CGM Realty Fund 41st Quarterly Report June 30, 2004

Transcription

1 INVESTMENT ADVISER CAPITAL GROWTH MANAGEMENT LIMITED PARTNERSHIP Boston, Massachusetts CGM Realty Fund 1st Quarterly Report June 30, 200 TELEPHONE NUMBERS For information about: Account Procedures and Status Redemptions Exchanges Call A No-Load Fund New Account Procedures Prospectuses Performance Proxy Voting Policies Call Proxy voting policies are available without charge, upon request. These policies also appear in the Fund s Statement of Additional Information, which can be found on the SEC s website, MAILING ADDRESS CGM Shareholder Services c/o Boston Financial Data Services P.O. Box 8511 Boston, MA This report has been prepared for the shareholders of the Fund and is not authorized for distribution to current or prospective investors in the Fund unless it is accompanied or preceded by a prospectus. RQR2 0 Printed in U.S.A. Investment Adviser Capital Growth Management Limited Partnership

2 To Our Shareholders: CGM Realty Fund declined 8.5% during the second quarter of 200 while the unmanaged Standard and Poor s 500 Index rose 1.7% and the National Association of Real Estate Investment Trusts (NAREIT) Equity REIT Index decreased 5.8% over the same period. For the first six months of the year, CGM Realty Fund returned 3.3%, the unmanaged S&P 500 Index rose 3.%, and the NAREIT Equity REIT Index increased 5.5%. A check of vital signs confirms an economic expansion is well under way with new gains in employment numbers in the lead. Payrolls have added approximately 210,000 new jobs each month since January 1 for a total of 1.3 million jobs through June 200 a far cry from the media s so-called jobless recovery of late last year. Gross Domestic Product increased 3.9% during the first quarter of 200 and it looks as though the expansion rate for the second quarter will be about the same. Consumer spending the early leader in this recovery continues to increase though it is no longer considered robust. June spending levels fell off, we suspect, because consumers were discouraged by the daily drumbeat of Iraqi war news and reports of terrorism around the world. And, election year rhetoric is likely taking its toll on the consumer psyche as well. On a more positive note, the flip side of the economy capital spending by corporations is on an upswing, fueling optimism for a continuing recovery. Consumers are not alone in their worries about events overseas. The general uncertainty associated with developments in Iraq weighs heavily on investor confidence as well. However, the biggest questions facing investors these days have to do with inflation: How much and how fast? So far, inflation has kicked in this year at a higher rate than we expected, largely as a result of a jump in commodities prices driven by demand from China and the Pacific Rim. Though recent numbers suggest that business may be slowing in these countries, what if the economy continues to expand from current levels? The Federal Reserve Board s June 30 move to boost its target on the Federal Funds rate one quarter of one percent was so widely anticipated, the stock market barely took notice of the event and the bond market actually rose in response. For now, interest rates, while up from their lows, are still accommodating. At June 30, long term (10-year) bond yields were up to.6%, 30-year mortgage rates were 6.25% and three-month treasury bills were yielding 1.32%. Stock market behavior has been somewhat puzzling so far this year. Corporate profits since the beginning of the year have been impressive with estimates of year-to-year gains of more than 25% in the first quarter of this year. Yet the equity market as measured by the S&P 500 Index is up only 3.% in 200 through June 30. We are inclined to think equities may be marking time for valuations to become even more attractive as earnings move higher. And, we believe investors may need to see more of the recovery accompanied by only modest inflation before stock prices react. CGM Realty Fund is primarily invested in the housing and building materials industry and holds smaller positions in hotel and retail REITs. The Fund s three largest holdings are Hovnanian Enterprises, Inc., William Lyon Homes and D.R. Horton, Inc. July 2, 200 Robert L. Kemp President 1

