<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 2, 2000
FILE NOS. 333-00295
811-07495
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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. 6 [X]
AND
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 7 [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)
(914) 697-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
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 on May 1, 2000
pursuant to paragraph (a) of Rule 485.
------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
Prospectus
THE DIVERSIFIED INVESTORS FUNDS GROUP
THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
Diversified Investment Advisors, Inc.,
investment adviser
MONEY MARKET FUND
Diversified Investors Money Market Fund
BOND FUNDS
Diversified Investors High Quality Bond Fund
Diversified Investors Intermediate Government Bond Fund
Diversified Investors Core Bond Fund
Diversified Investors High-Yield Bond Fund
BALANCED FUND
Diversified Investors Balanced Fund
STOCK FUNDS
Diversified Investors Stock Index Fund
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
The mutual funds described in this prospectus are designed to meet a variety of
investment goals. The Funds employ a wide range of stock and bond strategies
covering the full risk/reward spectrum. You may choose to allocate your
investment among the Stock, Bond and Money Market Funds, which each invest in
securities through an underlying mutual fund, or you may choose to invest in a
Strategic Allocation Fund. The Strategic Allocation Funds invest in combinations
of the other Funds determined by Diversified Investment Advisors. No Fund, by
itself, is a complete investment program.
The Securities and Exchange Commission has
not approved or disapproved these securities
or passed upon the adequacy or accuracy of this prospectus,
and any representation to the contrary
is a criminal offense.
May 1, 2000
<PAGE> 3
(This page intentionally left blank.)
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Funds at a Glance....................................... 2
Money Market Fund...................................... 2
Bond Funds............................................. 5
Balanced Fund.......................................... 13
Stock Funds............................................ 17
Strategic Allocation Funds............................. 31
Shareholder Services........................................ 41
How to Reach the Funds................................. 41
How to Purchase Shares................................. 41
How the Price of Your Shares is Calculated............. 42
How to Sell Shares..................................... 42
Shareholder Services and Policies...................... 43
Dividends and Distributions................................. 44
Tax Matters................................................. 44
Management.................................................. 45
More About the Funds........................................ 49
Money Market Fund...................................... 50
Bond Funds............................................. 51
Balanced Fund.......................................... 53
Stock Funds............................................ 54
Strategic Allocation Funds............................. 57
Risks.................................................. 57
General Information......................................... 60
Additional Performance Information.......................... 61
Financial Highlights........................................ 64
Appendix A -- Strategic Allocation Funds.................... A-1
Appendix B -- Instructions for Purchases and Sales from the
Distributor............................................... B-1
Appendix C -- Composite Performance of Subadvisers.......... C-1
</TABLE>
<PAGE> 5
-2-
THE FUNDS AT A GLANCE
MONEY MARKET FUND
DIVERSIFIED INVESTORS MONEY MARKET FUND
THIS SUMMARY BRIEFLY DESCRIBES THE MONEY MARKET FUND AND THE PRINCIPAL RISKS OF
INVESTING IN IT.
FUND GOAL
The Fund's goal is to provide liquidity and as high a level of income as is
consistent with the preservation of capital.
MAIN INVESTMENT STRATEGIES
The Fund invests primarily in high quality, short-term money market instruments.
These instruments include short-term U.S. government obligations, corporate
bonds and notes, bank obligations (such as certificates of deposit and bankers'
acceptances), commercial paper and repurchase agreements. The Fund may invest
more than 25% of its total assets in obligations of U.S. banks.
The Fund invests in securities through an underlying mutual fund (called a
Portfolio) having the same investment goals and strategies. All references in
this prospectus to the Fund include the Fund's underlying Portfolio, unless
otherwise noted.
MAIN RISKS
The value of the Fund's shares will change under certain circumstances. This
means that your Fund shares may be worth more or less when you sell them than
when you bought them. You may lose money if you invest in the Fund.
- The Fund's rate of income will vary from day to day depending on
short-term interest rates. Investing in high quality, short-term
instruments may result in a lower yield (the income on your investment)
than investing in lower quality or longer-term instruments.
- The Fund does not maintain a stable net asset value of $1.00 per share
and does not declare dividends on a daily basis (many money market funds
do). Undeclared investment income, or a default on a portfolio security,
may cause the Fund's net asset value to fluctuate.
- If the Fund concentrates in U.S. bank obligations, the Fund will be
particularly sensitive to adverse events affecting U.S. banks. Banks are
sensitive to changes in money market and general economic conditions, as
well as decisions by regulators that can affect banks' profitability.
Please note that an investment in the Fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
WHO MAY WANT TO INVEST
Consider investing in the Money Market Fund if you are a conservative investor
who is seeking liquidity and preservation of capital. Because the Fund
emphasizes stability, it may be an appropriate component of a savings plan.
<PAGE> 6
-3-
FUND PERFORMANCE
The following bar chart and tables can help you evaluate the risks of investing
in the Fund, and how the Fund's returns have varied over time.
- The bar chart shows changes in the Fund's performance from year to year
over the last six calendar years.
- The tables show the Fund's best and worst quarters during the years
covered by the bar chart, and how the Fund's average annual returns for
the periods indicated compare to those of a broad measure of market
performance. Please remember that, unlike the Fund, the market index
does not include the costs of buying and selling securities and other
Fund expenses.
When you consider this information, please remember that the Fund's past
performance is not necessarily an indication of how it will perform in the
future.
TOTAL RETURN
(per calendar year)
1994 1995 1996 1997 1998 1999
[Diversified Investors Money Market Fund Bar Graph]
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS MONEY MARKET FUND
---------------------------------------
<S> <C>
'1994' 3.45
'1995' 5.50
'1996' 4.87
'1997' 4.98
'1998' 4.91
'1999' 4.66
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
- -----------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
(for calendar quarters covered by the bar chart)
- -----------------------------------------------------------------
Quarter Ending
- -----------------------------------------------------------------
Highest 1.78% June 30, 1995
- -----------------------------------------------------------------
Lowest 0.56% March 31, 1994
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- -----------------------------------------------------------------------------------
Since Inception
1 Year 5 Year January 1, 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund 4.66% 4.98% 4.73%
- -----------------------------------------------------------------------------------
Salomon Bros.
3-Month T-Bill
Index 4.73% 5.20% 5.04%
- -----------------------------------------------------------------------------------
</TABLE>
<PAGE> 7
-4-
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF THE MONEY MARKET FUND.
<TABLE>
<S> <C>
--------------------------------------------------------------------------------
SHAREHOLDER FEES (fees paid directly from your investment)
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on Purchases None
--------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) None
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
--------------------------------------------------------------------------------
Redemption Fee None
--------------------------------------------------------------------------------
Exchange Fee None
--------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets) as a % of average net assets(1)
--------------------------------------------------------------------------------
Advisory Fee .25%
--------------------------------------------------------------------------------
Distribution (12b-1) Fees .25%
--------------------------------------------------------------------------------
Other Expenses
--------------------------------------------------------------------------------
Administrative Services Fee .30%
--------------------------------------------------------------------------------
Miscellaneous Expenses .08%
--------------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES .88%
--------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(2) .08%
--------------------------------------------------------------------------------
NET EXPENSES .80%
--------------------------------------------------------------------------------
</TABLE>
(1) The Fund invests in securities through an underlying mutual fund. This
table and the example below reflect the expenses of the Fund and that
underlying fund.
(2) The Adviser has contractually agreed to reimburse certain of the Fund's
expenses.
EXAMPLE
This example is intended to help you compare the cost of investing in the Money
Market Fund to the cost of investing in other mutual funds. The example assumes
that:
- you invest $10,000 in the Fund for the time periods indicated; and
- you then sell all your shares at the end of those periods.
The example also assumes that:
- your investment has a 5% return each year; and
- the Fund's operating expenses shown in the table above, after fee
waivers and reimbursements, remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- -----------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------------------------------------
$82 $255 $444 $990
- -----------------------------------------------------------------------
</TABLE>
<PAGE> 8
-5-
BOND FUNDS
DIVERSIFIED INVESTORS HIGH QUALITY BOND FUND
DIVERSIFIED INVESTORS INTERMEDIATE GOVERNMENT BOND FUND
DIVERSIFIED INVESTORS CORE BOND FUND
DIVERSIFIED INVESTORS HIGH-YIELD BOND FUND
THIS SUMMARY BRIEFLY DESCRIBES THE BOND FUNDS AND THE PRINCIPAL RISKS OF
INVESTING IN THEM.
FUND GOALS
HIGH QUALITY BOND FUND The Fund's goal is to provide a high
risk-adjusted return while focusing on the
preservation of capital.
INTERMEDIATE GOVERNMENT BOND FUND The Fund's goal is to provide as high a
level of current income as is consistent
with the preservation of capital.
CORE BOND FUND The Fund's goal is to achieve maximum total
return.
HIGH-YIELD BOND FUND The Fund's goal is to provide a high level
of current income.
MAIN INVESTMENT STRATEGIES
HIGH QUALITY BOND FUND
The High Quality Bond Fund invests primarily in a diverse portfolio of high
quality bonds and other debt securities with short and intermediate maturities.
Under normal circumstances the Fund invests at least 65% of its assets in these
securities.
The Fund considers securities rated BBB- or better by Standard & Poor's or Baa3
or better by Moody's (and securities that the Fund's advisers believe are of
comparable quality) to be high quality.
The dollar-weighted average maturity of the Fund generally does not exceed three
years under normal circumstances.
The Fund may, but is not required to, engage in certain investment strategies
involving derivatives. These investment strategies may be employed only in
connection with hedging activities.
The Fund invests in securities through an underlying mutual fund (called a
Portfolio) having the same investment goals and strategies. All references in
this prospectus to the Fund includes the Fund's underlying Portfolio, unless
otherwise noted.
INTERMEDIATE GOVERNMENT BOND FUND
The Intermediate Government Bond Fund invests primarily in U.S. government
obligations and repurchase agreements secured by U.S. government obligations.
Under normal circumstances the Fund invests at least 65% of its assets in these
securities.
The Fund's dollar-weighted average maturity generally is between three and ten
years under normal circumstances.
The Fund may, but is not required to, engage in certain investment strategies
involving derivatives. These investment strategies may be employed only in
connection with hedging activities.
The Fund invests in securities through an underlying mutual fund (called a
Portfolio) having the same investment goals and strategies. All references in
this prospectus to the Fund includes the Fund's underlying Portfolio, unless
otherwise noted.
<PAGE> 9
-6-
CORE BOND FUND
The Core Bond Fund invests primarily in investment grade debt securities and
U.S. government obligations (including mortgage-backed securities guaranteed by
U.S. government agencies and instrumentalities). Under normal circumstances the
Fund invests at least 65% of its assets in U.S. government securities and
corporate bonds. The Fund also invests in securities of foreign issuers.
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's dollar-weighted average maturity generally is between five and
fifteen years (and does not exceed thirty years) under normal circumstances.
The Fund may, but is not required to, engage in certain investment strategies
involving derivatives. These investment strategies may be employed only in
connection with hedging activities.
The Fund invests in securities through an underlying mutual fund (called a
Portfolio) having the same investment goals and strategies. All references in
this prospectus to the Fund includes the Fund's underlying Portfolio, unless
otherwise noted. Prior to August 17, 1999, the Fund was called Diversified
Investors Government/Corporate Bond Fund.
HIGH-YIELD BOND FUND
The High-Yield Bond Fund invests primarily in high-yielding, income producing
debt securities and preferred stocks. Under normal circumstances the Fund
invests at least 65% of its assets in debt securities and preferred stock.
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.
The Fund may, but is not required to, engage in certain investment strategies
involving derivatives. These investment strategies may be employed only in
connection with hedging activities.
The Fund invests in securities through an underlying mutual fund (called a
Portfolio) having the same investment goals and strategies. All references in
this prospectus to the Fund includes the Fund's underlying Portfolio, unless
otherwise noted.
MAIN RISKS
The value of each Fund's shares will change daily as the value of its underlying
securities change. This means that your Fund shares may be worth more or less
when you sell them than when you bought them. You may lose money if you invest
in a Fund.
- MARKET RISK. This is the risk that the prices of securities will rise or
fall due to changing economic, political or market conditions, or due to
a company's individual situation. The value of securities held by the
High-Yield Bond Fund may be quite volatile.
- INTEREST RATE RISK. In general, the prices of debt securities rise when
interest rates fall, and fall when interest rates rise. A change in
interest rates could cause a Fund's share price to go down. Generally,
the longer the average maturity of the bonds in a Fund, the more the
Fund's share price will fluctuate in response to interest rate changes.
- PREPAYMENT AND EXTENSION RISK. The issuers of debt securities held by a
Fund may be able to prepay principal due on the securities, particularly
during periods of declining interest rates. The Fund may not be able to
reinvest that principal at attractive rates. The Fund would also lose
the benefit of falling interest rates on the price of the repaid bond.
Securities subject to prepayment risk generally offer less potential for
gains when interest rates decline, and may offer a greater potential for
loss when interest rates rise. Also, rising interest rates may cause
prepayments to occur at slower than expected rates. This effectively
lengthens the maturities of the affected
<PAGE> 10
-7-
securities, making them more sensitive to interest rate changes and the
Fund's share price more volatile. Mortgage-backed securities are
particularly susceptible to prepayment risk and their prices may be
volatile.
- CREDIT RISK. Some issuers may not make payments on debt securities held
by a Fund, causing a loss. Or, an issuer's financial condition may
deteriorate, lowering the credit quality of a security and leading to
greater volatility in the price of the security and in shares of a Fund.
Investments held by the High-Yield Bond Fund will be particularly
susceptible to credit risk. U.S. government securities are generally
considered not to be subject to credit risk.
- FOREIGN SECURITIES. Investments in foreign securities involve risks
relating to adverse political, social and economic developments abroad,
as well as risks resulting from the differences between the regulations
to which U.S. and foreign issuers and markets are subject. These risks
may include expropriation of assets, confiscatory taxation, withholding
taxes on dividends and interest paid on Fund investments, currency
exchange controls and other limitations on the use or transfer of Fund
assets and political or social instability. There may be rapid changes
in the value of foreign currencies or securities, causing a Fund's share
price to be volatile. Also, in certain circumstances, a Fund could
realize reduced or no value in U.S. dollars from its investments in
foreign securities, causing the Fund's share price to go down.
- PORTFOLIO SELECTION FOR THE BOND FUNDS. The advisers of the Bond Funds
may not pick securities that perform well because they are unable to
predict accurately the direction of interest rates or the maturity of
certain debts obligations or to assess accurately credit quality or
other factors. In that case, investors in a Bond Fund may lose money or
their investment in a such Fund may not do as well as other similar
investments.
- DERIVATIVES. Each Fund may, but is not required to, engage in certain
investment strategies involving derivatives (such as options, futures,
swaps and forward currency contracts). These investment strategies may
be employed only in connection with hedging activities. The success or
failure of a hedging transaction will depend on the advisers' ability to
predict movements in the hedge, the investment being hedged and the
market in general (and the correlation between these factors).
Derivatives may not always be available on terms that make economic
sense (for example, they may be too costly), and, when used, their
transaction costs and premiums may adversely affect Fund performance.
Please note that an investment in the Funds is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
WHO MAY WANT TO INVEST
Consider investing in the Bond Funds if you are seeking current income (or, for
the Core Bond Fund, high total return, meaning the total return on your
investment, including both income and growth of capital). Consider the HIGH
QUALITY BOND FUND if you are seeking a higher yield than a money market fund
through investments in high quality, short-term debt securities. Consider the
INTERMEDIATE GOVERNMENT BOND FUND if you are seeking a higher yield than a money
market fund and more price stability than a lower quality or longer-term bond
fund. This Fund offers an added measure of protection against credit risk with
its focus on U.S. government securities. Consider the CORE BOND FUND if you are
seeking a higher level of current income than is generally available from
short-term securities and are willing to accept the greater price fluctuations
associated with higher levels of income. Consider the HIGH-YIELD BOND FUND if
you are seeking a higher level of current income than is generally available
from a higher quality bond fund and are willing to accept significant price
volatility and risk of loss.
<PAGE> 11
-8-
FUND PERFORMANCE
The following bar charts and tables can help you evaluate the risks of investing
in the Bond Funds, and how the Funds' returns have varied over time.
- The bar charts show changes in the Funds' performance from year to year.
- The tables show the Funds' best and worst quarters during the years
covered by the bar charts, and how the Funds' average annual returns for
the periods indicated compare to that of a broad measure of market
performance. Please remember that, unlike the Funds, the market indices
do not include the costs of buying and selling securities and other Fund
expenses.
When you consider this information, please remember that a Fund's past
performance is not necessarily an indication of how it will perform in the
future.
HIGH QUALITY BOND FUND
TOTAL RETURN
(per calendar year)
1995 1996 1997 1998 1999
<TABLE>
<CAPTION>
HIGH QUALITY BOND FUND
----------------------
<S> <C>
'1995' 11.85
'1996' 4.51
'1997' 5.11
'1998' 6.08
'1999' 2.62
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
(for calendar quarters covered by the bar chart)
- -----------------------------------------------------------------
Quarter Ending
- -----------------------------------------------------------------
<S> <C> <C>
Highest 2.79% March 31, 1995
- -----------------------------------------------------------------
Lowest 0.27% March 31, 1996
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1998)
- -----------------------------------------------------------------------------------
Since Inception
1 Year 5 Year July 1, 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
High Quality Bond
Fund 2.62% 5.99% 5.56%
- -----------------------------------------------------------------------------------
Merrill Lynch
1-3 Year
Treasury
Index 3.06% 6.51% 6.05%
- -----------------------------------------------------------------------------------
</TABLE>
<PAGE> 12
-9-
INTERMEDIATE GOVERNMENT BOND FUND
TOTAL RETURN
(per calendar year)
1997 1998 1999
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT BOND FUND BAR
CHART
-------------------------------------
<S> <C>
1997 6.88
1998 6.47
1999 0.99
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
(for calendar quarters covered by the bar chart)
- -----------------------------------------------------------------
Quarter Ending
<S> <C> <C>
- -----------------------------------------------------------------
Highest 4.20% March 31, 1995
- -----------------------------------------------------------------
Lowest -0.64% March 31, 1996
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- --------------------------------------------------------------
Since Inception
1 Year February 22, 1996
- --------------------------------------------------------------
<S> <C> <C>
Intermediate
Government Bond Fund 0.99% 4.61%
- --------------------------------------------------------------
Lehman Bros.
