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As filed with the Securities and Exchange Commission on September 30, 1997
File No. 811-9130
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 5
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SCHRODER CAPITAL FUNDS
(Exact Name of Registrant as Specified in its Charter)
Two Portland Square, Portland, Maine 04101
(Address of Principal Executive Office)
Registrant's Telephone Number, including Area Code: 207-879-1900
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Catherine S. Wooledge, Esq.
Forum Financial Services, Inc.
Two Portland Square
Portland, Maine 04101
(Name and Address of Agent for Service)
Copies to:
R. Darrell Mounts, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036
Alexandra Poe, Esq.
Schroder Capital Management International Inc.
787 seventh Avenue, 34th Floor
New York, New York 10019
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EXPLANATORY NOTE
This Registration Statement is being filed by Registrant pursuant to Section
8(b) of the Investment Company Act of 1940, as amended. Beneficial interests in
the series of Registrant are not being registered under the Securities Act of
1933, as amended, because such interests will be issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of that act. Investments in Registrant's series may
only be made by certain qualified investors, whether organized within or
without the United States (excluding individuals, S corporations, partnerships,
and grantor trusts beneficially owned by any individuals, S corporations, or
partnerships). This Registration Statement does not constitute an offer to
sell, or the solicitation of an offer to buy, any beneficial interests in any
series of Registrant.
THIS REGISTRATION STATEMENT IS INTENDED TO SUPPLEMENT THE PREVIOUSLY FILED
REGISTRATION STATEMENT OF THE SCHRODER CAPITAL FUNDS AND DOES NOT EFFECT THE
INTERNATIONAL EQUITY FUND, SCHRODER EMERGING MARKETS FUND INSTITUTIONAL
PORTFOLIO, SCHRODER U.S. SMALLER COMPANIES PORTFOLIO OR THE SCHRODER
INTERNATIONAL SMALLER COMPANIES PORTFOLIO.
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PART A
(PRIVATE PLACEMENT MEMORANDUM)
SCHRODER CAPITAL FUNDS
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SCHRODER EM CORE PORTFOLIO
OCTOBER 1, 1997
INTRODUCTION
Schroder Capital Funds (the "Trust") is registered as an open-end management
investment company under the Investment Company Act of 1940 (the "1940 Act").
The Trust offers beneficial interests ("Interests") in separate series, each
with a distinct investment objective and policies (each, a "portfolio" and
collectively, the "portfolios"). The Trust currently offers six portfolios:
Schroder EM Core Portfolio (the "Portfolio"), Schroder Emerging Markets Fund
Institutional Portfolio, International Equity Fund, Schroder U.S. Smaller
Companies Portfolio, Schroder International Smaller Companies Portfolio and
Schroder Global Growth Portfolio. Additional portfolios may be added in the
future. This Part A relates solely to the Portfolio.
The Trust does not offer its Interests directly to the public; Interests are
offered on a no-load basis exclusively to various qualified investors (including
other investment companies) as described in Item 4 below. An investor that is
an investment company or other collective investment vehicle typically has an
investment objective and polices substantially similar to those of the portfolio
in which it invests and typically seeks to achieve its investment objective by
holding Interests in another portfolio, instead of separately managing its own
portfolio of investment securities and related assets.
Interests of the Trust are not offered publicly and, are not registered under
the Securities Act of 1933 (the "1933 Act"). Accordingly, consistent with
paragraph 4 of Instruction F of the General Instructions to Form N-1A, responses
to Items 1, 2, 3 and 5A of that Form have been omitted.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
The Trust was organized as a business trust under the laws of the State of
Delaware on September 7, 1995, under Trust Instrument dated September 6, 1995.
The Trust has an unlimited number of authorized Interests. The assets of the
Portfolio and of any additional portfolios now existing or created in the
future, belong only to that portfolio. The assets belonging to a portfolio are
charged with the liabilities of and all expenses, costs, charges and reserves
attributable to that portfolio. The Portfolio is classified as
"non-diversified" under the 1940 Act and commenced operations on or about
October 1, 1997.
Interests in the Portfolio are offered solely in private placement transactions
that do not involve any "public offering" within the meaning of Section 4(2) of
the 1933 Act. Investments in the
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Portfolio may only be made by certain qualified investors (excluding S
corporations, partnerships, and grantor trusts beneficially owned by any
individuals, S corporations, or partnerships). Investors may be organized
within or without the U.S. This registration statement does not constitute an
offer to sell, or the solicitation of an offer to buy, any "security" within the
meaning of the 1933 Act.
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek long-term capital appreciation.
The Portfolio seeks to achieve its objective through investment primarily in
equity securities of issuers domiciled or doing business in emerging market
countries in regions such as Southeast Asia, Latin America, and Eastern and
Southern Europe. Current income is incidental to the Portfolio's objective.
There can be no assurance that the Portfolio will achieve its investment
objective.
INVESTMENT POLICIES
The Portfolio's investment objective and all fundamental investment policies may
not be changed without approval of the holders of a majority of the Portfolio's
outstanding voting Interests (defined in the same manner as the phrase "vote of
a majority of the outstanding voting securities" is defined in the 1940 Act).
Unless otherwise indicated, all other investment policies are not fundamental
and may be changed by the Trust's Board of Trustees (the "Board") without prior
investor approval. Additional investment techniques, features and restrictions
concerning the Portfolio's investments are described below and under "Investment
Objective and Policies" and in Part B.
Under normal conditions, the Portfolio invests at least 65% of its total assets
in emerging market equity securities, including common stocks, preferred stocks,
convertible preferred stocks, stock rights and warrants, and convertible debt
securities. Investments in stock rights and warrants are not considered in the
65% of total assets determination but are subject to the limitations described
below in "Warrants and Stock Rights". The Portfolio may invest up to 35% of its
net assets in high-risk debt securities that unrated or rated below investment
grade. (See "Certain Risks of Debt Securities".) Under certain circumstances,
the Portfolio may invest indirectly in these securities by investing in other
investment companies or vehicles. (See "Other Investment Vehicles".) The
Portfolio may acquire emerging market securities that are not denominated in
emerging market currency.
In recent years, many emerging market countries have begun programs of economic
reform removing import tariffs, dismantling trade barriers, deregulating foreign
investment, privatizing state owned industries, permitting the value of their
currencies to float against the dollar and other major currencies, and generally
reducing the level of state intervention in industry and commerce. Important
intra-regional economic integration also holds the promise of greater trade and
growth. At the same time, significant progress has been made in restructuring
the heavy external debt burden that certain emerging market countries
accumulated during the 1970s and 1980s. While there is no assurance that these
trends will continue, the Portfolio's investment adviser seeks out attractive
investment opportunities in these countries.
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"Emerging market" countries are all those not included in the Morgan Stanley
Capital International World Index ("MSCI World") of major world economies.
Where the investment adviser determines that the economy of a particular country
included in the MSCI World more appropriately reflects an emerging market
economy, however, the adviser may include such country in the emerging market
category. The following countries currently are excluded from the Portfolio's
emerging market category: Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand,
Norway, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United
States of America. The Portfolio does not necessarily seek to diversify
investments on a geographic basis within the emerging market category and may
invest more than 25% of its total assets in issuers located in any one country.
To the extent the Portfolio concentrates its investments in issuers located in
one country, the Portfolio is more susceptible to factors adversely affecting
that country. (See "Geographic Concentration".)
An issuer of a security ordinarily is considered to be domiciled or doing
business in an emerging market when: (1) it is organized under the laws of an
emerging market country; (2) its primary trading market is located in an
emerging market country; (3) in the judgment of the investment adviser, at least
50% of the issuer's revenues or profits are derived from goods produced or sold,
investments made, or services performed in emerging market countries; or (4) it
has at least 50% of its assets situated in emerging market countries. The
Portfolio may acquire emerging market securities that are denominated in
currencies other than a currency of an emerging market country. The Portfolio's
investment adviser may consider investment companies to be located in the
country or countries in which they primarily make their portfolio investments.
In anticipation of the Portfolio's currency requirements and in seeking to
protect against possible adverse movements in foreign exchange rates, the
Portfolio may enter into forward contracts to purchase or sell foreign
currencies. Although these forward contracts may reduce the risk of loss to the
Portfolio due to a decline in the value of the currency that is sold, the
contracts also limit any possible gain which might result should the value of
such currency rise.
COMMON AND PREFERRED STOCK, CONVERTIBLE PREFERRED STOCK AND WARRANTS. The
Portfolio's investments consist primarily of common or preferred stock of
established emerging market companies that are listed on recognized securities
exchanges or traded in other established markets. However, the Portfolio may
make limited investment in convertible preferred stock, warrants and stock
rights.
Common stockholders are the owners of the company issuing the stock and,
accordingly, vote on various corporate governance matters such as mergers.
Shareholders are not creditors of the company but rather, upon liquidation of
the company, would be entitled to their pro rata share of the company's assets
after creditors (including fixed income security holders) and any preferred
stockholders are paid. Preferred stock is a class of stock having a preference
over common stock as to dividends and, generally, as to the recovery of
investment. A preferred stockholder is also a shareholder and not a creditor of
the company. Equity securities may be traded in the over-the counter market or
on a securities exchange but are not traded every day or in the volume typical
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of securities traded on a major U.S. national securities exchange. As a result,
disposition by the Portfolio of a security to meet withdrawals by
interestholders may require that these securities be sold at a discount from
market prices during periods when disposition is not desirable, or in many small
sales over a lengthy period of time. The market value of all securities,
including equity securities, is based upon the market's perception of value and
not necessarily the "book value" of an issuer or other objective measure of a
company's worth.
Convertible preferred stock generally may be converted at a stated price within
a specific amount of time into a specified number of shares of common stock. A
convertible security entitles the holder to receive the dividend paid on
preferred stock until the convertible security is converted or exchanged.
Before conversion, convertible securities have characteristics similar to
non-convertible debt securities in that they ordinarily provide a stream of
income at a higher yield than those of common stocks of the same or similar
issuers. These securities usually are senior to common stock in a company's
capital structure but subordinated to non-convertible debt securities. In
general, the value of a convertible security is the higher of its investment
value (its value as a fixed-income security) or its conversion value (the value
of the underlying shares of common stock if the security is converted). As a
fixed-income security, the value of a convertible security generally increases
when interest rates decline and generally decreases when interest rates rise.
The value of a convertible security is, however, also influenced by the value of
the underlying common stock.
The Portfolio may also invest in warrants. Warrants are options to purchase an
equity security at a specified price (usually representing a premium over the
applicable market value of the underlying equity security at the time of the
warrant's issuance) and usually during a specified period of time.
AMERICAN DEPOSITORY RECEIPTS ("ADRs"). Due to the absence of established
securities markets in certain emerging market countries and restrictions in
certain countries on direct investment by foreign entities, the Portfolio may
invest in certain emerging market issuers through the purchase of sponsored and
unsponsored American Depositary Receipts or other similar securities, such as
American Depositary Shares, Global Depositary Shares or International Depositary
Receipts ("ADRs"). ADRs are receipts typically issued by U.S. banks evidencing
ownership of the underlying securities into which they are convertible. These
securities may or may not be denominated in the same currency as the underlying
securities. Unsponsored ADRs may be created without the participation of the
foreign issuer. Holders of unsponsored ADRs generally bear all the costs of the
ADR facility, whereas foreign issuers typically bear certain costs in a
sponsored ADR. The bank or trust company depository of an unsponsored ADR may
be under no obligation to distribute shareholder communications received from
the foreign issuer or to pass through voting rights.
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DEBT SECURITIES. The Portfolio may seek capital appreciation through investment
in emerging market debt securities. Capital appreciation in debt securities may
arise as a result of a favorable change in relative foreign exchange rates, in
relative interest-rate levels, or in the creditworthiness of issuers. The
receipt of income from such debt securities is incidental to the Portfolio's
objective of long-term capital appreciation. Such income can be used, however,
to offset the operating expenses of the Portfolio. In accordance with its
investment objective, the Portfolio does not seek to benefit from anticipated
short-term fluctuations in currency exchange rates. The Portfolio also may
invest to a certain extent in debt securities in order to participate in
debt-to-equity conversion programs incident to corporate reorganizations.
Debt securities are generally subject to two kinds of risk -- credit risk and
market risk. Credit risk refers to the ability of the debtor, and any other
obligor, to pay principal and interest on the debt as it becomes due. The
Portfolio may, from time to time, invest in debt securities with high risk and
high yields (as compared to other debt securities meeting the Portfolio's
investment criteria). The debt securities in which the Portfolio invests may be
unrated but will not be in default at the time of purchase. Market risk refers
to the tendency of the value of debt securities to vary inversely with interest
rate changes. Certain debt instruments may also be subject to extension risk,
which refers to change in total return on a debt instrument resulting from
extension or abbreviation of the instrument's maturity.
The Portfolio may invest in debt securities issued or guaranteed by emerging
market governments (including countries, provinces and municipalities) or their
agencies and instrumentalities ("governmental entities"); debt securities issued
or guaranteed by international organizations designated or supported by multiple
foreign governmental entities (which are not obligations of foreign governments)
to promote economic reconstruction or development; and debt securities issued by
corporations or financial institutions.
BRADY BONDS. The Portfolio may invest a portion of its assets in Brady Bonds,
which are securities created through the exchange of existing commercial bank
loans to sovereign entities for new obligations in connection with debt
restructuring (under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady). Brady Bonds have been issued
only recently and, therefore, do not have a long payment history. Brady Bonds
may have collateralized and uncollateralized components, are issued in various
currencies, and are actively traded in the over-the-counter secondary market.
Brady Bonds are not considered U.S. government securities. In light of the
residual risk associated with the uncollateralized portions of Brady Bonds and,
among other factors, the history of defaults with respect to commercial bank
loans by public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds are considered speculative. Brady Bonds could be
subject to restructuring arrangements or to requests for new credit, which could
cause the Portfolio to suffer a loss of interest or principal on its holdings.
(For further information see "Brady Bonds", in the Statement of Additional
Information.)
INVESTMENT IN OTHER INVESTMENT COMPANIES OR VEHICLES. The Portfolio may be able
to invest in certain emerging markets solely or primarily through governmentally
authorized investment vehicles or companies. Pursuant to the 1940 Act, the
Portfolio may invest up to 10% of its total
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assets in the shares of other investment companies and up to 5% of its total
assets in any one investment company, as long as each investment does not
represent more than 3% of the outstanding voting stock of the investment company
at the time of such investment.
When investing through investment companies, the Portfolio may pay substantial
premiums above such investment companies' net asset value per share. Such
investments are subject to limitations under the 1940 Act and market
availability. The Portfolio does not intend to invest in other investment
companies unless, in the judgment of SCMI, the potential benefits of such
investment justify the payments of any applicable premiums or sales charges. As
a shareholder in an investment company, the Portfolio would bear its ratable
share of the investment company's expenses, including its advisory and
administrative fees. At the same time, the Portfolio would continue to pay its
own fees and expenses.
TEMPORARY DEFENSIVE INVESTMENTS. For temporary defensive purposes, the
Portfolio may invest without limitation in (or enter into repurchase agreements
maturing in seven days or less with U.S. banks and broker-dealers with respect
to) short-term debt securities, including commercial paper, U.S. Treasury bills,
other short-term U.S. government securities, certificates of deposit, and
bankers' acceptances of U.S. banks. The Portfolio also may hold cash and time
deposits denominated in any major foreign currency in foreign banks. (See Part
B for further information about these securities.)
REPURCHASE AGREEMENTS. The Portfolio may invest in repurchase agreements, which
are a means of investing monies for a short period. Under a repurchase
agreement, a seller -- a U.S. bank or recognized broker-dealer -- sells
securities to the Portfolio and agrees to repurchase them (at the Portfolio's
cost plus interest) within a specified period (normally one day). The value of
the underlying securities purchased by the Portfolio is monitored at all times
by SCMI to ensure that the total value of the underlying collateral equals or
exceeds the value of the repurchase agreement. The Portfolio's custodian bank
holds the collateral until the repurchase agreement has matured. If the seller
defaults under a repurchase agreement, the Portfolio may have difficulty
exercising its rights to the underlying collateral and may incur costs and
experience time delays in disposing of it. To evaluate potential risk, SCMI
reviews the creditworthiness of banks and dealers with which the Portfolio
enters into repurchase agreements.
FOREIGN EXCHANGE CONTRACTS. Changes in currency exchange rates affect the
U.S.-dollar values of securities denominated in foreign currencies. Exchange
rates between the U.S. dollar and other currencies fluctuate in response to
forces of supply and demand in the foreign exchange markets. These forces are
affected by the international balance of payments and other economic and
financial conditions, government intervention, speculation, and other factors,
many of which may be difficult (if not impossible) to predict. When investing
in foreign securities, the Portfolio usually effects currency exchange
transactions on a spot (I.E., cash) basis at the spot rate prevailing in the
foreign exchange market. The Portfolio incurs foreign exchange expenses in
converting assets from one currency to another.
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The Portfolio may enter into forward contracts for the purchase or sale of
foreign currency: (1) to "lock in" the U.S. dollar price of the securities
denominated in a foreign currency or the U.S.-dollar value of interest and
dividends to be paid on such securities, or (2) to hedge against the possibility
that a foreign currency may suffer a decline against the U.S. dollar. A forward
currency contract is an obligation to purchase or sell a specific currency at a
future date (which may be any fixed number of days from the date of the contract
agreed upon by the parties) at a price set at the time of the contract. This
method of attempting to hedge against a decline in the value of a currency does
not eliminate fluctuations in the underlying prices of securities and exposes
the Portfolio to the risk that the counterparty is unable to perform. Although
the strategy of engaging in foreign currency transactions could reduce the risk
of loss due to a decline in the value of the hedged currency, it could also
limit the potential gain from an increase in the value of the currency. The
Portfolio's investment adviser does not intend to maintain a net exposure to
such contracts if the fulfillment of obligations under such contracts would
obligate the Portfolio to deliver an amount of foreign currency in excess of the
value of its portfolio securities or other assets denominated in the currency.
The Portfolio does not enter into these contracts for speculative purposes and
does not enter into non-hedging currency contracts. The Portfolio does
generally not enter into a forward contract with a term of greater than one
year. Forward contracts are not exchange traded, and there can be no assurance
that a liquid market will exist at a time when the Portfolio seeks to close out
a forward contract. Currently, only a limited market, if any, exists for
hedging transactions relating to currencies in certain emerging markets or to
securities of issuers domiciled or principally engaged in business in certain
emerging markets. This may limit the Portfolio's ability to effectively hedge
its investments in those markets. These contracts involve a risk of loss if
SCMI fails to predict currency values. The Portfolio has no plan to enter into
currency futures or options contracts but may do so in the future. (See "Risk
Considerations -- Currency Fluctuations and Devaluations".)
ILLIQUID AND RESTRICTED SECURITIES. As a non-fundamental policy, the Portfolio
does not invest more than 15% of its assets in securities that SCMI determined
to be illiquid. Securities that may be resold to certain institutional
customers under Rule 144A of the Securities act of 1933 or Section 4(2) paper
issued under that Act that has an active secondary market may be determined by
SCMI to be liquid for purposes of compliance with the Portfolio's limitations on
illiquid investments. There is no guarantee that the Portfolio will be able to
sell such securities at any time when SCMI deems it advisable to do so or at
prices prevailing for comparable securities that are more widely held. (See
"Investment Policies -- Illiquid and Restricted Securities" in Part B for
further information.)
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend portfolio securities to
brokers, dealers and other financial institutions meeting specified credit
conditions if the loan is collateralized in accordance with applicable
regulatory requirements and if, after any loan, the value of the securities
loaned does not exceed 25% of the value of the Portfolio's total assets. By so
doing, the Portfolio seeks to earn income. In the event of the other party's
bankruptcy, the Portfolio could experience delays in recovering the securities
it has loaned; if, in the meantime, the value of the securities the Portfolio
lent has increased, the Portfolio, and thus its interestholders, could
experience a loss.
The Portfolio may lend its securities if it maintains in a segregated account
liquid assets equal to the current market value of the securities loaned
(including accrued interest thereon) plus the loan interest payable to the
Portfolio. Any securities that the Portfolio receives as collateral do
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not become part of its portfolio at the time of the loan. In the event of a
default by the borrower, the Portfolio will (if permitted by law) dispose of
such collateral except for such part thereof that is a security in which the
Portfolio is permitted to invest. While the securities are on loan, the
borrower pays the Portfolio any accrued income on those securities, and the
Portfolio may invest the cash collateral and earn income or receive an agreed
upon fee from a borrower that has delivered cash equivalent collateral. Cash
collateral received by the Portfolio is invested in U.S. government securities
and liquid high-grade debt or equity obligations. The value of securities loaned
is marked to market daily. Portfolio securities purchased with cash collateral
are subject to possible depreciation. Loans of securities by the Portfolio are
subject to termination at the Portfolio's or the borrower's option. The
Portfolio may pay reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the Board. (See "Loans of Portfolio Securities" in the SAI for
further information on securities loans.)
OPTIONS AND FUTURES TRANSACTIONS. Although the Portfolio does not presently
intend to do so, it may: (1) write covered call options on portfolio
securities, and the U.S. dollar and emerging market currencies without limit;
(2) write covered put options on portfolio securities, the U.S. dollar and
emerging market currencies with the limitation that the aggregate value of the
obligations underlying the puts determined as of the date the options are sold
will not exceed 50% of the Portfolio's net assets; (3) purchase call and put
options in amounts up to 5% of its total assets; and (4)(a) purchase and sell
futures contracts that are traded on U.S. and foreign commodity exchanges on
underlying portfolio securities, any emerging market currency, U.S. and emerging
market fixed-income securities and such indices of U.S. or emerging market
equity or fixed-income securities as may exist or come into being and (b)
purchase and write call and put options on such futures contracts, in all cases
involving such futures contracts or options on futures contracts for hedging
purposes only, and without limit, except that the Portfolio may not enter into
futures contracts or purchase related options if, immediately thereafter, the
amount committed to margin plus the amount paid for premiums for unexpired
options on futures contracts generally exceeds 5% of the value of the
Portfolio's total assets. All of the foregoing are referred to as "Hedging
Instruments".
In general, the Portfolio may use Hedging Instruments: (1) to protect against
declines in the market value of the Portfolio's portfolio securities or stock
index futures, and the currencies in which they are denominated, or (2) to
establish a position in securities markets as a temporary substitute for
purchasing particular equity securities. The Portfolio will not use Hedging
Instruments for speculation. Hedging Instruments have certain risks associated
with them including: (1) the possible failure of such instruments as hedging
techniques in cases where the price movement of the securities underlying the
options or futures does not follow the price movements of the portfolio
securities subject to the hedge; (2) potentially unlimited loss associated with
futures transactions and the possible lack of a liquid secondary market for
closing out a futures position; and (3) possible losses resulting from the
inability of the Portfolio's investment adviser to predict the direction of
stock prices, interest rates and other economic factors. In addition, only a
limited market, if any, currently exists for hedging transactions relating to
currencies in many emerging markets or to securities of issuers domiciled or
principally engaged in business in emerging markets. This may limit the
Portfolio's ability to
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effectively hedge its investments in such emerging market countries. The
Hedging Instruments the Portfolio may use and the risks associated with them are
described in greater detail under "Options and Futures Transactions" in Part B.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES AND FORWARD-COMMITMENTS. The
Portfolio may purchase securities on a when-issued or delayed-delivery basis or
may purchase or sell securities on a forward-commitment basis. When such
transactions are negotiated, the price is fixed at the time of the commitment,
but delivery and payment may take place a month or more after the date of the
commitment. There is no overall limit on the percentage of the Portfolio's
assets that may be committed to the purchase of securities on a when-issued,
delivery-delivery or forward-commitment basis. An increase in the percentage of
the Portfolio's assets committed to the purchase of securities on a when-issued,
delivery-delivery or forward-commitment basis may increase the volatility of the
Portfolio's net asset value.
WHEN, AS AND IF ISSUED SECURITIES. The Portfolio may purchase securities on a
"when as and if issued" basis under which the issuance of the security depends
upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization, leveraged buyout or debt restructuring. If the
anticipated event does not occur and the securities are not issued, the
Portfolio will have lost an investment opportunity. There is no overall limit
to the percentage of the Portfolio's assets that may be committed to the
purchase of securities on a "when, as and if issued" basis. An increase in the
percentage of the Portfolio's assets committed to the purchase of securities on
a "when, as and if issued" basis may increase the volatility of its net asset
value.
INVESTMENT RESTRICTIONS
The following investment restrictions of the Portfolio were designed to reduce
the Portfolio's exposure in specific situations. Pursuant to these
restrictions, which are fundamental policies, the Portfolio will not:
1. Concentrate investments in any particular industry; therefore, the
Portfolio will not purchase the securities of companies in any one industry if,
thereafter, 25% or more of the Portfolio's total assets would consist of
securities of companies in that industry. (This restriction does not apply to
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.)
2. Issue senior securities, borrow money or pledge its assets in excess of 10%
of its total assets taken at market value (including the amount borrowed) and
then only from a bank as a temporary measure for extraordinary or emergency
purposes including to meet redemptions or to settle securities transactions.
Usually only "leveraged" investment companies may borrow in excess of 5% of
their assets; however, the Portfolio will not borrow to increase income but only
as a temporary measure for extraordinary or emergency purposes, including to
meet redemptions or to settle securities transactions which may otherwise
require untimely dispositions of Portfolio securities. The Portfolio will not
purchase securities while borrowings exceed 5% of total assets. (For the
purpose of this restriction, collateral arrangements with respect to the writing
of options, futures contracts, options on futures contracts, and collateral
arrangements with respect to initial
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and variation margin are not deemed to be a pledge of assets and neither such
arrangements nor the purchase or sale of futures or related options are deemed
to be the issuance of a senior security.)
3. Make investments for the purpose of exercising control or management.
Investments by the Portfolio in wholly-owned investment entities created under
the laws of certain countries will not be deemed the making of investments for
the purpose of exercising control or management.
The percentage restrictions described above and in Part B apply only at the time
of investment and require no action by the Portfolio as a result of subsequent
changes in value of the investments or the size of the Portfolio. A
supplementary list of investment restrictions is contained in Part B.
CERTAIN RISKS OF DEBT SECURITIES. Emerging market debt securities in which the
Portfolio may invest may be rated below investment grade or may not be rated at
all. The Portfolio may invest up to 35% of its net assets in such debt
securities. Securities rated below investment grade, I.E. those in the medium
to lower rating categories by nationally recognized statistical rating
organizations, such as Standard & Poor's Corporation ("S&P") and Moody's
Investors Service, Inc. ("Moody's"), and unrated securities of comparable
quality ("high yield/high risk securities") are predominantly speculative with
respect to the capacity to pay interest and repay principal, and generally
involve a greater volatility of price than securities in higher rating
categories. These securities are commonly referred to as "junk" bonds.
The risks associated with high yield/high risk securities are generally greater
than those associated with higher-rated securities. It should be noted that
even bonds rated "BBB" by S&P or "Baa" by Moody's, I.E., the lowest
investment-grade categories assigned by those rating agencies, are described by
them as having speculative characteristics and that changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
of issuers of such bonds to make principal and interest payments than is the
case with higher grade bonds. The Portfolio is not obligated to dispose of
securities due to changes by the rating agencies.
In purchasing high yield/high risk securities, the Portfolio will rely on the
investment adviser's judgment, analysis and experience in evaluating the
creditworthiness of an issuer of such securities. Nonetheless, investors should
carefully review the investment objective and policies of the Portfolio and
consider their ability to assume the investment risks involved before making an
investment. The Portfolio is not authorized to purchase debt securities that
are in default, except for sovereign debt (discussed below) in which the
Portfolio may invest no more than 5% of its total assets while such sovereign
debt securities are in default.
The market values of high yield/high risk securities tend to reflect individual
issuer developments and to exhibit sensitivity to adverse economic changes to a
greater extent than do higher-rated securities, which react primarily to
fluctuations in the general level of interest rates. Issuers of high yield/high
risk securities may be highly leveraged and may not have available to them more
traditional methods of financing. During economic downturns or substantial
periods
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of rising interest rates, issuers of high yield/high risk securities, especially
those which are highly leveraged, may be less able to service their principal
and interest payment obligations, meet their projected business goals or obtain
additional financing. The risk of loss due to default by the issuer is
significantly greater for holders of high yield/high risk securities because
such securities may be unsecured and may be subordinated to other creditors of
the issuer. In addition, the Portfolio may incur additional expenses to the
extent it is required to seek recovery upon a default by the issuer of such an
obligation or participate in the restructuring of such obligation.
Periods of economic uncertainty and change can be expected to result in
increased volatility of market prices of high yield/high risk securities and,
correspondingly, the Portfolio's net asset value to the extent it invests in
such securities. Further, market prices of such securities structured as zero
coupon or pay-in-kind securities are affected to a greater extent by interest
rate changes and thereby tend to be more volatile than any securities which pay
interest periodically and in cash.
High yield/high risk securities may have call or redemption features which would
permit an issuer to repurchase the securities from the Portfolio. If a call
were exercised by the issuer during a period of declining interest rates, the
Portfolio likely would have to replace such called securities with lower
yielding securities, thus decreasing the net investment income to the Portfolio
and dividends to investors.
While a secondary trading market for high yield/high risk securities does exist,
it is generally not as liquid as the secondary market for higher rated
securities. In periods of reduced secondary market liquidity, prices of high
yield/high risk securities may become volatile and experience sudden and
substantial price declines, and the Portfolio may have difficulty in disposing
of particular issues when necessary to meet the Portfolio's liquidity needs or
in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
high yield/high risk securities also may make it more difficult for the
Portfolio to obtain accurate market quotations for purposes of valuing the
Portfolio's investment portfolio. Market quotations are generally available on
many high yield/high risk securities only from a limited number of dealers and
may not necessarily represent firm bids of such dealers or prices for actual
sales. Under such conditions, the Portfolio may have to rely more heavily on
the judgment of the Board to value such securities accurately.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high
yield/high risk securities, particularly in a thinly traded market. Factors
adversely affecting the market value of high yield/high risk securities are
likely to adversely affect the Portfolio's net asset value.
Investment in sovereign debt involves a high degree of risk. Certain emerging
market countries such as Argentina, Brazil and Mexico are among the largest
debtors to commercial banks and foreign governments. At times, certain emerging
market countries have declared moratoria on the payment of principal and/or
interest on outstanding debt. The governmental entity that controls the
repayment of sovereign debt may not be able or willing to repay the principal
and/or interest when due in accordance with the terms of such debt. A
governmental entity's
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willingness or ability to repay principal and interest when it is due may be
affected by many factors such as its cash flow situation, the extent of its
foreign reserves, the availability of sufficient foreign exchange, the relative
size of the debt service burden to the economy as a whole, and political
restraints. The Portfolio, as a holder of sovereign debt, may be requested to
participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceeding by which defaulted
sovereign debt may be collected in whole or in part.
The sovereign debt instruments in which the Portfolio may invest involve great
risk and are deemed to be the equivalent in terms of quality to high yield/high
risk securities discussed above and are subject to many of the same risks as
such securities. Similarly, the Portfolio may have difficulty disposing of
certain sovereign debt obligations because there may be a thin trading market
for such securities. The Portfolio will not invest more than 5% of its total
assets in sovereign debt which in default.
PORTFOLIO TURNOVER. The Portfolio may engage in short-term trading but its
portfolio turnover rate is not expected to exceed 100%. High portfolio turnover
and short-term trading involve correspondingly greater commission expenses and
transaction costs. Also, higher portfolio turnover rates can make it more
difficult for the Portfolio to qualify as a regulated investment company for
federal income tax purposes and a possible increase in short-term capital gains
(or losses). (See "Taxation" in Part B.)
RISK CONSIDERATIONS
FOREIGN INVESTMENTS. All investments, domestic and foreign, involve risk.
Investment in the securities of foreign issuers may involve risks in addition to
those normally associated with investments in the securities of U.S. issuers.
