File Nos. 333-00295
811-07495
As filed with the Securities and Exchange Commission on February 13, 1998
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 / /
POST-EFFECTIVE AMENDMENT NO. 2 /X/
and
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 3 /X/
THE DIVERSIFIED INVESTORS
STRATEGIC ALLOCATION FUNDS
(Exact Name of Registrant as Specified in Charter)
Four Manhattanville Road, Purchase, New York 10577
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: 914-697-8000
Robert F. Colby, Esq.
Diversified Investment Advisors, Inc.
Four Manhattanville Road
Purchase, New York 10577
(Name and Address of Agent for Service)
Copy to:
Roger P. Joseph, Esq.
Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110
It is proposed that this filing will become effective (check appropriate
box):
[ ] immediately upon filing pursuant to paragraph (b).
[ ] on (date) pursuant to paragraph (b).
[ ] 60 days after filing pursuant to paragraph (a)(1).
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485.
[X] 75 days after filing pursuant to paragraph (a)(2).
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
FORM N-1A
CROSS REFERENCE SHEET
PART A
ITEM NO. PROSPECTUS HEADINGS
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis Expenses
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Cover Page; Management
5. Management of the Fund Management; General Information
5A. Management's Discussion of Fund Performance Not applicable
6. Capital Stock and other Securities Cover Page; Shareholder Services;
Management; General Information
7. Purchase of Securities Being Offered Shareholder Services; General
Information
8. Redemption or Repurchase Shareholder Services
9. Pending Legal Proceedings Not applicable
PART B STATEMENT OF ADDITIONAL
ITEM NO. INFORMATION HEADINGS
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Not Applicable
13. Investment Objectives and Policies Investment Objectives,
Policies and Associated Risk Factors
14. Management of the Fund Management
15. Control Persons and Principal Holders of
Securities Principal Holders of Securities
16. Investment Advisory and Other Services Management; see Prospectus--
"Management"
17. Brokerage Allocation and Other Practices Investment Objectives,
Policies and Associated Risk Factors
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18. Capital Stock and Other Securities Taxation; Description of the Trusts;
Fund Shares; see Prospectus--
"Management" and "General
Information"
19. Purchase, Redemption and Pricing of
Securities Being Offered Determination of Net Asset Value;
Valuation of Securities; see
Prospectus--"Shareholder Services"
20. Tax Status Taxation; see Prospectus--
"General Information"
21. Underwriters Distribution Plans; see Prospectus--
"Management" and "Shareholder
Services"
22. Calculations of Yield Quotations of Money
Market Funds Performance Information
23. Financial Statements Experts; Financial Statements;
Reports of Independent Accountants
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PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this registration statement.
<PAGE>
Prospectus
THE DIVERSIFIED INVESTORS FUNDS GROUP
THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
This Prospectus describes the following no-load mutual funds advised by
Diversified Investment Advisors, Inc.:
Money Market Fund: Diversified Investors Money Market Fund
Bond Funds: Diversified Investors High Quality Bond Fund
Diversified Investors Intermediate Government Bond Fund
Diversified Investors Government/Corporate Bond Fund
Diversified Investors High-Yield Bond Fund
Balanced Fund: Diversified Investors Balanced Fund
Stock Funds: Diversified Investors Equity Income Fund
Diversified Investors Equity Value Fund
Diversified Investors Growth & Income Fund
Diversified Investors Equity Growth Fund
Diversified Investors Special Equity Fund
Diversified Investors Aggressive Equity Fund
Diversified Investors International Equity Fund
Strategic Allocation
Funds: Short Horizon Strategic Allocation Fund
Short/Intermediate Horizon Strategic Allocation Fund
Intermediate Horizon Strategic Allocation Fund
Intermediate/Long Horizon Strategic Allocation Fund
Long Horizon Strategic Allocation Fund
UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN
PORTFOLIOS OF SECURITIES, EACH FUND (OTHER THAN THE STRATEGIC ALLOCATION FUNDS)
SEEKS ITS INVESTMENT OBJECTIVE BY INVESTING IN A PORTFOLIO WITH THE SAME
INVESTMENT OBJECTIVE AND POLICIES AS THAT FUND. SEE "SPECIAL INFORMATION
CONCERNING INVESTMENT STRUCTURE" ON PAGE _____ FOR MORE INFORMATION. EACH
STRATEGIC ALLOCATION FUND SEEKS ITS INVESTMENT OBJECTIVE BY INVESTING IN A
COMBINATION OF THE OTHER FUNDS OFFERED IN THIS PROSPECTUS.
INVESTMENTS IN THE MONEY MARKET FUND ARE NEITHER INSURED NOR GUARANTEED
BY THE U.S. GOVERNMENT. THE MONEY MARKET FUND DOES NOT MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE; THE FUND'S NET ASSET VALUE WILL FLUCTUATE.
THE HIGH-YIELD BOND FUND MAY INVEST A SUBSTANTIAL PORTION OF ITS ASSETS
IN "JUNK BONDS." JUNK BONDS ARE SPECULATIVE. INVESTORS SHOULD CAREFULLY ASSESS
THE SPECIAL RISKS OF INVESTING IN THIS FUND.
Please read this Prospectus before investing, and keep it on file for
future reference. It contains important information, including how the Funds
invest and services available to shareholders.
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To learn more about the Funds and their investments, you can obtain a
copy of the Funds' most recent financial report and portfolio listing or a copy
of the Statement of Additional Information dated the date of this Prospectus.
The Statement of Additional Information has been filed with the Securities and
Exchange Commission and is incorporated into this Prospectus by reference. For
a free copy of either document call (914) 697-8000. You can also obtain copies
of either document from the Securities and Exchange Commission's web site at
http://www.sec.gov.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
May 1, 1998
<PAGE>
CONTENTS
Fund Summary
Expenses
Financial Highlights
Investment Information
Investment objectives and principal investment policies
Additional investment policies
Risk considerations
Shareholder Services
How to purchase shares
How to sell shares
Shareholder services and policies
Dividends and Distributions
Management
Taxes
General Information
Net asset value
Organization
Voting and other rights
Performance information
Expenses
Appendix A - Strategic Allocation Funds
Appendix B - Permitted Investments and Investment Practices
Appendix C - Purchases and Redemptions
Appendix D - Composite Performance of Subadvisers
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FUND SUMMARY
This section lists the Funds, their investment objectives and who may
want to invest. See the rest of this Prospectus for more information, including
risk considerations.
All references in this Prospectus to a Fund include the underlying
Portfolio (or, for a Strategic Allocation Fund, the underlying Funds) through
which it invests, except as otherwise noted. As with any mutual fund, there can
be no assurance that a Fund will achieve its investment objective. No Fund, by
itself, is intended to be a complete investment program.
MONEY MARKET FUND
MONEY
MARKET FUND Objective: to provide liquidity and as high a level of
income as is consistent with the preservation of
capital.
WHO MAY WANT TO INVEST
The Money Market Fund is designed for conservative investors who want
liquidity and preservation of capital. Unlike many money market funds, the Fund
does not maintain a stable net asset value of $1.00 per share. The Fund
declares and pays dividends only once a year, in December. Because it
emphasizes stability, the Fund may be an appropriate component of a savings
plan.
BOND FUNDS
HIGH QUALITY BOND FUND Objective: to provide a high risk-adjusted return while
focusing on the preservation of capital.
INTERMEDIATE GOVERNMENT
BOND FUND Objective: to provide as high a level of current income
as is consistent with the preservation of capital.
GOVERNMENT/CORPORATE
BOND FUND Objective: to achieve maximum total return.
HIGH-YIELD BOND FUND Objective: to provide a high level of current income.
WHO MAY WANT TO INVEST
The Bond Funds are designed for investors seeking current income (or, for
the Government/Corporate Bond Fund, high total return). The High Quality Bond
Fund may be appropriate for investors seeking a higher yield than a money
market fund through investments in high quality, short term, investment grade
debt securities. The Intermediate Government Bond Fund may be appropriate for
investors seeking a higher yield than a money market fund and more price
stability than a lower quality or longer-term bond fund. The Intermediate
Government Bond Fund offers an added measure of protection against credit risk
with its focus on U.S. government securities. The Government/Corporate Bond
Fund may be appropriate for investors seeking a higher level of current income
than is generally available from short-term securities and who are willing to
accept the greater price fluctuations associated with higher levels of income.
The High-Yield Bond Fund may invest a substantial portion of its assets in
lower-rated debt securities commonly referred to as "junk bonds". The
High-Yield Bond Fund may be appropriate for long-term investors seeking a
higher level of current income than is generally available from a higher
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quality bond fund and who are willing to accept greater volatility of price and
greater risk of loss than a higher quality bond fund.
BALANCED FUND
BALANCED FUND Objective: to provide a high total investment
return through investment in a balanced portfolio of
stocks, bonds and money market instruments.
WHO MAY WANT TO INVEST
The Balanced Fund is designed for investors seeking a balanced investment
program through both stocks and bonds. The Balanced Fund invests in a managed
mix of common and preferred stocks, debt securities, U.S. government
securities, commercial paper and bank obligations.
STOCK FUNDS
EQUITY INCOME FUND Objective: to provide a high level of current income
through investment in a diversified portfolio of common
stocks with relatively high current yield. Capital
appreciation is a secondary objective.
EQUITY VALUE FUND Objective: to provide a high total investment return
through investment primarily in a diversified portfolio
of common stocks.
GROWTH & INCOME FUND Objective: to provide capital appreciation and current
income.
EQUITY GROWTH FUND Objective: to provide a high level of capital
appreciation through investment in a diversified
portfolio of common stocks with a potential for
above-average growth in earnings. Current income is a
secondary objective.
SPECIAL EQUITY FUND Objective: to provide a high level of capital
appreciation through investment in a diversified
portfolio of common stocks of small to medium size
companies.
AGGRESSIVE EQUITY FUND Objective: to provide a high level of capital
appreciation primarily through investing in a
diversified portfolio of common stocks.
INTERNATIONAL EQUITY Objective: to provide a high level of long-term capital
FUND appreciation through investment in a diversified
portfolio of securities of foreign issuers.
WHO MAY WANT TO INVEST
The Stock Funds may be appropriate for those who can tolerate stock
market fluctuations and changes in the value of their investments. The Equity
Income Fund is designed for those who seek current income from equity
investments. The Growth & Income Fund may be appropriate for those who seek a
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greater potential for capital appreciation than an income fund and less price
volatility than a growth fund. The Equity Value Fund, the Equity Growth Fund,
the Special Equity Fund, the Aggressive Equity Fund and the International
Equity Fund may be appropriate for those who seek growth from equity
investments, who can tolerate substantial changes in the value of an investment
and who do not require current income from the investment. The Special Equity
Fund emphasizes securities of small to medium size companies, which may be more
volatile than those of larger companies. The Aggressive Equity Fund emphasizes
securities of high growth companies without regard to market capitalization and
its investment characteristics, such as price-to-earnings ratio, can undergo
major changes at any time. As a result, the Special Equity Fund and the
Aggressive Equity Fund may be volatile. Each Stock Fund may, and the
International Fund will, invest in non-U.S. securities. Investments in non-U.S.
securities may involve risks in addition to those of U.S. investments.
STRATEGIC ALLOCATION FUNDS
SHORT HORIZON STRATEGIC
ALLOCATION FUND (formerly
known as the Conservative
Strategic Allocation Fund) Objective: a high level of income and preservation
of capital.
SHORT/INTERMEDIATE HORIZON
STRATEGIC ALLOCATION FUND Objective: to achieve reasonable returns with
considerably less than average volatility as
compared to other balanced funds.
INTERMEDIATE HORIZON
STRATEGIC ALLOCATION FUND
(formerly known as the
Moderate Strategic
Allocation Fund) Objective: to achieve long-term returns from a
combination of investment income and capital
appreciation with slightly less than average
volatility as compared to other balanced funds.
INTERMEDIATE/LONG HORIZON
STRATEGIC ALLOCATION FUND
(formerly known as the
Aggressive Strategic
Allocation Fund) Objective: to achieve long-term returns from a
combination of investment income and capital
appreciation with slightly more than average
volatility as compared to other balanced funds.
LONG HORIZON
STRATEGIC ALLOCATION FUND Objective: to provide long-term returns from
growth of capital and growth of income.
WHO MAY WANT TO INVEST
The Strategic Allocation Funds are designed for investors seeking a
long-term, professionally managed asset allocation investment program. Each
Strategic Allocation Fund invests in a combination of the Funds described above
in this Prospectus. Diversified Investment Advisors selects the combination and
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amount of underlying Funds based on each Strategic Allocation Fund's investment
objective and Diversified's economic and market outlook. The Short Horizon
Strategic Allocation Fund may be appropriate for those who seek current income
through investment primarily in the Money Market and Bond Funds. The
Short/Intermediate Horizon Strategic Allocation Fund may be appropriate for
those who seek current income through investment primarily in the Bond Funds
with slightly more volatility than the Short Horizon Strategic Allocation Fund
and less volatility than the other Strategic Allocation Funds. The Intermediate
Horizon Strategic Allocation Fund may be appropriate for those who seek high
long-term returns through a diversified investment portfolio of stocks, fixed
income and money market securities. The Intermediate/Long Horizon Strategic
Allocation Fund may be appropriate for those who seek long-term returns through
investment primarily in the Stock and Bond Funds with slightly more volatility
as compared to other balanced funds. The Long Horizon Strategic Allocation Fund
may be appropriate for those who seek long-term growth through equity
investments and who can tolerate substantial changes in the value of their
investment.
EXPENSES
These tables show shareholder transaction expenses and estimated annual
operating expenses for each Fund and, as applicable, its corresponding
Portfolio, and are intended to assist investors in understanding the various
costs and expenses that shareholders in the Funds will bear, either directly or
indirectly. For more information, see "Management" on page __ and "General
Information - Expenses" on page __.
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on None
purchases and reinvested dividends
Deferred sales charges imposed on None
redemptions
Redemption fee None
Exchange fee None
ANNUAL OPERATING EXPENSES(1)
(expressed as a percentage of average net assets)
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Other Expenses
Total
Advisory 12b-1 Administrative Miscellaneous Operating
Fee(2) Fee(3) Services Fee (2) Expenses Expenses(2)
<S> <C> <C> <C> <C> <C>
Money Market Fund 0.25% 0.25% 0.00% 0.30% 0.80%
High Quality Bond Fund 0.35% 0.25% 0.30% 0.10% 1.00%
Intermediate Government Bond Fund 0.32% 0.25% 0.00% 0.43% 1.00%
Government/Corporate Bond Fund 0.35% 0.25% 0.30% 0.10% 1.00%
High-Yield Bond Fund 0.00% 0.25% 0.00% 0.85% 1.10%
Balanced Fund 0.45% 0.25% 0.00% 0.40% 1.10%
Equity Income Fund 0.45% 0.25% 0.00% 0.30% 1.00%
Equity Value Fund 0.45% 0.25% 0.00% 0.40% 1.10%
Growth & Income Fund 0.58% 0.25% 0.00% 0.32% 1.15%
Equity Growth Fund 0.69% 0.25% 0.00% 0.31% 1.25%
Special Equity Fund 0.79% 0.25% 0.30% 0.16% 1.50%
Aggressive Equity Fund 0.72% 0.25% 0.00% 0.53% 1.50%
International Equity Fund 0.68% 0.25% 0.00% 0.47% 1.40%
</TABLE>
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<CAPTION>
Total
Management 12b-1 Other Operating
Fees Fee Expenses Expenses
<S> <C> <C> <C> <C>
Short Horizon Strategic Allocation Fund (4) 0.20% None None 0.20%
Short/Intermediate Horizon Strategic 0.20% None None 0.20%
Allocation Fund (4)(5)
Intermediate Horizon Strategic Allocation 0.20% None None 0.20%
Fund (4)
Intermediate/Long Horizon Strategic 0.20% None None 0.20%
Allocation Fund (4)
Long Horizon Strategic Allocation Fund (4)(5) 0.20% None None 0.20%
</TABLE>
EACH STRATEGIC ALLOCATION FUND ALSO BEARS ITS PRO RATA SHARE OF THE FEES
AND EXPENSES (INCLUDING ADVISORY AND RULE 12B-1 FEES) OF THE UNDERLYING FUNDS
IN WHICH IT INVESTS AND THE INVESTMENT RETURNS FOR THE FUND WILL BE NET OF THE
EXPENSES OF THE STRATEGIC ALLOCATION FUND AND THOSE UNDERLYING FUNDS.
EXAMPLE(1)
A shareholder would pay the following expenses on a $1,000 investment,
assuming a 5% annual return, reinvestment of all dividends and redemption of
the shares after the number of years indicated:
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<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Money Market Fund $8 $26 $44 $99
High Quality Bond Fund 10 32 55 122
Intermediate Government Bond Fund 10 32 55 122
Government/Corporate Bond Fund 10 32 55 122
High-Yield Bond Fund 11 35 61 134
Balanced Fund 11 35 61 134
Equity Income Fund 10 32 55 122
Equity Value Fund 11 35 --- ---
Growth & Income Fund 12 37 63 140
Equity Growth Fund 13 40 69 151
Special Equity Fund 15 47 82 179
Aggressive Equity Fund 15 47 --- ---
International Equity Fund 14 44 77 168
Short Horizon Strategic Allocation Fund (4) 11.90 38.08 --- ---
Short/Intermediate Horizon Strategic Allocation 13.00 40.46 --- ---
Fund (4)(5)
Intermediate Horizon Strategic Allocation Fund 13.50 42.00 --- ---
(4)
Intermediate/Long Horizon Strategic Allocation 14.00 43.53 --- ---
Fund (4)
Long Horizon Strategic Allocation Fund (4)(5) 14.80 45.98 --- ---
</TABLE>
(1)Unless otherwise noted, the information in the expense table and the
example is based on the fiscal year ended December 31, 1997 and reflects
voluntary fee waivers and reimbursements. Of course, there can be no assurance
that fee waivers and reimbursements will continue at these levels. The
assumption in the example of a 5% annual return is required by the Securities
and Exchange Commission for all mutual funds, and is not a prediction of any
Fund's future performance. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OF ANY FUND. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN.
(2)Without fee waivers and reimbursements, advisory fees, administrative
services fees and total operating expenses would be 0.25%, 0.30% and 4.35% for
the Money Market Fund; 0.35%, 0.30% and 12.60% for the High Quality Bond Fund;
0.35%, 0.30% and 17.46% for the Intermediate Government Bond Fund; 0.35%, 0.30%
and 7.50% for the Government/Corporate Bond Fund; 0.55%, 0.30% and 25.60% for
the High-Yield Bond Fund; 0.45%, 0.30% and 3.08% for the Balanced Fund; 0.45%,
0.30% and 3.22% for the Equity Income Fund; 0.57%, 0.30% and 56.35% for the
Equity Value Fund; 0.60%, 0.30% and 3.99% for the Growth & Income Fund; 0.70%,
0.30% and 4.34% for the Equity Growth Fund; 0.80%, 0.30% and 3.63% for the
Special Equity Fund; 0.97%, 0.30% and 64.34% for the Aggressive Equity Fund;
and 0.75%, 0.30%, and 9.79% for the International Equity Fund.
<PAGE>
(3)12b-1 fees are asset-based sales charges. After a substantial period
of time annual payment of the fee may total more than the maximum sales charge
that would have been permissible if imposed entirely as an initial sales
charge.
(4) Based on the expense ratios for the Money Market, Bond and Stock
Funds set forth above, the average weighted expense ratio is expected to be:
from 1.12% to 1.26% for the Short Horizon Strategic Allocation Fund; from 1.16%
to 1.37% for the Short/Intermediate Horizon Strategic Allocation Fund; from
1.22% to 1.43% for the Intermediate Horizon Strategic Allocation Fund; from
1.27% to 1.49% for the Intermediate/Long Horizon Strategic Allocation Fund; and
from 1.31% to 1.58% for the Long Horizon Strategic Allocation Fund. A range of
expense ratios is given because the percentage of each Fund's assets invested
in the underlying Funds will fluctuate. Based on these ranges, the midpoint
ratios of 1.19%, 1.30%, 1.35%, 1.40% and 1.48%, respectively, are used to
calculate the expenses a shareholder would incur as reflected in the example.
(5) Because the Fund is newly organized, amounts are estimated for the
current fiscal year.
FINANCIAL HIGHLIGHTS
These tables contain financial information about the Funds and are
included in the Funds' Annual Reports. The tables have been audited by Coopers
& Lybrand L.L.P., independent accountants. Their reports on the financial
statements and financial highlights are included in the Annual Reports. The
financial statements and financial highlights are incorporated by reference
into the Statement of Additional Information. Copies of the Annual Reports may
be obtained without charge by calling (914) 697-8000. The Short/Intermediate
Horizon Strategic Allocation Fund and Long Horizon Strategic Allocation Fund
are newly organized and have not issued financial statements.
MONEY MARKET FUND
[To be added by amendment.]
BOND FUNDS
BALANCED FUND
STOCK FUNDS
STRATEGIC ALLOCATION FUNDS
INVESTMENT INFORMATION
INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT POLICIES
This section describes each Fund's investment objective and principal
investment policies. Additional investment policies and risk considerations are
described in the next sections. Each Fund's investment objective may be changed
without shareholder approval, but shareholders will be given at least 30 days'
prior written notice before any change is implemented. Of course, there can be
no assurance that any Fund will achieve its investment objective. Each Fund
(other than the Strategic Allocation Funds) is a diversified mutual fund.
MONEY MARKET FUND
The investment objective of the Money Market Fund is to provide liquidity
and as high a level of current income as is consistent with the preservation of
capital.
This Fund invests primarily in high quality, short-term money market
instruments. These instruments include short-term U.S. government obligations,
corporate bonds, bank obligations (including certificates of deposit, bankers'
acceptances and fixed time obligations), commercial paper and other short-term
debt obligations and repurchase agreements.
<PAGE>
The Fund complies with industry regulations applicable to money market
funds. These regulations require that the Fund's investments mature or be
deemed to mature within 397 days from the date of acquisition, that the average
maturity of the Fund's investments (on a dollar-weighted basis) be 90 days or
less, and that all of the Fund's investments be in U.S. dollar-denominated high
quality securities which have been determined by the Fund to present minimal
credit risks. The Fund reserves the right to concentrate 25% or more of its
total assets in domestic bank obligations. Investments in high quality,
short-term instruments may, in many circumstances, result in a lower yield than
would be available from investments in instruments with a lower quality or a
longer term.
Unlike many money market funds, the Fund does not maintain a stable net
asset value of $1.00 per share and will not declare dividends on a daily basis.
Undeclared investment income may cause the Fund's net asset value per share to
fluctuate.
BOND FUNDS
The investment objective of the High Quality Bond Fund is to provide a
high risk-adjusted return while focusing on the preservation of capital.
The High Quality Bond Fund invests at least 65% of its assets under
normal circumstances in high quality debt securities with short and
intermediate maturities (including repurchase agreements and reverse repurchase
agreements). The Fund's duration generally is between one and three years.
Duration is a way of measuring the Fund's overall sensitivity to interest rate
fluctuations. The dollar-weighted average maturity of the Fund will generally
will not exceed three years under normal circumstances. Individual securities
held by the Fund may have longer maturities. Short-term debt securities
generally fluctuate less in price, and have lower yields, than longer-term
securities of comparable quality.
The Fund considers high quality debt securities to be those rated A or
better by Standard & Poor's or A3 or better by Moody's and securities of
comparable quality as determined by the Fund's advisers. Ratings are described
in the Statement of Additional Information. Investments in higher quality
instruments may result in a lower yield than would be available from
investments in lower quality instruments.
The investment objective of the Intermediate Government Bond Fund is to
provide as high a level of current income as is consistent with the
preservation of capital.
The Intermediate Government Bond Fund invests in U.S. government
obligations and high quality, short-term obligations (including repurchase
agreements and reverse repurchase agreements). Under normal circumstances the
Fund invests at least 65% of its assets in U.S. government obligations and
repurchase agreements secured by U.S. government obligations. U.S. government
obligations are issued or guaranteed as to principal and interest by the U.S.
government or one of its agencies or instrumentalities. Some obligations of
U.S. government agencies and instrumentalities are supported by the "full faith
and credit" of the United States, others by the right of the issuer to borrow
from the U.S. Treasury, and others only by the credit of the agency or
instrumentality. The Fund also invests in mortgage-backed securities backed by
pass-through certificates issued or guaranteed by the U.S. government or its
agencies. ALTHOUGH THE FUND INVESTS IN U.S. GOVERNMENT OBLIGATIONS, AN
INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
The Fund's duration generally is between one and five years, and its
dollar-weighted average maturity generally is between three and five years (and
<PAGE>
does not exceed ten years) under normal circumstances. The Fund may invest in
securities with maturities of as much as 30 years.
The investment objective of the Government/Corporate Bond Fund is to
achieve the maximum total return.
The Government/Corporate Bond Fund invests in investment grade debt
securities, U.S. government obligations (including U.S. government agency and
instrumentality obligations and collateralized mortgage obligations guaranteed
by these agencies and instrumentalities), and high quality short-term
obligations (including repurchase agreements and reverse repurchase
agreements). Under normal circumstances the Fund invests at least 65% of its
assets in U.S. government securities, corporate bonds and short-term
instruments.
Investment grade debt securities carry a rating of at least BBB from
Standard & Poor's or Baa from Moody's or are of comparable quality as
determined by the Fund's advisers. The Fund also invests in securities of
non-U.S. issuers.
The Fund's duration generally is between three and ten years, and its
dollar-weighted average maturity generally is between five and fifteen years
(and does not exceed thirty years) under normal circumstances. While
longer-term securities tend to have higher yields than short-term securities,
they are subject to greater price fluctuations as a result of interest rate
changes and other factors.
The investment objective of the High-Yield Bond Fund is to provide a high
level of current income.
The High-Yield Bond Fund invests at least 65% of its assets under normal
circumstances in high-yielding, income producing debt securities, such as
debentures and notes, and preferred stocks, including convertible and zero
coupon securities. The Fund may invest in equity securities, including common
stocks, warrants and rights. The Fund may invest all or a substantial portion
of its assets in lower-rated debt securities, commonly referred to as "junk
bonds." Investing in junk bonds is an aggressive approach to income investing.
Investors should carefully consider the special risks of investing in this
Fund. See "Risk Considerations."
BALANCED FUND
The investment objective of the Balanced Fund is to provide a high total
investment return through investment in a balanced portfolio of stocks, bonds
and money market instruments.
The Fund seeks to meet its investment objective by maintaining a balanced
portfolio of stocks and bonds. The Fund invests in a managed mix of common and
preferred stocks (and their equivalents including American Depositary
Receipts), debt securities and commercial paper of U.S. corporations, U.S.
government securities and bank obligations. The Fund varies the percentage of
assets invested in any one type of security in accordance with its advisers'
interpretation of economic and market conditions, fiscal and monetary policy,
and underlying securities values. Under normal circumstances, approximately 60%
of the Fund's assets will be invested in equity securities and 40% of the
Fund's assets will be invested in fixed income securities (at least 25% of
which will be invested in fixed-income senior securities, including debt
securities and preferred stock). In selecting common stocks, emphasis is placed
on investing in established companies. Most of the Fund's non-convertible
long-term debt investments consist of investment grade securities (those rated
BBB or better by Standard & Poor's or Baa or better by Moody's) and those of
equivalent quality as determined by the Fund's advisers. Less than 5% of the
<PAGE>
Fund's investments consist of securities rated BBB by Standard & Poor's or Baa
by Moody's. These ratings are described in the Statement of Additional
Information.
STOCK FUNDS
The investment objective of the Equity Income Fund is to provide a high
level of current income through investment in a diversified portfolio of common
stocks with relatively high current yields; capital appreciation is a secondary
objective.
The investment objective of the Equity Value Fund is to provide a high
total investment return through investment primarily in a diversified portfolio
of common stocks.
The investment objective of the Growth & Income Fund is to provide
capital appreciation and current income.
The Equity Income Fund invests primarily in stocks of companies which, in
the opinion of the Fund's advisers, are fundamentally sound financially and
which pay relatively high dividends on a consistent basis. The Equity Value
Fund invests primarily in stocks of companies which, in the opinion of the
Fund's advisers, are trading at low valuations relative to market and/or
historical levels. These stocks tend to have relatively low price/earnings
ratios and/or relatively low price/book value ratios. Low price/earnings ratios
or price/book value ratios mean that the stock is less expensive than average
relative to the company's earnings or book value, respectively. The Growth &
Income Fund invests primarily in a diversified portfolio of securities selected
in large part for their potential to generate long term capital appreciation.
The Fund also may select securities based on their potential to generate
current income. The Fund emphasizes securities of growing, financially stable
and undervalued companies. This Fund attempts to achieve more capital
appreciation than an income fund and less price volatility than a growth fund.
In selecting investments, these three Funds emphasize common stocks and
preferred stocks listed on the New York Stock Exchange and on other national
securities exchanges and, to a lesser extent, stocks that are traded
over-the-counter.
The investment objective of the Equity Growth Fund is to provide a high
level of capital appreciation through investment in a diversified portfolio of
common stocks with potential for above average growth in earnings and
dividends; current income is a secondary objective.
The Equity Growth Fund invests primarily in a diversified portfolio of
common stocks, of companies with potential for above average growth in earnings
and dividends. As a fundamental policy that cannot be changed without
shareholder approval, under normal circumstances, at least 65% of the assets of
the Fund are invested in equity securities. The Fund emphasizes common and
preferred stocks listed on the New York Stock Exchange and other national
securities exchanges and, to a lesser extent, stocks that are traded
over-the-counter. Multiple managers are used to control the volatility often
associated with growth funds.