Intermediate
Gov. Bond
Index 0.49% 5.43%
- --------------------------------------------------------------
</TABLE>
<PAGE> 13
-10-
CORE BOND FUND
TOTAL RETURN
(per calendar year)
1995 1996 1997 1998 1999
<TABLE>
<CAPTION>
GOVERNMENT/CORPORATE BOND FUND
------------------------------
<S> <C>
'1995' 20.30
'1996' 2.74
'1997' 8.14
'1998' 7.13
'1999' -1.43
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
(for calendar quarters covered by the bar chart)
- -----------------------------------------------------------------
Quarter Ending
- -----------------------------------------------------------------
<S> <C> <C>
Highest 8.16% June 30, 1995
- -----------------------------------------------------------------
Lowest -2.43% March 31, 1996
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- -----------------------------------------------------------------------------------
Since Inception
1 Year 5 Year July 1, 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Core Bond Fund -1.43% 7.13% 6.68%
- -----------------------------------------------------------------------------------
Lehman Bros.
Aggregate
Bond Index -0.82% 7.73% 5.88%
- -----------------------------------------------------------------------------------
</TABLE>
<PAGE> 14
-11-
HIGH-YIELD BOND FUND
TOTAL RETURN
(per calendar year)
1997 1998 1999
<TABLE>
<CAPTION>
HIGH-YIELD BOND FUND
--------------------
<S> <C>
1997 12.28
1998 2.2
1999 0.04
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
(for calendar quarters covered by the bar chart)
- -----------------------------------------------------------------
Quarter Ending
- -----------------------------------------------------------------
<S> <C> <C>
Highest 4.87% June 30, 1997
- -----------------------------------------------------------------
Lowest -4.76% September 30, 1998
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- --------------------------------------------------------------
Since Inception
1 Year January 30, 1996
- --------------------------------------------------------------
<S> <C> <C>
High-Yield Bond Fund 0.04% 5.81%
- --------------------------------------------------------------
Salomon Bros.
High Yield
Cash Pay
Index 0.82% 6.96%
- --------------------------------------------------------------
</TABLE>
<PAGE> 15
-12-
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF THE BOND FUNDS.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
INTERMEDIATE
SHAREHOLDER FEES (FEES PAID HIGH QUALITY GOVERNMENT CORE HIGH-YIELD
DIRECTLY FROM YOUR INVESTMENT) BOND FUND BOND FUND BOND FUND BOND FUND
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases None None None None
-----------------------------------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) None None None None
-----------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None None None None
-----------------------------------------------------------------------------------------------------------------------
Redemption Fee None None None None
-----------------------------------------------------------------------------------------------------------------------
Exchange Fee None None None None
-----------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING
EXPENSES (expenses that are
deducted from Fund assets) as
a % of average net assets(1)
-----------------------------------------------------------------------------------------------------------------------
Advisory Fee .35% .35% .35% .55%
-----------------------------------------------------------------------------------------------------------------------
Distribution (12b-1) Fees .25% .25% .25% .25%
-----------------------------------------------------------------------------------------------------------------------
Other Expenses
-----------------------------------------------------------------------------------------------------------------------
Administrative Services Fee .30% .30% .30% .30%
-----------------------------------------------------------------------------------------------------------------------
Miscellaneous Expenses .18% .18% .07% .20%
-----------------------------------------------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES 1.08% 1.08% .97% 1.30%
-----------------------------------------------------------------------------------------------------------------------
Fee Waiver and/or Expense
Reimbursement(2) .08% .08% -- .20%
-----------------------------------------------------------------------------------------------------------------------
NET EXPENSES 1.00% 1.00% .97% 1.10%
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Each Fund invests in securities through an underlying mutual fund. This
table and the example below reflect the expenses of the Fund and that
underlying fund.
(2) The Adviser has contractually agreed to reimburse certain of the Funds'
expenses.
EXAMPLE
This example is intended to help you compare the cost of investing in a Bond
Fund to the cost of investing in other mutual funds. The example assumes that:
- you invest $10,000 in a Fund for the time periods indicated; and
- you then sell all your shares at the end of those periods.
The example also assumes that:
- your investment has a 5% return each year; and
- the Fund's operating expenses shown in the table above, after fee
waivers and reimbursements, remain the same.
<PAGE> 16
-13-
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
INTERMEDIATE
HIGH QUALITY GOVERNMENT CORE HIGH-YIELD
BOND FUND BOND FUND BOND FUND BOND FUND
- ------------------------------------------------------------------------------------------------------------------
1 year $102 $102 $99 $112
- ------------------------------------------------------------------------------------------------------------------
3 years $318 $318 $309 $350
- ------------------------------------------------------------------------------------------------------------------
5 years $552 $552 $536 $606
- ------------------------------------------------------------------------------------------------------------------
10 years $1,225 $1,225 $1,190 $1,340
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
BALANCED FUND
DIVERSIFIED INVESTORS BALANCED FUND
THIS SUMMARY BRIEFLY DESCRIBES THE BALANCED FUND AND THE PRINCIPAL RISKS OF
INVESTING IN IT.
FUND GOAL
The Fund's goal is to provide a high total investment return through investment
in a broadly diversified portfolio of stocks, bonds and money market
instruments.
MAIN INVESTMENT STRATEGIES
The Fund invests in a managed mix of equity and debt securities of predominately
U.S. issuers. The Fund may also invest in foreign securities including
securities of issuers located in emerging markets.
The Fund varies the percentage of assets invested in any one type of security in
accordance with its adviser's interpretation of economic and market conditions,
fiscal and monetary policy, and underlying securities values. Generally, the
Fund invests approximately 60% of its assets in equity securities and 40% of its
assets in fixed income and money market securities.
The Fund may, but is not required to, engage in certain investment strategies
involving derivatives. These investment strategies may be employed only in
connection with hedging activities.
The Fund invests in securities through an underlying mutual fund (called a
Portfolio) having the same investment goals and strategies. All references in
this prospectus to the Fund include the Fund's underlying Portfolio, unless
otherwise noted.
MAIN RISKS
The value of the Fund's shares will change daily as the value of its underlying
securities change. This means that your Fund shares may be worth more or less
when you sell them than when you bought them. You may lose money if you invest
in the Fund.
- MARKET RISK. This is the risk that the prices of securities will rise or
fall due to changing economic, political or market conditions, or due to
a company's individual situation. Historically, equity securities have
been more volatile than most debt securities in response to market risk.
- INTEREST RATE RISK. In general, the prices of debt securities rise when
interest rates fall, and fall when interest rates rise. A change in
interest rates could cause the Fund's share price to go down. Generally,
the longer the average maturity of the bonds in the Fund, the more the
Fund's share price will fluctuate in response to interest rate changes.
<PAGE> 17
-14-
- CREDIT RISK. Some issuers may not make payments on debt securities held
by the Fund, causing a loss. Or, an issuer's financial condition may
deteriorate, lowering the credit quality of a security and leading to
greater volatility in the price of the security and in shares of the
Fund. The prices of lower rated securities often are more volatile than
those of higher rated securities.
- PREPAYMENT AND EXTENSION RISK. The issuers of debt securities held by
the Fund may be able to prepay principal due on the securities,
particularly during periods of declining interest rates. The Fund may
not be able to reinvest that principal at attractive rates. The Fund
would also lose the benefit of falling interest rates on the price of
the repaid bond. Securities subject to prepayment risk generally offer
less potential for gains when interest rates decline, and may offer a
greater potential for loss when interest rates rise. Also, rising
interest rates may cause prepayments to occur at slower than expected
rates. This effectively lengthens the maturities of the affected
securities, making them more sensitive to interest rate changes and the
Fund's share price more volatile. Mortgage-backed securities are
particularly susceptible to prepayment risk and their prices may be
volatile.
- FOREIGN SECURITIES. Investments in foreign securities involve risks
relating to adverse political, social and economic developments abroad,
as well as risks resulting from the differences between the regulations
to which U.S. and foreign issuers and markets are subject. These risks
may include expropriation of assets, confiscatory taxation, withholding
taxes on dividends and interest paid on Fund investments, currency
exchange controls and other limitations on the use or transfer of Fund
assets and political or social instability. There may be rapid changes
in the value of foreign currencies or securities, causing the Fund's
share price to be volatile. Also, in certain circumstances, the Fund
could realize reduced or no value in U.S. dollars from its investments
in foreign securities, causing the Fund's share price to go down.
The Balanced Fund may invest in issuers located in emerging, or
developing, markets. All of the risks of investing in foreign securities
are heightened by investing in these markets.
- PORTFOLIO SELECTION. The advisers of the Balanced Fund may not pick
securities that perform well because they are unable to predict
accurately the direction of interest rates or the maturity of certain
debts obligations or to assess accurately credit quality or other
factors. In that case, investors in the Balanced Fund may lose money or
their investment in the Fund may not do as well as other similar
investments.
- DERIVATIVES. The Fund may, but is not required to, engage in certain
investment strategies involving derivatives (such as options, futures,
swaps and forward currency contracts). These investment strategies may
be employed only in connection with hedging activities. The success or
failure of a hedging transaction will depend on the advisers' ability to
predict movements in the hedge, the investment being hedged and the
market in general (and the correlation between these factors).
Derivatives may not always be available on terms that make economic
sense (for example, they may be too costly), and, when used, their
transaction costs and premiums may adversely affect Fund performance.
Please note that an investment in the Fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
WHO MAY WANT TO INVEST
Consider investing in the Balanced Fund if you are seeking a diversified
investment program through both stocks and bonds.
<PAGE> 18
-15-
FUND PERFORMANCE
The following bar chart and tables can help you evaluate the risks of investing
in the Fund, and how the Fund's returns have varied over time.
- The bar chart shows changes in the Fund's performance from year to year
over the last five calendar years.
- The tables show the Fund's best and worst quarters during the years
covered by the bar chart, and how the Fund's average annual returns for
the periods indicated compare to those of a broad measure of stock
performance and a broad measure of bond performance. Please remember
that, unlike the Fund, the market indices do not include the costs of
buying and selling securities and other Fund expenses.
When you consider this information, please remember that the Fund's past
performance is not necessarily an indication of how it will perform in the
future.
TOTAL RETURN
(per calendar year)
1995 1996 1997 1998 1999
<TABLE>
<CAPTION>
TOTAL RETURN
------------
<S> <C>
'1995' 28.47
'1996' 16.39
'1997' 18.67
'1998' 11.81
'1999' 10.97
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
(for calendar quarters covered by the bar chart)
- -----------------------------------------------------------------
Quarter Ending
- -----------------------------------------------------------------
<S> <C> <C>
Highest 10.77% December 31, 1999
- -----------------------------------------------------------------
Lowest -8.74% September 30, 1998
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- -----------------------------------------------------------------------------------
Since Inception
1 Year 5 Year July 1, 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Fund 10.97% 17.09% 15.71%
- -----------------------------------------------------------------------------------
S&P 500 Index 21.14% 28.66% 23.64%
- -----------------------------------------------------------------------------------
Lehman Bros.
Aggregate
Bond Index -0.82% 20.14% 5.88%
- -----------------------------------------------------------------------------------
</TABLE>
<PAGE> 19
-16-
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF THE BALANCED FUND.
<TABLE>
<S> <C>
--------------------------------------------------------------------------------
SHAREHOLDER FEES (fees paid directly from your investment)
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on Purchases None
--------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) None
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
--------------------------------------------------------------------------------
Redemption Fee None
--------------------------------------------------------------------------------
Exchange Fee None
--------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets) as a % of average net assets(1)
--------------------------------------------------------------------------------
Advisory Fee .45%
--------------------------------------------------------------------------------
Distribution (12b-1) Fees .25%
--------------------------------------------------------------------------------
Other Expenses
--------------------------------------------------------------------------------
Administrative Services Fee .30%
--------------------------------------------------------------------------------
Miscellaneous Expenses .14%
--------------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES 1.14%
--------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(2) .06%
--------------------------------------------------------------------------------
NET EXPENSES 1.08%
--------------------------------------------------------------------------------
</TABLE>
(1) The Fund invests in securities through an underlying mutual fund. This
table and the example below reflect the expenses of the Fund and that
underlying fund.
(2) The Adviser has contractually agreed to reimburse certain of the Fund's
expenses.
EXAMPLE
This example is intended to help you compare the cost of investing in the
Balanced Fund to the cost of investing in other mutual funds. The example
assumes that:
- you invest $10,000 in the Fund for the time periods indicated; and
- you then sell all your shares at the end of those periods.
The example also assumes that:
- your investment has a 5% return each year; and
- the Fund's operating expenses shown in the table above, after fee
waivers and reimbursement, remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- -----------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------------------------------------
$110 $343 $595 $1,317
- -----------------------------------------------------------------------
</TABLE>
<PAGE> 20
-17-
STOCK FUNDS
DIVERSIFIED INVESTORS STOCK INDEX FUND
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
THIS SUMMARY BRIEFLY DESCRIBES THE STOCK FUNDS AND THE PRINCIPAL RISKS OF
INVESTING IN THEM.
FUND GOALS
STOCK INDEX FUND The Fund's goal is to match the performance
of the Standard & Poor's 500 Composite Stock
Price Index.
EQUITY INCOME FUND The Fund's goal is 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 goal.
EQUITY VALUE FUND The Fund's goal is to provide a high total
investment return through investment
primarily in a diversified portfolio of
common stocks.
GROWTH & INCOME FUND The Fund's goal is to provide capital
appreciation and current income.
EQUITY GROWTH FUND The Fund's goal is 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
goal.
SPECIAL EQUITY FUND The Fund's goal is 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 The Fund's goal is to provide a high level
of capital appreciation primarily through
investing in a diversified portfolio of
common stocks.
INTERNATIONAL EQUITY FUND The Fund's goal is to provide a high level
of long-term capital appreciation through
investment in a diversified portfolio of
securities of foreign issuers.
<PAGE> 21
-18-
MAIN INVESTMENT STRATEGIES
STOCK INDEX FUND
The Stock Index Fund invests substantially all of its assets (at least 90% under
normal conditions) in the stocks comprising the Standard & Poor's 500 Composite
Stock Price Index(1). In attempting to match the return of the S&P 500 Index,
the Fund invests approximately the same percentage of its assets in each stock
as the stock represents in the S&P 500 Index. The Fund may also use various
investment techniques such as buying and selling futures contracts and options,
entering into swap agreements and purchasing indexed securities.
The Fund invests in securities through an underlying mutual fund (called a
Portfolio) having the same investment goals and strategies. All references in
this prospectus to the Fund include the Fund's underlying Portfolio, unless
otherwise noted.
EQUITY INCOME FUND
The Equity Income Fund invests primarily in common 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 Fund may, but is
not required to, engage in certain investment strategies involving derivatives.
These investment strategies may be employed only in connection with hedging
activities.
The Fund invests in securities through an underlying mutual fund (called a
Portfolio) having the same investment goals and strategies. All references in
this prospectus to the Fund include the Fund's underlying Portfolio, unless
otherwise noted.
EQUITY VALUE FUND
The Equity Value Fund invests primarily in common stocks of companies which, in
the opinion of the Fund's advisers, are trading at low valuations relative to
market and/or historical levels. The Fund may, but is not required to, engage in
certain investment strategies involving derivatives. These investment strategies
may be employed only in connection with hedging activities.
The Fund invests in securities through an underlying mutual fund (called a
Portfolio) having the same investment goals and strategies. All references in
this prospectus to the Fund include the Fund's underlying Portfolio, unless
otherwise noted.
GROWTH & INCOME FUND
The Growth & Income Fund invests primarily in securities selected in large part
for their potential to generate long-term capital appreciation. The Fund may
also select securities based on their potential to generate current income. The
Fund emphasizes common stocks and securities of growing, financially stable and
undervalued companies. The Fund may, but is not required to, engage in certain
investment strategies involving derivatives. These investment strategies may be
employed only in connection with hedging activities.
The Fund invests in securities through an underlying mutual fund (called a
Portfolio) having the same investment goals and strategies. All references in
this prospectus to the Fund include the Fund's underlying Portfolio, unless
otherwise noted.
- ---------------
(1) Standard & Poor's does not sponsor the Stock Index Fund, nor is it
affiliated in any way with the Fund's advisers. "Standard & Poor's(R)," "S&P
500(R)," and "Standard & Poor's 500(R)" are trademarks of The McGraw-Hill
Companies, Inc. The Stock Index Fund is not sponsored, endorsed, sold or
promoted by Standard & Poor's and Standard & Poor's makes no representation
or warranty, express or implied, regarding the advisability of investing in
the Stock Index Fund.
<PAGE> 22
-19-
EQUITY GROWTH FUND
The Equity Growth Fund invests primarily in common stocks of companies that its
advisers believe have the potential for above average growth in earnings. The
Fund uses multiple managers to control the volatility often associated with
growth funds. The Fund may, but is not required to, engage in certain investment
strategies involving derivatives. These investment strategies may be employed
only in connection with hedging activities.
The Fund invests in securities through an underlying mutual fund (called a
Portfolio) having the same investment goals and strategies. All references in
this prospectus to the Fund include the Fund's underlying Portfolio, unless
otherwise noted.
SPECIAL EQUITY FUND
The Special Equity Fund invests primarily in 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 Fund emphasizes common stocks of U.S.
companies with market capitalizations of less than $2 billion. The Fund uses
multiple managers to control the volatility often associated with investments in
companies of this size. The Fund may, but is not required to, engage in certain
investment strategies involving derivatives. These investment strategies may be
employed only in connection with hedging activities.
The Fund invests in securities through an underlying mutual fund (called a
Portfolio) having the same investment goals and strategies. All references in
this prospectus to the Fund include the Fund's underlying Portfolio, unless
otherwise noted.
AGGRESSIVE EQUITY FUND
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. The Fund invests primarily in
common stocks. The value of shares of this Fund may be quite volatile. The Fund
may, but is not required to, engage in certain investment strategies involving
derivatives. These investment strategies may be employed only in connection with
hedging activities.
The Fund invests in securities through an underlying mutual fund (called a
Portfolio) having the same investment goals and strategies. All references in
this prospectus to the Fund include the Fund's underlying Portfolio, unless
otherwise noted.