While the Portfolio will generally invest only in securities of companies and
governments in countries that SCMI considers both politically and economically
stable, all foreign investments are subject to risks of foreign political and
economic instability, adverse movements in foreign exchange rates, the
imposition or tightening of exchange controls, or other limitations on
repatriation of foreign capital. Foreign investments are subject to the risk of
changes in foreign governmental attitudes towards private investment that could
lead to nationalization, increased taxation or confiscation of Portfolio assets.
Moreover, (1) dividends payable on foreign securities may be subject to foreign
withholding taxes, thereby reducing the income earned by the Portfolio; (2)
commission rates payable on foreign portfolio transactions are generally higher
than in the United States; (3) accounting, auditing and financial reporting
standards differ from those in the United States, which means that less
information about foreign companies may be available than is generally available
about issuers of comparable securities in the U.S.; (4) foreign securities often
trade less frequently and with lower volume than U.S. securities and
consequently may exhibit greater price volatility; and (5) foreign securities
trading practices, including those involving securities settlement, may expose
the Portfolio to increased risk in the event of a failed trade or the insolvency
of a foreign broker-dealer or registrar.
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REGULATION AND LIQUIDITY OF MARKETS. Government supervision and regulation of
exchanges and brokers in emerging market countries is typically less extensive
than in the United States. These markets may have different clearance and
settlement procedures, and in certain cases, settlements have not kept pace with
the volume of securities transactions, making them difficult to conduct. Delays
in settlement could adversely affect or interrupt the Portfolio's intended
investment program or result in investment losses due to intervening declines in
security values.
Securities markets in emerging market countries are substantially smaller than
U.S. securities markets and have substantially lower trading volume, resulting
in diminished liquidity and greater price volatility. Reduced secondary market
liquidity may make it more difficult for the Portfolio to determine the value of
its portfolio securities or dispose of particular instruments when necessary.
Brokerage commissions and other transaction costs on foreign securities
exchanges are also generally higher.
EMERGING MARKETS. In any emerging market country, there is the possibility of
expropriation of assets, confiscatory taxation, nationalization of companies or
industries, foreign exchange controls, foreign investment controls on daily
stock market movements, default in foreign government securities, political or
social instability, or diplomatic developments that could affect investments in
those countries. In the event of expropriation, nationalization or other
confiscation, the Portfolio could lose its entire investment in a country. The
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be adversely
affected by trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by the
countries with which they trade. There may also be less monitoring and
regulation of emerging markets and the activities of brokers there. Investing
may require that the Portfolio adopt special procedures, seek local government
approvals or take other actions that may incur costs for the Portfolio.
Certain emerging market countries may restrict investment by foreign entities by
limiting the size of foreign investment in certain issuers; requiring prior
approval of foreign investment by the government; imposing additional tax on
foreign investors; or limiting foreign investors to specific classes of
securities of an issuer that have less advantageous rights (with regard to price
or convertibility, for example) than classes available to domiciliaries of the
country. These restrictions or controls may at times limit or preclude
investment in certain securities and may increase the costs and expenses of the
Portfolio.
CURRENCY FLUCTUATIONS AND DEVALUATIONS. Because the Portfolio will invest
heavily in non-U.S. currency-denominated securities, changes in foreign currency
exchange rates will affect the value of the Portfolio's investments. A decline
against the dollar in the value of currencies in which the Portfolio's
investments are denominated will result in a corresponding decline in the dollar
value of the Portfolio's assets. This risk is heightened in some emerging
market countries. Some emerging market countries may also have managed
currencies that do not freely float against the dollar.
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The Portfolio is required to distribute substantially all of its investment
income in U.S. dollars. Because most of the Portfolio's income is received and
realized in foreign currencies, a decline in the value of a particular foreign
currency against the U.S. dollar that occurs after the Portfolio's income has
been earned may require the Portfolio to liquidate some portfolio securities to
acquire sufficient U.S. dollars to make such distributions. Similarly, if the
exchange rate declines between the time the Portfolio incurs expenses in U.S.
dollars and the time such expenses are paid, the Portfolio may be required to
liquidate additional foreign securities to purchase the U.S. dollars required to
meet such expenses.
INFLATION. Several emerging market countries have experienced high, and in some
periods extremely high, rates of inflation in recent years. Inflation and rapid
fluctuations in inflation rates may adversely affect these countries' economies
and securities markets. Further, inflation accounting rules in some emerging
market countries require, for companies that keep accounting records in the
local currency, that certain assets and liabilities be restated on the company's
balance sheet in order to express items in terms of currency of constant
purchasing power. Inflation accounting may indirectly generate losses or
profits for certain emerging market companies.
NON-DIVERSIFIED INVESTMENTS. Because suitable investments in emerging market
countries may be limited, the Portfolio has classified itself as
"non-diversified" under the 1940 Act so that it may invest more than 5% of its
total assets in the securities of a single issuer. This classification may not
be changed without an interestholder vote. However, so that the Portfolio may
continue to qualify as a "regulated investment company" under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), at the close of each
quarter of the taxable year, (1) not more than 25% of the market value of the
Portfolio's total assets will be invested in the securities of a single issuer,
(2) with respect to 50% of the market value of its total assets, not more than
5% will be invested in the securities of a single issuer, and (3) the Portfolio
will not own more than 10% of the outstanding voting securities of a single
issuer. (See "Dividends, Distributions and Taxes".)
To the extent the Portfolio makes investments in excess of 5% of its assets in a
particular issuer, its exposure to credit and market risks associated with that
issuer is increased. Also, since a relatively high percentage of the
Portfolio's assets may be invested in the securities of a limited number of
issuers, the Portfolio may be more susceptible to any single economic, political
or regulatory occurrence than a diversified investment company.
GEOGRAPHIC CONCENTRATION. The Portfolio may invest more than 25% of its total
assets in issuers located in any one country. To the extent it invests in
issuers of one country, the Portfolio is susceptible to factors adversely
affecting that country, including political and economic developments and
foreign exchange rate fluctuations as discussed above. The value of the
Portfolio's assets may fluctuate more widely than the value of shares of a
comparable fund with less geographic concentration.
CERTAIN RISKS OF DEBT SECURITIES. The Portfolio may invest without limitation
in investment grade emerging market debt securities; it may invest up to 35% of
its total assets in debt
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securities that are unrated or are rated below investment grade (below Baa by
Moody's or BBB by S&P; for a further description of S&P's and Moody's securities
ratings. (See the Appendix to the SAI). Note that even debt securities rated
Baa by Moody's are considered to have speculative characteristics. Below
investment grade securities (and unrated securities of comparable quality)
("high yield/high risk securities") are predominantly speculative with respect
to the capacity to pay interest and repay principal, and generally involve a
greater volatility of price than securities in higher rating categories. These
securities are commonly referred to as "junk" bonds. The risks associated with
junk bonds are generally greater than those associated with higher-rated
securities. The Portfolio is not obligated to dispose of securities due to
rating changes by Moody's, S&P or other rating agencies. The Portfolio is not
authorized to purchase debt securities that are in default, except for sovereign
debt (discussed below) in which the Portfolio may invest no more than 5% of its
total assets while such sovereign debt securities are in default.
In purchasing high yield/high risk securities, the Portfolio will rely on the
investment adviser's judgment, analysis and experience in evaluating the
creditworthiness of an issuer of such securities. Nonetheless, investors should
review the investment objective and policies of the Portfolio and consider their
willingness to assume risk before making an investment.
High yield/high risk securities' market values are affected more by individual
issuer developments and are more sensitive to adverse economic changes than are
higher-rated securities. Issuers of high yield/high risk securities may be
highly leveraged and may not have more traditional methods of financing
available to them. During economic downturns or substantial periods of rising
interest rates, issuers of high yield/high risk securities, especially highly
leveraged ones, may be less able to service their principal and interest payment
obligations, meet their projected business goals, or obtain additional
financing. The risk of loss due to default by the issuer is significantly
greater for holders of high yield/high risk securities because such securities
may be unsecured and may be subordinated to other creditors of the issuer. In
addition, the Portfolio may incur additional expenses if it is required to seek
recovery upon a default by the issuer of such an obligation or participate in
the restructuring of such obligation.
Periods of economic uncertainty and change will likely cause increased
volatility in the market prices of high yield/high risk securities and,
correspondingly, the Portfolio's net asset value if it invests in such
securities; market prices of such securities structured as zero coupon or
pay-in-kind securities are more affected by interest rate changes and thus tend
to be more volatile than securities that pay interest periodically and in cash.
High yield/high risk securities may have call or redemption features which would
permit an issuer to repurchase the securities from the Portfolio. If a call
were exercised by the issuer during a period of declining interest rates, the
Portfolio would likely have to replace called securities with lower yielding
securities, thus decreasing the Portfolio's net investment income and dividends
to interestholders.
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While a secondary trading market for high yield/high risk securities does exist,
it is generally not as liquid as the secondary market for higher rated
securities. In periods of reduced secondary market liquidity, prices of high
yield/high risk securities may become volatile and experience sudden and
substantial price declines. The Portfolio may, therefore, have difficulty
disposing of particular issues to meet its liquidity needs or in response to a
specific economic event (such as a deterioration in the creditworthiness of the
issuer). Reduced secondary market liquidity for certain high yield/high risk
securities also may make it more difficult for the Portfolio to obtain accurate
market quotations (for purposes of valuing the Portfolio's investment
portfolio): market quotations are generally available on many high yield/high
risk securities only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales. Under such
conditions, high yield/high risk securities may have to be valued at fair value
as determined by the Schroder Core Board or SCMI under Board-approved
guidelines.
Adverse publicity and investor perceptions (which may not be based on
fundamental analysis) may decrease the value and liquidity of high yield/high
risk securities, particularly in a thinly traded market. Factors adversely
affecting the market value of high yield/high risk securities are likely to
adversely affect the Portfolio's, and thus its interestholders', net asset
value.
SOVEREIGN DEBT. Investment in sovereign debt carries high risk. Certain
emerging market countries such as Argentina, Brazil and Mexico are among the
largest debtors to commercial banks and foreign governments. At times, certain
emerging market countries have declared moratoria on the payment of principal
and/or interest on outstanding debt. The governmental entity that controls the
repayment of sovereign debt may not be able or willing to repay the principal
and/or interest when due in accordance with the terms of such debt. A
governmental entity's willingness or ability to repay principal and interest
when it is due may be affected by many factors, such as its cash flow situation,
the extent of its foreign reserves, the availability of sufficient foreign
exchange, the relative size of the debt service burden to the economy as a
whole, and political restraints. The Portfolio, as a holder of sovereign debt,
may be asked to participate in the rescheduling of such debt and to extend
further loans to governmental entities. There is no bankruptcy proceeding by
which defaulted sovereign debt may be collected.
The sovereign debt instruments in which the Portfolio may invest involve great
risk and are deemed to be the equivalent in terms of quality to high yield/high
risk securities discussed above and are subject to many of the same risks as
such securities. Similarly, the Portfolio may have difficulty disposing of
certain sovereign debt obligations because there may be a thin trading market
for such securities. The Portfolio will not invest more than 5% of its total
assets in sovereign debt instruments that are in default.
ITEM 5. MANAGEMENT OF THE TRUST.
TRUSTEES AND OFFICERS
The business and affairs of the Trust are managed under the direction of the
Board. The Board formulates the general policies of the Portfolio and the Trust
and meets periodically to review the results of the Portfolio, monitor
investment activities and practices and discuss other matters
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affecting the Portfolio and the Trust. Additional information regarding the
Trustees and executive officers of the Trust may be found in Part B.
INVESTMENT ADVISER
Schroder Capital Management International Inc., 787 Seventh Avenue, New York,
New York 10019, serves as investment adviser to the Portfolio pursuant to
advisory agreements with the Trust. SCMI manages the investment and
reinvestment of the assets included in the Portfolio's investment portfolio and
continuously reviews, supervises and administers the Portfolio's investments.
In this regard, it is the responsibility of SCMI to make decisions relating to
the Portfolio's investments and to place purchase and sale orders regarding such
investments with brokers or dealers selected by it in its discretion.
SCMI is a wholly owned U.S. subsidiary of Schroders Incorporated, the wholly
owned U.S. holding company subsidiary of Schroders plc. Schroders plc is the
holding company parent of a large worldwide group of banks and financial
services companies (referred to as the "Schroder Group"), with associated
companies and branch and representative offices located in eighteen countries
worldwide. The Schroder Group specializes in providing investment management
services.
The investment advisory agreement for the Portfolio provides that SCMI is
entitled to receive an advisory fee at an annual rate of 1.00% of the
Portfolio's average daily net assets. [AS OF OCTOBER 1, 1997,] SCMI has agreed,
however, to waive its fee to the extent required to maintain the Portfolio's
expense ratio at or below 1.18% of the Portfolio's average daily net assets.
The Investment Advisory Contract authorizes and directs SCMI to place orders for
the purchase and sale of the Portfolio's investments with brokers and dealers
selected by SCMI in its discretion and to seek "best execution" of such
portfolio transactions. The Portfolio may pay higher than the lowest available
commission rates when SCMI believes it is reasonable to do so in light of the
value of the brokerage and research services provided by the broker effecting
the transaction. It should be noted that costs associated with transactions in
foreign securities are generally higher than with transactions in U.S.
securities. However, the Portfolio will seek to achieve the best net results in
effecting such transactions.
Subject to the Portfolio's policy of obtaining the best price consistent with
quality of execution on transactions, SCMI may employ Schroder Securities
Limited and its affiliates (collectively, "Schroder Securities"), affiliates of
SCMI, to effect transactions of the Portfolio on certain foreign securities
exchanges. Because of the affiliation between SCMI and Schroder Securities, the
Portfolio's payment of commissions to Schroder Securities is subject to
procedures adopted by the Board to provide that such commissions will not exceed
the usual and customary brokers' commissions. No specific portion of the
Portfolio's brokerage will be directed to Schroder Securities and in no event
will Schroder Securities receive such brokerage in recognition of research
services.
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Although the Portfolio does not currently engage in directed brokerage
arrangements to pay expenses, it may do so in the future. These arrangements,
whereby brokers executing the Portfolio's portfolio transactions would agree to
pay designated expenses of the Portfolio if brokerage commissions generated by
the Portfolio reached certain levels, might reduce these expenses. As
anticipated, these arrangements would not materially increase the brokerage
commissions paid by a Portfolio. Because brokerage commissions are not
reflected in Portfolio expenses, however, certain expenses might not be fully
set forth in the fee table, per share table, and financial statements of
registered open-end investment companies that invest in the Portfolio and might
therefore appear lower than actual expenses incurred.
PORTFOLIO MANAGERS. The Portfolio's current investment managers include
John A. Troiano, a Vice President of the Trust and Schroder Core, who has
managed the Portfolio's assets since its inception, assisted by the management
team of Heather Crighton and Mark Bridgeman, who are responsible for the
day-to-day management of the investment portfolio. Mr. Troiano, Chief Executive
Officer of SCMI since April 1, 1997, has been a Managing Director of SCMI since
October 1995 and has been employed by various Schroder Group companies in the
investment research and portfolio management areas since 1981. Ms. Crighton is
a Vice President of SCMI and has been employed by SCMI/various Schroder Group
companies in the investment research and portfolio management areas since 1992.
Mr. Bridgeman, also a Vice President of SCMI, has been employed by various
Schroder Group companies in the investment research and portfolio management
areas since 1990.
ADMINISTRATIVE SERVICES
On behalf of the Portfolio, the Trust has entered into an administration
agreement with Schroder Fund Advisors Inc. ("Schroder Advisors"), 787 Seventh
Avenue, New York, New York 10019. Schroder Advisors is a wholly owned
subsidiary of SCMI. For these services, Schroder Advisors is entitled to
receive an administration fee at an annual rate of 0.05% of the Portfolio's
average daily net assets. From time to time, Schroder Advisors voluntarily may
agree to waive all or a portion of its fees.
In addition, the Trust has entered into a subadministration agreement with Forum
Administrative Services, Limited Liability Company ("Forum"), Two Portland
Square, Portland, Maine 04101. For these sub-administration services, Forum is
entitled to receive a subadministration fee at an annual rate of 0.10% of the
Portfolio's average daily net assets. From time to time, Forum voluntarily may
agree to waive all or a portion of its fees.
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INTERESTHOLDER RECORDKEEPER AND FUND ACCOUNTANT
Forum Financial Corp. ("FFC"), Two Portland Square, Portland, Maine 04101, is
the Trust's interestholder recordkeeper and fund accountant. FFC is an
affiliate of Forum. For recordkeeping services with respect to the Portfolio's
Interests, FFC is entitled to receive a fee of $12,000 per year plus $25 per
interestholder account. For fund accounting services with respect to the
Portfolio, FFC is entitled to receive a base fee of $60,000 per year for the
Portfolio ($36,000 plus $24,000 for international portfolios) plus additional
amounts depending on the assets of the Portfolio, the number and type of
securities held by the Portfolio and the portfolio turnover rate of the
Portfolio. From time to time, FFC voluntarily may agree to waive all or a
portion of its fees.
EXPENSES
The Portfolio is obligated to pay for all of its expenses. These expenses
include: governmental fees; interest charges; taxes; brokerage fees and
commissions; insurance premiums; investment advisory, custodial, administrative
and transfer agency and fund accounting fees, as described above; compensation
of certain of the Trust's Trustees, costs of membership trade associations; fee
and expenses of independent auditors and legal counsel to the Trust; and
expenses of calculating the net asset value of and the net income of the
Portfolios. The Portfolio's expenses comprise Trust expenses attributable to
the Portfolio, which are allocated to the Portfolio, and expenses not
attributable to the Portfolio, which are allocated among the portfolios in
proportion to their average net assets or as otherwise determined by the Board.
CUSTODIAN
The Chase Manhattan Bank, through its Global Securities Services division
located in London, England, acts as custodian of the Portfolio's assets and
employs foreign subcustodians to maintain the Portfolio's foreign assets outside
the U.S.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Trust was organized as a business trust under the laws of the State of
Delaware. Under the Trust Instrument, the Trustees are authorized to issue
Interests in separate series of the Trust. The Trust currently has five
portfolios and the Trust reserves the right to create additional portfolios.
Each investor in the Portfolio is entitled to participate equally in the
Portfolio's earnings and assets and to a vote in proportion to the amount of
its investment in the Portfolio. Investments in the Portfolio may not be
transferred, but an investor may withdraw all or any portion of its investment
at any time at net asset value.
Investments in the Portfolio have no preemptive or conversion rights and are
fully paid and non-assessable, except as set forth below. The Trust is not
required and has no current intention to hold annual meetings of investors, but
the Trust will hold special meetings of investors when in
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the Trustees' judgment it is necessary or desirable to submit matters to an
investor vote. Generally, Interests are voted in the aggregate without
reference to a particular portfolio, except if the matter affects only one
portfolio or portfolio voting is required, in which case Interests are voted
separately by portfolio. Investors have the right to remove one or more
Trustees without a meeting by a declaration in writing by a specified number of
investors. Upon liquidation of the Portfolio, investors will be entitled to
share pro rata in the Portfolio's net assets available for distribution to
investors.
The Portfolio's net income consists of: (1) all dividends, accrued interest
(including earned discount, both original issue and market discount), and other
income, including any net realized gains on the Portfolio's assets; less (2) all
actual and accrued expenses of the Portfolio, amortization of any premium, and
net realized losses on the Portfolio's assets (all as determined in accordance
with generally accepted accounting principles). All of the Portfolio's net
income is allocated pro rata among the investors in the Portfolio. The
Portfolio's net income generally is not distributed to the investors in the
Portfolio except as determined by the Trustees from time to time but instead is
included in the net asset value of the investors' respective Interests in the
Portfolio.
The Portfolio is not required to pay federal income taxes on its ordinary income
and capital gain, as it is treated as a partnership for federal income tax
purposes. All interest, dividends and gains and losses of the Portfolio are
deemed to "pass through" to its investors, regardless of whether such interest,
dividends or gains are distributed by the Portfolio or losses are realized by
the Portfolio. Under the anticipated method of the Portfolio's operations, it
will not be subject to any income tax. However, each investor in the Portfolio
will be taxed on its proportionate share (as determined in accordance with the
Trust's Trust Instrument and the Code) of the Portfolio's ordinary income and
capital gain, to the extent that the investor is subject to tax on its income.
It is intended that the Portfolio's assets, income, and distributions will be
managed in such a way that an investor in the Portfolio will be able to satisfy
the requirements of Subchapter M of the Code, assuming that the investor
invested all of its assets in the Portfolio. The Trust will inform investors of
the amount and nature of such income or gain.
Investor inquiries may be directed to Forum Financial Services, Inc. (FFSI).
ITEM 7. PURCHASE OF SECURITIES.
Interests in the Portfolio are issued solely in private placement transactions
that do not involve any "public offering" within the meaning of Section 4(2) of
the 1933 Act. (See "General Description of Registrant".) All investments in
the Portfolio are made without a sales load, at the net asset value next
determined after an order is received by the Portfolio.
A Subscription Agreement must be completed before the Portfolio will accept a
new interestholder.
Net asset value is calculated as of 4:00 p.m. (Eastern time), Monday through
Friday, on each day that the New York Stock Exchange is open for trading (which
excludes the following national
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business holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day)("Portfolio
Business Day"). Net asset value per Interest is calculated by dividing the
aggregate value of the Portfolio's assets less all liabilities by the number of
Interests outstanding. Portfolio securities listed on recognized stock
exchanges are valued at the last reported trade price, prior to the time when
the assets are valued, on the exchange on which the securities are principally
traded. Listed securities traded on recognized stock exchanges where last trade
prices are not available are valued at mid-market prices. Securities traded in
over-the-counter markets, or listed securities for which no trade is reported on
the valuation date, are valued at the most recent reported mid-market price.
Other securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith using methods
approved by the Board.
Trading in securities on European and Far Eastern Securities exchanges and
over-the-counter markets may not take place on every day that the New York Stock
Exchange is open for trading. Furthermore, trading takes place in various
foreign markets on days on which the Portfolio's net asset value is not
calculated. If events materially affecting the value of foreign securities
occur between the time when their price is determined and the time when net
asset value is calculated, such securities will be valued at fair value as
determined in good faith by the Board.
All assets and liabilities of the Portfolio denominated in foreign currencies
are converted to U.S. dollars at the mid price of such currencies against U.S.
dollars last quoted by a major bank prior to the time when net asset value of
the Portfolio is calculated.
Registered investment companies are subject to no minimum initial or subsequent
investment amount. For other qualified investors, the minimum initial
investment amount is $50 million, and there is no minimum subsequent investment
amount. However, since the Portfolio seeks to be as fully invested at all times
as is reasonably practicable in order to enhance the return on its assets,
investments must be made in federal funds (I.E., monies credited to the account
of the Trust's custodian by a Federal Reserve Bank). Minimum investment amounts
may be waived in the discretion of the Portfolio's investment adviser, SCMI.
Purchase payments may be transmitted by Federal Reserve Bank wire directly to
the Portfolio as follows:
The Chase Manhattan Bank
New York, NY
ABA No.: 021000021
For Credit To: Forum Financial Corp.
Account No.: [applied for]
Ref.: Schroder EM Core Portfolio
Account of: (interestholder name)
Account Number: (interestholder account number)
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The wire order must specify the name of the Portfolio, the account name and
number, address, confirmation number, amount to be wired, name of the wiring
bank, and name and telephone number of the person to be contacted in connection
with the order. Wire orders received prior to 4:00 p.m. (Eastern time) on each
Portfolio Business Day will be processed at the net asset value determined as of
that day. Wire orders received after 4:00 p.m. (Eastern time) will be processed
at the net asset value determined as of the next Portfolio Business Day.
The Trust reserves the right to cease accepting investments in the Portfolio at
any time or to reject any investment order.
The exclusive placement agent for the Trust is FFSI. FFSI receives no
compensation for serving as the exclusive placement agent for the Trust.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the Portfolio may withdraw all or any portion of its investment
in the Portfolio at the net asset value next determined after a withdrawal
request in proper form is furnished by the investor to the Trust. Withdrawal
proceeds are paid by the Portfolio in federal funds normally on the business day
after the withdrawal is effected, but in any event within seven days.
Investments in the Portfolio may not be transferred. The right of redemption
may not be suspended nor the payment dates postponed for more than seven days
except when the New York Stock Exchange is closed (or when trading thereon is
restricted) for any reason other than its customary weekend or holiday closings
or under any emergency or other circumstances as determined by the Securities
and Exchange Commission.
Portfolio Interests are redeemed at their next determined net asset value after
receipt by the Portfolio (at the address set forth above under "Purchase of
Shares") of a redemption request in proper form. Redemption requests may be
made between 9:00 a.m. and 6:00 p.m. (Eastern time) on each Business Day.
Redemption requests that are received prior to 4:00 p.m. (Eastern time) are
processed at the net asset value determined as of that day. Redemption requests
that are received after 4:00 p.m. (Eastern time) are processed at the net asset
value determined the next Portfolio Business Day.
Telephone redemption requests may be made by telephoning the transfer agent at
800-344-8332. An interestholder must provide the transfer agent with the name
of the Portfolio, the dollar amount or number of Interests to be redeemed,
interestholder account number, and some additional form of identification such
as a password. A redemption by telephone may be made only if the telephone
redemption privilege option has been elected on the Subscription Agreement or
otherwise in writing. In an effort to prevent unauthorized or fraudulent
redemption requests by telephone, reasonable procedures will be followed by the
transfer agent to confirm that telephone instructions are genuine. The transfer
agent and the Trust generally will not be liable for any losses due to
unauthorized or fraudulent redemption requests, but may be liable if it does not
follow these procedures. In times of drastic economic or market change it may
be difficult to make redemptions by telephone. If an interestholder cannot
reach the transfer agent by telephone, redemption requests may be mailed or hand
delivered to the transfer agent.
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Redemption proceeds normally are paid in cash. Redemptions from the Portfolio
may be made wholly or partially in portfolio securities, however, if the Board
determines that payment in cash would be detrimental to the best interests of
the Portfolio. The Trust has filed an election with the Commission pursuant to
which the Portfolio will only consider effecting a redemption in portfolio
securities if the particular interestholder is redeeming more than $250,000 or
1% of the Portfolio's net asset value, whichever is less, during any 90-day
period. It is the Portfolio's policy, however, to redeem Interests solely in
cash up to the greater of $5,000,000 or 5% of net assets during any 90-day
period. This policy may involve the sale of certain portfolio securities before
the time SCMI might otherwise deem appropriate and, therefore, may negatively
impact the Portfolio's investment portfolio.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
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PART A
(PRIVATE PLACEMENT MEMORANDUM)
SCHRODER CAPITAL FUNDS
--------
SCHRODER GLOBAL GROWTH PORTFOLIO
OCTOBER 1, 1997
INTRODUCTION
Schroder Capital Funds (the "Trust") is registered as an open-end management
investment company under the Investment Company Act of 1940 (the "1940 Act").
The Trust is authorized to offer beneficial interests (Interests") in separate
series, each with a distinct investment objective and policies (each, a
"portfolio" and collectively, the "portfolios"). The Trust currently offers six
portfolios: Schroder Global Growth Portfolio (the "Portfolio"), International
Equity Fund, Schroder Emerging Markets Fund Institutional Portfolio, Schroder
U.S. Smaller Companies Portfolio, Schroder International Smaller Companies
Portfolio and Schroder EM Core Portfolio. Additional portfolios may be added
in the future. This Part A relates solely to the Portfolio.
The Trust does not offer its Interests directly to the public; Interests are
offered on a no-load basis exclusively to various qualified investors (including
other investment companies) as described in Item 4 below. An investor that is
an investment company or other collective investment vehicle seeks to achieve
its investment objective by holding Interests in another portfolio, instead of
separately managing its own portfolio of investment securities and related
assets.
Interests of the Trust are not offered publicly and, accordingly, are not
registered under the Securities Act of 1933 (the "1933 Act"). Accordingly,
consistent with paragraph 4 of Instruction F of the General Instructions to Form
N-1A, responses to Items 1, 2, 3 and 5A of that Form have been omitted.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
The Trust was organized as a business trust under the laws of the State of
Delaware on September 7, 1995, under a Trust Instrument dated September 6, 1995.
The Trust has an unlimited number of authorized Interests. The assets of the
Portfolio and of any additional portfolios now existing or created in the
future, belong only to that portfolio. The assets belonging to a portfolio are
charged with the liabilities of and all expenses, costs, charges and reserves
attributable to that portfolio. The Portfolio is classified as "diversified"
under the 1940 Act and commenced operations on October 1, 1997.
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Interests in the Portfolio are offered solely in private placement transactions
that do not involve any "public offering" within the meaning of Section 4(2) of
the 1933 Act. Investments in the Portfolio may only be made by certain
qualified investors (excluding S corporations, partnerships, and grantor trusts
beneficially owned by any individuals, S corporations, or partnerships).
Investors may be organized within or outside the U.S. This registration
statement does not constitute an offer to sell, or the solicitation of an offer
to buy, any "security" within the meaning of the 1933 Act.
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek long-term growth of capital by
investing primarily in common stocks of established companies throughout the
world, including the United States. There can be no assurance that the
Portfolio will achieve its investment objective.
INVESTMENT POLICIES
The Portfolio's investment objective and fundamental investment policies may not
be changed without approval of the holders of a majority of the outstanding
voting Interests (defined in the same manner as the phrase "vote of a majority
of the outstanding voting securities" is defined in the 1940 Act) of the
Portfolio. Unless otherwise indicated, investment policies are not fundamental
and may be changed by the Trust's Board of Trustees (the "Board") without prior
investor approval. Additional investment techniques, features and restrictions
concerning the Portfolio's investments are described below and under "Investment
Restrictions" and "Risk Considerations" in Part A and under "Investment
Policies" in Part B.
Global Growth Portfolio invests in common stocks of established companies
located in the developed, newly industrialized and emerging markets. Normally
the Portfolio will invest in companies located in at least five countries, one
of which will be the United States. While the Portfolio can purchase stocks
without regard to a company's market capitalization, investments will generally
be concentrated in large and, to a lesser extent, medium-sized company's. The
median annual market capitalization of the companies in which the Portfolio
invests will average greater than $13.5 billion. The percentage of the
Portfolio's assets invested in U.S. and non-U.S. stocks will vary over time in
accordance with the outlook of the investment adviser.
Stock selection is at the heart of the investment adviser's investment process.
The investment adviser emphasizes fundamental company analysis in its approach
to selecting investments for the Portfolio. The investment adviser seeks
companies that it believes have a sustainable competitive advantage and whose
growth potential is undervalued by investors. In selecting companies for
investment, the investment adviser considers historical growth rates and future
growth prospects, management capability, competitive position in both domestic
and export markets and other factors. The investment adviser will seek to add
value through active geographic allocation. The investment adviser's allocation
decisions are based upon its assessment of the likelihood that the country will
have a favorable long-term business environment in which corporate growth will
not be impeded by adverse macroeconomic or political factors.
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The Portfolio may invest in debt securities issued or guaranteed by foreign
governments (including countries, provinces and municipalities) or their
agencies and instrumentalities; debt securities issued or guaranteed by
international organizations designated or supported by multiple foreign
governmental entities (which are not obligations of foreign governments) to
promote economic reconstruction or development; and debt securities issued by
corporations or financial institutions.
GEOGRAPHIC CONCENTRATION. The Portfolio may invest more than 25% of its total
assets in issuers located in any one country and to the extent that it does so,
is susceptible to a range of factors that could adversely affect that country,
including the political and economic developments and foreign exchange rate
fluctuations discussed below. As a result of investing substantially in one
country, the value of the Portfolio's assets may fluctuate more widely than the
value of shares of a comparable fund with a lesser degree of geographic
concentration.