The investment objective of the Special Equity Fund is to provide a high
level of capital appreciation through investment in a diversified portfolio of
common stocks of small to medium size companies.
The Special Equity Fund invests primarily in a diversified portfolio of
stocks of small to medium size companies which, in the opinion of the Fund's
advisers, present an opportunity for significant increases in earnings, revenue
and/or value, without consideration for current income. The Special Equity Fund
<PAGE>
emphasizes common stocks of U.S. companies with market capitalizations of less
than $2 billion. Investing in securities of smaller companies involves special
risks. Multiple managers are used to control the volatility often associated
with investments in companies of this size. Investors should carefully consider
the risks of investing in the Special Equity Fund. See "Risk Considerations".
The investment objective of the Aggressive Equity Fund is to provide a
high level of capital appreciation primarily through investing in a diversified
portfolio of common stocks.
The Aggressive Equity Fund invests primarily in high growth companies
without regard to market capitalization. The Fund seeks to invest in companies
which present an opportunity for significant increases in earnings, revenue
and/or value, without consideration for current income, to achieve excess
market returns relative to its benchmark, the Russell 2000 Growth Index. The
Fund also emphasizes stocks of companies with consistent, above-average and
accelerating profitability and growth. The investment characteristics, such as
price-to-earnings ratio, of the Fund can undergo major changes at any time. As
a result, the price of shares of this fund may be very volatile.
The investment objective of the International Equity Fund is to provide a
high level of long-term capital appreciation through investment in a
diversified portfolio of securities of foreign issuers.
The International Equity Fund invests primarily in foreign securities,
meaning securities of issuers that, in the opinion of the Fund's advisers, have
their principal activities outside the United States or whose securities are
traded primarily outside the United States. Under normal circumstances, at
least 65% of the Fund's assets are invested in equity securities of issuers in
at least three countries other than the United States. The Fund invests most of
its assets in securities of issuers in Canada, Australia and developed
countries in Europe and the Far East. The Fund may invest up to 10% of its
assets in securities of issuers in developing countries. The Fund may also
invest in any type or quality of debt securities, including lower-rated
securities, and may enter into forward currency exchange contracts solely for
hedging purposes. See "Risk Considerations".
Each of the Stock Funds may also invest in bonds and short-term
obligations as well as securities convertible into common stocks, preferred
stocks, debt securities and short-term obligations.
STRATEGIC ALLOCATION FUNDS
The investment objective of the Short Horizon Strategic Allocation Fund
(formerly known as the Conservative Strategic Allocation Fund) is a high level
of income and preservation of capital.
The investment objective of the Short/Intermediate Horizon Strategic
Allocation Fund is to achieve reasonable returns with considerably less than
average volatility as compared to other balanced funds.
The investment objective of the Intermediate Horizon Strategic Allocation
Fund (formerly known as the Moderate Strategic Allocation Fund) is a high total
investment return.
The investment objective of the Intermediate/Long Horizon Strategic
Allocation Fund (formerly known as the Aggressive Strategic Allocation Fund) is
long-term growth of capital and growth of income.
<PAGE>
The investment objective of the Long Horizon Strategic Allocation Fund is
to achieve long-term returns from growth of capital and growth of income.
As a fundamental policy each Strategic Allocation Fund offers an asset
allocation investment program by investing in a combination of the Funds (other
than the Balanced Fund) described above in this Prospectus. Diversified
Investment Advisors selects the combination and amount of underlying Funds
based on each Strategic Allocation Fund's investment objective and
Diversified's economic and market outlook. Each Strategic Allocation Fund is a
non-diversified fund, meaning that it is not limited by the Investment Company
Act of 1940 as to the amount of its assets that may be invested in a single
issuer (although certain diversification requirements under the Internal
Revenue Code still apply).
Diversified has established general percentage allocations for the assets
of each Strategic Allocation Fund among the Money Market, Bond and Stock Funds.
These general allocations reflect Diversified's present strategy for asset
allocation during normal market conditions, and may be changed at any time
without shareholder approval. Diversified also may allocate the assets of each
Strategic Allocation Fund without limit to the Money Market Fund to reduce
volatility, to provide a reserve for future allocations and for temporary
defensive purposes.
Under normal circumstances, at least 65% of the assets of the Short
Horizon Strategic Allocation Fund are invested in the Money Market and Bond
Funds, with at least 10% of the assets of the Fund invested in the Money Market
Fund. The Fund may also invest in the Equity Income, Equity Value and Growth &
Income Funds. The assets of the Fund are generally allocated 0-50% to the Money
Market Fund, 50-100% to the Bond Funds and 0-20% to the Stock Funds. For
specific allocations to the underlying Funds, see Appendix A.
Under normal circumstances, more of the assets of the Short/Intermediate
Horizon Fund are allocated to the Bond Funds than are allocated to the Stock
Funds. For specific allocations to the underlying Funds, see Appendix A.
Under normal circumstances, the assets of the Intermediate Horizon
Strategic Allocation Fund are generally allocated 0-25% to the Money Market
Fund, 25-75% to the Bond Funds and 25-75% to the Stock Funds. For specific
allocations to the underlying Funds, see Appendix A.
Under normal circumstances, at least 65% of the assets of the
Intermediate/Long Horizon Strategic Allocation Fund are invested in the Stock
Funds. The Fund may also invest in the Money Market and Bond Funds. The assets
of the Fund are generally allocated 0-20% to the Money Market Fund, 0-50% to
the Bond Funds and 50-100% to the Stock Funds. For specific allocations to the
underlying Funds see Appendix A.
Under normal circumstances, the assets of the Long Horizon Strategic
Allocation Fund are invested primarily in the Stock Funds. For specific
allocations to the underlying Funds see Appendix A.
ADDITIONAL INVESTMENT POLICIES
This section describes additional investment policies of the Funds.
Except as otherwise noted, these investment policies do not apply to the
Strategic Allocation Funds except to the extent that the Strategic Allocation
Funds invest in the other Funds. See "Risk Considerations" for more
information.
<PAGE>
FOREIGN SECURITIES. Each Fund may invest a portion of its assets in
foreign securities. The International Equity Fund will invest a substantial
portion of its assets in foreign securities. Investing in foreign securities
involves risks in addition to those of investing in U.S. securities. These
risks are heightened for investments in securities of issuers in developing
countries. See "Risk Considerations."
TEMPORARY INVESTMENTS. During periods of unusual economic or market
conditions or for temporary defensive purposes or liquidity, each Fund may
invest without limit in cash and in U.S. dollar-denominated high quality money
market and short-term instruments. These investments may result in a lower
yield than would be available from investments with a lower quality or longer
term.
OTHER PERMITTED INVESTMENTS. For more information regarding the Funds'
permitted investments and investment practices, see Appendix B. The Funds will
not necessarily invest or engage in each of the investments and investment
practices in Appendix B but reserve the right to do so. The Money Market Fund
will invest or engage in the investments and investment practices in Appendix B
only to the extent consistent with industry regulations applicable to money
market funds.
INVESTMENT RESTRICTIONS. The Statement of Additional Information contains
a list of specific investment restrictions which govern the investment policies
of the Funds, including the Strategic Allocation Funds. Under its investment
restrictions, each Fund may borrow money and enter into reverse repurchase
agreements in an amount not to exceed 331/3% of the Fund's assets (including
the borrowing) less liabilities (not including the borrowing). Except as
otherwise noted, the Funds' investment objectives and policies may be changed
without shareholder approval. If a percentage or rating restriction (other than
a restriction as to borrowing) is adhered to at the time an investment is made,
a later change in percentage or rating resulting from changes in a Fund's
securities is not a violation of policy.
PORTFOLIO TURNOVER. Securities of a Fund are sold whenever the Fund's
advisers believe it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held. The turnover rates for each Fund are included in the Financial
Highlights for that Fund. The amount of brokerage commissions and realization
of taxable capital gains will tend to increase as the level of portfolio
activity increases. The annual turnover rate for each of the Short/Intermediate
Horizon Strategic Allocation Fund and the Long Horizon Strategic Allocation
Fund is not expected to exceed 150%.
BROKERAGE TRANSACTIONS. The primary consideration in placing each Fund's
securities transactions with broker-dealers for execution is to obtain and
maintain the availability of execution at the most favorable prices and in the
most effective manner possible. A Fund may execute brokerage or other agency
transactions through an investment adviser or distributor of the Fund. These
entities may be paid for these transactions.
RISK CONSIDERATIONS
The risks of investing in each Fund vary depending upon the nature of the
securities held, and the investment practices employed, on its behalf. Certain
of these risks are described in this section.
CHANGES IN NET ASSET VALUE. Each Fund's net asset value will fluctuate
based on changes in the values of its underlying portfolio securities. The
Strategic Allocation Funds' net asset value will fluctuate based on changes in
the net asset value of the underlying Funds. This means that an investor's
<PAGE>
shares may be worth more or less at redemption than at the time of purchase.
Equity securities fluctuate in response to general market and economic
conditions and other factors, including actual and anticipated earnings,
changes in management, political developments and the potential for takeovers
and acquisitions. The value of debt securities generally goes down when
interest rates go up, and up when interest rates go down. Changes in interest
rates will generally cause larger changes in the prices of longer-term
securities than in the prices of shorter-term securities. Prices of debt
securities also fluctuate based on changes in the actual and perceived
creditworthiness of issuers. The prices of lower-rated securities often
fluctuate more than those of higher-rated securities.
CREDIT RISK OF DEBT SECURITIES. Investors should be aware that securities
offering above-average yields may involve above-average risks. It is possible
that some issuers will not make payments on debt securities held by a Fund.
Lower-rated debt securities usually are defined as securities rated BB or
lower by Standard & Poor's or Ba or lower by Moody's. See the Statement of
Additional Information for more information on ratings. Lower-rated debt
securities are considered speculative and involve greater volatility of price
and greater risk of loss than higher-rated securities due to changes in
creditworthiness and ability to pay. In adverse economic or other
circumstances, issuers of these securities are more likely to have difficulty
making principal and interest payments than issuers of higher grade
obligations. A Fund may incur additional expenses to the extent that is it
required to seek recovery upon a default in the payment of lower-rated debt
security. The values of lower-rated debt securities tend to reflect individual
corporate developments or adverse economic changes to a greater extent than
higher-rated securities, which react primarily to fluctuations in the general
level of interest rates. Periods of economic uncertainty and changes generally
result in increased volatility in the market prices of such securities, and
thus in a Fund's net asset value.
In the event of default, lower-rated debt securities are frequently
subordinated to the prior payment of senior indebtedness and are traded in
markets that may be relatively less liquid that the market for higher-rated
securities. Under adverse market or economic conditions or in the event of
adverse changes in the financial condition of the issuer, a Fund may find it
more difficult to sell these securities when it may be advisable to do so or
may be able to sell these securities only at prices lower than if the
securities were more widely held.
FOREIGN SECURITIES. In general, investments in foreign securities entail
risks relating to political, social and economic developments abroad. There are
also risks from the differences between the regulations to which U.S. and
foreign issuers and markets are subject. These risks may include expropriation,
confiscatory taxation, withholding taxes on dividends and interest, limitations
on the use or transfer of portfolio assets and political or social instability.
Asserting legal rights and claims may be difficult, costly and slow in foreign
countries. In addition, foreign companies may be subject to accounting
standards or governmental supervision less extensive than in the U.S.,
resulting in less public information about their operations.
Foreign markets may be less liquid and more volatile than U.S. markets,
and may offer less protection to investors such as the Funds. Prices at which a
Fund may acquire securities may be affected by persons trading with material
non-public information and by brokers effecting securities transactions in
anticipation of transactions by the Funds. In addition, costs of trading may be
higher than those in the U.S., due to the differing compensation and commission
structures in foreign securities markets.
Equity securities traded in certain foreign countries may trade at
price-earnings multiples higher than those of comparable companies trading on
securities markets in the United States. These multiples may not be
<PAGE>
sustainable. Rapid increases in money supply in certain countries may result in
speculative investment in equity securities which may contribute to volatility
of trading markets.
Because foreign securities often trade in currencies other than the U.S.
dollar, changes in currency exchange rates will affect a Fund's net asset
value, the value of dividends and interest earned and gains and losses realized
on the sale of securities. In addition, some foreign currency values may be
volatile and there is the possibility of governmental controls on currency
exchanges or governmental intervention in currency markets.
The costs attributable to foreign investing, such as the costs of
maintaining custody of securities in foreign countries, frequently are higher
than those involved in U.S. investing. As a result, the operating expense
ratios of the Funds may be higher than those of investment companies investing
exclusively in U.S. securities.
The Stock Funds, and in particular the International Equity Fund, may
invest in issuers located in developing countries, which are generally defined
as countries in the initial stages of their industrialization cycles with low
per capita income. All of the risks of investing in non-U.S. securities are
heightened by investing in developing countries. Historical experience
indicates that the markets of developing countries have been more volatile than
the markets of developed countries with more mature economies; these markets
often have provided wider fluctuations in rates of return, and greater risks,
to investors.
SMALLER COMPANIES. Investors in the Stock Funds, particularly the Special
Equity Fund, should be aware that the securities of companies with small market
capitalizations may have more risks than the securities of other companies.
Smaller companies may be more susceptible to market downturns or setbacks
because they may have limited product lines, markets, distribution channels,
and financial and management resources. There is often less publicly available
information about smaller companies than about more established companies. As a
result, the prices of securities issued by smaller companies may be volatile.
Shares of the Stock Funds, particularly the Special Equity Fund, may fluctuate
in value more than shares of an equity fund with more investments in larger,
more established companies.
INVESTMENT PRACTICES. Certain of the investment practices employed for
the Funds may entail certain risks. These risks are in addition to the risks
described above and are described in Appendix B.
SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE OF THE MONEY MARKET,
BOND, BALANCED AND STOCK FUNDS. None of these Funds invests directly in
securities. Instead, these Funds invest all of their investable assets in a
Portfolio with the same investment objective and policies as the Funds. The
Portfolios, in turn, buy, hold and sell securities in accordance with these
objectives and policies. Of course, there can be no assurance that the Funds or
the Portfolios will achieve their objectives. The Trustees of the Funds believe
that the aggregate per share expenses of each Fund and its Portfolio are less
than or approximately equal to the expenses that the Fund would incur if the
assets of the Fund were invested directly in the types of securities held by
the Portfolio. Each Fund may withdraw its investment in its Portfolio at any
time, and will do so if the Trustees believe it to be in the best interest of
the Fund's shareholders. If a Fund were to withdraw its investment in its
Portfolio, the Fund could either invest directly in securities in accordance
with the investment policies described above or invest in another mutual fund
or pooled investment vehicle having the same investment objectives and
policies. If a Fund were to withdraw, the Fund could receive securities from
its Portfolio instead of cash, causing the Fund to incur brokerage, tax and
other charges or leaving it with securities which may or may not be readily
marketable or widely diversified.
<PAGE>
Each Portfolio may change its investment objective and certain of its
investment policies and restrictions without approval by its investors, but
each Portfolio will notify the Fund (which in turn will notify its
shareholders) and its other investors at least 30 days before implementing any
change in its investment objective. A change in investment objective, policies
or restrictions may cause a Fund to withdraw its investment in its Portfolio.
Certain investment restrictions of each Portfolio cannot be changed
without approval by the investors in that Portfolio. These policies are
described in the Statement of Additional Information. When a Fund is asked to
vote on matters concerning its Portfolio the Fund will hold a shareholder
meeting and vote in accordance with shareholder instructions (except in limited
circumstances as permitted by applicable rules and regulations). Of course, the
Fund could be outvoted, or otherwise adversely affected, by other investors in
its Portfolio.
The Portfolios may sell interests to investors in addition to the Funds.
These investors may be mutual funds which offer shares to their shareholders
with different costs and expenses than the Funds. Therefore, the investment
returns for all investors in funds investing in a Portfolio may not be the
same. These differences in returns are also present in other mutual fund
structures.
SPECIAL CONSIDERATIONS - STRATEGIC ALLOCATION FUNDS. None of these Funds
invests directly in securities. Instead, each Fund, as a matter of fundamental
policy, invests solely in the underlying Funds. As a result, each Fund's
performance is directly related to the performance of the underlying Funds, and
investors in these Funds are subject, albeit indirectly, to all of the risks
associated with investments in the underlying Funds.
SHAREHOLDER SERVICES
This section describes how to do business with the Funds and shareholder
services that are available.
HOW TO PURCHASE SHARES
Shares of the Funds are available to individual and institutional
investors. You may be able to establish new accounts in a Fund under certain
retirement plans (a "Plan"). These Plans include, but are not limited to,
401(k), 403(b) and 457 Plans, Money Purchase Plans, Profit Sharing Plans,
Simplified Employee Pension Plans, Keogh Plans and IRAs. Consult with your
Service Agent and your tax and retirement advisers. If you are a participant in
a Plan, you should obtain the Plan's conditions for participation from your
Plan administrator.
Each Fund's share price, called net asset value, is calculated every
business day. Each Fund's shares are sold without a sales charge. Purchases may
be made Monday through Friday, except on certain holidays. Shares are purchased
at the net asset value next calculated after your investment is received in
good order and is accepted by the Distributor. Net asset value is normally
calculated at 4 p.m. Eastern time, unless the financial markets close early.
You may purchase shares in a Fund through the Distributor directly or by
authorizing your Plan to purchase shares on your behalf. See Appendix C for
information on purchases directly through the Distributor. See your Plan
administrator to obtain purchase instructions if you are a participant in a
Plan. Plans which include fixed investment options may restrict or prohibit the
purchase of shares of certain of the Funds with monies withdrawn from those
fixed investment options.
<PAGE>
The minimum initial investment is $5,000. This minimum is currently being
waived by each Fund. There is no minimum for subsequent investments. A Plan
may, however, impose minimum investment requirements. Plan participants should
consult their Plan administrator.
Each Fund reserves the right to cease offering its shares for sale at any
time or to reject any order for the purchase of shares.
HOW TO SELL SHARES
On any business day, you may redeem all or a portion of your shares. Your
transaction will be processed at net asset value the next time it is calculated
after your redemption request in good order is received and accepted by the
Distributor. Redemption proceeds normally will be paid or mailed within seven
days. A redemption is treated as a sale for tax purposes, and could result in
taxable gain or loss in a non-tax-sheltered account.
Participants in a Plan should obtain redemption instructions from their
Plan administrator. If you purchased shares directly through the Distributor,
see Appendix C for redemption instructions.
A signature guarantee is required for the following:
o any redemption by mail if the proceeds are to be paid to someone else
or are to be mailed to an address other than your address of record;
o any redemption by mail if the proceeds are to be wired to a bank;
o any redemption request for more than $50,000; and
o requests to transfer registration of shares to another owner.
At the Funds' discretion signature guarantees may also be required for
other redemptions. A signature guarantee assures that a signature is genuine
and protects shareholders from unauthorized account transfers. Banks, savings
and loan associations, trust companies, credit unions, broker-dealers and
member firms of a national securities exchange may guarantee signatures. Call
your financial institution to see if it has this capability. A signature
guarantee is not the same as a notarized signature.
SHAREHOLDER SERVICES AND POLICIES
Exchanges. On any business day you may exchange all or a portion of your
shares for shares of any other available Fund. To make exchanges, please follow
the procedures for redemptions. Plan participants should contact their Plan
administrator. Exchanges are processed at net asset value the next time it is
calculated after your exchange request in good order is received and approved.
The Funds reserve the right to reject any exchange request or to modify or
terminate the exchange privilege at any time. An exchange is the sale of shares
of one Fund and purchase of shares of another, and could result in taxable gain
or loss in a non-tax-sheltered account.
Redemption proceeds. The Funds intend to pay redemption proceeds in cash,
but reserve the right to pay in kind by delivery of investment securities equal
to the redemption price. In these cases, you might incur brokerage costs in
converting the securities to cash. The right of any shareholder to receive
payment of redemption proceeds may be suspended, or payment may be postponed,
in certain circumstances. These circumstances include any period the New York
<PAGE>
Stock Exchange is closed (other than weekends or holidays) or trading on the
Exchange is restricted, any period when an emergency exists and any time the
Securities and Exchange Commission permits mutual funds to postpone payments
for the protection of investors.
Taxpayer identification number. On the account application or other
appropriate form, you will be asked to certify that your social security or
taxpayer identification number is correct and that you are not subject to
backup withholding for failing to report income to the IRS. If you are subject
to the 31% backup withholding or you did not certify your taxpayer
identification, the IRS requires the Funds to withhold 31% of any dividends and
redemption or exchange proceeds.
Share certificates. Share certificates are not issued.
Involuntary redemptions. If your account balance falls below $1,000 as a
result of a redemption or exchange, you will be given notice and 15 days to
establish the minimum balance. If you do not, your account may be closed and
the proceeds sent to you.
Telephone transactions. You may initiate redemptions and exchanges by
telephone. The Funds and their agents will not be responsible for any losses
resulting from unauthorized transactions when procedures designed to verify the
identity of the caller are followed. It may be difficult to reach the Funds by
telephone during periods of unusual market activity. If you are unable to reach
a representative by telephone, please consider sending written instructions.
Address changes. To change the address on your account contact your Plan
administrator or call (914) 697-8000 and send a written request signed by all
account owners. Include the name of your Fund(s), the account numbers(s), the
name(s) on the account and both the old and new addresses.
Registration changes. To change the name on an account, the shares are
generally transferred to a new account. In some cases, legal documentation may
be required. For more information, contact your Plan administrator or call
(914) 697-8000. If your shares are held of record by a financial institution,
contact that financial institution for ownership changes.
Statements and reports. The Funds will send you a confirmation statement
after every transaction that affects your account balance or your account
registration. Information regarding the tax status of income dividends and
capital gains distributions will be mailed to investors with non-tax-sheltered
accounts early each year.
Financial reports for the Funds will be mailed semiannually to all
shareholders.
DIVIDENDS AND DISTRIBUTIONS
Shares begin accruing dividends on the day following the date of
purchase, and accrue dividends through and including the day of redemption.
Substantially all of each Fund's net income from dividends and interest is paid
to its shareholders of record annually on or about the last day of DECEMBER.
<PAGE>
Each Fund's net realized short-term and long-term capital gains, if any,
will be distributed to the Fund's shareholders at least annually, in December.
Each Fund may also make additional distributions to its shareholders to the
extent necessary to avoid the application of the 4% non-deductible excise tax
on certain undistributed income and net capital gains of mutual funds.
Distributions are paid in additional shares issued at net asset value
unless the shareholder elects to receive payment in cash.
MANAGEMENT
TRUSTEES AND OFFICERS. Each Fund other than the Strategic Allocation
Funds is supervised by the Board of Trustees of The Diversified Investors Funds
Group. Each Strategic Allocation Fund is supervised by the Board of Trustees of
The Diversified Investors Strategic Allocation Funds. Each Portfolio is
supervised by the Board of Trustees of Diversified Investors Portfolios. A
majority of the disinterested Trustees of the Funds are different from a
majority of the disinterested Trustees of the Portfolios. More information on
the Trustees and Fund officers may be found under "Management" in the Statement
of Additional Information.
INVESTMENT ADVISER. Diversified Investment Advisors, Inc. is the
investment adviser (the "Adviser") of each Portfolio and each Strategic
Allocation Fund.
Diversified is an indirect, wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"), a financial services holding company whose primary emphasis is life
and health insurance and annuity and investment products. AEGON is an indirect,
wholly-owned subsidiary of AEGON nv, a Netherlands corporation which is a
publicly traded international insurance group. Diversified was incorporated in
1992 for the purpose of acting as the investment adviser to the Portfolios.
Diversified has selected Subadvisers for each Portfolio which have been
approved by the Trustees and the shareholders of that Portfolio. Diversified
provides general supervision of the Subadvisers for the Portfolios subject to
the policies set by the Trustees of Diversified Investors Portfolios.
Diversified manages the assets of each Strategic Allocation Fund in accordance
with the investment policies approved by the Board of Trustees. Investment
management decisions are made by a committee of Diversified's personnel and not
by any particular individual.
It is the responsibility of the Subadviser(s) to each Portfolio to make
the day-to day investment decisions for the Portfolio and to place the purchase
and sale orders for securities transactions, subject in all cases to the
general supervision of Diversified and the policies set by the Trustees of
Diversified Investors Portfolios. The Subadvisers are as follows:
<PAGE>
MONEY MARKET PORTFOLIO,
INTERMEDIATE GOVERNMENT
BOND PORTFOLIO AND
GOVERNMENT/CORPORATE BOND PORTFOLIO:
Capital Management Group, a division of 1740
Advisers, Inc., a wholly-owned subsidiary of The
Mutual Life Insurance Company of New York. Capital
Management Group has been a registered investment
adviser since [_____________]. The address of Capital
Management Group is 1740 Broadway, New York 10019
The following representatives of Capital Management
Group are primarily responsible for the day-to day
management of the Portfolios:
Money Market Portfolio: David E. Wheeler, Investment
Vice President and Portfolio Manager, has been
responsible for the day-to-day management of the
Portfolio since 1997. Mr. Wheeler has been employed
by Capital Management Group since 1994 and was
employed at AIG Investment Advisers prior to 1994.
Intermediate Government Bond Portfolio and
Government/Corporate Bond Portfolio: Gregory Staples,
Vice President, has been responsible for the day-to
day management of the Intermediate Government Bond
Portfolio since 1996 and the Government/Corporate
Bond Portfolio since 1994. Mr. Staples has been
employed by Capital Management Group since 1987.
HIGH QUALITY BOND PORTFOLIO:
Merganser Capital Management Corporation. Merganser
was formed in 1987 and is owned by certain of its
employees. Merganser has been a registered investment
adviser since [_______________]. The principal
business address of Merganser is One Cambridge
Center, Cambridge, Massachusetts 02142
Investment management decisions of Merganser are made
by committee and not by managers individually.
HIGH-YIELD BOND PORTFOLIO:
Delaware Investment Advisers. Delaware Investment
Advisers is a business trust. Delaware Investment
Advisers is owned by Lincoln National Corp. Delaware
Investment Advisers has been a registered investment
adviser since [_______________]. The principal
business address of Delaware Investment Advisers is
2005 Market Street, Philadelphia, Pennsylvania 19103.
<PAGE>
Investment management decisions of Delaware
Investment Advisers are made by committee and not by
managers individually.
BALANCED PORTFOLIO:
Institutional Capital Corporation. Institutional
Capital was formed in January of 1970 and is owned by
certain of its employees. Institutional Capital has
been a registered investment adviser since
[_____________]. The principal business address of
Institutional Capital is 303 West Madison Street,
Chicago, Illinois 60606.
Investment management decisions of Institutional
Capital are made by committee and not by managers
individually.
EQUITY INCOME PORTFOLIO:
Asset Management Group, a division of 1740 Advisers,
Inc., which is a wholly-owned subsidiary of MONY.
Asset Management Group has been a registered
investment adviser since [___________]. The address
of Asset Management Group is 1740 Broadway, New York,
New York 10019.
Investment management decisions at Asset Management
Group are made by committee and not by managers
individually.
EQUITY VALUE PORTFOLIO:
Ark Asset Management Co., Inc. Ark was formed in July
of 1989 and is owned by Ark Asset Holdings, Inc. Ark
Asset Holdings, Inc. is owned by certain of its
employees. Ark has been a registered investment
adviser since [______________]. The principal address
of Ark is 55 Water Street, New York, New York 10041.
Investment management decisions of Ark are made by
committee and not by managers individually.
GROWTH & INCOME PORTFOLIO:
Putnam Advisory Company, Inc. Putnam was formed in
1937 and is owned by Marsh & McLennon Companies, Inc.
Putnam has been a registered investment adviser since
[_____________]. The principal address of Putnam is
One Post Office Square, Boston, Massachusetts 02109.
The investment management decisions of Putnam are
made by committee and not by managers individually.
<PAGE>
EQUITY GROWTH PORTFOLIO:
Dresdner RCM Global Investors, LLC
Montag & Caldwell, Inc.
Dresdner RCM Global Investors, LLC was established in
1996, when Dresdner Bank acquired RCM Capital
Management, LLC. Dresdner RCM has been a registered
investment adviser since [_____________]. The
principal address of Dresdner RCM is Four Embarcadero
Center, Suite 2900, San Francisco, California 94111.
Investment management decisions of Dresdner RCM are
made by committee and not by managers individually.
Montag & Caldwell Incorporated was established in
1945 and is owned by Alleghany Corporation. Montag &
Caldwell has been a registered investment adviser
since [_____________]. The principal address of
Montag & Caldwell is 3343 Peachtree Road, N.E., Suite
1100, Atlanta, Georgia 30326-1022.
Investment management decisions of Montag & Caldwell
are made by committee and not by managers
individually.
SPECIAL EQUITY PORTFOLIO:
Ark Asset Management Co., Inc.
Liberty Investment Management
Pilgrim Baxter & Associates, Ltd.
Westport Asset Management, Inc.
Ark Asset Management Co., Inc. was formed in July of
1989 and is owned by Ark Asset Holdings, Inc. Ark
Asset Holdings, Inc. is owned by certain of its
employees. Ark has been a registered investment
adviser since [______________]. The principal address
of Ark is 55 Water Street, New York, New York 10041.