INTERNATIONAL EQUITY FUND
The International Equity Fund invests primarily in foreign securities. Under
normal circumstances, the Fund invests at least 65% of its assets in equity
securities of issuers in at least three countries other than the United States.
The Fund may invest up to 10% of its assets in securities of issuers in
developing countries. The Fund may, but is not required to, engage in certain
investment strategies involving derivatives. These investment strategies may be
employed only in connection with hedging activities.
The Fund invests in securities through an underlying mutual fund (called a
Portfolio) having the same investment goals and strategies. All references in
this prospectus to the Fund include the Fund's underlying Portfolio, unless
otherwise noted.
<PAGE> 23
-20-
MAIN RISKS
The value of each Fund's shares will change daily as the value of its underlying
securities change. This means that your Fund shares may be worth more or less
when you sell them than when you bought them. You may lose money if you invest
in the Fund.
- MARKET RISK. This is the risk that the prices of securities will rise or
fall due to changing economic, political or market conditions, or due to
a company's individual situation. Historically, equity securities have
been more volatile than most debt securities in response to market risk.
The value of some securities held by each Fund may be quite volatile.
- GROWTH SECURITIES. Growth securities typically are quite sensitive to
market movements because their market prices tend to reflect future
expectations. When it appears those expectations will not be met, the
prices of growth securities typically fall.
- PORTFOLIO SELECTION FOR THE GROWTH & INCOME FUND AND EQUITY GROWTH
FUND. The success of the Growth & Income and Equity Growth Funds'
investment strategy depends largely on the skill of those Funds'
advisers in assessing the growth potential of companies in which the
Funds invest. The advisers may fail to pick stocks that outperform the
market or that do as well as the market. In that case, investors in one
of these Funds may lose money or their investment may not do as well as
an investment in another stock fund using a growth approach.
- VALUE INVESTING. A security may not achieve its expected value because
the circumstances causing it to be underpriced worsen (causing the price
to decline further) or do not change. In addition, the Fund may
underperform certain other stock funds (those emphasizing growth stocks,
for example) during periods when value stocks are out of favor. The
Equity Value Fund and the Growth & Income Fund are particularly
susceptible to the risks of value investing.
- PORTFOLIO SELECTION FOR VALUE INVESTING. The success of a Fund using a
value approach depends largely on the advisers' skill in identifying
securities of companies that are in fact undervalued, but have good
longer term business prospects. The advisers may not be correct in their
determinations. In that case, investors in such a Fund may lose money or
their investment in the Fund may not do as well as an investment in
another stock fund using a value approach.
- SMALLER COMPANIES. The securities of smaller capitalized companies may
have more risks than those of larger, more seasoned companies. They may
be particularly susceptible to market downturns because of limited
product lines, markets, distribution channels or financial and
management resources. Also, there may be less publicly available
information about small cap companies. As a result, their prices may be
more volatile, causing a Fund's share price to be volatile. Investments
held by the Special Equity Fund are likely to be particularly
susceptible to the risks of small cap companies.
- FOREIGN SECURITIES. Investments in foreign securities involve risks
relating to adverse political, social and economic developments abroad,
as well as risks resulting from the differences between the regulations
to which U.S. and foreign issuers and markets are subject. These risks
may include expropriation of assets, confiscatory taxation, withholding
taxes on dividends and interest paid on Fund investments, currency
exchange controls and other limitations on the use or transfer of Fund
assets and political or social instability. There may be rapid changes
in the value of foreign currencies or securities, causing a Fund's share
price to be volatile. Also, in certain circumstances, a Fund could
realize reduced or no value in U.S. dollars from its investments in
foreign securities, causing the Fund's share price to go down.
The International Equity Fund may invest in issuers located in emerging,
or developing, markets. All of the risks of investing in foreign
securities are heightened by investing in these markets.
- DERIVATIVES. Each Fund may, but is not required to, engage in certain
investment strategies involving derivatives (such as options, futures,
swaps and forward currency contracts). These investment strategies may
be employed only in connection with hedging activities. The success
<PAGE> 24
-21-
or failure of a hedging transaction will depend on the advisers' ability to
predict movements in the hedge, the investment being hedged and the market in
general (and the correlation between these factors). Derivatives may not
always be available on terms that make economic sense (for example, they
may be too costly), and, when used, their transaction costs and premiums
may adversely affect Fund performance.
- INTEREST RATE RISK. In general, the prices of debt securities rise when
interest rates fall, and fall when interest rates rise. Longer term
obligations are usually more sensitive to interest rate changes than
shorter term obligations. A change in interest rates could cause a
Fund's share price to go down. Generally, the longer the average
maturity of the bonds in a Fund, the more the Fund's share price will
fluctuate in response to interest rate changes.
- CREDIT RISK. Some issuers may not make payments on debt securities held
by a Fund, causing a loss. Or, an issuer's financial condition may
deteriorate, lowering the credit quality of a security and leading to
greater volatility in the price of the security and in shares of the
Fund. The prices of lower rated securities often are more volatile than
those of higher rated securities.
Please note that an investment in the Funds is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
WHO MAY WANT TO INVEST
Consider investing in the Stock Funds if you can tolerate stock market
fluctuations and changes in the value of your investment. Consider the STOCK
INDEX FUND if you wish to keep investment expenses low while seeking potentially
high long-term returns from investments in large companies. Consider the EQUITY
INCOME FUND if you are seeking capital appreciation with an income component to
temper volatility. Consider the GROWTH & INCOME FUND if you are seeking a
greater potential for capital appreciation than an income fund and less price
volatility than a growth fund. Consider the EQUITY VALUE FUND, EQUITY GROWTH
FUND, SPECIAL EQUITY FUND, AGGRESSIVE EQUITY FUND and INTERNATIONAL EQUITY FUND
if you are seeking growth from equity investments, can tolerate substantial
changes in the value of your investment and do not require current income from
your investment. The Special Equity Fund emphasizes securities of small to
medium size companies. The Aggressive Equity Fund emphasizes securities of high
growth companies without regard to market capitalization. As a result, the
Special Equity Fund and the Aggressive Equity Fund may be particularly volatile.
FUND PERFORMANCE
The following bar charts and tables can help you evaluate the risks of investing
in the Stock Funds, and how the Funds' returns have varied over time.
- The bar charts show changes in the Funds' performance from year to year.
- The tables show the Funds' best and worst quarters during the years
covered by the bar charts, and how the Funds' average annual returns for
the periods indicated compare to those of broad measures of market
performance. Please remember that, unlike the Funds, the market indices
do not include the costs of buying and selling securities and other Fund
expenses.
When you consider this information, please remember that a Fund's past
performance is not necessarily an indication of how it will perform in the
future.
STOCK INDEX FUND
The Fund began operations on March 10, 1999 and does not have a full calendar
year of investment returns at the date of this prospectus.
<PAGE> 25
-22-
EQUITY INCOME FUND
TOTAL RETURN
(per calendar year)
1995 1996 1997 1998 1999
<TABLE>
<CAPTION>
EQUITY INCOME FUND
------------------
<S> <C>
1995 34.62
1996 17.91
1997 29.31
1998 12.47
1999 7.70
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
(for calendar quarters covered by the bar chart)
- -----------------------------------------------------------------
Quarter Ending
- -----------------------------------------------------------------
<S> <C> <C>
Highest 15.50% June 30, 1997
- -----------------------------------------------------------------
Lowest -9.54% September 30, 1998
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- -----------------------------------------------------------------
1 Year 5 Year Since Inception
July 1, 1994
- -----------------------------------------------------------------
<S> <C> <C> <C>
Equity Income Fund 7.70% 19.97% 18.05%
- -----------------------------------------------------------------
S&P 500 Index 21.14% 28.66% 23.64%
- -----------------------------------------------------------------
Russell 1000 Value
Index 7.35% 23.08% 18.49%
- -----------------------------------------------------------------
</TABLE>
<PAGE> 26
-23-
EQUITY VALUE FUND
TOTAL RETURN
(per calendar year)
1997 1998 1999
<TABLE>
<CAPTION>
EQUITY VALUE FUND
-----------------
<S> <C>
1997 21.43
1998 10.79
1999 -3.07
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
(for calendar quarters covered by the bar chart)
- -----------------------------------------------------------------
Quarter Ending
- -----------------------------------------------------------------
<S> <C> <C>
Highest 13.63% June 30, 1997
- -----------------------------------------------------------------
Lowest -9.32% September 30, 1998
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- --------------------------------------------------------------
Since Inception
1 Year June 13, 1996
- --------------------------------------------------------------
<S> <C> <C>
Equity Value Fund -3.07% 10.03%
- --------------------------------------------------------------
S&P 500 Index 21.14% 23.64%
- --------------------------------------------------------------
Russell 1000 Value
Index 7.35% 18.49%
- --------------------------------------------------------------
</TABLE>
<PAGE> 27
-24-
GROWTH & INCOME FUND
TOTAL RETURN
(per calendar year)
1995 1996 1997 1998 1999
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND
----------------------
<S> <C>
'1995' 32.11
'1996' 21.61
'1997' 34.14
'1998' 34.63
'1999' 30.05
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
(for calendar quarters covered by the bar chart)
- -----------------------------------------------------------------
Quarter Ending
- -----------------------------------------------------------------
<S> <C> <C>
Highest 24.96% December 31, 1998
- -----------------------------------------------------------------
Lowest -12.01% September 30, 1998
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- -----------------------------------------------------------------------------------
Since Inception
1 Year 5 Year July 1, 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth & Income Fund 30.05% 30.40% 27.86%
- -----------------------------------------------------------------------------------
S&P 500 Index 21.14% 28.66% 23.64%
- -----------------------------------------------------------------------------------
</TABLE>
<PAGE> 28
-25-
EQUITY GROWTH FUND
TOTAL RETURN
(per calendar year)
1995 1996 1997 1998 1999
<TABLE>
<CAPTION>
EQUITY GROWTH FUND
------------------
<S> <C>
'1995' 18.50
'1996' 17.93
'1997' 26.54
'1998' 35.97
'1999' 37.08
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
(for calendar quarters covered by the bar chart)
- -----------------------------------------------------------------
Quarter Ending
- -----------------------------------------------------------------
<S> <C> <C>
Highest 29.77% December 31, 1998
- -----------------------------------------------------------------
Lowest -11.31% September 30, 1998
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- -----------------------------------------------------------------------------------
Since Inception
1 Year 5 Year July 1, 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Growth Fund 37.08% 26.92% 27.11%
- -----------------------------------------------------------------------------------
S&P 500 Index 21.14% 23.64%
- -----------------------------------------------------------------------------------
Russell 1000 Growth
Index 33.16% 32.42% 26.91%
- -----------------------------------------------------------------------------------
</TABLE>
<PAGE> 29
-26-
SPECIAL EQUITY FUND
TOTAL RETURN
(per calendar year)
1995 1996 1997 1998 1999
<TABLE>
<CAPTION>
SPECIAL EQUITY FUND
-------------------
<S> <C>
'1995' 41.50
'1996' 25.76
'1997' 25.82
'1998' 3.10
'1999' 25.32
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
(for calendar quarters covered by the bar chart)
- -----------------------------------------------------------------
Quarter Ending
- -----------------------------------------------------------------
<S> <C> <C>
Highest 20.84% December 31, 1998
- -----------------------------------------------------------------
Lowest -20.13% September 30, 1998
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- -----------------------------------------------------------------------------------
Since Inception
1 Year 5 Year July 1, 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Special Equity Fund 25.32% 23.66% 23.12%
- -----------------------------------------------------------------------------------
S&P 500 Index 21.14% 23.64%
- -----------------------------------------------------------------------------------
Russell 2000 Index 21.26% 16.69% 13.38%
- -----------------------------------------------------------------------------------
</TABLE>
<PAGE> 30
-27-
AGGRESSIVE EQUITY FUND
TOTAL RETURN
(per calendar year)
1997 1998 1999
<TABLE>
<CAPTION>
AGGRESSIVE EQUITY FUND
----------------------
<S> <C>
1997 6.13
1998 41.79
1999 64.01
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
(for calendar quarters covered by the bar chart)
- -----------------------------------------------------------------
Quarter Ending
- -----------------------------------------------------------------
<S> <C> <C>
Highest 43.66% December 31, 1999
- -----------------------------------------------------------------
Lowest -18.48% December 31, 1997
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- --------------------------------------------------------------
Since Inception
1 Year June 11, 1996
- --------------------------------------------------------------
<S> <C> <C>
Aggressive
Equity Fund 64.01% 26.92%
- --------------------------------------------------------------
S&P 500 Index 21.14% 23.64%
- --------------------------------------------------------------
Russell 2000 Growth
Index 43.09% 15.12%
- --------------------------------------------------------------
</TABLE>
<PAGE> 31
-28-
INTERNATIONAL EQUITY FUND
TOTAL RETURN
(per calendar year)
1997 1998 1999
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
-------------------------
<S> <C>
1997 7.74
1998 10.47
1999 63.73
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
(for calendar quarters covered by the bar chart)
- -----------------------------------------------------------------
Quarter Ending
- -----------------------------------------------------------------
<S> <C> <C>
Highest 27.40% December 31, 1999
- -----------------------------------------------------------------
Lowest -16.75% September 30, 1998
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- --------------------------------------------------------------
Since Inception
1 Year January 18, 1996
- --------------------------------------------------------------
<S> <C> <C>
International Equity
Fund 63.73% 22.34%
- --------------------------------------------------------------
MSCI World EX-US
Index 28.27% 12.44%
- --------------------------------------------------------------
</TABLE>
<PAGE> 32
-29-
FUND FEES AND EXPENSES
THE TABLES BELOW DESCRIBE THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD SHARES OF THE STOCK FUNDS.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES (FEES PAID STOCK EQUITY EQUITY GROWTH &
DIRECTLY FROM YOUR INVESTMENT) INDEX FUND INCOME FUND VALUE FUND INCOME FUND
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases None None None None
-----------------------------------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) None None None None
-----------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None None None None
-----------------------------------------------------------------------------------------------------------------------
Redemption Fee None None None None
-----------------------------------------------------------------------------------------------------------------------
Exchange Fee None None None None
-----------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund
assets) as a % of average net
assets(1)
-----------------------------------------------------------------------------------------------------------------------
Advisory Fee .40% .45% .57% .60%
-----------------------------------------------------------------------------------------------------------------------
Distribution (12b-1) Fees .25% .25% .25% .25%
-----------------------------------------------------------------------------------------------------------------------
Other Expenses
-----------------------------------------------------------------------------------------------------------------------
Administrative Services Fee (2) .30% .30% .30%
-----------------------------------------------------------------------------------------------------------------------
Miscellaneous Expenses .40% .05% .09% .05%
-----------------------------------------------------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES 1.05% 1.05% 1.21% 1.20%
-----------------------------------------------------------------------------------------------------------------------
Fee Waiver and/or Expense
Reimbursement(3) .40% .05% .11% .05%
-----------------------------------------------------------------------------------------------------------------------
NET EXPENSES .65% 1.00% 1.10% 1.15%
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Each Fund invests in securities through an underlying mutual fund. This
table and the example below reflect the expenses of the Fund and that
underlying fund.
(2) Administrative services fees of the Fund are included in the Advisory
Fee for the Fund.
(3) The Adviser has contractually agreed to reimburse certain of the Funds'
expenses.
<PAGE> 33
-30-
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
AGGRESSIVE
SHAREHOLDER FEES (FEES PAID EQUITY GROWTH SPECIAL EQUITY EQUITY INTERNATIONAL
DIRECTLY FROM YOUR INVESTMENT) FUND FUND FUND EQUITY FUND
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases None None None None
-----------------------------------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) None None None None
-----------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None None None None
-----------------------------------------------------------------------------------------------------------------------
Redemption Fee None None None None
-----------------------------------------------------------------------------------------------------------------------
Exchange Fee None None None None
-----------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund
assets) as a % of average net
assets(1)
-----------------------------------------------------------------------------------------------------------------------
Advisory Fee .62% .80% .97% .75%
-----------------------------------------------------------------------------------------------------------------------
Distribution (12b-1) Fees .25% .25% .25% .25%
-----------------------------------------------------------------------------------------------------------------------
Other Expenses
-----------------------------------------------------------------------------------------------------------------------
Administrative Services Fee .30% .30% .30% .30%
-----------------------------------------------------------------------------------------------------------------------
Miscellaneous Expenses .04% .08% .11% .15%
-----------------------------------------------------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES 1.21% 1.43% 1.63% 1.45%
-----------------------------------------------------------------------------------------------------------------------
Fee Waiver and/or Expense
Reimbursement(2) --% --% .14% .05%
-----------------------------------------------------------------------------------------------------------------------
NET EXPENSES 1.21% 1.43% 1.49% 1.40%
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Each Fund invests in securities through an underlying mutual fund. This
table and the example below reflect the expenses of the Fund and that
underlying fund.
(2) The Adviser has contractually agreed to reimburse certain of the Funds'
expenses.
EXAMPLE
This example is intended to help you compare the cost of investing in a Stock
Fund to the cost of investing in other mutual funds. The example assumes that:
- you invest $10,000 in a Fund for the time periods indicated; and
- you then sell all your shares at the end of those periods.
The example also assumes that:
- your investment has a 5% return each year; and
- the Fund's operating expenses shown in the tables above, after fee
waivers and reimbursements, remain the same.
<PAGE> 34
-31-
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
STOCK EQUITY INCOME EQUITY GROWTH &
INDEX FUND FUND VALUE FUND INCOME FUND
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year $ 66 $ 102 $ 112 $ 117
---------------------------------------------------------------------------------------------------------------
3 years $208 $ 318 $ 350 $ 365
---------------------------------------------------------------------------------------------------------------
5 years N/A $ 552 $ 606 $ 633
---------------------------------------------------------------------------------------------------------------
10 years N/A $1,225 $1,340 $1,398
---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
AGGRESSIVE
EQUITY GROWTH SPECIAL EQUITY EQUITY INTERNATIONAL
FUND FUND FUND EQUITY FUND
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year $ 123 $ 146 $ 152 $ 143
---------------------------------------------------------------------------------------------------------------
3 years $ 384 $ 452 $ 471 $ 443
---------------------------------------------------------------------------------------------------------------
5 years $ 665 $ 782 $ 813 $ 766
---------------------------------------------------------------------------------------------------------------
10 years $1,466 $1,713 $1,779 $1,680
---------------------------------------------------------------------------------------------------------------
</TABLE>
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
THIS SUMMARY BRIEFLY DESCRIBES EACH OF THE STRATEGIC ALLOCATION FUNDS AND THE
PRINCIPAL RISKS OF INVESTING IN THEM.
