716
Securities
lending, net -- 260,016 194,443 152,042
-------------- -------------- -------------- --------------
30,985,428 19,328,444 77,893,597 23,684,758
-------------- -------------- -------------- --------------
EXPENSES:
Management fees 3,648,767 1,933,614 3,803,417 3,013,413
Distribution and
service fees:
Advisor Class 122,364 139,542 641,148 43,366
R Class 65 -- -- --
Trustees' fees
and expenses 26,709 16,143 32,764 26,749
Other expenses 1,327 799 1,623 3,218
-------------- -------------- -------------- --------------
3,799,232 2,090,098 4,478,952 3,086,746
-------------- -------------- -------------- --------------
Amount waived (383,688) -- -- --
-------------- -------------- -------------- --------------
3,415,544 2,090,098 4,478,952 3,086,746
-------------- -------------- -------------- --------------
NET INVESTMENT INCOME
(LOSS) 27,569,884 17,238,346 73,414,645 20,598,012
-------------- -------------- -------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN
(LOSS) ON:
Investment transactions 1,646,397 5,425,962 (2,940,071) (1,275,514)
Futures and swaps
transactions 592,373 199,021 1,549,418 876,784
-------------- -------------- -------------- --------------
2,238,770 5,624,983 (1,390,653) (398,730)
-------------- -------------- -------------- --------------
CHANGE IN NET
UNREALIZED APPRECIATION
(DEPRECIATION) ON:
Investments (19,274,264) (23,100,458) (138,634,839) (15,390,636)
Futures and swaps 1,779,630 1,984,508 (2,546,734) 926,357
-------------- -------------- -------------- --------------
(17,494,634) (21,115,950) (141,181,573) (14,464,279)
-------------- -------------- -------------- --------------
NET REALIZED
AND UNREALIZED
GAIN (LOSS) (15,255,864) (15,490,967) (142,572,226) (14,863,009)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS $ 12,314,020 $ 1,747,379 $ (69,157,581) $ 5,735,003
============== ============== ============== ==============
See Notes to Financial Statements.
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33
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED) AND YEAR ENDED MARCH 31, 2008
Ginnie Mae Government Bond
Increase (Decrease) in
Net Assets Sept. 30, 2008 March 31, 2008 Sept. 30, 2008 March 31, 2008
OPERATIONS
Net investment income
(loss) $ 27,569,884 $ 60,028,470 $ 17,238,346 $ 27,373,072
Net realized
gain (loss) 2,238,770 7,226,685 5,624,983 12,276,771
Change in net
unrealized appreciation
(depreciation) (17,494,634) 23,501,053 (21,115,950) 24,737,208
-------------- -------------- -------------- --------------
Net increase (decrease)
in net assets resulting
from operations 12,314,020 90,756,208 1,747,379 64,387,051
-------------- -------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS
From net
investment income:
Investor Class (26,443,282) (57,813,145) (15,051,360) (24,999,483)
Institutional Class (143,688) (106,601) -- --
Advisor Class (2,042,717) (3,988,215) (2,296,530) (2,522,752)
C Class -- (372,915) -- --
R Class (512) (559) -- --
-------------- -------------- -------------- --------------
Decrease in net assets
from distributions (28,630,199) (62,281,435) (17,347,890) (27,522,235)
-------------- -------------- -------------- --------------
CAPITAL SHARE TRANSACTIONS
Net increase (decrease)
in net assets from
capital share
transactions 61,863,388 (70,865,135) 114,056,752 189,748,598
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE)
IN
NET ASSETS 45,547,209 (42,390,362) 98,456,241 226,613,414
NET ASSETS
Beginning of period 1,280,698,113 1,323,088,475 767,615,897 541,002,483
-------------- -------------- -------------- --------------
End of period $1,326,245,322 $1,280,698,113 $866,072,138 $767,615,897
============== ============== ============== ==============
See Notes to Financial Statements.
- ------
34
SIX MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED) AND YEAR ENDED MARCH 31, 2008
Inflation-Adjusted Bond Short-Term Government
Increase (Decrease) in
Net Assets Sept. 30, 2008 March 31, 2008 Sept. 30, 2008 March 31, 2008
OPERATIONS
Net investment income
(loss) $ 73,414,645 $ 65,219,469 $ 20,598,012 $ 43,840,812
Net realized
gain (loss) (1,390,653) 9,291,202 (398,730) 18,099,248
Change in net
unrealized appreciation
(depreciation) (141,181,573) 78,032,274 (14,464,279) 14,951,187
-------------- -------------- -------------- --------------
Net increase (decrease)
in net assets resulting
from operations (69,157,581) 152,542,945 5,735,003 76,891,247
-------------- -------------- -------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS
From net
investment income:
Investor Class (42,778,274) (33,985,965) (20,158,176) (43,042,945)
Institutional Class (7,257,440) (7,477,589) -- --
Advisor Class (21,560,856) (20,054,534) (633,147) (1,121,139)
-------------- -------------- -------------- --------------
Decrease in net assets
from distributions (71,596,570) (61,518,088) (20,791,323) (44,164,084)
-------------- -------------- -------------- --------------
CAPITAL SHARE
TRANSACTIONS
Net increase (decrease)
in net assets from
capital share
transactions 352,692,175 327,830,796 (87,998,445) 141,029,180
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE)
IN
NET ASSETS 211,938,024 418,855,653 (103,054,765) 173,756,343
NET ASSETS
Beginning of period 1,547,112,014 1,128,256,361 1,138,326,218 964,569,875
-------------- -------------- -------------- --------------
End of period $1,759,050,038 $1,547,112,014 $1,035,271,453 $1,138,326,218
============== ============== ============== ==============
Accumulated
undistributed
net investment income
(loss) $5,473,978 3,655,903 $(5,332) --
============== ============== ============== ==============
See Notes to Financial Statements.
- ------
35
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 (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
certificates. 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 pursues this objective by investing primarily 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
primarily 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 pursues its objective by investing
primarily 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, including 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
Institutional Class, the Advisor Class and the R Class. Prior to December 3,
2007, Ginnie Mae was authorized to issue the C Class (see Note 9). 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 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. Sale of Ginnie Mae's
Institutional Class and R Class commenced on September 28, 2007.
SECURITY VALUATIONS -- Debt securities maturing in greater than 60 days at the
time of purchase 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 at the time of purchase may be valued at
cost, plus or minus any amortized discount or premium. Discount notes may be
valued through a commercial pricing service or at amortized cost, which
approximates fair value. 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 as determined by the Board of Trustees or its designee, in
accordance with procedures adopted by the Board of Trustees, if such
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
had 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 -- For financial reporting purposes, 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.
- ------
36
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 -- The funds may lend portfolio securities through their
lending agent to certain approved borrowers in order to earn additional income.
The income earned, net of any rebates or fees, is included in the Statement of
Operations. The funds 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 swap agreements 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. 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.
- ------
37
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. The funds have adopted the provisions of Financial Accounting
Standards Board Interpretation No. 48, "Accounting for Income Taxes" during the
current fiscal year. The funds are no longer subject to examination by tax
authorities for years prior to 2005. At this time, management believes there are
no uncertain tax positions which, based on their technical merit, would not be
sustained upon examination and for which it is reasonably possible that the
total amounts of unrecognized tax benefits will significantly change in the next
twelve months. Accordingly, no provision has been made for federal or state
income taxes. Interest and penalties associated with any federal or state income
tax obligations, if any, are recorded as interest expense.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income for
Ginnie Mae, Government Bond and Short-Term Government are declared daily and
paid monthly. Distributions from net investment income for Inflation-Adjusted
are declared and paid quarterly. 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 Investments 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, Advisor Class
and R Class) for the funds range from 0.2500% to 0.3100%. The Institutional
Class is 0.2000% less at each point within the Complex Fee range. From April 1,
2008 to July 31, 2008, the investment advisor voluntarily agreed to waive 0.079%
of its management fee for Ginnie Mae. Effective August 1, 2008, the investment
advisor voluntarily agreed to waive 0.02% of its management fee for Ginnie Mae.
The total amount of the waiver for the six months ended September 30, 2008, was
$353,188, $1,821, $28,671 and $8 for the Investor Class, Institutional Class,
Advisor Class and R Class, respectively. The fee waiver may be revised or
terminated at any time without notice.
The effective annual management fee for each class of each fund for the six
months ended September 30, 2008, was as follows:
Investor Institutional Advisor R
Ginnie Mae (before waiver) 0.56% 0.36% 0.56% 0.56%
Ginnie Mae (after waiver) 0.50% 0.30% 0.50% 0.50%
Government Bond 0.48% N/A 0.48% N/A
Inflation-Adjusted 0.48% 0.28% 0.48% N/A
Short-Term Government 0.56% N/A 0.56% N/A
- ------
38
DISTRIBUTION AND SERVICE FEES -- The Board of Trustees has adopted a separate
Master Distribution and Individual Shareholder Services Plan for each of the
Advisor Class and R Class (collectively, the plans), pursuant to Rule 12b-1 of
the 1940 Act. The plans provide that the Advisor Class will pay American Century
Investment Services, Inc. (ACIS) an annual distribution and service fee of
0.25%. The plans provide that the R Class will pay ACIS an annual distribution
and service fee of 0.50%. The fees are computed and accrued daily based on each
class's daily net assets and paid monthly in arrears. The fees are used to pay
financial intermediaries for distribution and individual shareholder services.
Fees incurred under the plans during the six months ended September 30, 2008,
are detailed in the Statement of Operations.
RELATED PARTIES -- Certain officers and trustees of the trust are also officers
and/or directors 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. Directors of these
entities are officers and directors of other entities and those other entities
own 35% of the outstanding shares of Short-Term Government.
Effective May 15, 2008, the funds are eligible to invest in a money market fund
for temporary purposes, which is managed by J.P. Morgan Investment Management,
Inc. (JPMIM). JPMIM is a wholly owned subsidiary of JPMorgan Chase & Co. (JPM).
JPM is an equity investor in ACC. The funds have a securities lending agreement
with JPMorgan Chase Bank (JPMCB). JPMCB is a custodian of the funds and a wholly
owned subsidiary of JPM.