Ronald Wiener, Vice Chairman and Portfolio Manager,
has been primarily responsible for the day-to-day
management of the Portfolio on behalf of Ark since
1994. Mr. Wiener has been employed by Ark since 1986
and was employed at Lehman Management Co., Inc. as
Senior Vice President and Senior Portfolio Manager,
Specialty Growth Equity Management, from 19__ to
19__.
Liberty Investment Management is a division of
Goldman Sachs Asset Management and was established in
January of 1997 when Goldman, Sachs & Co. acquired
Liberty Investment Management, Inc. Goldman Sachs
Asset Management is a separate operating division of
Goldman, Sachs & Co., a worldwide investment banking
firm. Liberty has been a registered investment
<PAGE>
adviser since [____________]. The principal business
address of Liberty is 2502 Rocky Point Drive, Suite
500, Tampa, Florida 33607.
Herbert E. Ehlers, Managing Director, and Timothy G.
Ebright, Portfolio Manager, have been responsible for
the day-to-day management of the Portfolio on behalf
of Liberty since 1994. Both Mr. Ehlers and Ebright
have been employed at Liberty or its predecessor
Liberty Investment Management, Inc. since 1988.
Pilgrim Baxter & Associates, Ltd. was formed in 1995
and is owned by United Asset Management, Inc., a
publicly-owned corporation. Pilgrim has been a
registered investment adviser since [____________].
The principal business address of Pilgrim is 1255
Drummers Lane, Wayne, Pennsylvania 19807.
John Force, Portfolio Manager, has been responsible
for the day-to-day management of the Portfolio on
behalf of Pilgrim since 1994 and has been employed by
Pilgrim since 1992.
Westport Asset Management, Inc. was formed in 1993
and is owned by certain of its employees. Westport
has been a registered investment adviser since
[____________]. The principal business address of
Westport is 253 Riverside Avenue, Westport,
Connecticut 06880.
Andrew Knuth, Portfolio Manager, has been responsible
for the day-to day management of the Portfolio on
behalf of Westport since 1994 and has been employed
by Westport since 1983.
AGGRESSIVE EQUITY PORTFOLIO
McKinley Capital Management, Inc. McKinley was formed
in March of 1991 and is owned by Robert Gilliam.
McKinley has been a registered investment adviser
since [______________]. The principal business
address of McKinley is 3301 C Street, Anchorage
Alaska 99503.
Robert Gilliam, Portfolio Manager, has been
responsible for the day-to-day management of the
Portfolio since 1996 and has been employed by
McKinley since 1991.
INTERNATIONAL EQUITY PORTFOLIO
Capital Guardian Trust Company. Capital Guardian was
formed in 1968 and is owned by The Capital Group
Companies, Inc. Capital Guardian has been a
registered investment adviser since [_____________].
The principal address of Capital Guardian is 333
South Hope Street, Los Angeles, California 90071.
<PAGE>
Capital Guardian uses a system of multiple portfolio
managers. Within investment guidelines, each
portfolio manager makes individual decisions as to
company, country, industry, timing and percentage
based on extensive field research and direct company
contact.
Management's discussion of Fund performance is included in the Annual
Report, which may be obtained without charge by calling (914) 697-8000.
Advisory Fees. Diversified is entitled to receive investment advisory
fees, which are accrued daily and payable monthly, at an annual percentage of
each Fund's average daily net assets. The rate is 0.20% for each of the
Strategic Allocation Funds. The rates for the Portfolios are shown in the table
below.
Each of the Subadvisers is entitled to receive a fee from Diversified at
an annual percentage of each Fund's average daily net assets. The rates are
shown in the table below.
<TABLE>
<CAPTION>
COMPENSATION COMPENSATION
PORTFOLIO SUBADVISERS (%) (%)
TO ADVISER (1) TO SUBADVISERS
<S> <C> <C> <C>
Money Market Portfolio Capital Management Group 0.25 0.05
High Quality Bond Merganser Capital Management 0.35 (2)
Portfolio Corporation
Intermediate Capital Management Group 0.35 0.15
Government Bond
Portfolio
Government/Corporate Capital Management Group 0.35 0.15
Bond Portfolio
High-Yield Bond Delaware Investment Advisers 0.55 (3)
Portfolio
Balanced Portfolio Institutional Capital Corporation 0.45 (4)
Equity Income Portfolio Asset Management Group 0.45 0.25
Equity Value Portfolio Ark Asset Management Co., Inc. 0.57 (5)
Growth & Income Portfolio Putnam Advisory Company, Inc. 0.60 (6)
Equity Growth Portfolio Dresdner RCM Global Investors, LLC 0.62 (7)
Montag & Caldwell, Inc.
Special Equity Portfolio Pilgrim Baxter & Associates, Ltd. 0.80 0.50
Ark Asset Management Co., Inc.
Liberty Investment Management
Westport Asset Management, Inc.
<PAGE>
Aggressive Equity McKinley Capital Management 0.97 (8)
Portfolio
International Equity Capital Guardian Trust Company 0.75 (9)
Portfolio
</TABLE>
- ----------------------------------
(1)The Adviser is currently waiving a portion of its fees. See "Expense
Summary" on page 2 for a review of the fee waivers currently in effect.
(2)0.50% on the first $10,000,000 of average net assets of the High Quality
Bond Portfolio, 0.375% on the next $15,000,000 in assets, 0.25% on the next
$75,000,000 in assets and 0.1875% on all assets in excess of $100,000,000.
(3)0.40% on the first $20,000,000 of average net assets of the High-Yield Bond
Portfolio, 0.30% on the next $20,000,000 in assets and 0.20% on assets in
excess of $40,000,000.
(4)0.55% on the first $25,000,000 of average net assets of the Balanced
Portfolio, 0.45% on the next $25,000,000 in assets and 0.35% on assets in
excess of $50,000,000.
(5)0.45% on the first $100,000,000 of average net assets of the Equity Value
Portfolio, 0.40% on the next $50,000,000 in assets and 0.35% on the next
$50,000,000 in assets; when the Portfolio achieves $200,000,000 in assets,
the rate shall be 0.40% on assets up to $200,000,000 and 0.35% on assets in
excess of $200,000,000 so long as the Portfolio continues to have more than
$200,000,000 in assets.
(6)0.30% on the first $100,000,000 of average net assets of the Growth &
Income Portfolio, 0.20% on assets in excess of $100,000,000.
(7)With respect to assets of the Equity Growth Portfolio allocated to each
Subadviser: 0.50% on the first $50,000,000 of average net assets, 0.25% on
the next $50,000,000 in assets and 0.20% on all assets in excess of
$100,000,000.
(8)0.90% on the first $10,000,000 of average net assets of the Aggressive
Equity Portfolio, 0.80% on the next $15,000,000 in assets, 0.60% on the next
$25,000,000 in assets, 0.40% on the next $50,000,000 in assets and 0.35% on
assets in excess of $100,000,000.
(9)0.75% on the first $25,000,000 of average net assets of the International
Equity Portfolio, 0.60% on the next $25,000,000 in assets, 0.425% from
$50,000,000 in assets to $250,000,000 in assets, and 0.375% on all assets in
excess of $250,000,000.
Diversified has agreed to waive its investment advisory fees to the
extent necessary to limit the total operating expenses of each Fund to a
specified level. Diversified also may contribute to the Funds from time to time
to help them maintain competitive expense ratios. These arrangements are
voluntary and may be terminated at any time.
The following chart shows the investment advisory fees paid by each
Portfolio and each Strategic Allocation Fund for the fiscal year ended December
31, 1997. These fees are expressed as a percentage of average daily net assets.
Each of Short/Intermediate Horizon Strategic Allocation Fund and the Long
Horizon Strategic Allocation Fund is newly organized and had no operations
during that fiscal year.
Advisory fees paid
Money Market Portfolio
High Quality Bond Portfolio [To be added by
amendment.]
Intermediate Government Bond Portfolio
Government/Corporate Bond Portfolio
High-Yield Bond Portfolio
Balanced Portfolio
<PAGE>
Equity Income Portfolio
Equity Value Portfolio
Growth & Income Portfolio
Equity Growth Portfolio
Special Equity Portfolio
Aggressive Equity Portfolio
International Equity Portfolio
Short Horizon Strategic Allocation Fund
Intermediate Horizon Strategic Allocation Fund
Intermediate/Long Horizon Strategic Allocation Fund
ADMINISTRATOR. Diversified provides administrative services to the Funds,
including regulatory reporting, office facilities and equipment and personnel.
For these services Diversified receives a fee, which is calculated daily and
paid monthly, at an annual rate of 0.30% of the average daily net assets of
each Fund (other than the Strategic Allocation Funds). Diversified receives no
compensation for providing administrative services to the Strategic Allocation
Funds. Diversified may to waive a portion of its fee from time to time.
SERVICING AGENTS. Diversified and other agents who have entered into
Service Agreements with Diversified are the Funds' Servicing Agents. All
shareholders must be represented by a Servicing Agent. Diversified is the
Funds' transfer agent. Diversified's address is Four Manhattanville Road,
Purchase, New York 10577.
DISTRIBUTION ARRANGEMENTS. Diversified Investors Securities Corp., Four
Manhattanville Road, Purchase, New York 10577, is the distributor of shares of
each of the Money Market, Bond, Balanced and Stock Funds. Under a Distribution
Plan which has been adopted pursuant to Rule 12b-1 under the Investment Company
Act of 1940, each Fund (other than the Strategic Allocation Funds) may pay
monthly fees at an annual rate of up to 0.25% of the Fund's average daily net
assets. These fees may be used by the Distributor to reimburse itself for its
services or for advertising, marketing or other promotional activities.
CUSTODIAN. Investors Bank & Trust Company, 89 South Street, Boston,
Massachusetts 02205, is the Funds' custodian. Fund securities may be held by a
sub-custodian bank approved by the Trustees.
TAXES
This discussion of taxes is for general information only. Investors
should consult their own tax advisers about their particular situations.
Each Fund intends to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies so that it will not be liable for
any federal income or excise taxes. Each Fund may pay withholding or other
taxes to foreign governments during the year, however, and these taxes will
reduce those Funds' dividends.
With certain exceptions, Fund dividends and capital gains distributions
are subject to federal income tax and may also be subject to state and local
taxes. Distributions from interest on U.S. government obligations may be exempt
from state and local taxes. Dividends and distributions are treated in the same
manner for federal tax purposes whether they are paid in cash or as additional
shares. Generally, distributions from a Fund's net investment income and
short-term capital gains will be taxed as ordinary income. A portion of certain
Funds' distributions from net investment income may be eligible for the
dividends-received deduction available to corporations. Distributions of
<PAGE>
long-term net capital gains will be taxed as such regardless of how long the
shares of a Fund have been held.
For each Fund, Fund distributions will reduce the distributing Fund's net
asset value per share. Shareholders who buy shares just before a Fund makes a
distribution may pay the full price for the shares and then effectively receive
a portion of the purchase price back as a taxable distribution.
Plans which invest in a Fund and satisfy all conditions applicable to
such Plans under the Internal Revenue Code generally will not be subject to
federal tax liability on either distributions from the Fund or redemptions of
shares of the Fund. Rather, participants in such Plans will be taxed when they
begin taking distributions from the Plan in accordance with the rules under the
Internal Revenue Code governing the taxation of such distributions.
Early each year, each Fund will notify its shareholders (other than Plan
participants) of the amount and tax status of distributions paid to
shareholders for the preceding year. Please consult your own tax advisers
regarding the status of your account under state and local laws.
PERFORMANCE INFORMATION
Fund performance may be quoted in advertising, shareholder reports and
other communications. Each Fund may provide its yield and/or total return for
certain periods and may also quote fund rankings from various sources, such as
Russell Data Services (a division of Frank Russell Company), Lipper Analytical
Services, Inc., Weisenberger Investment Company Service, Morningstar, Inc. and
CDA. The current yield for a Fund will be calculated by dividing net investment
income per share during a recent 30-day period (7-day period for the Money
Market Fund) by the net asset value per share on the last day of the period and
annualizing the result. Total return refers to the change over a stated period
in the value of an investment in a Fund, reflects any change in net asset value
and is compounded to include the value of any shares purchased with dividends
or capital gains declared during the period. Yield reflects only net income as
of a stated time, while total return reflects all components of investment
return over a stated period of time. For more information about the calculation
of yield and total return, see the Statement of Additional Information.
Please note that the investment results of each Fund will fluctuate over
time. All performance information is historical and should not be considered a
representation of what an investment may earn in the future.
TOTAL RETURNS
Before the Funds and Portfolios commenced operations, the assets that
were contributed to certain Portfolios were managed in Pooled Separate Accounts
of Mutual of New York. The total return for each Fund (other than the
High-Yield Bond, Equity Value and Aggressive Equity Funds) for any period which
includes a period prior to the contribution by the Pooled Separate Account will
reflect the performance of the Pooled Separate Account. Pooled Separate Account
performance will only be included, however, from the date that the Pooled
Separate Account adopted investment objectives, policies and practices and was
managed in a manner that are in all material respects the same as for the
applicable Fund. This Pooled Separate Account performance will be adjusted to
reflect current Fund fees and expenses, after waivers and reimbursements. See
"Expenses" on page ____ for a review of the voluntary expense reimbursements
and fee waivers currently in effect. Diversified intends to continue to waive
its advisory fees and contribute to the Funds from time to time so that the
expense ratios of the Funds will not materially increase prior to December 31,
<PAGE>
1998. The Pooled Separate Accounts were not registered under the Investment
Company Act of 1940 and were not subject to certain investment restrictions
imposed by that Act or the Internal Revenue Code. If the Pooled Separate
Accounts had been so registered, investment performance might have been
adversely affected.
As of December 31, 1997, the average annual total returns for each of the
following Funds, including the Pooled Separate Accounts referred to above, were
as follows:
<TABLE>
<CAPTION>
FOR THE
FOR THE FOR THE FOR THE FOR THE PERIOD SINCE
YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
INCEPTION ENDED ENDED ENDED ENDED THROUGH
FUND DATE 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97
- ---------------------------- --------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Money Market
High Quality Bond
Intermediate Government Bond
Government/Corporate Bond
High-Yield Bond
Balanced
Equity Income
Equity Value
Growth & Income
Equity Growth
Special Equity
Aggressive Equity
International Equity
Short Horizon Strategic
Allocation Fund
Intermediate Horizon Strategic
Allocation Fund
Intermediate/Long Horizon
Strategic Allocation Fund
</TABLE>
COMPOSITE PERFORMANCE OF DIVERSIFIED AND THE SUBADVISERS
The table below shows total returns calculated for all private accounts
and collective investment vehicles managed by Diversified during the periods
indicated with investment objectives, policies and restrictions substantially
similar to the Strategic Allocation Funds and which have been managed as these
Funds are managed. Diversified has managed these collective investment vehicles
since October 1, 1992. The returns are adjusted to assume that all charges,
expenses and fees of the Strategic Allocation Funds which are presently in
effect were deducted during the periods.
The average annual total returns at December 31, 1997 for all such
private accounts and collective investment vehicles managed by Diversified,
adjusted to assume that all charges, expenses and fees presently in effect were
deducted, are as follows:
<TABLE>
<CAPTION>
Inception Since
Date 1 Year 3 Years Inception
<S> <C> <C> <C> <C>
Short Horizon Strategic Allocation Fund
Short/Intermediate Strategic Allocation Fund
<PAGE>
Intermediate Horizon Strategic Allocation
Fund
Intermediate/Long Horizon Strategic
Allocation Fund
Long Horizon Strategic Allocation Fund
</TABLE>
See Appendix D for the past performance of the Subadvisers to the
High-Yield Bond Portfolio, Equity Value Portfolio, Growth & Income Portfolio,
Equity Growth Portfolio and Aggressive Equity Portfolio in managing
substantially similar accounts.
GENERAL INFORMATION
NET ASSET VALUE. Net asset value per share for each Fund is calculated
each business day at the close of regular trading on the New York Stock
Exchange, normally 4 p.m. Eastern time.
All purchases, redemptions and exchanges will be processed at net asset
value the next time it is calculated after a request is received and approved
by the Distributor. Net asset value per share is calculated by dividing the
total value of a Fund's securities and other assets, less liabilities, by the
total number of shares outstanding. Securities are valued at market value or,
if a market quotation is not readily available, at their fair value determined
in good faith under procedures established by and under the supervision of the
Trustees. Money market instruments maturing within 60 days are valued at
amortized cost, which approximates market value.
ORGANIZATION. Each Fund (other than the Strategic Allocation Funds) is a
series of The Diversified Investors Funds Group. The Diversified Investors
Funds Group is a Massachusetts business trust which was organized on April 23,
1993; it also is an open-end management investment company registered under the
Investment Company Act of 1940. The Diversified Investors Funds Group currently
has fifteen active series.
Each of these Funds is a diversified mutual fund. Under the Investment
Company Act of 1940, a diversified mutual fund must manage at least 75% of its
total assets so that no more than 5% of those assets are invested in any one
company at the time of investment.
Each Strategic Allocation Fund is a series of The Diversified Investors
Strategic Allocation Funds. The Diversified Investors Strategic Allocation
Funds is a Massachusetts business trust which was organized on January 5, 1996;
it also is an open-end management investment company registered under the
Investment Company Act of 1940. The Diversified Investors Strategic Allocation
Funds currently has five active series.
Each Strategic Allocation Fund is a non-diversified mutual fund, meaning
that it is not subject to restrictions under the Investment Company Act of 1940
limiting the investment of its assets in one or relatively few issuers
(although certain diversification requirements are imposed by the Internal
Revenue Code). Each of these Funds invests in the underlying Funds, which are
diversified.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the trust's
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.
<PAGE>
Each Fund (other than the Strategic Allocation Funds) invests all of its
investable assets in a Portfolio which has the same investment objective and
policies as that Fund. Each Portfolio is a series of Diversified Investors
Portfolios, which is a New York trust and an investment company registered
under the Investment Company Act of 1940.
VOTING AND OTHER RIGHTS. Each of The Diversified Investors Funds Group
and The Diversified Investors Strategic Allocation Funds may issue an unlimited
number of shares, may create new series of shares and may divide shares in each
series into classes. Each share of each Fund gives the shareholder one vote in
Trustee elections and other matters submitted to shareholders for vote. All
shares of each series of The Diversified Investors Funds Group and The
Diversified Investors Strategic Allocation Funds have equal voting rights
except that, in matters affecting only a particular Fund or class, only shares
of that particular Fund or class are entitled to vote.
Each of the Money Market, High-Yield Bond, Equity Value, Equity Growth,
Special Equity and International Equity Funds currently offers three classes of
shares. Diversified Class shares are described in this Prospectus. The other
two classes of shares, Stephens Premium Class shares and Stephens Institutional
Class shares, may have different expenses, which may affect the performance of
those shares. Call the Distributor at (914) 697-8000 for more information.
Because The Diversified Investors Funds Group and The Diversified
Investors Strategic Allocation Funds are Massachusetts business trusts, the
Funds are not required to hold annual shareholder meetings. Shareholder
approval will usually be sought only for changes in certain investment
restrictions and for the election of Trustees under certain circumstances.
Trustees may be removed by shareholders under certain circumstances. Each share
of each Fund is entitled to participate equally in dividends and other
distributions and the proceeds of any liquidation of that Fund, subject to any
differing expenses borne by different classes of the Fund.
EXPENSES. In addition to amounts payable to its service providers and
under the Distribution Plan, each Fund is responsible for its own expenses,
including the compensation of Trustees that are not affiliated with Diversified
or any Subadviser, government fees, taxes, accounting and legal fees, expenses
of communicating with shareholders, interest expense and insurance premiums.
Each Strategic Allocation Fund is also responsible for its proportionate share
of the expenses of the Money Market, Bond and Stocks Funds in which it invests.
Each of the Money Market, Bond, Balanced and Stock Funds is responsible for its
proportionate share of the expenses of the underlying Portfolio in which it
invests.
The following table shows each Fund's expenses for the fiscal year ended
December 31, 1997, expressed as a percentage of average net assets. The Adviser
is currently waiving a portion of its fees and reimbursing certain expenses.
See "Expenses" on page __. The Short/Intermediate Horizon Strategic Allocation
Fund and the Long Horizon Strategic Allocation Fund are newly organized and had
no operations during that fiscal year.
Expenses
Money Market Fund 0.80%
High Quality Bond Fund 1.00%
Intermediate Government Bond Fund 1.00%
Government/Corporate Bond Fund 1.00%
High-Yield Bond Fund 1.10%
Balanced Fund 1.10%
Equity Income Fund 1.00%
Equity Value Fund 1.10%
<PAGE>
Growth & Income Fund 1.15%
Equity Growth Fund 1.25%
Special Equity Fund 1.50%
Aggressive Equity Fund 1.50%
International Equity Fund 1.40%
Short Horizon Strategic Allocation Fund 0.20%
Intermediate Horizon Strategic Allocation Fund 0.20%
Intermediate/Long Horizon Strategic Allocation Fund 0.20%
INDEPENDENT AUDITORS. Coopers & Lybrand L.L.P. serves as independent
auditor for each Fund and each Portfolio.
-------------------------------
The Statement of Additional Information dated the date of this Prospectus
contains more detailed information about the Funds, including information
relating to (i) investment policies and restrictions, (ii) the Trustees,
officers and investment advisers, (iii) securities transactions, (iv) the
Funds' shares, including rights and liabilities of shareholders, (v) the method
used to calculate performance information and (vi) the determination of net
asset value.
No person has been authorized to give any information or make any
representations not contained in this Prospectus or the Statement of Additional
Information in connection with the offering made by this Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Funds or their distributor. This Prospectus does
not constitute an offering by the Funds or their distributor in any
jurisdiction in which such offering may not lawfully be made.
<PAGE>
APPENDIX A
STRATEGIC ALLOCATION FUNDS
Under normal circumstances, the Strategic Allocation Funds are allocated among
the Money Market, Bond and Stock Funds as follows:
Short Horizon Strategic Allocation Fund:
Money Market Fund 0-40%
High Quality Bond Fund 10-50%
Intermediate Government Bond Fund 10-40%
Government/Corporate Bond Fund 10-50%
High-Yield Bond Fund 0-30%
Equity Income Fund 0-20%
Equity Value Fund 0-10%
Growth & Income Fund 0-10%
Short/Intermediate Horizon Strategic Allocation Fund:
Money Market Fund 0-30%
High Quality Bond Fund 10-40%
Intermediate Government Bond Fund 0-30%
Government/Corporate Bond Fund 20-60%
High-Yield Bond Fund 0-30%
Equity Income Fund 0-20%
Equity Value Fund 0-20%
Growth & Income Fund 0-20%
Equity Growth Fund 0-20%
Special Equity Fund 0-10%
Aggressive Equity Fund 0-10%
International Equity Fund 0-10%
Intermediate Horizon Strategic Allocation Fund:
Money Market Fund 0-30%
High Quality Bond Fund 10-30%
Intermediate Government Bond Fund 0-20%
Government/Corporate Bond Fund 15-40%
High-Yield Bond Fund 0-20%
Equity Income Fund 0-25%
Equity Value Fund 0-25%
Growth & Income Fund 0-25%
Equity Growth Fund 0-25%
Special Equity Fund 0-20%
Aggressive Equity Fund 0-10%
International Equity Fund 0-15%
Intermediate/Long Horizon Strategic Allocation Fund:
Money Market Fund 0-20%
High Quality Bond Fund 0-20%
Intermediate Government Bond Fund 0-20%
<PAGE>
Government/Corporate Bond Fund 0-20%
High-Yield Bond Fund 0-15%
Equity Income Fund 0-40%
Equity Value Fund 0-40%
Growth & Income Fund 0-40%
Equity Growth Fund 0-40%
Special Equity Fund 0-40%
Aggressive Equity Fund 0-10%
International Equity Fund 0-20%
Long Horizon Strategic Allocation Fund:
Money Market Fund 0-20%
High Quality Bond Fund 0-15%
Intermediate Government Bond Fund 0-15%
Government/Corporate Bond Fund 0-10%
High-Yield Bond Fund 0%
Equity Income Fund 0-40%
Equity Value Fund 0-40%
Growth & Income Fund 0-40%
Equity Growth Fund 0-40%
Special Equity Fund 0-40%
Aggressive Equity Fund 0-20%
International Equity Fund 0-30%
<PAGE>
APPENDIX B
PERMITTED INVESTMENTS
AND INVESTMENT PRACTICES
U.S. Treasury Obligations - U.S. Treasury obligations include bills, notes and
bonds issued by the U.S. Treasury and separately traded interest and principal
component parts of these obligations that are transferable through the Federal
book-entry system known as Separately Traded Registered Interest and Principal
Securities (STRIPS). STRIPS are sold as zero coupon securities. These
securities are usually structured with two classes that receive different
portions of the interest and principal payments from the underlying obligation.
The yield to maturity on the interest-only class is extremely sensitive to the
rate of principal payments on the underlying obligation. The market value of
the principal-only class generally is unusually volatile in response to changes
in interest rates. See "Zero Coupon Securities" for more information.
U.S. Government Agencies - Certain Federal agencies such as the Government
National Mortgage Association (GNMA) have been established as instrumentalities
of the U.S. government to supervise and finance certain types of activities.
Issues of these agencies, while not direct obligations of the U.S. government,
are either backed by the full faith and credit of the United States (e.g.,
GNMA) or supported by the issuing agencies' right to borrow from the Treasury.
The issues of other agencies are supported only by the credit of the
instrumentality (e.g., Federal National Mortgage Association).
Receipts - Receipts are interests in separately traded interest and principal
component parts of U.S. Treasury obligations that are issued by banks and
brokerage firms and are created by depositing U.S. Treasury obligations into a
special account at a custodian bank. The custodian holds the interest and
principal payments for the benefit of the registered owners of the certificates
or receipts. Receipts include Treasury Receipts (TRs), Treasury Investment
Growth Receipts (TIGRs) and Certificates of Accrual on Treasury Securities
(CATS). TRs, TIGRs, and CATS are sold as zero coupon securities.
Zero Coupon Securities - A zero coupon security pays no interest or principal
to its holder during its life. A zero coupon security is sold at a discount,
frequently substantial, and redeemed at face value at its maturity date. The
market prices of zero coupon securities are generally more volatile than the
market prices of securities of similar maturity that pay interest periodically,
and zero coupon securities are likely to react more to interest rate changes
than non-zero coupon securities with similar maturity and credit qualities.
Bank Obligations - Bank obligations include certificates of deposit, time
deposits (including Eurodollar time deposits) and bankers' acceptances and
other short-term debt obligations issued by domestic banks, foreign
subsidiaries or foreign branches of domestic banks, domestic and foreign
branches of foreign banks, domestic savings and loan associations and other
banking institutions. The Funds have established certain minimum credit quality
standards for bank obligations in which they invest.
Bankers' Acceptances - A banker's acceptance is a bill of exchange or time
draft drawn on and accepted by a commercial bank. It is used by corporations to
finance the shipment and storage of goods and to furnish dollar exchange.
Maturities are generally six months or less.
Certificates of Deposit - A certificate of deposit is a negotiable
interest-bearing instrument with a specific maturity. Certificates of deposit
are issued by banks and savings and loan institutions in exchange for the
deposit of funds and normally can be traded in the secondary market prior to
maturity.
<PAGE>
Time Deposits - A time deposit is a non-negotiable receipt issued by a bank in
exchange for the deposit of funds. Like a certificate of deposit, it earns a
specified rate of interest over a definite period of time; however, it cannot
be traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
Commercial Paper - Commercial paper is the term used to designate unsecured
short-term promissory notes issued by corporations and other entities.
Maturities on these issues vary from one to 270 days.
Money Market Funds - A money market fund is a mutual fund that limits its
investments to high quality money market instruments with a weighted average
maturity of 90 days or less. Consistent with applicable regulations the Funds
may not invest more than certain percentages of their assets in other mutual
funds. Investing in other mutual funds causes shareholders to bear not only
Fund expenses, but also expenses of the underlying mutual funds.
Variable and Floating Rate Instruments - Certain obligations may carry variable
or floating rates of interest and may involve a conditional or unconditional
demand feature permitting the holder to demand payment of principal at any time
or at specified intervals. These obligations may include variable amount master
demand notes. Such instruments bear interest at rates which are not fixed, but
which vary with changes in specified market rates or indices, such as a Federal
Reserve composite index. A demand instrument with a demand notice period
exceeding seven days may be considered illiquid if there is no secondary market
for such security. The interest rate on these securities may be reset daily,
weekly, quarterly, or some other reset period and may have a floor or ceiling
on interest rate charges. There is a risk that the current interest rate on
such obligations may not accurately reflect existing market interest rates.
Repurchase Agreements - A repurchase agreement is an agreement where a person
buys a security and simultaneously commits to sell the security to the seller
at an agreed upon price (including principal and interest) on an agreed upon
date within a number of days from the date of purchase. A Fund bears a risk of
loss in the event the other party defaults on its obligations and the Fund is
delayed or prevented from its right to dispose of the collateral securities or
if the Fund realizes a loss on the sale of the collateral securities.
Reverse Repurchase Agreements - Reverse repurchase agreements involve the sale
of securities held by a Fund and the agreement by the Fund to repurchase the
securities at an agreed-upon price, date and interest payment. When a Fund
enters into reverse repurchase transactions, securities of a dollar amount
equal in value to the securities subject to the agreement will be maintained in
a segregated account with the Fund's custodian. The segregation of assets could
impair the Fund's ability to meet its current obligations or impede investment
management if a large portion of the Fund's assets are involved. Reverse
repurchase agreements are considered to be a form of borrowing.