3 INVESTMENT PERFORMANCE Total Return for Periods Ended June 30, 200 CGM Realty Fund The Fund s Average Annual Total Return 10 years % 17.2% 5 years Year Months The adviser limited the Fund s total operating expenses to 1.00% of its average net assets from inception through December 31, Otherwise, the Fund s total return for the ten-year period would have been lower. The performance data contained in this report represent past performance, which is no guarantee of future results. The table above does not reflect the deduction of taxes a shareholder would pay on Fund distributions or the redemption of Fund shares and assumes the reinvestment of all Fund distributions. The investment return and the principal value of an investment in the Fund will fluctuate so that investors shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. 2

4 BOARD OF TRUSTEES PETER O. BROWN G. KENNETH HEEBNER MARK W. HOLLAND ROBERT L. KEMP LAURENS MACLURE JAMES VAN DYKE QUEREAU, JR. J. BAUR WHITTLESEY OFFICERS ROBERT L. KEMP, President G. KENNETH HEEBNER, Vice President DAVID C. FIETZE, Chief Compliance Officer KATHLEEN S. HAUGHTON, Vice President JEM A. HUDGINS, Treasurer LESLIE A. LAKE, Vice President and Secretary MARTHA I. MAGUIRE, Vice President MARY L. STONE, Assistant Vice President W. DUGAL THOMAS, Vice President INVESTMENT ADVISER CAPITAL GROWTH MANAGEMENT LIMITED PARTNERSHIP Boston, Massachusetts TRANSFER AND DIVIDEND PAYING AGENT AND CUSTODIAN OF ASSETS STATE STREET BANK AND TRUST COMPANY Boston, Massachusetts SHAREHOLDER SERVICING AGENT FOR STATE STREET BANK AND TRUST COMPANY BOSTON FINANCIAL DATA SERVICES, INC. P.O. Box 8511 Boston, Massachusetts

5 The Fund is supervised by the board of trustees (the Board ) of the Trust. The Board is responsible for the general oversight of the Fund, including general supervision and review of the Fund s investment activities. The Board, in turn, elects the officers who are responsible for administering the Fund s day-to-day operations. An asterisk in the table below identifies those trustees and officers who are interested persons of the Trust as defined in the Investment Company Act of 190. Each trustee and officer of the Trust noted as an interested person is interested by virtue of that individual s position with Capital Growth Management Limited Partnership ( CGM ), the Fund s investment adviser, as described in the table below. Each trustee serves during the continued lifetime of the Trust or until he earlier dies, resigns or is removed, or if sooner, until the election and qualification of his successor. Each officer serves until his or her successor is elected or qualified or until the officer sooner dies, resigns, or is removed or becomes disqualified. The trustees and officers of the Trust, their ages, their principal occupations during the past five years, the number of CGM Funds they oversee, and other directorships they hold are set forth below. Unless otherwise noted below, the address of each interested trustee and officer is One International Place, Boston, Massachusetts Correspondence intended for the trustees who are not interested persons of the Trust may be sent c/o Capital Growth Management, One International Place, Boston, Massachusetts The Statement of Additional Information for the Fund includes additional information about Fund trustees and is available, without charge, upon request by calling the CGM Marketing Department, toll free, at Name, Address and Age Interested Trustees G. Kenneth Heebner* age 63 Robert L. Kemp* age 72 Disinterested Trustees Peter O. Brown age 63 Mark W. Holland age 5 Position Held and Length of Time Served Trustee since 1993 Trustee since 1990 Trustee since 1993 Trustee since 200 Principal Occupation During Past 5 Years and Other Directorships Held Employee, CGM; Part Owner, Kenbob, Inc. (managing partner of CGM) Employee, CGM; Part Owner, Kenbob, Inc. (managing partner of CGM) Counsel (formerly, Partner), Harter, Secrest & Emery LLP (law firm); Trustee, TT International U.S.A. Master and Feeder Trusts (four mutual funds) President, Wellesley Financial Advisors, LLC; formerly Vice President and Chief Operating Officer, Fixed Income Management, Loomis, Sayles & Company L.P.; formerly Director, Loomis, Sayles & Company L.P. Number of Funds in the CGM Funds Complex Overseen