RISKS OF INTERNATIONAL INVESTING. All investments, domestic and foreign,
involve risks. Investment in the securities of foreign issuers may involve
risks in addition to those normally associated with investments in the
securities of U.S. issuers. While the Portfolio will generally invest only in
securities of companies and governments in countries that the investment
adviser, in its judgment, considers both politically and economically stable,
all foreign investments are subject to risks of foreign political and economic
instability, adverse movements in foreign exchange rates, the imposition or
tightening of exchange controls or other limitations on repatriation of foreign
capital. Foreign investments are subject to the risk of changes in foreign
governmental attitudes towards private investment that could lead to
nationalization, increased taxation or confiscation of Portfolio assets.
Moreover, (1) dividends payable on foreign securities may be subject to foreign
withholding taxes, thereby reducing the income earned by the Portfolio; (2)
commission rates payable on foreign portfolio transactions are generally higher
than in the United States; (3) accounting, auditing and financial reporting
standards differ from those in the United States, which means that less
information about foreign companies may be available than is generally available
about issuers of comparable securities in the United States.; (4) foreign
securities often trade less frequently and with lower volume than U.S.
securities and consequently may exhibit greater price volatility; and (5)
foreign securities trading practices, including those involving securities
settlement, may expose the Portfolio to increased risk in the event of a failed
trade or the insolvency of a foreign broker-dealer or registrar.
EMERGING MARKETS. Investing in emerging market countries generally presents
greater risk than does other foreign investing. In any emerging market country,
there is the increased possibility of expropriation of assets, confiscatory
taxation, nationalization of companies or industries, foreign exchange controls,
foreign investment controls on daily stock market movements, default in foreign
government securities, political or social instability, or diplomatic
developments that could affect investments in those countries. In the event of
expropriation, nationalization or other confiscation, the Portfolio could lose
its entire investment in the country involved. The economies of developing
countries are more likely to be adversely affected by trade barriers, exchange
controls, managed adjustments in relative currency values and other
protectionist
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measures imposed or negotiated by the countries with which they trade. There
may also be less monitoring and regulation of emerging markets and the
activities of brokers there. Investing may require that the Portfolio adopt
special procedures, seek local government approvals or take other actions that
may incur costs for the Portfolio.
Certain emerging market countries may restrict investment by foreign investors.
These restrictions or controls may at times limit or preclude investment in
certain securities and may increase the costs and expenses of the Portfolio.
Several emerging market countries have experienced high, and in some periods
extremely high, rates of inflation in recent years. Inflation and rapid
fluctuations in inflation rates may adversely affect these countries' economies
and securities markets. Further, inflation accounting rules in some emerging
market countries may indirectly generate losses or profits for certain emerging
market companies.
CURRENCY FLUCTUATIONS AND DEVALUATIONS. Because the Portfolio will invest
heavily in non-U.S. currency-denominated securities, changes in foreign currency
exchange rates will affect the value of the Portfolio's investments. A decline
against the dollar in the value of currencies in which the Portfolio's
investments are denominated will result in a corresponding decline in the dollar
value of the Portfolio's assets. This risk is heightened in some emerging
market countries.
The Portfolio may at times have to liquidate portfolio securities in order to
acquire sufficient U.S. dollars to fund redemptions of the Funds or other
investors or to purchase the U.S. dollars in order to pay its expenses. Changes
in foreign currency exchange rates may contribute to the need to liquidate
portfolio securities.
FOREIGN EXCHANGE CONTRACTS. Because the Portfolio will invest in non-U.S. dollar
denominated securities, changes in foreign currency exchange rates will affect
the value of the Portfolio's investments. A decline against the dollar in the
value of currencies in which the Portfolio's investments are denominated will
result in a corresponding decline in the dollar value of its assets. This risk
tends to be heightened in the case of investing in certain emerging market
countries. For example, some currencies of emerging market countries have
experienced repeated devaluations relative to the U.S. dollar, and major
adjustments have periodically been made in certain of such currencies. Some
emerging market countries may also have managed currencies that do not float
freely against the dollar. Exchange rates are influenced generally by the
forces of supply and demand in the foreign currency markets and by numerous
other political and economic events occurring outside the United States, many of
which may be difficult, if not impossible, to predict. When investing in
foreign securities, the Portfolio usually effects currency exchange transactions
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange
market. The Portfolio incurs foreign exchange expenses in converting assets
from one currency to another.
The Portfolio may enter into foreign currency forward contracts to purchase or
sell foreign currencies in anticipation of its currency requirements and to
protect against possible adverse movements in foreign exchange rates. A forward
currency contract is an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. This
method
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of attempting to hedge the value of portfolio securities against a decline in
the value of a currency does not eliminate fluctuations in the underlying prices
of the securities and may expose the Portfolio to the risk that the counterparty
is unable to perform. Although such contracts may reduce the risk of loss to the
Portfolio due to a decline in the value of the currency sold, they also limit
any possible gain that might result should the value of such currency rise. The
Portfolio does not intend to maintain a net exposure to such contracts where the
fulfillment of obligations under such contracts would obligate it to deliver an
amount of foreign currency in excess of the value of its portfolio securities or
other assets denominated in the currency. The Portfolio will not enter into
these contracts for speculative purposes and will not enter into non-hedging
currency contracts. These contracts involve a risk of loss if the investment
adviser fails to predict currency values correctly. The Portfolio has no
present intention to enter into currency futures or options contracts, but may
do so in the future.
DEBT SECURITIES. The Portfolio may seek capital appreciation through investment
in convertible or non-convertible debt securities. Capital appreciation in debt
securities may arise as a result of a favorable change in relative foreign
exchange rates, in relative interest rate levels, or in the creditworthiness of
issuers. The receipt of income from these securities is incidental to the
Portfolio's objective of long-term capital appreciation. Such income can be
used, however, to offset the operating expenses of the Portfolio. The Portfolio
will not seek to benefit from anticipated short-term fluctuations in currency
exchange rates. The Portfolio may invest to a certain extent in debt securities
in order to participate in debt-to-equity conversion programs incident to
corporate reorganizations.
The following pages contain additional information about the securities in which
the Portfolio may invest, strategies SCMI may employ in pursuit of the
Portfolio's objective, and a summary of related risks. A complete listing of
the Portfolio's investment restrictions and more detailed information about the
Portfolio's investments is contained in Part B. Policy limitations and
investment restrictions generally are considered at the time of purchase.
BORROWING AND LENDING. As a fundamental policy, the Portfolio may borrow money
but will limit borrowings to amounts not in excess of 33 1/3% of the value of
the Portfolio's total assets. Borrowing for other than temporary or emergency
purposes or meeting redemption requests is not expected to exceed 5% of the
value of the Portfolio's assets. Certain transactions, such as reverse
repurchase agreements, that are similar to borrowings are not treated as
borrowings to the extent that the are fully collateralized. The Portfolio may
lend its investment securities to brokers, dealers and financial institutions
for the purpose of realizing additional income. The total market value of
securities loaned will not at any time exceed one-third of the value of the
total assets of the Portfolio. Lending portfolio securities may result in the
possible loss of rights in the collateral should the borrower fail financially.
U.S. GOVERNMENT SECURITIES. U.S. Government Securities are obligations issued
or guaranteed as to principal and interest by the United States Government, its
agencies or instrumentalities. U.S. Government Securities include obligations
backed by the full faith and credit of the U.S. Government as well as securities
supported primarily or solely by the creditworthiness of the agency or
instrumentality issuing the security, such as securities of the Federal National
Mortgage
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Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation ("Freddie
Mac") and the Student Loan Marketing Association ("Sallie Mae"). There is no
guarantee that the U.S. Government will support securities not backed by its
full faith and credit.
ILLIQUID SECURITIES. Illiquid securities are securities that cannot be disposed
of within seven days in the ordinary course of business at approximately the
amount at which the Portfolio has valued the securities and include, among other
things, repurchase agreements not entitling the holder to payment within seven
days and securities subject to restrictions on resale (other than those
determined to be liquid by the investment advisers). Limitations on resale may
have an adverse effect on the marketability of portfolio securities, and the
Portfolio might also have to register securities subject to restrictions on
resale in order to dispose of them, resulting in expense and delay. The
Portfolio might not be able to dispose of restricted or other securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemptions. There can be no assurance that a liquid market will
exist for any security at any particular time.
TEMPORARY DEFENSIVE POSITION. When business or financial conditions warrant,
the Portfolio may assume a temporary defensive position and invest without limit
in cash or prime quality cash equivalents, including: (1) short-term U.S.
Government Securities; (2) certificates of deposit, bankers' acceptances and
interest-bearing savings deposits of commercial banks doing business in the
United States; (3) commercial paper; (4) repurchase agreements; and (5) shares
of "money market funds" registered under the 1940 Act within the limits
specified therein. During periods when and to the extent that the Portfolio has
assumed a temporary defensive position, it may not be pursuing its investment
objective. Apart from temporary defensive purposes, the Portfolio may at any
time invest a portion of its assets in cash and cash equivalents or, in other
investment companies to the extent permitted under the 1940 Act. Except during
periods when the Portfolio assumes a temporary defensive position, the Portfolio
will have at least 65% of its total assets invested in common stock.
REPURCHASE AGREEMENTS. Repurchase Agreements involve the purchase of a security
by the Portfolio and a simultaneous agreement by the seller (generally a bank or
dealer) to repurchase the security from the Portfolio at a specified date or
upon demand. This technique offers a method of earning income on idle cash.
Repurchase agreements involve the risk that the seller will fail to repurchase
the security as agreed. In that case, the Portfolio will bear the risk of
market value fluctuations until the security can be sold and may encounter
delays and incur costs in liquidating the security.
COMMON AND PREFERRED STOCK AND WARRANTS. The Portfolio may invest in common and
preferred stock. Common stockholders are the owners of the company issuing the
stock and, accordingly, vote on various corporate governance matters such as
mergers. They are not creditors of the company, but rather, upon liquidation of
the company, are entitled to their pro rata share of the company's assets after
creditors (including fixed income security holders) and preferred stockholders,
if any, are paid. Preferred stock is a class of stock having a preference over
common stock as to dividends and, generally, as to the recovery of investment. A
preferred stockholder is also a shareholder and not a creditor of the company.
Equity securities owned by the Portfolio may be traded in the over-the-counter
market or on a securities exchange, but may
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not be traded every day or in the volume typical of securities traded on a major
U.S. national securities exchange. As a result, disposition by the Portfolio of
a security to meet withdrawals by interest holders or otherwise may require the
Portfolio to sell these securities at a discount from market prices, to sell
during periods when disposition is not desirable, or to make many small sales
over a lengthy period of time. The market value of all securities, including
equity securities, is based upon the market's perception of value and not
necessarily the "book value" of an issuer or other objective measure of a
company's worth.
The Portfolio may also invest in warrants, which are options to purchase an
equity security at a specified price (usually representing a premium over the
applicable market value of the underlying equity security at the time of the
warrant's issuance) and usually during a specified period of time.
DERIVATIVE INVESTMENTS. The Portfolio may from time to time use various
derivative instruments to protect its investment portfolio from movements in
securities prices and interest rates. The Portfolio may also use a variety of
currency hedging techniques, including forward currency contracts, to manage
exchange rate risk when investing in securities denominated in foreign
currencies.
Derivative instruments include futures contracts on securities, financial
indices and foreign currencies, options on contracts and on securities,
financial indices and foreign currencies and interest rate swaps and
swap-related products. The Portfolio uses derivative instruments primarily to
hedge the value of its portfolio against potential adverse movements in
securities prices, foreign currency markets or interest rates. To a limited
extent, the Portfolio may also use derivative instruments for non-hedging
purposes such as seeking to increase the Portfolio's income or otherwise seeking
to enhance return.
The use of derivative instruments exposes the Portfolio to additional investment
risks and transaction costs. Risks inherent in the use of derivative
instruments include: (1) the risk that interest rates, securities prices and
currency markets will not move in the directions that the portfolio manager
anticipates; (2) imperfect correlation between the price of derivative
instruments and movements in the prices of the securities, interest rates or
currencies being hedged; (3) the fact that skills needed to use these strategies
are different from those needed to select portfolio securities; (4) inability to
close out certain hedged positions to avoid adverse tax consequences; (5) the
possible absence of a liquid secondary market for any particular instrument and
possible exchange-imposed price fluctuation limits, either of which may make it
difficult or impossible to close out a position when desired; (6) leverage risk,
that is, the risk that adverse price movements in an instrument can result in a
loss substantially greater than the Portfolio's initial investment in that
instrument (in some cases, the potential loss is unlimited); and (7)
particularly in the case of privately negotiated instruments, the risk that the
counterparty will fail to perform its obligations, which could leave the
Portfolio worse off than if it had not entered into the position.
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Although the Portfolio believes that the use of derivative instruments will be
beneficial, the Portfolio's performance could be worse than if the Portfolio had
not used such instruments if the investment adviser's judgment proves incorrect.
INVESTMENT RESTRICTIONS
The following fundamental restrictions of the Portfolio are designed to reduce
its exposure in specific situations. The Portfolio will not:
(a) Invest more than 5% of its assets in the securities of any single issuer.
(This restriction does not apply to securities issued by the U.S. Government,
its agencies, instrumentalities or government-sponsored enterprises.)
(b) Purchase more than 10% of the voting securities of any one issuer.
Moreover, the Portfolio will not purchase more than 3% of the outstanding
securities of any closed-end investment company. (Any such purchase of
securities issued by a closed-end investment company will otherwise be made in
full compliance with Sections 12(d)(1)(a)(i), (ii) and (iii) of the Act.)
(c) Invest more than 10% of its assets in "restricted securities" which
include: (1) securities which are not readily marketable, and (2) securities of
issuers having a record (together with all predecessors) of less than three
years of continuous operation.
(d) Invest more than 25% of its assets in any one industry.
(e) Borrow money, except from banks for temporary emergency purposes and then
only in an amount not exceeding 5% of the value of the total assets of the
Portfolio.
(f) Pledge, mortgage or hypothecate its assets to an extent greater than 10% of
the value of the total assets of the Portfolio.
The percentage restrictions described above and in Part B apply only at the time
of investment and require no action by the Portfolio as a result of subsequent
changes in value of the investment or the size of the Portfolio. A
comprehensive list of investment restrictions is contained in Part B.
RISK CONSIDERATIONS
FOREIGN INVESTMENTS. All investments, domestic and foreign, involve risk.
Investment in the securities of foreign issuers may involve risks in addition to
those normally associated with investments in the securities of U.S. issuers.
While the Portfolio generally invests only in securities of companies and
governments in countries that SCMI considers both politically and economically
stable, all foreign investments are subject to risks of foreign political and
economic instability, adverse movements in foreign exchange rates, the
imposition or tightening of exchange controls, or other limitations on
repatriation of foreign capital. Foreign investments are subject to the risk of
changes in foreign governmental attitudes towards private investment that could
lead to nationalization, increased taxation or confiscation of Portfolio assets.
Moreover: (1) dividends payable on foreign securities may be subject to foreign
withholding taxes, thereby reducing the income earned by the Portfolio; (2)
commission rates payable on
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foreign portfolio transactions are generally higher than in the United States;
(3) accounting, auditing and financial reporting standards differ from those in
the United States, which means that less information about foreign companies may
be available than is generally available about issuers of comparable securities
in the U.S.; (4) foreign securities often trade less frequently and with lower
volume than U.S. securities and consequently may exhibit greater price
volatility; and (5) foreign securities trading practices, including those
involving securities settlement, may expose the Portfolio to increased risk in
the event of a failed trade or the insolvency of a foreign broker-dealer or
registrar.
CURRENCY FLUCTUATIONS AND DEVALUATIONS. Because the Portfolio invests in
non-U.S. currency-denominated securities, changes in foreign currency exchange
rates affect the value of the Portfolio's investments. A decline against the
dollar in the value of currencies in which the Portfolio's investments are
denominated results in a corresponding decline in the dollar value of the
Portfolio's assets.
The Portfolio is required to distribute substantially all of its investment
income in U.S. dollars. Because most of the Portfolio's income is received and
realized in foreign currencies, a decline in the value of a particular foreign
currency against the U.S. dollar that occurs after the Portfolio's income has
been earned may require liquidation of some portfolio securities to acquire
sufficient U.S. dollars to make such distributions. Similarly, if the exchange
rate declines between the time the Portfolio incurs expenses in U.S. dollars and
the time such expenses are paid, liquidation of additional foreign securities to
purchase the U.S. dollars may be required to meet such expenses.
Debt securities are generally subject to two kinds of risk -- credit risk and
market risk. Credit risk refers to the ability of the debtor, and any other
obligor, to repay principal and pay interest on the debt as it becomes due. The
Portfolio may, from time to time, invest in debt securities with high risk and
high yields (as compared to other debt securities meeting the Portfolio's
investment criteria). The debt securities in which the Portfolio invests may be
unrated but will not be in default at the time of purchase. Market risk refers
to the tendency of the value of debt securities to vary inversely with interest
rate changes. Certain debt instruments may also be subject to extension risk,
which refers to change in total return on a debt instrument resulting from
extension or abbreviation of the instrument's maturity.
HIGH-YIELD, HIGH-RISK SECURITIES. The Portfolio may invest up to 10% of its
assets in debt securities that are rated below investment grade (I.E., below
"BBB" by S&P or "Baa" by Moody's). These debt securities have speculative
characteristics, and changes in economic conditions or individual corporate
developments are more likely to lead to a weakened capacity to make principal
and interest payments than is the case of higher-grade bonds (See "Risk
Considerations" and "Commercial Paper".)
ITEM 5. MANAGEMENT OF THE TRUST.
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TRUSTEES AND OFFICERS. The Trust's business and affairs are managed under the
Board's direction. The Board formulates the Trust's and Portfolio's general
policies and meets periodically to review the Portfolio's results, monitor
investment activities and practices and discuss other matters affecting the
Portfolio and the Trust. Additional information regarding the Trustees and
executive officers of the Trust may be found in Part B.
INVESTMENT ADVISER
Schroder Capital Management International Inc., 787 Seventh Avenue, New York,
New York 10019, serves as investment adviser to the Portfolio under an advisory
agreement with the Trust. SCMI manages the investment and reinvestment of the
Portfolio's investment portfolio and continuously reviews, supervises and
administers the Portfolio's investments. In this regard, SCMI is responsible
for making decisions relating to the Portfolio's investments and for placing
purchase and sale orders regarding investments with brokers or dealers selected
by SCMI in its discretion.
SCMI is a wholly owned U.S. subsidiary of Schroders Incorporated, the wholly
owned U.S. holding company subsidiary of Schroders plc. Schroders plc is the
holding company parent of a large worldwide group of banks and financial
services companies (referred to as the "Schroder Group"), with associated
companies and branch and representative offices located in eighteen countries
world-wide. The Schroder Group specializes in providing investment management
services. As of June 30, 1997, the Schroder Group managed over $175 billion in
assets worldwide.
The investment advisory agreement provides that SCMI is entitled to receive an
advisory fee at an annual rate of 0.90% of the Portfolio's average daily net
assets. From time to time, SCMI voluntarily may agree to waive all or a portion
of its fees.
The Investment Advisory Contract authorizes and directs SCMI to place orders for
the purchase and sale of the Portfolio's investments with brokers and dealers
selected by SCMI in its discretion and to seek "best execution" of such
portfolio transactions. The Portfolio may pay higher than the lowest available
commission rates when SCMI believes it is reasonable to do so in light of the
value of the brokerage and research services provided by the broker effecting
the transaction. It should be noted that costs associated with transactions in
foreign securities are generally higher than with transactions in U.S.
securities. However, SCMI seeks to achieve the best net results in effecting
such transactions for the Portfolio.
Subject to the policy of obtaining the best price consistent with quality of
execution on transactions, SCMI may employ Schroder Securities Limited and its
affiliates (collectively, "Schroder Securities"), affiliates of SCMI, to effect
transactions of the Portfolio on certain foreign securities exchanges. Because
of the affiliation between SCMI and Schroder Securities, the Portfolio's payment
of commissions to Schroder Securities is subject to procedures adopted by the
Board to provide that such commissions will not exceed the usual and customary
brokers' commissions. No specific portion of the Portfolio's brokerage will be
directed to Schroder
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Securities and in no event will Schroder Securities receive such brokerage in
recognition of research services.
Although the Portfolio does not currently engage in directed brokerage
arrangements to pay expenses, it may do so in the future. These arrangements,
whereby brokers executing the Portfolio's portfolio transactions would agree to
pay designated expenses of the Portfolio if brokerage commissions generated by
the Portfolio reached certain levels, might reduce these expenses. As
anticipated, these arrangements would not materially increase the brokerage
commissions paid by a Portfolio. Because brokerage commissions are not
reflected in Portfolio expenses, however, certain expenses might not be fully
set forth in the fee table, per share table, and financial statements of
registered open-end investment companies that invest in the Portfolio and might
therefore appear lower than actual expenses incurred.
PORTFOLIO MANAGERS. The Portfolio is managed by the investment management
team of Michael Perelstein and Paul Morris (with the assistance of a Schroder
investment committee). Mr. Perelstein has been a Senior Vice President of
Schroder since January 2, 1997. Prior thereto, he was a Managing Director at
MacKay Shields. Mr. Perelstein has more than twelve years of international
and global investment experience. Mr. Morris has been a Senior Vice President
of SCMI and a Director of Schroder Capital Management Inc. since January 1997.
Prior thereto he was Principal and Senior Portfolio Manager at Weiss Peck &
Greer, L.L.C.; Managing Director (Equity Division) UBS Asset Management and
Equity Portfolio Manager at Chase Investors Management Corp.
ADMINISTRATIVE SERVICES
On behalf of the Portfolio, the Trust has entered into an administration
agreement with Schroder Fund Advisors Inc. ("Schroder Advisors"), 787 Seventh
Avenue, New York, New York 10019. Schroder Advisors is a wholly owned
subsidiary of SCMI. For these services Schroder Advisors is entitled to receive
an administration fee at the annual rate of 0.15% of the Portfolio's average
daily net assets. In addition, the Trust has entered into a subadministration
agreement with Forum Administrative Services, Limited Liability Company
("Forum"), Two Portland Square, Portland, Maine 04101. For these
sub-administration services, Forum is entitled to receive a subadministration
fee at an annual rate of 0.075% of the Portfolio's average daily net assets.
From time to time, Schroder Advisors or Forum voluntarily may agree to waive all
or a portion of its fees.
INTERESTHOLDER RECORDKEEPER AND FUND ACCOUNTANT
Forum Accounting Services, LLC ("Forum Accounting"), Two Portland Square,
Portland, Maine 04101, is the Trust's interestholder recordkeeper and fund
accountant. Forum Accounting is an affiliate of Forum. For recordkeeping
services for the Portfolio's Interests, Forum Accounting is entitled to receive
a fee of $[12,000] per year plus $[25] per interestholder account. For fund
accounting services for the Portfolio, Forum Accounting is entitled to receive a
base fee of $[60,000] per year ($[36,000] plus $[24,000] for international
portfolios) plus additional amounts depending on the Portfolio's assets, the
number and type of securities it holds and its portfolio
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turnover rate. From time to time, Forum Accounting voluntarily may agree to
waive all or a portion of its fees.
EXPENSES
The Portfolio is obligated to pay for all of its expenses. These expenses
include: governmental fees; interest charges; taxes; brokerage fees and
commissions; insurance premiums; investment advisory, custodial, administrative
and transfer agency and fund accounting fees, as described above; compensation
of certain of the Trust's Trustees, costs of membership trade associations; fee
and expenses of independent auditors and legal counsel to the Trust; and
expenses of calculating the net asset value of and the net income of the
Portfolio. The Portfolio's expenses comprise Trust expenses attributable to the
Portfolio, which are allocated to the Portfolio, and expenses not attributable
to the Portfolio, which are allocated among the portfolios in proportion to
their average net assets or as otherwise determined by the Board.
CUSTODIAN
The Chase Manhattan Bank, through its Global Securities Services division,
located in London, England, acts as custodian of the Portfolio's assets and
employs foreign subcustodians to maintain the Portfolios' foreign assets outside
the U.S.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Trust was organized as a business trust under the laws of the State of
Delaware. Under the Trust Instrument, the Trustees are authorized to issue
Interests in separate series of the Trust. The Trust currently has six
portfolios (one being the Portfolio), and the Trust reserves the right to create
additional portfolios.
Each investor in the Portfolio is entitled to participate equally in the
Portfolio's earnings and assets and to a vote in proportion to the amount of its
investment in the Portfolio. Investments in the Portfolio may not be
transferred, but an investor may withdraw all or any portion of its investment
at any time at net asset value.
Investments in the Portfolio have no preemptive or conversion rights and are
fully paid and non-assessable, except as set forth below. The Trust is not
required and has no current intention to hold annual meetings of investors, but
the Trust will hold special meetings of investors when in the Trustees' judgment
it is necessary or desirable to submit matters to an investor vote. Generally,
Interests are voted in the aggregate without reference to a particular
portfolio, except if the matter affects only one portfolio or portfolio voting
is required, in which case Interests are voted separately by portfolio.
Investors have the right to remove one or more Trustees without a meeting by a
declaration in writing by a specified number of investors. Upon liquidation of
the Portfolio, investors will be entitled to share pro rata in the Portfolio's
net assets available for distribution to investors.
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The Portfolio's net income consists of: (1) all dividends, accrued interest
(including earned discount, both original issue and market discount), and other
income, including any net realized gain on the Portfolio's assets; less (2) all
actual and accrued expenses of the Portfolio, amortization of any premium, and
net realized loss on the Portfolio's assets (all as determined in accordance
with generally accepted accounting principles). All of the Portfolio's net
income is allocated pro rata among the investors in the Portfolio. The
Portfolio's net income generally is not distributed to the investors in the
Portfolio except as determined by the Trustees from time to time but instead is
included in the net asset value of the investors' respective Interests in the
Portfolio.
The Portfolio is not required to pay federal income taxes on its ordinary income
and capital gain, as it is treated as a partnership for federal income tax
purposes. All interest, dividends and gain and loss of the Portfolio are deemed
to "pass through" to its investors, regardless of whether such interest,
dividends or gain are distributed by the Portfolio or loss are realized by the
Portfolio.
Under the Portfolio's operational methods, it is not subject to any income tax.
However, each investor in the Portfolio will be taxed on the investor's
proportionate share (as determined in accordance with the Trust's Trust
Instrument and the Code) of the Portfolio's ordinary income and capital gain, to
the extent that the investor is subject to tax on its income. [The Portfolio's
assets, income, and distributions are managed in such a way that an investor in
the Portfolio will be able to satisfy the requirements of Subchapter M of the
Code, assuming that the investor invested all of its assets in the Portfolio.]
The Trust will inform investors of the amount and nature of such income or gain.
Investor inquiries may be directed to Forum Financial Services, Inc. (FFSI).
ITEM 7. PURCHASE OF SECURITIES.
Portfolio Interests are issued solely in private placement transactions that do
not involve any "public offering" within the meaning of Section 4(2) of the 1933
Act. See "General Description of Registrant" above. All investments are made
without a sales load, at the Portfolio's net asset value next determined after
an order is received. A Subscription Agreement must be completed before the
Portfolio will accept a new interestholder.
Net asset value is calculated as of 4:00 p.m. (Eastern time), Monday through
Friday, on each day that the New York Stock Exchange is open for trading (which
excludes the following national business holidays: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas) ("Portfolio Business Day"). Net asset
value per Interest is calculated by dividing the aggregate value of the
Portfolio's assets less all liabilities by the number of Interests outstanding.
Portfolio securities listed on recognized stock exchanges are valued at the last
reported trade price, prior to the time when the assets are valued, on the
exchange on which the securities are principally traded. Listed securities
traded on recognized stock exchanges where last trade prices are not available
are valued at mid-market prices. Securities traded in over-the-counter markets,
or listed securities for which no trade is reported on the valuation date, are
valued at the most recent
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reported mid-market price. Other securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith using methods approved by the Board.
Trading in securities on non-U.S. exchanges and over-the-counter markets may not
take place on every day that the New York Stock Exchange is open for trading.
Furthermore, trading takes place in various foreign markets on days on which the
Portfolio's net asset value is not calculated. If events materially affecting
the value of foreign securities occur between the time when their price is
determined and the time when net asset value is calculated, such securities will
be valued at fair value as determined in good faith by using methods approved by
the Schroder Core II Board. All assets and liabilities of the Portfolio
denominated in foreign currencies are valued in U.S. dollars based on the
exchange rate last quoted by a major bank prior to the time when the net asset
value of the Portfolio is calculated.
Registered investment companies are subject to no minimum initial or subsequent
investment amount. For other qualified investors, the minimum initial
investment amount is $[10] million, and there is no minimum subsequent
investment amount. However, since the Portfolio seeks to be as fully invested
at all times as is reasonably practicable in order to enhance the return on its
assets, investments must be made in federal funds (I.E., monies credited to the
account of the Trust's custodian by a Federal Reserve Bank). Minimum investment
amounts may be waived at the discretion of the Portfolio's investment adviser,
SCMI.
Qualified investors may transmit purchase payments by Federal Reserve Bank wire
directly to the Portfolio as follows:
THE CHASE MANHATTAN BANK
NEW YORK, NY
ABA NO.: 021000021
FOR CREDIT TO: FORUM FINANCIAL CORP.
ACCOUNT. NO.: [910-2-791424]
REF.: SCHRODER GLOBAL GROWTH PORTFOLIO
ACCOUNT OF: (INTERESTHOLDER NAME)
ACCOUNT NUMBER: (INTERESTHOLDER ACCOUNT NUMBER)
The wire order must specify the name of the Portfolio, the account name and
number, address, confirmation number, amount to be wired, name of the wiring
bank, and name and telephone number of the person to be contacted in connection
with the order. If the initial investment is by wire, an account number is
assigned, and a Subscription Agreement must be completed and mailed to the
Portfolio before any account becomes active. Wire orders received prior to 4:00
p.m. (Eastern time) on each Portfolio day that the New York Stock Exchange is
open for trading (a "Business Day") are processed at the net asset value
determined as of that day. Wire orders received after 4:00 p.m. (Eastern time)
are processed at the net asset value determined as of the next Business Day.
The Trust reserves the right to cease accepting investments in the Portfolio at
any time or to reject any investment order.
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Forum is the exclusive placement agent for the Trust. Forum receives no
compensation for serving as the Trust's exclusive placement agent.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor may withdraw all or any portion of its investment in the Portfolio
at the net asset value next determined after the investor furnishes a withdrawal
request in proper form to the Trust. Withdrawal proceeds are paid by the
Portfolio in federal funds normally on the business day after the withdrawal is
effected but, in any event, within seven days. Investments in the Portfolio may
not be transferred. The right of redemption may not be suspended nor the
payment dates postponed for more than seven days except when the New York Stock
Exchange is closed (or when trading on the Exchange is restricted) for any
reason other than its customary weekend or holiday closings or under any
emergency or other circumstances as determined by the Securities and Exchange
Commission.
Interests are redeemed at their next determined net asset value after receipt by
the Trust (at the address set forth above under "Purchase of Shares") of a
redemption request in proper form. Redemption requests may be made between 9:00
a.m. and 6:00 p.m. (Eastern time) on each Business Day. Redemption requests
that are received prior to 4:00 p.m. (Eastern time) are processed at the net
asset value determined as of that day. Redemption requests that are received
after 4:00 p.m. (Eastern time) are processed at the net asset value determined
on the next Business Day.
Telephone redemption requests may be made by telephoning the transfer agent at
(800) 344-8332. An interestholder must provide the transfer agent with the
Portfolio's name, the dollar amount or number of Interests to be redeemed,
interestholder account number, and some additional form of identification such
as a password. A telephone redemption may be made only if the telephone
redemption privilege option has been elected on the Subscription Agreement or
otherwise in writing. In an effort to prevent unauthorized or fraudulent
redemption requests by telephone, reasonable procedures will be followed by the
transfer agent to confirm that telephone instructions are genuine. The transfer
agent and the Trust generally will not be liable for any losses due to
unauthorized or fraudulent redemption requests, but either may be liable if it
does not follow these procedures. In times of drastic economic or market change
it may be difficult to make redemptions by telephone. If an interestholder
cannot reach the transfer agent by telephone, redemption requests may be mailed
or hand- delivered to the transfer agent.