FUND GOALS
SHORT HORIZON STRATEGIC ALLOCATION
FUND The Fund's goal is to provide a high level
of income and preservation of capital.
SHORT/INTERMEDIATE HORIZON
STRATEGIC ALLOCATION FUND The Fund's goal is to achieve reasonable
returns with considerably less than average
volatility as compared to other balanced
funds.
INTERMEDIATE HORIZON STRATEGIC
ALLOCATION FUND The Fund's goal is 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 The Fund's goal is 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.
<PAGE> 35
-32-
LONG HORIZON
STRATEGIC ALLOCATION FUND The Fund's goal is to provide long-term
returns from growth of capital and growth of
income.
MAIN INVESTMENT STRATEGIES
The Strategic Allocation Funds are asset allocation funds. Each Fund invests in
a combination of the Funds (other than the Balanced Fund and the Stock Index
Fund) described above in this prospectus. Diversified selects the combination
and amount of underlying Funds to invest in based on each Strategic Allocation
Fund's investment goal.
The following chart shows approximately how much of the assets of each Strategic
Allocation Fund are invested in the Money Market, Bond and Stock Funds. These
allocations reflect Diversified's present strategy for asset allocation during
normal market conditions, and may be changed at any time. Under severe market
conditions, Diversified may allocate the assets of each Strategic Allocation
Fund without limit to the Money Market Fund. For specific allocations to the
underlying Funds, see Appendix A.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
MONEY MARKET BOND STOCK
FUND FUNDS FUNDS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT HORIZON 10% 80% 10%
- ------------------------------------------------------------------------------------------------------------------------
SHORT/INTERMEDIATE HORIZON None 70% 30%
- ------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE HORIZON None 50% 50%
- ------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE/LONG HORIZON None 30% 70%
- ------------------------------------------------------------------------------------------------------------------------
LONG HORIZON None None 100%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
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).
MAIN RISKS
Please remember that the risks of investing in each Strategic Allocation Fund
depend on the underlying Funds in which the Strategic Allocation Fund invests
and, in turn, on the securities that the underlying Funds hold and the
investment strategies they use. For example, the Short Horizon and Short/
Intermediate Horizon Strategic Allocation Funds invest more of their assets in
the Bond Funds. As a result, the Short Horizon and Short/Intermediate Horizon
Funds may be more susceptible to interest rate risk and credit risk than the
Strategic Allocation Funds investing more of their assets in the Stock Funds.
Similarly, the Strategic Allocation Funds investing more of their assets in the
Stock Funds may be susceptible to greater price volatility under certain market
conditions than the Strategic Allocation Funds investing more of their assets in
the Bond Funds.
The value of each Strategic Allocation Fund's shares will change daily as the
value of its underlying securities change. This means that your Fund shares may
be worth more or less when you sell them than when you bought them. You may lose
money if you invest in a Strategic Allocation Fund.
- MARKET RISK. This is the risk that the prices of securities will rise or
fall due to changing economic, political or market conditions, or due to
a company's individual situation. Historically, equity securities have
been more volatile than most debt securities in response to market risk.
It is also possible that the Funds will not perform as intended. For
example, the Short Horizon Strategic Allocation Fund is expected to be
the least volatile of the Funds. However, under certain market conditions
this Fund could be the most volatile.
<PAGE> 36
-33-
- INTEREST RATE RISK. In general, the prices of debt securities rise when
interest rates fall, and fall when interest rates rise. A change in
interest rates could cause the Funds' share prices to go down.
Generally, the longer the average maturity of the bonds in a Fund, the
more the Fund's share price will fluctuate in response to interest rate
changes.
- CREDIT RISK. Some issuers may not make payments on debt securities held
by the underlying Funds, causing a loss. Or, an issuer's financial
condition may deteriorate, lowering the credit quality of a security and
leading to greater volatility in the price of the security and in shares
of a Fund. The prices of lower rated securities often are more volatile
than those of higher rated securities.
- PREPAYMENT AND EXTENSION RISK. The issuers of debt securities held by a
Fund may be able to prepay principal due on the securities, particularly
during periods of declining interest rates. The Fund may not be able to
reinvest that principal at attractive rates. The Fund would also lose
the benefit of falling interest rates on the price of the repaid bond.
Securities subject to prepayment risk generally offer less potential for
gains when interest rates decline, and may offer a greater potential for
loss when interest rates rise. Also, rising interest rates may cause
prepayments to occur at slower than expected rates. This effectively
lengthens the maturities of the affected securities, making them more
sensitive to interest rate changes and the Fund's share price more
volatile. Mortgage-backed securities are particularly susceptible to
prepayment risk and their prices may be volatile.
- FOREIGN SECURITIES. Investments in foreign securities involve risks
relating to adverse political, social and economic developments abroad,
as well as risks resulting from the differences between the regulations
to which U.S. and foreign issuers and markets are subject. These risks
may include expropriation of assets, confiscatory taxation, withholding
taxes on dividends and interest paid on Fund investments, currency
exchange controls and other limitations on the use or transfer of Fund
assets and political or social instability. There may be rapid changes
in the value of foreign currencies or securities, causing a Fund's share
price to be volatile. Also, in certain circumstances, a Fund could
realize reduced or no value in U.S. dollars from its investments in
foreign securities, causing the Fund's share price to go down.
- GROWTH SECURITIES. Growth securities typically are quite sensitive to
market movements because their market prices tend to reflect future
expectations. When it appears those expectations will not be met, the
prices of growth securities typically fall. The success of an underlying
Fund's investment in growth securities depends largely on the Fund's
advisers' skill in assessing the growth potential of the companies that
issued the securities.
- SMALLER COMPANIES. The securities of smaller capitalized companies may
have more risks than those of larger, more seasoned companies. They may
be particularly susceptible to market downturns and their prices may be
more volatile, causing a Fund's share price to be volatile.
- PORTFOLIO SELECTION. The success of each Strategic Allocation Fund's
investment strategy depends largely on the adviser's skill in both
identifying long term performance and relationships between the Money
Market, Bond and Stock Funds in which the Strategic Allocation Funds
invest and in assessing growth potential or credit quality of companies
in which the Funds invest, or in predicting accurately the direction of
interest rates or the maturity of certain debt obligations, or other
factors. If the advisers are not successful, the investors in the
Strategic Allocation Funds may lose money or their investment may not do
as well as an investment in another allocation fund.
- DERIVATIVES. Each Fund may, but is not required to, engage in certain
investment strategies involving derivatives (such as options, futures,
swaps and forward currency contracts). These investment strategies may
be employed only in connection with hedging activities. The success or
failure of a hedging transaction will depend on the advisers' ability to
predict movements in the hedge, the investment being hedged and the
market in general (and the correlation between
<PAGE> 37
-34-
these factors). Derivatives may not always be available on terms that
make economic sense (for example, they may be too costly), and, when
used, their transaction costs and premiums may adversely affect Fund
performance.
Please note that an investment in the Funds is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
WHO MAY WANT TO INVEST
Consider investing in the Strategic Allocation Funds if you are seeking a
long-term, professionally managed asset allocation investment program. You
should not invest in the Strategic Allocation Funds to provide for short-term
financial needs or to play short-term swings in the stock or bond markets.
Consider the SHORT HORIZON STRATEGIC ALLOCATION FUND if you are seeking current
income through investment primarily in the Money Market and Bond Funds. Consider
the SHORT/INTERMEDIATE HORIZON STRATEGIC ALLOCATION FUND if you are seeking
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. Consider the INTERMEDIATE HORIZON
STRATEGIC ALLOCATION FUND if you are seeking high long-term returns through a
diversified investment portfolio of stocks, fixed income and money market
securities. Consider the INTERMEDIATE/LONG HORIZON STRATEGIC ALLOCATION FUND if
you are seeking long-term returns through investment primarily in the Stock and
Bond Funds with slightly more volatility as compared to other balanced funds.
Consider the LONG HORIZON STRATEGIC ALLOCATION FUND if you are seeking long-term
growth through equity investments and can tolerate substantial changes in the
value of your investment.
FUND PERFORMANCE
The following bar charts and tables can help you evaluate the risks of investing
in the Strategic Allocation Funds, and how the Funds' returns have varied over
time.
- The bar charts show changes in the Funds' performance from year to year.
- The tables show the Funds' best and worst quarters during the years
covered by the bar charts, and how the Funds' average annual returns for
the periods indicated compare to those of broad measures of market
performance. Please remember that, unlike the Funds, the market indices
do not include the costs of buying and selling securities and other Fund
expenses.
When you consider this information, please remember that a Fund's past
performance is not necessarily an indication of how it will perform in the
future.
<PAGE> 38
-35-
SHORT HORIZON STRATEGIC ALLOCATION FUND
TOTAL RETURN
(per calendar year)
1997 1998 1999
<TABLE>
<CAPTION>
SHORT HORIZON STRATEGIC ALLOCATION FUND
---------------------------------------
<S> <C>
1997 8.69
1998 6.35
1999 1.45
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
(for calendar quarters covered by the bar chart)
- -----------------------------------------------------------------
Quarter Ending
- -----------------------------------------------------------------
<S> <C> <C>
Highest 3.91% June 30, 1997
- -----------------------------------------------------------------
Lowest 0.14% March 31, 1997
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- --------------------------------------------------------------
Since Inception
1 Year April 15, 1996
- --------------------------------------------------------------
<S> <C> <C>
Short Horizon
Strategic
Allocation Fund 1.45% 5.89%
- --------------------------------------------------------------
Lehman
Aggregate Index -0.82%* 6.37%*
- --------------------------------------------------------------
</TABLE>
* A combined index consisting of 80% Lehman Aggregate Index, 10% Salomon
Brothers Treasury Bill Index, and 10% Russell 1000 Value Index had a one year
return of 0.59% and a return of 7.61% for the period since the Fund's
inception.
<PAGE> 39
-36-
SHORT/INTERMEDIATE HORIZON STRATEGIC ALLOCATION FUND
TOTAL RETURN
(per calendar year)
1999
<TABLE>
<CAPTION>
SHORT/INTERMEDIATE HORIZON STRATEGIC
ALLOCATION FUND
------------------------------------
<S> <C>
1999 7.7
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- ----------------------------------------------------------------------
Since Inception
1 Year May 1, 1998
- ----------------------------------------------------------------------
<S> <C> <C>
Short/Intermediate Horizon
Strategic
Allocation Fund 7.70% 6.88%
- ----------------------------------------------------------------------
S&P 500 Index 21.14% 19.96%
- ----------------------------------------------------------------------
Lehman
Aggregate Bond -0.82%* 3.32%*
- ----------------------------------------------------------------------
</TABLE>
* A contained index consisting of 70% Lehman Bond Aggregate, 18% Russell 1000,
8% Russell 2000, 4% MSCI World EX-US had a one year return 6.02% and a return
of 7.18% for the period since the Fund's inception.
<PAGE> 40
-37-
INTERMEDIATE HORIZON STRATEGIC ALLOCATION FUND
TOTAL RETURN
(per calendar year)
1997 1998 1999
<TABLE>
<CAPTION>
INTERMEDIATE HORIZON STRATEGIC ALLOCATION
FUND
-----------------------------------------
<S> <C>
1997 14.29
1998 12.31
1999 13.14
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
(for calendar quarters covered by the bar chart)
- -----------------------------------------------------------------
Quarter Ending
- -----------------------------------------------------------------
<S> <C> <C>
Highest 10.56% December 31, 1998
- -----------------------------------------------------------------
Lowest -6.07% September 30, 1998
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- --------------------------------------------------------------
Since Inception
1 Year April 15, 1996
- --------------------------------------------------------------
<S> <C> <C>
Intermediate
Horizon Strategic
Allocation Fund 13.14% 12.21%
- --------------------------------------------------------------
S&P 500 Index 21.14%* 27.55%*
- --------------------------------------------------------------
Lehman Bros.
Aggregate
Bond Index -0.82%* 6.37%*
- --------------------------------------------------------------
</TABLE>
* A combined index consisting of 50% Lehman Aggregate Index, 30% Russell 1000
Index, 12% Russell 2000 Index and 8% MSCI World EX-US Index had a one year
return of 10.78% and a return of 13.68% for the period since the Fund's
inception.
<PAGE> 41
-38-
INTERMEDIATE/LONG HORIZON STRATEGIC ALLOCATION FUND
TOTAL RETURN
(per calendar year)
1997 1998 1999
<TABLE>
<CAPTION>
INTERMEDIATE/LONG HORIZON STRATEGIC
ALLOCATION FUND
-----------------------------------
<S> <C>
1997 18.95
1998 14.05
1999 19.06
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
(for calendar quarters covered by the bar chart)
- -----------------------------------------------------------------
Quarter Ending
- -----------------------------------------------------------------
<S> <C> <C>
Highest 14.65% June 30, 1997
- -----------------------------------------------------------------
Lowest -8.63% September 30, 1998
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- --------------------------------------------------------------
Since Inception
1 Year April 15, 1996
- --------------------------------------------------------------
<S> <C> <C>
Intermediate/ Long
Horizon Strategic
Allocation Fund 19.06% 15.49%
- --------------------------------------------------------------
S&P 500 Index 21.14%* 27.55%*
- --------------------------------------------------------------
</TABLE>
* A combined index consisting of 42% Russell 1000 Index, 30% Lehman Aggregate
Index, 18% Russell 2000 Index, and 10% MSCI World EX-US Index had a one year
return of 15.61% and a return of 16.53% for the period since the Fund's
inception.
<PAGE> 42
-39-
LONG HORIZON STRATEGIC ALLOCATION FUND
TOTAL RETURN
(per calendar year)
1999
<TABLE>
<CAPTION>
LONG HORIZON STRATEGIC ALLOCATION FUND
--------------------------------------
<S> <C>
1999 27.41
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1999)
- --------------------------------------------------------------
Since Inception
1 Year May 1, 1998
- --------------------------------------------------------------
<S> <C> <C>
Long Horizon
Strategic Allocation
Fund 27.41% 11.85%
- --------------------------------------------------------------
S&P 500 Index 21.14%* 19.96%*
- --------------------------------------------------------------
</TABLE>
* A combined index consisting of 60% Russell 1000, 25% Russell 2000, and 15%
MSCI World EX-US Index had a one year return of 22.31% and a return of 15.36%
for the period since the Fund's inception.
<PAGE> 43
-40-
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF THE STRATEGIC ALLOCATION FUNDS.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
SHORT/
SHORT INTERMEDIATE INTERMEDIATE INTERMEDIATE/ LONG
HORIZON HORIZON HORIZON LONG HORIZON HORIZON
STRATEGIC STRATEGIC STRATEGIC STRATEGIC STRATEGIC
SHAREHOLDER FEES (FEES PAID ALLOCATION ALLOCATION ALLOCATION ALLOCATION ALLOCATION
DIRECTLY FROM YOUR INVESTMENT) FUND FUND FUND FUND FUND
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed
on Purchases None None None None None
--------------------------------------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) None None None None None
--------------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed
on Reinvested Dividends None None None None None
--------------------------------------------------------------------------------------------------------------------------
Redemption Fee None None None None None
--------------------------------------------------------------------------------------------------------------------------
Exchange Fee None None None None None
--------------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING
EXPENSES (expenses that are
deducted from Fund assets) as
a % of average net assets
--------------------------------------------------------------------------------------------------------------------------
Advisory Fee .20% .20% .20% .20% .20%
--------------------------------------------------------------------------------------------------------------------------
Distribution (12b-1) Fees None None None None None
--------------------------------------------------------------------------------------------------------------------------
Other Expenses
--------------------------------------------------------------------------------------------------------------------------
Administrative Services Fee None None None None None
--------------------------------------------------------------------------------------------------------------------------
Miscellaneous Expenses None None None None None
--------------------------------------------------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES(1) .20% .20% .20% .20% .20%
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 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 STRATEGIC
ALLOCATION FUND WILL BE NET OF THE EXPENSES OF THE STRATEGIC ALLOCATION
FUND AND THOSE UNDERLYING FUNDS. Based on the expense ratios for the
Money Market, Bond and Stock Funds in which the Strategic Allocation
Funds invest, the average weighted expense ratios are 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 Strategic Allocation Fund's assets invested in the
underlying Funds will fluctuate. Based on these ranges, the target ratios
of 1.19%, 1.29%, 1.33%, 1.38% and 1.45%, respectively, are used to
calculate the expenses a shareholder would incur as reflected in the
example below.
EXAMPLE
This example is intended to help you compare the cost of investing in a
Strategic Allocation Fund to the cost of investing in other mutual funds. The
example assumes that:
- you invest $10,000 in a Fund for the time periods indicated; and
- you then sell all your shares at the end of those periods.
<PAGE> 44
-41-
The example also assumes that:
- your investment has a 5% return each year; and
- the Fund's operating expenses shown in the table above remain the same
before taking into consideration any fee waivers or reimbursements.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------------
SHORT/
INTERMEDIATE INTERMEDIATE INTERMEDIATE/
SHORT HORIZON HORIZON STRATEGIC HORIZON STRATEGIC LONG HORIZON LONG HORIZON
STRATEGIC ALLOCATION ALLOCATION STRATEGIC STRATEGIC
ALLOCATION FUND FUND ALLOCATION ALLOCATION
FUND FUND FUND
-----------------------------------------------------------------------------------------------------------------------------
1 year $121 $131 $135 $140 $148
-----------------------------------------------------------------------------------------------------------------------------
3 years $378 $409 $421 $437 $459
-----------------------------------------------------------------------------------------------------------------------------
5 years $654 $708 $729 $755 $792
-----------------------------------------------------------------------------------------------------------------------------
10 years $1,443 $1,556 $1,601 $1,657 $1,735
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SHAREHOLDER SERVICES
This section describes how to do business with the Funds and shareholder
services that are available.