6 Name, Address and Age Laurens MacLure age 79 James Van Dyke Quereau, Jr. age 55 J. Baur Whittlesey age 57 Officers G. Kenneth Heebner* age 63 Robert L. Kemp* age 72 David C. Fietze* age 35 address: 222 Berkeley Street, Boston, Massachusetts Kathleen S. Haughton* age address: 222 Berkeley Street, Boston, Massachusetts Jem A. Hudgins* age 1 Leslie A. Lake* age 59 Martha I. Maguire* age 8 Mary L. Stone* age 59 W. Dugal Thomas* age 67 CGM REALTY FUND Position Held and Length of Time Served Trustee since 1990 Trustee since 1993 Principal Occupation During Past 5 Years and Other Directorships Held Retired; formerly President and Chief Executive Officer, New England Deaconess Hospital; formerly Trustee, New England Zenith Fund; formerly Director, Massachusetts Blue Cross/ Blue Shield Managing Partner and Director, Stratton Management Company (investment management); Director and Vice President, Semper Trust Co. Number of Funds in the CGM Funds Complex Overseen Trustee since 1990 Member, Ledgewood Law Firm, P.C. Vice President since 1990 President since 1990 Chief Compliance Officer since 200 Vice President since 1992 and Anti-Money Laundering Compliance Officer since 2002 Treasurer since 200 Vice President and Secretary since 1992 Employee, CGM; Part Owner, Kenbob, Inc. (managing partner of CGM) Employee, CGM; Part Owner, Kenbob, Inc. (managing partner of CGM) Employee Legal counsel, CGM; formerly counsel, Bartlett Hackett Feinberg, P.C.; formerly counsel, McLane, Graf, Raulerson & Middleton Employee Investor Services Division, CGM Employee CGM; formerly Vice President Tax and Treasury, AEW Capital Management L.P. Employee Office Administrator, CGM Vice President since 199 Employee Funds Marketing, CGM Assistant Vice President since 1990 Vice President since 1992 Employee Portfolio Transactions, CGM Employee Director of Marketing, CGM 5

7 INVESTMENTS as of June 30, 200 CGM REALTY FUND COMMON STOCKS 99.% OF TOTAL NET ASSETS REAL ESTATE INVESTMENT TRUSTS 20.% Shares Value(a) Hotels 17.9% FelCor Lodging Trust, Inc.(b)(c)... 2,977,600 $ 36,028,960 Host Marriott Corporation(b)... 2,830,000 3,978,800 LaSalle Hotel Properties(c)... 1,635,300 39,901, ,909,080 Retail 2.5% Chelsea Property Group, Inc ,000 15,391,920 TOTAL REAL ESTATE INVESTMENT TRUSTS ,301,000 HOUSING AND BUILDING MATERIALS 79.0% Brookfield Homes Corporation ,200 21,02,68 Centex Corporation ,000 32,82,500 D.R. Horton, Inc.... 1,570,650,606,60 Hovnanian Enterprises, Inc.(b)... 1,693,000 58,76,030 KB Home... 30,000 29,510,900 Lennar Corporation; Class A ,000 3,881,600 Lennar Corporation; Class B... 78,000 3,231,50 M.D.C. Holdings, Inc ,88 0,700,731 Meritage Corporation(b) ,900 3,268,320 Pulte Homes, Inc.... 7,000 38,710,320 Ryland Group, Inc ,800 7,100,560 Standard Pacific Corporation ,000 39,0,000 Toll Brothers, Inc.(b) ,000 38,299,600 WCI Communities, Inc.(b) ,000 12,382,050 William Lyon Homes(b)... 85,700,757,255 89,538,33 TOTAL COMMON STOCKS (Identified Cost $379,632,62) ,839,33 6 See accompanying notes to financial statements.