Redemption proceeds normally are paid in cash. Redemptions from the Portfolio
may be made wholly or partially in portfolio securities, however, if the Board
determines that payment in cash would be detrimental to the best interests of
the Portfolio. The Trust has filed an election with the Commission pursuant to
which the Portfolio will only consider effecting a redemption in portfolio
securities if the particular interestholder is redeeming more than $250,000 or
1% of the Portfolio's net asset value, whichever is less, during any 90-day
period.
ITEM 9. PENDING LEGAL PROCEEDINGS.
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Not applicable.
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PART B
(STATEMENT OF ADDITIONAL INFORMATION)
SCHRODER CAPITAL FUNDS
--------
SCHRODER EM CORE PORTFOLIO
OCTOBER 1, 1997
ITEM 10. COVER PAGE.
Not applicable.
ITEM 11. TABLE OF CONTENTS.
General Information and History . . . . . . . . . . . . . . . . B-1
Investment Objective and Policies . . . . . . . . . . . . . . . B-1
Management of the Trust . . . . . . . . . . . . . . . . . . . . B-14
Control Persons and Principal Holders of Securities . . . . . . B-16
Investment Advisory and Other Services. . . . . . . . . . . . . B-17
Brokerage Allocation and Other Practices. . . . . . . . . . . . B-18
Capital Stock and Other Securities. . . . . . . . . . . . . . . B-18
Purchase, Redemption and Pricing of Securities. . . . . . . . . B-21
Tax Status. . . . . . . . . . . . . . . . . . . . . . . . . . . B-21
Underwriters. . . . . . . . . . . . . . . . . . . . . . . . . . B-22
Calculations of Performance Data. . . . . . . . . . . . . . . . B-22
Financial Statements. . . . . . . . . . . . . . . . . . . . . . B-22
ITEM 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
ITEM 13. INVESTMENT OBJECTIVE AND POLICIES.
INVESTMENT POLICIES
INTRODUCTION
Part A contains information about the investment Objective, policies and
restrictions of Schroder Emerging Markets Portfolio (the "Portfolio"), a series
of Schroder Capital Funds (the "Trust"). The following discussion is intended
to supplement the disclosure in Part A concerning the Portfolio's investments,
investment techniques and strategies and the risks associated therewith. This
Part B should be read only in conjunction with Part A. Defined terms used in
this Part B have the same meaning as in Part A.
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CONVERTIBLE SECURITIES
The Portfolio may invest in convertible preferred stocks and convertible debt
securities ("convertible securities"). A convertible security is a bond,
debenture, note, preferred stock or other security that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula.
Convertible securities rank senior to common stocks in a corporation's capital
structure and, therefore, carry less risk than the corporation's common stock.
The value of a convertible security is a function of its "investment value" (its
value as if it did not have a conversion privilege), and its "conversion value"
(the security's worth if it were to be exchanged for the underlying security, at
market value, pursuant to its conversion privilege).
DEBT-TO-EQUITY CONVERSIONS
The Portfolio may invest up to 5% of its net assets in debt-to-equity
conversions. Debt-to-equity conversion programs are sponsored in varying
degrees by certain emerging market countries, particularly in Latin America, and
permit investors to use external debt of a country to make equity investments in
local companies. Many conversion programs relate primarily to investments in
transportation, communication, utilities and similar infrastructure-related
areas. The terms of the programs vary from country to country, but include
significant restrictions on the application of proceeds received in the
conversion and on the repatriation of investment profits and capital. When
inviting conversion applications by holders of eligible debt, a government
usually specifies the minimum discount from par value that it will accept for
conversion. SCMI believes that debt-to-equity conversion programs may offer
investors opportunities to invest in otherwise restricted equity securities that
have a potential for significant capital appreciation and intends to invest
assets of the Portfolio to a limited extent in such programs under appropriate
circumstances. There can be no assurance that debt-to-equity conversion
programs will continue to be successful or that the Portfolio will be able to
convert all or any of its emerging market debt portfolio into equity
investments.
U.S. GOVERNMENT SECURITIES
The Portfolio may invest in securities issued or guaranteed by the U.S.
Government (or its agencies, instrumentalities or government-sponsored
enterprises) that have remaining maturities not exceeding one year. Agencies,
instrumentalities and government sponsored enterprises that have been
established or sponsored by the U.S. Government and issue or guarantee debt
securities include the Bank for Cooperatives, the Export-Import Bank, the
Federal Farm Credit System, the Federal Home Loan Banks, the Federal Home Loan
Mortgage Corporation, the Federal Intermediate Credit Banks, the Federal Land
Banks, the Federal National Mortgage Association, the Government National
Mortgage Association and the Student Loan Marketing Association. Except for
obligations issued by the U.S. Treasury and the Government National Mortgage
Association, none of the obligations of the other agencies, instrumentalities or
government-sponsored enterprises referred to above are backed by the full faith
and credit of the U.S. Government. There can be no assurance that the U.S.
Government will provide financial support to these obligations where it is not
obligated to do so.
BANK OBLIGATIONS
The Portfolio may invest in obligations of U.S. banks (including certificates of
deposit and bankers' acceptances) whose total assets at the time of purchase
exceed $1 billion. Such banks must be members of the Federal Deposit Insurance
Corporation. The Portfolio also may hold cash and time deposits denominated in
any major currency in foreign banks.
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A certificate of deposit is an interest-bearing negotiable certificate issued by
a bank against funds deposited in the bank. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. Although the borrower is liable
for payment of the draft, the bank unconditionally guarantees to pay the draft
at its face value on the maturity date. A time deposit is a non-negotiable
receipt issued by a bank in exchange for the deposit of funds. Similar to a
certificate of deposit, a time deposit earns a specified rate of interest over a
definite time period; however, it cannot be traded in the secondary markets.
SHORT-TERM DEBT SECURITIES
The Portfolio may invest in commercial paper -- short-term unsecured promissory
notes issued in bearer form by bank holding companies, corporations and finance
companies. The commercial paper purchased by the Portfolio for temporary
defensive purposes consists of direct obligations of domestic issuers that at
the time of investment are rated "P-1" by Moody's Investors Service ("Moody's")
or "A-1" by Standard & Poor's ("S&P"), or securities that, if not rated, are
issued by companies having an outstanding debt issue currently rated "Aaa" or
"Aa" by Moody's or "AAA" or "AA" by S&P. The rating "P-1" is the highest
commercial paper rating assigned by Moody's and the rating "A-1" is the highest
commercial paper rating assigned by S&P. The Portfolio also may invest in
variable rate master demand notes, which are obligations that permit the
investment of fluctuating amounts at varying market rates of interest pursuant
to arrangements between the issuer and a commercial bank acting as agent for the
payer of such notes. Generally both parties have the right to vary the amount
of the outstanding indebtedness on the notes.
REPURCHASE AGREEMENTS
The Portfolio may invest in securities subject to repurchase agreements that
mature or may be terminated by notice in seven days or less with U.S. banks or
broker-dealers. In a typical repurchase agreement the seller of a security
commits itself at the time of the sale to repurchase that security from the
buyer at a mutually agreed-upon time and price. The repurchase price exceeds
the sale price, reflecting an agreed-upon interest rate effective for the period
the buyer owns the security subject to repurchase. The agreed-upon rate is
unrelated to the interest rate on that security. SCMI monitors the value of the
underlying security at the time the transaction is entered into and at all times
during the term of the repurchase agreement to insure that the value of the
security always equals or exceeds the repurchase price. If a seller defaults
under a repurchase agreement, the Portfolio may have difficulty exercising its
rights to the underlying securities and may incur costs and experience time
delays in connection with the disposition of such securities. To evaluate
potential risks, SCMI reviews the credit-worthiness of banks and dealers with
which the Portfolio enters into repurchase agreements.
ILLIQUID AND RESTRICTED SECURITIES
"Illiquid and Restricted Securities" under "Investment Policies" in Part A sets
forth the circumstances in which the Portfolio may invest in "restricted
securities". In connection with the Portfolio's original purchase of restricted
securities, it may negotiate rights with the issuer to have such securities
registered for sale at a later time. Further, the registration expenses of
illiquid restricted securities may also be negotiated by the Portfolio with the
issuer at the time such securities are purchased by the Portfolio. When
registration is required, however, a considerable period may elapse between the
decision to sell the securities and the time the Portfolio would be permitted to
sell such securities. A similar delay might be experienced in attempting to
sell such securities pursuant to an exemption from registration. Thus, the
Portfolio may not be able to obtain as favorable a price as that prevailing at
the time of the decision to sell.
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LOANS OF PORTFOLIO SECURITIES
The Portfolio may lend its portfolio securities subject to the restrictions
stated in Part A. Under applicable regulatory requirements (which are subject
to change), the loan collateral must: (1) on each business day, at least equal
the market value of the loaned securities; and (2) consist of cash, bank letters
of credit, U.S. Government securities, other cash equivalents or liquid
securities in which the Portfolio is permitted to invest. To be acceptable as
collateral, letters of credit must obligate a bank to pay amounts demanded by
the Portfolio if the demand meets the terms of the letter. Such terms and the
issuing bank must be satisfactory to the Portfolio. When lending portfolio
securities, the Portfolio receives from the borrower an amount equal to the
interest paid or the dividends declared on the loaned securities during the term
of the loan plus the interest on the collateral securities (less any finders' or
administrative fees the Portfolio pays in arranging the loan). The Portfolio
may share the interest it receives on the collateral securities with the
borrower if it realizes at least a minimum amount of interest required by the
lending guidelines established by the Trust's Board. The Portfolio will not
lend its portfolio securities to any officer, director, employee or affiliate of
the Portfolio or SCMI. The terms of the Portfolio's loans must meet certain
tests under the Internal Revenue Code and permit the Portfolio to reacquire
loaned securities on five business days' notice or in time to vote on any
important matter.
Portfolio securities purchased with cash collateral are subject to possible
depreciation. Loans of securities by the Portfolio will be subject to
termination at the Portfolio's or the borrower's option. The Portfolio may pay
reasonable negotiated fees in connection with loaned securities, so long as such
fees are set forth in a written contract and approved by Board.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
To hedge against adverse price movements in the securities held in its portfolio
and the currencies in which they are denominated (as well as in the securities
it might wish to purchase and their denominated currencies), the Portfolio may
engage in transactions in forward foreign currency exchange contracts.
A forward foreign currency exchange contract ("forward contract") is an
obligation to purchase or sell a currency at a future date (which may be any
fixed number of days from the date of the contract agreed upon by the parties)
at a price set at the time of the contract. The Portfolio may enter into
forward contracts as a hedge against fluctuations in future foreign exchange
rates.
Currently, only a limited market, if any, exists for hedging transactions
relating to currencies in many emerging market countries or to securities of
issuers domiciled or principally engaged in business in emerging market
countries. This may limit the Portfolio's ability to hedge its investments
effectively in those emerging markets. Hedging against a decline in the value
of a currency does not eliminate fluctuations in the prices of portfolio
securities or prevent losses if the prices of such securities decline. Such
transactions also limit the opportunity for gain if the value of the hedged
currencies should rise. In addition, it may not be possible for the Portfolio
to hedge against a devaluation that is so generally anticipated that the
Portfolio is not able to contract to sell the currency at a price above the
devaluation level it anticipates.
The Portfolio may enter into forward contracts under certain instances. When
the Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may, for example, wish to secure the price
of the security in U.S. dollars or some other foreign currency which the
Portfolio is temporarily holding in its portfolio. By entering into a forward
contract for the purchase or sale (for a fixed amount of dollars or other
currency) of the amount of foreign currency involved in the underlying security
transactions, the Portfolio is able to protect itself against possible loss
(resulting from adverse changes in the relationship between the U.S. dollar or
other currency being used for the security purchase and the foreign currency in
which the security is denominated) during the period between the date on which
the security is purchased or sold and the date on which payment is made or
received. In addition, when the Portfolio anticipates purchasing securities at
some future date, and wishes to secure the current exchange rate of the currency
in which those securities are denominated against the U.S. dollar or some other
foreign currency, it may enter into a forward contract to purchase an amount of
currency equal to part or all of the value of the anticipated purchase for a
fixed amount of U.S. dollars or other currency.
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In all of the above instances, if the currency in which the Portfolio's
portfolio securities (or anticipated portfolio securities) are denominated rises
in value with respect to the currency which is being purchased, then the
Portfolio will have realized fewer gain than if the Portfolio had not entered
into the forward contracts. Furthermore, the precise matching of the forward
contract amounts and the value of the securities involved is not generally
possible, since the future value of such securities in foreign currencies
changes as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and the date it matures.
To the extent that the Portfolio enters into forward contracts to hedge against
a decline in the value of portfolio holdings denominated in a particular foreign
currency resulting from currency fluctuations, there is a risk that the
Portfolio may nevertheless realize a gain or loss as a result of currency
fluctuations after such portfolio holdings are sold should the Portfolio be
unable to enter into an "offsetting" forward foreign currency contract with the
same party or another party. The Portfolio may be limited in its ability to
enter into hedging transactions involving forward contracts by the Internal
Revenue Code requirements relating to qualifications as a regulated investment
company (see "Taxation").
The Portfolio is not required to enter into such transactions with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the investment adviser. Generally, the Portfolio will not enter
into a forward contract with a term of greater than one year.
OPTIONS AND FUTURES TRANSACTIONS
As discussed in Part A, the Portfolio may write covered call options against
securities held in its portfolio and covered put options on eligible portfolio
securities, and may purchase options of the same series to effect closing
transactions, and may hedge against potential changes in the market value of its
investments (or anticipated investments) by purchasing put and call options on
portfolio (or eligible portfolio) securities (and the currencies in which they
are denominated) and engaging in transactions involving futures contracts and
options on such contracts.
Call and put options on U.S. Treasury notes, bonds and bills and on various
foreign currencies are listed on several U.S. and foreign securities exchanges
and are written in over-the-counter transactions ("OTC Options"). Listed
options are issued or guaranteed by the exchange on which they trade or by a
clearing corporation such as the Options Clearing Corporation ("OCC").
Ownership of a listed call option gives the Portfolio the right to buy from the
OCC (in the U.S.) or other clearing corporation or exchange, the underlying
security or currency covered by the option at the stated exercise price (the
price per unit of the underlying security or currency) by filing an exercise
notice prior to the expiration date of the option. The writer (seller) of the
option would then have the obligation to sell, to the OCC (in the U.S.) or other
clearing corporation or exchange, the underlying security or currency at that
exercise price prior to the expiration date of the option, regardless of its
then current market price. Ownership of a listed put option would give the
Portfolio the right to sell the underlying security or currency to the OCC (in
the U.S.) or other clearing corporation or exchange at the stated exercise
price. Upon notice of exercise of the put option, the writer of the option
would have the obligation to purchase the underlying security or currency from
the OCC (in the U.S.) or other clearing corporation or exchange at the exercise
price.
The OCC or other clearing corporation or exchange that issues listed options
ensures that all transactions in such options are properly executed. OTC
options are purchased from or sold (written) to dealers or financial
institutions that have entered into direct agreements with the Portfolio. With
OTC options, variables such as expiration date, exercise price and premium are
agreed between the Portfolio and the transacting dealer. If the transacting
dealer fails to make or take delivery of the securities or amount of foreign
currency underlying an option it has written, the Portfolio would lose the
premium paid for the option as well as any anticipated benefit of the
transaction. The Portfolio will engage in OTC option transactions only with
member banks of the Federal Reserve System or primary dealers in U.S. Government
securities or with affiliates of such banks or dealers have capital of at least
$50 million or whose obligations are guaranteed by an entity having capital of
at least $50 million.
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OPTIONS ON FOREIGN CURRENCIES. The Portfolio may purchase and write options on
foreign currencies for purposes similar to those involved with investing in
forward foreign currency exchange contracts. For example, in order to protect
against declines in the dollar value of portfolio securities that are
denominated in a foreign currency, the Portfolio may purchase put options on an
amount of such foreign currency equivalent to the current value of the portfolio
securities involved. As a result, the Portfolio would be able to sell the
foreign currency for a fixed amount of U.S. dollars, thereby securing the dollar
value of the portfolio securities (less the amount of the premiums paid for the
options). Conversely, the Portfolio may purchase call options on foreign
currencies in which securities it anticipates purchasing are denominated to
secure a set U.S. dollar price for such securities and protect against a decline
in the value of the U.S. dollar against such foreign currency. The Portfolio
may also purchase call and put options to close out written option positions.
The Portfolio also may write covered call options on foreign currency to protect
against potential declines in its portfolio securities that are denominated in
foreign currencies. If the U.S. dollar value of the portfolio securities falls
as a result of a decline in the exchange rate between the foreign currency in
which it is denominated and the U.S. dollar, then a loss to the Portfolio
occasioned by such value decline would be ameliorated by receipt of the premium
on the option sold. At the same time, however, the Portfolio gives up the
benefit of any rise in value of the relevant portfolio securities above the
exercise price of the option and, in fact, only receives a benefit from the
writing of the option to the extent that the value of the portfolio securities
falls below the price of the premium received. The Portfolio also may write
options to close out long call option positions. A covered put option on a
foreign currency would be written by the Portfolio for the same reason it would
purchase a call option, namely, to hedge against an increase in the U.S. dollar
value of a foreign security that the Portfolio anticipates purchasing. In this
case, the receipt of the premium would offset, to the extent of the size of the
premium, any increased cost to the Portfolio resulting from an increase in the
U.S. dollar value of the foreign security. However, the Portfolio could not
benefit from any decline in the cost of the foreign security that is greater
than the price of the premium received. The Portfolio also may write options to
close out long put option positions.
Markets in foreign currency options are relatively new, and the Portfolio's
ability to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. Although the Portfolio will not
purchase or write such options unless and until, in the opinion of SCMI, the
market for them has developed sufficiently to ensure that their risks are not
greater than the risks in connection with the underlying currency, there can be
no assurance that a liquid secondary market will exist for a particular option
at any specific time. In addition, options on foreign currencies are affected
by all of those factors that influence foreign exchange rates and investments
generally.
The value of a foreign currency option depends upon the value of the underlying
currency relative to the U.S. dollar, with the result that the price of the
option position may vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a foreign security,
including foreign securities held in a "hedged" investment portfolio. Because
foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign currencies
or any regulatory requirement that quotations available through dealers or other
market sources be firm or revised on a timely basis. Quotation information
available is generally representative of very large transactions in the
interbank market and, thus, may not reflect relatively smaller transactions
(I.E., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the
extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that are not reflected in the options market.
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COVERED CALL WRITING. The Portfolio is permitted to write covered call options
on portfolio securities, and on the U.S. dollar and foreign currencies in which
they are denominated, without limit. Generally, a call option is "covered" if
the Portfolio owns (or has the right to acquire without additional cash
consideration) or if at all times the Portfolio maintains with its custodian, in
a segregated account, cash, U.S. Government securities or other high-grade
liquid securities) the underlying security (currency) subject to the option. In
the case of call options on U.S. Treasury Bills, however, the Portfolio might
own U.S. Treasury Bills of a different series from those underlying the call
option, but with a principal amount and value corresponding to the exercise
price and a maturity date no later than that of the security (currency)
deliverable under the call option. A call option is also covered if the
Portfolio holds a call on the same security as the underlying security
(currency) of the written option, where the exercise price of the call used for
coverage is equal to or less than the exercise price of the call or greater than
the exercise price of the call written if the mark-to-market difference is
maintained by the Portfolio in cash, U.S. Government securities or other
high-grade liquid securities held by the Portfolio in a segregated account
maintained with its custodian.
The Portfolio receives a premium from the purchaser in return for a call it has
written. Receipt of such premiums may enable the Portfolio to earn a higher
level of current income than it would earn from holding the underlying
securities (currencies) alone. Moreover, the premium received offsets a portion
of the potential loss incurred by the Portfolio if the securities (currencies)
underlying the option are ultimately sold (exchanged) by the Portfolio at a
loss. Furthermore, a premium received on a call written on a foreign currency
ameliorates any potential loss of value on the portfolio security due to a
decline in the value of the currency. However, during the option period, the
covered call writer has, in return for the premium, given up the opportunity for
capital appreciation above the exercise price should the market price of the
underlying security (or the exchange rate of the currency in which it is
denominated) increase but has retained the risk of loss should the price of the
underlying security (or the exchange rate of the currency in which it is
denominated) decline. The premium received fluctuates with varying economic
market conditions. If the market value of the portfolio securities (or the
currencies in which they are denominated) upon which call options have been
written increases, the Portfolio may receive a lower total return from the
portion of its portfolio upon which calls have been written than it would have
had such calls not been written.
With respect to listed options and certain OTC options, during the option period
the Portfolio may be required, at any time, to deliver the underlying security
(currency) against payment of the exercise price on any calls it has written
(exercise of certain listed and OTC options may be limited to specific
expiration dates). This obligation terminates upon the expiration of the option
period or at such earlier time when the writer effects a closing purchase
transaction. A closing purchase transaction is accomplished by purchasing an
option of the same series as the option previously written. However, once the
Portfolio has been assigned an exercise notice, the Portfolio is unable to
effect a closing purchase transaction.
Closing purchase transactions are ordinarily effected to realize a profit on an
outstanding call option, to prevent an underlying security (currency) from being
called, to permit the sale of an underlying security (or the exchange of the
underlying currency) or to enable the Portfolio to write another call option on
the underlying security (currency) with either a different exercise price or
expiration date or both. The Portfolio may realize a net gain or loss from a
closing purchase transaction depending upon whether the amount of the premium
received on the call option is more or less than the cost of effecting the
closing purchase transaction. Any loss incurred in a closing purchase
transaction may be wholly or partially offset by unrealized appreciation in the
market value of the underlying security (currency). Conversely, a gain
resulting from a closing purchase transaction could be offset in whole or in
part or exceeded by a decline in the market value of the underlying security
(currency).
If a call option expires unexercised, the Portfolio realizes a gain in the
amount of the premium on the option less the commission paid. Such a gain,
however, may be offset by depreciation in the market value of the underlying
security (currency) during the option period. If a call option is exercised,
the Portfolio realizes a gain or loss from the sale of the underlying security
(currency) equal to the difference between the purchase price of the underlying
security (currency) and the proceeds of the sale of the security (currency) plus
the premium received on the option less the commission paid.
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Options written by the Portfolio normally have expiration dates of up to
eighteen months from the date written. The exercised price of a call option may
be below, equal to or above the current market value of the underlying security
at the time the option is written.
COVERED PUT WRITING. As a writer of a covered put option, the Portfolio incurs
an obligation to buy the security underlying the option from the purchaser of
the put, at the option's exercise price at any time during the option period, at
the purchaser's election (certain listed and OTC put options written by the
Portfolio will be exercisable by the purchaser only on a specific date). A put
is "covered" if at all times the Portfolio maintains with its custodian (in a
segregated account) cash, U.S. Government securities or other high-grade liquid
securities in an amount equal to at least the exercise price of the option.
Similarly, a short put position could be covered by the Portfolio by its
purchase of a put option on the same security (currency) as the underlying
security of the written option, where the exercise price of the purchased option
is equal to or more than the exercise price of the put written or less than the
exercise price of the put written if the marked-to-market difference is
maintained by the Portfolio in cash, U.S. Government securities or other
high-grade liquid securities held by the Portfolio in a segregated account
maintained at its custodian. In writing puts, the Portfolio assumes the risk of
loss should the market value of the underlying security (currency) decline below
the exercise price of the option (any loss being decreased by the receipt of the
premium on the option written). In the case of listed options, during the
option period the Portfolio may be required, at any time, to make payment of the
exercise price against delivery of the underlying security (currency). The
operation of and limitations on covered put options in other respects are
substantially identical to those of call options.
The Portfolio will write put options for three purposes: (1) to receive the
income derived from the premiums paid by purchasers; (2) when the investment
adviser wishes to purchase the security (or a security denominated in the
currency underlying the option) underlying the option at a price lower than its
current market price (in which case it will write the covered put at an exercise
price reflecting the lower purchase price sought); and (3) to close out a long
put option position. The potential gain on a covered put option is limited to
the premium received on the option (less the commissions paid on the
transaction) while the potential loss equals the differences between the
exercise price of the option and the current market price of the underlying
securities (currencies) when the put is exercised, offset by the premium
received (less the commissions paid on the transaction).
PURCHASING CALL AND PUT OPTIONS. The Portfolio may purchase listed and OTC call
and put options in amounts equaling up to 5% of its total assets. The Portfolio
may purchase a call option in order to close out a covered call position (see
"Covered Call Writing"), to protect against an increase in price of a security
it anticipates purchasing or, in the case of a call option on foreign currency,
to hedge against an adverse exchange rate move of the currency in which the
security it anticipates purchasing is denominated vis-a-vis the currency in
which the exercise price is denominated. The purchase of the call option to
effect a closing transaction on a call written over-the-counter may be a listed
or an OTC option. In either case, the call purchased is likely to be on the
same securities (currencies) and have the same terms as the written option. If
purchased over-the-counter, the option would generally be acquired from the
dealer or financial institution which purchased the call written by the
Portfolio.
The Portfolio may purchase put options on securities (currencies) held in its
portfolio to protect itself against a decline in the value of the security and
to close out written put option positions. If the value of the underlying
security (currency) were to fall below the exercise price of the put purchased
in an amount greater then the premium paid for the option, the Portfolio would
incur no additional loss. In addition, the Portfolio may sell a put option it
has previously purchased prior to the sale of the securities (currencies)
underlying such option. Such a sale would result in a net gain or loss
depending upon whether the amount received on the sale is more or less than the
premium and other transaction costs paid on the put option that is sold. Any
such gain or loss could be offset in whole or in part by a change in the market
value of the underlying security (currency). If a put option purchased by the
Portfolio expired without being sold or exercised, the premium would be lost.
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RISKS OF OPTIONS TRANSACTIONS. During the option period, the covered call
writer has, in return for the premium on the option, given up the opportunity
for capital appreciation above the exercise price if the market price of the
underlying security (or the value of its denominated currency) increases but has
retained the risk of loss if the price of the underlying security (or the value
of its denominated currency) declines. The writer has no control over the time
when it may be required to fulfill its obligation as a writer of the option.
Once an option writer has received an exercise notice, it cannot effect a
closing purchase transaction in order to terminate its obligation under the
option and must deliver or receive the underlying securities at the exercise
price.
Prior to exercise or expiration, an option position can only be terminated by
entering into a closing purchase or sale transaction. If a covered call option
writer is unable to effect a closing purchase transaction or to purchase an
offsetting OTC option, it cannot sell the underlying security until the option
expires or the option is exercised. Accordingly, a covered call option writer
may not be able to sell an underlying security at a time when it might otherwise
be advantageous to do so. A covered put option writer who is unable to effect a
closing purchase transaction or to purchase an offsetting OTC option would
continue to bear the risk of decline in the market price of the underlying
security until the option expires or is exercised. In addition, a covered put
writer would be unable to utilize the amount held in cash or U.S. Government or
other high grade liquid obligations as security for the put option for other
investment purposes until the exercise or expiration of the option.
The Portfolio's ability to close out its position as a writer of an option is
dependent upon the existence of a liquid secondary market on option exchanges.
There is no assurance that such a market will exist, particularly in the case of
OTC options, since such options will generally only be closed out by entering
into a closing purchase transaction with the purchasing dealer. However, the
Portfolio may be able to purchase an offsetting option that does not close out
its position as a writer but constitutes an asset of equal value to the
obligation under the option written. If the Portfolio is not able to either
enter into a closing purchase transaction or purchase an offsetting position, it
will be required to maintain the securities subject to the call, or the
collateral underlying the put, even though it might not be advantageous to do
so, until a closing transaction can be entered into (or the option is exercised
or expires).
Among the possible reasons for the absence of a liquid secondary market on an
exchange are: (1) insufficient trading interest in certain options;
(2) restrictions on transactions imposed by an exchange; (3) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (4) interruption of the normal
operations on an exchange; (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume; or (6) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the secondary market on that exchange (or in that
class or series of options) would cease to exist.
In the event of the bankruptcy of a broker through which the Portfolio engages
in transactions in options, the Portfolio could experience delays and/or losses
in liquidating open positions purchased or sold through the broker and/or incur
a loss of all or part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an OTC option purchased by the
Portfolio, the Portfolio could experience a loss of all or part of the value of
the option. Transactions will be entered into by the Portfolio only with
brokers or financial institutions deemed creditworthy by SCMI.
Exchanges have established limitations governing the maximum number of options
on the same underlying security or futures contract (whether or not covered)
that may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). An exchange may order the liquidation of positions found
to be in violation of these limits and it may impose other sanctions or
restrictions. These position limits may restrict the number of listed options
which the Portfolio may write.
The hours of trading for options may not conform to the hours during which the
underlying securities are traded. If the option markets close before the
markets for the underlying securities, significant price and rate movements can
take place in the underlying markets that cannot be reflected in the option
markets.
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The extent to which the Portfolio may enter into transactions involving options
may be limited by the Internal Revenue Code's requirements for qualification as
a regulated investment company and the Portfolio's intention to qualify as such
(see "Taxation").
FUTURES CONTRACTS. The Portfolio may purchase and sell interest-rate, currency,
and index futures contracts ("futures contracts") that are traded on U.S. and
foreign commodity exchanges, on such underlying securities as U.S. Treasury
bonds, notes and bills, and/or any foreign government fixed-income security
("interest-rate futures contracts"), on various currencies ("currency futures
contracts") and on such indices of U.S. and foreign securities as may exist or
come into being ("index futures contracts").
The Portfolio may purchase or sell interest-rate futures contracts for the
purpose of hedging some or all of the value of its portfolio securities (or
anticipated portfolio securities) against changes in prevailing interest rates.
If the investment adviser anticipates that interest rates may rise and,
concomitantly, that the price of certain of its portfolio securities fall, the
Portfolio may sell an interest-rate futures contract. If declining interest
rates are anticipated, the Portfolio may purchase an interest-rate futures
contract to protect against a potential increase in the price of securities the
Portfolio intends to purchase. Subsequently, appropriate securities may be
purchased by the Portfolio in an orderly fashion; as securities are purchased,
corresponding futures positions would be terminated by offsetting sales of
contracts.
The Portfolio may purchase or sell currency futures contracts on currencies in
which its portfolio securities (or anticipated portfolio securities) are
denominated for the purposes of hedging against anticipated changes in currency
exchange rates. The Portfolio may enter into currency futures contracts for the
same reasons as set forth above for entering into forward foreign currency
exchange contracts; namely, to secure the value of a security purchased or sold
in a given currency vis-a-vis a different currency or to hedge against an
adverse currency exchange rate movement of a portfolio security's (or
anticipated portfolio security's) denominated currency vis-a-vis a different
currency.
The Portfolio may purchase or sell index futures contracts for the purpose of
hedging some or all of its portfolio (or anticipated portfolio) securities
against changes in their prices. If it anticipates that the prices of
securities it holds may fall, the Portfolio may sell an index futures contract.
Conversely, if the Portfolio wishes to hedge against anticipated price rises in
those securities that it intends to purchase, the Portfolio may purchase an
index futures contract.
In addition to the above, interest-rate, currency and index futures contracts
will be bought or sold in order to close out short or long positions maintained
by the Portfolio in corresponding futures contracts.
Although most interest-rate futures contracts call for actual delivery or
acceptance of securities, the contracts usually are closed out before the
settlement date without making or taking delivery. A futures contract sale is
closed out by effecting a futures contract purchase for the same aggregate
amount of the specific type of security (currency) and the same delivery date.