3. INVESTMENT TANSACTIONS
Investment transactions, excluding short-term investments, for the six months
ended September 30, 2008, were as follows:
Short-Term
Ginnie Mae Government Bond Inflation-Adjusted Government
PURCHASES
U.S. Treasury &
Government
Agency
Obligations $2,531,155,068 $1,865,713,382 $350,182,795 $549,129,806
Investment
securities other
than U.S.
Treasury &
Government
Agency
Obligations -- -- $46,551,038 --
PROCEEDS FROM SALES
U.S. Treasury &
Government
Agency
Obligations $2,438,043,596 $1,717,495,973 $63,449,890 $526,547,687
Investment
securities other
than U.S.
Treasury &
Government
Agency
Obligations -- $92,067 $11,319,360 $35,611,107
- ------
39
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the funds were as follows (unlimited number of shares
authorized):
Six months ended Year ended
September 30, 2008 March 31, 2008
Shares Amount Shares Amount
Ginnie Mae
INVESTOR CLASS
Sold 12,998,465 $ 133,995,781 12,040,291 $ 122,889,655
Issued in
reinvestment of
distributions 2,263,762 23,212,773 4,830,929 49,260,584
Redeemed (10,401,118) (106,847,660) (23,500,177) (238,953,395)
------------ ------------- ------------ -------------
4,861,109 50,360,894 (6,628,957) (66,803,156)
------------ ------------- ------------ -------------
INSTITUTIONAL CLASS
Sold 123,754 1,282,146 603,792 6,189,083
Issued in
reinvestment of
distributions 14,024 143,688 10,096 104,885
Redeemed (42,162) (432,212) (23,359) (241,514)
------------ ------------- ------------ -------------
95,616 993,622 590,529 6,052,454
------------ ------------- ------------ -------------
ADVISOR CLASS
Sold 2,558,496 26,298,357 3,665,454 37,424,219
Issued in
connection with
reclassification
(Note 9) -- -- 616,398 6,366,954
Issued in
reinvestment of
distributions 124,637 1,278,061 266,216 2,715,213
Redeemed (1,661,968) (17,068,058) (3,843,011) (39,232,541)
------------ ------------- ------------ -------------
1,021,165 10,508,360 705,057 7,273,845
------------ ------------- ------------ -------------
C CLASS N/A
Sold 38,155 386,577
Issued in
reinvestment of
distributions 31,753 319,714
Redeemed in
connection with
reclassification
(Note 9) (616,398) (6,366,954)
Redeemed (1,161,216) (11,753,154)
------------ ------------- ------------ -------------
(1,707,706) (17,413,817)
------------ ------------- ------------ -------------
R CLASS
Sold -- -- 2,473 24,988
Issued in
reinvestment of
distributions 50 512 53 551
------------ ------------- ------------ -------------
50 512 2,526 25,539
------------ ------------- ------------ -------------
Net increase
(decrease) 5,977,940 $ 61,863,388 (7,038,551) $(70,865,135)
============ ============= ============ =============
Government Bond
INVESTOR CLASS
Sold 19,851,492 $ 215,725,999 26,538,987 $ 282,961,488
Issued in
reinvestment of
distributions 1,325,309 14,328,918 2,164,845 22,978,888
Redeemed (12,074,666) (131,165,760) (16,647,809) (176,824,621)
------------ ------------- ------------ -------------
9,102,135 98,889,157 12,056,023 129,115,755
------------ ------------- ------------ -------------
ADVISOR CLASS
Sold 4,556,333 49,514,218 7,922,901 84,808,627
Issued in
reinvestment of
distributions 142,065 1,536,070 186,444 1,986,555
Redeemed (3,304,622) (35,882,693) (2,450,824) (26,162,339)
------------ ------------- ------------ -------------
1,393,776 15,167,595 5,658,521 60,632,843
------------ ------------- ------------ -------------
Net increase
(decrease) 10,495,911 $ 114,056,752 17,714,544 $ 189,748,598
============ ============= ============ =============
- ------
40
Six months ended Year ended
September 30, 2008 March 31, 2008
Shares Amount Shares Amount
Inflation-Adjusted
INVESTOR CLASS
Sold 37,213,406 $ 426,517,377 45,189,675 $ 511,117,147
Issued in
reinvestment of
distributions 3,153,582 35,201,513 2,363,258 25,900,406
Redeemed (18,583,304) (212,037,356) (25,956,661) (284,928,103)
------------ ------------- ------------ -------------
21,783,684 249,681,534 21,596,272 252,089,450
------------ ------------- ------------ -------------
INSTITUTIONAL CLASS
Sold 3,585,153 40,905,027 6,285,842 69,645,632
Issued in
reinvestment of
distributions 451,896 5,040,691 484,844 5,289,594
Redeemed (2,931,281) (33,515,247) (3,539,847) (39,262,951)
------------ ------------- ------------ -------------
1,105,768 12,430,471 3,230,839 35,672,275
------------ ------------- ------------ -------------
ADVISOR CLASS
Sold 15,862,644 181,152,540 19,728,802 222,750,562
Issued in
reinvestment of
distributions 1,861,125 20,737,752 1,762,357 19,175,429
Redeemed (9,769,193) (111,310,122) (18,544,928) (201,856,920)
------------ ------------- ------------ -------------
7,954,576 90,580,170 2,946,231 40,069,071
------------ ------------- ------------ -------------
Net increase
(decrease) 30,844,028 $ 352,692,175 27,773,342 $ 327,830,796
============ ============= ============ =============
Short-Term Government
INVESTOR CLASS
Sold 15,217,782 $ 145,362,895 43,538,823 $ 413,115,547
Issued in
reinvestment of
distributions 2,054,968 19,615,164 4,428,016 41,891,320
Redeemed (28,217,781) (269,490,427) (33,374,658) (317,997,836)
------------ ------------- ------------ -------------
(10,945,031) (104,512,368) 14,592,181 137,009,031
------------ ------------- ------------ -------------
ADVISOR CLASS
Sold 2,426,873 23,166,282 1,447,952 13,767,726
Issued in
reinvestment of
distributions 66,123 631,039 118,282 1,117,841
Redeemed (762,651) (7,283,398) (1,150,476) (10,865,418)
------------ ------------- ------------ -------------
1,730,345 16,513,923 415,758 4,020,149
------------ ------------- ------------ -------------
Net increase
(decrease) (9,214,686) $(87,998,445) 15,007,939 $ 141,029,180
============ ============= ============ =============
5. SECURITIES LENDING
As of September 30, 2008, the funds did not have any securities on loan. 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 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.
- ------
41
6. FAIR VALUE MEASUREMENTS
The funds' securities valuation process is based on several considerations and
may use multiple inputs to determine the fair value of the positions held by the
funds. In conformity with accounting principles generally accepted in the United
States of America, the inputs used to determine a valuation are classified into
three broad levels as follows:
*Level 1 valuation inputs consist of actual quoted prices based on an active
market;
*Level 2 valuation inputs consist of significant direct or indirect observable
market data; or
*Level 3 valuation inputs consist of significant unobservable inputs such as the
fund's own assumptions.
The level classification is based on the lowest level input that is significant
to the fair valuation measurement. The valuation inputs are not an indication of
the risks associated with investing in these securities or other financial
instruments.
The following is a summary of the valuation inputs used to determine the fair
value of the funds' securities and other financial instruments as of September
30, 2008:
Unrealized Gain (Loss)
Value of on Other
Fund/Valuation Inputs Investment Securities Financial Instruments*
GINNIE MAE
Level 1 -- Quoted Prices -- $639,912
Level 2 -- Other Significant
Observable Inputs $1,718,950,884 --
Level 3 -- Significant
Unobservable Inputs -- --
-------------- --------------
$1,718,950,884 $639,912
============== ==============
GOVERNMENT BOND
Level 1 -- Quoted Prices -- $1,623,809
Level 2 -- Other Significant
Observable Inputs $1,024,438,492 --
Level 3 -- Significant
Unobservable Inputs -- --
-------------- --------------
$1,024,438,492 $1,623,809
============== ==============
INFLATION-ADJUSTED
Level 1 -- Quoted Prices -- $ 2,908,251
Level 2 -- Other Significant
Observable Inputs $1,761,615,511 (3,127,226)
Level 3 -- Significant
Unobservable Inputs -- --
-------------- --------------
$1,761,615,511 $ (218,975)
============== ==============
SHORT-TERM GOVERNMENT
Level 1 -- Quoted Prices -- $2,282,769
Level 2 -- Other Significant
Observable Inputs $1,032,282,394 --
Level 3 -- Significant
Unobservable Inputs -- --
-------------- --------------
$1,032,282,394 $2,282,769
============== ==============
*Includes futures contracts and swap agreements.
7. 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 Bank of America, N.A.
The funds may borrow money for temporary or emergency purposes to fund
shareholder redemptions. Borrowings under the agreement, which is subject to
annual renewal, bear interest at the Federal Funds rate plus 0.40%. The funds
did not borrow from the line during the six months ended September 30, 2008.
- ------
42
8. 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, 2008, the components of investments for federal income tax
purposes were as follows:
Short-Term
Ginnie Mae Government Bond Inflation-Adjusted Government
Federal tax cost
of investments $1,726,577,446 $1,022,833,412 $1,813,312,777 $1,033,461,967
============== ============== ============== ==============
Gross tax
appreciation of
investments $ 7,003,123 $9,251,361 $ 9,203,812 $ 6,911,201
Gross tax
depreciation of
investments (14,629,685) (7,646,281) (60,901,078) (8,090,774)
-------------- -------------- -------------- --------------
Net tax
appreciation
(depreciation) of
investments $ (7,626,562) $1,605,080 $(51,697,266) $(1,179,573)
============== ============== ============== ==============
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.
Following are the capital loss carryovers and capital loss deferral amounts as
of March 31, 2008:
Short-Term
Ginnie Mae Government Bond Inflation-Adjusted Government
Accumulated
capital losses $(52,759,426) -- $(10,244,385) $(25,463,033)
Capital loss
deferrals $(2,373,064) -- -- --
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:
2009 2010 2011 2012 2013 2014 2015
Ginnie Mae $(255,936) -- $(285,414) $(22,063,924) $(11,922,927) $(10,878,793) $(7,352,432)
--
Inflation-Adjusted -- -- -- -- -- $(10,244,385)
Short-Term
Government $(2,235,685) -- -- -- $(8,188,381) $(7,433,319) $(7,605,648)
The capital loss deferrals listed above represent net capital losses incurred in
the five-month period ended March 31, 2008. The funds have elected to treat such
losses as having been incurred in the following fiscal year for federal income
tax purposes.