8 INVESTMENTS as of June 30, 200 (continued) SHORT-TERM INVESTMENT 0.7% Face Amount Value(a) American Express Credit Corporation, 1.30%, 7/01/0 (Cost $,20,000)... $,20,000 $,20,000 TOTAL INVESTMENTS 100.1% (Identified Cost $38,052,62)(d) ,259,33 Cash and receivables ,80 Liabilities... (1,109,595) TOTAL NET ASSETS 100.0%... $619,920,53 (a) See Note 1A. (b) Non-income producing security. (c) Non-controlled affiliate. (d) Federal Tax Information: At June 30, 200 the net unrealized appreciation on investments based on cost of $38,052,62 for Federal income tax purposes was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost... $ 237,231,76 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value... (1,02,78) Net unrealized appreciation... $ 236,206,692 See accompanying notes to financial statements. 7

9 STATEMENT OF ASSETS AND LIABILITIES June 30, 200 STATEMENT OF OPERATIONS Six Months Ended June 30, 200 Assets Investments at value: Unaffiliated issuers (identified cost $331,118,398)... $5,329,05 Non-controlled affiliates (identified cost $52,93,2)... 75,930,280 Total Investments ,259,33 Cash...,67 Receivable for: Shares of the Fund sold $,299 Dividends and interest 321, , ,030,138 Liabilities Payable for: Shares of the Fund redeemed ,212 Accrued expenses: Management fees... 16,353 Trustees fees... 20,718 Accounting and Administration fees... 6,166 Transfer agent fees... 3,237 Other expenses... 33, ,383 1,109,595 Net Assets... $619,920,53 Net Assets consist of: Capital paid-in... $3,151,80 Undistributed net investment income.. 5,05,675 Accumulated net realized gain on investments and foreign currency net... 3,516,696 Unrealized appreciation on investments net ,206,692 Net Assets... $619,920,53 Shares of beneficial interest outstanding, no par value... 2,2,627 Net asset value per share*... $25.57 *Shares of the Fund are sold and redeemed at net asset value ($619,920,53 2,2,627). Investment Income Income Dividends (including dividend income of $686,826 from non-controlled affiliated issuers)... $ 8,029,672 Interest... 33,19 8,062,866 Expenses Management fees... 2,597,276 Trustees fees... 37,630 Accounting and Administration... 37,000 Custodian... 51,117 Transfer agent ,562 Audit and tax services... 19,125 Legal... 55,861 Printing... 31,115 Registration... 16,168 Line of credit commitment fee... 10,153 Miscellaneous... 1,18 3,017,191 Net investment income... 5,05,675 Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Transactions Realized gain on investments and foreign currency transactions net... 3,828,000 Unrealized depreciation net... (2,629,673) Net gain on investments and foreign currency transactions... 10,198,327 Net Change in Assets from Operations... $15,2,002 See accompanying notes to financial statements. 8

10 STATEMENT OF CHANGES IN NET ASSETS Six Months Ended June 30, 200 Year Ended December 31, 2003 From Operations Net investment income... $ 5,05,675 $ 736,377 Net realized gain from investments and foreign currency transactions... 3,828,000 0,262,853 Unrealized appreciation (depreciation)... (2,629,673) 250,099,83 Change in net assets from operations... 15,2, ,099,073 From Distributions to Shareholders Net investment income... (76,112) Net realized long-term capital gain on investments... (1,565,7) (15,311,856) From Capital Share Transactions Proceeds from sale of shares ,383,00 28,97,108 Net asset value of shares issued in connection with reinvestment of: Dividends from net investment income ,73 Distributions from net long-term capital realized gain... 12,52, ,383,00 262,15,391 Cost of shares redeemed... (165,126,101) (233,269,827) Change in net assets derived from capital share transactions... (39,73,097) 28,875,56 Total change in net assets... (2,99,095) 30,662,781 Net Assets Beginning of period... 6,19, ,756,857 End of period (including undistributed net investment income of $5,05,675 and $0, respectively)... $619,920,53 $6,19,638 Number of Shares of the Fund: Issued from sale of shares...,893,828 12,2,150 Issued in connection with reinvestment of: Dividends from net investment income... 38,971 Distributions from net long-term capital realized gain ,300,893,828 12,982,21 Redeemed... (6,688,203) (12,323,869) Net change... (1,79,375) 658,552 See accompanying notes to financial statements. 9