If the sale price exceeds the offsetting purchase price, the seller would be
paid the difference and would realize a gain. If the offsetting purchase price
exceeds the sale price, the seller would pay the difference and would realize a
loss. Similarly, a futures contract purchase is closed out by effecting a
futures contract sale for the same aggregate amount of the specific type of
security (currency) and the same delivery date. If the offsetting sale price
exceeds the purchase price, the purchaser would realize a gain, whereas if the
purchase price exceeds the offsetting sale price, the purchaser would realize a
loss. There is no assurance that the Portfolio will be able to enter into a
closing transaction.
INTEREST RATE FUTURES CONTRACTS. When the Portfolio enters into an
interest-rate futures contract, it is initially required to deposit with the
Portfolio's custodian (in a segregated account in the name of the broker
performing the transaction) an "initial margin" of cash or U.S. Government
securities or other high grade liquid securities equal to approximately 2% of
the contract amount. Initial margin requirements are established by the
exchanges on which futures contracts trade and may change. In addition, brokers
may establish margin deposit requirements in excess of those required by the
exchanges.
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Initial margin in futures transactions is different from margin in securities
transactions in that initial margin does not involve the borrowing of money by a
brokers' client but is, rather, a good faith deposit on the futures contract
that is returned to the Portfolio upon the proper termination of the futures
contract. The margin deposits made are marked to market daily, and the
Portfolio may be required to make subsequent deposits with the Portfolio's
futures contract clearing broker of cash or U.S. Government securities (called
"variation margin") that reflect price fluctuations in the futures contract.
CURRENCY FUTURES CONTRACTS. Generally, foreign currency futures contracts
provide for the delivery of a specified amount of a given currency, on the
exercise date, for a set exercise price denominated in U.S. dollars or other
currency. Foreign currency futures contracts would be entered into for the same
reason and under the same circumstances as forward foreign currency exchange
contracts. SCMI assesses such factors as cost spreads, liquidity and
transaction costs in determining whether to use futures contracts or forward
contracts in its foreign currency transactions and hedging strategy.
Purchasers and sellers of foreign currency futures contracts are subject to the
same risks that apply generally to the buying and selling of futures contracts.
In addition, there are risks associated with foreign currency futures contracts
and their use as a hedging device similar to those associated with options on
foreign currencies described above. Further, settlement of a foreign currency
futures contract must occur within the country issuing the underlying currency.
Thus, the Portfolio must accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign restrictions or regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
may be required to pay any fees, taxes or charges associated with such delivery
that are assessed in the issuing country.
INDEX FUTURES CONTRACTS. The Portfolio may invest in index futures contracts.
An index futures contract sale creates an obligation by the Portfolio, as
seller, to deliver cash at a specified future time. An index futures contract
purchase creates an obligation by the Portfolio, as purchaser, to take delivery
of cash at a specified future time. Futures contracts on indices do not require
the physical delivery of securities but provide for a final cash settlement on
the expiration date that reflects accumulated profits and losses credited or
debited to each party's account.
The Portfolio is required to maintain margin deposits with brokerage firms
through which it effects index futures contracts in a manner similar to that
described above for interest-rate futures contracts. In addition, due to
current industry practice, daily variations in gain and loss on open contracts
are required to be reflected in cash in the form of variation margin payments.
The Portfolio may be required to make additional margin payments during the term
of the contract.
At any time prior to expiration of the futures contract, the Portfolio may elect
to close the position by taking an opposite position, which operates to
terminate the Portfolio's position in the futures contract. A final
determination of variation margin is then made, additional cash may be required
to be paid by or released to the Portfolio and the Portfolio, realizes a loss or
gain.
OPTIONS ON FUTURES CONTRACTS. The Portfolio may purchase and write call and put
options on futures contracts traded on an exchange and may enter into closing
transactions with respect to such options to terminate an existing position. An
option on a futures contract gives the purchaser the right (in return for the
premium paid) to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. Upon exercise of the
option, the delivery of the position in the futures contract by the writer of
the option to the holder of the option is accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contract at the time of exercise
exceeds, in case of a call, or is less than, in the case of a put, the exercise
price of the option on the futures contract.
The Portfolio may purchase and write options on futures contracts for purposes
identical to those set forth above for the purchase of a futures contract
(purchase of a call option or sale of a put option) and the sale of a futures
contract (purchase of a put option or sale of a call option), or to close out a
long or short position in futures contracts. If, for example, the investment
adviser wished to protect against an increase in interest rates and the
resulting negative
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impact on the value of a portion of its fixed-income portfolio, it might write a
call option on an interest-rate futures contract, the underlying security of
which correlates with the portion of the portfolio the investment adviser seeks
to hedge. Any premiums received in the writing of options on futures contracts
may provide a further hedge against losses resulting from price declines in
portions of the Portfolio's investment portfolio.
Options on foreign currency futures contracts may involve certain additional
risks. Trading options on foreign currency futures contracts is relatively new.
The ability to establish and close out positions on such options is subject to
the maintenance of a liquid secondary market. To reduce this risk, the
Portfolio will not purchase or write options on foreign currency futures
contracts unless and until, in SCMI's opinion, the market for such options has
developed sufficiently that the risks in connection with them are not greater
than the risks in connection with transactions in the underlying foreign
currency futures contracts.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The
Portfolio may not enter into futures contracts or purchase related options
thereon if, immediately thereafter, the amount committed to margin plus the
amount paid for premiums for unexpired options on futures contracts exceeds 5%
of the value of the Portfolio's total assets, after taking into account
unrealized gain and unrealized loss on such contracts it has entered into,
provided, however, that in the case of an option that is in-the-money (the
exercise price of the call (put) option is less (more) than the market price of
the underlying security) at the time of purchase, the in-the-money amount may be
excluded in calculating the 5%. However, there is no overall limitation on the
percentage of the Portfolio's assets that may be subject to a hedge position.
In addition, in accordance with the regulations of the Commodity Futures Trading
Commission ("CFTC") under which the Portfolio is exempted from registration as a
commodity pool operator, the Portfolio may only enter into futures contracts and
options on futures contracts transactions for purposes of hedging a part or all
of its portfolio. Except as described above, there are no other limitations on
the use of futures and options thereon by the Portfolio.
The writer of an option on a futures contract is required to deposit initial and
variation margin pursuant to requirements similar to those applicable to futures
contracts. Premiums received from the writing of an option on a futures
contract are included in initial margin deposits.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. The Portfolio
may sell a futures contract to protect against the decline in the value of
securities (or the currency in which they are denominated) held by the
Portfolio. However, it is possible that the futures market may advance and the
value of the Portfolio's securities (or the currency in which they are
denominated) may decline. If this occurs, the Portfolio loses money on the
futures contract and also experiences a decline in value of its portfolio
securities. While this might occur for only a very brief period or to a very
small degree, over time the value of a diversified portfolio tends to move in
the same direction as the futures contracts.
If the Portfolio purchases a futures contract to hedge against the increase in
value of securities it intends to buy (or the currency in which they are
denominated) and the value of such securities (currencies) decreases, then the
Portfolio may determine not to invest in the securities as planned and would
realize a loss on the futures contract that is not offset by a reduction in the
price of the securities.
If the Portfolio has sold a call option on a futures contract, it covers this
position by holding (in a segregated account maintained at its custodian) cash,
U.S. Government securities or other high-grade liquid securities equal in value
(when added to any initial or variation margin on deposit) to the market value
of the securities (currencies) underlying the futures contract or the exercise
price of the option. Such a position also may be covered by owning the
securities (currencies) underlying the futures contract or by holding a call
option permitting the Portfolio to purchase the same contract at a price no
higher than the price at which the short position was established.
In addition, if the Portfolio holds a long position in a futures contract, it
may hold cash, U.S. Government securities or other high-grade liquid securities
equal to the purchase price of the contract (less the amount of initial or
variation margin on deposit) in a segregated account maintained for the
Portfolio by its custodian. Alternatively, the Portfolio could cover its long
position by purchasing a put option on the same futures contract with an
exercise price as high or higher than the price of the contract held by the
Portfolio.
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Exchanges limit the amount by which the price of a futures contract may move on
any day. If the price moves equal the daily limit on successive days, then it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased. In the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin on open
futures contract positions. In such situations, if the Portfolio has
insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do so.
In addition, the Portfolio may be required to take or make delivery of the
instruments underlying interest rate futures contracts it holds at a time when
it is disadvantageous to do so. The inability to close out options and futures
contract positions could also have an adverse impact on the Portfolio's ability
to effectively hedge its portfolio.
Futures contracts and options thereon that are purchased or sold on foreign
commodities exchanges may have greater price volatility than their U.S.
counterparts. Furthermore, foreign commodities exchanges may be less regulated
and under less governmental scrutiny than U.S. exchanges, and foreign brokerage
commissions, clearing costs and other transaction costs may be higher. Greater
margin requirements may limit the Portfolio's ability to enter into certain
commodity transactions on foreign exchanges. Moreover, differences in clearance
and delivery requirements on foreign exchanges may cause delays in the
settlement of the Portfolio's foreign exchange transactions.
In the event of the bankruptcy of a broker through which the Portfolio is
engaged in transactions in futures or options thereon, the Portfolio could
experience delays and/or losses in liquidating open positions purchased or sold
through the broker and/or incur a loss of all or part of its margin deposits
with the broker. Similarly, in the event of the bankruptcy of the writer of an
OTC option purchased by the Portfolio, the Portfolio could experience a loss of
all or part of the value of the option. Transactions are entered into by the
Portfolio only with brokers or financial institutions deemed creditworthy by
SCMI.
While the futures contracts and options transactions in which the Portfolio
engages for the purpose of hedging its portfolio securities are not speculative
in nature, there are risks inherent in the use of such instruments. One such
risk that may arise in employing futures contracts to protect against the price
volatility of portfolio securities (and the currencies in which they are
denominated) is that the prices of securities and indices subject to futures
contracts (and thereby the futures contract prices) may correlate imperfectly
with the behavior of the cash prices of the Portfolio's portfolio securities
(and the currencies in which they are denominated). Another such risk is that
prices of interest rate futures contracts may not move in tandem with the
changes in prevailing interest rates against which the Portfolio seeks a hedge.
A correlation may also be distorted by the fact that the futures market is
dominated by short-term traders seeking to profit from the difference between a
contract or security price objective and their cost of borrowed funds. Such
distortions are generally minor and are expected to diminish as the contract
approaches maturity.
There may exist an imperfect correlation between the price movements of futures
contracts purchased by the Portfolio and the movements in the prices of the
securities (currencies) that are the subject of the hedge. If participants in
the futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationship between the debt securities or currency markets and futures
markets could result. Price distortions could also result if investors in
futures contracts choose to make or take delivery of underlying securities
rather than engage in closing transactions due to the resultant reduction in the
liquidity of the futures market. In addition, because deposit requirements in
the futures markets are less onerous than margin requirements in the cash
market, increased participation by speculators in the futures market can be
anticipated with the resulting speculation causing temporary price distortions.
Due to the possibility of price distortions in the futures contracts market and
because of an imperfect correlation between movements in the prices of
securities and movements in the prices of futures contracts, a correct forecast
of interest rate trends may still not result in a successful hedging
transaction.
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There is no assurance that a liquid secondary market will exist for futures
contracts and related options in which the Portfolio may invest. In the event a
liquid market does not exist, it may not be possible to close out a futures
position, and in the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin. In
addition, limitations imposed by an exchange or board of trade on which futures
contracts are traded may compel the Portfolio to or prevent it from closing out
a contract, which may result in reduced gain or increased loss to the Portfolio.
The absence of a liquid market in futures contracts might cause the Portfolio to
make or take delivery of the underlying securities (currencies) at a time when
it may be disadvantageous to do so.
The extent to which the Portfolio may enter into transactions involving futures
contracts and options thereon may be limited by the Internal Revenue Code's
requirements for qualification as a regulated investment company and the
Portfolio's intention to qualify as such (see "Taxation").
WARRANTS AND STOCK RIGHTS
The Portfolio may invest in warrants, which are options to purchase an equity
security at a specified price (usually representing a premium over the
applicable market value of the underlying equity security at the time of the
warrant's issuance). Investments in warrants involve certain risks, including
the possible lack of a liquid market for the resale of the warrants, potential
price fluctuations as a result of speculation or other factors and failure of
the price of the underlying security to reach a level at which the warrant can
be prudently exercised (in which case the warrant may expire without being
exercised, resulting in the loss of the Portfolio's entire investment therein).
The prices of warrants do not necessarily move parallel to the prices of the
underlying securities. Warrants have no voting rights, receive no dividends and
have no rights with respect to the assets of the issuer.
In addition, the Portfolio may invest up to 5% of its assets (at the time of
investment) in stock rights. A stock right is an option given to a shareholder
to buy additional shares at a predetermined price during a specified time
period.
INVESTMENT RESTRICTIONS
The following investment restrictions restate or are in addition to those
described under "Investment Restrictions" and "Investment Policies" in Part A.
These restrictions, unless otherwise indicated, are fundamental policies of the
Portfolio and cannot be changed without the vote of a "majority" of the
Portfolio's outstanding shares. Under the 1940 Act, such a "majority" vote is
defined as the vote of the holders of the lesser of: (1) 67% of more of the
shares present or represented by proxy at a meeting of shareholders, if the
holders of more than 50% of the outstanding shares are present; or (2) more than
50% of the outstanding shares. Under these additional restrictions, the
Portfolio will not:
(a) Underwrite securities of other companies except insofar as the
Portfolio might be deemed to be an underwriter in the resale of any securities
held in its portfolio.
(b) Invest in commodities or commodity contracts other than Hedging
Instruments which it may use as permitted by any of its other fundamental
policies, whether or not any such Hedging Instrument is considered to be a
commodity or a commodity contract.
(c) Purchase securities on margin; however, the Portfolio may make margin
deposits in connection with any Hedging Instruments which it may use as
permitted by any of its other fundamental policies.
(d) Purchase or write puts or calls except as permitted by any of its
other fundamental policies.
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(e) Lend money except in connection with the acquisition of debt
securities which the Portfolio's investment policies and restrictions permit it
to purchase (see "Investment Objective and Policies" in Part A); the Portfolio
may also make loans of portfolio securities (see "Loans of Portfolio
Securities") and enter into repurchase agreements (see "Repurchase Agreements").
(f) Make short sales of securities.
(g) Invest in interests in oil, gas or other mineral exploration or
development programs but may purchase readily marketable securities of companies
which operate, invest in, or sponsor such programs.
(h) Invest in real estate or in interests in real estate, but may purchase
readily marketable securities of companies holding real estate or interests
therein.
Except as required by the 1940 Act, if any percentage restriction on investment
or utilization of assets is adhered to at the time an investment is made, a
later change in percentage resulting from a change in the market values of the
Portfolio's assets or purchases and redemptions of interests will not be
considered a violation of the limitation.
ITEM 14. MANAGEMENT OF THE TRUST.
The following information relates to the principal occupations of each Trustee
and executive officer of the Trust during the past five years and shows the
nature of any affiliation with SCMI. Each of these individuals currently serves
in the same capacity for Schroder Capital Funds (Delaware), an investment
company with a series that invests all of its assets in the Portfolio.
PETER E. GUERNSEY, Oyster Bay, New York - Trustee of the Trust - Insurance
Consultant since August 1986; prior thereto Senior Vice President, Marsh &
McLennan, Inc., insurance brokers.
JOHN I. HOWELL, Greenwich, Connecticut - Trustee of the Trust - Private
Consultant since February 1987; Honorary Director, American International Group,
Inc.; Director, American International Life Assurance Company of New York.
CLARENCE F. MICHALIS, 44 East 64th Street, New York, New York - Trustee of the
Trust - Chairman of the Board of Directors, Josiah Macy, Jr. Foundation
(charitable foundation).
HERMANN C. SCHWAB, 787 Seventh Avenue, New York, New York - Chairman and Trustee
of the Trust - retired since March, 1988; prior thereto, consultant to SCMI
since February 1, 1984.
MARK J. SMITH, (b), 33 Gutter Lane, London, England - President and Trustee of
the Trust - First Vice President of SCMI since April 1990; Director and Vice
President, Schroder Advisors.
ROBERT G. DAVY, 787 Seventh Avenue, New York, New York - a Vice-President of the
Trust - Director of SCMI and Schroder Capital Management International Ltd.
since 1994; First Vice President of SCMI since July, 1992; prior thereto,
employed by various affiliates of Schroders plc in various positions in the
investment research and portfolio management areas since 1986.
MARGARET H. DOUGLAS-HAMILTON(b) (c), 787 Seventh Avenue, New York, New York -
Vice President of the Trust - Secretary of SCM since July 1995; Secretary of
Schroder Advisers since April 1990; First Vice President and General Counsel of
Schroders Incorporated(b) since May 1987; prior thereto, partner of Sullivan &
Worcester, a law firm.
RICHARD R. FOULKES, 787 Seventh Avenue, New York, New York - a Vice President of
the Trust; Deputy Chairman of SCMI since October 1995; Director and Executive
Vice President of Schroder Capital Management International Ltd. since 1989.
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CATHERINE S. WOOLEDGE, Two Portland Square, Portland, Maine - Assistant
Treasurer and Assistant Secretary of the Trust - Counsel, Forum Financial
Services, Inc. Prior thereto, associate at Morrison & Foerster from September
1994 through October 1996; associate corporate counsel at Franklin Resources,
Inc. September 1993 through September 1994; and prior thereto, associate at
Drinker Biddle & Reath, Washington, D.C.
BARBARA GOTTLIEB(c), 787 Seventh Avenue, New York, New York - Assistant
Secretary of the Trust - Assistant Vice President of SWIS since July 1995 prior
thereto held various positions with SWIS affiliates.
ROBERT JACKOWITZ(b) (c), 787 Seventh Avenue, New York, New York - Treasurer of
the Trust - Vice President of SCM since September 1995; Treasurer of SCM and
Schroder Advisers since July 1995; Vice President of SCMI since June 1995; and
Assistant Treasurer of Schroders Incorporated since January 1993.
JOHN Y. KEFFER, Two Portland Square, Portland, Maine - Vice President of the
Trust. President of Forum Financial Services, Inc., the Fund's
sub-administrator, and Forum Financial Corp., the Fund's transfer and dividend
disbursing agent and fund accountant.
JANE P. LUCAS, (c) 787 Seventh Avenue, New York, New York - Vice President of
the Trust - Director and Senior Vice President SCMI; Director of SCM since
September 1995; Assistant Director Schroder Investment Management Ltd. since
June 1991.
GERARDO MACHADO, 787 Seventh Avenue, New York, New York - Assistant Secretary of
the Trust - Associate, SCMI.
CATHERINE A. MAZZA, 787 Seventh Avenue, New York, New York - Vice President of
the Trust - President of Schroder Advisors since 1997; First Vice President of
SCMI and SCM since 1996; prior thereto, held various marketing positions at
Alliance Capital, an investment adviser, since July 1985.
THOMAS G. SHEEHAN, Two Portland Square, Portland, Maine - Assistant Treasurer
and Assistant Secretary of the Trust - Counsel, Forum Financial Services, Inc.
since 1993; prior thereto, Special Counsel, U.S. Securities and Exchange
Commission, Division of Investment Management, Washington, D.C.
FARIBA TALEBI, 787 Seventh Avenue, New York, New York - Vice President of the
Trust - First Vice President of SCMI since April 1993, employed in various
positions in the investment research and portfolio management areas since 1987.
JOHN A. TROIANO(b), 787 Seventh Avenue, New York, New York - Vice President of
the Trust - Managing Director and Senior Vice President of SCMI since October
1995; Director of Schroder Advisors since October 1992; Director of SCMI since
1991; prior thereto, employed by various affiliates of SCMI in various positions
in the investment research and portfolio management areas since 1981.
IRA L. UNSCHULD, 787 Seventh Avenue, New York, New York - Vice President of the
Trust - Vice President of SCMI since April, 1993 and an Associate from July,
1990 to April, 1993; prior to July, 1990, employed by various financial
institutions as a securities or financial analyst.
ALEXANDRA POE, 787 Seventh Avenue, New York, New York - Secretary and Vice
President of the Trust - Vice President of SCMI since August 1996; Fund Counsel
and Senior Vice President of Schroder Advisors since August 1996; prior thereto
an investment management attorney with Gordon Altman Butowsky Weitzen Shalov &
Wein since July 1994; prior thereto counsel and Vice President of Citibank, N.A.
since 1989.
MARY KUNKEMUELLER, 787 Seventh Avenue, New York, New York - Assistant Secretary
of the Trust.
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(a) Interested Trustee of the Trust within the meaning of the 1940 Act.
(b) Schroder Fund Advisors, Inc. ("Schroder Advisors") is a wholly owned
subsidiary of SCMI, which is a wholly owned subsidiary of Schroders
Incorporated, which in turn is an indirect, wholly owned U.S. subsidiary of
Schroders plc.
(c) Schroder Capital Management, Inc. ("SCM") is a wholly owned subsidiary of
Schroder Wertheim Holdings Incorporated which is a wholly owned subsidiary
of Schroders, Incorporated, which in turn is an indirect wholly owned U.S.
subsidiary of Schroders plc.
Officers and Trustees who are interested persons of the Trust receive no salary,
fees or compensation from the Portfolio. Independent Trustees of the Portfolio
receive an annual fee of $2,000 and a fee of $500 for each meeting of the Board
attended by them except in the case of Mr. Schwab, who receives an annual fee of
$3,000 and a fee of $1,000 for each meeting attended. The Portfolio has no
bonus, profit sharing, pension or retirement plans.
The following table provides the aggregate compensation paid to the Trustees of
the Trust by the Trust and Schroder Asian Growth Fund, Inc., combined.
Information is presented for the fiscal year ended October 31, 1996.
<TABLE>
<CAPTION>
Name of Trustee Aggregate Pension or Estimated Annual Total
Compensation Retirement Benefits Upon Compensation
From Trust Benefits Accrued Retirement From Trust And
As Part of Fund Complex
Portfolio Expenses Paid To Trustees*
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mr. Guernsey $1,750 $0 $0 $14,750
Mr. Hansmann 1,375 0 0 1,375
Mr. Howell 1,750 0 0 14,750
Mr. Michalis 1,750 0 0 1,750
Mr. Schwab 3,000 0 0 3,000
Mr. Smith 0 0 0 0
</TABLE>
* In addition to the Trust, "Fund Complex" includes Schroder Capital Funds II,
an open-end investment company for which SCMI serves as investment adviser,
Schroder Capital Funds (Delaware), an open-end investment company for which SCMI
serves as investment adviser, and Schroder Asian Growth Fund, Inc., a closed-end
investment company for which SCMI serves as investment adviser.
As of September 30, 1997, the officers and Trustees of the Trust owned, in the
aggregate, less than 1% of the Portfolio's outstanding shares.
While the Trust is a Delaware business trust, certain of its Trustees or
officers are residents of the United Kingdom and substantially all of their
assets may be located outside of the U.S. As a result it may be difficult for
U.S. investors to effect service upon such persons within the U.S., or to
realize judgments of courts of the U.S. predicated upon civil liabilities of
such persons under the Federal securities laws of the U.S. The Trust has been
advised that there is substantial doubt as to the enforceability in the United
Kingdom of such civil remedies and criminal penalties as are afforded by the
Federal securities laws of the U.S. Also it is unclear if extradition treaties
now in effect between the U.S. and the United Kingdom would subject such persons
to effective enforcement of the criminal penalties of such acts.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of October 1, 1997, Schroder Emerging Markets Fund (the "Fund"), a series of
Schroder Capital Funds (Delaware), a Delaware business trust registered with the
SEC as an open-end management investment company, invests all of its investable
assets in the Portfolio and may be deemed to control the Portfolio for purposes
of the 1940 Act.
Schroder Capital Funds (Delaware) has informed the Trust that whenever the Fund
is requested to vote on matters pertaining to the Portfolio, the Fund will hold
a meeting of its shareholders and will cast its vote as instructed by its
shareholders. This only applies to matters for which the Fund would be required
to have a shareholder meeting if it
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directly held investment securities rather than invested in the Portfolio. It
is anticipated that any other registered investment company (or series thereof)
that may in the future invest in the Portfolio will follow the same or a similar
practice.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
INVESTMENT ADVISORY SERVICES
SCMI, 787 Seventh Avenue, New York, New York, 10019, serves as Adviser to the
Portfolio pursuant to an investment advisory agreement. SCMI is a wholly owned
U.S. subsidiary of Schroders Incorporated (doing business in New York State as
Schroders Holdings), the wholly owned U.S. holding company subsidiary of
Schroders plc. Schroders plc is the holding company parent of a large worldwide
group of banks and financial service companies (referred to as the "Schroder
Group"), with associated companies and branch and representative offices located
in seventeen countries worldwide. The Schroder Group specializes in providing
investment management services, with Group funds under management currently in
excess of $175 billion as of June 30, 1997.
Pursuant to the investment advisory agreement, SCMI is responsible for managing
the investment and reinvestment of the assets included in the Portfolio and for
continuously reviewing, supervising and administering the Portfolio's
investments. In this regard, it is the responsibility of SCMI to make decisions
relating to the Portfolio's investments and to place purchase and sale orders
regarding such investments with brokers or dealers selected by it in its
discretion. SCMI also furnishes to the Board, which has overall responsibility
for the business and affairs of the Trust, periodic reports on the investment
performance of the Portfolio.
Under the terms of the investment advisory agreement, SCMI is required to manage
the Portfolio's investment portfolio in accordance with applicable laws and
regulations. In making its investment decisions, SCMI does not use material
information that may be in its possession or in the possession of its
affiliates.
The investment advisory agreement continues in effect provided such continuance
is approved annually: (1) by the holders of a majority of the outstanding
voting securities of the Portfolio (as defined by the 1940 Act) or by the Board;
and (2) by a majority of the Trustees who are not parties to such agreement or
"interested persons" (as defined in the 1940 Act) of any such party. The
investment advisory agreement may be terminated without penalty by vote of the
Trustees or the interestholders of the Portfolio on 60 days' written notice to
the Adviser, or by the Adviser on 60 days' written notice to the Trust, and it
terminates automatically if assigned. The investment advisory agreement also
provides that, with respect to the Portfolio, neither SCMI nor its personnel
shall be liable for any error of judgment or mistake of law or for any act or
omission in the performance of its or their duties to the Portfolio, except for
willful misfeasance, bad faith or gross negligence in the performance of the
SCMI's or their duties or by reason of reckless disregard of its or their
obligations and duties under the investment advisory agreement.
For its services, the Portfolio pays SCMI a fee at an annual rate of 1.00% of
its average daily net assets.
ADMINISTRATIVE SERVICES
On behalf of the Portfolio, the Trust has entered into an administration
agreement with Schroder Fund Advisors Inc. ("Schroder Advisors"), 787 Seventh
Avenue, New York, New York 10019. The Trust has also entered into a
subadministration agreement with Forum Administrative Services, Limited
Liability Company ("Forum"). Pursuant to their agreements, Schroder Advisors
and Forum provide certain management and administrative services necessary for
the Portfolio's operations, other than the investment management and
administrative services provided to the Portfolio by SCMI pursuant to the
investment advisory agreement, including among other things: (1) preparation of
shareholder reports and communications; (2) regulatory compliance, such as
reports to and filings with the Securities and Exchange Commission and state
securities commissions; and (3) general supervision of the operation of the
Portfolio, including coordination of the services performed by the Portfolio's
investment adviser, transfer agent, custodian, independent accountants, legal
counsel and others. Schroder Advisors is a wholly owned
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subsidiary of SCMI and is a registered broker-dealer organized to act as
administrator and distributor of mutual funds.
For these services, Schroder Advisors is entitled to receive from the Portfolio
a fee at the annual rate of 0.15% of the Portfolio's average daily net assets.
Forum is entitled to receive from the Portfolio a fee at the annual rate of
0.075% of the Portfolio's average daily net assets for its services.
The Administration Agreement and Subadministration Agreements are terminable
with respect to the Fund without penalty, at any time, by the Board, upon 60
days' written notice to Schroder Advisors, or by Schroder Advisors upon 60 days'
written notice to the Trust.
CUSTODIAN
The Chase Manhattan Bank, N.A., through its Global Securities Services division
located in London, England, acts as custodian of the Portfolio's assets, but
plays no role in making decisions as to the purchase or sale of portfolio
securities for the Portfolio. Pursuant to rules adopted under the 1940 Act, the
Portfolio may maintain its foreign securities and cash in the custody of certain
eligible foreign banks and securities depositories. Selection of these foreign
custodial institutions is made by the Board following a consideration of a
number of factors, including (but not limited to) the reliability and financial
stability of the institution; the ability of the institution to perform capably
custodial services for the Portfolio; the reputation of the institution in its
national market; the political and economic stability of the country in which
the institution is located; and further risks of potential nationalization or
expropriation of Portfolio assets.
INDEPENDENT AUDITORS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts 02109,
serves as independent auditors for the Trust.
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
INVESTMENT DECISIONS
Investment decisions for the Portfolio and for the other investment advisory
clients of SCMI are made with a view to achieving their respective investment
objective. Investment decisions are the product of many factors in addition to
basic suitability for the particular client involved. Thus, a particular
security may be bought or sold for certain clients even though it could have
been bought or sold for other clients at the same time. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling the security. In some instances, one client may sell a particular
security to another client. It also sometimes happens that two or more clients
simultaneously purchase or sell the same security, in which event each day's
transactions in such security are, insofar as is possible, averaged as to price
and allocated between such clients in a manner which in SCMI's opinion is
equitable to each and in accordance with the amount being purchased or sold by
each. There may be circumstances when purchases or sales of portfolio
securities for one or more clients will have an adverse effect on other clients.
BROKERAGE AND RESEARCH SERVICES
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Portfolio of negotiated brokerage commissions. Such commissions
vary among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Transactions in foreign securities generally involve the payment
of fixed brokerage commissions, which are generally higher than those in the
United States. Since most brokerage transactions for the Portfolio will be
placed with foreign broker-dealers, certain portfolio transaction costs for the
Portfolio may be higher than fees for similar transactions executed on U.S.
securities exchanges. There is generally no stated commission in the case of
securities traded in the over-the-counter markets, but the price paid by the
Portfolio usually includes an undisclosed dealer commission or mark-
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up. In underwritten offerings, the price paid by the Portfolio includes a
disclosed, fixed commission or discount retained by the underwriter or dealer.
The Investment Advisory Contract authorizes and directs SCMI to place orders for
the purchase and sale of the Portfolio's investments with brokers or dealers
selected by SCMI in its discretion and to seek "best execution" of such
portfolio transactions. SCMI places all such orders for the purchase and sale
of portfolio securities and buys and sells securities for the Portfolio through
a substantial number of brokers and dealers. In so doing, SCMI uses its best
efforts to obtain for the Portfolio the most favorable price and execution
available. The Portfolio may, however, pay higher than the lowest available
commission rates when SCMI believes it is reasonable to do so in light of the
value of the brokerage and research services provided by the broker effecting
the transaction. In seeking the most favorable price and execution, SCMI,
having in mind the Portfolio's best interests, considers all factors it deems
relevant, including, by way of illustration, price, the size of the transaction,
the nature of the market for the security, the amount of the commission, the
timing of the transaction taking into account market prices and trends, the
reputation, experience and financial stability of the broker-dealers involved
and the quality of service rendered by the broker-dealers in other transactions.
It has for many years been a common practice in the investment advisory business
as conducted in certain countries, including the United States, for advisers of
investment companies and other institutional investors to receive research
services from broker-dealers which execute portfolio transactions for the
clients of such advisers. Consistent with this practice, SCMI may receive
research services from broker-dealers with which SCMI places the Portfolio's
portfolio transactions. These services, which in some cases may also be
purchased for cash, include such items as general economic and security market
reviews, industry and company reviews, evaluations of securities and
recommendations as to the purchase and sale of securities. Some of these
services are of value to SCMI in advising various of its clients (including the
Portfolio), although not all of these services are necessarily useful and of
value in managing the Portfolio. The investment advisory fee paid fee paid by
the Portfolio is not reduced because SCMI and its affiliates receive such
services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934 (the
"Act"), SCMI may cause the Portfolio to pay a broker-dealer which provides
"brokerage and research services" (as defined in the Act) to SCMI an amount of
disclosed commission for effecting a securities transaction for the Portfolio in
excess of the commission which another broker-dealer would have charged for
effecting that transaction.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc. and subject to seeking the most favorable price and execution
available and such other policies as the Trustees may determine, SCMI may
consider sales of shares of the Portfolio as a factor in the selection of
broker-dealers to execute portfolio transactions for the Portfolio.