HOW TO REACH THE FUNDS
<TABLE>
<S> <C>
BY TELEPHONE Call toll free at (800) 926-0044
BY MAIL The Diversified Investors Funds Group
(or The Diversified Investors Strategic Allocation Funds)
4 Manhattanville Road
Purchase, New York 10577
</TABLE>
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.
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. Plans may prohibit
purchases or redemptions of Fund shares during certain circumstances, such as a
change in plan administrators. Consult your plan administrator for more
information.
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 net asset
value (NAV) next calculated after your investment is received in good order and
is accepted by the Distributor.
You may purchase shares in a Fund through the Distributor directly or by
authorizing your retirement plan to purchase shares on your behalf. See Appendix
B for information on purchases directly through the Distributor. See your plan
administrator to obtain purchase instructions if you are a participant in a
retirement 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> 45
-42-
The minimum initial investment is $5,000. The Funds are currently waiving this
minimum. There is no minimum for subsequent investments. A retirement 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 THE PRICE OF YOUR SHARES IS CALCULATED
Each Fund calculates its NAV every day that the New York Stock Exchange is open
for trading. This calculation is made at the close of regular trading on the
Exchange, normally 4 p.m. Eastern time. No Fund calculates its NAV on days when
the New York Stock Exchange is closed. The New York Stock Exchange is normally
closed on the following national holidays: New Year's Day, Martin Luther King
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas.
What is NAV?
NAV refers to a Fund's NET ASSET VALUE. 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. Foreign securities are valued based on quotations
from the primary market in which they are traded, and converted from the local
currency into U.S. dollars using current exchange rates. Money market
instruments maturing within sixty days are valued at amortized cost, which
approximates market value.
Please note that trading may take place in foreign securities held by a Fund on
days when the Fund is not open for business. As a result, the Fund's NAV may
change on days on which it is not possible to purchase or sell shares of the
Fund.
HOW TO SELL SHARES
On any business day, you may sell (redeem) all or a portion of your shares. Your
transaction will be processed at the applicable Fund's NAV the next time it is
calculated after your redemption request in good order is received 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 retirement plan should obtain redemption instructions from
their plan administrator. If you purchased shares directly through the
Distributor, see Appendix B for redemption instructions.
A signature guarantee is required for the following:
- 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;
- any redemption by mail if the proceeds are to be wired to a bank;
- any redemption request for more than $50,000; and
- 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
<PAGE> 46
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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
sales described above under "How to Sell Shares." Plan participants should
contact their plan administrator. Exchanges are processed at NAV 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.
Your right 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 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.
INVOLUNTARY REDEMPTIONS
If your account balance falls below $1,000 as a result of a redemption or
exchange, your account may be closed and the proceeds sent to you. You will be
given notice before this occurs.
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. During periods of unusual market activity, severe weather or other
abnormal circumstances, it may be difficult for you to reach a representative of
the Funds by telephone. In that case, please consider sending written
instructions.
ADDRESS CHANGES
To change the address on your account contact your plan administrator or call
(800) 926-0044 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 (800) 926-0044. If your
shares are held of record by a financial institution, contact that financial
institution for ownership changes.
<PAGE> 47
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STATEMENTS AND REPORTS
The Funds will send you a confirmation statement quarterly reflecting regularly
scheduled contributions and other transactions affecting your account. The Funds
will also send you a confirmation statement after every transaction that affects
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
As a Fund shareholder, you are entitled to your share of a Fund's net income and
gains on its investments. Each Fund passes substantially all of its earnings
along to its investors as distributions. When a Fund earns dividends from stocks
and interest from bonds and other debt securities and distributes those earnings
to shareholders, it is called a DIVIDEND DISTRIBUTION. A Fund realizes capital
gains when it sells securities for a higher price than it paid. When these gains
are distributed to shareholders, it is called a CAPITAL GAIN DISTRIBUTION.
Each Fund pays substantially all of its net income from dividends and interest
to its shareholders of record annually during the month of DECEMBER.
Each Fund distributes any net realized short-term and long-term capital gains to
its 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.
You will receive all distributions from a Fund in additional shares of the same
Fund issued at NAV.
TAX MATTERS
This discussion of taxes is for general information only. You should consult
your own tax adviser about your particular situation, and the status of your
account under state and local laws.
TAXES OF DISTRIBUTIONS
If you are otherwise subject to federal income taxes, you will normally have to
pay federal income taxes on the distributions you receive from a Fund, even if
you reinvest the distributions in additional shares. Distributions designated by
a Fund as capital gain dividends are taxable as long-term capital gains. Other
distributions are generally taxable as ordinary income. Some distributions paid
in January may be taxable to you as if they had been paid the previous December.
TAXES ON SALE OR EXCHANGES
If you are otherwise subject to federal income taxes, anytime you sell or
exchange shares, it is considered a taxable event for you. Depending on the
purchase price and the sale price of the shares you sell or exchange, you may
have a gain or a loss on the transaction. You are responsible for any tax
liabilities generated by your transaction.
OTHER TAX MATTERS
Retirement plans that invest in a Fund and satisfy applicable Internal Revenue
Code conditions generally will not be subject to federal tax liability on either
distributions from a Fund or redemptions of shares of a Fund. Participants in
these retirement plans will be taxed when they begin taking distributions from
the plan in accordance with Internal Revenue Code rules.
<PAGE> 48
-45-
Fund distributions will reduce a Fund's net asset value per share. As a result,
if you are otherwise subject to federal income taxes, and you buy shares in a
Fund just before the Fund makes a distribution, you may pay the full price for
the shares and then effectively receive a portion of the purchase price back as
a taxable distribution.
By law, each Fund must withhold 31% of your distributions and proceeds if you
have not provided complete, correct taxpayer information or are otherwise
subject to "backup withholding". Funds may also be required to withhold a
portion of any distributions and redemption proceeds otherwise due to
shareholders who are not U.S. citizens or residents.
Early each year, each Fund will notify its shareholders (other than retirement
plan participants) of the amount and tax status of distributions paid to
shareholders for the preceding year.
MANAGEMENT
INVESTMENT ADVISERS
FUNDS OTHER THAN THE STOCK INDEX FUND
Diversified Investment Advisors, Inc. is the investment adviser of each of the
underlying mutual funds (called Portfolios) in which these Funds invest.
Diversified also advises each Strategic Allocation Fund. Diversified is an
indirect, wholly-owned subsidiary of AEGON USA, Inc., a financial services
holding company whose primary emphasis is life and health insurance and annuity
and investment products. AEGON USA is an indirect, wholly-owned subsidiary of
AEGON N.V., a Netherlands corporation which is a publicly traded international
insurance group.
Diversified has selected subadvisers for each Portfolio. Diversified provides
general supervision of the subadvisers and also manages the assets of each
Strategic Allocation Fund, subject in each case to policies set by the Trustees.
Diversified's investment management decisions are made by a committee of
Diversified's personnel.
The subadvisers make the day-to-day investment decisions for the Portfolios and
place the purchase and sale orders for securities transactions, subject in all
cases to the general supervision of Diversified. The subadvisers are listed
below; see "Subadvisers."
STOCK INDEX FUND
Diversified is the investment adviser of the Stock Index Fund, providing general
supervision of the Fund's investment in its underlying Portfolio, subject to
policies set by the Trustees.
Barclays Global Fund Advisors is the investment adviser of the Portfolio in
which the Stock Index Fund invests. Barclays Global Fund Advisors was formed in
October, 1996 and is a direct subsidiary of Barclays Global Investors, N.A.
(which, in turn, is an indirect subsidiary of Barclays Bank PLC). Barclays
Global Fund Advisors has been a registered investment adviser since 1996. The
principal business address of Barclays Global Fund Advisors is 45 Fremont
Street, San Francisco, California 94105. Investment management decisions of
Barclays Global Fund Advisors are made by committee and not by managers
individually.
SUBADVISERS
The subadvisers described in this section are responsible for the daily
management of the Portfolios underlying the Funds named below. Diversified
provides general supervision of the subadvisers. Except as otherwise noted,
investment decisions are made by a committee of each subadviser's personnel.
<PAGE> 49
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MONEY MARKET FUND
INTERMEDIATE GOVERNMENT BOND FUND
Capital Management Group. Capital Management Group is a division of 1740
Advisers, Inc., a wholly-owned subsidiary of The MONY Group, Inc. Capital
Management Group has been a registered investment adviser since 1971. The
address of Capital Management Group is 1740 Broadway, New York, New York 10019.
The following representatives of Capital Management Group are primarily
responsible for the day-to-day management of the Funds indicated:
Money Market Fund: David E. Wheeler, Investment Vice President and Portfolio
Manager, has been responsible for the day-to-day management of the Money Market
Fund 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 Fund: Gregory Staples, Vice President, has been
responsible for the day-to-day management of the Intermediate Government Bond
Fund since 1994. Mr. Staples has been employed by Capital Management Group since
1987.
CORE BOND FUND
Payden & Rygel. Payden was formed in 1984 and is owned by Joan A. Payden, John
P. Isaacson and Scott A. King. Payden (or its predecessors) has been a
registered investment adviser since 1983. The principal business address of
Payden is 333 South Grand Avenue, 32nd Floor, Los Angeles, California 90071.
HIGH QUALITY BOND FUND
Merganser Capital Management Corporation. Merganser was formed in 1984 and is
owned by certain of its employees. Merganser has been a registered investment
adviser since 1984. The principal business address of Merganser is One Cambridge
Center, Cambridge, Massachusetts 02142.
HIGH-YIELD BOND FUND
Delaware Investment Advisers. Delaware Investment Advisers is a series of
Delaware Management Business Trust. Delaware is indirectly owned by Lincoln
National Corporation. Delaware and its predecessors have been registered
investment advisers since 1952. The principal business address of Delaware
Investment Advisers is 2005 Market Street, Philadelphia, Pennsylvania 19103.
BALANCED FUND
Aeltus Investment Management, Inc.
Payden & Rygel
Aeltus Investment Management, Inc. Aeltus was formed in 1972 and is an indirect
wholly-owned subsidiary of Aetna Inc. Aeltus has been a registered investment
adviser since 1972. The principal business address of Aeltus is 10 State House
Square, Hartford, Connecticut 06103-3602.
Geoffrey A. Brod, Portfolio Manager, has been responsible for the day-to-day
supervision of management of the Balanced Fund on behalf of Aeltus since 1999
and has been employed by Aeltus or its parent company since 1966.
Payden & Rygel. Payden was formed in 1984 and is owned by Joan A. Payden, John
P. Isaacson and Scott A. King. Payden (or its predecessors) has been a
registered investment adviser since 1983. The principal business address of
Payden is 333 South Grand Avenue, 32nd Floor, Los Angeles, California 90071.
<PAGE> 50
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EQUITY INCOME FUND
Asset Management Group. Asset Management Group is a division of 1740 Advisers,
Inc., which is a wholly-owned subsidiary of The MONY Group, Inc. Asset
Management Group has been a registered investment adviser since 1971. The
address of Asset Management Group is 1740 Broadway, New York, New York 10019.
EQUITY VALUE FUND
Ark Asset Management Co., Inc. Ark was formed in August of 1989 and is owned by
Ark Asset Holdings, Inc. Ark Asset Holdings, Inc. is owned by Ark employees. Ark
has been a registered investment adviser since 1989. The principal address of
Ark is 125 Broad Street, New York, New York 10004.
GROWTH & INCOME FUND
Putnam Advisory Company, Inc. Putnam is owned by Putnam Investments, Inc., which
is in turn, other than a minority interest, owned by employees owned by Marsh &
McLennan Companies, Inc. Putnam Advisory Company manages institutional assets,
and has been a registered investment adviser since 1968. The principal address
of Putnam is One Post Office Square, Boston, Massachusetts 02109.
EQUITY GROWTH FUND
Dresdner RCM Global Investors LLC
Montag & Caldwell Incorporated
Dresdner RCM Global Investors LLC was established in 1996, when Dresdner Bank AG
acquired RCM Capital Management. Dresdner RCM has been a registered investment
adviser since 1972. The principal address of Dresdner RCM is Four Embarcadero
Center, San Francisco, California 94111.
Montag & Caldwell Incorporated was established in 1945 and is owned by Alleghany
Corporation. Montag & Caldwell has been a registered investment adviser since
1968. The principal address of Montag & Caldwell is 3455 Peachtree Road, N.E.,
Suite 1200, Atlanta, Georgia 30326-3248.
SPECIAL EQUITY FUND
Goldman Sachs Asset Management
Husic Capital Management
RS Investment Management, L.P.
Westport Asset Management, Inc.
Goldman Sachs Asset Management is a separate operating division of Goldman,
Sachs & Co., a worldwide investment banking firm, with numerous offices
throughout the United States and globally. Goldman, Sachs & Co. acquired Liberty
Investment Management, Inc., the predecessor firm, in January of 1997. Liberty
had been a registered investment adviser since 1994. Liberty's predecessor,
Eagle Asset Management, Inc., had been a registered investment adviser since
1984. The business address of the Goldman Sachs branch office responsible for
managing the Fund 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 Special Equity Fund
on behalf of Liberty, and now Goldman Sachs, since 1994. Mr. Ehlers and Mr.
Ebright have been employed by Goldman Sachs since 1997. Before that, they were
employed by Liberty Investment Management, Inc. or its predecessor, Eagle Asset
Management, Inc., since 1980 and 1988, respectively.
Husic Capital Management. ("Husic") was founded in March 1986 and is a
California limited partnership. The General Partner of Husic is Frank J. Husic &
Co., a California corporation ("Husic & Co."). Mr. Frank J. Husic is the sole
shareholder of Husic & Co. Husic has been a registered investment adviser since
1986. The principal business address of Husic is 555 California Street, Suite
2900, San
<PAGE> 51
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Francisco, California 94104. Investment management decisions of Husic are made
by committee and not by managers individually.
RS Investment Management, L.P. RS was formed in 1999 and is owned by certain of
its employees. RS (or its predecessor) has been a registered investment adviser
since 1984. The principal business address of RS is 388 Market Street, Suite
200, San Francisco, Ca 94111.
Westport Asset Management, Inc. was formed in 1983 and is owned by certain of
its employees. Westport has been a registered investment adviser since 1983. 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 Special Equity Fund on behalf of Westport since 1994 and has
been employed by Westport since 1983.
AGGRESSIVE EQUITY FUND
McKinley Capital Management, Inc. McKinley was formed in March of 1991 and is
owned by Robert B. Gillam. In 1998 and 1999 McKinley awarded equity interest to
key employees. McKinley has been a registered investment adviser since 1991. The
principal business address of McKinley is 3301 C Street, Anchorage, Alaska
99503.
Robert B. Gillam, Portfolio Manager, has been responsible for the day-to-day
supervision of management of the Aggressive Equity Fund since 1996 and has been
employed by McKinley since 1991.
INTERNATIONAL EQUITY FUND
Capital Guardian Trust Company. Capital Guardian was formed in 1968 and is owned
by Capital Group International, Inc., which is owned by The Capital Group
Companies, Inc. Capital Guardian is a trust company regulated by the California
Department of Financial Institutions. The principal address of Capital Guardian
is 333 South Hope Street, Los Angeles, California 90071.
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.
ADVISORY FEES
For the fiscal year ended December 31, 1999, Diversified and the subadvisers
received aggregate advisory fees (after waivers) equal to that percentage of
each Fund's average daily net assets set forth in the table below.
<PAGE> 52
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<TABLE>
<S> <C>
--------------------------------------------------------------------------------
Money Market Fund 0.25%
--------------------------------------------------------------------------------
High Quality Bond Fund 0.35%
--------------------------------------------------------------------------------
Intermediate Government Bond Fund 0.35%
--------------------------------------------------------------------------------
Core Bond Fund 0.35%
--------------------------------------------------------------------------------
High-Yield Bond Fund 0.55%
--------------------------------------------------------------------------------
Balanced Fund 0.45%
--------------------------------------------------------------------------------
Stock Index Fund 0.40%
--------------------------------------------------------------------------------
Equity Income Fund 0.45%
--------------------------------------------------------------------------------
Equity Value Fund 0.57%
--------------------------------------------------------------------------------
Growth & Income Fund 0.60%
--------------------------------------------------------------------------------
Equity Growth Fund 0.62%
--------------------------------------------------------------------------------
Special Equity Fund 0.80%
--------------------------------------------------------------------------------
Aggressive Equity Fund 0.97%
--------------------------------------------------------------------------------
International Equity Fund 0.75%
--------------------------------------------------------------------------------
Short Horizon Strategic Allocation Fund 0.20%*
--------------------------------------------------------------------------------
Short/Intermediate Horizon Strategic Allocation Fund 0.20%*
--------------------------------------------------------------------------------
Intermediate Horizon Strategic Allocation Fund 0.20%*
--------------------------------------------------------------------------------
Intermediate/Long Horizon Strategic Allocation Fund 0.20%*
--------------------------------------------------------------------------------
Long Horizon Strategic Allocation Fund 0.20%*
--------------------------------------------------------------------------------
</TABLE>
* In addition, this Fund bears its pro rata share of the advisory fees of the
underlying Funds in which it invests.
MORE ABOUT THE FUNDS
Each Fund's goal and principal investment strategies, and the main risks of
investing in the Funds, are summarized at the beginning of this prospectus. More
information on investment strategies, investments and risks appears in this
section. Except as noted below, each Fund's goal and strategies may be changed
without shareholder approval. There can, of course, be no assurance that any
Fund will achieve its investment goal.
Please note that each Fund may also use strategies and invest in securities that
are not described in the Statement of Additional Information. Of course, the
Fund's advisers may decide, as a matter of investment strategy, not to use the
investments and investment techniques described below and in the Statement of
Additional Information at any particular time.
Each Fund (other than the Stock Index Fund) is actively managed, and the
portfolio managers may trade securities frequently, resulting, from time to
time, in an annual portfolio turnover rate of over 100%. Trading securities may
produce capital gains, which are taxable when distributed to investors with
non-tax-sheltered accounts. Active trading may also increase the amount of
commissions or mark-ups to broker-dealers that the Fund pays when it buys and
sells securities. The "Financial Highlights" section of this prospectus shows
each Fund's historical portfolio turnover rate.