11 FINANCIAL HIGHLIGHTS Six Months Ended June 30, 200 For the Year Ended December 31, For a share of the Fund outstanding throughout each period: Net asset value at the beginning of period.. $2.75 $13.39 $13.7 $13.53 $11.08 $11.59 Net investment income (a) 0.03(a) 0.0(a) 0.8(a) Dividends from net investment income... (0.0) (0.58) (0.71) (0.73) (0.65) Distribution from net long-term realized gain (0.56) Distribution from tax return of capital... (0.16) Total Distributions... (0.60) (0.58) (0.71) (0.73) (0.81) Net realized and unrealized gain (loss) on investments and foreign currency transactions (0.35) Net increase (decrease) in net asset value (0.08) (0.06) 2.5 (0.51) Net asset value at end of period... $25.57 $2.75 $13.39 $13.7 $13.53 $11.08 Total Return (%) Ratios: Operating expenses to average net assets (%) * Net investment income to average net assets (%) * Portfolio turnover (%)... 39* Net assets at end of period (in thousands) ($) ,921 6,20 339, ,156 99, ,830 (a) Per share net investment income has been calculated using the average shares outstanding during the period. * Computed on an annualized basis. 10 See accompanying notes to financial statements.

12 NOTES TO FINANCIAL STATEMENTS June 30, The Fund is a diversified series of CGM Trust which is organized as a Massachusetts business trust under the laws of Massachusetts pursuant to an Agreement and Declaration of Trust. The Trust is registered under the Investment Company Act of 190 as an open-end management investment company. The Trust has two other funds whose financial statements are not presented herein. Along with one other fund in a separate Trust, there are four CGM Funds. The Fund commenced operations on May 13, 199. The Fund s investment objective is to provide a combination of income and long-term growth of capital. The Fund intends to pursue its objective by investing primarily in equity securities of companies in the real estate industry. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. Security valuation Equity securities are valued on the basis of valuations furnished by a pricing service, authorized by the Board of Trustees. The pricing service provides the last reported sale price for securities listed on a national securities exchange or in the case of the NASDAQ national market system, the NASDAQ official closing price. For securities with no sale reported and in the case of overthe-counter securities not so listed, the last reported bid price is used. Short-term investments having a maturity of sixty days or less are stated at amortized cost, which approximates value. Other assets and securities which are not readily marketable will be valued in good faith at fair value using methods determined by the Board of Trustees. B. Security transactions and related investment income Security transactions are accounted for on the trade date (date the order to buy or sell is executed) and dividend income is recorded on the exdividend date net of applicable foreign taxes, a portion of which may be recoverable. The Fund will accrue such taxes and recoveries as applicable based upon its current interpretations of the tax rules and regulations that exist in the markets in which it invests. Interest income is recorded on the accrual basis. Net gain or loss on securities sold is determined on the identified cost basis. Dividend income received by the Fund from its investment in REITs may consist of ordinary income, capital gains and return of capital. Non-cash dividends, if any, are recorded at the fair market value of the securities received. For the period ended June 30, 200 the Fund received a special distribution of a 12% senior subordinated debenture due in 2020 which amounted to $3,272,00. This amount is included in dividend income stated in the statement of operations. C. Federal income taxes It is the Fund s policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute to its shareholders all of its taxable income and net realized capital gains, within the prescribed time period. Accordingly, no provision for federal income tax has been made. At December 31, 2003 there were no capital loss carryovers available to offset future realized gains. D. Dividends and distributions to shareholders Dividends and distributions are recorded by the Fund on the ex-dividend date. The classification of income and capital gains distributions is determined in 11