Subject to the general policies regarding allocation of portfolio brokerage as
set forth above, the Board has authorized SCMI to employ Schroder Securities
Limited and its affiliates (collectively, "Schroder Securities"), which are
affiliated with SCMI, to effect securities transactions of the Portfolio on
various foreign securities exchanges on which Schroder Securities has trading
privileges, provided certain other conditions are satisfied as described below.
Payment of brokerage commissions to Schroder Securities for effecting such
transactions is subject to Section 17(e) of the 1940 Act, which requires, among
other things, that commissions for transactions on securities exchanges paid by
a registered investment company to a broker which is an affiliated person of
such investment company or an affiliated person of another person so affiliated
not exceed the usual and customary broker's commissions for such transactions.
It is the Portfolio's policy that commissions paid to Schroder Securities will
in the judgment of the officers of SCMI responsible for making portfolio
decisions and selecting brokers, be: (1) at least as favorable as commissions
contemporaneously charged by Schroder Securities on comparable transactions for
its most favored unaffiliated customers; and (2) at least as favorable as those
which would be charged on comparable transactions by other qualified brokers
having comparable execution capability. The Board of Trustees, including a
majority of the non-interested Trustees, has adopted procedures pursuant to Rule
17e-1 promulgated by the Securities and Exchange Commission under Section 17(e)
to ensure that commissions paid to Schroder Securities by the Portfolio
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satisfy the foregoing standards. The Board will review all transactions at
least quarterly for compliance with these procedures.
It is further a policy of the Portfolio that all such transactions effected for
the Portfolio by Schroder Wertheim on the New York Stock Exchange be in
accordance with Rule 11a2-2(T) promulgated under the 1934 Act, which requires in
substance that a member of such exchange not associated with Schroder Wertheim
actually execute the transaction on the exchange floor or through the exchange
facilities. Thus, while Schroder Wertheim will bear responsibility for
determining important elements of execution such as timing and order size,
another firm will actually execute the transaction.
Schroder Wertheim pays a portion of the brokerage commissions it receives from
the Portfolio to the brokers executing the Portfolio's transactions on the New
York Stock Exchange. In accordance with Rule 11a2-2(T), Schroder Core has
entered into an agreement with Schroder Wertheim permitting it to retain a
portion of the brokerage commissions paid to it by the Portfolio. This
agreement has been approved by the Schroder Core Board, including a majority of
the non-interested Trustees.
The Portfolio has no understanding or arrangement to direct any specific portion
of its brokerage to Schroder Securities and will not direct brokerage to
Schroder Securities in recognition of research services. Schroder Securities
commenced operations in 1990.
From time to time, the Portfolio may purchase securities of a broker or dealer
through which its regularly engages in securities transactions.
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
Under the Trust Instrument, the Trustees are authorized to issue beneficial
interest in one or more separate and distinct series. Investments in the
Portfolio have no preference, preemptive, conversion or similar rights and are
fully paid and nonassessable, except as set forth below. Each investor in the
Portfolio is entitled to a vote in proportion to the amount of its investment
therein. Investors in the Portfolio and other series (collectively, the
"portfolios") of the Trust will all vote together in certain circumstances
(e.g., election of the Trustees and ratification of auditors, as required by the
1940 Act and the rules thereunder). One or more portfolios could control the
outcome of these votes. Investors do not have cumulative voting rights, and
investors holding more than 50% of the aggregate interests in the Trust or in
the Portfolio, as the case may be, may control the outcome of votes. The Trust
is not required and has no current intention to hold annual meetings of
investors, but the Trust will hold special meetings of investors when (1) a
majority of the Trustees determines to do so or (2) investors holding at least
10% of the interests in the Trust (or the Portfolio) request in writing a
meeting of investors in the Trust (or Portfolio). Except for certain matters
specifically described in the Trust Instrument, the Trustees may amend the
Trust's Trust Instrument without the vote of investors.
The Trust, with respect to the Portfolio, may enter into a merger or
consolidation, or sell all or substantially all of its assets, if approved by
the Board. The Portfolio may be terminated (1) upon liquidation and
distribution of its assets, if approved by the vote of a majority of the
Portfolio's outstanding voting securities (as defined in the 1940 Act) or (2) by
the Trustees on written notice to the Portfolio's investors. Upon liquidation
or dissolution of any Portfolio, the investors therein would be entitled to
share pro rata in its net assets available for distribution to investors.
The Trust is organized as a business trust under the laws of the State of
Delaware. The Trust's interestholders are not personally liable for the
obligations of the Trust under Delaware law. The Delaware Business Trust Act
provides that an interestholder of a Delaware business trust shall be entitled
to the same limitation of liability extended to shareholders of private
corporations for profit. However, no similar statutory or other authority
limiting business trust interestholder liability exists in many other states,
including Texas. As a result, to the extent that the Trust or an interestholder
is subject to the jurisdiction of courts in those states, the courts may not
apply Delaware law, and may thereby subject the Trust to liability. To guard
against this risk, the Trust Instrument of the Trust disclaims liability for
acts or obligations of the Trust and requires that notice of such disclaimer be
given in each agreement, obligation and instrument entered into by the Trust or
its Trustees, and provides for indemnification out of Trust property of any
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interestholder held personally liable for the obligations of the Trust. Thus,
the risk of an interestholder incurring financial loss beyond his investment
because of shareholder liability is limited to circumstances in which (1) a
court refuses to apply Delaware law, (2) no contractual limitation of liability
is in effect, and (3) the Trust itself is unable to meet its obligations. In
light of Delaware law, the nature of the Trust's business, and the nature of its
assets, the Board believes that the risk of personal liability to a Trust
interestholder is remote.
ITEM 19. PURCHASE, REDEMPTION AND PRICING OF SECURITIES.
Interests in the Portfolio are issued solely in private placement transactions
that do not involve any "public offering" within the meaning of section 4(2) of
the 1933 Act. All investments in the Portfolio are made and withdrawn at the
net asset value ("NAV") next determined after an order is received by the
Portfolio. NAV per share is calculated by dividing the aggregate value of the
Portfolio's assets less all liabilities by the number of shares of the Portfolio
outstanding. (See Items 6, 7 and 8 in Part A.)
ITEM 20. TAX STATUS.
The Portfolio will be classified for federal income tax purposes as a
partnership that will not be a "publicly traded partnership." As a result, the
Portfolio will not be subject to federal income tax; instead, each investor in
the Portfolio will be required to take into account in determining its federal
income tax liability its share of the Portfolio's income, gains, losses,
deductions, and credits, without regard to whether it has received any cash
distributions from the Portfolio. The Portfolio also will not be subject to
Delaware income or franchise tax.
Each investor in the Portfolio will be deemed to own a proportionate share of
the Portfolio's assets, and to earn a proportionate share of the Portfolio's
income, for, among other things, purposes of determining whether the investor
satisfies the requirements to qualify as a regulated investment company ("RIC").
Accordingly, the Portfolio intends to conduct its operations so that its
investors that intend to qualify as RICs ("RIC investors") will be able to
satisfy all those requirements.
Distributions to an investor from the Portfolio (whether pursuant to a partial
or complete withdrawal or otherwise) will not result in the investor's
recognition of any gain or loss for federal income tax purposes, except that (1)
gain will be recognized to the extent any cash that is distributed exceeds the
investor's basis for its interest in the Portfolio before the distribution, (2)
income or gain will be recognized if the distribution is in liquidation of the
investor's entire interest in the Portfolio and includes a disproportionate
share of any unrealized receivables held by the Portfolio, (3) loss will be
recognized if a liquidation distribution consists solely of cash and/or
unrealized receivables, and (4) gain or loss may be recognized on a distribution
to an investor that contributed property to the Portfolio. An investor's basis
for its interest in the Portfolio generally will equal the amount of cash and
the basis of any property it invests in the Portfolio, increased by the
investor's share of the Portfolio's net income and gains and decreased by (a)
the amount of cash and the basis of any property the Portfolio distributes to
the investor and (b) the investor's share of the Portfolio's losses.
Dividends and interest received by the Portfolio may be subject to income,
withholding, or other taxes imposed by foreign countries and; U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors.
The Portfolio may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation that, in general, meets either of
the following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, a RIC that holds stock of a
PFIC (including a RIC investor's indirect holding thereof through its interest
in the Portfolio) will be subject to federal income tax on a portion of any
"excess distribution" received on the stock or of any gain on disposition of the
stock (collectively "PFIC income"), plus interest thereon, even if the RIC
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the RIC's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders.
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If the Portfolio invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund," then in lieu of the foregoing tax and interest obligation, the
Portfolio would be required to include in income each year its pro rata share of
the qualified electing fund's annual ordinary earnings and net capital gain (the
excess of net long-term capital gain over net short-term capital loss) - which
most likely would have to be distributed by the Portfolio's RIC investors to
satisfy the distribution requirements applicable to them - even if those
earnings and gain were not received by it. In most instances it will be very
difficult, if not impossible, to make this election because of certain
requirements thereof.
Three bills passed by Congress in 1991 and 1992 and vetoed by President Bush
would have substantially modified the taxation of U.S. shareholders of foreign
corporations, including eliminating the provisions described above dealing with
PFICs and replacing them (and other provisions) with a regulatory scheme
involving entities called "passive foreign corporations." The "Tax
Simplification and Technical Corrections Bill of 1993," passed in May 1994 by
the House of Representatives, contains the same modifications. It is unclear at
this time whether, and in what form, the proposed modifications may be enacted
into law.
Proposed regulations have been published pursuant to which certain RICs would be
entitled to elect to "mark to market" their stock in certain PFICs. "Marking to
market," in this context, means recognizing as gain for each taxable year the
excess, as of the end of that year, of the fair market value of each such PFIC's
stock over the adjusted basis in that stock (including marked-to-market gain for
each prior year for which an election was in effect).
The Portfolio's use of hedging strategies, such as writing (selling) and
purchasing options and futures and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the gains and losses the Portfolio realizes in
connection therewith. The Portfolio's income from foreign currencies (except
certain gains therefrom that may be excluded by future regulations), and income
from transactions in hedging instruments derived by it with respect to its
business of investing in securities or foreign currencies, will qualify as
permissible income for its RIC investors under the requirement that at least 90%
of a RIC's gross income each taxable year consist of specified types of income.
However, income from the disposition by the Portfolio of hedging instruments
(other than those on foreign currencies) held for less than three months will be
subject to the requirement applicable to its RIC investors that less than 30% of
a RIC's gross income each taxable year consist of certain short-term gains
("Short-Short Limitation"). Income from the disposition of foreign currencies,
and hedging instruments on foreign currencies, that are not directly related to
the Portfolio's principal business of investing in securities (or options and
futures with respect thereto) also will be subject to the Short-Short Limitation
for its RIC investors if they are held for less than three months.
If the Portfolio satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether its RIC investors
satisfy the Short-Short Limitation. Thus, only the net gain (if any) from the
designated hedge will be included in gross income for purposes of that
limitation. The Portfolio will consider whether it should seek to qualify for
this treatment for its hedging transactions. To the extent the Portfolio does
not so qualify, it may be forced to defer the closing out of certain hedging
instruments beyond the time when it otherwise would be advantageous to do so, in
order for its RIC investors to qualify or continue to qualify as RICs.
ITEM 21. UNDERWRITERS.
Forum Financial Services, Inc. ("FFSI"), Two Portland Square, Portland, Maine
04101, serves as the Trust's placement agent. Forum will receive no
compensation for such placement agent services.
ITEM 22. CALCULATIONS OF PERFORMANCE DATA.
Not applicable.
ITEM 23. FINANCIAL STATEMENTS.
Not applicable.
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PART B
(STATEMENT OF ADDITIONAL INFORMATION)
SCHRODER CAPITAL FUNDS
---------
SCHRODER GLOBAL GROWTH PORTFOLIO
OCTOBER 1, 1997
ITEM 10. COVER PAGE.
Not applicable.
ITEM 11. TABLE OF CONTENTS.
General Information and History. . . . . . . . . . . . . . . . . . . B-
Investment Objectives and Policies . . . . . . . . . . . . . . . . . B-
Management of the Trust. . . . . . . . . . . . . . . . . . . . . . . B-
Control Persons and Principal Holders of Securities. . . . . . . . . B-
Investment Advisory and Other Services . . . . . . . . . . . . . . . B-
Brokerage Allocation and Other Practices . . . . . . . . . . . . . . B-
Capital Stock and Other Securities . . . . . . . . . . . . . . . . . B-
Purchase, Redemption and Pricing of Securities . . . . . . . . . . . B-
Tax Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-
Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-
Calculations of Performance Data . . . . . . . . . . . . . . . . . . B-
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . B-
ITEM 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
ITEM 13. INVESTMENT OBJECTIVES AND POLICIES.
INVESTMENT POLICIES
INTRODUCTION
Part A contains information about the investment objectives, policies and
restrictions of Schroder Global Growth Portfolio (the "Portfolio"), a series of
Schroder Capital Funds (the "Trust"). The following discussion is intended to
supplement the disclosure in Part A concerning the Portfolio's investments,
investment techniques and strategies and the risks associated therewith. This
Part B should be read only in conjunction with Part A.
DEFINITIONS
As used in Part B, the following terms shall have the meanings listed:
"Board" shall mean the Board of Trustees of the Trust.
"1933 Act" shall mean the Securities Act of 1933, as amended.
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"1940 Act" shall mean the Investment Company Act of 1940, as amended.
"Commission" shall mean the U.S. Securities and Exchange Commission.
FOREIGN SECURITIES
Investment in the securities of foreign issuers may involve risks in addition to
those normally associated with investments in the securities of U.S. issuers.
There may be less publicly available information about foreign issuers than is
available for U.S. issuers, and foreign auditing, accounting and financial
reporting practices may differ from U.S. practices. Foreign securities markets
may be less active than U.S. markets, trading may be thin and consequently
securities prices may be more volatile. The Portfolio's investment adviser,
Schroder Capital Management International, Inc. ("SCMI" or "Adviser") will, in
general, invest only in securities of companies and governments of countries
which, in its judgment, are both politically and economically stable.
Nevertheless, all foreign investments are subject to risks of foreign political
and economic instability, adverse movements in foreign exchange rates, the
imposition or tightening of exchange controls or other limitations on the
repatriation of foreign capital and changes in foreign governmental attitudes
toward private investment, possibly leading to nationalization, increased
taxation, or confiscation of Portfolio assets.
DEPOSITORY RECEIPTS
Investments in securities of foreign issuers may on occasion be in the form of
sponsored or unsponsored American Depository Receipts ("ADRs") or European
Depository Receipts ("EDRs"), or other similar securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued in the United States by a bank or
trust company, evidencing ownership of the underlying securities. EDRs are
typically issued in Europe under a similar arrangement. Generally, ADRs, in
registered form, are designed for use in the U.S. securities markets and EDRs,
in bearer form, are designed for use in European securities markets.
Unsponsored ADRs may be created without the participation of the foreign issuer.
Holders of these ADRs generally bear all the costs of the ADR facility, whereas
foreign issuers typically bear certain costs in a sponsored ADR. The bank or
trust company depository of an unsponsored ADR may be under no obligation to
distribute shareholder communications received from the foreign issuer or to
pass through voting rights.
USE OF FORWARD CONTRACTS IN FOREIGN EXCHANGE TRANSACTIONS
To protect or "hedge" against adverse movements in foreign currency exchange
rates, the Portfolio may invest in forward contracts to purchase or sell an
agreed-upon amount of a specified currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the parties,
at a price set at the time of the contract. Such contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades.
Although such contracts tend to minimize the risk of loss due to a decline in
the value of the currency which is sold, they expose the Portfolio to the risk
that the counterparty is unable to perform and they tend to limit commensurately
any potential gain which might result should the value of such currency increase
during the contract period.
U.S. GOVERNMENT SECURITIES
The Portfolio may invest in obligations issued or guaranteed by the U.S.
Government or its agencies, instrumentalities or government-sponsored entities
that have remaining maturates not exceeding one year. Agencies and
instrumentalities which issue or guarantee debt securities and which have been
established or sponsored by the U.S. Government include the Bank for
Cooperatives, the Export-Import Bank, the Federal Farm Credit System, the
Federal Home Loan Banks, the Federal Home Loan Mortgage Corporation, the Federal
Intermediate Credit Banks, the Federal Land Banks, the Federal National Mortgage
Association, the Government National Mortgage Association and the Student Loan
Marketing Association. Except for obligations issued by the U.S. Treasury and
the Government National Mortgage Association, none of the obligations of the
other agencies, instrumentalities or
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government-sponsored entities referred to above are backed by the full faith and
credit of the U.S. Government. There can be no assurance that the U.S.
Government will provide financial support to these obligations if it is not
obligated to do so.
BANK OBLIGATIONS
The Portfolio may invest in obligations of U.S. banks (including certificates of
deposit and bankers' acceptances) having total assets at the time of purchase in
excess of $1 billion. Such banks must be members of the Federal Deposit
Insurance Corporation or the Federal Savings and Loan Insurance Corporation.
The Portfolio also may invest in certificates of deposit issued by foreign
banks, denominated in any major foreign currency. The Portfolio will invest in
instruments issued by foreign banks which, in the view of SCMI and the Board,
are of credit-worthiness and financial stature in their respective countries
comparable to U.S. banks used by the Portfolio. The Portfolio may also hold
cash and time deposits denominated in any major currency in foreign banks.
A certificate of deposit is an interest-bearing negotiable certificate issued by
a bank against funds deposited in the bank. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. Although the borrower is liable
for payment of the draft, the bank unconditionally guarantees to pay the draft
at its face value on the maturity date. A time deposit is a non-negotiable
receipt issued by a bank in exchange for the deposit of funds. Similar to a
certificate of deposit, a time deposit earns a specified rate of interest over a
definite time period; however, it cannot be traded in the secondary markets.
SHORT-TERM DEBT SECURITIES
The Portfolio may invest in commercial paper, that is short-term unsecured
promissory notes issued in bearer form by bank holding companies, corporations
and finance companies. The commercial paper purchased by the Portfolio for
temporary defensive purposes consists of direct obligations of domestic issuers
which, at the time of investment, are rated "P-1" by Moody's Investors Service,
Inc. ("Moody's") or "A-1" by Standard & Poor's Ratings Group ("S&P"), or
securities that, if not rated, are issued by companies having an outstanding
debt issue currently rated "Aa" by Moody's or "AAA" or "AA" by S&P. The rating
"P-1" is the highest commercial paper rating assigned by Moody's and the rating
"A-1" is the highest commercial paper ratings assigned by S&P.
REPURCHASE AGREEMENTS
The Portfolio may invest in securities subject to repurchase agreements that
mature or may be terminated by notice in seven days or less with U.S. banks or
broker-dealers. In a typical repurchase agreement the seller of a security
commits itself at the time of the sale to repurchase that security from the
buyer at a mutually agreed-upon time and price. The repurchase price exceeds
the sale price, reflecting an agreed-upon interest rate effective for the period
the buyer owns the security subject to repurchase. The agreed-upon rate is
unrelated to the interest rate on that security. SCMI monitors the value of the
underlying security at the time the transaction is entered into and at all times
during the term of the repurchase agreement to insure that the value of the
security always equals or exceeds the repurchase price. In the event of default
by the seller under the repurchase agreement, the Portfolio may have
difficulties in exercising its rights to the underlying securities and may incur
costs and experience time delays in connection with the disposition of such
securities. To evaluate potential risks, SCMI reviews the credit-worthiness of
those banks and dealers with which the Portfolio enters into repurchase
agreements.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
To hedge against adverse price movements in the securities held in its portfolio
and the currencies in which they are denominated (as well as in the securities
it might wish to purchase and their denominated currencies), the Portfolio may
engage in transactions in forward foreign currency exchange contracts.
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A forward foreign currency exchange contract ("forward contract") is an
obligation to purchase or sell a currency at a future date (which may be any
fixed number of days from the date of the contract agreed upon by the parties)
at a price set at the time of the contract. The Portfolio may enter into
forward contracts as a hedge against fluctuations in future foreign exchange
rates.
Currently, only a limited market, if any, exists for hedging transactions
relating to currencies in many emerging market countries or to securities of
issuers domiciled or principally engaged in business in emerging market
countries. This may limit the Portfolio's ability to hedge its investments
effectively in those emerging markets. Hedging against a decline in the value
of a currency does not eliminate fluctuations in the prices of portfolio
securities or prevent losses if the prices of such securities decline. Such
transactions also limit the opportunity for gain if the value of the hedged
currencies should rise. In addition, it may not be possible for the Portfolio
to hedge against a devaluation that is so generally anticipated that the
Portfolio is not able to contract to sell the currency at a price above the
devaluation level it anticipates.
The Portfolio will enter into forward contracts under certain instances. When
the Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may, for example, wish to secure the price
of the security in U.S. dollars or some other foreign currency which the
Portfolio is temporarily holding in its portfolio. By entering into a forward
contract for the purchase or sale (for a fixed amount of dollars or other
currency) of the amount of foreign currency involved in the underlying security
transactions, the Portfolio will be able to protect itself against possible loss
(resulting from adverse changes in the relationship between the U.S. dollar or
other currency being used for the security purchase and the foreign currency in
which the security is denominated) during the period between the date on which
the security is purchased or sold and the date on which payment is made or
received. In addition, when the Portfolio anticipates purchasing securities at
some future date, and wishes to secure the current exchange rate of the currency
in which those securities are denominated against the U.S. dollar or some other
foreign currency, it may enter into a forward contract to purchase an amount of
currency equal to part or all of the value of the anticipated purchase, for a
fixed amount of U.S. dollars or other currency.
In all of the above instances, if the currency in which the Portfolio's
portfolio securities (or anticipated portfolio securities) are denominated rises
in value with respect to the currency which is being purchased, then the
Portfolio will have realized fewer gains than if the Portfolio had not entered
into the forward contracts. Furthermore, the precise matching of the forward
contract amounts and the value of the securities involved is not generally
possible, since the future value of such securities in foreign currencies
changes as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and the date it matures.
To the extent that the Portfolio enters into forward contracts to hedge against
a decline in the value of portfolio holdings denominated in a particular foreign
currency resulting from currency fluctuations, there is a risk that the
Portfolio may nevertheless realize a gain or loss as a result of currency
fluctuations after such portfolio holdings are sold should the Portfolio be
unable to enter into an "offsetting" forward foreign currency contract with the
same party or another party. The Portfolio may be limited in its ability to
enter into hedging transactions involving forward contracts by the Internal
Revenue Code requirements relating to qualifications as a regulated investment
company (see "Taxation").
The Portfolio is not required to enter into such transactions with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Adviser. Generally, the Portfolio will not enter into a
forward contract with a term of greater than one year.
OPTIONS AND FUTURES TRANSACTIONS
As discussed in the Prospectus, the Portfolio may write covered call options
against securities held in its portfolio and covered put options on eligible
portfolio securities and may purchase options of the same series to effect
closing transactions, and may hedge against potential changes in the market
value of its investments (or anticipated investments), by purchasing put and
call options on portfolio (or eligible portfolio) securities (and the currencies
in which they are denominated) and engaging in transactions involving futures
contracts and options on such contracts.
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Call and put options on U.S. Treasury notes, bonds and bills and on various
foreign currencies are listed on several U.S. and foreign securities exchanges
and are written in over-the-counter transactions ("OTC Options"). Listed
options are issued or guaranteed by the exchange on which they trade or by a
clearing corporation such as the Options Clearing Corporation ("OCC").
Ownership of a listed call option gives the Portfolio the right to buy from the
OCC (in the U.S.) or other clearing corporation or exchange, the underlying
security or currency covered by the option at the stated exercise price (the
price per unit of the underlying security or currency) by filing an exercise
notice prior to the expiration date of the option. The writer (seller) of the
option would then have the obligation to sell, to the OCC (in the U.S.) or other
clearing corporation or exchange, the underlying security or currency at that
exercise price prior to the expiration date of the option, regardless of its
then current market price. Ownership of a listed put option would give the
Portfolio the right to sell the underlying security or currency to the OCC (in
the U.S.) or other clearing corporation or exchange at the stated exercise
price. Upon notice of exercise of the put option, the writer of the option
would have the obligation to purchase the underlying security or currency from
the OCC (in the U.S.) or other clearing corporation or exchange at the exercise
price.
The OCC or other clearing corporation or exchange that issues listed options
ensures that all transactions in such options are properly executed. OTC
options are purchased from or sold (written) to dealers or financial
institutions that have entered into direct agreements with the Portfolio. With
OTC options, variables such as expiration date, exercise price and premium are
agreed between the Portfolio and the transacting dealer. If the transacting
dealer fails to make or take delivery of the securities or amount of foreign
currency underlying an option it has written, the Portfolio would lose the
premium paid for the option as well as any anticipated benefit of the
transaction. The Portfolio will engage in OTC option transactions only with
member banks of the Federal Reserve System or primary dealers in U.S. Government
securities or with affiliates of such banks or dealers which have capital of at
least $50 million or whose obligations are guaranteed by an entity having
capital of at least $50 million.
OPTIONS ON FOREIGN CURRENCIES. The Portfolio may purchase and write options on
foreign currencies for purposes similar to those involved with investing in
forward foreign currency exchange contracts. For example, in order to protect
against declines in the dollar value of portfolio securities that are
denominated in a foreign currency, the Portfolio may purchase put options on an
amount of such foreign currency equivalent to the current value of the portfolio
securities involved. As a result, the Portfolio would be able to sell the
foreign currency for a fixed amount of U.S. dollars, thereby securing the dollar
value of the portfolio securities (less the amount of the premiums paid for the
options). Conversely, the Portfolio may purchase call options on foreign
currencies in which securities it anticipates purchasing are denominated to
secure a set U.S. dollar price for such securities and protect against a decline
in the value of the U.S. dollar against such foreign currency. The Portfolio
may also purchase call and put options to close out written option positions.
The Portfolio also may write covered call options on foreign currency to protect
against potential declines in its portfolio securities that are denominated in
foreign currencies. If the U.S. dollar value of the portfolio securities falls
as a result of a decline in the exchange rate between the foreign currency in
which it is denominated and the U.S. dollar, then a loss to the Portfolio
occasioned by such value decline would be ameliorated by receipt of the premium
on the option sold. At the same time, however, the Portfolio gives up the
benefit of any rise in value of the relevant portfolio securities above the
exercise price of the option and, in fact, only receives a benefit from the
writing of the option to the extent that the value of the portfolio securities
falls below the price of the premium received. The Portfolio also may write
options to close out long call option positions. A covered put option on a
foreign currency would be written by the Portfolio for the same reason it would
purchase a call option, namely, to hedge against an increase in the U.S. dollar
value of a foreign security that the Portfolio anticipates purchasing. In this
case, the receipt of the premium would offset, to the extent of the size of the
premium, any increased cost to the Portfolio resulting from an increase in the
U.S. dollar value of the foreign security. However, the Portfolio could not
benefit from any decline in the cost of the foreign security that is greater
than the price of the premium received. The Portfolio also may write options to
close out long put option positions.
Markets in foreign currency options are relatively new, and the Portfolio's
ability to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. Although the Portfolio will not
purchase or write such options unless and until, in the opinion of the SCMI, the
market for them has developed sufficiently to ensure that their risks are not
greater than the risks in connection with the underlying currency, there
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can be no assurance that a liquid secondary market will exist for a particular
option at any specific time. In addition, options on foreign currencies are
affected by all of those factors that influence foreign exchange rates and
investments generally.
The value of a foreign currency option depends upon the value of the underlying
currency relative to the U.S. dollar, with the result that the price of the
option position may vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a foreign security,
including foreign securities held in a "hedged" investment portfolio. Because
foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign currencies
or any regulatory requirement that quotations available through dealers or other
market sources be firm or revised on a timely basis. Quotation information
available is generally representative of very large transactions in the
interbank market and, thus, may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the
extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that are not reflected in the options market.
COVERED CALL WRITING. The Portfolio is permitted to write covered call options
on portfolio securities, and on the U.S. dollar and foreign currencies in which
they are denominated, without limit. Generally, a call option is "covered" if
the Portfolio owns (or has the right to acquire without additional cash
consideration (or for additional cash consideration held for the Portfolio by
its custodian in a segregated account) the underlying security (currency)
subject to the option. In the case of call options on U.S. Treasury Bills,
however, the Portfolio might own U.S. Treasury Bills of a different series from
those underlying the call option, but with a principal amount and value
corresponding to the exercise price and a maturity date no later than that of
the security (currency) deliverable under the call option. A call option is
also covered if the Portfolio holds a call on the same security as the
underlying security (currency) of the written option, where the exercise price
of the call used for coverage is equal to or less than the exercise price of the
call or greater than the exercise price of the call written if the
mark-to-market difference is maintained by the Portfolio in cash, U.S.
Government securities or other high-grade debt obligations held by the Portfolio
in a segregated account maintained with its custodian.
The Portfolio receives a premium from the purchaser in return for a call it has
written. Receipt of such premiums may enable the Portfolio to earn a higher
level of current income than it would earn from holding the underlying
securities (currencies) alone. Moreover, the premium received offsets a portion
of the potential loss incurred by the Portfolio if the securities (currencies)
underlying the option are ultimately sold (exchanged) by the Portfolio at a
loss. Furthermore, a premium received on a call written on a foreign currency
ameliorates any potential loss of value on the portfolio security due to a
decline in the value of the currency. However, during the option period, the
covered call writer has, in return for the premium, given up the opportunity for
capital appreciation above the exercise price should the market price of the
underlying security (or the exchange rate of the currency in which it is
denominated) increase but has retained the risk of loss should the price of the
underlying security (or the exchange rate of the currency in which it is
denominated) decline. The premium received fluctuates with varying economic
market conditions. If the market value of the portfolio securities (or the
currencies in which they are denominated) upon which call options have been
written increases, the Portfolio may receive a lower total return from the
portion of its portfolio upon which calls have been written than it would have
had such calls not been written.
With respect to listed options and certain OTC options, during the option period
the Portfolio may be required, at any time, to deliver the underlying security
(currency) against payment of the exercise price on any calls it has written
(exercise of certain listed and OTC options may be limited to specific
expiration dates). This obligation terminates upon the expiration of the option
period or at such earlier time when the writer effects a closing purchase
transaction. A closing purchase transaction is accomplished by purchasing an
option of the same series as the option previously written. However, once the
Portfolio has been assigned an exercise notice, the Portfolio is unable to
effect a closing purchase transaction.
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Closing purchase transactions are ordinarily effected to realize a profit on an
outstanding call option, to prevent an underlying security (currency) from being
called, to permit the sale of an underlying security (or the exchange of the
underlying currency) or to enable the Portfolio to write another call option on
the underlying security (currency) with either a different exercise price or
expiration date or both. The Portfolio may realize a net gain or loss from a
closing purchase transaction depending upon whether the amount of the premium
received on the call option is more or less than the cost of effecting the
closing purchase transaction. Any loss incurred in a closing purchase
transaction may be wholly or partially offset by unrealized appreciation in the
market value of the underlying security (currency). Conversely, a gain
resulting from a closing purchase transaction could be offset in whole or in
part or exceeded by a decline in the market value of the underlying security
(currency).