Each Fund may, from time to time, take temporary defensive positions that are
inconsistent with the Fund's principal investment strategies in attempting to
respond to adverse market, political or other conditions. When doing so, the
Fund may invest without limit in high quality money market and other short-term
instruments, and may not be pursuing its investment goal. These investments may
result in a lower yield than would be available from investments with a lower
quality or longer term.
<PAGE> 53
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What are Money Market Instruments?
A MONEY MARKET INSTRUMENT is a short-term IOU issued by banks or other
corporations, the U.S. or a foreign government or state or local governments.
Money market instruments have maturity dates of 13 months or less. Money market
instruments may include CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES, VARIABLE
RATE DEMAND NOTES (where the interest rate is reset periodically and the holder
may demand payment from the issuer at any time), FIXED-TERM OBLIGATIONS,
COMMERCIAL PAPER (short term unsecured debt of corporations), ASSET-BACKED
SECURITIES (which are backed by pools of accounts receivable such as car
installment loans or credit card receivables) and REPURCHASE AGREEMENTS. In a
repurchase agreement, the seller sells a security and agrees to buy it back at a
later date (usually within seven days) and at a higher price, which reflects an
agreed upon interest rate.
MONEY MARKET FUND
This Fund invests primarily in high quality, short-term money market
instruments. The Fund may invest more than 25% of its total assets in
obligations of U.S. banks.
The Fund complies with SEC 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 ninety 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. 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.
The Fund does not maintain a stable net asset value of $1.00 per share and does
not declare dividends on a daily basis (many money market funds do). Investment
income that has not yet been declared as a dividend, or a default on a portfolio
security, may cause the Fund's net asset value to fluctuate.
If the Fund concentrates in bank obligations, the Fund will be particularly
sensitive to adverse events affecting U.S. banks. Banks are sensitive to changes
in money market and general economic conditions, as well as decisions by
regulators that can affect banks' profitability.
Management of the Fund reflects the goal of maximizing yield, subject to the
portfolio manager's outlook for short-term interest rates and anticipates
liquidity needs. The Fund is constructed from an approved list of money market
issues that have passed and maintain rigorous credit facility standards.
Securities are sold when the Fund needs cash to meet redemptions, or when the
managers believe that better opportunities exist or that particular securities
no longer fit within the overall strategy for achieving the Fund's goal. In
general, the portfolio managers attempt to temper income volatility in the Fund
by investing significant portions of the portfolio in securities with maturities
of thirty to forty-five days.
<PAGE> 54
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BOND FUNDS
What is a Bond?
A BOND, which is also called a DEBT SECURITY or DEBT OBLIGATION, is like a loan.
The issuer of the bond, which could be the U.S. government, a corporation, or a
city or state, borrows money from investors and agrees to pay back the loan
amount (the PRINCIPAL) on a certain date (the MATURITY DATE). Usually, the
issuer also agrees to pay interest on certain dates during the period of the
loan. Some bonds, such as ZERO COUPON BONDS, do not pay interest, but instead
pay back more at maturity than the original loan. Most bonds pay a fixed rate of
interest (or income), but some bonds' interest rates may change based on market
or other factors.
The HIGH QUALITY BOND FUND invests primarily in high quality debt securities
with short and intermediate maturities, such as corporate bonds and notes,
mortgage-backed and asset-backed securities, U.S. Treasury and government agency
obligations, securities of foreign issuers (such as Yankee bonds) and repurchase
agreements. Under normal circumstances the Fund invests at least 65% of its
assets in these securities.
The dollar-weighted average maturity of the Fund generally does 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'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
net asset value of a fund with a shorter duration will generally fluctuate less
in response to interest rate changes than that of a fund with a longer duration.
The Fund considers securities rated BBB or better by Standard & Poor's or Baa3
or better by Moody's (and securities that the Fund's advisers believe are of
comparable quality) to be high quality. 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.
What are U.S. Government Obligations?
U.S. GOVERNMENT OBLIGATIONS are securities that 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. U.S. government
obligations generally have less credit risk than other debt obligations.
The INTERMEDIATE GOVERNMENT BOND FUND invests primarily in U.S. government
obligations and repurchase agreements secured by U.S. government obligations.
Under normal circumstances the Fund invests at least 65% of its assets in these
securities.
The Fund also invests in mortgage-backed securities backed by pass-through
certificates issued or guaranteed by the U.S. government or its agencies, and in
other high quality, short-term obligations (such as corporate bonds and notes,
bank obligations and repurchase agreements). 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 ten years under
normal circumstances. The Fund may invest in securities with maturities of as
much as thirty years.
<PAGE> 55
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The portfolio managers of the HIGH QUALITY BOND FUND and INTERMEDIATE GOVERNMENT
BOND FUND use "top down" economic analysis to determine economic outlook and to
forecast interest rates. They also analyze the yield curve under multiple market
conditions in making maturity and duration decisions for portfolio securities.
The managers of these Funds then attempt to select securities that will enable
each Fund to maintain a stable share price and at the same time to achieve a
high level of income. The managers use the same top down approach when deciding
which securities to sell. Securities are sold when a Fund needs cash to meet
redemptions, or when the managers believe that better opportunities exist or
that particular securities no longer fit within the overall strategy for
achieving the Fund's goal.
What are Mortgage-Backed Securities?
Home mortgage loans are typically grouped together into "POOLS" by banks and
other lending institutions. Interests in these pools (called MORTGAGE-BACKED
SECURITIES) are then sold to investors, allowing the bank or other lending
institution to have more money available to loan to home buyers. When homeowners
make interest and principal payments, these payments are passed on to the
investors in the pool. Most of these pools are guaranteed by U.S. government
agencies or by government sponsored private corporations -- familiarly called
"GINNIE MAES", "FANNIE MAES" and "FREDDIE MACS." Mortgaged-backed securities
include COLLATERALIZED MORTGAGE OBLIGATIONS, or CMOs.
The CORE BOND FUND invests primarily in investment grade debt securities and
U.S. government obligations (including mortgage-backed securities guaranteed by
U.S. government agencies and instrumentalities). Under normal circumstances the
Fund invests at least 65% of its assets in U.S. government securities and
corporate bonds.
The Fund also invests in high quality, short-term obligations and repurchase
agreements, and in securities of foreign issuers.
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'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.
Payden & Rygel uses both "top down" and "bottom up" analysis to determine
sector, security and duration positions for the Core Bond Portfolio. These three
factors are jointly determined and are interdependent. The overall position in
the corporate sector, for example, is established in conjunction with
assessments of relative value for specific corporate securities. Extensive
bottom up analysis using a variety of valuation tools is conducted for sector
allocation and security selection. Duration policy is primarily a result of
sector allocations and expected long-term interest rate trends (rather than
short-term interest rate forecasting). Yield curve positioning is also a key
aspect of duration management. Security sales decisions are driven by the same
criteria as purchase decisions.
The HIGH-YIELD BOND FUND invests primarily in high-yielding, income producing
debt securities, such as debentures and notes, and in convertible and
non-convertible preferred stocks. Under normal circumstances the Fund invests at
least 65% of its assets in these securities.
The Fund may invest all or a substantial portion of its assets in lower-rated
debt securities, commonly referred to as "junk bonds." Lower-rated debt
securities offer yields that fluctuate over time but that generally are superior
to the yields offered by higher-rated securities. However, these securities also
involve significantly greater risks, including price volatility and risk of
default in the payment of interest and principal, than higher-rated securities.
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.
<PAGE> 56
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Lower quality securities tend to be issued by companies that are less secure
financially. In addition, in the event these companies have financial
difficulty, banks or other senior lenders often have priority in being repaid.
As a result, when selecting investments, the Fund's advisers rely on fundamental
research to identify companies with adequate cash flows, attractive valuations
and strong management teams.
In selecting investments for the Fund, the Fund's advisers exclude securities
that are in default or that pay interest in the form of additional debt
securities. As a result, the Fund may be somewhat more conservative than certain
other high-yield funds. The Fund is designed to outperform more aggressive
high-yield funds in high-yield market downturns, and its performance may lag
these funds in high-yield market upturns. Of course, it is possible that the
Fund will not perform as expected.
The Fund may also invest in equity securities, including common stocks, warrants
and rights. Investors should carefully consider the special risks of investing
in this Fund.
* * *
Fixed income securities may bear fixed, fixed and contingent, or variable rates
of interest and may involve equity features, such as conversion or exchange
rights or warrants for the acquisition of stock of the same or a different
issuer or participations based on revenues, sales or profits. Changes in
interest rates will generally cause bigger changes in prices of longer-term
securities than in prices of shorter-term securities.
Each of the Bond Funds may use derivatives solely for hedging purposes. These
may include options, futures, swaps and forward currency contracts.
Each of the Bond Funds will use short-term debt and money market instruments,
including short-term U.S. government and corporate obligations, commercial
paper, bank obligations and repurchase agreements, in varying amounts for
liquidity and cash management, and as a risk management tool.
BALANCED FUND
The Balanced Fund seeks to meet its investment objective by maintaining a
broadly diversified portfolio of stocks and bonds. The Fund invests in a managed
mix of equity and debt securities of predominately U.S. issuers. However, the
Fund may invest in securities of foreign issuers, including issuers located in
emerging, or developing, markets.
The Fund's equity securities include common and preferred stocks (and their
equivalents such as American Depositary Receipts). The Fund's debt securities
include corporate bonds, notes and commercial paper, 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 adviser's interpretation of economic and market conditions,
fiscal and monetary policy, and underlying securities values. Generally, the
Fund invests approximately 60% of its assets in equity securities and
approximately 40% of its assets in fixed income securities (investing at least
25% in fixed-income senior securities, including debt securities and preferred
stock).
In selecting common stocks, the Fund emphasizes established companies. Most of
the Fund's long-term debt investments are investment grade (rated BBB or better
by Standard & Poor's or Baa or better by Moody's) or considered by the Fund's
advisers to be of comparable quality.
The Fund may use derivatives solely for hedging purposes. These may include
options, futures, swaps and forward currency contracts.
The Fund will use short-term debt and money market instruments, including
short-term U.S. government and corporate obligations, commercial paper, bank
obligations and repurchase agreements, in varying amounts for liquidity and cash
management, and as a risk management tool.
<PAGE> 57
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STOCK FUNDS
The STOCK INDEX FUND seeks its objective by investing in the stocks comprising
the Standard & Poor's 500 Composite Stock Price Index. The weightings of stocks
in the S&P 500 Index are based on each stock's relative total market
capitalization; that is, its market price per share times the number of shares
outstanding. The Fund invests approximately the same percentage of its assets in
each stock as the stock represents in the S&P 500 Index. Under normal market
conditions, the Fund invests at least 90% of its assets in securities comprising
the S&P 500 Index.
The Stock Index Fund attempts to achieve, in both rising and falling markets, a
correlation of at least 95% between its total return before expenses and the
total return of the S&P 500 Index. The Fund's ability to match the investment
performance of the S&P 500 Index may be affected by, among other things, Fund
expenses, the amount of cash and cash equivalents held by the Fund, the manner
in which the total return of the S&P 500 Index is calculated and the timing,
frequency and size of cash flows into and out of the Fund. The Fund's advisers
regularly monitor the Fund's correlation to the S&P 500 Index. In the unlikely
event that the Fund cannot achieve a correlation of at least 95%, the Fund's
Trustees will consider alternative arrangements.
In the future, the Stock Index Fund may select another index if it is deemed to
be more representative of the performance of publicly traded common stocks in
the aggregate.
In seeking to replicate the performance of the S&P 500 Index, the Stock Index
Fund may use various investment techniques, such as buying and selling futures
contracts and options, entering into swap agreements and purchasing indexed
securities. The Fund may also lend its portfolio securities. These techniques
may increase the Fund's volatility and may involve a small investment of cash
relative to the magnitude of the risk being taken.
The Stock Index Fund may invest not more than 10% of its total assets under
normal market conditions in cash and high-quality money market instruments.
These investments are made to provide liquidity and when there is an unexpected
or abnormal level of investments in or redemptions from the Fund.
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 Fund emphasizes 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.
What is Value Investing?
Funds that use a VALUE-ORIENTED STRATEGY search for those companies that appear
to be trading below their true worth. These companies 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 a stock is less
expensive than average relative to the company's earnings or book value,
respectively. These funds use research to identify potential investments,
examining such features as a firm's financial condition, business prospects,
competitive position and business strategy. They look for companies that appear
likely to come back into favor with investors, for reasons that may range from
good prospective earnings or strong management teams to new products or
services. A fund's advisers may not be correct in its determination of companies
that are in fact undervalued, but have good longer term business prospects.
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
Fund emphasizes common stocks and preferred
<PAGE> 58
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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 portfolio managers of the EQUITY INCOME FUND and EQUITY VALUE FUND use a
"bottom up" value-oriented approach in selecting investments for the Funds. When
portfolio managers use a "bottom up" approach, they look primarily at individual
companies against the context of broader market factors. A value-oriented
approach attempts to identify companies that appear to be trading below their
true worth. The managers use the same bottom up approach when deciding which
securities to sell. Securities are sold when a Fund needs cash to meet
redemptions, or when the managers believe that better opportunities exist or
that particular securities no longer fit within the overall strategy for
achieving the Fund's goals.
The GROWTH & INCOME FUND invests primarily in 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. The Fund emphasizes
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 EQUITY GROWTH FUND invests primarily in common stocks of companies with
potential for above average growth in earnings and dividends. Under normal
circumstances the Fund invests at least 65% of its assets 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. The Fund uses multiple managers to control the
volatility often associated with growth funds.
What is Growth Investing?
Funds that use a GROWTH-ORIENTED STRATEGY search for companies growing faster
than the economy as a whole. Often, these companies are in expanding industries,
such as computers and pharmaceuticals. While the size of a company is not
necessarily a factor in determining whether its stock is suitable for a growth
fund, a growth strategy that focuses on larger companies is generally considered
less aggressive than one that focuses on smaller companies. Many stocks owned by
growth funds do not pay dividends and can be more volatile than other types of
investments. As a result, growth funds are appropriate for investors who have
long-term investment horizons. A Fund's advisors may fail to pick stocks that
outperform the economy or that do as well as the economy.
The SPECIAL EQUITY FUND invests primarily in 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 emphasizes common
stocks of U.S. companies with market capitalizations of less than $1 billion.
The Fund uses multiple managers to control the volatility often associated with
investments in companies of this size. The Fund utilizes two growth-style
managers and two value-oriented managers. The Fund is designed to provide an
opportunity for higher returns relative to the broad small cap market during
periods when a particular style is out of favor.
Investing in securities of smaller companies involves special risks. Investors
should carefully consider the risks of investing in the Special Equity Fund.
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
<PAGE> 59
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investment characteristics, such as price-to-earnings ratio, of the Fund can
undergo major changes at any time. As a result, the value of shares of this Fund
may be very volatile.
The portfolio managers of the GROWTH & INCOME FUND, EQUITY GROWTH FUND, SPECIAL
EQUITY FUND and AGGRESSIVE EQUITY FUND use a "bottom up" approach in selecting
securities, relying primarily on stock selection against the context of broader
market factors. These managers look for companies that they believe are in
dynamic high growth sectors of the world economy, and that are thought to have
dominant or strong competitive positions within their sectors. They also look
for companies that are expected to have strong earnings growth potential. The
managers use the same bottom up approach when deciding which securities to sell.
Securities are sold when a Fund needs cash to meet redemptions, or when the
managers believe that better opportunities exist or that particular securities
no longer fit within the overall strategy for achieving the Fund's goal.
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 the Fund invests
at least 65% of its assets 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.
The portfolio managers of the International Equity Fund use a "bottom up"
approach in which stock selection is based on in-depth local research. In
selecting individual securities, the portfolio managers use a value-oriented
strategy to identify companies that appear to be trading below their true worth.
The managers blend their basic, fundamental approach with macroeconomics and
political judgments on the outlook for economies, industries, currencies and
markets. The managers also use a bottom up approach when deciding which
securities to sell. Securities are sold when the Fund needs cash to meet
redemptions, or when the managers believe that better opportunities exist or
that particular securities no longer fit within the overall strategy for
achieving the Fund's goal.
* * *
Each of the Stock Funds, other than the Stock Index Fund, may use derivatives
solely for hedging purposes. These may include options, futures, swaps and
forward currency contracts. The Stock Index Fund may use derivatives to generate
income.
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. These Funds will use short-term
obligations and money market securities, including commercial paper, bank
obligations and repurchase agreements, in varying amounts for liquidity and cash
management, and as a risk management tool.
STRATEGIC ALLOCATION FUNDS
Each Strategic Allocation Fund invests in a combination of the Funds (other than
the Balanced Fund and the Stock Index Fund) described above in this prospectus.
This policy of investing in the other Funds is a fundamental policy that cannot
be changed without shareholder approval. Diversified selects the combination and
amount of underlying Funds based on each Strategic Allocation Fund's investment
objective.
The following chart shows target allocations for the assets of each Strategic
Allocation Fund among the Money Market, Bond and Stock Funds. These allocations
reflect Diversified's present strategy for asset allocation during normal market
conditions, and may be changed at any time. Under severe market
<PAGE> 60
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conditions, Diversified also may allocate the assets of each Strategic
Allocation Fund without limit to the Money Market Fund. For specific allocations
to the underlying Funds, see Appendix A.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
MONEY MARKET BOND STOCK
FUND FUNDS FUNDS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT HORIZON 10% 80% 10%
- ------------------------------------------------------------------------------------------------------------------------
SHORT/INTERMEDIATE HORIZON None 70% 30%
- ------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE HORIZON None 50% 50%
- ------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE/LONG HORIZON None 30% 70%
- ------------------------------------------------------------------------------------------------------------------------
LONG HORIZON None None 100%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
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). Each Strategic
Allocation Fund invests in the underlying Funds, which are diversified.
RISKS
Investing in a mutual fund involves risk. Before investing, you should consider
the risks you will assume. Certain of these risks are described below. More
information about risks appears in the Funds' Statement of Additional
Information. The value of a Fund's shares will change daily as the value of its
underlying securities change. This means that your Fund shares may be worth more
or less when you sell them than when you bought them. You may lose money if you
invest in the Funds.