Mortgage-Backed Securities - The Funds may purchase mortgage-backed securities
issued or guaranteed as to payment of principal and interest by the U.S.
government or one of its agencies and backed by the full faith and credit of
the U.S. government, including direct pass-through certificates of GNMA, as
well as mortgage-backed securities for which principal and interest payments
are backed by the credit of particular agencies of the U.S. government.
Mortgage-backed securities are generally backed or collateralized by a pool of
mortgages. These securities are sometimes called collateralized mortgage
obligations or CMOs.
Even if the U.S. government or one of its agencies guarantees principal
and interest payments of a mortgage-backed security, the market price of a
<PAGE>
mortgage-backed security is not insured and may be subject to market
volatility. When interest rates decline, mortgage-backed securities experience
higher rates of prepayment because the underlying mortgages are refinanced to
take advantage of the lower rates. Thus, prices of mortgage-backed securities
may not increase as much as prices of other debt obligations when interest
rates decline, and mortgage-backed securities may not be an effective means of
locking in a particular interest rate. In addition, any premium paid for a
mortgage-backed security may be lost when it is prepaid. When interest rates
increase, mortgage-backed securities experience lower rates of prepayment. This
has the effect of lengthening the expected maturity of a mortgage-backed
security. As a result, prices of mortgage-backed securities may decrease more
than prices of other debt obligations when interest rates increase.
Additionally mortgage-backed securities are also subject to maturity
extension risk, that is, the possibility that rising interest rates may cause
prepayments to occur at a slower than expected rate. This particular risk may
effectively convert a security that was considered short or intermediate-term
at the time of purchase into a long-term security. Long-term securities
generally fluctuate more widely in response to changes in interest rates than
short or intermediate-term securities. Thus, a rising interest rate would not
only likely decrease the value of a Fund's securities, but would also increase
the inherent volatility of the Fund by effectively converting short term debt
instruments into long term debt instruments.
Forward Commitments or Purchases on a When-Issued Basis - Forward commitments
or purchases of securities on a when-issued basis are transactions where the
price of the securities is fixed at the time of commitment and the delivery and
payment ordinarily takes place beyond customary settlement time. The interest
rate realized on these securities is fixed as of the purchase date and no
interest accrues to the buyer before settlement. The securities are subject to
market fluctuation due to changes in market interest rates; the securities are
also subject to fluctuation in value pending settlement based upon public
perception of the creditworthiness of the issuer of these securities.
Yankee Bonds and Eurodollar Bonds - Yankee bonds are U.S. dollar denominated
bonds issued in the United States market by foreign issuers and are subject to
the regulations of the Securities and Exchange Commission. Eurodollar bonds are
fixed income securities that are denominated in U.S. dollars, underwritten by
an international syndicate and sold to non-U.S. investors. U.S.-based investors
may purchase eurodollar bonds in the secondary market after a seasoning period.
Eurodollar bonds are not subject to regulation by the Securities and Exchange
Commission.
Asset-Backed Securities - The Funds may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card or automobile
loan receivables, representing the obligations of a number of different
parties. Corporate asset-backed securities present certain risks. For instance,
in the case of credit card receivables, these securities may not have the
benefit of any security interest in the related collateral.
Standby Commitments - A security purchased subject to a standby commitment may
be sold at a fixed price prior to maturity and may be sold at any time at
market rates. A premium may be paid for a standby commitment and will have the
effect of reducing the yield otherwise payable on the underlying security.
Guaranteed Investment Contracts (GIC) - A GIC is a contract between an
insurance company and, generally, an institutional investor that guarantees the
investor a specified interest rate for a specific period and the return of the
investor's principal.
<PAGE>
Common and Preferred Stock - Common stocks are generally more volatile than
other securities. Preferred stocks share some of the characteristics of both
debt and equity investments and are generally preferred over common stocks with
respect to dividends and in liquidation.
Convertible Securities - Convertible securities have characteristics similar to
both fixed income and equity securities. Because of the conversion feature, the
market value of convertible securities tends to move together with the market
value of the underlying stock. The value of convertible securities is also
affected by prevailing interest rates, the credit quality of the issuer, and
any call provisions. Convertible securities include both debt obligations and
preferred stock.
American, European and Continental Depositary Receipts - American Depositary
Receipts (ADRs) are securities, typically issued by a U.S. financial
institution, that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer. European Depositary Receipts (EDRs),
which are sometimes referred to as Continental Depositary Receipts (CDRs), are
securities, typically issued by a non-U.S. financial institution, that evidence
ownership interests in a security or a pool of securities issued by either a
U.S. or foreign issuer. ADRs, EDRs and CDRs may be available for investment
through "sponsored" or "unsponsored" facilities. A sponsored facility is
established jointly by the issuer of the security underlying the receipt and a
depositary, whereas an unsponsored facility may be established by a depositary
without participation by the issuer of the receipt's underlying security.
Holdings of an unsponsored depositary receipt generally bear all the costs of
the unsponsored facility and the depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass voting rights
through to the holders of the receipts in respect of the deposited securities.
Investments in securities of foreign issuers (including ADRs, EDRs and CDRs)
are subject to special risks. See "Risk Considerations."
Foreign Currency Transactions - Forward currency exchange contracts may be
entered into for each Fund for the purchase or sale of foreign currency to
hedge against adverse rate changes or otherwise to achieve the Fund's
investment objectives. A currency exchange contract allows a definite price in
dollars to be fixed for securities of foreign issuers that have been purchased
or sold (but not settled) for the Fund.
Each Fund may also enter into proxy hedges and cross hedges. In a proxy
hedge, which generally is less costly than a direct hedge, a Fund, having
purchased a security, will sell a currency whose value is believed to be
closely linked to the currency in which the security is denominated. Interest
rates prevailing in the country whose currency was sold would be expected to be
closer to those in the U.S. and lower than those of securities denominated in
the currency of the original holding. This type of hedging entails greater risk
than a direct hedge because it is dependent on a stable relationship between
the two currencies paired as proxies and the relationships can be very unstable
at times. A Fund may enter into a cross hedge if a particular currency is
expected to decrease against another currency. The Fund would sell the currency
expected to decrease and purchase a currency which is expected to increase
against the currency sold in an amount equal to some or all of the Fund's
holdings denominated in the currency sold.
Entering into exchange contracts may result in the loss of all or a
portion of the benefits which otherwise could have been obtained from favorable
movements in exchange rates. In addition, entering into such contracts means
incurring certain transaction costs and bearing the risk of incurring losses if
rates do not move in the direction anticipated.
<PAGE>
Warrants - A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specified amount of the corporation's
capital stock at a set price for a specified period of time. Each Fund may
invest up to 5% of its net assets in warrants, except that this limitation does
not apply to warrants acquired in units or attached to securities. Included in
this limitation, but not to exceed 2% of the Fund's net assets, may be warrants
not listed on the New York Stock Exchange or American Stock Exchange.
Securities Lending - Consistent with applicable regulatory requirements and in
order to generate additional income, each Fund may lend securities to
broker-dealers and other institutional borrowers. The Fund must be able to
terminate the loan at any time and the loan must be continuously secured by
collateral (usually cash or U.S. government securities) in an amount not less
than the market value, determined daily, of the securities loaned. It is
intended that the value of securities loaned by a Fund would not exceed 331/3%
of the Fund's total assets. In the event of the bankruptcy of the other party
to a securities loan, a Fund could experience delays in recovering either the
securities lent or cash. To the extent that, in the meantime, the value of the
securities lent has increased or the value of the securities purchased has
decreased, the Fund could experience a loss. The voting rights of such
securities may pass to the borrower; however, the lending Fund will seek to
call loans, to vote proxies, or otherwise to obtain rights to vote or consent
if a material event affecting the investment is to occur.
Restricted or Illiquid Securities - Securities that may not be sold freely to
the public absent registration or securities for which there is no readily
available market are referred to as restricted or illiquid securities,
respectively. Each Fund may invest up to 15% (10% for the Money Market Fund) of
its net assets in illiquid securities, including restricted securities that are
illiquid. The absence of a trading market can make it difficult to ascertain a
market value for these investments. Disposing of illiquid securities may
involve time-consuming negotiation and legal expense, and it may be difficult
or impossible for a Fund to sell them promptly at an acceptable price.
Rule 144A Securities - A Fund may purchase restricted securities that are not
registered for sale to the general public if it is determined that there is a
dealer or institutional market in the securities. In that case, the securities
will not be treated as illiquid for purposes of the Fund's investment
limitation described above. The Trustees will review these determinations.
These securities are known as "Rule 144A securities" because they are traded
under SEC Rule 144A among qualified institutional buyers. Institutional trading
in Rule 144A securities is relatively new and the liquidity of these
investments could be impaired if trading in Rule 144A securities does not
develop or if qualified institutional buyers become, for a time, uninterested
in purchasing Rule 144A securities.
Options - The Funds may engage in writing call options from time to time. Under
a call option, the purchaser of the option has the right to purchase, and the
writer (the Fund) the obligation to sell, the underlying security at the
exercise price during the option period. Options written on individual
securities are written solely as covered call options (such as options written
on securities owned by the Fund) and may be written for hedging purposes. Such
options must be listed on a national securities exchange.
There are risks associated with options transactions, including that the
success of a hedging strategy may depend on the ability of the Adviser to
predict movements in the prices of individual securities, market fluctuations
and movements in interest rates; there may be an imperfect correlation between
the movement in prices of securities held by a Fund and price movements of the
related options; there may not be a liquid secondary market for options; and
while a Fund will receive a premium when it writes covered call options, it may
not participate fully in a rise in the market value of the underlying security.
<PAGE>
Futures and Options on Futures - Futures contracts provide for the future sale
by one party and purchase by another party of a specified amount of a specified
security at a specified future time and at a specified price. An option on a
futures contract gives the purchaser the right, in exchange for a premium, to
assume a position in a futures contract at a specified exercise price during
the term of the option. The Funds may enter into futures contracts and options
on futures contracts provided that the sum of a Fund's initial margin deposits
on open futures contracts which are not for hedging purposes plus the amount
paid for premiums for unexpired options on futures contracts which are not for
hedging purposes does not exceed 5% of the market value of the Fund's total
assets. In addition, the outstanding obligations to purchase securities under
futures contracts will not exceed 50% of the Fund's total assets.
The Funds may purchase and sell interest rate futures contracts and
options on interest rate futures contracts, stock index futures contracts and
options on stock index futures contracts; and currency futures contracts and
options on currency futures contracts.
The Funds intend to use futures contracts and related options only for
bona fide hedging purposes, i.e., to offset unfavorable changes in the value of
securities otherwise held or expected to be acquired for investment purposes.
There are risks associated with these hedging activities. See "Options."
Other Investment Companies - Subject to applicable statutory and regulatory
limitations, assets of each Fund may be invested in shares of other investment
companies and foreign investment trusts. Each Fund may invest up to 5% of its
assets in closed-end investment companies which primarily hold securities of
non-U.S. issuers.
Currency Swaps - Currency swaps involve the exchange of rights to make or
receive payments in specified currencies. Currency swaps usually involve the
delivery of the entire principal value of one designated currency. Therefore,
the entire principal value of a currency swap is subject to the risk that the
other party to the swap will default on its contractual delivery obligations.
The use of currency swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values and currency exchange rates, the investment performance of the
Fund would be less favorable that it would have been if this investment
technique were not used.
Short Sales "Against the Box" - In a short sale, a Fund sells a borrowed
security and has a corresponding obligation to the lender to return the
identical security. A Fund may engage in a short sale only if at the time of
the short sale it owns or has the right to obtain, at no additional cost, an
equal amount of the security being sold short. This investment technique is
known as a short sale "against the box." A Fund may make a short sale as a
hedge, when it believes that the value of a security owned by the Fund (or a
security convertible or exchangeable for such security) may decline.
<PAGE>
APPENDIX C
INSTRUCTIONS FOR PURCHASES AND REDEMPTIONS FROM THE DISTRIBUTOR
PURCHASES
Initial and subsequent purchases may be made by check or wire transfer.
Checks should be in U.S. dollars and drawn on a U.S. bank. Checks for shares of
the Money Market, Bond, Balanced and Stock Funds should be made payable to The
Diversified Investors Funds Group and mailed to:
The Diversified Investors Funds Group
Four Manhattanville Road
Purchase, New York 10577
Checks for shares of the Strategic Allocation Funds should be made payable to
The Diversified Investors Strategic Allocation Funds and mailed to
The Diversified Investors Strategic Allocation Funds
Four Manhattanville Road
Purchase, New York 10577
In the case of an initial purchase, the check must be accompanied by a
completed Account Application. If shares are purchased with a check that does
not clear, the purchase will be canceled and any losses or fees incurred in the
transaction will be the responsibility of the investor. If shares are purchased
with a check and a redemption request relating to such shares is received
within 15 days of such purchase, the redemption proceeds will be paid only when
the check clears.
If you would like to purchase shares in a Fund by a wire transfer, please
call (914) 697-8000 for wire transfer instructions and direct your bank to
transmit immediately available funds in accordance with such instructions.
Investors who make initial purchases by wire transfer must complete an Account
Application and mail it to The Diversified Investors Fund Group (in case of a
purchase of a Money Market, Bond, Balanced or Stock Fund) or The Diversified
Investors Strategic Allocation Funds (in case of a purchase of a Strategic
Allocation Fund), in each case at the address above.
REDEMPTIONS
Redemption requests may be made by mail and, in certain circumstances,
telephone. The proceeds of the redemption will be sent by mail or, if
authorized on the Account Application, wire transfer.
Redemption requests by mail must specify the dollar amount or number of
shares to be redeemed, the account number and the name of the Fund. The
redemption request must be signed in exactly the same way that the account is
registered. If there is more than one owner of the shares, each owner must sign
the redemption request.
<PAGE>
Requests to redeem shares in any of the Money Market, Bond, Balanced or
Stock Funds should be mailed to The Diversified Investors Funds Group at:
The Diversified Investors Fund Group
Four Manhattanville Road
Purchase, New York 10577
Requests to redeem shares in any of the Strategic Allocation Funds should
be mailed to The Diversified Investors Strategic Allocation Funds at:
The Diversified Investors Strategic Allocation Funds
Four Manhattanville Road
Purchase, New York 10577
You may redeem shares by telephone if you authorized such redemptions on
your Account Application. The Funds reserve the right to refuse telephone
redemptions and may limit the number of telephone redemptions or the amount
that can be redeemed by telephone at any time. Instructions for wire
redemptions are included in the Account Application.
<PAGE>
APPENDIX D
COMPOSITE PERFORMANCE OF SUBADVISERS
The following table sets forth the average annual total returns of all
institutional private accounts and collective investment vehicles managed by
the Subadvisers to the High-Yield Bond Portfolio, Equity Value Portfolio,
Growth & Income Portfolio, Equity Growth Portfolio and Aggressive Equity
Portfolio with investment objectives, policies and restrictions substantially
similar to each such Portfolio and which have been managed as each Portfolio is
managed. The data is provided to illustrate the past performances of the
Subadvisers in managing substantially similar accounts as measured against
specified market indices and does not represent the performance of the Funds.
Investors should not consider this performance data as an indication of future
performance of the Funds or the Subadvisers.
The institutional private accounts and collective investment vehicles
that are included in the Subadvisers' composites are not subject to the
diversification requirements, specific tax restrictions and investment
limitations imposed on the Funds or the Portfolios by the Investment Company
Act or the Internal Revenue Code. The performance results of the Subadvisers'
composites could have been adversely affected if the institutional private
accounts and collective investment vehicles included in the composites had been
regulated as investment companies under the federal securities law. The
investment results of the Subadvisers' composites presented below are unaudited
and are not intended to predict or suggest the returns that might be
experienced by the Funds or an individual investing in any of the Funds.
Investors should also be aware that the use of a methodology different from that
used to calculate the performance date set forth below could result in
different performance data.
The Subadvisers' composite performance data shown below were calculated
in accordance with recommended standards of the Association for Investment
Management and Research, retroactively applied to all time periods. All returns
presented were calculated on a total return basis and include all dividends and
interest, accrued income and realized and unrealized gains and losses, and
deductions for brokerage commissions and execution costs. Returns for each
period are adjusted to assume that all charges, expenses and fees of each Fund
and its corresponding Portfolio which are presently in effect were deducted
during such periods. All returns are for the periods ended on December 31,
1997.
1 3 5 10 SINCE
YEAR YEARS YEARS YEARS INCEPTION
------ ------- ------ ------- ---------
Delaware Investment Advisers,
Subadviser to High-Yield Bond
Portfolio
Subadviser's composite(1)......
Benchmark Index(2).............
Peer Group(3)..................
Ark Asset Management Co., Inc.
Subadviser to Equity Value
Portfolio
Subadviser's composite(4)......
Benchmark Index(5).............
Peer Group(6)..................
Putnam Advisory Company, Inc.,
Subadviser to Growth & Income
Portfolio
Subadviser's composite(7)......
Benchmark Index(8).............
Peer Group(6)..................
[Dresdner RCM Global Investors,
LLC]
Subadviser to Equity Growth
Portfolio
Subadviser's composite(9)......
Benchmark Index(5).............
Peer Group(10).................
[Montag & Caldwell, Inc.]
Subadviser to Equity Growth
Portfolio
Subadviser's composite(11).....
Benchmark Index(5).............
Peer Group(10).................
McKinley Capital Management, Inc.,
Subadviser to Aggressive Equity
Portfolio
Subadviser's composite(12).....
Benchmark Index(13)............
Peer Group(14).................
- ------------
(1) Commencement of investment operations is January 1, 1980 for the
Subadviser's composite.
(2) The Benchmark Index is the Salomon Brothers High-Yield Market Index. The
Salomon Brothers High-Yield Market Index tracks the performance of below
investment-grade corporate bonds issued in the United States. The index
includes cashpay and deferred-interest bonds that are public, have a fixed
coupon and are non convertible. To enter the index, bonds must also have $50
million or more in face value outstanding, one year or more left to maturity,
and one high-yield rating by Moody's or Standard & Poor's. The index excludes
bonds of bankrupt issuers.
(3) The Peer Group is the Lipper High Current Yield Fund Index. The Lipper
High Current Yield Fund Index tracks the net performance of mutual funds which,
as determined by Lipper Analytical Services, Inc., are managed in accordance
with an investment objective defined as follows: "Aim at high (relative)
current yield from fixed income securities. No quality or maturity
restrictions. Tend to invest in lower grade debt issues".
(4) Commencement of investment operations is April 1, 1985 for the
Subadviser's composite.
(5) The Benchmark Index is the Russell 1000 Value Index. The Russell 1000
Value Index measures the performance of those companies included in the Russell
1000 Index with lower price-to-book ratios and lower forecasted growth values.
The Russell 1000 Index measures the performance of the one thousand largest
U.S. companies based on total market capitalization, which represents
approximately 88% of the investable U.S. equity market.
(6) The Peer Group is the Lipper Growth & Income Fund Index. The Lipper
Growth & Income Fund Index tracks the net performance of mutual funds which, as
determined by Lipper Analytical Services, Inc., are managed in accordance with
an investment objective defined as follows: "A fund which combines a growth of
earnings orientation and an income requirement for level and/or rising
dividends".
(7) Commencement of investment operations is January 1, 1989 for the
Subadviser's composite.
(8) The Benchmark Index is the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500"). The S&P 500 is used as a broad-based measurement of
changes in domestic stock market conditions and is based on the average
performance of 500 widely held common stocks traded in the United States.
(9) Commencement of investment operations is [___________] for the
Subadviser's composite.
<PAGE>
(10) The Peer Group is the Lipper Growth Fund Index. The Lipper Growth Fund
Index tracks the net performance of mutual funds which, as determined by Lipper
Analytical Services, Inc., are managed in accordance with an investment
objective defined as follows: "A fund which normally invests in companies whose
long-term earnings are expected to grow significantly faster than the earnings
of the stocks represented in the major unmanaged stock indices".
(11) Commencement of investment operations is [___________] for the
Subadviser's composite.
(12) Commencement of investment operations is October 1, 1990 for the
Subadviser's composite.
(13) The Benchmark Index is the Russell 2000 Growth Index. The Russell 2000
Growth Index measures the performance of those companies included in the
Russell 2000 Index with higher price-to-book ratios and higher forecasted
growth values. The Russell 2000 Index measures the performance of the two
thousand smallest companies in the Russell 3000 Index, which represents
approximately 10% of the total market capitalization of the Russell 3000 Index
(the Russell 3000 Index represents approximately 98% of the investable U.S.
equity market)
(14) The Peer Group is the Lipper Mid Cap Fund Index. The Lipper Mid Cap Fund
Index tracks the net performance of mutual funds which, as determined by Lipper
Analytical Services, Inc., are managed in accordance with an investment
objective defined as follows: "A fund which limits its investments to companies
with average market capitalizations between $800 million and the average market
capitalization of the Wilshire 4500 Index".
<PAGE>
THE DIVERSIFIED INVESTORS FUNDS GROUP
THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
Money Market Fund: Diversified Investors Money Market Fund
Bond Funds: Diversified Investors High Quality Bond Fund
Diversified Investors Intermediate Government Bond Fund
Stephens Intermediate Bond Fund
Diversified Investors Government/Corporate Bond Fund
Diversified Investors High-Yield Bond Fund
Balanced Fund: Diversified Investors Balanced Fund
Stock Funds: Diversified Investors Equity Income Fund
Diversified Investors Equity Value Fund
Diversified Investors Growth & Income Fund
Diversified Investors Equity Growth Fund
Diversified Investors Special Equity Fund
Stephens Select Equity Fund
Diversified Investors Aggressive Equity Fund
Diversified Investors International Equity Fund
Strategic Allocation
Funds: Short Horizon Strategic Allocation Fund
Short/Intermediate Horizon Strategic Allocation Fund
Intermediate Horizon Strategic Allocation Fund
Intermediate/Long Horizon Strategic Allocation Fund
Long Horizon Strategic Allocation Fund
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 1998
The Diversified Investors Funds Group (the "Diversified Investors Trust")
is comprised of fifteen separate series of shares or funds. The Diversified
Investors Strategic Allocation Funds (the "Strategic Allocation Trust") is
comprised of five separate series of shares or funds. This Statement of
Additional Information describes the shares of each fund listed above.
Shares of the Funds are divided into separate classes of shares. Each
Fund other than the Intermediate Bond and Select Equity Funds issues
Diversified Class shares. In addition, each of the Money Market, Intermediate
Bond, High-Yield Bond, Equity Value, Equity Growth, Special Equity, Select
Equity and International Equity Funds also issue Stephens Premium Class shares
and Stephens Institutional Class shares.
<PAGE>
The Diversified Investors Funds Group
The Diversified Investors Strategic Allocation Funds
Four Manhattanville Road
Purchase, New York 10577
914-697-8000
TABLE OF CONTENTS
PAGE
The Trusts................................................................. __
Investment Objectives, Policies and Associated Risk Factors of the Funds... __
Performance Information.................................................... __
Determination of Net Asset Value; Valuation of Securities ................. __
Management................................................................. __
Taxation................................................................... __
Distribution Plans......................................................... __
Independent Accountants.................................................... __
Description of the Trusts; Fund Shares..................................... __
Experts.................................................................... __
Financial Statements....................................................... __
Appendix................................................................... __
This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in the
separate Prospectuses (each a "Prospectus") for each of the classes of shares
of the Funds. This Statement of Additional Information should be read only in
conjunction with a Prospectus, a copy of which may be obtained by an investor
without charge. To obtain a Prospectus dated May 1, 1998, as amended from time
to time, with respect to Diversified Class shares, please contact Diversified
Investors Securities Corp., the Funds' Distributor, at the address and
telephone number listed above. To obtain a Prospectus dated May 1, 1998, as
amended from time to time, with respect to Stephens Premium Class shares or
Stephens Institutional Class shares, please contact [ _________ ] at [
_________ ]. Terms used but not defined herein, which are defined in a
Prospectus, are used herein as defined in the Prospectus.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
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THE DIVERSIFIED INVESTORS FUNDS GROUP
THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
THE TRUSTS
Each of the Diversified Investors Funds Group (the "Diversified Investors
Trust") and The Diversified Investors Strategic Allocation Funds (the
"Strategic Allocation Trust" and, together with the Diversified Investors
Trust, the "Trusts") is a diversified, open-end management investment company.
The Diversified Investors Trust was organized as a business trust under the
laws of the Commonwealth of Massachusetts on April 23, 1993. Shares of the
Diversified Investors Trust are divided into fifteen separate series described
herein. The Strategic Allocation Trust was organized as a business trust under
the laws of the Commonwealth of Massachusetts on January 5, 1996. Shares of the
Strategic Allocation Trust are divided into five separate series described
herein. Each of the Money Market, Bond (other than Intermediate Bond), Balanced
and Stock (other than Select Equity) Funds seeks to achieve its investment
objective by investing all of its assets in a Portfolio. Each of the Strategic
Allocation Funds seeks to achieve its investment objective by investing in the
Money Market, Bond and Stock Funds.
Each of the Portfolios is a series of Diversified Investors Portfolios
(the "Portfolio Series"). The Intermediate Bond and Select Equity Funds seek to
achieve their respective investment objectives by investing directly in
securities pursuant to the investment strategies and techniques specified
herein and in the Prospectus for such Funds. Each of the Trusts may create
additional series from time to time.
The investment adviser of the Intermediate Bond and Select Equity Funds,
each Strategic Allocation Fund and each Portfolio is Diversified Investment
Advisors, Inc. ("Diversified" or the "Adviser"). The subadviser (the
"Subadviser") of the Intermediate Bond and Select Equity Funds and each
Portfolio is set forth in the table below.
<TABLE>
<CAPTION>
FUND OR PORTFOLIO CORRESPONDING SUBADVISER
<S> <C>
Money Market Portfolio.................. 1740 Advisers, Inc.
High Quality Bond Portfolio............. Merganser Capital Management Corporation
Intermediate Government Bond Portfolio 1740 Advisers, Inc.
Intermediate Bond Fund.................. Stephens Capital Management
Government/Corporate Bond Portfolio..... 1740 Advisers, Inc.
High-Yield Bond Portfolio............... Delaware Investment Advisers
Balanced Portfolio...................... Institutional Capital Corporation
Equity Value Portfolio.................. ARK Asset Management Co., Inc.
Equity Income Portfolio................. 1740 Advisers, Inc.
Growth & Income Portfolio............... Putnam Advisory Company, Inc.
Equity Growth Portfolio................. Dresdner RCM Global Investors, LLC
Montag & Caldwell, Inc.
Special Equity Portfolio................ Pilgrim Baxter & Associates
Ark Asset Management Co., Inc.
Liberty Investment Management
Westport Asset Management, Inc.
Select Equity Fund...................... Stephens Capital Management
Aggressive Equity Portfolio............. McKinley Capital Management, Inc.
International Equity Portfolio.......... Capital Guardian Trust Company
</TABLE>
As to each Fund and Portfolio listed in the table above, the Adviser and
its Subadviser or Subadvisers are referred to herein collectively as the
"Advisers."
INVESTMENT OBJECTIVES, POLICIES AND
ASSOCIATED RISK FACTORS
INVESTMENT OBJECTIVES
The investment objective of each Fund is described in the Prospectus for
that Fund. There can, of course, be no assurance that a Fund will achieve its
investment objective. All references in this Statement of Additional
Information to a Fund (other than the Intermediate and Select Equity Funds)
include the underlying Portfolio (or, for a Strategic Allocation Fund, the
underlying Funds) through which it invests, except as otherwise noted.
INVESTMENT POLICIES
The following supplements the discussion of the various investment
strategies and techniques employed by the Funds as set forth in the
Prospectuses for the Funds.
BANK OBLIGATIONS
Domestic commercial banks organized under federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System. Domestic banks organized under state law are
supervised and examined by state banking authorities but are members of the
Federal Reserve System only if they elect to join. In addition, state banks are
subject to federal examination and to a substantial body of federal law and
regulation. As a result of federal or state laws and regulations, domestic
banks, among other things, generally are required to maintain specified levels
of reserves, are limited in the amounts which they can loan to a single
borrower, and are subject to other regulations designed to promote financial
soundness. However, not all of such laws and regulations apply to the foreign
branches of domestic banks.
Obligations of foreign branches and subsidiaries of domestic banks and
domestic and foreign branches of foreign banks, such as certificates of deposit
and time deposits, may be general obligations of the parent banks in addition
to the issuing branch, or may be limited by the terms of a specific obligation
and governmental regulation. Such obligations are subject to risks that are
different from or are in addition to those of domestic banks. These risks
include foreign economic and political developments, foreign governmental
restrictions that may adversely affect payment of principal and interest on the
obligations, foreign exchange controls and foreign withholding and other taxes
on interest income. These foreign branches and subsidiaries are not necessarily
subject to the same or similar regulatory requirements that apply to domestic
banks, such as mandatory reserve requirements, loan limitations, and
accounting, auditing and financial record keeping requirements. In addition,
less information may be publicly available about a foreign branch of a domestic
bank or about a foreign bank than about a domestic bank. A domestic branch of a
foreign bank with assets in excess of $1 billion may be subject to reserve
requirements imposed by the Federal Reserve System or by the state in which the
branch is located if the branch is licensed in that state.
In addition, branches licensed by the Comptroller of the Currency and
branches licensed by certain states may be required to: (a) pledge to the
regulator, by depositing assets with a designated bank within the state, a
certain percentage of their assets as fixed from time to time by the
appropriate regulatory authority; and (b) maintain assets within the state in
an amount equal to a specified percentage of the aggregate amount of
liabilities of the foreign bank payable at or through all of its agencies or
branches within the state.