If a call option expires unexercised, the Portfolio realizes a gain in the
amount of the premium on the option less the commission paid. Such a gain,
however, may be offset by depreciation in the market value of the underlying
security (currency) during the option period. If a call option is exercised,
the Portfolio realizes a gain or loss from the sale of the underlying security
(currency) equal to the difference between the purchase price of the underlying
security (currency) and the proceeds of the sale of the security (currency) plus
the premium received on the option less the commission paid.
Options written by the Portfolio normally have expiration dates of up to
eighteen months from the date written. The exercised price of a call option may
be below, equal to or above the current market value of the underlying security
at the time the option is written.
COVERED PUT WRITING. As a writer of a covered put option, the Portfolio would
incur an obligation to buy the security underlying the option from the purchaser
of the put, at the option's exercise price at any time during the option period,
at the purchaser's election (certain listed and OTC put options written by the
Portfolio will be exercisable by the purchaser only on a specific date). A put
is "covered" if at all times the Portfolio maintains with its custodian (in a
segregated account) cash, U.S. Government securities or other high-grade
obligations in an amount equal to at least the exercise price of the option.
Similarly, a short put position could be covered by the Portfolio by its
purchase of a put option on the same security (currency) as the underlying
security of the written option, where the exercise price of the purchased option
is equal to or more than the exercise price of the put written or less than the
exercise price of the put written if the marked to market difference is
maintained by the Portfolio in cash, U.S. Government securities or other
high-grade debt obligations which the Portfolio holds in a segregated account
maintained at its custodian. In writing puts, the Portfolio assumes the risk of
loss should the market value of the underlying security (currency) decline below
the exercise price of the option (any loss being decreased by the receipt of the
premium on the option written). In the case of listed options, during the
option period the Portfolio may be required, at any time, to make payment of the
exercise price against delivery of the underlying security (currency). The
operation of and limitations on covered put options in other respects are
substantially identical to those of call options.
The Portfolio will write put options for three purposes: (i) to receive the
income derived from the premiums paid by purchasers; (ii) when the investment
adviser wishes to purchase the security (or a security denominated in the
currency underlying the option) underlying the option at a price lower than its
current market price (in which case it will write the covered put at an exercise
price reflecting the lower purchase price sought); and (iii) to close out a long
put option position. The potential gain on a covered put option is limited to
the premium received on the option (less the commissions paid on the
transaction) while the potential loss equals the differences between the
exercise price of the option and the current market price of the underlying
securities (currencies) when the put is exercised, offset by the premium
received (less the commissions paid on the transaction).
PURCHASING CALL AND PUT OPTIONS. The Portfolio may purchase listed and OTC call
and put options in amounts equaling up to 5% of its total assets. The Portfolio
may purchase a call option in order to close out a covered call position (see
"Covered Call Writing" above), to protect against an increase in price of a
security it anticipates purchasing or, in the case of a call option on foreign
currency, to hedge against an adverse exchange rate move of the currency in
which the security it anticipates purchasing is denominated vis-a-vis the
currency in which the exercise price is denominated. The purchase of the call
option to effect a closing transaction on a call written over-
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the-counter may be a listed or an OTC option. In either case, the call
purchased is likely to be on the same securities (currencies) and have the same
terms as the written option. If purchased over-the-counter, the option would
generally be acquired from the dealer or financial institution which purchased
the call written by the Portfolio.
The Portfolio may purchase put options on securities (currencies) that it holds
in its portfolio to protect itself against a decline in the value of the
security and to close out written put option positions. If the value of the
underlying security (currency) were to fall below the exercise price of the put
purchased in an amount greater then the premium paid for the option, the
Portfolio would incur no additional loss. In addition, the Portfolio may sell a
put option it has previously purchased prior to the sale of the securities
(currencies) underlying such option. Such a sale would result in a net gain or
loss depending upon whether the amount received on the sale is more or less than
the premium and other transaction costs paid on the put option that is sold.
Any such gain or loss could be offset in whole or in part by a change in the
market value of the underlying security (currency). If a put option purchased
by the Portfolio expired without being sold or exercised, the premium would be
lost.
RISKS OF OPTIONS TRANSACTIONS. During the option period, the covered call
writer has, in return for the premium on the option, given up the opportunity
for capital appreciation above the exercise price if the market price of the
underlying security (or the value of its denominated currency) increases but has
retained the risk of loss if the price of the underlying security (or the value
of its denominated currency) declines. The writer has no control over the time
when it may be required to fulfill its obligation as a writer of the option.
Once an option writer has received an exercise notice, it cannot effect a
closing purchase transaction in order to terminate its obligation under the
option and must deliver or receive the underlying securities at the exercise
price.
Prior to exercise or expiration, an option position can only be terminated by
entering into a closing purchase or sale transaction. If a covered call option
writer is unable to effect a closing purchase transaction or to purchase an
offsetting OTC option, it cannot sell the underlying security until the option
expires or the option is exercised. Accordingly, a covered call option writer
may not be able to sell an underlying security at a time when it might otherwise
be advantageous to do so. A covered put option writer who is unable to effect a
closing purchase transaction or to purchase an offsetting OTC option would
continue to bear the risk of decline in the market price of the underlying
security until the option expires or is exercised. In addition, a covered put
writer would be unable to utilize the amount held in cash or U.S. Government or
other high grade short-term obligations as security for the put option for other
investment purposes until the exercise or expiration of the option.
The Portfolio's ability to close out its position as a writer of an option is
dependent upon the existence of a liquid secondary market on option exchanges.
There is no assurance that such a market will exist, particularly in the case of
OTC options, since such options will generally only be closed out by entering
into a closing purchase transaction with the purchasing dealer. However, the
Portfolio may be able to purchase an offsetting option that does not close out
its position as a writer but constitutes an asset of equal value to the
obligation under the option written. If the Portfolio is not able to either
enter into a closing purchase transaction or purchase an offsetting position, it
will be required to maintain the securities subject to the call, or the
collateral underlying the put, even though it might not be advantageous to do
so, until a closing transaction can be entered into (or the option is exercised
or expires).
Among the possible reasons for the absence of a liquid secondary market on an
exchange are: (i) insufficient trading interest in certain options;
(ii) restrictions on transactions imposed by an exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (iv) interruption of the normal
operations on an exchange; (v) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume; or (vi) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the secondary market on that exchange (or in that
class or series of options) would cease to exist.
In the event of the bankruptcy of a broker through which the Portfolio engages
in transactions in options, the Portfolio could experience delays and/or losses
in liquidating open positions purchased or sold through the broker and/or incur
a loss of all or part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an OTC option purchased by the
Portfolio, the Portfolio could experience a loss of all or part of the
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value of the option. Transactions will be entered into by the Portfolio only
with brokers or financial institutions deemed creditworthy by SCMI.
Exchanges have established limitations governing the maximum number of options
on the same underlying security or futures contract (whether or not covered)
that may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). An exchange may order the liquidation of positions found
to be in violation of these limits and it may impose other sanctions or
restrictions. These position limits may restrict the number of listed options
which the Portfolio may write.
The hours of trading for options may not conform to the hours during which the
underlying securities are traded. If the option markets close before the markets
for the underlying securities, significant price and rate movements can take
place in the underlying markets that cannot be reflected in the option markets.
The extent to which the Portfolio may enter into transactions involving options
may be limited by the Internal Revenue Code's requirements for qualification as
a regulated investment company and the Portfolio's intention to qualify as such
(see "Taxation").
FUTURES CONTRACTS. The Portfolio may purchase and sell interest rate, currency,
and index futures contracts ("futures contracts") that are traded on U.S. and
foreign commodity exchanges, on such underlying securities as U.S. Treasury
bonds, notes and bills, and/or any foreign government fixed-income security
("interest rate futures contracts"), on various currencies ("currency futures
contracts") and on such indices of U.S. and foreign securities as may exist or
come into being ("index futures contracts").
The Portfolio may purchase or sell interest rate futures contracts for the
purpose of hedging some or all of the value of its portfolio securities (or
anticipated portfolio securities) against changes in prevailing interest rates.
If the investment adviser anticipates that interest rates may rise and,
concomitantly, that the price of certain of its portfolio securities fall, the
Portfolio may sell an interest rate futures contract. If declining interest
rates are anticipated, the Portfolio may purchase an interest rate futures
contract to protect against a potential increase in the price of securities the
Portfolio intends to purchase. Subsequently, appropriate securities may be
purchased by the Portfolio in an orderly fashion; as securities are purchased,
corresponding futures positions would be terminated by offsetting sales of
contracts.
The Portfolio may purchase or sell currency futures contracts on currencies in
which its portfolio securities (or anticipated portfolio securities) are
denominated for the purposes of hedging against anticipated changes in currency
exchange rates. The Portfolio may enter into currency futures contracts for the
same reasons as set forth above for entering into forward foreign currency
exchange contracts; namely, to secure the value of a security purchased or sold
in a given currency vis-a-vis a different currency or to hedge against an
adverse currency exchange rate movement of a portfolio security's (or
anticipated portfolio security's) denominated currency vis-a-vis a different
currency.
The Portfolio may purchase or sell index futures contracts for the purpose of
hedging some or all of its portfolio (or anticipated portfolio) securities
against changes in their prices. If it anticipates that the prices of
securities it holds may fall, the Portfolio may sell an index futures contract.
Conversely, if the Portfolio wishes to hedge against anticipated price rises in
those securities which it intends to purchase, the Portfolio may purchase an
index futures contract.
In addition to the above, interest rate, currency and index futures contracts
will be bought or sold in order to close out short or long positions maintained
by the Portfolio in corresponding futures contracts.
Although most interest rate futures contracts call for actual delivery or
acceptance of securities, the contracts usually are closed out before the
settlement date without making or taking delivery. A futures contract sale is
closed out by effecting a futures contract purchase for the same aggregate
amount of the specific type of security (currency) and the same delivery date.
If the sale price exceeds the offsetting purchase price, the seller would be
paid the
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difference and would realize a gain. If the offsetting purchase price exceeds
the sale price, the seller would pay the difference and would realize a loss.
Similarly, a futures contract purchase is closed out by effecting a futures
contract sale for the same aggregate amount of the specific type of security
(currency) and the same delivery date. If the offsetting sale price exceeds the
purchase price, the purchaser would realize a gain, whereas if the purchase
price exceeds the offsetting sale price, the purchaser would realize a loss.
There is no assurance that the Portfolio will be able to enter into a closing
transaction.
INTEREST RATE FUTURES CONTRACTS. When the Portfolio enters into an interest
rate futures contract, it is initially required to deposit with the Portfolio's
custodian (in a segregated account in the name of the broker performing the
transaction) an "initial margin" of cash or U.S. Government securities or other
high grade short-term obligations equal to approximately 2% of the contract
amount. Initial margin requirements are established by the exchanges on which
futures contracts trade and may change. In addition, brokers may establish
margin deposit requirements in excess of those required by the exchanges.
Initial margin in futures transactions is different from margin in securities
transactions in that initial margin does not involve the borrowing of money by a
brokers' client but is, rather, a good faith deposit on the futures contract
that will be returned to the Portfolio upon the proper termination of the
futures contract. The margin deposits made are marked to market daily, and the
Portfolio may be required to make subsequent deposits with the Portfolio's
futures contract clearing broker of cash or U.S. Government securities (called
"variation margin") that are reflective of price fluctuations in the futures
contract.
CURRENCY FUTURES CONTRACTS. Generally, foreign currency futures contracts
provide for the delivery of a specified amount of a given currency, on the
exercise date, for a set exercise price denominated in U.S. dollars or other
currency. Foreign currency futures contracts would be entered into for the same
reason and under the same circumstances as forward foreign currency exchange
contracts. SCMI assesses such factors as cost spreads, liquidity and transaction
costs in determining whether to use futures contracts or forward contracts in
its foreign currency transactions and hedging strategy.
Purchasers and sellers of foreign currency futures contracts are subject to the
same risks that apply generally to the buying and selling of futures contracts.
In addition, there are risks associated with foreign currency futures contracts
and their use as a hedging device similar to those associated with options on
foreign currencies described above. Further, settlement of a foreign currency
futures contract must occur within the country issuing the underlying currency.
Thus, the Portfolio must accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign restrictions or regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
may be required to pay any fees, taxes or charges associated with such delivery
that are assessed in the issuing country.
INDEX FUTURES CONTRACTS. The Portfolio may invest in index futures contracts.
An index futures contract sale creates an obligation by the Portfolio, as
seller, to deliver cash at a specified future time. An index futures contract
purchase would create an obligation by the Portfolio, as purchaser, to take
delivery of cash at a specified future time. Futures contracts on indices do
not require the physical delivery of securities but provide for a final cash
settlement on the expiration date that reflects accumulated profits and losses
credited or debited to each party's account.
The Portfolio is required to maintain margin deposits with brokerage firms
through which it effects index futures contracts in a manner similar to that
described above for interest rate futures contracts. In addition, due to
current industry practice, daily variations in gains and losses on open
contracts are required to be reflected in cash in the form of variation margin
payments. The Portfolio may be required to make additional margin payments
during the term of the contract.
At any time prior to expiration of the futures contract, the Portfolio may elect
to close the position by taking an opposite position, which will operate to
terminate the Portfolio's position in the futures contract. A final
determination of variation margin is then made, additional cash may be required
to be paid by or released to the Portfolio and the Portfolio realizes a loss or
gain.
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OPTIONS ON FUTURES CONTRACTS. The Portfolio may purchase and write call and put
options on futures contracts traded on an exchange and may enter into closing
transactions with respect to such options to terminate an existing position. An
option on a futures contract gives the purchaser the right (in return for the
premium paid) to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. Upon exercise of the
option, the delivery of the position in the futures contract by the writer of
the option to the holder of the option is accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contract at the time of exercise
exceeds, in case of a call, or is less than, in the case of a put, the exercise
price of the option on the futures contract.
The Portfolio may purchase and write options on futures contracts for purposes
identical to those set forth above for the purchase of a futures contract
(purchase of a call option or sale of a put option) and the sale of a futures
contract (purchase of a put option or sale of a call option), or to close out a
long or short position in futures contracts. If, for example, the investment
adviser wished to protect against an increase in interest rates and the
resulting negative impact on the value of a portion of its fixed-income
portfolio, it might write a call option on an interest rate futures contract,
the underlying security of which correlates with the portion of the portfolio
the investment adviser seeks to hedge. Any premiums received in the writing of
options on futures contracts may provide a further hedge against losses
resulting from price declines in portions of the Portfolio's investment
portfolio.
Options on foreign currency futures contracts may involve certain additional
risks. Trading options on foreign currency futures contracts is relatively new.
The ability to establish and close out positions on such options is subject to
the maintenance of a liquid secondary market. To reduce this risk, the
Portfolio will not purchase or write options on foreign currency futures
contracts unless and until, in SCMI's opinion, the market for such options has
developed sufficiently that the risks in connection with them are not greater
than the risks in connection with transactions in the underlying foreign
currency futures contracts.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The
Portfolio may not enter into futures contracts or purchase related options
thereon if, immediately thereafter, the amount committed to margin plus the
amount paid for premiums for unexpired options on futures contracts exceeds 5%
of the value of the Portfolio's total assets, after taking into account
unrealized gains and unrealized losses on such contracts it has entered into,
provided, however, that in the case of an option that is in-the-money (the
exercise price of the call (put) option is less (more) than the market price of
the underlying security) at the time of purchase, the in-the-money amount may be
excluded in calculating the 5%. However, there is no overall limitation on the
percentage of the Portfolio's assets that may be subject to a hedge position.
In addition, in accordance with the regulations of the Commodity Futures Trading
Commission ("CFTC") under which the Portfolio is exempted from registration as a
commodity pool operator, the Portfolio may only enter into futures contracts and
options on futures contracts transactions for purposes of hedging a part or all
of its portfolio. Except as described above, there are no other limitations on
the use of futures and options thereon by the Portfolio.
The writer of an option on a futures contract is required to deposit initial and
variation margin pursuant to requirements similar to those applicable to futures
contracts. Premiums received from the writing of an option on a futures
contract are included in initial margin deposits.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. The Portfolio
may sell a futures contract to protect against the decline in the value of
securities (or the currency in which they are denominated) held by the
Portfolio. However, it is possible that the futures market may advance and the
value of the Portfolio's securities (or the currency in which they are
denominated) may decline. If this occurs, the Portfolio will lose money on the
futures contract and also experience a decline in value of its portfolio
securities. While this might occur for only a very brief period or to a very
small degree, over time the value of a diversified portfolio will tend to move
in the same direction as the futures contracts.
If the Portfolio purchases a futures contract to hedge against the increase in
value of securities it intends to buy (or the currency in which they are
denominated) and the value of such securities (currencies) decreases, then the
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Portfolio may determine not to invest in the securities as planned and will
realize a loss on the futures contract that is not offset by a reduction in the
price of the securities.
If the Portfolio has sold a call option on a futures contract, it will cover
this position by holding (in a segregated account maintained at its custodian)
cash, U.S. Government securities or other high-grade debt obligations equal in
value (when added to any initial or variation margin on deposit) to the market
value of the securities (currencies) underlying the futures contract or the
exercise price of the option. Such a position may also be covered by owning the
securities (currencies) underlying the futures contract or by holding a call
option permitting the Portfolio to purchase the same contract at a price no
higher than the price at which the short position was established.
In addition, if the Portfolio holds a long position in a futures contract, it
will hold cash, U.S. Government securities or other high-grade debt obligations
equal to the purchase price of the contract (less the amount of initial or
variation margin on deposit) in a segregated account maintained for the
Portfolio by its custodian. Alternatively, the Portfolio could cover its long
position by purchasing a put option on the same futures contract with an
exercise price as high or higher than the price of the contract held by the
Portfolio.
Exchanges limit the amount by which the price of a futures contract may move on
any day. If the price moves equal the daily limit on successive days, then it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased. In the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin on open
futures contract positions. In such situations, if the Portfolio has
insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do so.
In addition, the Portfolio may be required to take or make delivery of the
instruments underlying interest rate futures contracts it holds at a time when
it is disadvantageous to do so. The inability to close out options and futures
contract positions could also have an adverse impact on the Portfolio's ability
to effectively hedge its portfolio.
Futures contracts and options thereon that are purchased or sold on foreign
commodities exchanges may have greater price volatility than their U.S.
counterparts. Furthermore, foreign commodities exchanges may be less regulated
and under less governmental scrutiny than U.S. exchanges, and brokerage
commissions, clearing costs and other transaction costs may be higher. Greater
margin requirements may limit the Portfolio's ability to enter into certain
commodity transactions on foreign exchanges. Moreover, differences in clearance
and delivery requirements on foreign exchanges may cause delays in the
settlement of the Portfolio's foreign exchange transactions.
In the event of the bankruptcy of a broker through which the Portfolio engages
in transactions in futures or options thereon, the Portfolio could experience
delays and/or losses in liquidating open positions purchased or sold through the
broker and/or incur a loss of all or part of its margin deposits with the
broker. Similarly, in the event of the bankruptcy of the writer of an OTC
option purchased by the Portfolio, the Portfolio could experience a loss of all
or part of the value of the option. Transactions are entered into by the
Portfolio only with brokers or financial institutions deemed creditworthy by
SCMI.
While the futures contracts and options transactions in which the Portfolio
engages for the purpose of hedging its portfolio securities are not speculative
in nature, there are risks inherent in the use of such instruments. One such
risk that may arise in employing futures contracts to protect against the price
volatility of portfolio securities (and the currencies in which they are
denominated) is that the prices of securities and indices subject to futures
contracts (and thereby the futures contract prices) may correlate imperfectly
with the behavior of the cash prices of the Portfolio's portfolio securities
(and the currencies in which they are denominated). Another such risk is that
prices of interest rate futures contracts may not move in tandem with the
changes in prevailing interest rates against which the Portfolio seeks a hedge.
A correlation may also be distorted by the fact that the futures market is
dominated by short-term traders seeking to profit from the difference between a
contract or security price objective and their cost of borrowed funds. Such
distortions are generally minor and are expected to diminish as the contract
approaches maturity.
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There may exist an imperfect correlation between the price movements of futures
contracts purchased by the Portfolio and the movements in the prices of the
securities (currencies) which are the subject of the hedge. If participants in
the futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationship between the debt securities or currency markets and futures
markets could result. Price distortions could also result if investors in
futures contracts choose to make or take delivery of underlying securities
rather than engage in closing transactions due to the resultant reduction in the
liquidity of the futures market. In addition, because the deposit requirements
in the futures markets are less onerous than margin requirements in the cash
market, increased participation by speculators in the futures market can be
anticipated with the resulting speculation causing temporary price distortions.
Due to the possibility of price distortions in the futures contracts market and
because of the imperfect correlation between movements in the prices of
securities and movements in the prices of futures contracts, a correct forecast
of interest rate trends may still not result in a successful hedging
transaction.
There is no assurance that a liquid secondary market will exist for futures
contracts and related options in which the Portfolio may invest. In the event a
liquid market does not exist, it may not be possible to close out a futures
position, and in the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin. In
addition, limitations imposed by an exchange or board of trade on which futures
contracts are traded may compel the Portfolio to or prevent it from closing out
a contract, which may result in reduced gain or increased loss to the Portfolio.
The absence of a liquid market in futures contracts might cause the Portfolio to
make or take delivery of the underlying securities (currencies) at a time when
it may be disadvantageous to do so.
The extent to which the Portfolio may enter into transactions involving futures
contracts and options thereon may be limited by the Internal Revenue Code's
requirements for qualification as a regulated investment company and the
Portfolio's intention to qualify as such (see "Taxation").
WARRANTS AND STOCK RIGHTS. The Portfolio may invest in warrants, which are
options to purchase an equity security at a specified price (usually
representing a premium over the applicable market value of the underlying equity
security at the time of the warrant's issuance). Investments in warrants
involve certain risks, including the possible lack of a liquid market for the
resale of the warrants, potential price fluctuations as a result of speculation
or other factors and failure of the price of the underlying security to reach a
level at which the warrant can be prudently exercised (in which case the warrant
may expire without being exercised, resulting in the loss of the Portfolio's
entire investment therein). The prices of warrants do not necessarily move
parallel to the prices of the underlying securities. Warrants have no voting
rights, receive no dividends and have no rights with respect to the assets of
the issuer.
In addition, the Portfolio may invest up to 5% of its assets (at the time of
investment) in stock rights. A stock right is an option given to a shareholder
to buy additional shares at a predetermined price during a specified time
period.
INVESTMENT RESTRICTIONS
The following investment restrictions restate or are in addition to those
described under "Investment Restrictions" and "Investment Policies" in Part A.
These restrictions, unless otherwise indicated (see in particular the discussion
below regarding restriction c(i)), are fundamental policies of the Portfolio and
cannot be changed without the vote of a "majority" of the Portfolio's
outstanding shares. Under the 1940 Act, such a "majority" vote is defined as
the vote of the holders of the lesser of: (i) 67% of more of the shares present
or represented by proxy at a meeting of shareholders, if the holders of more
than 50% of the outstanding shares are present, or (ii) more than 50% of the
outstanding shares. Under these additional restrictions, the Portfolio will
not:
[(a) Invest more than 5% of its assets in the securities of any single
issuer. This restriction does not apply to securities issued by the
U.S. Government, its agencies or instrumentalities.
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(b) Purchase more than 10% of the voting securities of any one issuer.
Moreover, the Portfolio will not purchase more than 3% of the
outstanding securities of any closed-end investment company. (Any such
purchase of securities issued by a closed-end investment company will
otherwise be made in full compliance with Sections 12(d)(1)(a)(i), (ii)
and (iii) of the Investment Company Act of the 1940 Act.)
(c) Invest in (i) securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily
available market exists, or in (ii) securities of issuers having a
record, together with predecessors, of less than three years of
continuous operations if, regarding all such securities, more than 10%
of its total assets would be invested in such securities.
(d) Invest 25% or more of the value of its total assets in any one industry.
(e) Borrow money, except from banks, for temporary emergency purposes and
then only in an amount not exceeding 5% of the value of the total assets
of the Portfolio.
(f) Pledge, mortgage or hypothecate its assets to an extent greater than 10%
of the value of the total assets of the Portfolio.
(g) Purchase securities on margin or sell short.
(h) Make investments for the purpose of exercising control or management.
(i) Purchase or sell real estate, provided that the Portfolio may invest in
securities issued by companies which invest in real estate or interests
therein.
(j) Make loans to other persons, provided that for purposes of this
restriction, entering into repurchase agreements, acquiring corporate
debt securities and investing in U.S. Government obligations, short-term
commercial paper, certificates of deposit and bankers' acceptances shall
not be deemed to be the making of a loan.
(k) Invest in commodities; commodity contracts other than foreign currency
forward contracts; or oil, gas and other mineral resource, lease, or
arbitrage transactions.
(l) Write, purchase or sell options or puts, calls, straddles, spreads, or
combinations thereof.
(m) Underwrite securities issued by other persons except to the extent that,
in connection with the disposition of its portfolio investments, it may
be deemed to be an underwriter under U.S. securities laws.
(n) Invest in warrants, valued at the lower of cost or market, more than 5%
of the value of the Portfolio's net assets (included within that amount,
but not to exceed 2% of the value of the Portfolio's net assets, may be
warrants which are not listed on the New York or American Stock
Exchange. Warrants acquired by the Portfolio in units or attached to
securities may be deemed to be without value.).]
The Portfolio's restrictions on investing in the securities described in (c)(i)
above is an operating (non-fundamental) policy, which may be changed by the
Board without prior shareholder approval. This policy does not include
restricted securities eligible for resale to qualified institutional purchasers
pursuant to Rule 144A under the 1933 Act that are determined to be liquid by the
Board or SCMI under Board-approved guidelines. Such guidelines take into
account trading activity for such securities and the availability of reliable
pricing information, among other factors. If there is a lack of trading
interest in particular Rule 144A securities, the Portfolio's holdings of those
securities may be illiquid.
Except as required by the 1940 Act, if any percentage restriction on investment
or utilization of assets is adhered to at the time an investment is made, a
later change in percentage resulting from a change in the market values of the
Portfolio's assets or purchases and redemptions of interests will not be
considered a violation of the limitation.
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ITEM 14. MANAGEMENT OF THE TRUST.
The following information relates to the principal occupations of each Trustee
and executive officer of the Trust during the past five years and shows the
nature of any affiliation with SCMI. Each of these individuals currently serves
in the same capacity for Schroder Capital Funds (Delaware), an investment
company with a series that invests all of its assets in the Portfolio.
PETER E. GUERNSEY, Oyster Bay, New York - Trustee of the Trust - Insurance
Consultant since August 1986; prior thereto Senior Vice President, Marsh &
McLennan, Inc., insurance brokers.
JOHN I. HOWELL, Greenwich, Connecticut - Trustee of the Trust - Private
Consultant since February 1987; Honorary Director, American International Group,
Inc.; Director, American International Life Assurance Company of New York.
CLARENCE F. MICHALIS, 44 East 64th Street, New York, New York - Trustee of the
Trust - Chairman of the Board of Directors, Josiah Macy, Jr. Foundation
(charitable foundation).
HERMANN C. SCHWAB, 787 Seventh Avenue, New York, New York - Chairman (Honorary)
and Trustee of the Trust - retired since March, 1988; prior thereto, consultant
to SCMI since February 1, 1984.
MARK J. SMITH, (b), 33 Gutter Lane, London, England - President and Trustee of
the Trust - First Vice President of SCMI since April 1990; Director and Vice
President, Schroder Advisors.
ROBERT G. DAVY, 787 Seventh Avenue, New York, New York - a Vice-President of the
Trust - Director of SCMI and Schroder Capital Management International Ltd.
since 1994; First Vice President of SCMI since July, 1992; prior thereto,
employed by various affiliates of Schroders plc in various positions in the
investment research and portfolio management areas since 1986.
MARGARET H. DOUGLAS-HAMILTON(b) (c), 787 Seventh Avenue, New York, New York -
Vice President of the Trust - Secretary of SCM since July 1995; Secretary of
Schroder Advisers since April 1990; First Vice President and General Counsel of
Schroders Incorporated(b) since May 1987; prior thereto, partner of Sullivan &
Worcester, a law firm.
RICHARD R. FOULKES, 787 Seventh Avenue, New York, New York - a Vice President of
the Trust; Deputy Chairman of SCMI since October 1995; Director and Executive
Vice President of Schroder Capital Management International Ltd. since 1989.
CATHERINE S. WOOLEDGE, Two Portland Square, Portland, Maine - Assistant
Treasurer and Assistant Secretary of the Trust - Counsel, Forum Financial
Services, Inc. Prior thereto, associate at Morrison & Foerster since September
1994, prior thereto associate corporate counsel at Franklin Resources, Inc.
since September 1993, and prior thereto associate at Drinker Biddle & Reath,
Washington, D.C.
BARBARA GOTTLIEB(c), 787 Seventh Avenue, New York, New York - Assistant
Secretary of the Trust - Assistant Vice President of SWIS since July 1995 prior
thereto held various positions with SWIS affiliates.
JOHN Y. KEFFER, 2 Portland Square, Portland, Maine - Vice President of the
Trust. President of Forum Financial Services, Inc., the Fund's
sub-administrator, and Forum Financial Corp., the Fund's transfer and dividend
disbursing agent and fund accountant.
JANE P. LUCAS, (c) 787 Seventh Avenue, New York, New York - Vice President of
the Trust - Director and Senior Vice President SCMI; Director of SCM since
September 1995; Assistant Director Schroder Investment Management Ltd. since
June 1991.
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GERARDO MACHADO, 787 Seventh Avenue, New York, New York - Assistant Secretary of
the Trust - Associate, SCMI.
CATHERINE A. MAZZA, 787 Seventh Avenue, New York, New York - Vice President of
the Trust - President of Schroder Advisors since 1997; First Vice President of
SCMI and SCM since 1996; prior thereto, held various marketing positions at
Alliance Capital, an investment adviser, since July 1985.
THOMAS G. SHEEHAN, Two Portland Square, Portland, Maine - Assistant Treasurer
and Assistant Secretary of the Trust - Counsel, Forum Financial Services, Inc.
since 1993; prior thereto, Special Counsel, U.S. Securities and Exchange
Commission, Division of Investment Management, Washington, D.C.
FARIBA TALEBI, 787 Seventh Avenue, New York, New York - Vice President of the
Trust - First Vice President of SCMI since April 1993, employed in various
positions in the investment research and portfolio management areas since 1987.
JOHN A. TROIANO(b), 787 Seventh Avenue, New York, New York - Vice President of
the Trust - Managing Director and Senior Vice President of SCMI since October
1995; Director of Schroder Advisors since October 1992; Director of SCMI since
1991; prior thereto, employed by various affiliates of SCMI in various positions
in the investment research and portfolio management areas since 1981.
IRA L. UNSCHULD, 787 Seventh Avenue, New York, New York - Vice President of the
Trust - Vice President of SCMI since April, 1993 and an Associate from July,
1990 to April, 1993; prior to July, 1990, employed by various financial
institutions as a securities or financial analyst.
ALEXANDRA POE, 787 Seventh Avenue, New York, New York - Secretary and Vice
President of the Trust - Vice President of SCMI since August 1996; Fund Counsel
and Senior Vice President of Schroder Advisors since August 1996; prior thereto
an investment management attorney with Gordon Altman Butowsky Weitzen Shalov &
Wein since July 1994; prior thereto counsel and Vice President of Citibank, N.A.
since 1989.
MARY KUNKEMUELLER, 787 Seventh Avenue, New York, New York - Assistant Secretary
of the Trust.
(a) Interested Trustee of the Trust within the meaning of the 1940 Act.
(b) Schroder Fund Advisors, Inc. ("Schroder Advisors") is a wholly owned
subsidiary of SCMI, which is a wholly owned subsidiary of Schroders
Incorporated, which in turn is an indirect, wholly owned U.S. subsidiary of
Schroders plc.
(c) Schroder Capital Management, Inc. ("SCM") is a wholly owned subsidiary of
Schroder Wertheim Holdings Incorporated which is a wholly owned subsidiary
of Schroders, Incorporated, which in turn is an indirect wholly owned U.S.
subsidiary of Schroders plc.