9. CORPORATE EVENT
On December 8, 2006, the Board of Trustees approved a reclassification of C
Class shares of Ginnie Mae into Advisor Class shares. The reclassification was
effective December 3, 2007.
- ------
43
10. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board (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. The adoption of FAS 157 does not materially impact the
determination of fair value.
In March 2008, the FASB issued Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities -- an
amendment of FASB Statement No. 133" (FAS 161). FAS 161 is effective for fiscal
years beginning after November 15, 2008. FAS 161 amends and expands disclosures
about derivative instruments and hedging activities. FAS 161 requires
qualitative disclosures about the objectives and strategies of derivative
instruments, quantitative disclosures about the fair value amounts of and gains
and losses on derivative instruments, and disclosures of credit-risk-related
contingent features in hedging activities. Management is currently evaluating
the impact that adopting FAS 161 will have on the financial statement
disclosures.
- ------
44
FINANCIAL HIGHLIGHTS
Ginnie Mae
Investor Class
For a Share Outstanding Throughout the Years Ended March 31 (except as noted)
2008(1) 2008 2007 2006 2005 2004
PER-SHARE DATA
Net Asset Value,
Beginning of Period $10.40 $10.17 $10.11 $10.34 $10.61 $10.85
-------- -------- -------- -------- -------- --------
Income From
Investment Operations
Net Investment
Income (Loss)(2) 0.22 0.48 0.48 0.43 0.37 0.29
Net Realized
and Unrealized
Gain (Loss) (0.12) 0.25 0.08 (0.18) (0.15) (0.04)
-------- -------- -------- -------- -------- --------
Total From
Investment
Operations 0.10 0.73 0.56 0.25 0.22 0.25
-------- -------- -------- -------- -------- --------
Distributions
From Net
Investment
Income (0.23) (0.50) (0.50) (0.48) (0.49) (0.49)
-------- -------- -------- -------- -------- --------
Net Asset Value,
End of Period $10.27 $10.40 $10.17 $10.11 $10.34 $10.61
======== ======== ======== ======== ======== ========
TOTAL RETURN(3) 0.96% 7.39% 5.69% 2.47% 2.11% 2.43%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating
Expenses to Average
Net Assets 0.51%(4)(5) 0.52%(5) 0.57% 0.57% 0.58% 0.59%
Ratio of Operating
Expenses to Average
Net Assets (Before
Expense Waiver) 0.57%(4) 0.57% 0.57% 0.57% 0.58% 0.59%
Ratio of Net
Investment Income
(Loss) to Average
Net Assets 4.25%(4)(5) 4.73%(5) 4.71% 4.15% 3.58% 2.77%
Ratio of Net
Investment Income
(Loss) to Average
Net Assets (Before
Expense Waiver) 4.19%(4) 4.68% 4.71% 4.15% 3.58% 2.77%
Portfolio Turnover
Rate 174% 338% 410% 315% 315% 356%
Net Assets,
End of Period
(in thousands) $1,214,536 $1,179,206 $1,219,743 $1,382,022 $1,482,999 $1,676,815
(1) Six months ended September 30, 2008 (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.
(5) Effective August 1, 2007, the investment advisor voluntarily agreed to waive
a portion of its management fee.
See Notes to Financial Statements.
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45
Ginnie Mae
Institutional Class
For a Share Outstanding Throughout the Periods Indicated
2008(1) 2008(2)
PER-SHARE DATA
Net Asset Value, Beginning of Period $10.40 $10.11
-------- --------
Income From Investment Operations
Net Investment Income (Loss)(3) 0.23 0.25
Net Realized and Unrealized Gain (Loss) (0.12) 0.30
-------- --------
Total From Investment Operations 0.11 0.55
-------- --------
Distributions
From Net Investment Income (0.24) (0.26)
-------- --------
Net Asset Value, End of Period $10.27 $10.40
======== ========
TOTAL RETURN(4) 1.06% 5.45%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average Net Assets(5) 0.31%(6) 0.29%(6)
Ratio of Operating Expenses to Average Net Assets (Before
Expense Waiver) 0.37%(6) 0.37%(6)
Ratio of Net Investment Income (Loss) to
Average Net Assets(5) 4.45%(6) 4.86%(6)
Ratio of Net Investment Income (Loss) to
Average Net Assets (Before Expense Waiver) 4.39%(6) 4.78%(6)
Portfolio Turnover Rate 174% 338%(7)
Net Assets, End of Period (in thousands) $7,050 $6,143
(1) Six months ended September 30, 2008 (unaudited).
(2) September 28, 2007 (commencement of sale) through March 31, 2008.
(3) Computed using average shares outstanding throughout the period.
(4) 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.
(5) Effective August 1, 2007, the investment advisor voluntarily agreed to waive
a portion of its management fee.
(6) Annualized.
(7) Portolio turnover is calculated at the fund level. Percentage indicated was
calculated for the year ended March 31, 2008.
See Notes to Financial Statements.
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46
Ginnie Mae
Advisor Class
For a Share Outstanding Throughout the Years Ended March 31 (except as noted)
2008(1) 2008 2007 2006 2005 2004
PER-SHARE DATA
Net Asset Value,
Beginning of Period $10.40 $10.17 $10.11 $10.34 $10.61 $10.85
-------- -------- -------- -------- -------- --------
Income From
Investment Operations
Net Investment
Income (Loss)(2) 0.21 0.46 0.45 0.40 0.35 0.27
Net Realized and
Unrealized
Gain (Loss) (0.13) 0.24 0.08 (0.17) (0.16) (0.04)
-------- -------- -------- -------- -------- --------
Total From
Investment
Operations 0.08 0.70 0.53 0.23 0.19 0.23
-------- -------- -------- -------- -------- --------
Distributions
From Net
Investment
Income (0.21) (0.47) (0.47) (0.46) (0.46) (0.47)
-------- -------- -------- -------- -------- --------
Net Asset Value, End
of Period $10.27 $10.40 $10.17 $10.11 $10.34 $10.61
======== ======== ======== ======== ======== ========
TOTAL RETURN(3) 0.83% 7.12% 5.42% 2.22% 1.85% 2.18%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating
Expenses to Average
Net Assets 0.76%(4)(5) 0.77%(5) 0.82% 0.82% 0.83% 0.84%
Ratio of Operating
Expenses to Average
Net Assets (Before
Expense Waiver) 0.82%(4) 0.82% 0.82% 0.82% 0.83% 0.84%
Ratio of Net
Investment Income
(Loss) to Average
Net Assets 4.00%(4)(5) 4.48%(5) 4.46% 3.90% 3.33% 2.52%
Ratio of Net
Investment Income
(Loss) to Average
Net Assets (Before
Expense Waiver) 3.94%(4) 4.43% 4.46% 3.90% 3.33% 2.52%
Portfolio Turnover
Rate 174% 338% 410% 315% 315% 356%
Net Assets,
End of Period
(in thousands) $104,634 $95,323 $85,984 $73,998 $72,571 $61,288
(1) Six months ended September 30, 2008 (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.
(5) Effective August 1, 2007, the investment advisor voluntarily agreed to waive
a portion of its management fee.
See Notes to Financial Statements.
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47
Ginnie Mae
R Class
For a Share Outstanding Throughout the Periods Indicated
2008(1) 2008(2)
PER-SHARE DATA
Net Asset Value, Beginning of Period $10.40 $10.11
-------- --------
Income From Investment Operations
Net Investment Income (Loss)(3) 0.19 0.22
Net Realized and Unrealized Gain (Loss) (0.12) 0.29
-------- --------
Total From Investment Operations 0.07 0.51
-------- --------
Distributions
From Net Investment Income (0.20) (0.22)
-------- --------
Net Asset Value, End of Period $10.27 $10.40
======== ========
TOTAL RETURN(4) 0.70% 5.09%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average Net Assets(5) 1.01%(6) 0.99%(6)
Ratio of Operating Expenses to Average Net Assets (Before
Expense Waiver) 1.07%(6) 1.07%(6)
Ratio of Net Investment Income (Loss) to
Average Net Assets(5) 3.75%(6) 4.19%(6)
Ratio of Net Investment Income (Loss) to
Average Net Assets (Before Expense Waiver) 3.69%(6) 4.11%(6)
Portfolio Turnover Rate 174% 338%(7)
Net Assets, End of Period (in thousands) $26 $26
(1) Six months ended September 30, 2008 (unaudited).
(2) September 28, 2007 (commencement of sale) through March 31, 2008.
(3) Computed using average shares outstanding throughout the period.
(4) 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.
(5) Effective August 1, 2007, the investment advisor voluntarily agreed to waive
a portion of its management fee.
(6) Annualized.
(7) Portolio turnover is calculated at the fund level. Percentage indicated was
calculated for the year ended March 31, 2008.
See Notes to Financial Statements.
- ------
48
Government Bond
Investor Class
For a Share Outstanding Throughout the Years Ended March 31 (except as noted)
2008(1) 2008 2007 2006 2005 2004
PER-SHARE DATA
Net Asset Value,
Beginning of Period $11.05 $10.45 $10.33 $10.52 $10.93 $11.25
-------- -------- -------- -------- -------- --------
Income From
Investment Operations
Net Investment
Income (Loss)(2) 0.23 0.47 0.48 0.42 0.29 0.28
Net Realized
and Unrealized
Gain (Loss) (0.21) 0.60 0.12 (0.19) (0.24) (0.02)
-------- -------- -------- -------- -------- --------
Total From
Investment
Operations 0.02 1.07 0.60 0.23 0.05 0.26
-------- -------- -------- -------- -------- --------
Distributions
From Net
Investment
Income (0.24) (0.47) (0.48) (0.42) (0.30) (0.29)
From Net
Realized Gains -- -- -- -- (0.16) (0.29)
-------- -------- -------- -------- -------- --------
Total
Distributions (0.24) (0.47) (0.48) (0.42) (0.46) (0.58)
-------- -------- -------- -------- -------- --------
Net Asset Value, End
of Period $10.83 $11.05 $10.45 $10.33 $10.52 $10.93
======== ======== ======== ======== ======== ========
TOTAL RETURN(3) 0.17% 10.58% 5.95% 2.17% 0.50% 2.42%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating
Expenses to Average
Net Assets 0.49%(4) 0.49% 0.49% 0.49% 0.50% 0.51%
Ratio of Net
Investment Income
(Loss) to Average
Net Assets 4.32%(4) 4.45% 4.60% 3.94% 2.70% 2.56%
Portfolio Turnover
Rate 203% 239% 319% 416% 553% 376%
Net Assets,
End of Period
(in thousands) $747,557 $662,104 $500,331 $524,557 $438,997 $468,052
(1) Six months ended September 30, 2008 (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.