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U.S. GOVERNMENT AND AGENCY SECURITIES
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include U.S. Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury Bills have initial
maturities of one year or less; Treasury Notes have initial maturities of one
to ten years; and Treasury Bonds generally have initial maturities of greater
than ten years. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
While the U.S. Government provides financial support to such U.S.
Government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law.
COMMERCIAL PAPER
Commercial paper consists of short-term (usually from 1 to 270 days)
unsecured promissory notes issued by corporations in order to finance their
current operations. A variable amount master demand note (which is a type of
commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under an agreement between a
commercial paper issuer and an institutional lender pursuant to which the
lender may determine to invest varying amounts.
The Funds may purchase three types of commercial paper, as classified by
exemption from registration under the Securities Act of 1933, as amended (the
"1933 Act"). The three types include open market, privately placed, and letter
of credit commercial paper. Trading of such commercial paper is conducted
primarily by institutional investors through investment dealers or directly
through the issuers. Individual investor participation in the commercial paper
market is very limited.
OPEN MARKET. "Open market" commercial paper refers to the commercial
paper of any industrial, commercial, or financial institution which is
openly traded, including directly issued paper. "Open market" paper's
1933 Act exemption is under Section 3(a)(3) which limits the use of
proceeds to current transactions, limits maturities to 270 days and
requires that the paper contain no provision for automatic rollovers.
PRIVATELY PLACED. "Privately placed" commercial paper relies on the
exemption from registration provided by Section 4(2), which exempts
transactions by an issuer not involving any public offering. The
commercial paper may only be offered to a limited number of accredited
investors. "Privately placed" commercial paper has no maturity
restriction.
LETTER OF CREDIT. "Letter of credit" commercial paper is exempt from
registration under Section 3(a)(2) of the 1933 Act. It is backed by an
irrevocable or unconditional commitment by a bank to provide funds for
repayment of the notes. "Letter of credit" paper has no limitations on
purchases.
<PAGE>
VARIABLE RATE AND FLOATING RATE SECURITIES
The Funds may purchase floating and variable rate demand notes and bonds,
which are obligations ordinarily having stated maturities in excess of 397
days, but which permit the holder to demand payment of principal at any time,
or at specified intervals not exceeding 397 days, in each case upon not more
than 30 days' notice. Variable rate demand notes include master demand notes
which are obligations that permit a Fund to invest fluctuating amounts, which
may change daily without penalty, pursuant to direct arrangements between the
Fund, as lender, and the borrower. The interest rates on these notes fluctuate
from time to time. The issuer of such obligations normally has a corresponding
right, after a given period, to prepay in its discretion the outstanding
principal amount of the obligations plus accrued interest upon a specified
number of days' notice to the holders of such obligations. The interest rate on
a floating rate demand obligation is based on a known lending rate, such as a
bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable rate demand obligation is adjusted
automatically at specified intervals. Frequently, such obligations are
collateralized by letters of credit or other credit support arrangements
provided by banks. Because these obligations are direct lending arrangements
between the lender and borrower, it is not contemplated that such instruments
generally will be traded, and there generally is no established secondary
market for these obligations, although they are redeemable at face value.
Accordingly, where these obligations are not secured by letters of credit or
other credit support arrangements, a Fund's right to redeem is dependent on the
ability of the borrower to pay principal and interest on demand. Such
obligations frequently are not rated by credit rating agencies and a Fund may
invest in obligations which are not so rated only if the Advisers determine
that at the time of investment the obligations are of comparable quality to the
other obligations in which the Fund may invest. The Advisers, on behalf of a
Fund, will consider on an ongoing basis the creditworthiness of the issuers of
the floating and variable rate demand obligations held by the Fund. The Funds
will not invest more than 15% (10% in the case of the Money Market Fund) of the
value of their net assets in floating or variable rate demand obligations as to
which they cannot exercise the demand feature on not more than seven days'
notice if there is no secondary market available for these obligations, and in
other securities that are not readily marketable. See "Investment Restrictions"
below.
PARTICIPATION INTERESTS
A Fund may purchase from financial institutions participation interests
in securities in which such Fund may invest. A participation interest gives a
Fund an undivided interest in the security in the proportion that the Fund's
participation interest bears to the total principal amount of the security.
These instruments may have fixed, floating or variable rates of interest, with
remaining maturities of 13 months or less. If the participation interest is
unrated, or has been given a rating below that which is permissible for
purchase by the Fund, the participation interest will be backed by an
irrevocable letter of credit or guarantee of a bank, or the payment obligation
otherwise will be collateralized by U.S. Government securities, or, in the case
of unrated participation interests, the Advisers must have determined that the
instrument is of comparable quality to those instruments in which a Fund may
invest. For certain participation interests, a Fund will have the right to
demand payment, on not more than seven days' notice, for all or any part of the
Fund's participation interest in the security, plus accrued interest. As to
these instruments, a Fund intends to exercise its right to demand payment only
upon a default under the terms of the security, as needed to provide liquidity
to meet redemptions, or to maintain or improve the quality of its investment
portfolio. A Fund will not invest more than 15% (10% in the case of the Money
Market Fund) of its net assets in participation interests that do not have this
demand feature, and in other securities that are not readily marketable. See
"Investment Restrictions" below.
<PAGE>
ILLIQUID SECURITIES
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the 1933 Act, securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the 1933 Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold
a significant amount of these restricted or other illiquid securities because
of the potential for delays on resale and uncertainty in valuation. Limitations
on resale may have an adverse effect on the marketability of portfolio
securities and a mutual fund might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemptions within seven days. A mutual fund
might also have to register such restricted securities in order to dispose of
them which, if possible at all, would result in additional expense and delay.
Adverse market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for repayment. The
fact that there are contractual or legal restrictions on resale of such
investments to the general public or to certain institutions may not be
indicative of their liquidity.
The Securities and Exchange Commission (the "SEC") has recently adopted
Rule 144A, which allows a broader institutional trading market for securities
otherwise subject to restriction on their resale to the general public. Rule
144A establishes a "safe harbor" from the registration requirements of the 1933
Act for resales of certain securities to qualified institutional buyers.
The Advisers will monitor the liquidity of Rule 144A securities for each
Fund under the supervision of the Portfolio Series' or the Trust's Boards of
Trustees. In reaching liquidity decisions, the Advisers will consider, among
other things, the following factors: (a) the frequency of trades and quotes for
the security, (b) the number of dealers and other potential purchasers wishing
to purchase or sell the security, (c) dealer undertakings to make a market in
the security and (d) the nature of the security and of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
UNSECURED PROMISSORY NOTES
A Fund also may purchase unsecured promissory notes ("Notes") which are
not readily marketable and have not been registered under the 1933 Act,
provided such investments are consistent with the Fund's investment objective.
The Notes purchased by the Fund will have remaining maturities of 13 months or
less. The Fund will invest no more than 15% (10% in the case of the Money
Market Fund) of its net assets in such Notes and in other securities that are
not readily marketable (which securities would include floating and variable
rate demand obligations as to which the Fund cannot exercise the demand feature
described above and as to which there is no secondary market). See "Investment
Restrictions" below.
<PAGE>
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Repurchase agreements are agreements by which a person purchases a
security and simultaneously commits to resell that security to the seller
(which is usually a member bank of the Federal Reserve System or a member firm
of the New York Stock Exchange (or a subsidiary thereof)) at an agreed-upon
date within a number of days (usually not more than seven) from the date of
purchase. The resale price reflects the purchase price plus an agreed-upon
market rate of interest which is unrelated to the coupon rate or maturity of
the purchased security. A repurchase agreement involves the obligation of the
seller to pay the agreed-upon price, which obligation is in effect secured by
the value of the underlying security, usually U.S. Government or government
agency issues. Under the Investment Company Act of 1940, as amended (the "1940
Act"), repurchase agreements may be considered to be loans by the buyer. A
Fund's risk is limited to the ability of the seller to pay the agreed upon
amount on the delivery date. If the seller defaults, the underlying security
constitutes collateral for the seller's obligation to pay although a Fund may
incur certain costs in liquidating this collateral and in certain cases may not
be permitted to liquidate this collateral. All repurchase agreements entered
into by the Funds are fully collateralized, with such collateral being marked
to market daily.
The Funds may borrow funds for temporary or emergency purposes, such as
meeting larger than anticipated redemption requests, and not for leverage. One
means of borrowing is by agreeing to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase them at a
mutually agreed date and price (a "reverse repurchase agreement"). At the time
a Fund enters into a reverse repurchase agreement it will place in a segregated
custodial account cash, U.S. Government securities or high-grade debt
obligations having a value equal to the repurchase price, including accrued
interest. Reverse repurchase agreements involve the risk that the market value
of the securities sold by the Fund may decline below the repurchase price of
those securities.
FOREIGN SECURITIES--ALL FUNDS
The Funds may invest their assets in securities of foreign issuers.
Investing in securities issued by companies whose principal business activities
are outside the United States may involve significant risks not present in
domestic investments. For example, there is generally less publicly available
information about foreign companies, particularly those not subject to the
disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing and financial
reporting requirements comparable to those applicable to domestic issuers.
Investments in foreign securities also involve the risk of possible adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, brokerage or other taxation, limitation on the removal
of funds or other assets of a Fund, political or financial instability or
diplomatic and other developments which would affect such investments. Further,
economies of particular countries or areas of the world may differ favorably or
unfavorably from the economy of the United States.
It is anticipated that in most cases the best available market for
foreign securities would be on exchanges or in over-the-counter markets located
outside the United States. Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as those in the United States,
and securities of some foreign issuers (particularly those located in
developing countries) may be less liquid and more volatile than securities of
comparable United States companies. Foreign security trading practices,
including those involving securities settlement where a Fund's assets may be
released prior to receipt of payment, may expose a Fund to increased risk in
the event of a failed trade or the insolvency of a foreign broker-dealer. In
addition, foreign brokerage commissions are generally higher than commissions
on securities traded in the United States and may be non-negotiable. In
general, there is less overall governmental supervision and regulation of
<PAGE>
foreign securities exchanges, brokers and listed companies than in the United
States.
FOREIGN SECURITIES--MONEY MARKET FUND
The Money Market Fund may invest in the following foreign securities: (a)
U.S. dollar-denominated obligations of foreign branches and subsidiaries of
domestic banks and foreign banks (such as Eurodollar CDs, which are U.S.
dollar-denominated CDs issued by branches of foreign and domestic banks located
outside the United States; Eurodollar TDs ("ETDs"), which are U.S.
dollar-denominated deposits in a foreign branch of a foreign or domestic bank;
and Canadian TDs, which are essentially the same as ETDs except they are issued
by branches of major Canadian banks); (b) high quality, U.S. dollar-denominated
short-term bonds and notes (including variable amount master demand notes)
issued by foreign corporations (including Canadian commercial paper, which is
commercial paper issued by a Canadian corporation or a Canadian subsidiary of a
U.S. corporation, and Europaper, which is U.S. dollar-denominated commercial
paper of a foreign issuer); and (c) U.S. dollar-denominated obligations issued
or guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities that are determined by the Advisers
to be of comparable quality to the other obligations in which the Money Market
Fund may invest. Such securities also include debt obligations of supranational
entities. Supranational entities include international organizations designated
or supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank.
FOREIGN SECURITIES--FUNDS OTHER THAN THE MONEY MARKET FUND
Not more than 5% of a Fund's assets may be invested in closed-end
investment companies which primarily hold foreign securities. Investments in
such companies may entail the risk that the market value of such investments
may be substantially less than their net asset value and that there would be
duplication of investment management and other fees and expenses.
American Depository Receipts ("ADRs"), European Depositary Receipts
("EDRs"), Global Depositary Receipts ("GDRs") and other forms of depositary
receipts for securities of foreign issuers provide an alternative method for a
Fund to make foreign investments. These securities are not denominated in the
same currency as the securities into which they may be converted and fluctuate
in value based on the underlying security. Generally, ADRs, in registered form,
are designed for use in U.S. securities markets and EDRs and GDRs, in bearer
form, are designed for use in European and global securities markets. ADRs are
receipts typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities. EDRs and GDRs are European and global receipts
evidencing a similar arrangement.
The Funds may invest in foreign securities that impose restrictions on
transfer within the United States or to United States persons. Although
securities subject to such transfer restrictions may be marketable abroad, they
may be less liquid than foreign securities of the same class that are not
subject to such restrictions.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Because some Funds may buy and sell securities denominated in currencies
other than the U.S. dollar and receive interest, dividends and sale proceeds in
currencies other than the U.S. dollar, the Funds from time to time may enter
into foreign currency exchange transactions to convert to and from different
<PAGE>
foreign currencies and to convert foreign currencies to and from the U.S.
dollar. The Funds either enter into these transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market or
use forward contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by a Fund
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. Forward foreign currency
exchange contracts establish an exchange rate at a future date. These contracts
are transferable in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward foreign
currency exchange contract generally has no deposit requirement and is traded
at a net price without commission. A Fund maintains with its custodian a
segregated account of high grade liquid assets in an amount at least equal to
its obligations under each forward foreign currency exchange contract. Neither
spot transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of the Fund's securities or in foreign exchange
rates, or prevent loss if the prices of these securities should decline.
The Funds may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or changes
in foreign currency exchange rates that would adversely affect a portfolio
position or an anticipated investment position. The Funds may enter into
foreign currency cross hedging transactions if a particular currency is
expected to decrease against another currency. A Fund would sell the currency
expected to decrease and purchase a currency which is expected to increase
against the currency sold in an amount equal to some or all of the Fund's
holdings denominated in the currency sold.
With respect to Funds other than the International Equity Fund
consideration of the prospect for currency parities will be incorporated into
the Advisers' long-term investment decisions. Therefore these Funds will not
routinely enter into foreign currency hedging transactions with respect to
security transactions; however, the Advisers believe that it is important to
have the flexibility to enter into foreign currency hedging transactions when
they determine that the transactions would be in a Fund's best interest.
Although these transactions tend to minimize the risk of loss due to a decline
in the value of the hedged currency, at the same time they tend to limit any
potential gain that might be realized should the value of the hedged currency
increase. The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of such securities between the date the forward contract
is entered into and the date it matures. The projection of currency market
movements is extremely difficult, and the successful execution of a hedging
strategy is highly uncertain.
While these contracts are not presently regulated by the Commodity
Futures Trading Commission ("CFTC"), the CFTC may in the future assert
authority to regulate forward contracts. In such event a Fund's ability to
utilize forward contracts in the manner set forth in the Prospectus for the
Fund may be restricted. Forward contracts may reduce the potential gain from a
positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance for a Fund than if it had not entered into such contracts.
The use of foreign currency forward contracts may not eliminate fluctuations in
the underlying U.S. dollar equivalent value of the prices of or rates of return
on a Fund's foreign currency denominated portfolio securities and the use of
such techniques will subject the Fund to certain risks.
Even if a hedge is generally successful, the matching of the increase in
value of a forward contract and the decline in the U.S. dollar equivalent value
of the foreign currency denominated asset that is the subject of the hedge
generally will not be precise. In addition, a Fund may not always be able to
<PAGE>
enter into foreign currency forward contracts at attractive prices and this
will limit a Fund's ability to use such contract to hedge or cross-hedge its
assets. Also, with regard to a Fund's use of cross-hedges, there can be no
assurance that historical correlations between the movement of certain foreign
currencies relative to the U.S. dollar will continue. Thus, at any time poor
correlation may exist between movements in the exchange rates of the foreign
currencies underlying a Fund's cross-hedges and the movements in the exchange
rates of the foreign currencies in which the Fund's assets that are the subject
of such cross-hedges are denominated.
GUARANTEED INVESTMENT CONTRACTS
The Funds may invest in guaranteed investment contracts ("GICs") issued
by insurance companies. Pursuant to such contracts, a Fund makes cash
contributions to a deposit fund of the insurance company's general account. The
insurance company then credits to the Fund guaranteed interest. The GICs
provide that this guaranteed interest will not be less than a certain minimum
rate. The insurance company may assess periodic charges against a GIC for
expenses and service costs allocable to it, and the charges will be deducted
from the value of the deposit fund. Because a Fund may not receive the
principal amount of a GIC from the insurance company on seven days' notice or
less, the GIC is considered an illiquid investment and, together with other
instruments in a Fund which are not readily marketable, will not exceed 15%
(10% in the case of the Money Market Fund) of the Fund's net assets. The term
of a GIC will be 13 months or less. In determining average weighted portfolio
maturity, a GIC will be deemed to have a maturity equal to the longer of the
period of time remaining until the next readjustment of the guaranteed interest
rate or the period of time remaining until the principal amount can be
recovered from the issuer through demand.
WHEN-ISSUED SECURITIES
The Funds may purchase securities on a "when-issued" or on a "forward
delivery" basis. It is expected that, under normal circumstances, the Funds
would take delivery of such securities. When a Fund commits to purchase a
security on a "when-issued" or on a "forward delivery" basis, the Fund
establishes procedures consistent with the relevant policies of the SEC. Since
those policies currently require that an amount of a Fund's assets equal to the
amount of the purchase be held aside or segregated to be used to pay for the
commitment, the Funds expect always to have cash, cash equivalents, or high
quality debt securities sufficient to cover any commitments or to limit any
potential risk. However, although the Funds do not intend to make such
purchases for speculative purposes and intends to adhere to the provisions of
SEC policies, purchases of securities on such bases may involve more risk than
other types of purchases. For example, a Fund may have to sell assets which
have been set aside in order to meet redemptions. Also, if a Fund determines it
is advisable as a matter of investment strategy to sell the "when-issued" or
"forward delivery" securities, the Fund would be required to meet its
obligations from the then available cash flow or the sale of securities, or,
although it would not normally expect to do so, from the sale of the
"when-issued" or "forward delivery" securities themselves (which may have a
value greater or less than the Fund's payment obligation).
ZERO COUPON OBLIGATIONS
A Fund may acquire zero coupon obligations when consistent with its
investment objective and policies. Such obligations have greater price
volatility than coupon obligations and will not result in payment of interest
until maturity. Since interest income is accrued throughout the term of the
zero coupon obligation but is not actually received until maturity, a Fund may
have to sell other securities to pay dividends based on such accrued income
prior to maturity of the zero coupon obligation.
<PAGE>
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS AND FOREIGN CURRENCIES--
FUNDS OTHER THAN THE MONEY MARKET FUND
Futures Contracts. A Fund may enter into contracts for the purchase or
sale for future delivery of fixed-income securities or foreign currencies, or
contracts based on financial indices including any index of U.S. Government
securities, foreign government securities or corporate debt securities. U.S.
futures contracts have been designed by exchanges which have been designated
"contracts markets" by the CFTC, and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market. Futures contracts trade on a number of exchange markets, and,
through their clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange. A Fund may enter
into futures contracts which are based on debt securities that are backed by
the full faith and credit of the U.S. Government, such as long-term U.S.
Treasury Bonds, Treasury Notes, Government National Mortgage Association
modified pass-through mortgage-backed securities and three-month U.S. Treasury
Bills. A Fund may also enter into futures contracts which are based on bonds
issued by entities other than the U.S. Government.
Purchases or sales of stock index futures contracts are used to attempt
to protect the Fund's current or intended stock investments from broad
fluctuations in stock prices. For example, the Fund may sell stock index
futures contracts in anticipation of or during a decline in the market value of
the Fund's securities. If such decline occurs, the loss in value of portfolio
securities may be offset, in whole or part, by gains on the futures position.
When a Fund is not fully invested in the securities market and anticipates a
significant market advance, it may purchase stock index futures contracts in
order to gain rapid market exposure that may, in part or entirely, offset
increases in the cost of securities that the Fund intends to purchase. As such
purchases are made, the corresponding positions in stock index futures
contracts will be closed out. In a substantial majority of these transactions,
the Fund will purchase such securities upon termination of the futures
position, but under unusual market conditions, a long futures position may be
terminated without a related purchase of securities.
At the same time a futures contract is purchased or sold, the Fund must
allocate cash or securities as a deposit payment ("initial deposit"). It is
expected that the initial deposit would be approximately 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Fund would
provide or receive cash that reflects any decline or increase in the contract's
value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the
delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although futures contracts by their terms may call for the actual
delivery or acquisition of securities, in most cases the contractual obligation
is fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded, a
Fund will incur brokerage fees when it purchases or sells futures contracts.
The purpose of the acquisition or sale of a futures contract, in the case
of a Fund which holds or intends to acquire fixed-income securities, is to
<PAGE>
attempt to protect the Fund from fluctuations in interest or foreign exchange
rates without actually buying or selling fixed-income securities or foreign
currencies. For example, if interest rates were expected to increase, a Fund
might enter into futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling an equivalent value of the debt
securities owned by the Fund. If interest rates did increase, the value of the
debt security in a Fund would decline, but the value of the futures contracts
to the Fund would increase at approximately the same rate, thereby keeping the
net asset value of the Fund from declining as much as it otherwise would have.
The Fund could accomplish similar results by selling debt securities and
investing in bonds with short maturities when interest rates are expected to
increase. However, since the futures market is more liquid than the cash
market, the use of futures contracts as an investment technique allows a Fund
to maintain a defensive position without having to sell its portfolio
securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of
futures contracts should be similar to those of debt securities, a Fund could
take advantage of the anticipated rise in the value of debt securities without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Fund could then buy debt securities on
the cash market.
To the extent a Fund enters into futures contracts, the assets in the
segregated asset account maintained to cover the Fund's obligations with
respect to such futures contracts will consist of cash, cash equivalents or
high quality liquid debt securities from its portfolio in an amount equal to
the difference between the fluctuating market value of such futures contracts
and the aggregate value of the initial and variation margin payments made by
the Fund with respect to such futures contracts.
The ordinary spreads between prices in the cash and futures market, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Advisers may still not
result in a successful transaction.
In addition, futures contracts entail risks. Although the Advisers
believe that use of such contracts will benefit the Funds, if the Advisers'
investment judgment about the general direction of interest rates is incorrect,
a Fund's overall performance would be poorer than if it had not entered into
any such contract. For example, if a Fund has hedged against the possibility of
an increase in interest rates which would adversely affect the price of debt
securities held by it and interest rates decrease instead, the Fund will lose
part or all of the benefit of the increased value of its debt securities which
it has hedged because it will have offsetting losses in its futures positions.
In addition, in such situations, if a Fund has insufficient cash, it may have
to sell debt securities to meet daily variation margin requirements. Such sales
of bonds may be, but will not necessarily be, at increased prices which reflect
the rising market. A Fund may have to sell securities at a time when it may be
disadvantageous to do so.
<PAGE>
Options on Futures Contracts. The Funds may purchase and write options on
futures contracts for hedging purposes. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call option
on an individual security. Depending on the pricing of the option compared to
either the price of the futures contract upon which it is based or the price of
the underlying debt securities, it may or may not be less risky than ownership
of the futures contract or underlying debt securities. As with the purchase of
futures contracts, when a Fund is not fully invested it may purchase a call
option on a futures contract to hedge against a market advance due to declining
interest rates.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, a Fund may purchase a put option on a futures contract to hedge its
portfolio against the risk of rising interest rates.
The amount of risk a Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or currency which is deliverable
upon exercise of the futures contract. If the futures price at expiration of
the option is below the exercise price, a Fund will retain the full amount of
the option premium which provides a partial hedge against any decline that may
have occurred in the Fund's portfolio holdings. The writing of a put option on
a futures contract constitutes a partial hedge against increasing prices of the
security or foreign currency which is deliverable upon exercise of the futures
contract. If the futures price at expiration of the option is higher than the
exercise price, the Fund will retain the full amount of the option premium
which provides a partial hedge against any increase in the price of securities
which the Fund intends to purchase. If a put or call option the Fund has
written is exercised, the Fund will incur a loss which will be reduced by the
amount of the premium it receives. In the case of a call option written by the
Fund, the loss is potentially unlimited. Depending on the degree of correlation
between changes in the value of its portfolio securities and changes in the
value of its futures positions, the Fund's losses from options on futures may
to some extent be reduced or increased by changes in the value of portfolio
securities.
The Boards of Trustees of the Portfolio Series and the Trusts have
adopted the requirement that futures contracts and options on futures contracts
be used either (a) as a hedge without regard to any quantitative limitation, or
(b) for other purposes to the extent that immediately thereafter the aggregate
amount of margin deposits on all (non-hedge) futures contracts of the Fund and
premiums paid on outstanding (non-hedge) options on futures contracts owned by
the Fund does not exceed 5% of the market value of the total assets of the
Fund. In addition, the aggregate market value of the outstanding futures
contracts purchased by the Fund may not exceed 50% of the market value of the
total assets of the Fund. Neither of these restrictions will be changed by the
Portfolio Series' or a Trust's Boards of Trustees without considering the
policies and concerns of the various applicable federal and state regulatory
agencies.
Options on Foreign Currencies. A Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or forward contracts, may be utilized.
For example, a decline in the dollar value of a foreign currency in which
portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value of the
currency does decline, a Fund will have the right to sell such currency for a
<PAGE>
fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Fund may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Fund deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated, the Fund could sustain losses on transactions in
foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.
A Fund may write options on foreign currencies for the same types of
hedging purposes. For example, where a Fund anticipates a decline in the dollar
value of foreign currency denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call
option on the relevant currency. If the expected decline occurs, the options
will most likely not be exercised, and the diminution in value of portfolio
securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the Fund
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Fund to hedge such
increased cost up to the amount of the premium. As in the case of other types
of options, however, the writing of a foreign currency option will constitute
only a partial hedge up to the amount of the premium, and only if rates move in
the expected direction. If this does not occur, the option may be exercised and
the Fund would be required to purchase or sell the underlying currency at a
loss which may not be offset by the amount of the premium. Through the writing
of options on foreign currencies, the Fund also may be required to forego all
or a portion of the benefits which might otherwise have been obtained from
favorable movements in exchange rates.
Losses from the writing of call options are potentially unlimited.
Accordingly, the Funds intend that any call options on foreign currencies that
they write (other than for cross-hedging purposes as described below) will be
covered. A call option written on a foreign currency by a Fund is "covered" if
the Fund owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of another
foreign currency held in its portfolio. A call option is also covered if the
Fund has a call on the same foreign currency and in the same principal amount
as the call written where the exercise price of the call held (a) is equal to
or less than the exercise price of the call written or (b) is greater than the
exercise price of the call written if the difference is maintained by the Fund
in cash, U.S. Government securities and other high quality liquid debt
securities in a segregated account with its custodian.
The Funds may also write call options on foreign currencies that are not
covered for cross-hedging purposes. A call option on a foreign currency is for
cross-hedging purposes if it is not covered, but is designed to provide a hedge
against a decline in the U.S. dollar value of a security which the Fund owns or
has the right to acquire and which is denominated in the currency underlying
the option due to an adverse change in the exchange rate. In such
circumstances, the Fund collateralizes the option by maintaining in a
segregated account with its custodian, cash or U.S. Government securities or
other high quality liquid debt securities in an amount not less than the value
of the underlying foreign currency in U.S. dollars marked to market daily.
<PAGE>
Additional Risks of Options on Futures Contracts, Forward Contracts and
Options on Foreign Currencies. Unlike transactions entered into by a Fund in
futures contracts, forward contracts and options on foreign currencies are not
traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such instruments
are traded through financial institutions acting as market-makers, although
foreign currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board
Options Exchange, subject to SEC regulation. Similarly, options on currencies
may be traded over-the-counter. In an over-the-counter trading environment,
many of the protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Moreover, the option writer and a trader of forward contracts
could lose amounts substantially in excess of their initial investments, due to
the margin and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation ("OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting a Fund to liquidate open positions at a profit prior to
exercise or expiration, or to limit losses in the event of adverse market
movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the over-the-counter
market. For example, exercise and settlement of such options must be made
exclusively through the OCC, which has established banking relationships in
applicable foreign countries for this purpose. As a result, the OCC may, if it
determines that foreign governmental restrictions or taxes would prevent the
orderly settlement of foreign currency option exercises, or would result in
undue burdens on the OCC or its clearing member, impose special procedures on
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions on
exercise.
As in the case of forward contracts, certain options on foreign
currencies are traded over-the-counter and involve liquidity and credit risks
which may not be present in the case of exchange-traded currency options. A
Fund's ability to terminate over-the-counter options will be more limited than
with exchange-traded options. It is also possible that broker-dealers
participating in over-the-counter options transactions will not fulfill their
obligations. Until such time as the staff of the SEC changes its position, each
Fund will treat purchased over-the-counter options and assets used to cover
written over-the-counter options as illiquid securities. With respect to
options written with primary dealers in U.S. Government securities pursuant to
an agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to the
repurchase formula.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (a) other complex foreign
political and economic factors, (b) lesser availability than in the United
States of data on which to make trading decisions, (c) delays in the Fund's
<PAGE>
ability to act upon economic events occurring in foreign markets during
non-business hours in the United States, (d) the imposition of different
exercise and settlement terms and procedures and margin requirements than in
the United States, and (e) lesser trading volume.
The successful use of futures contracts, options on futures contracts and
options on foreign currencies draws upon the Advisers' skill and experience
with respect to such instruments. Should interest or exchange rates move in an
unexpected manner, a Fund may not achieve the anticipated benefits of futures
contracts or options on futures contracts or foreign currencies or may realize
losses and thus will be in a worse position than if such strategies had not
been used. In addition, the correlation between movements in the price of
futures contracts or options on futures contracts or foreign currencies and
movements in the price of the securities and currencies hedged or used for
cover will not be perfect and could produce unanticipated losses.