Please remember that the risks of investing in each Fund depend on the
securities that the Fund holds and the investment strategies it uses. For
example, Funds investing more of their assets in fixed income securities may be
more susceptible to interest rate risk and credit risk than Funds investing more
of their assets in equity securities. Similarly, Funds investing more of their
assets in equity securities may be susceptible to greater price volatility under
certain circumstances than Funds investing more of their assets in fixed income
securities. Please remember that an investment in the Funds is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
MARKET RISK. This is the risk that the prices of securities will rise or fall
due to changing economic, political or market conditions, or due to a company's
individual situation. The value of some securities held by certain of the Funds
may be quite volatile. Historically, equity securities have been more volatile
than most debt securities in response to market risk.
INTEREST RATE RISK. In general, the prices of debt securities rise when interest
rates fall, and fall when interest rates rise. Longer term obligations are
usually more sensitive to interest rate changes than shorter term obligations. A
change in interest rates could cause a Fund's share price to go down. Generally,
the longer the average maturity of the bonds in a Fund, the more the Fund's
share price will fluctuate in response to interest rate changes.
CREDIT RISK. Some issuers may not make payments on debt securities held by a
Fund, causing a loss. Or, an issuer may suffer adverse changes in its financial
condition that could lower the credit quality of a security, leading to greater
volatility in the price of the security and in shares of a Fund. A change in the
quality rating of a bond or other security can also affect the security's
liquidity and make it more difficult for a Fund to sell. The lower quality debt
securities in which the Funds may invest are more susceptible to these problems
than higher quality obligations. Investments held by the High-Yield Bond Fund
will be particularly susceptible to credit risk. U.S. government securities are
generally considered not to be subject to credit risk.
<PAGE> 61
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GROWTH SECURITIES. Growth securities typically are quite sensitive to market
movements because their market prices tend to reflect future expectations. When
it appears those expectations will not be met, the prices of growth securities
typically fall. The success of a Fund's investment in growth securities depends
largely on the Fund's advisers' skill in assessing the growth potential of the
companies that issued the securities. In addition, a Fund investing in growth
securities may underperform certain other stock funds (those emphasizing value
stocks, for example) during periods when growth stocks are out of favor.
VALUE INVESTING. When a Fund's portfolio managers use a value oriented approach
in managing the Fund, they look for securities that they believe are currently
undervalued, or priced below their true worth, but whose issuers have good
longer term prospects. An issuer may be undervalued relative to the stock market
in general, relative to the underlying value of its assets or relative to what a
sophisticated private investor would pay for the entire company. Value investing
is based on the belief that securities of companies which are temporarily
underpriced may provide a higher total return over time than securities of
companies whose positive attributes are reflected in the securities' current
price.
A security may not achieve its expected value because the circumstances causing
it to be undervalued worsen (causing the price to decline further) or do not
change, or because an adviser is incorrect in its determination that the
security is undervalued. In addition, Funds with a value orientation may
underperform certain other stock funds (those emphasizing growth stocks, for
example) during periods when value stocks are not in favor.
SMALLER COMPANIES. The securities of smaller capitalization companies may have
more risks than those of larger, more seasoned companies. They may be
particularly susceptible to market downturns because of limited product lines,
markets, distribution channels or financial and management resources. Also,
there may be less publicly available information about small cap companies.
Investments in small cap companies may be in anticipation of future products or
services to be provided by the companies. If those products or services are
delayed, the prices of the securities of the companies may drop. Sometimes, the
prices of the securities of smaller capitalized companies rise and fall based on
investor perception rather than economics. Securities of small cap companies may
be thinly traded, making their disposition more difficult. For all these
reasons, the prices of the securities of small cap companies may be more
volatile, causing a Fund's share price to be volatile. Funds that invest a
higher percentage of their assets in small cap stocks are generally more
volatile than funds investing a higher percentage of their assets in larger,
more established companies. Investments held by the Special Equity Fund are
likely to be particularly susceptible to the risks of small cap companies.
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, including risks relating
to political, social and economic developments abroad, as well as risks
resulting from the differences between the regulations to which U.S. and foreign
issuers and markets are subject.
- These risks may include expropriation of assets, confiscatory taxation,
withholding taxes on dividends and interest paid on Fund investments,
currency exchange controls and other limitations on the use or transfer
of Fund assets and political or social instability.
- Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may be
less public information about their operations.
- Foreign markets may be less liquid and more volatile than U.S. markets.
Rapid increases in money supply may result in speculative investing,
contributing to volatility. Also, equity securities may trade at
price-earnings multiples that are higher than those of comparable U.S.
companies, and that may not be sustainable. As a result, there may be
rapid changes in the value of foreign securities.
- Foreign markets may offer less protection to investors. Enforcing legal
rights may be difficult, costly and slow. There may be special problems
enforcing claims against foreign governments.
<PAGE> 62
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- Since 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. An increase in the U.S.
dollar relative to these other currencies will adversely affect the
value of the Fund. 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.
Controls or intervention could limit or prevent a Fund from realizing
value in U.S. dollars from its investment in foreign securities.
- The International Equity Fund and the Balanced Fund may invest in
issuers located in emerging, or developing, markets.
- Emerging or developing countries 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 foreign securities are heightened by
investing in developing countries.
- The markets of developing countries have been more volatile than the
markets of developed countries with more mature economies. These
markets often have provided higher rates of return, and greater risks,
to investors, but they also may provide lower rates of return or
negative returns, for extended periods.
PREPAYMENT AND EXTENSION RISK. The issuers of debt securities held by a Fund may
be able to prepay principal due on the securities, particularly during periods
of declining interest rates. The Fund may not be able to reinvest that principal
at attractive rates. The Fund would also lose the benefit of falling interest
rates on the price of the repaid bond. Securities subject to prepayment risk
generally offer less potential for gains when interest rates decline, and may
offer a greater potential for loss when interest rates rise. Also, rising
interest rates may cause prepayments to occur at slower than expected rates.
This effectively lengthens the maturities of the affected securities, making
them more sensitive to interest rate changes and the Fund's share price more
volatile. Mortgage-backed securities are particularly susceptible to prepayment
risk and their prices may be volatile.
CONVERTIBLE SECURITIES. Convertible securities, which are debt securities that
may be converted into stock, are subject to the market risk of stocks, and, like
other debt securities, are also subject to interest rate risk and the credit
risk of their issuers. Call provisions may allow the issuer to repay the debt
before it matures.
DERIVATIVES. Each Fund may, but is not required to, engage in certain investment
strategies involving derivatives (such as options, futures, swaps and forward
currency contracts). These investment strategies may be employed only in
connection with hedging activities such as the following:
- protecting against a decline in value of a Fund's current or anticipated
securities holdings;
- as a substitute for buying or selling portfolio holdings; and
- seeking to generate income to offset expenses or increase return.
A hedge is designed to neutralize a loss on a portfolio position with a gain in
the hedge position. A properly executed hedge will result in a loss in the
portfolio position being offset by a gain in the hedge position, or vice versa.
However, the market movement of a hedge may not be of the same magnitude as the
market movement of the hedged position. The success or failure of a hedging
transaction will depend on the advisers' ability to predict movements in the
hedge, the investment being hedged and the market in general (and the
correlation between these factors). Derivatives may not always be available on
terms that make economic sense (for example, they may be too costly), and, when
used, their transaction costs and premiums may adversely affect Fund
performance. The ability to use derivatives to hedge may also be restricted by
limits established by securities and commodities exchanges and by tax
considerations.
STRATEGIC ALLOCATION FUNDS. Each Strategic Allocation Fund invests solely in the
underlying Funds, as a matter of fundamental policy. As a result, each Strategic
Allocation Fund's performance is directly
<PAGE> 63
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related to the performance of the underlying Funds, and investors in the
Strategic Allocation Funds are subject to all of the risks associated with
investments in the underlying Funds.
GENERAL INFORMATION
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 pay for its services or for
advertising, marketing or other promotional activities.
What are Distribution (12b-1) Fees?
DISTRIBUTION FEES, also called 12B-1 FEES, are fees that are deducted from Fund
assets and are used to compensate those financial professionals who sell Fund
shares and provide ongoing services to shareholders and to pay other marketing
and advertising expenses. Because you pay these fees during the whole period
that you own the shares, over time, you may pay more than if you had paid other
types of sales charges.
INVESTMENT STRUCTURE. Each Fund (except for the Strategic Allocation Funds)
invests in securities through an underlying mutual fund having the same
investment goal and strategies. A Fund may stop investing in its underlying
mutual fund at any time, and will do so if the Fund's Trustees believe that to
be in the best interests of the Fund's shareholders. The Fund could then invest
in another mutual fund or pooled investment vehicle or invest directly in
securities. If a Fund were to stop investing in its underlying mutual fund, the
Fund could receive securities from the underlying mutual fund 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.
BROKERAGE TRANSACTIONS. Each Fund's advisers may use brokers or dealers for Fund
transactions who also provide brokerage and research services to the Fund or
other accounts over which the advisers exercise investment discretion. A Fund
may "pay up" for brokerage services, meaning that it is authorized to pay a
broker or dealer who provides these brokerage and research services a commission
for executing a portfolio transaction which is higher than the commission
another broker or dealer would have charged. However, a Fund will "pay up" only
if the applicable adviser determines in good faith that the higher commission is
reasonable in relation to the brokerage and research services provided, viewed
in terms of either the particular transaction or all of the accounts over which
the adviser exercises investment discretion.
SHARE CLASSES. 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 (800) 926-0044 for more
information.
ADDITIONAL 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
<PAGE> 64
-61-
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 in the Funds 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
MONY Life Insurance Company (formerly The Mutual Life Insurance Company of New
York). The total return for each Fund (other than the High-Yield Bond, Stock
Index, 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. 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.
<PAGE> 65
-62-
As of December 31, 1999, 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
YEAR 3 YEARS 5 YEARS 10 YEARS
INCEPTION ENDED ENDED ENDED ENDED
DATE 12/31/99 12/31/99 12/31/99 12/31/99
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MONEY MARKET 11/78 4.66% 4.85% 4.98% 4.75%
- -----------------------------------------------------------------------------------------------------------------------
HIGH QUALITY BOND 7/90 2.62% 4.59% 5.99% N/A
- -----------------------------------------------------------------------------------------------------------------------
INTERMEDIATE GOVERNMENT BOND 7/90 0.99% 4.75% 6.18% N/A
- -----------------------------------------------------------------------------------------------------------------------
CORE BOND 1/78 -1.43% 4.52% 7.14% 7.32%
- -----------------------------------------------------------------------------------------------------------------------
HIGH-YIELD BOND 8/95 0.04% 4.71% N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
BALANCED 12/92 10.97% 13.77% 17.10% N/A
- -----------------------------------------------------------------------------------------------------------------------
EQUITY INCOME 1/78 7.70% 16.13% 19.98% 13.44%
- -----------------------------------------------------------------------------------------------------------------------
EQUITY VALUE 4/96 -3.07% 9.25% N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME 1/86 30.05% 32.92% 30.42% 18.26%
- -----------------------------------------------------------------------------------------------------------------------
EQUITY GROWTH 3/93 37.08% 33.11% 26.94% N/A
- -----------------------------------------------------------------------------------------------------------------------
SPECIAL EQUITY 1/86 25.32% 17.59% 23.67% 16.02%
- -----------------------------------------------------------------------------------------------------------------------
AGGRESSIVE EQUITY 4/96 64.01% 35.14% N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY 12/92 63.73% 24.90% 20.44% N/A
- -----------------------------------------------------------------------------------------------------------------------
SHORT HORIZON STRATEGIC
ALLOCATION FUND 6/96 1.45% 5.45% N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
SHORT/INTERMEDIATE HORIZON
STRATEGIC ALLOCATION FUND 4/98 7.70% N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
INTERMEDIATE HORIZON STRATEGIC
ALLOCATION FUND 6/96 13.14% 13.25% N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
INTERMEDIATE/LONG HORIZON
STRATEGIC ALLOCATION FUND 6/96 19.06% 17.33% N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
LONG HORIZON STRATEGIC ALLOCATION
FUND 4/98 27.41 N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------- ----------------
FOR THE
PERIOD SINCE
INCEPTION
THROUGH
12/31/99
- ---------------------------------- ----------------
<S> <C>
MONEY MARKET 7.39%
- ---------------------------------------------------------------------
HIGH QUALITY BOND 6.05%
- --------------------------------------------------------------------------------------
INTERMEDIATE GOVERNMENT BOND 6.40%
- -------------------------------------------------------------------------------------------------------
CORE BOND 8.25%
- -----------------------------------------------------------------------------------------------------------------------
HIGH-YIELD BOND 6.77%
- -----------------------------------------------------------------------------------------------------------------------
BALANCED 13.76%
- -----------------------------------------------------------------------------------------------------------------------
EQUITY INCOME 14.18%
- -----------------------------------------------------------------------------------------------------------------------
EQUITY VALUE 10.23%
- -----------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME 17.42%
- -----------------------------------------------------------------------------------------------------------------------
EQUITY GROWTH 20.94%
- -----------------------------------------------------------------------------------------------------------------------
SPECIAL EQUITY 16.44%
- -----------------------------------------------------------------------------------------------------------------------
AGGRESSIVE EQUITY 29.16%
- -----------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY 19.53%
- -----------------------------------------------------------------------------------------------------------------------
SHORT HORIZON STRATEGIC
ALLOCATION FUND 5.88%
- -----------------------------------------------------------------------------------------------------------------------
SHORT/INTERMEDIATE HORIZON
STRATEGIC ALLOCATION FUND 6.88%
- -----------------------------------------------------------------------------------------------------------------------
INTERMEDIATE HORIZON STRATEGIC
ALLOCATION FUND 12.86%
- -----------------------------------------------------------------------------------------------------------------------
INTERMEDIATE/LONG HORIZON
STRATEGIC ALLOCATION FUND 16.77%
- -----------------------------------------------------------------------------------------------------------------------
LONG HORIZON STRATEGIC ALLOCATION
FUND 18.27
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The Stock Index Fund began operations on March 1, 1999 and therefore had no
performance history as of December 31, 1998.
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.
<PAGE> 66
-63-
The average annual total returns at December 31, 1999 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 5 YEARS INCEPTION
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHORT HORIZON
STRATEGIC ALLOCATION FUND 10/92 1.45% 5.45% 7.11% 5.96%
- ------------------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE HORIZON
STRATEGIC ALLOCATION FUND 10/92 13.14% 13.30% 13.48% 11.27%
- ------------------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE/LONG HORIZON
STRATEGIC ALLOCATION FUND 10/92 19.06% 17.33% 18.21% 15.44%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Appendix C for the past performance of the subadvisers to the High-Yield
Bond Fund, Equity Value Fund, Growth & Income Fund, Equity Growth Fund and
Aggressive Equity Fund in managing substantially similar accounts.
<PAGE> 67
-64-
FINANCIAL HIGHLIGHTS
This table is intended to help you understand each Fund's performance and other
financial information for the fiscal periods indicated. "Total return" shows how
much your investment in a Fund would have increased or decreased during each
period, assuming you had reinvested all dividends and distributions. The
financial information in this table, and the notes thereto, have been audited by
PricewaterhouseCoopers LLP, independent accountants for the Funds, whose report
is included in the Funds' annual report. The Funds' annual report is
incorporated into this registration statement by reference. Copies of the Funds'
annual report may be obtained without charge by calling (800) 926-0044.