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49
Government Bond
Advisor Class
For a Share Outstanding Throughout the Years Ended March 31 (except as noted)
2008(1) 2008 2007 2006 2005 2004
PER-SHARE DATA
Net Asset Value,
Beginning of Period $11.05 $10.45 $10.33 $10.52 $10.93 $11.25
-------- -------- -------- -------- -------- --------
Income From
Investment Operations
Net Investment
Income (Loss)(2) 0.22 0.44 0.45 0.39 0.26 0.25
Net Realized
and Unrealized
Gain (Loss) (0.22) 0.61 0.12 (0.19) (0.24) (0.02)
-------- -------- -------- -------- -------- --------
Total From
Investment
Operations --(3) 1.05 0.57 0.20 0.02 0.23
-------- -------- -------- -------- -------- --------
Distributions
From Net
Investment
Income (0.22) (0.45) (0.45) (0.39) (0.27) (0.26)
From Net
Realized Gains -- -- -- -- (0.16) (0.29)
-------- -------- -------- -------- -------- --------
Total
Distributions (0.22) (0.45) (0.45) (0.39) (0.43) (0.55)
-------- -------- -------- -------- -------- --------
Net Asset Value, End
of Period $10.83 $11.05 $10.45 $10.33 $10.52 $10.93
======== ======== ======== ======== ======== ========
TOTAL RETURN(4) 0.04% 10.31% 5.69% 1.91% 0.25% 2.16%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating
Expenses to Average
Net Assets 0.74%(5) 0.74% 0.74% 0.74% 0.75% 0.76%
Ratio of Net
Investment Income
(Loss) to Average
Net Assets 4.07%(5) 4.20% 4.35% 3.69% 2.45% 2.31%
Portfolio Turnover
Rate 203% 239% 319% 416% 553% 376%
Net Assets,
End of Period
(in thousands) $118,515 $105,512 $40,671 $41,336 $48,674 $45,136
(1) Six months ended September 30, 2008 (unaudited).
(2) Computed using average shares outstanding throughout the period.
(3) Per-share amount was less than $0.005.
(4) 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.
(5) Annualized.
See Notes to Financial Statements.
- ------
50
FINANCIAL HIGHLIGHTS
Inflation-Adjusted Bond
Investor Class
For a Share Outstanding Throughout the Years Ended March 31 (except as noted)
2008(1) 2008 2007 2006 2005 2004
PER-SHARE DATA
Net Asset Value,
Beginning of Period $11.72 $10.83 $10.73 $11.25 $11.45 $10.86
-------- -------- -------- -------- -------- --------
Income From
Investment
Operations
Net Investment
Income (Loss) 0.51(2) 0.62 0.38 0.56 0.45 0.39
Net Realized
and Unrealized
Gain (Loss) (0.95) 0.85 0.11 (0.49) (0.17) 0.67
-------- -------- -------- -------- -------- --------
Total From
Investment
Operations (0.44) 1.47 0.49 0.07 0.28 1.06
-------- -------- -------- -------- -------- --------
Distributions
From Net
Investment
Income (0.48) (0.58) (0.38) (0.56) (0.45) (0.39)
From Net
Realized Gains -- -- -- (0.03) (0.03) (0.08)
From Tax Return
of Capital -- -- (0.01) -- -- --
-------- -------- -------- -------- -------- --------
Total
Distributions (0.48) (0.58) (0.39) (0.59) (0.48) (0.47)
-------- -------- -------- -------- -------- --------
Net Asset Value,
End of Period $10.80 $11.72 $10.83 $10.73 $11.25 $11.45
======== ======== ======== ======== ======== ========
TOTAL RETURN(3) (3.83)% 14.08% 4.71% 0.56% 2.57% 10.04%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating
Expenses to Average
Net Assets 0.49%(4) 0.49% 0.49% 0.49% 0.50% 0.50%
Ratio of Net
Investment Income
(Loss)
to Average
Net Assets 8.95%(4) 5.66% 3.79% 4.85% 3.77% 3.50%
Portfolio Turnover
Rate 5% 33% 32% 27% 68% 54%
Net Assets,
End of Period (in
thousands) $1,058,087 $892,596 $590,530 $704,447 $646,214 $483,353
(1) Six months ended September 30, 2008 (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.
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51
Inflation-Adjusted Bond
Institutional Class
For a Share Outstanding Throughout the Years Ended March 31 (except as noted)
2008(1) 2008 2007 2006 2005 2004
PER-SHARE DATA
Net Asset Value,
Beginning of Period $11.71 $10.82 $10.73 $11.25 $11.45 $10.86
-------- -------- -------- -------- -------- --------
Income From
Investment Operations
Net Investment
Income (Loss) 0.52(2) 0.64 0.42 0.58 0.47 0.41
Net Realized
and Unrealized
Gain (Loss) (0.95) 0.85 0.09 (0.49) (0.17) 0.67
-------- -------- -------- -------- -------- --------
Total From
Investment
Operations (0.43) 1.49 0.51 0.09 0.30 1.08
-------- -------- -------- -------- -------- --------
Distributions
From Net
Investment
Income (0.49) (0.60) (0.42) (0.58) (0.47) (0.41)
From Net
Realized Gains -- -- -- (0.03) (0.03) (0.08)
-------- -------- -------- -------- -------- --------
Total
Distributions (0.49) (0.60) (0.42) (0.61) (0.50) (0.49)
-------- -------- -------- -------- -------- --------
Net Asset Value, End
of Period $10.79 $11.71 $10.82 $10.73 $11.25 $11.45
======== ======== ======== ======== ======== ========
TOTAL RETURN(3) (3.73)% 14.31% 4.92% 0.77% 2.77% 10.24%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating
Expenses to Average
Net Assets 0.29%(4) 0.29% 0.29% 0.29% 0.30% 0.30%
Ratio of Net
Investment
Income (Loss)
to Average
Net Assets 9.15%(4) 5.86% 3.99% 5.05% 3.97% 3.70%
Portfolio Turnover
Rate 5% 33% 32% 27% 68% 54%
Net Assets,
End of Period
(in thousands) $164,816 $165,872 $118,250 $81,860 $65,058 $56,103
(1) Six months ended September 30, 2008 (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.
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52
Inflation-Adjusted Bond
Advisor Class
For a Share Outstanding Throughout the Years Ended March 31 (except as noted)
2008(1) 2008 2007 2006 2005 2004
PER-SHARE DATA
Net Asset Value,
Beginning of Period $11.70 $10.81 $10.73 $11.25 $11.45 $10.86
-------- -------- -------- -------- -------- --------
Income From
Investment Operations
Net Investment
Income (Loss) 0.50(2) 0.60 0.36 0.54 0.42 0.36
Net Realized
and Unrealized
Gain (Loss) (0.95) 0.84 0.10 (0.49) (0.17) 0.67
-------- -------- -------- -------- -------- --------
Total From
Investment
Operations (0.45) 1.44 0.46 0.05 0.25 1.03
-------- -------- -------- -------- -------- --------
Distributions
From Net
Investment
Income (0.47) (0.55) (0.36) (0.54) (0.42) (0.36)
From Net
Realized Gains -- -- -- (0.03) (0.03) (0.08)
From Return
of Capital -- -- (0.02) -- -- --
-------- -------- -------- -------- -------- --------
Total
Distributions (0.47) (0.55) (0.38) (0.57) (0.45) (0.44)
-------- -------- -------- -------- -------- --------
Net Asset Value,
End of Period $10.78 $11.70 $10.81 $10.73 $11.25 $11.45
======== ======== ======== ======== ======== ========
TOTAL RETURN(3) (3.95)% 13.83% 4.37% 0.37% 2.33% 9.78%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating
Expenses to Average
Net Assets 0.74%(4) 0.74% 0.74% 0.74% 0.75% 0.75%
Ratio of Net
Investment Income
(Loss) to Average
Net Assets 8.70%(4) 5.41% 3.54% 4.60% 3.52% 3.25%
Portfolio Turnover
Rate 5% 33% 32% 27% 68% 54%
Net Assets,
End of Period
(in thousands) $536,147 $488,645 $419,477 $588,877 $295,129 $109,053
(1) Six months ended September 30, 2008 (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.
- ------
53
Short-Term Government
Investor Class
For a Share Outstanding Throughout the Years Ended March 31 (except as noted)
2008(1) 2008 2007 2006 2005 2004
PER-SHARE DATA
Net Asset Value,
Beginning of Period $9.65 $9.37 $9.32 $9.44 $9.66 $9.69
-------- -------- -------- -------- -------- --------
Income From
Investment Operations
Net Investment
Income (Loss)(2) 0.18 0.40 0.40 0.32 0.19 0.15
Net Realized
and Unrealized
Gain (Loss) (0.12) 0.29 0.06 (0.11) (0.21) (0.02)
-------- -------- -------- -------- -------- --------
Total From
Investment
Operations 0.06 0.69 0.46 0.21 (0.02) 0.13
-------- -------- -------- -------- -------- --------
Distributions
From Net
Investment
Income (0.19) (0.41) (0.41) (0.33) (0.20) (0.16)
-------- -------- -------- -------- -------- --------
Net Asset Value, End
of Period $9.52 $9.65 $9.37 $9.32 $9.44 $9.66
======== ======== ======== ======== ======== ========
TOTAL RETURN(3) 0.59% 7.50% 5.02% 2.22% (0.16)% 1.40%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating
Expenses to Average
Net Assets 0.57%(4) 0.57% 0.57% 0.57% 0.58% 0.59%
Ratio of Net
Investment Income
(Loss) to Average
Net Assets 3.84%(4) 4.23% 4.34% 3.41% 2.04% 1.54%
Portfolio Turnover
Rate 63% 148% 210% 292% 283% 232%
Net Assets,
End of Period
(in thousands) $986,851 $1,105,947 $937,029 $919,295 $928,460 $996,677
(1) Six months ended September 30, 2008 (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.