OPTIONS ON SECURITIES--FUNDS OTHER THAN THE MONEY MARKET FUND
The Funds may write (sell) covered call and put options to a limited
extent on their portfolio securities ("covered options"). However, a Fund may
forego the benefits of appreciation on securities sold or may pay more than the
market price on securities acquired pursuant to call and put options written by
the Fund.
When a Fund writes a covered call option, it gives the purchaser of the
option the right to buy the underlying security at the price specified in the
option (the "exercise price") by exercising the option at any time during the
option period. If the option expires unexercised, the Fund will realize income
in an amount equal to the premium received for writing the option. If the
option is exercised, a decision over which a Fund has no control, the Fund must
sell the underlying security to the option holder at the exercise price. By
writing a covered call option, a Fund forgoes, in exchange for the premium less
the commission ("net premium"), the opportunity to profit during the option
period from an increase in the market value of the underlying security above
the exercise price.
When a Fund writes a covered put option, it gives the purchaser of the
option the right to sell the underlying security to the Fund at the specified
exercise price at any time during the option period. If the option expires
unexercised, the Fund will realize income in the amount of the premium received
for writing the option. If the put option is exercised, a decision over which a
Fund has no control, the Fund must purchase the underlying security from the
option holder at the exercise price. By writing a covered put option, a Fund,
in exchange for the net premium received, accepts the risk of a decline in the
market value of the underlying security below the exercise price. A Fund will
only write put options involving securities for which a determination is made
at the time the option is written that the Fund wishes to acquire the
securities at the exercise price.
A Fund may terminate its obligation as the writer of a call or put option
by purchasing an option with the same exercise price and expiration date as the
option previously written. This transaction is called a "closing purchase
transaction." Where a Fund cannot effect a closing purchase transaction, it may
be forced to incur brokerage commissions or dealer spreads in selling
securities it receives or it may be forced to hold underlying securities until
an option is exercised or expires.
When a Fund writes an option, an amount equal to the net premium received
by the Fund is included in the liability section of the Fund's Statement of
Assets and Liabilities as a deferred credit. The amount of the deferred credit
will be subsequently marked to market to reflect the current market value of
the option written. The current market value of a traded option is the last
<PAGE>
sale price or, in the absence of a sale, the mean between the closing bid and
asked price. If an option expires on its stipulated expiration date or if the
Fund enters into a closing purchase transaction, the Fund will realize a gain
(or loss if the cost of a closing purchase transaction exceeds the premium
received when the option was sold), and the deferred credit related to such
option will be eliminated. If a call option is exercised, the Fund will realize
a gain or loss from the sale of the underlying security and the proceeds of the
sale will be increased by the premium originally received. The writing of
covered call options may be deemed to involve the pledge of the securities
against which the option is being written. Securities against which call
options are written will be segregated on the books of the custodian for the
Fund.
A Fund may purchase call and put options on any securities in which it
may invest. A Fund would normally purchase a call option in anticipation of an
increase in the market value of such securities. The purchase of a call option
would entitle the Fund, in exchange for the premium paid, to purchase a
security at a specified price during the option period. A Fund would ordinarily
have a gain if the value of the securities increased above the exercise price
sufficiently to cover the premium and would have a loss if the value of the
securities remained at or below the exercise price during the option period.
A Fund would normally purchase put options in anticipation of a decline
in the market value of securities in its portfolio ("protective puts") or
securities of the type in which it is permitted to invest. The purchase of a
put option would entitle a Fund, in exchange for the premium paid, to sell a
security, which may or may not be held in the Fund's portfolio, at a specified
price during the option period. The purchase of protective puts is designed
merely to offset or hedge against a decline in the market value of the Fund's
portfolio securities. Put options also may be purchased by a Fund for the
purpose of affirmatively benefiting from a decline in the price of securities
which the Fund does not own. A Fund would ordinarily recognize a gain if the
value of the securities decreased below the exercise price sufficiently to
cover the premium and would recognize a loss if the value of the securities
remained at or above the exercise price. Gains and losses on the purchase of
protective put options would tend to be offset by countervailing changes in the
value of underlying portfolio securities.
The Funds have adopted certain other nonfundamental policies concerning
option transactions which are discussed below. A Fund's activities in options
may also be restricted by the requirements of the Internal Revenue Code of
1986, as amended (the "Code"), for qualification as a regulated investment
company.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying
securities markets that cannot be reflected in the option markets. It is
impossible to predict the volume of trading that may exist in such options, and
there can be no assurance that viable exchange markets will develop or
continue.
The Funds may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Funds will purchase such options only from broker-dealers who are primary
government securities dealers recognized by the Federal Reserve Bank of New
York and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. The Advisers will monitor
the creditworthiness of dealers with whom a Fund enters into such options
transactions under the general supervision of the Board of Trustees.
<PAGE>
OPTIONS ON SECURITIES INDICES--FUNDS OTHER THAN THE MONEY MARKET FUND
In addition to options on securities, the Funds may also purchase and
write (sell) call and put options on securities indices. Such options give the
holder the right to receive a cash settlement during the term of the option
based upon the difference between the exercise price and the value of the
index. Such options will be used for the purposes described above under
"Options on Securities."
Options on securities indices entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close out
options positions on securities indices is more likely to occur, although the
Funds generally will only purchase or write such an option if the Advisers
believe the option can be closed out.
Use of options on securities indices also entails the risk that trading
in such options may be interrupted if trading in certain securities included in
the index is interrupted. The Funds will not purchase such options unless the
Advisers believe the market is sufficiently developed such that the risk of
trading in such options is no greater than the risk of trading in options on
securities.
Price movements in the Funds' securities may not correlate precisely with
movements in the level of an index and, therefore, the use of options on
indices cannot serve as a complete hedge. Because options on securities indices
require settlement in cash, the Advisers may be forced to liquidate portfolio
securities to meet settlement obligations.
SHORT SALES "AGAINST THE BOX"--FUNDS OTHER THAN THE MONEY MARKET FUND
In a short sale, a Fund sells a borrowed security and has a corresponding
obligation to the lender to return the identical security. A Fund may engage in
short sales only if at the time of the short sale it owns or has the right to
obtain, at no additional cost, an equal amount of the security being sold
short. This investment technique is known as a short sale "against the box".
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. If a Fund engages in a short sale, the collateral for the short
position will be maintained by its custodian or qualified sub-custodian. While
the short sale is open, a Fund maintains in a segregated account an amount of
securities equal in kind and amount to the securities sold short or securities
convertible into or exchangeable for such equivalent securities. These
securities constitute the Fund's long position.
The Funds will not engage in short sales against the box for investment
purposes. A Fund may, however, make a short sale as a hedge, when it believes
that the price of a security may decline, causing a decline in the value of a
security (or a security convertible or exchangeable for such security). In such
case, any future losses in a Fund's long position should be reduced by a gain
in the short position. Conversely, any gain in the long position should be
reduced by a loss in the short position. The extent to which such gains or
losses are reduced depends upon the amount of the security sold short relative
to the amount a Fund owns. There are certain additional transaction costs
associated with short sales against the box, but the Funds endeavor to offset
these costs with the income from the investment of the cash proceeds of short
sales.
As a nonfundamental operating policy, the Advisers do not expect that
more than 40% of a Fund's total assets would be involved in short sales against
the box. The Advisers do not currently intend to engage in such sales.
<PAGE>
CERTAIN OTHER OBLIGATIONS
In order to allow for investments in new instruments that may be created
in the future, if the Prospectus for a Fund is supplemented, the Fund may
invest in obligations other than those listed previously, provided such
investments are consistent with the Fund's investment objective, policies and
restrictions.
RATING SERVICES
The ratings of rating services represent their opinions as to the quality
of the securities that they undertake to rate. It should be emphasized,
however, that ratings are relative and subjective and are not absolute
standards of quality. Although these ratings are an initial criterion for
selection of portfolio investments, the Advisers also make their own
evaluations of these securities, subject to review by the Boards of Trustees of
the Portfolio Series and the Trusts. After purchase by a Fund, an obligation
may cease to be rated or its rating may be reduced below the minimum required
for purchase by the Fund. Neither event would require a Fund to dispose of the
obligation, but the Advisers will consider such an event in their determination
of whether a Fund should continue to hold the obligation. A description of the
ratings used herein and in each Prospectus for the Funds is set forth in the
Appendix to this Statement of Additional Information.
Except as stated otherwise, all investment policies and restrictions
described herein are nonfundamental, and may be changed without prior
shareholder approval.
INVESTMENT RESTRICTIONS
The "fundamental policies" of each Fund and each Portfolio may not be
changed with respect to the Fund or the Portfolio without the approval of a
"majority of the outstanding voting securities" of the Fund or the Portfolio,
as the case may be. "Majority of the outstanding voting securities" under the
1940 Act and as used in this Statement of Additional Information and each
Prospectus means, with respect to the Fund (or the Portfolio), the lesser of
(i) 67% or more of the outstanding voting securities of the Fund (or of the
total beneficial interests of the Portfolio) present at a meeting, if the
holders of more than 50% of the outstanding voting securities of the Fund (or
of the total beneficial interests of the Portfolio) are present or represented
by proxy, or (ii) more than 50% of the outstanding voting securities of the
Fund (or of the total beneficial interests of the Portfolio).
Whenever a Money Market, Bond, Balanced or Stock Fund is requested to
vote on a fundamental policy of a Portfolio, the Fund will hold a meeting of
the its shareholders and will cast its vote as instructed by the shareholders
(except in limited circumstances as permitted by applicable rules and
regulations). Whenever a Strategic Allocation Fund is requested to vote on a
fundamental policy of an underlying Fund, the Strategic Allocation Fund will
vote its shares in proportion to the vote of all shares of the underlying Fund.
If a percentage or a rating restriction on investment or utilization of assets
is adhered to at the time an investment is made or assets are so utilized, a
later change in such percentage resulting from changes in a Fund's or
Portfolio's total assets or the value of a Fund's or Portfolio's securities, or
a later change in the rating of a portfolio security, will not be considered a
violation of the relevant policy.
MONEY MARKET, BOND, BALANCED AND STOCK FUNDS AND PORTFOLIOS
Fundamental Policies. As a matter of fundamental policy, no Money Market,
Bond, Balanced or Stock Portfolio (or Money Market, Bond, Balanced or Stock
<PAGE>
Fund) may (except that no investment restriction of a Fund shall prevent a Fund
from investing all of its assets in an open-end investment company with
substantially the same investment objective as that Fund):
(1) borrow money or mortgage or hypothecate assets of the Portfolio
(Fund), except that in an amount not to exceed 1/3 of the current value
of the Portfolio's (Fund's) assets (including such borrowing) less
liabilities (not including such borrowing), it may borrow money and enter
into reverse repurchase agreements, and except that it may pledge,
mortgage or hypothecate not more than 1/3 of such assets to secure such
borrowings or reverse repurchase agreements, provided that collateral
arrangements with respect to options and futures, including deposits of
initial deposit and variation margin, are not considered a pledge of
assets for purposes of this restriction and except that assets may be
pledged to secure letters of credit solely for the purpose of
participating in a captive insurance company sponsored by the Investment
Company Institute;
(2) underwrite securities issued by other persons except insofar as
the Portfolio Series or the Portfolio (the Trust or the Fund) may
technically be deemed an underwriter under the 1933 Act in selling a
portfolio security;
(3) make loans to other persons except (a) through the lending of
the Portfolio's (Fund's) portfolio securities and provided that any such
loans not exceed 30% of the Portfolio's (Fund's) total assets (taken at
market value), (b) through the use of repurchase agreements or the
purchase of short-term obligations or (c) by purchasing debt securities
of types distributed publicly or privately;
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts (except futures and option contracts) in the ordinary
course of business (the Portfolio Series (Trust) may hold and sell, for
the Portfolio's (Fund's) portfolio, real estate acquired as a result of
the Portfolio's (Fund's) ownership of securities);
(5) concentrate its investments in any particular industry
(excluding U.S. Government securities), but if it is deemed appropriate
for the achievement of the Portfolio's (Fund's) investment objective(s),
up to 25% of its total assets may be invested in any one industry (except
that the Money Market Portfolio (Money Market Fund) reserves the freedom
of action to concentrate 25% or more of its assets in obligations of
domestic branches of domestic banks); or
(6) issue any senior security (as that term is defined in the 1940
Act) if such issuance is specifically prohibited by the 1940 Act or the
rules and regulations promulgated thereunder, provided that collateral
arrangements with respect to options and futures, including deposits of
initial deposit and variation margin, are not considered to be the
issuance of a senior security for purposes of this restriction.
Non-Fundamental Policies. Each of the Money Market, Bond, Balanced and
Stock Portfolios (and Funds, other than the Intermediate Bond Fund and Select
Equity Fund) will not as a matter of operating policy (except that no operating
policy shall prevent a Fund from investing all of its assets in an open-end
investment company with substantially the same investment objective as that
Fund):
(1) borrow money for any purpose in excess of 10% of the Portfolio's
(Fund's) total assets (taken at cost), except that the Portfolio (Fund)
may borrow for temporary or emergency purposes up to 1/3 of its assets;
<PAGE>
(2) pledge, mortgage or hypothecate for any purpose in excess of 10%
of the Portfolio's (Fund's) net assets (taken at market value), provided
that collateral arrangements with respect to options and futures,
including deposits of initial deposit and variation margin, reverse
repurchase agreements, when-issued securities and other similar
investment techniques are not considered a pledge of assets for purposes
of this restriction;
(3) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the clearance
of purchases and sales of securities may be obtained and except that
deposits of initial deposit and variation margin may be made in
connection with the purchase, ownership, holding or sale of futures;
(4) invest for the purpose of exercising control or management;
(5) purchase securities issued by any other investment company
except by purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase other than the customary
broker's commission, or except when such purchase, though not made in the
open market, is part of a plan of merger or consolidation; provided,
however, that securities of any investment company will not be purchased
for the Portfolio (Fund) if such purchase at the time thereof would cause
(a) more than 10% of the Portfolio's (Fund's) total assets (taken at the
greater of cost or market value) to be invested in the securities of such
issuers; (b) more that 5% of the Portfolio's (Fund's) total assets (taken
at the greater of cost or market value) to be invested in any one
investment company; or (c) more than 3% of the outstanding voting
securities of any such issuer to be held for the Portfolio (Fund); and
provided further that the Portfolio (Fund) may not purchase any security
from any open-end investment company;
(6) purchase securities of any issuer if such purchase at the time
thereof would cause the Portfolio (Fund) to hold more than 10% of any
class of securities of such issuer, for which purposes all indebtedness
of an issuer shall be deemed a single class and all preferred stock of an
issuer shall be deemed a single class, except that futures or option
contracts shall not be subject to this restriction;
(7) purchase or retain in the Portfolio's (Fund's) portfolio any
securities issued by an issuer any of whose officers, directors, trustees
or security holders is an officer or Trustee of the Portfolio Series
(Trust), or is an officer or partner of the Adviser or Subadviser, if
after the purchase of the securities of such issuer for the Portfolio
(Fund) one or more of such persons owns beneficially more than 1/2 of 1%
of the shares or securities, or both, all taken at market value, of such
issuer, and such persons owning more than 1/2 of 1% of such shares or
securities together own beneficially more than 5% of such shares or
securities, or both, all taken at market value;
(8) invest more than 5% of the Portfolio's (Fund's) net assets in
warrants or rights (valued at the lower of cost or market), but not more
than 2% of the Portfolio's (Fund's) net assets may be invested in
warrants not listed on the New York Stock Exchange or the American Stock
Exchange;
(9) make short sales of securities or maintain a short position
(excluding short sales if the Portfolio (Fund) owns an equal amount of
such securities or securities convertible into or exchangeable for,
without payment of any further consideration, securities of equivalent
kind and amount) if such short sales represent more than 25% of the
Portfolio's (Fund's) net assets (taken at market value); provided,
<PAGE>
however, that the value of the Portfolio's (Fund's) short sales of
securities (excluding U.S. Government securities) of any one issuer may
not be greater than 2% of the value (taken at market value) of the
Portfolio's (Fund's) net assets or more than 2% of the securities of any
class of any issuer; or
(10) enter into repurchase agreements providing for settlement in
more than seven days after notice or purchase securities which are not
readily marketable (which securities would include participation
interests that are not subject to the demand feature described in the
Fund's then-current Prospectus and floating and variable rate demand
obligations as to which no secondary market exists and the Portfolio
cannot exercise the demand feature described in the Fund's then-current
Prospectus on not more than seven days' notice), if, in the aggregate,
more than 15% (10% in the case of the Money Market Portfolio (Fund)) of
its net assets would be so invested. A Portfolio (Fund) may not invest in
time deposits maturing in more than seven days.
The non-fundamental policies (1) through (10) may be changed by the Board
of Trustees of the Portfolio Series or the Diversified Investors Trust.
STRATEGIC ALLOCATION FUNDS
Fundamental Policies. As a matter of fundamental policy, each Strategic
Allocation Fund may not:
(1) borrow money, except each Fund may borrow as a temporary measure for
extraordinary or emergency purposes, and then only in amounts not
exceeding 30% of its total assets valued at market. Each Fund will
not borrow in order to increase income (leveraging), but only to
facilitate redemption requests which might otherwise require
untimely investment liquidations;
(2) make loans, although the underlying Portfolios may purchase money
market securities and enter into repurchase agreements;
(3) purchase securities on margin;
(4) mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the Funds as security for indebtedness except as
may be necessary in connection with permissible borrowings, in which
event such mortgaging, pledging, or hypothecating may not exceed 30%
of each Fund's total assets, valued at market;
(5) purchase or sell real estate;
(6) issue senior securities (except permitted borrowings);
(7) effect short sales of securities; or
(8) underwrite securities issued by other persons, except to the extent
the Funds may be deemed to be underwriters within the meaning of the
Securities Act of 1993 in connection with the purchase and sale of
their portfolio securities in the ordinary course of pursuing their
investment programs.
In addition, as a matter of fundamental policy, each Strategic Allocation
Fund may engage in futures and options transactions through investments in the
underlying Funds.
Non-Fundamental Policies. As a matter of operating policy, each Fund may
not:
(1) invest in companies for the purpose of exercising management or
control;
<PAGE>
(2) purchase a security if, as a result of such purchase, more than 15%
of the value of each Fund's net assets would be invested in illiquid
securities or other securities that are not readily marketable;
(3) purchase participations or other direct interests or enter into
leases with respect to, oil, gas, other mineral exploration or
development programs;
(4) invest in options;
(5) purchase or retain the securities of any issuer if, to the knowledge
of the Funds' management, those officers and directors of the
Strategic Allocation Trust and of its investment manager, who each
owns beneficially more than .5% of the outstanding securities of
such issuer, together own beneficially more than 5% of such
securities;
(6) purchase the securities of any issuer (other than obligations issued
or guaranteed by the U.S. Government or any foreign government,
their agencies or instrumentalities or shares of underlying Funds)
if, as a result, more than 5% of the value of each Fund's total
assets would be invested in the securities of issuers which at the
time of purchase had been in operation for less than three years,
including predecessors and unconditional guarantors; or
(7) invest in warrants.
Because of its investment objectives and policies, each Strategic
Allocation Fund will concentrate more than 25% of its assets in the mutual fund
industry. In accordance with the Strategic Allocation Funds' investment
programs set forth in the Prospectus, each Strategic Allocation Fund may invest
more than 25% of its assets in certain of the Money Market, Bond and Stock
Funds. However, each of the Funds in which each Strategic Allocation Fund will
invest will not concentrate more than 25% of its total assets in any one
industry (except that the Money Market Fund (through the Money Market
Portfolio) reserves the right to concentrate 25% or more of its assets in
obligations of domestic branches of domestic banks.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Except as may be required to ensure satisfaction of certain tests
applicable to regulated investment companies under the Code, portfolio changes
are made without regard to the length of time a security has been held, or
whether a sale would result in the recognition of a profit or loss. Therefore,
the rate of portfolio turnover is not a limiting factor when changes are
appropriate. Portfolio trading is engaged in for a Fund if the Advisers believe
that a transaction net of costs (including custodian charges) will help achieve
the Fund's investment objective.
A Fund's purchases and sales of securities may be principal transactions,
that is, securities may be purchased directly from the issuer or from an
underwriter or market maker for the securities. There usually are no brokerage
commissions paid for such purchases and, therefore, the Funds do not anticipate
paying brokerage commissions in such transactions. Any transactions for which a
Fund pays a brokerage commission will be effected at the best price and
execution available. Purchases from underwriters of securities include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers serving as market makers include the spread between the bid and
the asked price.
Allocations of transactions, including their frequency, to various
dealers is determined by the Subadvisers in their best judgment and in a manner
<PAGE>
deemed to be in the best interest of the investors in a Fund rather than by any
formula. The primary consideration is prompt execution of orders in an
effective manner at the most favorable price.
Investment decisions for a Fund will be made independently from those for
any other account or investment company that is or may in the future become
managed by the Advisers or their affiliates. If, however, a Fund and other
investment companies or accounts managed by the Subadvisers are
contemporaneously engaged in the purchase or sale of the same security, the
transactions may be averaged as to price and allocated equitably to each
account. In some cases, this policy might adversely affect the price paid or
received by a Fund or the size of the position obtainable for the Fund. In
addition, when purchases or sales of the same security for a Fund and for other
investment companies managed by the Subadvisers occur contemporaneously, the
purchase or sale orders may be aggregated in order to obtain any price
advantages available to large denomination purchases or sales. Furthermore, in
certain circumstances affiliates of the Subadvisers whose investment portfolios
are managed internally, rather than by the Subadvisers, might seek to purchase
or sell the same type of investments at the same time as a Fund. Such an event
might also adversely affect that Fund.
The following Funds and Portfolios paid the approximate brokerage
commissions indicated for the fiscal years noted below:
Balanced Portfolio:
Fiscal year ended December 31, 1994: $245,752
Fiscal year ended December 31, 1995: $199,128
Fiscal year ended December 31, 1996: $317,179
Fiscal year ended December 31, 1997: $______
Equity Income Portfolio
Fiscal year ended December 31, 1994: $487,599
Fiscal year ended December 31, 1995: $377,904
Fiscal year ended December 31, 1996: $565,943
Fiscal year ended December 31, 1997: $______
Equity Value Portfolio
Fiscal year ended December 31, 1996: $64,207
Fiscal year ended December 31, 1997: $______
Growth & Income Portfolio
Fiscal year ended December 31, 1994: $ 64,869
Fiscal year ended December 31, 1995: $348,828
Fiscal year ended December 31, 1996: $397,075
Fiscal year ended December 31, 1997: $______
Equity Growth Portfolio
Fiscal year ended December 31, 1994: $162,258
Fiscal year ended December 31, 1995: $174,716
Fiscal year ended December 31, 1996: $670,631
Fiscal year ended December 31, 1997: $______
Special Equity Portfolio
Fiscal year ended December 31, 1994: $308,251
Fiscal year ended December 31, 1995: $425,803
Fiscal year ended December 31, 1996: $678,431
Fiscal year ended December 31, 1997: $______
<PAGE>
Select Equity Fund
Fiscal year ended December 31, 1997: $______
Aggressive Equity Portfolio
Fiscal year ended December 31, 1996: $15,490
Fiscal year ended December 31, 1997: $______
International Equity Portfolio
Fiscal year ended December 31, 1995: $ 38,261
Fiscal year ended December 31, 1996: $211,629
Fiscal year ended December 31, 1997: $______
PERFORMANCE INFORMATION
From time to time, quotations of the performance of each class of shares
of the Funds may be included in advertisements, sales literature or shareholder
reports. These performance figures are calculated in the following manner for
each Fund:
YIELD
MONEY MARKET FUND:
For the Money Market Fund, yield is computed in accordance with a
standardized method which involves determining the net change in the value of a
hypothetical pre-existing Money Market Fund account having a balance of one
share of a class at the beginning of a seven calendar day period for which
yield is to be quoted, dividing the net change by the value of the account at
the beginning of the period to obtain the base period return, and annualizing
the results (i.e., multiplying the base period return by 365/7). The net change
in the value of the account reflects the value of additional shares of a class
purchased with dividends declared on the original share and any such additional
shares and fees that may be charged to shareholder accounts, in proportion to
the length of the base period and the Money Market Fund's average account size,
but does not include realized gains and losses or unrealized appreciation and
depreciation. Effective annualized yield is computed by adding 1 to the base
period return (calculated as described above), raising that sum to a power
equal to 365 divided by 7, and subtracting 1 from the result.
Yields will fluctuate and are not necessarily representative of future
results. The investor should remember that yield is a function of the type and
quality of the instruments held by the Money Market Fund, portfolio maturity
and operating expenses. An investor's principal in the Money Market Fund is not
guaranteed. See "Determination of Net Asset Value" for a discussion of the
manner in which the price per share of each class of the Money Market Fund is
determined.
From time to time, the Money Market Fund in its advertising and sales
literature may refer to the growth of assets managed or administered by the
Adviser over certain time periods.
Comparative performance information may be used from time to time in
advertising or marketing the shares of each class of the Money Market Fund,
including data from Lipper Analytical Services, Inc., IBC/Donoghue's Money Fund
Report. Morningstar, Inc., CDA and other publications.
The annualized current seven-day yield of the Diversified Class shares,
Stephens Premium Class shares and Stephens Institutional Class shares of the
Money Market Fund for the year ended December 31, 1997 was [___%], [___%] and
[___%], respectively. For the same period, the annualized effective seven-day
yield, based upon dividends declared daily and reinvested monthly, of the
<PAGE>
Diversified Class shares, Stephens Premium Class shares and Stephens
Institutional Class shares of the Money Market Fund was [___%], [___%] and
[___%], respectively.
ALL OTHER FUNDS:
The yield quotation of each class will be based with respect to a class
on the annualized net investment income per share over a 30-day period. The
current yield for each class is calculated with respect to a class by dividing
the net investment income per share of the class earned during the period by
the net asset value per share of the class on the last day of that period. The
resulting figure is then annualized. Net investment income per share of a class
is determined by dividing (i) the dividends and interest earned during the
period attributable to a class, minus accrued expenses for the period
attributable to a class, by (ii) the average number of shares of the class
entitled to receive dividends during the period multiplied by the net asset
value per share of the class on the last day of the period.
TOTAL RETURNS
MONEY MARKET, BOND, BALANCED AND STOCK FUNDS:
The total return of each class will be calculated for certain periods by
determining the average annual compounded rates of return over those periods
that would cause an investment of $1,000 in a class (with all distributions
reinvested) to reach the value of that investment at the end of the periods.
The Funds may also calculate (i) a total return assuming an initial account
value of $1,000 and/or (ii) total rates of return which represent aggregate
performance over a period of year-by-year performance.
Total returns calculated for any of the following Funds for any period
which includes a period prior to the "reorganization date" will reflect the
performance of the corresponding Pooled Separate Account. The "reorganization
date" is the date on which the corresponding Pooled Separate Account of The
Mutual Life Insurance Company of New York ("MONY") set forth below contributed
all of its assets to the corresponding Portfolio of Diversified Investors
Portfolios in which the corresponding Fund invests its assets:
FUND MONY POOLED SEPARATE ACCOUNT
Money Market...................... Pooled Account No. 4
High Quality Bond................. Pooled Account No. 15
Intermediate Government Bond...... Pooled Account No. 10d
Government/Corporate Bond......... Pooled Account No. 5
Balanced.......................... Pooled Account No. 14
Equity Income..................... Pooled Account No. 6
Growth & Income................... Pooled Account No. 10a
Equity Growth..................... Pooled Account No. 1
Special Equity.................... Pooled Account No. 10b
International Equity.............. Pooled Account No. 12
Pooled Separate Account performance will only be included, however, from
the date that the Pooled Separate Account adopted investment objectives,
policies and practices and was managed in a manner that is in all material
respects the same as the applicable Fund. This Pooled Separate Account
performance will be adjusted to reflect current Fund fees and expenses, after
waivers and reimbursements. The Pooled Separate Accounts were not registered
under the Investment Company Act of 1940 and, therefore, were not subject to
certain investment restrictions imposed by that Act or the Code. If the Pooled
Separate Accounts had been so registered under that Act, investment performance
might have been adversely affected.
<PAGE>
As of December 31, 1997, the average annual total returns for the
Diversified Class shares of each of the following Funds, including the Pooled
Separate Accounts noted above, were as follows:
<TABLE>
<CAPTION>
FOR THE
FOR THE FOR THE FOR THE FOR THE PERIOD SINCE
YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
INCEPTION ENDED ENDED ENDED ENDED THROUGH
FUND DATE 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97
- ------------------------- --------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Money Market
High Quality Bond
Intermediate
Government Bond
Government/Corporate Bond
High-Yield Bond
Balanced
Equity Income
Equity Value
Growth & Income
Equity Growth
Special Equity
Aggressive Equity
International Equity
</TABLE>
Historical performance information for periods prior to the establishment
of the Stephens Premium Class shares or Stephens Institutional Class shares for
a Fund (other than the Intermediate Bond and Select Equity Funds) will be that
of the respective Diversified Class shares for that Fund and will be presented
in accordance with applicable SEC staff interpretations.