Officers and Trustees who are interested persons of the Trust receive no salary,
fees or compensation from the Portfolio. Independent Trustees of the Portfolio
receive an annual fee of $2,000 and a fee of $500 for each meeting of the Board
attended by them except in the case of Mr. Schwab, who receives an annual fee of
$3,000 and a fee of $1,000 for each meeting attended. The Portfolio has no
bonus, profit sharing, pension or retirement plans.
The following table provides the aggregate compensation paid to the Trustees of
the Trust by the Trust and Schroder Asian Growth Fund, Inc., combined.
Information is presented for the fiscal year ended October 31, 1996.
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Name of Trustee Aggregate Pension or Estimated Total
Compensation Retirement Annual Compensation
From Trust Benefits Accrued Benefits From Trust And
As Part of Upon Fund Complex
Portfolio Expenses Retirement Paid To Trustees*
- --------------------------------------------------------------------------------
Mr. Guernsey $1,750 $0 $0 $14,750
Mr. Hansmann 1,375 0 0 1,375
Mr. Howell 1,750 0 0 14,750
Mr. Michalis 1,750 0 0 1,750
Mr. Schwab 3,000 0 0 3,000
Mr. Smith 0 0 0 0
* In addition to the Trust, "Fund Complex" includes Schroder Capital Funds
(Delaware), an open-end investment company for which SCMI serves as investment
adviser, and Schroder Asian Growth Fund, Inc., a closed-end investment company
for which SCMI serves as investment adviser.
As of September 30, 1997, the officers and Trustees of the Trust owned, in the
aggregate, less than 1% of the Portfolio's outstanding shares.
While the Trust is a Delaware business trust, certain of its Trustees or
officers are residents of the United Kingdom and substantially all of their
assets may be located outside of the U.S. As a result it may be difficult for
U.S. investors to effect service upon such persons within the U.S., or to
realize judgments of courts of the U.S. predicated upon civil liabilities of
such persons under the Federal securities laws of the U.S. The Trust has been
advised that there is substantial doubt as to the enforceability in the United
Kingdom of such civil remedies and criminal penalties as are afforded by the
Federal securities laws of the U.S. Also it is unclear if extradition treaties
now in effect between the U.S. and the United Kingdom would subject such persons
to effective enforcement of the criminal penalties of such acts.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of October 1, 1997, Performa Global Growth Fund (the "Fund"), a series of
Norwest Advantage Funds, a Delaware business trust registered with the SEC as an
open-end, management investment company, invests all of its investable assets in
the Portfolio and may be deemed to control the Portfolio for purposes of the
1940 Act.
Norwest Advantage Funds has informed the Trust that whenever the Fund is
requested to vote on matters pertaining to the Portfolio, the Fund will hold a
meeting of its shareholders and will cast its vote as instructed by its
shareholders. This only applies to matters for which the Fund would be required
to have a shareholder meeting if it directly held investment securities rather
than invested in the Portfolio. It is anticipated that any other registered
investment company (or series thereof) that may in the future invest in the
Portfolio will follow the same or a similar practice.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
INVESTMENT ADVISORY SERVICES
SCMI, 787 Seventh Avenue, New York, New York, 10019, serves as Adviser to the
Portfolio pursuant to an investment advisory agreement. SCMI is a wholly owned
U.S. subsidiary of Schroders Incorporated (doing business in New York State as
Schroders Holdings), the wholly owned U.S. holding company subsidiary of
Schroders plc. Schroders plc is the holding company parent of a large worldwide
group of banks and financial service companies (referred to as the "Schroder
Group"), with associated companies and branch and representative offices located
in seventeen countries worldwide. The Schroder Group specializes in providing
investment management services, with Group funds under management currently in
excess of $175 billion.
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Pursuant to the investment advisory agreement, SCMI is responsible for managing
the investment and reinvestment of the assets included in the Portfolio and for
continuously reviewing, supervising and administering the Portfolio's
investments. In this regard, it is the responsibility of SCMI to make decisions
relating to the Portfolio's investments and to place purchase and sale orders
regarding such investments with brokers or dealers selected by it in its
discretion. SCMI also furnishes to the Board, which has overall responsibility
for the business and affairs of the Trust, periodic reports on the investment
performance of the Portfolio.
Under the terms of the investment advisory agreement, SCMI is required to manage
the Portfolio's investment portfolio in accordance with applicable laws and
regulations. In making its investment decisions, SCMI does not use material
information that may be in its possession or in the possession of its
affiliates.
The investment advisory agreement will continue in effect provided such
continuance is approved annually (i) by the holders of a majority of the
outstanding voting securities of the Portfolio (as defined by the 1940 Act) or
by the Board and (ii) by a majority of the Trustees who are not parties to such
agreement or "interested persons" (as defined in the 1940 Act) of any such
party. The investment advisory agreement may be terminated without penalty by
vote of the Trustees or the interestholders of the Portfolio on 60 days' written
notice to the Adviser, or by the Adviser on 60 days' written notice to the Trust
and it will terminate automatically if assigned. The investment advisory
agreement also provides that, with respect to the Portfolio, neither SCMI nor
its personnel shall be liable for any error of judgment or mistake of law or for
any act or omission in the performance of its or their duties to the Portfolio,
except for willful misfeasance, bad faith or gross negligence in the performance
of the SCMI's or their duties or by reason of reckless disregard of its or their
obligations and duties under the investment advisory agreement.
For its services, the Portfolio pays SCMI a fee at an annual rate of 0.90% of
its average daily net assets.
ADMINISTRATIVE SERVICES
On behalf of the Portfolio, the Trust has entered into an administration
agreement with Schroder Fund Advisors Inc. ("Schroder Advisors"), 787 Seventh
Avenue, New York, New York 10019. The Trust has also entered into a
sub-administration agreement with Forum Administrative Services, Limited
Liability Company ("Forum"). Pursuant to their agreements, Schroder Advisors and
Forum provide certain management and administrative services necessary for the
Portfolio's operations, other than the investment management and administrative
services provided to the Portfolio by SCMI pursuant to the investment advisory
agreement, including among other things, (i) preparation of shareholder reports
and communications, (ii) regulatory compliance, such as reports to and filings
with the Securities and Exchange Commission and state securities commissions,
and (iii) general supervision of the operation of the Portfolio, including
coordination of the services performed by the Portfolio's investment adviser,
transfer agent, custodian, independent accountants, legal counsel and others.
Schroder Advisors is a wholly owned subsidiary of SCMI, and is a registered
broker-dealer organized to act as administrator and distributor of mutual
funds.[ Effective July 5, 1995, Schroder Advisors changed its name from
Schroder Capital Distributors Inc.]
For these services, Schroder Advisors is entitled to receive from the Portfolio
a fee at the annual rate of 0.15% of the Portfolio's average daily net assets.
Forum is entitled to receive from the Portfolio a fee at the annual rate of
0.075% of the Portfolio's average daily net assets for its services.
The administrative services agreement and sub-administration agreement are
terminable with respect to the Portfolio without penalty, at any time, by vote
of a majority of the Trustees who are not "interested persons" of the Trust and
who have no direct or indirect financial interest in the operation of the
Portfolio's Distribution Plan or in the administrative services agreement or
sub-administration agreement, upon not more than 60 days' written notice to
Schroder Advisors or Forum, as appropriate, or by vote of the holders of a
majority of the shares of the Portfolio, or, upon 60 days' notice, by Schroder
Advisors or Forum. The administrative services agreement will terminate
automatically in the event of its assignment.
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The sub-administration agreement is terminable with respect to the Portfolio
without penalty, at any time, by the Board and the Adviser upon 60 days' written
notice to Forum or by Forum upon 60 days' written notice to the Portfolio and
the Adviser, as appropriate.
CUSTODIAN
The Chase Manhattan Bank, N.A., through its Global Securities Services division
located in London, England, acts as custodian of the Portfolio's assets, but
plays no role in making decisions as to the purchase or sale of portfolio
securities for the Portfolio. Pursuant to rules adopted under the 1940 Act, the
Portfolio may maintain its foreign securities and cash in the custody of certain
eligible foreign banks and securities depositories. Selection of these foreign
custodial institutions is made by the Board following a consideration of a
number of factors, including (but not limited to) the reliability and financial
stability of the institution; the ability of the institution to perform capably
custodial services for the Portfolio; the reputation of the institution in its
national market; the political and economic stability of the country in which
the institution is located; and further risks of potential nationalization or
expropriation of Portfolio assets.
INDEPENDENT AUDITORS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts 02109,
serves as independent auditors for the Trust.
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
INVESTMENT DECISIONS
Investment decisions for the Portfolio and for the other investment advisory
clients of SCMI are made with a view to achieving their respective investment
objectives. Investment decisions are the product of many factors in addition to
basic suitability for the particular client involved. Thus, a particular
security may be bought or sold for certain clients even though it could have
been bought or sold for other clients at the same time. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling the security. In some instances, one client may sell a particular
security to another client. It also sometimes happens that two or more clients
simultaneously purchase or sell the same security, in which event each day's
transactions in such security are, insofar as is possible, averaged as to price
and allocated between such clients in a manner which in SCMI's opinion is
equitable to each and in accordance with the amount being purchased or sold by
each. There may be circumstances when purchases or sales of portfolio
securities for one or more clients will have an adverse effect on other clients.
BROKERAGE AND RESEARCH SERVICES
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Portfolio of negotiated brokerage commissions. Such commissions
vary among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Transactions in foreign securities generally involve the payment
of fixed brokerage commissions, which are generally higher than those in the
United States. Since most brokerage transactions for the Portfolio will be
placed with foreign broker-dealers, certain portfolio transaction costs for the
Portfolio may be higher than fees for similar transactions executed on U.S.
securities exchanges. There is generally no stated commission in the case of
securities traded in the over-the-counter markets, but the price paid by the
Portfolio usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Portfolio includes a disclosed,
fixed commission or discount retained by the underwriter or dealer.
The Investment Advisory Contract authorizes and directs SCMI to place orders for
the purchase and sale of the Portfolio's investments with brokers or dealers
selected by SCMI in its discretion and to seek "best execution" of such
portfolio transactions. SCMI places all such orders for the purchase and sale
of portfolio securities and buys and sells securities for the Portfolio through
a substantial number of brokers and dealers. In so doing, SCMI uses its
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best efforts to obtain for the Portfolio the most favorable price and execution
available. The Portfolio may, however, pay higher than the lowest available
commission rates when SCMI believes it is reasonable to do so in light of the
value of the brokerage and research services provided by the broker effecting
the transaction. In seeking the most favorable price and execution, SCMI,
having in mind the Portfolio's best interests, considers all factors it deems
relevant, including, by way of illustration, price, the size of the transaction,
the nature of the market for the security, the amount of the commission, the
timing of the transaction taking into account market prices and trends, the
reputation, experience and financial stability of the broker-dealers involved
and the quality of service rendered by the broker-dealers in other transactions.
It has for many years been a common practice in the investment advisory business
as conducted in certain countries, including the United States, for advisers of
investment companies and other institutional investors to receive research
services from broker-dealers which execute portfolio transactions for the
clients of such advisers. Consistent with this practice, SCMI may receive
research services from broker-dealers with which SCMI places the Portfolio's
portfolio transactions. These services, which in some cases may also be
purchased for cash, include such items as general economic and security market
reviews, industry and company reviews, evaluations of securities and
recommendations as to the purchase and sale of securities. Some of these
services are of value to SCMI in advising various of its clients (including the
Portfolio), although not all of these services are necessarily useful and of
value in managing the Portfolio. The investment advisory fee paid by the
Portfolio is not reduced because SCMI and its affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934 (the
"Act"), SCMI may cause the Portfolio to pay a broker-dealer which provides
"brokerage and research services" (as defined in the Act) to SCMI an amount of
disclosed commission for effecting a securities transaction for the Portfolio in
excess of the commission which another broker-dealer would have charged for
effecting that transaction.
Subject to the general policies regarding allocation of portfolio brokerage as
set forth above, the Board has authorized SCMI to employ Schroder Securities
Limited and its affiliates (collectively, "Schroder Securities"), which are
affiliated with SCMI, to effect securities transactions of the Portfolio on
various foreign securities exchanges on which Schroder Securities has trading
privileges, provided certain other conditions are satisfied as described below.
Payment of brokerage commissions to Schroder Securities for effecting such
transactions is subject to Section 17(e) of the 1940 Act, which requires, among
other things, that commissions for transactions on securities exchanges paid by
a registered investment company to a broker which is an affiliated person of
such investment company or an affiliated person of another person so affiliated
not exceed the usual and customary broker's commissions for such transactions.
It is the Portfolio's policy that commissions paid to Schroder Securities will
in the judgment of the officers of SCMI responsible for making portfolio
decisions and selecting brokers, be (i) at least as favorable as commissions
contemporaneously charged by Schroder Securities on comparable transactions for
its most favored unaffiliated customers and (ii) at least as favorable as those
which would be charged on comparable transactions by other qualified brokers
having comparable execution capability. The Board of Trustees, including a
majority of the non-interested Trustees, has adopted procedures pursuant to Rule
17e-1 promulgated by the Securities and Exchange Commission under Section 17(e)
to ensure that commissions paid to Schroder Securities by the Portfolio satisfy
the foregoing standards. The Board will review all transactions at least
quarterly for compliance with these procedures.
The Portfolio has no understanding or arrangement to direct any specific portion
of its brokerage to Schroder Securities and will not direct brokerage to
Schroder Securities in recognition of research services. Schroder Securities
commenced operations in 1990.
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
Under the Trust Instrument, the Trustees are authorized to issue beneficial
interest in one or more separate and distinct series. Investments in the
Portfolio have no preference, preemptive, conversion or similar rights and are
fully paid and nonassessable, except as set forth below. Each investor in the
Portfolio is entitled to a vote in proportion to the amount
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of its investment therein. Investors in the Portfolio and other series
(collectively, the "portfolios") of the Trust will all vote together in certain
circumstances (e.g., election of the Trustees and ratification of auditors, as
required by the 1940 Act and the rules thereunder). One or more portfolios
could control the outcome of these votes. Investors do not have cumulative
voting rights, and investors holding more than 50% of the aggregate interests in
the Trust or in the Portfolio, as the case may be, may control the outcome of
votes. The Trust is not required and has no current intention to hold annual
meetings of investors, but the Trust will hold special meetings of investors
when (1) a majority of the Trustees determines to do so or (2) investors holding
at least 10% of the interests in the Trust (or the Portfolio) request in writing
a meeting of investors in the Trust (or Portfolio). Except for certain matters
specifically described in the Trust Instrument, the Trustees may amend the
Trust's Trust Instrument without the vote of investors.
The Trust, with respect to the Portfolio, may enter into a merger or
consolidation, or sell all or substantially all of its assets, if approved by
the Trust's Board. The Portfolio may be terminated (1) upon liquidation and
distribution of its assets, if approved by the vote of a majority of the
Portfolio's outstanding voting securities (as defined in the 1940 Act) or (2) by
the Trustees on written notice to the Portfolio's investors. Upon liquidation
or dissolution of any Portfolio, the investors therein would be entitled to
share pro rata in its net assets available for distribution to investors.
The Trust is organized as a business trust under the laws of the State of
Delaware. The Trust's interestholders are not personally liable for the
obligations of the Trust under Delaware law. The Delaware Business Trust Act
provides that an interestholder of a Delaware business trust shall be entitled
to the same limitation of liability extended to shareholders of private
corporations for profit. However, no similar statutory or other authority
limiting business trust interestholder liability exists in many other states,
including Texas. As a result, to the extent that the Trust or an interestholder
is subject to the jurisdiction of courts in those states, the courts may not
apply Delaware law, and may thereby subject the Trust to liability. To guard
against this risk, the Trust Instrument of the Trust disclaims liability for
acts or obligations of the Trust and requires that notice of such disclaimer be
given in each agreement, obligation and instrument entered into by the Trust or
its Trustees, and provides for indemnification out of Trust property of any
interestholder held personally liable for the obligations of the Trust. Thus,
the risk of an interestholder incurring financial loss beyond his investment
because of shareholder liability is limited to circumstances in which (1) a
court refuses to apply Delaware law, (2) no contractual limitation of liability
is in effect, and (3) the Trust itself is unable to meet its obligations. In
light of Delaware law, the nature of the Trust's business, and the nature of its
assets, the Board believes that the risk of personal liability to a Trust
interestholder is remote.
ITEM 19. PURCHASE, REDEMPTION AND PRICING OF SECURITIES.
Interests in the Portfolio are issued solely in private placement transactions
that do not involve any "public offering" within the meaning of section 4(2) of
the 1933 Act. All investments in the Portfolio are made and withdrawn at the
net asset value ("NAV") next determined after an order is received by the
Portfolio. NAV per share is calculated by dividing the aggregate value of the
Portfolio's assets less all liabilities by the number of shares of the Portfolio
outstanding. See Items 6, 7 and 8 in Part A.
ITEM 20. TAX STATUS.
The Portfolio will be classified for federal income tax purposes as a
partnership that will not be a "publicly traded partnership." As a result, the
Portfolio will not be subject to federal income tax; instead, each investor in
the Portfolio will be required to take into account in determining its federal
income tax liability its share of the Portfolio's income, gains, losses,
deductions, and credits, without regard to whether it has received any cash
distributions from the Portfolio. The Portfolio also will not be subject to
Delaware income or franchise tax.
Each investor in the Portfolio will be deemed to own a proportionate share of
the Portfolio's assets, and to earn a proportionate share of the Portfolio's
income, for, among other things, purposes of determining whether the investor
satisfies the requirements to qualify as a regulated investment company ("RIC").
Accordingly, the Portfolio intends to conduct its operations so that its
investors that intend to qualify as RICs ("RIC investors") will be able to
satisfy all those requirements.
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Distributions to an investor from the Portfolio (whether pursuant to a partial
or complete withdrawal or otherwise) will not result in the investor's
recognition of any gain or loss for federal income tax purposes, except that (1)
gain will be recognized to the extent any cash that is distributed exceeds the
investor's basis for its interest in the Portfolio before the distribution, (2)
income or gain will be recognized if the distribution is in liquidation of the
investor's entire interest in the Portfolio and includes a disproportionate
share of any unrealized receivables held by the Portfolio, (3) loss will be
recognized if a liquidation distribution consists solely of cash and/or
unrealized receivables, and (4) gain or loss may be recognized on a distribution
to an investor that contributed property to the Portfolio. An investor's basis
for its interest in the Portfolio generally will equal the amount of cash and
the basis of any property it invests in the Portfolio, increased by the
investor's share of the Portfolio's net income and gains and decreased by (a)
the amount of cash and the basis of any property the Portfolio distributes to
the investor and (b) the investor's share of the Portfolio's losses.
Dividends and interest received by the Portfolio may be subject to income,
withholding, or other taxes imposed by foreign countries and; U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors.
The Portfolio may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation that, in general, meets either of
the following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, a RIC that holds stock of a
PFIC (including a RIC investor's indirect holding thereof through its interest
in the Portfolio) will be subject to federal income tax on a portion of any
"excess distribution" received on the stock or of any gain on disposition of the
stock (collectively "PFIC income"), plus interest thereon, even if the RIC
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the RIC's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders.
If the Portfolio invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund," then in lieu of the foregoing tax and interest obligation, the
Portfolio would be required to include in income each year its pro rata share of
the qualified electing fund's annual ordinary earnings and net capital gain (the
excess of net long-term capital gain over net short-term capital loss) - which
most likely would have to be distributed by the Portfolio's RIC investors to
satisfy the distribution requirements applicable to them - even if those
earnings and gain were not received by it. In most instances it will be very
difficult, if not impossible, to make this election because of certain
requirements thereof.
Three bills passed by Congress in 1991 and 1992 and vetoed by President Bush
would have substantially modified the taxation of U.S. shareholders of foreign
corporations, including eliminating the provisions described above dealing with
PFICs and replacing them (and other provisions) with a regulatory scheme
involving entities called "passive foreign corporations." The "Tax
Simplification and Technical Corrections Bill of 1993," passed in May 1994 by
the House of Representatives, contains the same modifications. It is unclear at
this time whether, and in what form, the proposed modifications may be enacted
into law.
Proposed regulations have been published pursuant to which certain RICs would be
entitled to elect to "mark to market" their stock in certain PFICs. "Marking to
market," in this context, means recognizing as gain for each taxable year the
excess, as of the end of that year, of the fair market value of each such PFIC's
stock over the adjusted basis in that stock (including marked-to-market gain for
each prior year for which an election was in effect).
The Portfolio's use of hedging strategies, such as writing (selling) and
purchasing options and futures and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the gains and losses the Portfolio realizes in
connection therewith. The Portfolio's income from foreign currencies (except
certain gains therefrom that may be excluded by future regulations), and income
from transactions in hedging instruments derived by it with respect to its
business of investing in securities or foreign currencies, will qualify as
permissible income for its RIC investors under the requirement that at least 90%
of a RIC's gross income each taxable year consist of specified types of income.
However, income from the disposition by the Portfolio of hedging instruments
(other than those on foreign currencies) held for less than three months will be
subject to the requirement applicable to its RIC investors that less than 30% of
a RIC's gross income each taxable year consist of certain short-
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term gains ("Short-Short Limitation"). Income from the disposition of foreign
currencies, and hedging instruments on foreign currencies, that are not directly
related to the Portfolio's principal business of investing in securities (or
options and futures with respect thereto) also will be subject to the
Short-Short Limitation for its RIC investors if they are held for less than
three months.
If the Portfolio satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether its RIC investors
satisfy the Short-Short Limitation. Thus, only the net gain (if any) from the
designated hedge will be included in gross income for purposes of that
limitation. The Portfolio will consider whether it should seek to qualify for
this treatment for its hedging transactions. To the extent the Portfolio does
not so qualify, it may be forced to defer the closing out of certain hedging
instruments beyond the time when it otherwise would be advantageous to do so, in
order for its RIC investors to qualify or continue to qualify as RICs.
ITEM 21. UNDERWRITERS.
Forum Financial Services, Inc. ("FFSI"), Two Portland Square, Portland, Maine
04101 serves as the Trust's placement agent. Forum will receive no compensation
for such placement agent services.
ITEM 22. CALCULATIONS OF PERFORMANCE DATA.
Not applicable.
ITEM 23. FINANCIAL STATEMENTS.
Not applicable.
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PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements.
(1) Included in Part A
Not applicable
(2) Included in Part B
For International Equity Fund, Schroder Emerging Markets Fund Institutional
Portfolio and Schroder U.S. Smaller Companies Portfolio (each a "Portfolio"
and collectively the "Portfolios"):
Audited financial statements for the fiscal year ended October 31, 1996,
including: statements of assets and liabilities, statements of operations,
statements of changes in net assets, notes to financial statements,
schedules of investments and independent auditor's report thereon. (the
Schroder Capital Funds Annual Report with respect to the Portfolios as
filed with the Securities and Exchange Commission on January 6, 1997 as
part of the Annual Report of certain series of Schroder Capital Funds
(Delaware) Funds that invest in the Portfolios pursuant to Rule 30b2-1
under the Investment Company Act of 1940, as amended) are incorporated
herein by reference.
(b) Exhibits:
(1) Trust Instrument of Schroder Capital Funds (the "Trust") (filed as
Exhibit 1 to the Trust's Initial Registration Statement and
incorporated herein by reference).
(2) Not applicable.
(3) Not applicable.
(4) Not applicable.
(5) (a) Form of Investment Advisory Agreement between the Trust and
Schroder Capital Management International Inc. ("SCMI") with
respect to International Equity Fund, Schroder Emerging Markets
Fund Institutional Portfolio and Schroder U.S. Smaller Companies
Portfolio (filed as Exhibit 5 to the Trust's Amendment No. 1 and
incorporated herein by reference).
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(b) Investment Advisory Agreement between the Trust and SCMI with
respect to Schroder International Smaller Companies Portfolio
(filed as Exhibit 5 (b) to the Trust's Amendment No. 4 and
incorporated herein by reference).
(6) Not required.
(7) Not applicable.
(8) Form of Custodian Agreement between the Trust and The Chase Manhattan
Bank, N.A. with respect to International Equity Fund and Schroder
Emerging Markets Fund Institutional Portfolio and Schroder (filed as
Exhibit 8 to the Trust's Initial Registration Statement and
incorporated herein by reference).
(9) (a) Administration Agreement between the Trust and Schroder Fund
Advisors Inc. with respect to International Equity Fund, Schroder
Emerging Markets Fund Institutional Portfolio, Schroder U.S.
Smaller Companies Portfolio, Schroder International Smaller
Companies Portfolio and Schroder Global Asset Allocation
Portfolio (filed as Exhibit 9 (a) to the Trust's Amendment No. 4
and incorporated herein by reference).
(b) Sub-administration Agreement between the Trust and Forum
Administrative Services, Limited Liability Company with respect
to International Equity Fund, Schroder Emerging Markets Fund
Institutional Portfolio, Schroder U.S. Smaller Companies
Portfolio, Schroder International Smaller Companies Portfolio and
Schroder Global asset Allocation Portfolio (filed as Exhibit 9
(b) to the Trust's Amendment No. 4 and incorporated herein by
reference).
(e) Form of Transfer Agency and Portfolio Accounting Agreement
between the Trust and Forum Financial Corp. with respect to
International Equity Fund and Schroder Emerging Markets Fund
Institutional Portfolio (filed as Exhibit 9(c) to the Trust's
Initial Registration Statement and incorporated herein by
reference).
(f) Form of Placement Agent Agreement between the Trust and Forum
with respect to International Equity Fund and Schroder Emerging
Markets Fund Institutional Portfolio (filed as Exhibit 9(d) to
the Trust's Initial Registration Statement and incorporated
herein by reference).
(10) Not required.
(11) Not required.
(12) Not required.
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(13) Not applicable.
(14) Not applicable.
(15) Not applicable.
(16) Not applicable.
Item 25. Persons Controlled by or Under Common Control with Registrant.
None
Item 26. Number of Holders of Securities as of August 31, 1997.
Number of
Title of Class of Shares Holders
of Beneficial Interest ---------
- ------------------------
International Equity Fund 2
Schroder Emerging Markets Fund Institutional
Portfolio 2
Schroder U.S. Smaller Companies Portfolio 2
Item 27. Indemnification.
The Trust does not currently hold any directors' and officers' or errors
and omissions insurance policies. The Trust's trustees and officers are insured
under the Trust's fidelity bond purchased pursuant to Rule 17j-1 under the
Investment Company Act of 1940, as amended (the "Act").
The general effect of Article 5 of Registrant's Trust Instrument is to
indemnify existing or former trustees and officers of the Trust to the fullest
extent permitted by law against liability and expenses. There is no
indemnification if, among other things, any such person is adjudicated liable to
the Registrant or its shareholders by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office. This description is modified in its entirety by the provisions of
Article 5 of Registrant's Trust Instrument contained in this Registration
Statement as Exhibit 1 and incorporated herein by reference.
Provisions of Registrant's investment advisory agreements provide that the
respective investment adviser shall not be liable for any mistake of judgment or
in any event whatsoever, except for lack of good faith, provided that nothing
shall be deemed to protect, or purport to protect, the investment adviser
against any liability to Registrant or to Registrant's interestholders to which
the investment adviser would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of the investment
adviser's duties, or by reason
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of the investment adviser's reckless disregard of its obligations and duties
hereunder. This description is modified in its entirety by the provisions of
Registrant's Investment Advisory Agreement contained in this Registration
Statement as Exhibit 5 and incorporated herein by reference. Likewise,
Registrant has agreed to indemnify (1) Forum Financial Services, Inc. in the
Administration and Sub-Administration Agreements, (2) Forum Financial Corp. in
the Transfer Agency and Fund Accounting Agreement, and (3) Forum Financial
Services, Inc. in the Placement Agent Agreement for certain liabilities and
expenses arising out of their acts or omissions under the respective agreements.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The following are the directors and principal officers of SCMI, including their
business connections of a substantial nature. The address of each company
listed, unless otherwise noted, is 33 Gutter Lane, London EC2V 8AS, United
Kingdom. Schroder Capital Management International Limited ("Schroder Ltd.") is
a United Kingdom affiliate of SCMI which provides investment management services
international clients located principally in the United States.
David M. Salisbury. Chief Executive Officer, Director and Chairman of
Schroder Capital; Joint Chief Executive and Director of Schroder.
Richard R. Foulkes. Senior Vice President and Managing Director of Schroder
Capital.
John A. Troiano. Managing Director and Senior Vice President. Mr. Troiano
is also a Director of Schroder Ltd.
David Gibson. Senior Vice President and Director of Schroder Capital.
Director of Schroder Wertheim Investment Services Inc.
John S. Ager. Senior Vice President and Director of Schroder Capital.
Sharon L. Haugh. Senior Vice President and Director of Schroder Capital,
Director and Chairman of Schroder Advisors Inc.
Gavin D.L. Ralston. Senior Vice President and Director of Schroder Capital.
Mark J. Smith. Senior Vice President and Director of Schroder Capital.
Robert G. Davy. Senior Vice President. Mr. Davy is also a Director of
Schroder Ltd. and an officer of open end investment companies for which
SCMI and/or its affiliates provide investment services.
Jane P. Lucas. Senior Vice President and Director of Schroder Capital;
Director of Schroder Advisors Inc.; Director of Schroder Wertheim
Investment Services, Inc.
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C. John Govett. Director of Schroder Capital; Group Managing Director of
Schroder Investment Management Ltd. And Director of Schroders plc.
Phillipa J. Gould. Senior Vice President and Director of Schroder Capital.
Louise Croset. First Vice President and Director of Schroder Capital.
Abdallah Nauphal, Group Vice President and Director.
ITEM 29. PRINCIPAL UNDERWRITERS.
(A) Schroder Fund Advisors Inc., the Registrant's principal underwriter, also
serves as principal underwriter for Schroder Series Trust.
(B) Following is information with respect to each officer and director of
Schroder Fund Advisors Inc., the Distributor of the shares of Schroder
International Fund, Schroder U.S. Equity Fund, Schroder U.S. Smaller Companies
Fund, Schroder Emerging Markets Fund Institutional Portfolio, Schroder
International Smaller Companies Fund, Schroder International Bond Fund, Schroder
Cash Reserves Fund and Schroder Latin America Fund (each a series of the
Registrant):
Catherine A. Mazza, President
Mark J. Smith, Director and Vice President.
John A. Troiano, Director and Vice President
Sharon L. Haugh, Director
Robert Jackowitz, Treasurer
Margaret H. Douglas-Hamilton, Secretary
* Address for each is 787 Seventh Avenue, New York, New York 10019 except for
John A. Troiano and Mark J. Smith each of whose address is 33 Gutter Lane,
London, England.
(C) Inapplicable.
Item 30. Location of Books and Records.
The majority of the accounts, books and other documents required to be
maintained by Section 31(a) of the Act and the Rules thereunder are maintained
at the offices of Forum Administrative Services, Limited Liability Company and
Forum Financial Corp., Two Portland Square, Portland, Maine 04104. The records
required to be maintained under Rule 31a-1(b)(1)
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with respect to journals of receipts and deliveries of securities and receipts
and disbursements of cash are maintained at the offices of the Registrant's
custodian, which is named under "Custodian" in Part B to this Registration
Statement. The records required to be maintained under Rule 31a-1(b)(5), (6)
and (9) are maintained at the offices of Registrant's investment adviser, which
is named in Item 28 hereof.
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
Registrant undertakes to contain in its Trust Instrument provisions for
assisting shareholder communications and for the removal of trustees
substantially similar to those provided for in Section 16(c) of the Act, except
to the extent such provisions are mandatory or prohibited under applicable
Delaware law.
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SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York and
the State of New York on the 29th day of September, 1997.
SCHRODER CAPITAL FUNDS
By: /s/ Mark J. Smith
------------------------------------
Mark J. Smith
President
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