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54
Short-Term Government
Advisor Class
For a Share Outstanding Throughout the Years Ended March 31 (except as noted)
2008(1) 2008 2007 2006 2005 2004
PER-SHARE DATA
Net Asset Value,
Beginning of Period $9.65 $9.37 $9.32 $9.44 $9.66 $9.69
-------- -------- -------- -------- -------- --------
Income From
Investment Operations
Net Investment
Income (Loss)(2) 0.17 0.38 0.38 0.29 0.17 0.13
Net Realized
and Unrealized
Gain (Loss) (0.13) 0.28 0.05 (0.11) (0.21) (0.02)
-------- -------- -------- -------- -------- --------
Total From
Investment
Operations 0.04 0.66 0.43 0.18 (0.04) 0.11
-------- -------- -------- -------- -------- --------
Distributions
From Net
Investment
Income (0.17) (0.38) (0.38) (0.30) (0.18) (0.14)
-------- -------- -------- -------- -------- --------
Net Asset Value, End
of Period $9.52 $9.65 $9.37 $9.32 $9.44 $9.66
======== ======== ======== ======== ======== ========
TOTAL RETURN(3) 0.47% 7.23% 4.76% 1.96% (0.41)% 1.15%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating
Expenses to Average
Net Assets 0.82%(4) 0.82% 0.82% 0.82% 0.83% 0.84%
Ratio of Net
Investment Income
(Loss) to Average
Net Assets 3.59%(4) 3.98% 4.09% 3.16% 1.79% 1.29%
Portfolio
Turnover Rate 63% 148% 210% 292% 283% 232%
Net Assets,
End of Period
(in thousands) $48,420 $32,379 $27,541 $29,166 $43,431 $47,135
(1) Six months ended September 30, 2008 (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.
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55
APPROVAL OF MANAGEMENT AGREEMENTS
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 Investments, this process is referred to as the "15(c)
Process." The board oversees on a continuous basis and evaluates at its
quarterly meetings, directly and through the committees of the board, the nature
and quality of significant services provided by the advisor, the investment
performance of the funds, shareholder services, audit and compliance functions
and a variety of other matters relating to fund operations. Each year, it also
holds a special meeting in connection with determining whether to renew the
contracts for advisory services, to review fund performance, shareholder
services, adviser profitability, audit and compliance matters, and other fund
operational matters.
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, 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;
* reports on the wide range of programs and services the advisor provides to the
funds and their shareholders on a routine and non-routine basis;
* information about the compliance policies, procedures, and regulatory
experience of the advisor;
* data comparing the cost of owning the funds to the cost of owning 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 Directors at a special meeting and at a
regularly scheduled quarterly meeting reviewed and discussed the information
provided by the advisor throughout the year and to negotiate with the advisor
the renewal of the management agreement, including the setting of the applicable
advisory fee. The board had the benefit of the advice of its independent counsel
throughout the period.
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56
FACTORS CONSIDERED
The Directors considered all of the information provided by the advisor, an
independent data provider, 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, changing distribution channels 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.
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57
At each quarterly meeting and at the special meeting to consider renewal of the
advisory contract, the Directors, directly and through its Portfolio Committee,
reviews investment performance information for the funds, together with
comparative information for appropriate benchmarks and peer groups of funds
managed similarly to the funds. If performance concerns are identified, the
Directors discuss with the advisor the reasons for such results (e.g., market
conditions, security and sector selection) and any efforts being undertaken to
improve performance. Ginnie Mae's performance for both the one- and three-year
periods was above its benchmark. Government Bond's and Short-Term Government's
performance for both the one- and three-year periods were above the median for
their peer groups. Inflation-Adjusted Bond was above its benchmark for the
three-year period and fell below its benchmark for the one-year period.
SHAREHOLDER AND OTHER SERVICES. The advisor provides the funds with a
comprehensive package of transfer agency, shareholder, and other services. The
Directors, directly and through the various Committees of the Board, review
reports and evaluations of such services at their regular quarterly meetings and
at its special meeting to consider renewal of the Advisory Contract, 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. 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. 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.
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, and the expenses incurred by the advisor
in providing various functions to the funds. 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 increase in size,
and through reinvestment in its business
- ------
58
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 Ginnie Mae was below the
median of the total expense ratios of its peer group. The unified fee charged to
shareholders of Government Bond, Inflation-Adjusted Bond and Short-Term
Government was in the lowest quartile of the total expense ratios of their
respective 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 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.
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59
CONCLUSIONS OF THE DIRECTORS
As a result of this process, the 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 and others concluded that the investment
management agreement between each of Government Bond, Inflation-Adjusted Bond
and Short-Term Government and the advisor is fair and reasonable in light of the
services provided and should be renewed.
The Directors negotiated a renewal of the one-year waiver by the advisor of a
portion of the management fee of Ginnie Mae that was in place during the
previous year. These changes were proposed by the Directors based on their
review of the fund's percentile rank in its peer group universe and the fact
that the Directors seek as a general rule to have total expense ratios of
existing fixed income and money market funds in the lowest 25th percentile of
the fees of comparable funds. Although the adviser agreed to such a waiver in
the past, the adviser argued this year that it was no longer appropriate. After
discussions with the Directors, the adviser agreed to continue the waiver for
another year. Also as part of this negotiation, the adviser and the Directors
concluded that it would be appropriate to discuss over the coming year the
possibility of changes in the overall fee structure of the fund. The renewal of
the fee waiver, effective August 1, 2008, will result in a lowering of the
management fee of the fund by two basis points. Following these negotiations
with the advisor, the Directors concluded that the investment management
agreement between the fund and the advisor is fair and reasonable in light of
the services provided and should be renewed.
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60
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 Investments' 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.
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61
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 AGENCY INDEX is a market-capitalization-weighted index that
includes US government sponsored agencies with a remaining maturity of at least
one year.
The CITIGROUP CREDIT INDEX includes US and non-US corporate securities and
non-US sovereign and provincial securities.
The CITIGROUP MORTGAGE INDEX measures the mortgage component of the US BIG Bond
Index, comprising 15- and 30-year GNMA, FNMA, and FHLMC pass-throughs and FNMA
and FHLMC balloon mortgages.
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 INDEX is comprised of US Treasury securities with an
amount outstanding of at least $5 billion and a remaining maturity of at least
one year.
The CITIGROUP TREASURY/MORTGAGE INDEX is comprised of US 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 US 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 (BIG) 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 US HIGH-YIELD MARKET INDEX captures the performance of below-
investment-grade debt securities issued by corporations domiciled in the United
States or Canada. This index includes cash-pay and deferred-interest securities
that are publicly placed, have a fixed coupon, and are nonconvertible.
The CITIGROUP US 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 US TREASURY/AGENCY 1- TO 3-YEAR INDEX is a
market-capitalization-weighted index that includes fixed-rate US Treasury and
government agency issues with maturities between one and three years.
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62
NOTES
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63
NOTES
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64
[back cover]
[american century investments logo and text logo®]
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
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
P.O. Box 419200
Kansas City, MO 64141-6200
PRSRT STD
U.S. POSTAGE PAID
AMERICAN CENTURY
COMPANIES
American Century Investment Services, Inc., Distributor
©2008 American Century Proprietary Holdings, Inc. All rights reserved.
0811
CL-SAN-61615S
[front cover]
SEMIANNUAL REPORT
SEPTEMBER 30, 2008
[american century investments logo and text logo®]
AMERICAN CENTURY INVESTMENTS
CAPITAL PRESERVATION FUND
PRESIDENT'S LETTER
[photo of Jonathan Thomas]
JONATHAN THOMAS
Dear Investor:
Thank you for taking time to review the following discussions, from our
experienced portfolio management team, of the fund reporting period ended
September 30, 2008. It was a time of enormous upheaval and change. We
understand and appreciate the challenges you have faced during this historic
period, and share your concerns about the economy, the markets, and fund
holdings. To help address these issues, I'd like to provide my perspective on
how we have managed--and continue to manage--your investments in these
uncertain times.
As a company, American Century Investments® is well positioned to deal with
market turmoil. We are financially strong and privately held, which allows us
to align our resources with your long-term investment interests. In addition,
our actively managed, team-based approach allows our portfolio teams to
identify attractive investment opportunities regardless of market conditions.
Our seasoned investment professionals have substantial experience and have
successfully navigated previous market crises. These portfolio managers and
analysts continue to use a team approach and follow disciplined investment
processes designed to produce the best possible long-term results for you. For
example, our equity investment teams are working closely with our fixed income
group to monitor and assess credit crisis developments. The fixed income team
anticipated dislocation in the credit markets and--through its disciplined
processes and teamwork--helped reduce our exposure to investments that
suffered substantial losses.
How soon a sustainable recovery will occur is uncertain. But I am certain of
this: Since 1958, we've demonstrated a consistent ability to execute solid,
long-term investment strategies and the discipline to remain focused during
times of volatility or shifts in the markets. We've stayed true to our
principles, especially our belief that your success is the ultimate measure of
our success.
Thank you for your continued confidence in us.
Sincerely,
/s/Jonathan Thomas
Jonathan S. Thomas
President and Chief Executive Officer
American Century Investments
TABLE OF CONTENTS
Market Perspective. . . . . . . . . . . . . . . . . . . . . . . . . . 2
U.S. Fixed-Income Total Returns. . . . . . . . . . . . . . . . . . . 2
CAPITAL PRESERVATION
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . 4
Yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Portfolio Composition by Maturity. . . . . . . . . . . . . . . . . . 5
Shareholder Fee Example . . . . . . . . . . . . . . . . . . . . . . . 6
FINANCIAL STATEMENTS
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . 8
Statement of Assets and Liabilities . . . . . . . . . . . . . . . . . 9
Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . 10
Statement of Changes in Net Assets. . . . . . . . . . . . . . . . . . 11
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . 12
Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . 15
OTHER INFORMATION
Approval of Management Agreement for Capital Preservation . . . . . . 16
Additional Information. . . . . . . . . . . . . . . . . . . . . . . . 20
Index Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 21
The opinions expressed in the Market Perspective and the Portfolio Commentary
reflect those of the portfolio management team as of the date of the report,
and do not necessarily represent the opinions of American Century Investments
or any other person in the American Century Investments organization. Any such
opinions are subject to change at any time based upon market or other
conditions and American Century Investments 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 Investments
funds are based on numerous factors, may not be relied upon as an indication
of trading intent on behalf of any American Century Investments 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 Investments
by third party vendors. To the best of American Century Investments'
knowledge, such information is accurate at the time of printing.