As of December 31, 1997, the average annual total returns for the
Stephens Premium Class shares and the Stephens Institution Class shares of each
of the following Funds were as follows:
<TABLE>
<CAPTION>
FOR THE
FOR THE FOR THE FOR THE FOR THE PERIOD SINCE
YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
INCEPTION ENDED ENDED ENDED ENDED THROUGH
FUND DATE 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97
- ------------------------- -------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Money Market
Stephens Premium.......
Stephens Institutional.
Intermediate Bond
Stephens Premium.......
Stephens Institutional.
High-Yield Bond
Stephens Premium.......
Stephens Institutional.
Equity Value
Stephens Premium.......
Stephens Institutional.
Equity Growth
Stephens Premium.......
<PAGE>
Stephens Institutional.
Special Equity
Stephens Premium.......
Stephens Institutional.
Select Equity
Stephens Premium.......
Stephens Institutional.
International Equity
Stephens Premium.......
Stephens Institutional.
</TABLE>
Any yield or total return quotation provided for a class of shares of a
Fund should not be considered as representative of the performance of that
class of shares in the future since the net asset value of shares of the class
will vary based not only on the type, quality and maturities of the securities
held in the Fund or Portfolio(s), but also on changes in the current value of
such securities and on changes in the expenses of the class of shares and of
the Fund and corresponding Portfolio. These factors and possible differences in
the methods used to calculate yields and total return should be considered when
comparing the yield and total return of a class to yields and total rates of
return published for other investment companies or other investment vehicles.
Total return reflects the performance of both principal and income.
STRATEGIC ALLOCATION FUNDS:
The table below shows total returns calculated for all private accounts
and collective investment vehicles managed by Diversified during the periods
indicated with investment objectives, policies and restrictions substantially
similar to the Short Horizon Strategic Allocation Fund, the Short/Intermediate
Horizon Strategic Allocation Fund, the Intermediate Horizon Strategic
Allocation Fund, the Intermediate/Long Horizon Strategic Allocation Fund and
the Long Horizon Strategic Allocation Fund and which have been managed as these
Funds are or are expected to be managed. Diversified has managed these
collective investment vehicles since October 1, 1992. The returns are adjusted
to assume that all charges, expenses and fees of the Strategic Allocation Funds
which are presently in effect were deducted during the periods.
The average annual total returns at December 31, 1997 for all such
private accounts and collective investment vehicles managed by Diversified,
adjusted to assume that all charges, expenses and fees presently in effect were
deducted, are as follows:
<TABLE>
<CAPTION>
Inception Since
Date 1 Year 3 Years Inception
<S> <C> <C> <C> <C>
Short Horizon Strategic Allocation Fund
Short/Intermediate Horizon
Strategic Allocation Fund
Intermediate Horizon Strategic Allocation
Fund
Intermediate/Long Horizon Strategic
Allocation Fund
Long Horizon Strategic Allocation Fund
</TABLE>
<PAGE>
COMPARISON OF FUND PERFORMANCE
Comparison of the quoted non-standardized performance of various
investments is valid only if performance is calculated in the same manner.
Since there are different methods of calculating performance, investors should
consider the effect of the methods used to calculate performance when comparing
performance of a Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, a Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs. A Portfolio may
invest in some instruments not eligible for inclusion in such an index, and may
be prohibited from investing in some instruments included in this index.
Evaluations of a Fund's performance made by independent sources may also be
used in advertisements concerning a Fund. Sources for a Fund's performance
information may include, but are not limited to, the following:
Asian Wall Street Journal, a weekly Asian newspaper that often
reviews U.S. mutual funds investing internationally.
Barron's, a Dow Jones and Company, Inc. business and financial
weekly that periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports
the performance rankings and ratings of a variety of mutual funds
investing abroad.
Changing Times, The Kiplinger Magazine, a monthly investment
advisory publication that periodically features the performance of a
variety of securities.
Consumer Digest, a monthly business/financial magazine that includes
a "Money Watch" section featuring financial news.
Donoghue's Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., of Holliston, Massachusetts, reporting on the
performance of the nation's money market funds, summarizing money market
fund activity, and including certain averages as performance benchmarks,
specifically "Donoghue's Money Fund Average" and "Donoghue's Government
Money Fund Average."
Financial Times, Europe's business newspaper, which features from
time to time articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes
a "Market Watch" department reporting on activities in the mutual fund
industry.
Forbes, a national business publication that from time to time
reports the performance of specific investment companies in the mutual
fund industry.
Fortune, a national business publication that periodically rates the
performance of a variety of mutual funds.
Investor's Daily, a daily newspaper that features financial,
economic and business news.
<PAGE>
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis,
a weekly publication of industry-wide mutual fund averages by type of
fund.
Money, a monthly magazine that from time to time features both
specific funds and the mutual fund industry as a whole.
New York Times, a nationally distributed newspaper which regularly
covers financial news.
Personal Investing News, a monthly news publication that often
reports on investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that
includes a "Mutual Funds Outlook" section reporting on mutual fund
performance measures, yields, indices and portfolio holdings.
Success, a monthly magazine targeted to the world of entrepreneurs
and growing business, often featuring mutual fund performance data.
U.S. News and World Report, a national business weekly that
periodically reports mutual fund performance data.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
regularly covers financial news.
Weisenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies, including
comparative data on funds' backgrounds, management policies, salient
features, management results, income and dividend records, and price
ranges.
Working Women, a monthly publication that features a "Financial
Workshop" section reporting on the mutual fund/financial industry.
World Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
DETERMINATION OF NET ASSET VALUE; VALUATION OF SECURITIES
Each Fund determines the net asset value of each class of its shares each
day on which the New York Stock Exchange is open for trading. As a result, a
Fund will normally determine the net asset value of its classes every weekday
except for the following holidays or the days on which they are observed: New
Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas. This daily
determination of net asset value is made as of the close of regular trading on
the New York Stock Exchange, normally 4:00 p.m., New York time, by dividing the
total assets of a Fund attributable to a class less all of the liabilities
attributable to that class, by the total number of shares of that class
outstanding at the time the determination is made. Purchases and redemptions
will be effected at the time of determination of net asset value next following
the receipt of any purchase or redemption order deemed to be in good order.
Trading in securities on most non-U.S. exchanges and over-the-counter
markets is normally completed before the close of regular trading on the New
York Stock Exchange and may also take place on days on which the New York Stock
Exchange is closed. If events materially affecting the value of non-U.S.
securities occur between the time when the exchange on which they are traded
<PAGE>
closes and the time when a Fund's net asset value is calculated, such
securities may be valued at fair value in accordance with procedures
established by and under the general supervision of the Boards of Trustees of
the Portfolio Series and the Trusts.
Equity securities are valued at the last sale price on the exchange on
which they are primarily traded or at the ask price on the NASDAQ system for
unlisted national market issues, or at the last quoted bid price for securities
in which there were no sales during the day or for unlisted securities not
reported on the NASDAQ system. Bonds and other fixed income securities (other
than short-term obligations, but including listed issues) are valued on the
basis of valuations furnished by a pricing service, the use of which has been
approved by the Board of Trustees. In making such valuations, the pricing
service utilizes both dealer-supplied valuations and electronic data processing
techniques that take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Short-term obligations which
mature in 60 days or less are valued at amortized cost, which approximates fair
value as determined by the Board of Trustees. Futures and option contracts that
are traded on commodities or securities exchanges are normally valued at the
settlement price on the exchange on which they are traded. Portfolio securities
(other than short-term obligations) for which there are no such quotations or
valuations are valued at fair value as determined in good faith by or at the
direction of the Board of Trustees.
Interest income on long-term obligations is determined on the basis of
interest accrued plus amortization of discount (generally, the difference
between issue price and stated redemption price at maturity) and premiums
(generally, the excess of purchase price over stated redemption price at
maturity). Interest income on short-term obligations is determined on the basis
of interest and discount accrued less amortization of premium.
Any assets or liabilities initially denominated in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a
regular participant in the foreign exchange market or on the basis of a pricing
service that takes into account the quotes provided by a number of such major
banks. If neither of these alternatives is available or both are deemed not to
provide a suitable methodology for converting a foreign currency into U.S.
dollars, the Board of Trustees, in good faith, will establish a conversion rate
for such currency.
A determination of value used in calculating net asset value must be a
fair value determination made in good faith utilizing procedures approved by
the Boards of Trustees. While no single standard for determining fair value
exists, as a general rule, the current fair value of a security would appear to
be the amount which a Fund could expect to receive upon its current sale. Some,
but not necessarily all, of the general factors which may be considered in
determining fair value include: (a) the fundamental analytical data relating to
the investment; (b) the nature and duration of restrictions on disposition of
the securities; and (c) an evaluation of the forces which influence the market
in which these securities are purchased and sold. Without limiting or including
all of the specific factors which may be considered in determining fair value,
some of the specific factors include: type of security, financial statements of
the issuer, cost at date of purchase, size of holding, discount from market
value, value of unrestricted securities of the same class at the time of
purchase, special reports prepared by analysts, information as to any
transactions or offers with respect to the security, existence of merger
proposals or tender offers affecting the securities, price and extent of public
trading in similar securities of the issuer or comparable companies, and other
relevant matters.
Each investor in each Portfolio, including a Fund, may add to or reduce
its investment in the Portfolio on each day that the the New York Stock
<PAGE>
Exchange is open for trading. As of 4:00 p.m. (New York time) (or any earlier
close of regular trading on the Exchange) on each such day, the value of each
investor's interest in a Portfolio will be determined by multiplying the net
asset value of the Portfolio by the percentage representing that investor's
share of the aggregate beneficial interests in the Portfolio. Any additions or
reductions which are to be effected on that day will then be effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio
will then be recomputed as the percentage equal to the fraction (a) the
numerator of which is the value of such investor's investment in the Portfolio
as of 4:00 p.m. (or the earlier close of regular trading on the Exchange) on
such day plus or minus, as the case may be, the amount of net additions to or
reductions in the investor's investment in the Portfolio effected on such day,
and (b) the denominator of which is the aggregate net asset value of the
Portfolio as of 4:00 p.m. (or the earlier close of regular trading on the
Exchange) on such day plus or minus, as the case may be, the amount of the net
additions to or reductions in the aggregate investments in the Portfolio by all
investors in the Portfolio. The percentage so determined will then be applied
to determine the value of the investor's interest in a Portfolio as of 4:00
p.m. (or the earlier close of regular trading on the Exchange) on the following
day the New York Stock Exchange is open for trading.
MANAGEMENT
The respective Trustees and officers of each Trust and the Portfolio
Series and their principal occupations during the past five years are set forth
below. Their titles may have varied during that period. Asterisks indicate
those Trustees who are "interested persons" (as defined in the 1940 Act) of a
Trust or the Portfolio Series, as the case may be. Unless otherwise indicated,
the address of each Trustee and officer of the Trusts and the Portfolio Series
is Four Manhattanville Road, Purchase, New York 10577.
TRUSTEES OF EACH TRUST
Donald E. Flynn*........ Vice President, AEGON USA, Inc. (1988 to present).
Executive Vice President, AEGON USA Investment
Management, Inc. (1988 to present); Vice President,
AEGON USA Managed Portfolios, Inc. (1988 to present).
Age: 56.
Robert Lester Lindsay... Retired. Executive Vice President, The Mutual Life
Insurance Company of New York (prior to July 1989);
His address is Two Huguenot Center, Tenafly,
New Jersey 07670-2520. Age: 62.
Nikhil Malvania......... Partner, Deaner-Malvania Associates (since 1991).
Manager and Vice President, Strategic Planning
Associates (prior to 1991). His address is 88 Perry
Street, New York, New York 10014. Age: 45.
Joyce Galpern Norden.... Co-Director, Urman's Health Clinical Research Program
Medical Center, University of Pennsylvania (since May
1995). Foundations Director, American Jewish
Committee (October 1993 to May 1995). Executive
Director, Food-People Allied to Combat Hunger Inc.
(February 1991 to September 1993). Her address is
Nine Evergreen Way, North Tarrytown, New York 10591.
Age: 57.
Tom A. Schlossberg*..... President, Diversified (since October 1992).
Executive Vice President and Head of Pension
<PAGE>
Operations, The Mutual Life Insurance Company of New
York (January 1993 to December 1993). Age: 47.
TRUSTEES OF THE PORTFOLIO SERIES
In addition to the Trustees below, Messrs. Schlossberg and Flynn serve as
Trustees of the Portfolio Series.
Neal M. Jewell.......... Consultant (since 1995). Executive Vice President
(November 1991 to January 1995), Director of Overseas
Pensions (January 1990 to October 1991), American
International Group Asset Management. His address is
355 Thornridge Drive, Stamford, Connecticut 06903.
Age: 62.
Eugene M. Mannella...... Vice President, Investment Management Services, Inc.
(since August 1993). Senior Vice President, Lehman
Brothers Inc. (May 1986 to August 1993). His address
is Two Orchard Neck Road, Center Moriches,
New York 11934. Age: 43.
Patricia L. Sawyer...... Executive Vice President and Director, Robert L.
Smith & Co. (since July 1990). Vice President,
American Express (September 1988 to July 1990). Her
address is 256 West 10th Street, New York, New
York 10014. Age: 46.
OFFICERS
Mr. Schlossberg is President, Chief Executive Officer and Chairman of the
Board and Mr. Flynn is Vice President of each Trust and the Portfolio Series.
Each other officer also holds the same position indicated with each Trust and
the Portfolio Series.
Robert F. Colby......... Secretary; Vice President and Chief Corporate
Counsel, Mutual Life Insurance Company of New York
(April 1993 to December 1993); Vice President and
General Counsel, Diversified (since November 1993);
Vice President of Diversified Investors Securities
Corp. ("DISC") (since November 1993). Age: 41.
Alfred C. Sylvain....... Treasurer and Assistant Secretary; Vice President and
Treasurer of Diversified, (since November 1993);
Treasurer of DISC (since November 1993); Vice
President, Mutual Life Insurance Company of New York
(since January 1991). Age: 45.
John F. Hughes.......... Assistant Secretary; Senior Counsel, Mutual Life
Insurance Company of New York (since January 1988);
Vice President and Senior Counsel, Diversified (since
November 1993); Assistant Secretary, DISC (since
November 1993). Age: 56.
The Declaration of Trust of each Trust provides that each Trust will
indemnify its Trustees and officers as described below under "Description of
the Trusts; Fund Shares."
<PAGE>
COMPENSATION
For the fiscal year ended December 31, 1997, the Trusts provided the
following compensation to the Trustees.
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE PENSION OR COMPENSATION
COMPENSATION COMPENSATION RETIREMENT ESTIMATED FROM THE
FROM THE FROM THE BENEFITS ANNUAL TRUSTS AND
NAME OF DIVERSIFIED STRATEGIC ACCRUED AS BENEFITS FUND COMPLEX
PERSON, INVESTORS ALLOCATION PART OF FUND UPON PAID TO
POSITION TRUST TRUST EXPENSES RETIREMENT TRUSTEES
<S> <C> <C> <C> <C> <C>
Tom A. Schlossberg -0- -0- None N/A -0-
Trustee
Donald E. Flynn -0- -0- None N/A -0-
Trustee
Robert L. Lindsay $9,750 $3,250 None N/A $13,000
Trustee
Nikhil Malvania $9,750 $3,250 None N/A $13,000
Trustee
Joyce Galpern Norden $9,750 $3,250 None N/A $13,000
Trustee
</TABLE>
For the fiscal year ended December 31, 1997, the Portfolio Series
provided the following compensation to its Trustees.
<TABLE>
<CAPTION>
AGGREGATE PENSION OR COMPENSATION
COMPENSATION RETIREMENT ESTIMATED FROM THE TRUSTS
NAME OF FROM THE BENEFITS ACCRUED ANNUAL AND FUND
PERSON, PORTFOLIO AS PART OF FUND BENEFITS UPON COMPLEX PAID TO
POSITION SERIES EXPENSES RETIREMENT TRUSTEES
<S> <C> <C> <C> <C>
Tom A. Schlossberg None None N/A None
Trustee
Donald E. Flynn None None N/A None
Trustee
Neal M. Jewell $9,750 None N/A $9,750
Trustee
Eugene M. Manella $9,750 None N/A $9,750
Trustee
Patricia L. Sawyer $9,750 None N/A $9,750
Trustee
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES
At January 30, 1998, the Trustees and officers of the Trusts and the
Portfolio Series as a group held less than 1% of the outstanding shares of each
class of each Fund. [As of the same date, there were no outstanding Stephens
<PAGE>
Premium Class shares or Stephens Institutional Class shares of any Fund.] The
following investors owned of records or beneficially more than 5% of the
outstanding [Diversified Class] shares of the following Funds.
[Fund name]: ______.
[Fund name]: ______.
At January 30, 1998, AUSA Life Insurance Company, Inc. ("AUSA"), Four
Manhattanville Road, Purchase, New York 10577, and The Mutual Life Insurance
Company ("MONY"), 1740 Broadway, New York, New York 10019, owned the following
percentage interests of the outstanding beneficial interests of the Portfolios
and Funds indicated (all such interests being held in separate accounts of AUSA
and MONY, respectively):
AUSA MONY
Money Market ____% ____%
High Quality Bond ____ ____
Intermediate Government Bond ____ ____
Intermediate Bond ____ ____
Government/Corporate Bond ____ ____
High-Yield Bond ____ ____
Balanced ____ ____
Equity Income ____ ____
Equity Value ____ ____
Growth & Income ____ ____
Equity Growth ____ ____
Special Equity ____ ____
Select Equity ____ ____
Aggressive Equity ____ ____
International Equity ____ ____
INVESTMENT ADVISORY SERVICES
The Adviser manages the assets of (a) each of the Intermediate Bond,
Select Equity and Strategic Allocation Funds and (b) each Portfolio, in each
case pursuant to an Investment Advisory Agreement (the "Advisory Agreement")
with a Trust or the Portfolio Series, as the case may be, with respect to each
such Fund or Portfolio, and subject to the investment policies described herein
and in the Prospectus for the Funds. Subject to such further policies as the
Boards of Trustees of the Trusts and the Portfolio Series may determine, the
Adviser provides general investment advice to each such Fund and each
Portfolio.
For the Intermediate Bond and Select Equity Funds and each Portfolio, the
Adviser has entered into an Investment Subadvisory Agreement (each a
"Subadvisory Agreement") with a Subadviser.
Each Advisory Agreement and Subadvisory Agreement provides that the
Adviser or a Subadviser, as the case may be, may render services to others.
Each agreement is terminable without penalty on not more than 60 days' nor less
than 30 days' written notice by the Fund or Portfolio when authorized either by
majority vote of the investors in the Fund or Portfolio (with the vote of each
being in proportion to the amount of its investment) or by a vote of a majority
of the Board of Trustees of the Trust or Portfolio Series, as the case may be,
or by the Adviser or a Subadviser on not more than 60 days' nor less than 30
days' written notice, as the case may be, and will automatically terminate in
the event of its assignment. Each agreement provides that neither the Adviser
nor Subadviser nor their personnel shall be liable for any error of judgment or
<PAGE>
mistake of law or for any loss arising out of any investment or for any act or
omission in the execution of security transactions for the Fund or Portfolio,
except for willful misfeasance, bad faith, gross negligence or reckless
disregard of its or their obligations and duties under the Advisory Agreement
and the Subadvisory Agreement, as the case may be.
The Adviser's and Subadviser's fees with respect to a Fund are described
in the Prospectus for the Fund.
Diversified is an investment firm dedicated to meeting the complete needs
of retirement plan sponsors and participants from pre- through post-retirement.
Diversified provides flexible, high-quality services coupled with the
employment of independent investment managers in an innovative investment
structure.
Diversified provides services with respect to [$10 billion] in retirement
plan assets and has offices in Boston, Charlotte, Chicago, Cincinnati, Dallas,
Houston, New Orleans, New York, Philadelphia, Portland and San Francisco. It
maintains recordkeeping for 400,000 participants and has 600 employees
dedicated to retirement plan investment and administration. Its employees
average more than seven years of retirement plan experience.
As experts in customizing retirement solutions, Diversified offers
comprehensive programs of high-quality investments and administrative services
to defined benefit, defined contribution and not-for-profit pension plan
sponsors. Diversified forms a partnership with its clients to provide
exceptional plan design, participant communication programs, recordkeeping
services and technical guidance. Diversified's investment structure provides
access to an array of complementary investment alternatives representing the
major asset classes along the risk/reward spectrum.
Subadvisers are selected from more than 2,000 independent firms. Through
a rigorous portfolio manager selection process which includes researching each
potential subadviser's asset class, track record, organizational structure,
management team, consistency of performance and assets under management, five
to ten potential subadvisers are chosen. Out of that group, Diversified then
carefully chooses the three most qualified potential subadvisers based on
performance evaluation, ownership structure, personnel and philosophy to return
for an on-site visit and a quantitative and qualitative analysis by the
investment committee. Out of those three potential subadvisers, Diversified
then hires the most qualified, independent subadviser for each Portfolio,
subject to approval by the Board of Trustees of the Portfolio Series, including
a majority of the Trustees who are not "interested persons" of the Portfolio
Series. With respect to the Intermediate Bond and Select Equity Funds only,
Diversified appointed Stephens Capital Management ("Stephens") as the
Subadviser in the context of a broad strategic alliance with Stephens through
which the Diversified Investors Trust makes available its Stephens Premium
Class shares and Stephens Institutional Class shares exclusively to customers
of Stephens. Pursuant to the requirements of the 1940 Act, the selection of
Stephens as the Subadviser to the Intermediate Bond and Select Equity Funds was
approved by the Board of Trustees of the Diversified Investors Trust, including
a majority of the Trustees who are not "interested persons" of the Diversified
Investors Trust, and the initial shareholder of each of the Intermediate Bond
and Select Equity Fund.
Each Subadviser's performance on behalf of a Fund or Portfolio is
carefully monitored by Diversified taking into consideration investment
objectives and policies and level of risk. Diversified brings comprehensive
monitoring and control to the investment management process. It seeks superior
portfolio management and moves purposefully in replacing managers when
warranted. From a plan sponsor's perspective, replacing a manager, and not the
investment fund, is a key advantage in avoiding the expense and difficulty of
re-enrolling participants or disrupting established plan administration.
Diversified, the Diversified Investors Trust and the Portfolio Series have
applied for an Exemptive Order from the Securities and Exchange Commission
<PAGE>
which would permit Diversified to obtain the services of one or more
subadvisers without investor or shareholder approval.
Highly disciplined manager evaluation on both a quantitative and
qualitative basis is an ongoing process. Diversified's Manager Monitoring Group
gathers and analyzes performance and Diversified's Investment Committee reviews
it. Performance attribution, risk/return ratios and purchase/sale assessments
are prepared monthly and, each quarter, a more comprehensive review is
completed which consists of manager visits, fundamental analysis and
statistical analysis. Extensive quarterly analysis is conducted to ensure that
the investment fund is being managed in line with the stated objectives.
Semiannually, the Investment Committee reviews the back-up manager selection,
regression analysis and universe comparisons.
A number of "red flags" signal a more extensive and frequent manager
review. These flags consist of a return inconsistent with the investment
objective, changes in subadviser leadership, ownership or portfolio managers,
large changes in assets under management and changes in philosophy or
discipline. The immediate response to any red flag is to assess the potential
impact on the manager's ability to meet investment objectives. Diversified
monitors "back-up" additional independent managers for each investment class so
that, should a manager change be warranted, the transition can be effected on a
timely basis.
For the fiscal year ended December 31, 1994, Diversified earned and
voluntarily waived advisory fees as indicated with respect to the following
Portfolios:
PORTFOLIO EARNED WAIVED
Money Market.................... $ 312,079 $29,141
High Quality Bond............... 607,967 20,204
Intermediate Government Bond.... 246,814 32,308
Government/Corporate Bond....... 776,654 10,376
Balanced........................ 443,372 38,936
Equity Income................... 2,470,354 2,000
Growth & Income................. 576,431 23,726
Equity Growth................... 629,874 31,377
Special Equity.................. 1,628,738 61,756
For the fiscal year ended December 31, 1995, Diversified earned and
voluntarily waived advisory fees as indicated with respect to the following
Portfolios:
PORTFOLIO EARNED WAIVED
Money Market.................... $ 391,657 $22,086
High Quality Bond............... 562,958 9,897
Intermediate Government Bond.... 286,019 44,808
Government/Corporate Bond....... 1,011,116 --
High-Yield Bond................. 11,146 11,146
Balanced........................ 639,345 51,146
Equity Income................... 2,878,308 --
Growth & Income................. 639,911 28,140
Equity Growth................... 1,272,213 --
Special Equity.................. 2,018,861 82,511
International Equity............ 143,910 6,191
<PAGE>
For the fiscal year ended December 31, 1996, Diversified earned and
voluntarily waived advisory fees as indicated with respect to the following
Portfolios:
PORTFOLIO EARNED WAIVED
Money Market.................... $ 445,832 $ 680
High Quality Bond............... 627,049 --
Intermediate Government Bond.... 340,989 27,685
Government/Corporate Bond....... 1,232,524 --
High-Yield Bond................. 60,742 60,742
Balanced........................ 995,489 --
Equity Income................... 3,895,211 --
Equity Value.................... 84,055 70,088
Growth & Income................. 1,052,349 39,117
Equity Growth................... 1,730,632 1,462
Special Equity................ 3,255,893 47,350
Aggressive Equity............. 95,060 57,964
International Equity.......... 799,760 69,256
For the fiscal year ended December 31, 1997, Diversified earned and
voluntarily waived advisory fees as indicated with respect to the following
Funds and Portfolios (the Short/Intermediate Horizon Strategic Allocation Fund
and the Long Horizon Strategic Allocation Fund are newly organized and had no
operations during that period):
PORTFOLIO EARNED WAIVED
Money Market........................
High Quality Bond...................
Intermediate Government Bond........
Intermediate Bond...................
Government/Corporate Bond...........
High-Yield Bond.....................
Balanced............................
Equity Income.......................
Equity Value........................
Growth & Income.....................
Equity Growth.......................
Special Equity......................
Select Equity.......................
Aggressive Equity...................
International Equity................
Short Horizon Strategic Allocation..
Intermediate Horizon Strategic
Allocation........................
Intermediate/Long Horizon
Strategic Allocation..............
ADMINISTRATOR
Diversified provides administrative services to the Strategic Allocation
Funds and the Portfolios under Advisory Agreements with each of the Strategic
Allocation Trust and the Portfolio Series, and to the other Funds under the
Administrative Services and Transfer Agency Services Agreement with Diversified
Investors Trust. These agreements are described in the Prospectuses for the
<PAGE>
Funds. Each such agreement provides that Diversified may render services to
others as administrator. In addition, each agreement terminates automatically
if it is assigned and may be terminated without penalty, in the case of the
Portfolio Series, by majority vote of the investors in the Portfolio Series
(with the vote of each being in proportion to the amount of its investment) or,
in the case of a Trust, by majority vote of such Trust's shareholders, or by
either party on not more than 60 days' nor less than 30 days' written notice.
Each agreement also provides that neither Diversified nor its personnel shall
be liable for any error of judgment or mistake of law or for any act or
omission in connection with administrative services provided to any Fund or
Portfolio, except for willful misfeasance, bad faith or gross negligence in the
performance of its or their duties or by reason of reckless disregard of its or
their duties or obligations under said agreements. Diversified acts as
Administrator to the Strategic Allocation Funds and the Portfolios pursuant to
the respective Advisory Agreements and receives no additional compensation for
providing such administrative services.
CUSTODIAN AND TRANSFER AGENT
Pursuant to the Administrative and Transfer Agency Services Agreement
with the Diversified Investors Trust and the Advisory Agreement with the
Strategic Allocation Trust, Diversified acts as transfer agent for each of the
Funds (the "Transfer Agent"). The Transfer Agent maintains an account for each
shareholder of a Fund, performs other transfer agency functions, and acts as
dividend disbursing agent for each Fund.
Pursuant to Custodian Agreements, Investors Bank & Trust Company acts as
the custodian of each Fund's and Portfolio's assets (the "Custodian"). The
Custodian's responsibilities include safeguarding and controlling the cash and
securities of each Fund and Portfolio, handling the receipt and delivery of
securities, determining income and collecting interest on the investments of
each Fund and Portfolio, maintaining books of original entry for portfolio
accounting and other required books and accounts, and calculating the daily net
asset value of beneficial interests in each Fund and Portfolio. Securities held
by the Funds or Portfolios may be deposited into the Federal Reserve-Treasury
Department Book Entry System or the Depository Trust Company and may be held by
a subcustodian bank if such arrangements are reviewed and approved by the Board
of Trustees of the applicable Trust or the Portfolio Series, as the case may
be. The Custodian does not determine the investment policies of the Funds or
Portfolios or decide which securities the Funds or Portfolios will buy or sell.
A Fund or Portfolio may, however, invest in securities of the Custodian and may
deal with the Custodian as principal in securities and foreign exchange
transactions. For its services, the Custodian will receive such compensation as
may from time to time be agreed upon by it and the Trusts and the Portfolio
Series.