13 NOTES TO FINANCIAL STATEMENTS (continued) accordance with income tax regulations. Distributions from net investment income and short-term capital gains are treated as ordinary income for income tax purposes. Permanent book and tax differences relating to shareholder distributions may result in reclassifications to paid-in capital or accumulated realized gain/loss. These differences are primarily related to REITs and foreign exchange gains/(losses). The Fund also utilized earnings and profits distributed to shareholders on redemption of shares as a part of the dividend deduction for income tax purposes. For tax purposes, for the year ended December 31, 2003, the Fund designated $1,762,159 as long-term capital gain distribution and $76,112 as ordinary income. Undistributed net investment income or accumulated net investment loss may include temporary book and tax differences such as tax deferral of losses on wash sales, which will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. For tax purposes, for the year ended December 31, 2003, there was no undistributed ordinary income or capital gains except for the unrealized appreciation of $260,525,062. E. Foreign Currency Translation All assets and liabilities initially expressed in terms of foreign currencies are translated into U.S. dollars. Transactions affecting statement of operations accounts and net realized gain/(loss) on investments are translated at the rates prevailing at the dates of the transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Reported net realized foreign exchange gains or losses arise from sales of foreign currency, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains or losses arise from changes in the value of assets and liabilities other than investments in securities at the end of the period, resulting from changes in the exchange rate. F. Investment risk There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments and the possible imposition of currency exchange blockages or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. 2. Purchases and sale of securities For the period ended June 30, 200, purchases and sales of securities other than United States government obligations and short-term investments aggregated $12,315,707 and $158,17,008, respectively. There were no purchases or sales of United States government obligations. 3. A. Management fees During the period ended June 30, 200, the Fund incurred management fees of $2,597,276, paid or payable to the Fund s investment adviser, Capital Growth Management Limited Partnership (CGM), certain officers and directors of which are also officers and trustees of the Fund. The management agreement provides for a fee at the annual rate of 0.85% on the first $500 million of the Fund s average daily net assets and 0.75% on amounts in excess of $500 million. 12

14 NOTES TO FINANCIAL STATEMENTS (continued) B. Other expenses CGM performs certain administrative, accounting and other services for the Fund. The expenses of those services, which are paid to CGM by the Fund, include the following: (i) expenses for personnel performing bookkeeping, accounting and financial reporting functions and clerical functions relating to the Fund; (ii) expenses for services required in connection with the preparation of registration statements and prospectuses, shareholder reports and notices, proxy solicitation material furnished to shareholders of the Fund or regulatory authorities and reports and questionnaires for SEC compliance; and (iii) registration, filing and other fees in connection with requirements of regulatory authorities. For the period ended June 30, 200 these expenses amounted to $37,000 and are shown separately in the financial statements as Accounting and Administration. C. Trustees fees and expenses The Fund does not pay any compensation directly to its officers or to any trustees who are directors, officers or employees of CGM, or any affiliate of CGM (other than registered investment companies). For the period ended June 30, 200 each other trustee was compensated by the CGM Funds with an annual fee of $50,000 (the financial expert receives an additional $30,000 annually) plus travel expenses for each meeting attended. Of this amount, each fund is responsible for $7,000 per trustee plus an annual variable fee calculated based on the proportion of each fund s average net assets relative to the aggregate average net assets of the CGM Funds, which for the period ended June 30, 200 was $3,776 per trustee for the Fund.. Line of credit The Fund has a $20,000,000 committed unsecured line of credit with its custodian bank. Borrowings under the line will be charged interest at 0.75% over the current Overnight Federal Funds Rate. The Fund will incur a commitment fee of 0.10% per annum on the unused portion of the line of credit, payable quarterly. There were no borrowings under the line of credit during the period ended June 30, Affiliated issuers Affiliated issuers, as defined under the Investment Company Act of 190, are those in which the Fund s holdings of an issuer represent 5% or more of the outstanding voting securities of the issuer. The following summarizes transactions with affiliates of the Fund during the period ended June 30, 200: Name of Issuer Number of Shares Held December 31, 2003 Gross Additions Gross Reductions Number of Shares Held June 30, 200 Dividend Income Market Value June 30, 200 FelCor Lodging Trust, Inc.... 2,727, , ,977,600 $ 0 $36,028,960 LaSalle Hotels Properties... 1,515, , ,635, ,826 39,901,320 Total... $686,826 $75,930,280 13