MARKET PERSPECTIVE
[photo of Chief Investment Officer]
By David MacEwen, Chief Investment Officer, Fixed Income
UNPRECEDENTED EVENTS
The six months ended September 30, 2008, were characterized by unprecedented
market turmoil, including the spectacular failure of major financial
institutions and direct U.S. government intervention. In that environment,
investors favored higher-quality securities, while credit-related risk
aversion hurt lower-quality sectors of the market.
The Federal Reserve (the Fed) faced the dual challenges of keeping recession
at bay and fending off inflation. Early in the period, the Fed favored
anti-recessionary measures, cutting the federal funds target rate in April
2008. But as commodity prices reached record highs in June, the Fed seemed to
focus on inflation, holding interest rates steady during the remainder of the
reporting period. Inflation, as measured by the one-year change in the
Consumer Price Index, ended the period at 4.9%.
Despite the Fed's best efforts, economic prospects dimmed--credit markets
seized up, housing and the consumer took further hits, and the unemployment
rate broke above 6%. With the very health of the financial system at stake,
the government seized several tottering financial giants and began work on a
massive bank recapitalization program.
HIGH-QUALITY BONDS DID BEST
In this schizophrenic environment that pitted worry about inflation against
worry about economic depression, fixed-income returns were disappointing,
though we should point out that longer-term investment-grade bond returns are
positive. For the six months, higher-quality bonds held up better than
lower-rated debt--highly rated government agency mortgages and some Treasury
bonds were the only segments of the taxable bond market to manage positive
results. Meanwhile, corporate bonds tracked the equity markets, posting
sharply negative returns (see table at right).
RATES HIGHER, CURVE LITTLE CHANGED
Sharp volatility and inflation concerns meant bond yields finished the six
months higher. The yield on the two-year Treasury note went from 1.59% to
1.97%, while the 10-year Treasury yield rose from 3.41% to 3.83%. As a result,
the shape of the yield curve (a graphic representation of bond yields at
different maturities) was little changed--the difference in yield between two-
and 10-year Treasury securities inched up from 182 to 186 basis points (a
basis point equals 0.01%).
U.S. Fixed-Income Total Returns*
For the six months ended September 30, 2008
TREASURY SECURITIES
3-Month Bill 0.99%
2-Year Note 0.91%
10-Year Note -1.26%
30-Year Bond 2.36%
CITIGROUP U.S. BOND MARKET INDICES
Mortgage (mortgage-backed) 1.54%
Treasury 0.19%
Agency -0.68%
Broad Investment-Grade (multi-sector) -1.30%
Inflation-Linked Securities -3.86%
Credit (investment-grade corporate) -7.41%
High-Yield Market (corporate) -7.78%
*Total returns for periods less than one year are not annualized.
- ------
2
PERFORMANCE
Capital Preservation
Total Returns as of September 30, 2008
Average Annual Returns
6 Since Inception
months(1) 1 year 5 years 10 years Inception Date
INVESTOR CLASS 0.72% 2.36% 2.72% 3.04% 4.68% 10/13/72
90-DAY U.S.
TREASURY
BILL INDEX(2) 0.80% 2.22% 3.01% 3.26% 6.06%(3) --
LIPPER U.S.
TREASURY
MONEY MARKET
FUNDS AVERAGE
RETURN(2) 0.55% 1.92% 2.44% 2.80% 5.69%(4) --
Fund's Lipper
Ranking Among
U.S. Treasury
Money Market
Funds(2) 11 of 81 7 of 81 9 of 70 9 of 50 1 of 1(4) --
(1) Total returns for periods less than one year are not annualized.
(2) Data provided by Lipper Inc. - A Reuters Company. © 2008 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.
(3) Since 9/30/72, the date nearest the Investor Class's inception for which
data are available.
(4) Since 10/31/72, 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. 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
PORTFOLIO COMMENTARY
Capital Preservation
Portfolio Managers: Lynn Paschen and Steven Permut
PERFORMANCE SUMMARY
Capital Preservation returned 0.72%* for the six months ended September 30,
2008, surpassing the 0.55% average return of the 81 funds in Lipper Inc.'s
U.S. Treasury Money Market Funds category. The portfolio's return for the
reporting period ranked in the top 14% of the Lipper category, and its five-
and 10-year returns were in the top 13% and 18%, respectively, of the Lipper
group (see the previous page).
CREDIT CRISIS TOOK CENTER STAGE
Battling the double whammy of a weak economy and rising inflation, the Federal
Reserve (the Fed) seemed to shift to a slight anti-inflation bias when, after
steadily cutting rates between September 2007 and April 2008, it held the
federal funds rate target steady at 2% at its June, August, and September
policy meetings. But greater challenges were brewing, as the persistent credit
crunch turned into a full-blown financial crisis.
Long-standing concerns about economic growth, inflation (which actually eased
on a severe selloff in the commodities market late in the period), and the
tumbling housing market took a back seat to fallout from the U.S. government's
takeover of mortgage lender IndyMac and mortgage giants Fannie Mae and Freddie
Mac; Lehman Brothers' bankruptcy filing; the Fed's rescue plan for AIG; and
other extraordinary events in the financial sector. Businesses and consumers
faced stringent borrowing standards, banks stopped lending to each other, and
a large institutional money market fund "broke the buck." The stress
culminated with a massive taxpayer-funded recapitalization plan for financial
companies.
TREASURY LAUNCHED TEMPORARY MONEY MARKET GUARANTEE PROGRAM
Among its many efforts to address credit-market dislocations, the U.S.
Treasury initiated the Temporary Guarantee Program for Money Market Funds
(TGPMMF). The Treasury will guarantee the share price of any eligible money
market fund that applies and pays a fee to participate. The program covers
shareholder balances as of the close of business on September 19, 2008, and
kicks in when the share price of a participating fund falls below $0.995 and
the fund is liquidated. (For more information on TGPMMF, see paragraph at
bottom of page 5.)
All American Century Investments money market funds are participating in the
TGPMMF. We believe this added level of safety will help promote stability of
money market funds industry-wide and restore investor confidence in the
financial system. Capital Preservation invests entirely in U.S. Treasury
securities and already has the full faith and credit backing of the U.S.
government. But, we wanted to offer fund shareholders the additional
confidence this government guarantee can provide during these unsettled times.
We believe our participation in the program will help reassure fund
shareholders that their investments are safe, and it should reduce the risk of
mass redemptions.
*Total returns for periods less than one year are not annualized.
- ------
4
Capital Preservation
PORTFOLIO STRATEGY
Reflecting the steep decline in government money market yields, Capital
Preservation's seven-day current yield fell from 1.84% to 0.95% during the
six-month period. Demand for Treasury bills remained fierce as investors
sought a safe haven from falling equity prices, credit-sensitive bond
volatility, and bank-related fears. This heavy demand drove Treasury bill
prices up and yields down. The yield on the three-month Treasury bill fell
from 1.33% on March 31 to 0.91% on September 30.
Given the downward trend in short-term rates, our goal was to maintain a
relatively long weighted average maturity (WAM) throughout the six months, to
capture incrementally higher yields from longer-term bills. The fund's WAM
began the six-month period at 73 days and climbed to a high of 83 days in late
September before finishing the month at 76 days. This compares with what we
would consider a more neutral/average position of 65 days.
OUTLOOK
We expect the economy to face a more traditional, consumer-led recession as
the credit bubble is excised and the deleveraging process works its way
through the system. The unwinding/deleveraging process is healthy and
necessary, but is rarely orderly. We think continued Fed action is likely as
the economy slows and the unemployment rate rises.
ADDITIONAL INFORMATION ON THE TEMPORARY GUARANTEE PROGRAM FOR MONEY MARKET
FUNDS (TGPMMF)
The U.S. Treasury Temporary Guarantee Program for money market funds provides
a guarantee to participating money market mutual fund shareholders based on
the number of shares invested in the fund at the close of business on
September 19, 2008. Any additional shares purchased by an investor after the
close of business on September 19, 2008, will not be guaranteed. If an
investor closes his/her money market account, future investments in the fund
will not be guaranteed. If the number of shares an investor holds fluctuates
over the period, the investor will be covered for either the number of shares
held as of the close of business on September 19, 2008, or the current amount,
whichever is less. The Program expires on December 18, 2008, unless extended
by the United States Treasury.
Yields
As of
9/30/08
7-Day Current Yield 0.99%
7-Day Effective Yield 0.99%
Portfolio Composition by Maturity
% of fund % of fund
investments investments
as of as of
9/30/08 3/31/08
1 - 30 days 21% 29%
31 - 90 days 47% 47%
91 - 180 days 23% 19%
More than 180 days 9% 5%
- ------
5
SHAREHOLDER FEE EXAMPLE (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, 2008 to September 30, 2008.
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 Investments fund, or
Institutional Class shares of the American Century Diversified Bond Fund, in
an American Century Investments account (i.e., not a financial intermediary or
retirement plan account), American Century Investments 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
Investments 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 Investments 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.
- ------
6
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.
Beginning Ending
Account Account Expenses Paid
Value Value During Period* Annualized
4/1/08 9/30/08 4/1/08 - 9/30/08 Expense Ratio*
Actual $1,000.00 $1,007.20 $2.36 0.47%
Hypothetical $1,000.00 $1,022.71 $2.38 0.47%
*Expenses are equal to the fund'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.