TAXATION
Each Fund intends to qualify as a regulated investment company ("RIC")
for federal income tax purposes by meeting all applicable requirements of
Subchapter M of the Code, including requirements as to the nature of the Fund's
gross income, the amount of Fund distributions and the composition of the
Fund's portfolio assets. Because each Fund intends to distribute all of its net
investment income and net realized capital gains to its shareholders in
accordance with the timing requirements imposed by the Code, it is expected
that no Fund will be required to pay any entity level federal income or excise
taxes, although foreign-source income may be subject to foreign withholding
taxes. If a Fund should fail to qualify as a "regulated investment company" in
any year, the Fund will incur a regular corporate federal income tax upon its
taxable income (thereby reducing the return realized by Fund shareholders) and
Fund distributions would constitute ordinary corporate dividends when issued to
shareholders. However, Plans which hold the shares of a Fund on their
participants' behalf ("Qualified Investors") would not, in that event, incur
any income tax liability on such distributions provided such Plans remain
exempt from federal income tax. Similarily, the Strategic Allocation Funds, as
shareholders of the other Funds, would not necessarily incur any income tax
liability on such distributions provided they continue to qualify as
<PAGE>
"registered investment companies" and distribute their net investment income
and net capital gains to their shareholders in accordance with the timing
requirements imposed by the Code. The failure of the underlying Funds to
maintain their status as "regulated investment companies" may adversely affect
the ability of the Strategic Allocation Funds to maintain their status as such,
however.
Under interpretations of the Internal Revenue Service (1) each Portfolio
will be treated for federal income tax purposes as a partnership which is not a
publicly traded partnership and (2) for purposes of determining whether a Fund
satisfies requirements of Subchapter M of the Code, the Fund, if such Fund is
an investor in a Portfolio, will be deemed to own a proportionate share of that
Portfolio's assets and will be deemed to be entitled to that Portfolio's income
attributable to that share. The Portfolio Series has advised the Funds that it
intends to conduct the Portfolios' operations so as to enable investors which
invest substantially all of their assets in the Portfolios, including the
Funds, to satisfy those requirements.
DISTRIBUTIONS
Tax-qualified retirement plans ("Plans") which invest in any Fund
generally will not be subject to tax liability on either distributions from a
Fund or redemptions of shares of a Fund. Rather, participants are taxed when
they take distributions from the underlying Plan in accordance with the rules
under the Code governing the taxation of such distributions. Plans which are
otherwise generally exempt from federal taxation of their income might
nevertheless be taxed on distributions of the Fund, and any gain realized on
redemption of Fund shares, where the Plan is subject to the unrelated business
taxable income provisions of the Code with respect to its investment in the
Fund because, e.g., its acquisition of shares in the Fund was financed with
debt.
Individual and institutional investors, and Plans which for any reason
prove not to be exempt from federal income taxation, will be subject to tax on
distributions received from the Fund irrespective of the fact that such
distributions are reinvested in additional shares. Distributions to such
investors, other than of net capital gains, will be taxable as ordinary income;
distributions of net capital gains would be taxable to such investors as
long-term capital gain without regard to the length of time they have held the
shares in the Fund. Such capital gains will generally be taxable to such
investors as if the investors had directly realized gains from the same sources
from which they were realized by the Fund. A portion of the dividends received
from a Fund investing in corporate stocks (but none of that Fund's capital gain
distributions) may qualify for the dividends-received deduction for
corporations. Availability of the deduction for particular corporate
shareholders is subject to certain limitations, and deducted amounts may be
subject to the alternative minimum tax and may result in certain basis
adjustments. Certain dividends declared in October, November or December of a
calendar year and paid to an investor who is subject to tax on the distribution
in January of the succeeding calendar year are taxable to such investor as if
paid on December 31 of the year in which they were declared. Fund distributions
will reduce a Fund's net asset value per share. Shareholders who buy shares
shortly before a Fund makes a distribution may thus pay the full price for the
shares and then effectively receive a portion of the purchase price back as a
distribution, subject to tax in the case of investors otherwise subject to
income taxation.
Distributions and certain other payments to persons who are not citizens
or residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. Each Fund intends
to withhold U.S. federal income tax at the rate of 30% on taxable distributions
and other payments to Non-U.S. Persons that are subject to withholding,
regardless of whether a lower rate may be permitted under an applicable treaty.
Any amounts overwithheld may be recovered by such persons by filing a claim for
refund with the U.S. Internal Revenue Service within the time period
<PAGE>
appropriate to such claims. Distributions received from a Fund by Non-U.S.
Persons may also be subject to tax under the laws of their own jurisdictions.
Each Fund is also required in certain circumstances to apply backup withholding
at the rate of 31% on taxable distributions and redemption proceeds paid to any
shareholder (including a non-U.S. Person) who does not furnish to the Fund
certain information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding.
SALE OF SHARES
Any gain or loss realized by a shareholder subject to federal income tax
upon the sale or other disposition of shares of a Fund, or upon receipt of a
distribution in complete liquidation of a Fund, generally will be a capital
gain or loss that will be long-term or short-term depending upon the
shareholder's holding period for the shares and, if held as a capital asset by
an individual, estate or trust, may qualify for reduced tax rates if such
holding period exceeded eighteen months. Any loss realized on a sale or
exchange of a Fund's shares by such a shareholder will be disallowed to the
extent the shares disposed of are replaced (including by shares acquired
pursuant to reinvested distribution) within a period of 61 days beginning 30
days before and ending 30 days after the disposition. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss. Any
loss realized by such a shareholder on a disposition of a Fund's shares held
for six months or less will be treated as a long-term capital loss to the
extent of any distributions of net capital gain received by the shareholder
with respect to such shares.
FOREIGN SHAREHOLDERS
The tax consequences to a foreign shareholder of an investment in a Fund
may be different from those described herein. Foreign shareholders are advised
to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in a Fund.
TAXATION OF THE PORTFOLIO SERIES
The Portfolio Series, if treated for tax purposes as a partnership, would
not be subject to federal income taxation. Instead, a Fund would take into
account, in computing its federal income tax liability, its share of the
Portfolio Series' income, gains, losses, deductions, credits and tax preference
items, without regard to whether it has received any cash distributions from
the Portfolio Series.
Withdrawals by a Fund from a Portfolio generally will not result in such
Fund recognizing any gain or loss for federal income tax purposes, except that
(1) gain will be recognized to the extent that any cash distributed exceeds the
basis of a Fund's interest in its Portfolio prior to the distribution, (2)
income or gain will be realized if the withdrawal is in liquidation of a Fund's
entire interest in the Portfolio Series and includes a disproportionate share
of any unrealized receivables held by the Portfolio Series, and (3) loss will
be recognized if the distribution is in liquidation of that entire interest and
consists solely of cash and/or unrealized receivables. The basis of a Fund's
interest in the Portfolio Series generally equals the amount of cash and the
basis of any property that the Fund invests in a Portfolio, increased by the
Fund's share of income from that Portfolio and decreased by the amount of any
cash distributions and the basis of any property distributed from that
Portfolio.
FOREIGN WITHHOLDING TAXES
Income received by a Fund or Portfolio from sources within foreign
countries may be subject to withholding and other taxes imposed by such
<PAGE>
countries; it is not expected that the Portfolios or the Funds will be able to
"pass through" to the Fund shareholders subject to tax any foreign tax credits
with respect to these taxes.
Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. It is impossible to determine the effective
rate of foreign tax in advance since the amount of assets to be invested in
various countries will vary.
EFFECTS OF CERTAIN INVESTMENTS AND INVESTMENT POLICIES
A Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders
otherwise subject to taxation. Any investment in zero coupon securities,
deferred interest bonds, payment-in-kind bonds, certain stripped securities,
and certain securities purchased at a market discount will cause a Fund to
recognize income prior to the receipt of cash payments with respect to those
securities. In order to distribute this income and avoid a tax on the Fund, a
Portfolio may be required to liquidate portfolio securities that it might
otherwise have continued to hold, potentially resulting in additional taxable
gain or loss to the Fund.
A Fund's transactions in options, futures contracts and forward contracts
will be subject to special tax rules that may affect the amount, timing and
character of Fund income and distributions to shareholders. For example,
certain positions held by a Fund on the last business day of each taxable year
will be marked to market (i.e., treated as if closed out) on that day, and any
gain or loss associated with the positions will be treated as 60% long-term and
40% short-term capital gain or loss. Certain positions held by a Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in options, futures contracts, and
forward contracts to the extent necessary to meet the requirements of
Subchapter M of the Code. As a result, however, a Portfolio may be forced to
defer the closing out of certain options and futures contracts beyond the time
when it otherwise would be advantageous to do so.
Special tax considerations apply with respect to foreign investments of a
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and loss. The holding of foreign currencies for
nonhedging purposes and investment by a Fund in certain "passive foreign
investment companies" may be limited in order to avoid a tax on the Fund. A
Fund may elect to mark to market any investments in "passive foreign investment
companies" on the last day of each year. This election may cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
investments: In order to distribute this income and avoid a tax on the Fund,
the Fund may be required to liquidate portfolio securities that it might
otherwise have continued to hold.
OTHER TAXATION
The Trusts are organized as Massachusetts business trusts and, under
current law, neither any Trust nor any Fund is liable for any income or
franchise tax in the Commonwealth of Massachusetts, provided that each Fund
continues to qualify as a RIC for federal income tax purposes.
The Portfolio Series is organized as a New York trust. The Portfolio
Series is not subject to any income or franchise tax in the State of New York
or, so long as it is treated as a partnership (not taxable as a publicly traded
<PAGE>
partnership) for federal income tax purposes, the Commonwealth of
Massachusetts. The investment by certain Funds in a Portfolio does not cause
that Fund to be liable for any income or franchise tax in the State of New
York.
Distributions of a Fund that are derived from interest on obligations of
the U.S. Government and certain of its agencies and instrumentalities (but
generally not from capital gains realized upon the disposition of such
obligations) may be exempt from state and local taxes. Each Fund intends to
advise shareholders of the extent, if any, to which its distributions consist
of such interest.
Shareholders of the Funds may be subject to state and local taxes on a
Fund's distributions to them. Shareholders are advised to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in a Fund.
DISTRIBUTION PLAN
The Diversified Investors Trust has adopted a separate Distribution Plan
with respect to each class of shares of each of the Money Market, Bond,
Balanced and Stock Funds (each a "Distribution Plan") in accordance with Rule
12b-1 under the 1940 Act after having concluded that there is a reasonable
likelihood that each Distribution Plan will benefit the Diversified Investors
Trust, the class of shares of each Fund covered by that Distribution Plan, and
the holders of shares of each such class. The Distribution Plans provide that
the Distributor may receive a fee from each of the Money Market, Bond, Balanced
and Stock Funds at an annual rate not to exceed 0.25% of the average daily net
assets of such Fund attributable to Diversified Class shares, 0.25% of the
average daily net assets of such Fund attributable to Stephens Premium Class
shares, and 0.25% of the average daily net assets of such Fund attributable to
Stephens Institutional Class shares, in anticipation of, or as reimbursement
for, expenses incurred in connection with the sale of shares of such Fund, such
as advertising expenses and the expenses of printing (excluding typesetting)
and distributing Prospectuses and reports used for sales purposes, expenses of
preparing and printing of sales literature and other distribution-related
expenses.
Each Distribution Plan will continue in effect if such continuance is
specifically approved at least annually by a vote of both a majority of the
Diversified Investors Trust's Trustees and a majority of the Diversified
Investors Trust's Trustees who are not "interested persons" of the Trust and
who have no direct or indirect financial interest in the operation of the
Distribution Plan or in any agreement related to such Plan ("Qualified
Trustees"). Each Distribution Plan requires that at least quarterly the
Diversified Investors Trust and the Distributor shall provide to the Board of
Trustees and the Board of Trustees shall review a written report of the amounts
expended (and the purposes therefor) under the Distribution Plan. Each
Distribution Plan further provides that the selection and nomination of the
Diversified Investors Trust's disinterested Trustees shall be committed to the
discretion of the Trust's disinterested Trustees then in office. Each
Distribution Plan may be terminated at any time by a vote of a majority of the
Diversified Investors Trust's Qualified Trustees or by vote of a majority of
the outstanding voting securities of the applicable class of shares. Each
Distribution Plan may not be amended to increase materially the amount of
permitted expenses thereunder without the approval of a majority of the
outstanding voting securities of the applicable class and may not be materially
amended in any case without a vote of the majority of both the Trustees and the
Qualified Trustees. The Distributor will preserve copies of any plan, agreement
or report made pursuant to each Distribution Plan for a period of not less than
six years from the date of such plan, agreement, or report, and for the first
two years the Distributor will preserve such copies in an easily accessible
place.
As contemplated by each Distribution Plan, Diversified Investors
Securities Corp. acts as the agent of each of the Money Market, Bond, Balanced
and Stock Funds in connection with the offering of shares of such Funds
pursuant to a separate Distribution Agreement with respect to each class of
<PAGE>
shares (each a "Distribution Agreement"). After the Prospectuses and periodic
reports have been prepared, set in type and mailed to existing shareholders,
the Distributor pays for the printing and distribution of copies of the
Prospectuses and periodic reports which are used in connection with the
offering of shares of such Funds to prospective investors. Each Prospectus
contains a description of fees payable to the Distributor under the
Distribution Agreement with respect to the class(es) of shares offered pursuant
to that Prospectus.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as the Funds' and the Portfolios'
independent accountants providing audit and accounting services including (a)
audit of the annual financial statements, (b) assistance and consultation with
respect to the preparation of filings with the SEC and (c) preparation of
annual income tax returns.
DESCRIPTION OF THE TRUST; FUND SHARES
The Diversified Investors Trust is a Massachusetts business trust
established under a Declaration of Trust dated as of April 23, 1993. The
Strategic Investors Trust is a Massachusetts business trust established under a
Declaration of Trust dated as of January 5, 1996. The authorized capital of
each Trust consists of an unlimited number of shares of beneficial interest of
$0.00001 par value which may be issued in separate series. Currently, the
Diversified Investors Trust has fifteen active series and the Strategic
Allocation Trust has five active series, although additional series may be
established from time to time Each Trust may also establish classes of shares
within each series at any time. Each share of a series represents an equal
proportionate interest in that series with each other share of that series,
except that due to varying expenses borne by different classes, distributions
may be different for different classes. Shareholders of each series are
entitled, upon liquidation or dissolution, to a pro rata share in the net
assets of that series that are available for distribution to shareholders,
except to the extent of different expenses borne by different classes as noted
above. All consideration received by a Trust for shares of any series and all
assets in which such consideration is invested belong to that series and are
subject to the liabilities related thereto.
Shares of each Trust entitle their holder to one vote per share; however,
separate votes are taken by each class or series on matters affecting an
individual class or series. For example, a change in the distribution fee
applicable to a class would be voted only by shareholders of the class
involved. Similarly, a change in investment policy for a series would be voted
upon only by shareholders of the series involved.
On matters submitted by any underlying Fund for the consideration of any
Strategic Allocation Fund, the Strategic Allocation Fund will vote its shares
in proportion to the vote of all of the shares of that underlying Fund.
The Declaration of Trust of each Trust provides that obligations of the
Trust are not binding upon the Trustees individually but only upon the property
of the Trust, that the Trustees and officers will not be liable for errors of
judgment or mistakes of fact or law, and that the Trust will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Trust unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
unless with respect to any other matter it is finally adjudicated that they did
not act in good faith in the reasonable belief that their actions were in the
best interests of the Trust. In the case of settlement, such indemnification
will not be provided unless it has been determined by a court or other body
approving the settlement or other disposition, or by a reasonable
determination, based upon a review of readily available facts, by vote of a
majority of disinterested Trustees or in a written opinion of independent
<PAGE>
counsel, that such officers or Trustees have not engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of their duties.
Under Massachusetts law, shareholders of a Massachusetts business trust
may, under certain circumstances, be held personally liable as partners for its
obligations and liabilities. However, the Declaration of Trust of each Trust
contains an express disclaimer of shareholder liability for acts or obligations
of each Fund and provides for indemnification and reimbursement of expenses out
of Fund property for any shareholder held personally liable for the obligations
of a particular Fund. The Declaration of Trust of each Trust also provides for
the maintenance, by or on behalf of the Trust and the Funds, of appropriate
insurance (for example, fidelity bonding and errors and omissions insurance)
for the protection of the Funds, their shareholders, Trustees, officers,
employees and agents covering possible tort and other liabilities. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which both inadequate insurance
existed and a Fund itself was unable to meet its obligations.
EXPERTS
The financial statements incorporated herein have been so included in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of said firm as experts in auditing and accounting.
FINANCIAL STATEMENTS
The financial statements of the Trusts and the Portfolio Series as of
December 31, 1997 have been filed with the Securities and Exchange Commission
as part of the Funds' annual reports, pursuant to Section 30(b) of the 1940 Act
and Rule 30b2-1 thereunder, and are hereby incorporated herein by reference
from such reports. Copies of such reports will be provided without charge to
each person receiving this Statement of Additional Information.
[To be added by amendment.]
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITY RATINGS
STANDARD & POOR'S
Corporate and Municipal Bonds
AAA--An obligation rated AAA has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA--An obligation rated AA differs from the highest rated obligations
only in a small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
A--An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB--An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB--An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
Plus (+) or minus (-)--The ratings from AA to BB may be modified by the
addition of a plus or minus sign to show relative standing within the major
ratings categories.
Commercial Paper, including Tax Exempt
A-1--A short-term obligation rated A-1 is rated in the highest category
by Standard & Poor's. The obligor's capacity to meet its financial commitment
on the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2--A short-term obligation rated A-2 is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
A-3--A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
MOODY'S
Corporate and Municipal Bonds
AAA--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
<PAGE>
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
A--Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
BAA--Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA--Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
Commercial Paper
PRIME-1--Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
<PAGE>
Investment Adviser of certain Funds
and the Portfolios, Administrator
and Transfer Agent
Diversified Investment Advisors, Inc.
Four Manhattanville Road
Purchase, NY 10577
Investment Subadvisers of the Funds
Stephens Intermediate Bond Fund
and Stephens Select Equity Fund
Stephens Capital Management
111 Center Street
Little Rock, Arkansas 72201
Investment Subadvisers of the Portfolios
Diversified Investors Money Market Fund,
Diversified Investors Intermediate Government
Bond Portfolio and Diversified Investors
Government/Corporate Bond Portfolio:
Capital Management Group
1740 Broadway
New York, NY 10019
Diversified Investors High Quality Bond Portfolio:
Merganser Capital Management Corporation
One Cambridge Center
Cambridge, MA 02142
Diversified Investors High-Yield Bond Portfolio:
Delaware Investment Advisers
2005 Market Street
Philadelphia, Pennsylvania 19103
Diversified Investors Balanced Portfolio:
Institutional Capital Corporation
303 West Madison Street
Chicago, IL 60606
Diversified Investors Equity Income Portfolio:
Asset Management Group
1740 Broadway
New York, NY 10019
Diversified Investors Equity Value Portfolio:
ARK Asset Management Co., Inc.
55 Water Street
New York, NY 10041
<PAGE>
Diversified Investors Growth & Income Portfolio:
Putnam Advisory Company, Inc.
One Post Office Square
Boston, MA 02109
Diversified Investors Equity Growth Portfolio:
Dresdner RCM Global Investors, LLC
Four Embarcadero Center
San Francisco, CA 94111
Montag & Caldwell, Inc.
3343 Peachtree Road, N.E., Suite 1100
Atlanta, Georgia 30326
Diversified Investors Special Equity Portfolio:
Pilgrim Baxter & Associates
1255 Drummers Lane
Wayne, PA 19087
ARK Management Co., Inc.
One New York Plaza
New York, NY 10004
Liberty Investment Management
2502 Rocky Point Drive
Tampa, FL 33607
Westport Asset Management, Inc.
53 Riverside Avenue
Westport, CT 06880
Diversified Investors Aggressive Equity Portfolio:
McKinley Capital Management, Inc.
3301 C Street
Anchorage, AK 99503
Diversified Investors International Equity Portfolio:
Capital Guardian Trust Company
333 South Hope Street
Los Angeles, CA 90071
Distributor
Diversified Investors Securities Corp.
Four Manhattanville Road
Purchase, NY 10577
Custodian
Investors Bank & Trust Company
89 South Street
Boston, MA 02205-1537
<PAGE>
Independent Accountants
Coopers & Lybrand L.L.P.
1301 Avenue of the Americas
New York, New York 10019
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
The financial statements included in Part A are as follows:
Not Applicable.
The financial statements incorporated by reference into Part B are as
follows:
THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
Not Applicable.
THE DIVERSIFIED INVESTORS FUNDS GROUP
Not Applicable.
DIVERSIFIED INVESTORS PORTFOLIOS
Not Applicable.
(b) Exhibits:
1A. Declaration of Trust of the Registrant. (1)
1B. Amended and Restated Establishment and Designation of Series of
Shares of Beneficial Interest.
2. By-Laws of the Registrant. (1)
5. Investment Advisory Agreement between the Registrant and Diversified
Investment Advisors, Inc. ("Diversified"). (2)
6. Distribution Agreement between the Registrant and Diversified
Investors Securities Corp. ("DISC"). (2)
8. Custodian Agreement between the Registrant and Investors Bank &
Trust Company. (2)
9. Administrative and Transfer Agency Services Agreement between the
Registrant and Diversified. (2)
10. Opinion of Counsel. (2)
11. Consent of Independent Auditors. (**)
13. Investor Representation Letter of Initial Shareholder. (2)
16. Schedule for computation of performance quotations. (2)
<PAGE>
17. Financial Data Schedules. (**)
19. Powers of Attorney. (3)
- --------------------------
(1) Incorporated herein by reference from the Registrant's Registration
Statement (the "Registration Statement") on Form N-1A (File No. 33-61810)
as filed with the U.S. Securities and Exchange Commission (the
"Commission") on January 19, 1996.
(2) Incorporated herein by reference from Pre-Effective Amendment No. 1 to
the Registration Statement as filed with the Commission on May 3, 1996.
(3) Incorporated herein by reference from Post-Effective Amendment No. 1 to
the Registration Statement as filed with the Commission on April 28,
1997.
(**) To be filed by amendment.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT.
See "Management" in the Statement of Additional Information filed as part
of this Registration Statement.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
NUMBER OF RECORD
HOLDERS AS OF
TITLE OF CLASS DECEMBER 31, 1997
Short Horizon Strategic Allocation Fund 75
Intermediate Horizon Strategic Allocation Fund 88
Intermediate/Long Strategic Allocation Fund 93
ITEM 27. INDEMNIFICATION.
Reference is made to Article V of the Registrant's Declaration of Trust,
filed as an Exhibit herewith.
Insofar as indemnification for liability arising under the Securities Act
of 1933, as amended (the "1933 Act"), may be permitted to Trustees, officers
and controlling persons of the Trust pursuant to the Trust's Declaration of
Trust, or otherwise, the Trust has been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in the 1933 Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Trust of expenses
incurred or paid by a Trustee, officer or controlling person of the Trust in
the successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Trust will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Diversified Investment Advisors, Inc. ("Diversified") is an indirect,
wholly-owned subsidiary of AEGON USA, Inc., a financial services holding
<PAGE>
company whose primary emphasis is life and health insurance and annuity and
investment products. AEGON is an indirect, wholly-owned subsidiary of AEGON nv,
a Netherlands corporation which is a publicly traded international insurance
group.
Information as to the name, address and principal business of the directors
and executive officers of Diversified is included in its Form ADV as filed with
the Commission, and such information is hereby incorporated herein by reference
from such Form ADV.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Diversified Investors Securities Corp. is the principal underwriter
(the "Distributor") of the Registrant. The Distributor also serves as principal
underwriter for the Diversified Investors Funds Group and as the exclusive
placement agent for Diversified Investors Portfolios.
(b) The names, titles and principal business addresses of the officers
and directors of the Distributor are as stated on Form U-4 filed by each
individual officer and on Form BD including Schedule A thereof (File No.
8-45671), the text of which is hereby incorporated herein by reference.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Diversified Investment Advisors, Inc.
4 Manhattanville Road
Purchase, New York 10577
(administrator and transfer agent)
Diversified Investors Securities Corp.
4 Manhattanville Road
Purchase, New York 10577
(distributor)
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02205-1537
(custodian)
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
(a) The Registrant hereby undertakes to file a post-effective amendment
to this Registration Statement containing reasonably current financial
statements for each of the Short/Intermediate Horizon Strategic Allocation Fund
and the Long Horizon Strategic Allocation Fund which need not be certified,
within four to six months following the date shares of each of the
Short/Intermediate Horizon Strategic Allocation Fund and Long Horizon Strategic
Allocation Fund are sold to the public or operations for such Funds otherwise
begin.
(b) The Registrant undertakes to comply with Section 16(c) of the 1940
Act as though such provisions of the 1940 Act were applicable to the
<PAGE>
Registrant, except that the request referred to in the third full paragraph
thereof may only be made by shareholders who hold in the aggregate at least 10%
of the outstanding shares of the Registrant, regardless of the net asset value
of shares held by such requesting shareholders.
(c) If the information called for by Item 5A of Form N-1A is contained in
the latest annual report to shareholders, the Registrant will furnish each
person to whom a Part A is delivered with a copy of the Registrant's latest
annual report to shareholders upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the County of Westchester and
the State of New York, on the 13th day of February, 1998.
THE DIVERSIFIED INVESTORS
STRATEGIC ALLOCATION FUNDS
By: /s/ Tom A. Schlossberg
-----------------------------
Tom A. Schlossberg
Trustee, President,
Chief Executive Officer and Chairman
of the Board of Trustees
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated on February 13, 1998.
SIGNATURES TITLE
/s/ Tom A. Schlossberg
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Tom A. Schlossberg Trustee
*/s/ Donald E. Flynn
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Donald E. Flynn Trustee
*/s/ Robert L. Lindsay
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Robert L. Lindsay Trustee
*/s/ Nikhil Malvania
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Nikhil Malvania Trustee
*/s/ Joyce Galpern Norden
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Joyce Galpern Norden Trustee
/s/ Alfred C. Sylvain
- -----------------------------
Alfred C. Sylvain Treasurer, Chief Financial Officer
and Principal Accounting Officer
*By: /s/ Robert F. Colby
------------------------
Robert F. Colby
Attorney-in-fact pursuant to powers of attorney previously filed
<PAGE>
EXHIBIT LIST
EXHIBIT NO. DESCRIPTION
1B. Amended and Restated Establishment of Series of Shares of
Beneficial Interest.
<PAGE>
EXHIBIT 1B
THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
AMENDED AND RESTATED
ESTABLISHMENT AND DESIGNATION OF SERIES OF
SHARES OF BENEFICIAL INTEREST (PAR VALUE $0.00001 PER SHARE)
Pursuant to Section 6.9 of the Declaration of Trust, dated as of January
5, 1996, as amended (the "Declaration of Trust"), of The Diversified Investors
Strategic Allocation Funds (the "Trust"), the undersigned, being a majority of
the Trustees of the Trust, do hereby amend and restate the Trust's existing
Establishment and Designation of Series of Shares of Beneficial Interests (par
value $0.00001 per share) in order to change the names of three series of
Shares (as defined in the Declaration of Trust) which were previously
established and designated and to establish and designate two additional series
of Shares. No other changes to the special and relative rights of the existing
series are intended by this amendment and restatement. This amendment and
restatement shall become effective on the date set forth below.
1. The series shall be as follows:
The series previously designated as Diversified Investors Conservative
Strategic Allocation Fund shall be redesignated as "Short Horizon
Strategic Allocation Fund".
The series previously designated as Diversified Investors Moderate
Strategic Allocation Fund shall be redesignated as "Intermediate
Horizon Strategic Allocation Fund".
Theseries previously designated as Diversified Investors Aggressive
Strategic Allocation redesigned as "Intermediate/Long Horizon
Strategic Allocation Fund".
The two additional series shall be designated as follows:
Short/Intermediate Horizon Strategic Allocation Fund
Long Horizon Strategic Allocation Fund
2. Each series shall be authorized to hold cash, invest in securities,
instruments and other property and use investment techniques as from time to
time described in the Trust's then currently effective registration statement
under the Securities Act of 1933, to the extent pertaining to the offering of
Shares of each series. Each Share of each series shall be entitled to one vote
(or fraction thereof in respect of a fractional share) on matters on which
shares of that series shall be entitled to vote, shall represent a pro rata
beneficial interest in the assets allocated or belonging to such series, and
<PAGE>
shall be entitled to receive its pro rata share of the net assets of such
series upon liquidation of such series, all as provided in Section 6.9 of the
Declaration of Trust. The proceeds of sales of Shares of a series, together
with any income and gain thereon, less any diminution or expenses thereof,
shall irrevocably belong to that series, unless otherwise required by law.
3. Shareholders in each series shall vote separately as a class on any
matter to the extent required by, and any matter shall have been deemed
effectively acted upon with respect to such series as provided in, Rule 18f-2,
as from time to time in effect, under the Investment Company Act of 1940, as
amended, or any successor rule, and the Declaration of Trust.
4. The assets and liabilities of the Trust shall be allocated to each series
as set forth in Section 6.9 of the Declaration of Trust.
5. Subject to the provisions of Section 6.9 and Article IX of the
Declaration of Trust, the Trustees (including any successor Trustees) shall
have the right at any time and from time to time to change the designation of
any series now or hereafter created, or to otherwise change the special and
relative rights of any series.
IN WITNESS WHEREOF, the undersigned have executed this Establishment and
Designation of Series this 10th day of February, 1998.
/s/ Tom Schlossberg /s/ Donald E. Flynn
- ------------------------- -------------------------
TOM SCHLOSSBERG DONALD E. FLYNN
As Trustee and Not Individually As Trustee and Not Individually
/s/ Robert L. Lindsay /s/ Nikhil Malvania
- ------------------------- -------------------------
ROBERT L. LINDSAY NIKHIL MALVANIA
As Trustee and Not Individually As Trustee and Not Individually
/s/ Joyce Galpern Norden
- ------------------------
JOYCE GALPERN NORDEN
As Trustee and Not Individually