- ------
7
SCHEDULE OF INVESTMENTS
Capital Preservation
SEPTEMBER 30, 2008 (UNAUDITED)
Principal Amount Value
U.S. Treasury Bills(1) -- 81.4%
$120,000,000 U.S. Treasury Bills, 1.35%, 10/9/08 $ 119,964,222
55,000,000 U.S. Treasury Bills, 0.41%, 10/16/08 54,990,604
240,000,000 U.S. Treasury Bills, 0.76%, 10/23/08 239,889,450
200,000,000 U.S. Treasury Bills, 0.90%, 10/30/08 199,854,597
200,000,000 U.S. Treasury Bills, 0.96%, 11/6/08 199,808,500
374,000,000 U.S. Treasury Bills, 1.77%, 11/13/08 373,215,131
200,000,000 U.S. Treasury Bills, 1.06%, 11/20/08 199,705,556
200,000,000 U.S. Treasury Bills, 1.03%, 11/28/08 199,670,528
102,600,000 U.S. Treasury Bills, 0.51%, 12/4/08 102,506,676
200,000,000 U.S. Treasury Bills, 2.03%, 12/11/08 199,206,674
18,200,000 U.S. Treasury Bills, 0.20%, 12/26/08 18,191,304
15,000,000 U.S. Treasury Bills, 1.09%, 1/2/09 14,957,763
125,000,000 U.S. Treasury Bills, 1.92%, 1/15/09 124,299,590
100,000,000 U.S. Treasury Bills, 1.98%, 1/22/09 99,386,033
50,000,000 U.S. Treasury Bills, 2.02%, 2/12/09 49,627,778
150,000,000 U.S. Treasury Bills, 1.93%, 2/26/09 148,818,878
50,000,000 U.S. Treasury Bills, 1.84%, 3/5/09 49,607,979
50,000,000 U.S. Treasury Bills, 1.84%, 3/12/09 49,590,500
50,000,000 U.S. Treasury Bills, 1.57%, 3/19/09 49,633,833
100,000,000 U.S. Treasury Bills, 1.62%, 3/26/09 99,215,333
Principal Amount Value
$100,000,000 U.S. Treasury Bills, 2.25%, 6/4/09 $ 98,465,575
50,000,000 U.S. Treasury Bills, 2.32%, 7/30/09 49,047,442
50,000,000 U.S. Treasury Bills, 1.96%, 9/24/09 49,042,847
---------------
TOTAL U.S. TREASURY BILLS 2,788,696,793
---------------
U.S. Treasury Notes(1) -- 12.4%
50,000,000 U.S. Treasury Notes, 3.125%, 10/15/08 50,038,451
200,000,000 U.S. Treasury Notes, 4.875%, 10/31/08 200,513,191
27,000,000 U.S. Treasury Notes, 3.375%, 12/15/08 27,139,080
60,000,000 U.S. Treasury Notes, 4.75%, 12/31/08 60,602,465
25,000,000 U.S. Treasury Notes, 4.50%, 3/31/09 25,281,891
10,000,000 U.S. Treasury Notes, 4.875%, 5/15/09 10,165,928
25,000,000 U.S. Treasury Notes, 4.00%, 6/15/09 25,233,198
25,000,000 U.S. Treasury Notes, 4.625%, 7/31/09 25,461,193
---------------
TOTAL U.S. TREASURY NOTES 424,435,397
---------------
TOTAL INVESTMENT SECURITIES -- 93.8% 3,213,132,190
---------------
OTHER ASSETS AND LIABILITIES -- 6.2%(2) 210,893,823
---------------
TOTAL NET ASSETS -- 100.0% $3,424,026,013
===============
Notes to Schedule of Investments
(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) Category includes amounts related to securities purchased but not settled
as of September 30, 2008.
See Notes to Financial Statements.
- ------
8
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2008 (UNAUDITED)
ASSETS
Investment securities, at value (amortized cost
and cost for federal income tax purposes) $3,213,132,190
Cash 6,500,031
Receivable for investments sold 163,012,269
Receivable for capital shares sold 48,392,817
Interest receivable 6,466,094
---------------
3,437,503,401
---------------
LIABILITIES
Payable for capital shares redeemed 12,158,933
Accrued management fees 1,236,731
Dividends payable 81,724
---------------
13,477,388
---------------
NET ASSETS $3,424,026,013
===============
CAPITAL SHARES
Outstanding (unlimited number of shares authorized) 3,424,195,421
===============
NET ASSET VALUE PER SHARE $1.00
===============
NET ASSETS CONSIST OF:
Capital paid in $3,424,196,317
Accumulated net realized loss on investment transactions (170,304)
---------------
$3,424,026,013
===============
See Notes to Financial Statements.
- ------
9
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
INVESTMENT INCOME (LOSS)
INCOME:
Interest $30,454,207
---------------
EXPENSES:
Management fees 7,462,992
Trustees' fees and expenses 66,031
Other expenses 945
---------------
7,529,968
---------------
NET INVESTMENT INCOME (LOSS) 22,924,239
---------------
NET REALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS (15,805)
---------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $22,908,434
===============
See Notes to Financial Statements.
- ------
10
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED) AND YEAR ENDED MARCH 31, 2008
Increase (Decrease) in Net Assets Sept. 30, 2008 March 31, 2008
OPERATIONS
Net investment income (loss) $ 22,924,239 $ 111,799,329
Net realized gain (loss) (15,805) (111,932)
--------------- ---------------
Net increase (decrease) in net assets
resulting from operations 22,908,434 111,687,397
--------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income (22,924,239) (111,799,329)
--------------- ---------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 904,500,177 1,357,379,541
Proceeds in connection with
acquisition (Note 5) -- 547,078,894
Proceeds from reinvestment of distributions 22,276,497 107,730,588
Payments for shares redeemed (773,569,018) (1,398,228,886)
--------------- ---------------
Net increase (decrease) in net assets from
capital share transactions 153,207,656 613,960,137
--------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS 153,191,851 613,848,205
NET ASSETS
Beginning of period 3,270,834,162 2,656,985,957
--------------- ---------------
End of period $3,424,026,013 $ 3,270,834,162
=============== ===============
TRANSACTIONS IN SHARES OF THE FUND
Sold 904,500,177 1,357,379,541
Issued in connection with
acquisition (Note 5) -- 547,146,072
Issued in reinvestment of distributions 22,276,497 107,730,588
Redeemed (773,569,018) (1,398,228,886)
--------------- ---------------
Net increase (decrease) in
shares of the fund 153,207,656 614,027,315
=============== ===============
See Notes to Financial Statements.
- ------
11
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 (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 (the fund)
is one fund in a series issued by the trust. The fund is diversified under
Rule 2a-7 of the 1940 Act. The fund's investment objective is to seek maximum
safety and liquidity and pursues 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.
The following is a summary of the fund's significant accounting policies.
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 by the Board of Trustees
or its designee, in accordance with procedures adopted by the Board of
Trustees.
SECURITY TRANSACTIONS -- For financial reporting purposes, 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 fund 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 fund 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 fund 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 fund will
segregate cash, cash equivalents or other appropriate liquid securities on its
records in amounts sufficient to meet the purchase price.
INCOME TAX STATUS -- It is the 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. The fund has adopted the provisions of Financial Accounting
Standards Board Interpretation No. 48, "Accounting for Income Taxes" during
the current fiscal year. The fund is no longer subject to examination by tax
authorities for years prior to 2005. At this time, management believes there
are no uncertain tax positions which, based on their technical merit, would
not be sustained upon examination and for which it is reasonably possible that
the total amounts of unrecognized tax benefits will significantly change in
the next twelve months. Accordingly, no provision has been made for federal or
state income taxes. Interest and penalties associated with any federal or
state income tax obligations, if any, are recorded as interest expense.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income and
short-term capital gains, if any, are declared daily and paid monthly. The
fund does not expect to realize any long-term capital gains, and accordingly,
does 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 fund. In addition, in the normal course of
business, the fund enters into contracts that provide general
indemnifications. The fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the fund.
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.
- ------
12
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 fund with investment advisory and management
services in exchange for a single, unified management fee (the fee). The
Agreement provides that all expenses of the fund, 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 the fund and paid monthly in arrears. The fee consists of (1) an
Investment Category Fee based on the daily net assets of the fund and certain
other accounts managed by the investment advisor that are in the same broad
investment category as the fund and (2) a Complex Fee based on the assets of
all the funds in the American Century Investments family of funds.The rates
for the Investment Category Fee range from 0.1370% to 0.2500% and the rates
for the Complex Fee range from 0.2500% to 0.3100%. The effective annual
management fee for the six months ended September 30, 2008 was 0.47%.
TEMPORARY GUARANTEE PROGRAM -- On October 3, 2008, the Board of Trustees
approved the fund to participate in the U.S. Treasury Department's Temporary
Guarantee Program for Money Market Funds (the program). The program provides
coverage to eligible shareholders for share balances held in participating
money market funds as of the close of business on September 19, 2008 and
provides coverage through December 19, 2008. Participation in the program
requires the fund to pay an upfront fee of 0.01% of the net assets as of the
close of business on September 19, 2008, which is amortized daily over the
three month period. Participation in any extensions of the program by the U.S.
Treasury Department will be evaluated by the Board of Trustees. For the six
months ended September 30, 2008, the annualized ratio of the program expense
to average net assets was less than 0.01%.
RELATED PARTIES -- Certain officers and trustees of the trust are also
officers and/or directors of American Century Companies, Inc. (ACC), the
parent of the trust's investment advisor, ACIM, the distributor of the trust,
American Century Investment Services, Inc., and the trust's transfer agent,
American Century Services, LLC.
The fund is eligible to invest in a money market fund for temporary purposes,
which is managed by J. P. Morgan Investment Management, Inc. (JPMIM). JPMIM is
a wholly owned subsidiary of JPMorgan Chase & Co. (JPM). JPM is an equity
investor in ACC. JPMorgan Chase Bank is a custodian of the fund and a wholly
owned subsidiary of JPMorgan Chase & Co. (JPM). JPM is an equity investor in
ACC.
3. FAIR VALUE MEASUREMENTS
The fund's securities valuation process is based on several considerations and
may use multiple inputs to determine the fair value of the positions held by
the fund. In conformity with accounting principles generally accepted in the
United States of America, the inputs used to determine a valuation are
classified into three broad levels as follows:
* Level 1 valuation inputs consist of actual quoted prices based on an active
market;
* Level 2 valuation inputs consist of significant direct or indirect observable
market data; or
* Level 3 valuation inputs consist of significant unobservable inputs such as
the fund's own assumptions.
The level classification is based on the lowest level input that is
significant to the fair valuation measurement. The valuation inputs are not an
indication of the risks associated with investing in these securities or other
financial instruments.
The following is a summary of the valuation inputs used to determine the fair
value of the fund's securities as of September 30, 2008:
Value of
Valuation Inputs Investment Securities
Level 1 -- Quoted Prices --
Level 2 -- Other Significant Observable Inputs $3,213,132,190
Level 3 -- Significant Unobservable Inputs --
---------------
$3,213,132,190
===============
- ------
13
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.
As of March 31, 2008, the fund has accumulated capital losses of $(88,126),
which represent net capital loss carryovers that may be used to offset future
realized capital gains for federal income tax purposes. Capital loss
carryovers of $(10,417), $(2,278), $(313), $(55,066) and $(20,052) expire in
2011, 2012, 2013, 2014 and 2016, respectively.
5. REORGANIZATION PLAN
On December 8, 2006, the Board of Trustees approved a plan of reorganization
(the "Reorganization"), pursuant to which Capital Preservation acquired all of
the assets of Government Agency Money Market Fund (Government Agency) in
exchange for shares of equal value of Capital Preservation and assumption by
Capital Preservation of certain of Government Agency's ordinary course
liabilities. The financial statements and performance history of Capital
Preservation will be carried over in the post-reorganization. The
reorganization was effective after the close of business on August 31, 2007.
New shares in connection with the reorganization were issued by Capital
Preservation on September 4, 2007.
The acquisition was accomplished by a tax-free exchange of 547,146,072 shares
of Capital Preservation for 547,146,072 outstanding shares of Government
Agency. The net assets of Capital Preservation and Government Agency
immediately before the acquisition were $2,676,014,751 and $547,078,894,
respectively. Immediately after the acquisition, the combined net assets were
$3,223,093,645. Capital Preservation acquired capital loss carryovers of
$(13,028) and capital loss deferrals of $(12) from Government Agency.
6. RECENTLY ISSUED ACCOUNTING STANDARDS.
The Financial Accounting Standards Board (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. The adoption of FAS 157 does not materially impact the
determination of fair value.
In March 2008, the FASB issued Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities -- an
amendment of FASB Statement No. 133" (FAS 161). FAS 161 is effective for
fiscal years beginning after November 15, 2008. FAS 161 amends and expands
disclosures about derivative instruments and hedging activities. FAS 161
requires qualitative disclosures about the objectives and strategies of
derivative instruments, quantitative disclosures about the fair value amounts
of and gains and losses on derivative instruments, and disclosures of
credit-risk-related contingent features in hedging activities. Management is
currently evaluating the impact that adopting FAS 161 will have on the
financial statement disclosures.
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14
FINANCIAL HIGHLIGHTS
Capital Preservation
For a Share Outstanding Throughout the Years Ended March 31 (except as noted)
2008(1) 2008 2007 2006 2005 2004
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 (Loss) 0.01 0.04 0.04 0.03 0.01 0.01
--------- --------- --------- --------- --------- ---------
Distributions
From Net
Investment
Income (0.01) (0.04) (0.04) (0.03) (0.01) (0.01)
--------- --------- --------- --------- --------- ---------
Net Asset Value,
End of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
========= ========= ========= ========= ========= =========
TOTAL RETURN(2) 0.72% 3.90% 4.59% 3.06% 1.14% 0.60%
RATIOS/SUPPLEMENTAL DATA
Ratio of
Operating
Expenses to
Average Net Assets 0.47%(3) 0.47% 0.48% 0.48% 0.48% 0.48%
Ratio of Net
Investment Income
(Loss) to Average
Net Assets 1.44%(3) 3.78% 4.50% 3.01% 1.12% 0.59%
Net Assets, End
of Period (in
thousands) $3,424,026 $3,270,834 $2,656,986 $2,647,714 $2,761,800 $2,928,299
(1) Six months ended September 30, 2008 (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.
- ------
15
APPROVAL OF MANAGEMENT AGREEMENT
Capital Preservation
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 Investments, this process is referred to as the
"15(c) Process." The board oversees on a continuous basis and evaluates at its
quarterly meetings, directly and through the committees of the board, the
nature and quality of significant services provided by the advisor, the
investment performance of the funds, shareholder services, audit and
compliance functions and a variety of other matters relating to fund
operations. Each year, it also holds a special meeting in connection with
determining whether to renew the contracts for advisory services, to review
fund performance, shareholder services, adviser profitability, audit and
compliance matters, and other fund operational matters.
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, 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 (the
"fund") and the services provided to the fund 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 fund;
* reports on the wide range of programs and services the advisor provides to
the fund and its shareholders on a routine and non-routine basis;
* information about the compliance policies, procedures, and regulatory
experience of the advisor;
* data comparing the cost of owning the fund to the cost of owning a similar
fund;
* data comparing the fund's 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 fund 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 Directors at a special meeting and at a
regularly scheduled quarterly meeting reviewed and discussed the information
provided by the advisor throughout the year and to negotiate with the advisor
the renewal of the management agreement, including the setting of the
applicable advisory fee. The board had the benefit of the advice of its
independent counsel throughout the period.
- ------
16
FACTORS CONSIDERED
The Directors considered all of the information provided by the advisor, an
independent data provider, 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 fund. 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 fund's 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, changing distribution channels 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 fund 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.
- ------
17
At each quarterly meeting and at the special meeting to consider renewal of
the advisory contract, the Directors, directly and through its Portfolio
Committee, reviews investment performance information for the fund, together
with comparative information for appropriate benchmarks and peer groups of
funds managed similarly to the fund. If performance concerns are identified,
the Directors discuss with the advisor the reasons for such results (e.g.,
market conditions, security and sector selection) and any efforts being
undertaken to improve performance. The fund's performance for both the one-
and three-year periods was above the median of its peer group.
SHAREHOLDER AND OTHER SERVICES. The advisor provides the fund with a
comprehensive package of transfer agency, shareholder, and other services. The
Directors, directly and through the various Committees of the Board, review
reports and evaluations of such services at their regular quarterly meetings
and at its special meeting to consider renewal of the Advisory Contract,
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. The advisor provides detailed
information concerning its cost of providing various services to the fund, its
profitability in managing the fund, 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. 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.
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 fund specifically, and the expenses incurred by the
advisor in providing various functions to the fund. The Directors believe the
advisor is appropriately sharing economies of scale through its competitive
fee structure, fee breakpoints as the fund complex and the fund 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 fund
reflect the complexity of assessing economies of scale.
- ------
18
COMPARISON TO OTHER FUNDS' FEES. The fund pays the advisor a single,
all-inclusive (or unified) management fee for providing all services necessary
for the management and operation of the fund, other than brokerage expenses,
taxes, interest, extraordinary expenses, and the fees and expenses of the
fund's 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 fund 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 fund's unified fee to
the total expense ratio of other funds in the fund's peer group. The unified
fee charged to shareholders of the fund was in the lowest quartile of the
total expense ratios of its peer group.
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 fund. They observed that these varying
types of client accounts require different services and involve different
regulatory and entrepreneurial risks than the management of the fund. The
Directors analyzed this information and concluded that the fees charged and
services provided to the fund 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 fund. They concluded that the advisor's primary business
is managing mutual funds and it generally does not use 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 fund, 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 fund to determine breakpoints in the fund's
fee schedule, provided they are managed using the same investment team and
strategy.
CONCLUSIONS OF THE DIRECTORS
As a result of this process, the 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 and others concluded that the investment
management agreement between the fund and the advisor is fair and reasonable
in light of the services provided and should be renewed.
- ------
19
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 fund's investment advisor,
is responsible for exercising the voting rights associated with the securities
purchased and/or held by the fund. 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 Investments' 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 fund files its 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 fund's Form N-Q is 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 fund also makes its complete
schedule of portfolio holdings for the most recent quarter of its fiscal year
available on its website at americancentury.com and, upon request, by calling
1-800-345-2021.
- ------
20
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 CITIGROUP AGENCY INDEX is a market-capitalization-weighted index that
includes US government sponsored agencies with a remaining maturity of at
least one year.
The CITIGROUP CREDIT INDEX includes US and non-US corporate securities and
non-US sovereign and provincial securities.
The CITIGROUP MORTGAGE INDEX measures the mortgage component of the US BIG
Bond Index, comprising 15- and 30-year GNMA, FNMA, and FHLMC pass-throughs and
FNMA and FHLMC balloon mortgages.
The CITIGROUP TREASURY INDEX is comprised of US Treasury securities with an
amount outstanding of at least $5 billion and a remaining maturity of at least
one year.
The CITIGROUP US BROAD INVESTMENT-GRADE (BIG) 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 US HIGH-YIELD MARKET INDEX captures the performance of below-
investment-grade debt issued by corporations domiciled in the United States or
Canada. This index includes cash-pay and deferred-interest securities that are
publicly placed, have a fixed coupon, and are nonconvertible.
The CITIGROUP US 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).
- ------
21
NOTES
- ------
22
NOTES
- ------
23
NOTES
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24
[back cover]
[american century investments logo and text logo®]
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
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.
PRSRT STD
U.S. POSTAGE PAID
AMERICAN CENTURY
COMPANIES
American Century Investments
P.O. Box 419200
Kansas City, MO 64141-6200
American Century Investment Services, Inc., Distributor
©2008 American Century Proprietary Holdings, Inc. All rights reserved.
0811
CL-SAN-61616S
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. INVESTMENTS.
(a) The schedule of investments is included as part of the report to
stockholders filed under Item 1 of this Form.
(b) Not applicable.
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/ Jonathan S. Thomas
----------------------------------------
Name: Jonathan S. Thomas
Title: President
Date: November 28, 2008
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/ Jonathan S. Thomas
----------------------------------------
Name: Jonathan S. Thomas
Title: President
(principal executive officer)
Date: November 28, 2008
By: /s/ Robert J. Leach
----------------------------------------
Name: Robert J. Leach
Title: Vice President, Treasurer, and
Chief Financial Officer
(principal financial officer)
Date: November 28, 2008