For the average shares outstanding for each year:
<TABLE>
<CAPTION>
MONEY MARKET
---------------------------------------------------------------
FOR THE YEAR ENDED
---------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $ 10.44 $ 10.26 $ 10.11 $ 9.83 $ 9.61
----------- ----------- ----------- ---------- --------
Income from investment operations:
Net investment income............. 0.49 0.51 0.51 0.19 0.31
Net gains on investments (both
realized and unrealized)....... -- -- (0.01) 0.30 0.22
----------- ----------- ----------- ---------- --------
Total from investment operations.... 0.49 0.51 0.50 0.49 0.53
----------- ----------- ----------- ---------- --------
Less: Dividends and distributions
from:
Net investment income............. (0.35) (0.33) (0.35) (0.19) (0.31)
Net realized gain on
investments.................... -- -- -- -- --
Tax return of capital............. -- (0.00)** -- (0.02) --
----------- ----------- ----------- ---------- --------
Total dividends and distributions... (0.35) (0.33) (0.35) (0.21) (0.31)
----------- ----------- ----------- ---------- --------
Net asset value, end of period...... $ 10.58 $ 10.44 $ 10.26 $ 10.11 $ 9.83
----------- ----------- ----------- ---------- --------
Total return........................ 4.66% 4.91% 4.98% 4.87% 5.50%
=========== =========== =========== ========== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets end of period............ $99,519,160 $63,979,337 $21,513,791 $3,783,802 $113,491
=========== =========== =========== ========== ========
Ratio of expenses to average net
assets, including expenses of the
Series Portfolios................. 0.88% 0.97% 1.12% 4.35% 67.48%
Ratio of expenses to average net
assets, including expenses of the
Series Portfolios (net of
reimbursement).................... 0.80% 0.80% 0.80% 0.80% 0.76%
Ratio of net investment income to
average net assets................ 4.49% 4.65% 4.55% 1.20% (61.47)%
Ratio of net investment income to
average net assets (net of
reimbursement).................... 4.57% 4.82% 4.87% 4.76% 5.24%
</TABLE>
- ------------------
* Annualized
** Less than one penny per share
(1) Commencement of operations February 22, 1996
(2) Commencement of operations June 13, 1996
(3) Commencement of operations June 11, 1996
(4) Commencement of operations January 30, 1996
(5) Commencement of operations January 18, 1996
<PAGE> 68
-65-
For the average shares outstanding for each year:
<TABLE>
<CAPTION>
HIGH QUALITY BOND
-----------------------------------------------------------
FOR THE YEAR ENDED
-----------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period... $ 11.39 $ 11.13 $ 10.89 $ 10.61 $ 9.87
----------- ----------- ---------- -------- -------
Income from investment operations:
Net investment income................ 0.60 0.61 0.63 0.20 0.42
Net gains on investments (both
realized and unrealized).......... (0.30) 0.06 (0.07) 0.28 0.74
----------- ----------- ---------- -------- -------
Total from investment operations....... 0.30 0.67 0.56 0.48 1.16
----------- ----------- ---------- -------- -------
Less: Dividends and distributions from:
Net investment income................ (0.50) (0.41) (0.32) (0.20) (0.42)
Net realized gain on investments..... -- -- -- -- --
Tax return of capital................ -- -- (0.00)** -- --
----------- ----------- ---------- -------- -------
Total dividends and distributions...... (0.50) (0.41) (0.32) (0.20) (0.42)
----------- ----------- ---------- -------- -------
Net asset value, end of period......... $ 11.19 $ 11.39 $ 11.13 $ 10.89 $ 10.61
=========== =========== ========== ======== =======
Total return........................... 2.63% 6.08% 5.11% 4.51% 11.85%
=========== =========== ========== ======== =======
RATIOS/SUPPLEMENTAL DATA:
Net assets end of period............... $36,433,434 $21,031,334 $8,480,842 $966,031 $71,167
=========== =========== ========== ======== =======
Ratio of expenses to average net
assets, including expenses of the
Series Portfolios.................... 1.08% 1.22% 1.77% 12.60% 91.16%
Ratio of expenses to average net
assets, including expenses of the
Series Portfolios (net of
reimbursement)....................... 1.00% 1.00% 1.00% 0.98% 1.00%
Ratio of net investment income to
average net assets................... 5.10% 5.05% 4.81% 5.58% (83.53)%
Ratio of net investment income to
average net assets (net of
reimbursement)....................... 5.18% 5.27% 5.58% 6.03% 6.63%
</TABLE>
- ------------------
* Annualized
** Less than one penny per share
(1) Commencement of operations February 22, 1996
(2) Commencement of operations June 13, 1996
(3) Commencement of operations June 11, 1996
(4) Commencement of operations January 30, 1996
(5) Commencement of operations January 18, 1996
<PAGE> 69
-66-
For the average shares outstanding for each year:
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT BOND(1)
----------------------------------------------------
FOR THE YEAR ENDED
----------------------------------------------------
1999 1998 1997 1996
----------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.......... $ 10.98 $ 10.67 $ 10.21 $ 10.00
----------- ----------- ---------- --------
Income from investment operations:
Net investment income....................... 0.53 0.54 0.54 0.14
Net gains on investments (both realized and
unrealized).............................. (0.42) 0.15 0.16 0.22
----------- ----------- ---------- --------
Total from investment operations.............. 0.11 0.69 0.70 0.36
----------- ----------- ---------- --------
Less: Dividends and distributions from:
Net investment income....................... (0.45) (0.37) (0.24) (0.14)
Net realized gain on investments............ (0.01) (0.01) -- --
Tax return of capital....................... -- (0.00)** (0.00)** (0.01)
----------- ----------- ---------- --------
Total dividends and distributions............. (0.46) (0.38) (0.24) (0.15)
----------- ----------- ---------- --------
Net asset value, end of period................ $ 10.63 $ 10.98 $ 10.67 $ 10.21
=========== =========== ========== ========
Total return.................................. 0.99% 6.47% 6.88% 4.15%*
=========== =========== ========== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets end of period...................... $40,366,826 $25,893,328 $8,515,888 $893,261
=========== =========== ========== ========
Ratio of expenses to average net assets,
including expenses of the Series
Portfolios.................................. 1.08% 1.19% 1.91% 17.46%*
Ratio of expenses to average net assets,
including expenses of the Series Portfolios
(net of reimbursement)...................... 1.00% 1.00% 1.00% 0.94%*
Ratio of net investment income to average net
assets...................................... 4.79% 4.65% 4.13% (11.28)%*
Ratio of net investment income to average net
assets (net of reimbursement)............... 4.87% 4.84% 5.05% 5.24%*
</TABLE>
- ------------------
* Annualized
** Less than one penny per share
(1) Commencement of operations February 22, 1996
(2) Commencement of operations June 13, 1996
(3) Commencement of operations June 11, 1996
(4) Commencement of operations January 30, 1996
(5) Commencement of operations January 18, 1996
<PAGE> 70
-67-
For the average shares outstanding for each year:
<TABLE>
<CAPTION>
CORE BOND
----------------------------------------------------------------
FOR THE YEAR ENDED
----------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ----------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................... $ 12.60 $ 12.27 $ 11.69 $ 11.60 $ 9.91
------------ ----------- ----------- ---------- --------
Income from investment operations:
Net investment income............ 0.66 0.68 0.72 0.22 0.30
Net gains (losses) on investments
(both realized and
unrealized)................... (0.85) 0.20 0.24 0.10 1.71
------------ ----------- ----------- ---------- --------
Total from investment operations... (0.19) 0.88 0.96 0.32 2.01
------------ ----------- ----------- ---------- --------
Less: Dividends and distributions
from:
Net investment income............ (0.53) (0.54) (0.38) (0.23) (0.28)
Net realized gain on
investments................... -- (0.01)** -- -- (0.04)
Tax return of capital............ -- (0.00)** (0.00)* -- --
------------ ----------- ----------- ---------- --------
Total dividends and
distributions.................... (0.53) (0.55) (0.38) (0.23) (0.32)
------------ ----------- ----------- ---------- --------
Net asset value, end of period..... $ 11.88 $ 12.60 $ 12.27 $ 11.69 $ 11.60
============ =========== =========== ========== ========
Total return....................... (1.51)% 7.21% 8.14% 2.74% 20.30%
============ =========== =========== ========== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets end of period........... $112,521,653 $65,605,780 $21,504,827 $2,056,127 $175,079
============ =========== =========== ========== ========
Ratio of expenses to average net
assets, including expenses of the
Series Portfolios................ 0.97% 1.05% 1.32% 7.50% 56.91%
Ratio of expenses to average net
assets, including expenses of the
Series Portfolios (net of
reimbursement)................... 0.97% 1.00% 1.00% 0.99% 0.85%
Ratio of net investment income to
average net assets............... 5.26% 5.30% 5.52% 0.66% (50.11)%
Ratio of net investment income to
average net assets (net of
reimbursement)................... 5.26% 5.35% 5.85% 5.85% 5.92%
</TABLE>
- ------------------
* Annualized
** Less than one penny per share
(1) Commencement of operations February 22, 1996
(2) Commencement of operations June 13, 1996
(3) Commencement of operations June 11, 1996
(4) Commencement of operations January 30, 1996
(5) Commencement of operations January 18, 1996
<PAGE> 71
-68-
For the average shares outstanding for each year:
<TABLE>
<CAPTION>
BALANCED
------------------------------------------------------------------
FOR THE YEAR ENDED
------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period......................... $ 15.75 $ 14.58 $ 13.27 $ 12.04 $ 10.05
------------ ------------ ----------- ---------- --------
Income from investment
operations:
Net investment income.......... 0.30 0.40 0.44 0.21 0.24
Net gains on investments (both
realized and unrealized).... 1.40 1.31 2.02 1.77 2.61
------------ ------------ ----------- ---------- --------
Total from investment
operations..................... 1.70 1.71 2.46 1.98 2.85
------------ ------------ ----------- ---------- --------
Less: Dividends and distributions
from:
Net investment income.......... (0.30) (0.29) (0.91) (0.21) (0.24)
Net realized gain on
investments................. (0.83) (0.25) (0.24) (0.54) (0.51)
Tax return of capital.......... -- -- -- -- (0.11)
------------ ------------ ----------- ---------- --------
Total dividends and
distributions.................. 1.13 (0.54) (1.15) (0.75) (0.86)
------------ ------------ ----------- ---------- --------
Net asset value, end of period... $ 16.32 $ 15.75 $ 14.58 $ 13.27 $ 12.04
============ ============ =========== ========== ========
Total return..................... 10.97% 11.81% 18.67% 16.39% 28.47%
============ ============ =========== ========== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets end of period......... $143,014,166 $103,470,279 $49,014,319 $5,182,113 $895,351
============ ============ =========== ========== ========
Ratio of expenses to average net
assets, including expenses of
the Series Portfolios.......... 1.14% 1.11% 1.21% 3.08% 9.95%
Ratio of expenses to average net
assets, including expenses of
the Series Portfolios (net of
reimbursement)................. 1.08% 1.10% 1.10% 0.97% 0.87%
Ratio of net investment income to
average net assets............. 1.84% 2.57% 2.88% 0.78% (5.68)%
Ratio of net investment income to
average net assets (net of
reimbursement)................. 1.90% 2.58% 2.99% 2.98% 3.40%
</TABLE>
- ------------------
* Annualized
** Less than one penny per share
(1) Commencement of operations February 22, 1996
(2) Commencement of operations June 13, 1996
(3) Commencement of operations June 11, 1996
(4) Commencement of operations January 30, 1996
(5) Commencement of operations January 18, 1996
<PAGE> 72
-69-
For the average shares outstanding for each year:
<TABLE>
<CAPTION>
EQUITY INCOME
--------------------------------------------------------------------
FOR THE YEAR ENDED
--------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $ 20.93 $ 19.22 $ 15.25 $ 13.09 $ 9.93
------------ ------------ ----------- ---------- --------
Income from investment
operations:
Net investment income........ 0.27 0.35 0.32 0.16 0.16
Net gains on investments
(both realized and
unrealized)............... 1.31 2.02 4.14 2.18 3.28
------------ ------------ ----------- ---------- --------
Total from investment
operations................... 1.58 2.37 4.46 2.34 3.44
------------ ------------ ----------- ---------- --------
Less: Dividends and
distributions from:
Net investment income........ (0.21) (0.28) (0.20) (0.14) (0.16)
Net realized gain on
investments............... (0.61) (0.36) (0.29) (0.04) (0.04)
Tax return of capital........ -- (0.02) -- -- (0.08)
------------ ------------ ----------- ---------- --------
Total dividends and
distributions................ (0.82) (0.66) (0.49) (0.18) (0.28)
------------ ------------ ----------- ---------- --------
Net asset value, end of
period....................... $ 21.69 $ 20.93 $ 19.22 $ 15.25 $ 13.09
============ ============ =========== ========== ========
Total return................... 7.70% 12.47% 29.31% 17.91% 34.62%
============ ============ =========== ========== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets end of period....... $203,482,872 $124,478,213 $62,936,623 $7,455,379 $590,381
============ ============ =========== ========== ========
Ratio of expenses to average
net assets, including
expenses of the Series
Portfolios................... 1.05% 1.09% 1.20% 3.22% 17.88%
Ratio of expenses to average
net assets, including
expenses of the Series
Portfolios (net of
reimbursement)............... 1.00% 1.00% 1.00% 1.00% 0.90%
Ratio of net investment income
to average net assets........ 1.17% 1.63% 1.51% 0.11% (14.15)%
Ratio of net investment income
to average net assets (net of
reimbursement)............... 1.22% 1.72% 1.71% 2.33% 2.82%
</TABLE>
- ------------------
* Annualized
** Less than one penny per share
(1) Commencement of operations February 22, 1996
(2) Commencement of operations June 13, 1996
(3) Commencement of operations June 11, 1996
(4) Commencement of operations January 30, 1996
(5) Commencement of operations January 18, 1996
<PAGE> 73
-70-
For the average shares outstanding for each year:
<TABLE>
<CAPTION>
EQUITY VALUE(2)
-----------------------------------------------------
FOR THE YEAR ENDED
-----------------------------------------------------
1999 1998 1997 1996
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period......... $ 12.38 $ 12.27 $ 10.75 $ 10.00
----------- ----------- ----------- --------
Income from investment operations:
Net investment income...................... 0.16 0.13 0.12 0.02
Net gains on investments (both realized and
unrealized)............................. (0.56) 1.17 2.17 0.86
----------- ----------- ----------- --------
Total income from investment operation....... (0.40) 1.30 2.29 0.88
----------- ----------- ----------- --------
Less: Dividends and distributions from:
Net investment income...................... (0.11) (1.07) (0.71) (0.01)
Net realized gain on investments........... (0.35) (0.12) (0.06) (0.12)
In excess of net realized gains............ (0.36) -- -- --
----------- ----------- ----------- --------
Total dividends and distributions............ (0.82) (1.19) (0.77) (0.13)
----------- ----------- ----------- --------
Net asset value, end of period............... $ 11.16 $ 12.38 $ 12.27 $ 10.75
=========== =========== =========== ========
Total return................................. (3.07)% 10.79% 21.43% 16.61%*
----------- ----------- ----------- --------
RATIOS/SUPPLEMENTAL DATA:
Net assets end of period..................... $88,167,552 $54,085,925 $21,309,839 $385,208
=========== =========== =========== ========
Ratio of expenses to average net assets,
including expenses of the Series
Portfolios................................. 1.21% 1.28% 1.66% 56.35%*
Ratio of expenses to average net assets,
including expenses of the Series Portfolios
(net of reimbursement)..................... 1.10% 1.10% 1.10% 1.07%*
Ratio of net investment income to average net
assets..................................... 1.12% 0.80% 0.36% (54.60)%*
Ratio of net investment income to average net
assets (net of reimbursement).............. 1.23% 0.98% 0.93% 1.09%*
</TABLE>
- ------------------
* Annualized
** Less than one penny per share
(1) Commencement of operations February 22, 1996
(2) Commencement of operations June 13, 1996
(3) Commencement of operations June 11, 1996
(4) Commencement of operations January 30, 1996
(5) Commencement of operations January 18, 1996
<PAGE> 74
-71-
For the average shares outstanding for each year:
<TABLE>
<CAPTION>
GROWTH & INCOME
-----------------------------------------------------------------
FOR THE YEAR ENDED
-----------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period.......................... $ 23.99 $ 18.16 $ 13.78 $ 11.47 $ 10.22
------------ ------------ ----------- ---------- --------
Income from investment operations:
Net investment income........... (0.12) (0.05) 0.02 0.19 0.06
Net gains on investments (both
realized and unrealized)..... 7.24 6.32 4.67 2.29 3.18
------------ ------------ ----------- ---------- --------
Total from investment
operations...................... 7.12 6.27 4.69 2.48 3.24
------------ ------------ ----------- ---------- --------
Less: Dividends and distributions
from:
Net investment income........... -- (0.01) (0.06) (0.15) (0.06)
Net realized gain on
investments.................. (1.42) (0.01) (0.25) (0.02) (0.95)
Tax return of capital........... -- (0.42) -- -- (0.98)
------------ ------------ ----------- ---------- --------
Total dividends and
distributions................... (1.42) (0.44) (0.31) (0.17) (1.99)
------------ ------------ ----------- ---------- --------
Net asset value, end of period.... $ 29.69 $ 23.99 $ 18.16 $ 13.78 $ 11.47
============ ============ =========== ========== ========
Total return...................... 30.05% 34.63% 34.14% 21.61% 32.11%
============ ============ =========== ========== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets end of period.......... $459,797,532 $200,946,409 $61,020,784 $5,483,747 $443,638
============ ============ =========== ========== ========
Ratio of expenses to average net
assets, including expenses of
the Series Portfolios........... 1.20% 1.24% 1.39% 3.99% 21.71%
Ratio of expenses to average net
assets, including expenses of
the Series Portfolios (net of
reimbursement).................. 1.15% 1.15% 1.15% 1.14% 1.03%
Ratio of net investment income to
average net assets.............. (0.51)% (0.32)% (0.15)% (2.38)% (19.66)%
Ratio of net investment income to
average net assets (net of
reimbursement).................. (0.46)% (0.22)% 0.10% 0.47% 1.02%
</TABLE>
- ------------------
* Annualized
** Less than one penny per share
(1) Commencement of operations February 22, 1996
(2) Commencement of operations June 13, 1996
(3) Commencement of operations June 11, 1996
(4) Commencement of operations January 30, 1996
(5) Commencement of operations January 18, 1996
<PAGE> 75
-72-
For the average shares outstanding for each year:
<TABLE>
<CAPTION>
EQUITY GROWTH
------------------------------------------------------------------
FOR THE YEAR ENDED
------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period......................... $ 23.32 $ 17.73 $ 14.50 $ 13.36 $ 11.35
------------ ------------ ----------- ---------- --------
Income from investment
operations:
Net investment income.......... (0.12) (0.07) (0.03) -- 0.01
Net gains on investments (both
realized and unrealized).... 8.69 6.41 3.85 2.41 2.09
------------ ------------ ----------- ---------- --------
Total from investment
operations..................... 8.57 6.34 3.82 2.41 2.10
------------ ------------ ----------- ---------- --------
Less: Dividends and distributions
from:
Net investment income.......... -- (0.09) (0.26) -- (0.01)
Net realized gain on
investments................. (1.17) (0.66) (0.33) (1.18) --
Tax return of capital.......... -- -- (0.00)** (0.09) (0.08)
------------ ------------ ----------- ---------- --------
Total dividends and
distributions.................. (1.17) (0.75) (0.59) (1.27) (0.09)
------------ ------------ ----------- ---------- --------
Net asset value, end of period... $ 30.72 $ 23.32 $ 17.73 $ 14.50 $ 13.36
============ ============ =========== ========== ========
Total return..................... 37.08% 35.97% 26.54% 17.93% 18.50%
============ ============ =========== ========== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets end of period......... $352,834,964 $150,958,507 $57,186,689 $3,859,931 $618,317
============ ============ =========== ========== ========
Ratio of expenses to average net
assets, including expenses of
the Series Portfolios.......... 1.21% 1.26% 1.37% 4.34% 14.34%
Ratio of expenses to average net
assets, including expenses of
the Series Portfolios (net of
reimbursement)................. 1.21% 1.24% 1.25% 1.20% 1.01%
Ratio of net investment income to
average net assets............. (0.46)% (0.38)% (0.31)% (3.64)% (13.13)%
Ratio of net investment income to
average net assets (net of
reimbursement)................. (0.46)% (0.36)% (0.19)% 0.50% 0.20%
</TABLE>
- ------------------
* Annualized
** Less than one penny per share
(1) Commencement of operations February 22, 1996
(2) Commencement of operations June 13, 1996
(3) Commencement of operations June 11, 1996
(4) Commencement of operations January 30, 1996
(5) Commencement of operations January 18, 1996
<PAGE> 76
-73-
For the average shares outstanding for each year:
<TABLE>
<CAPTION>
SPECIAL EQUITY
-----------------------------------------------------------------
FOR THE YEAR ENDED
-----------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period.......................... $ 20.98 $ 20.56 $ 17.09 $ 13.95 $ 10.75
------------ ------------ ----------- ---------- --------
Income from investment operations:
Net investment income........... (0.10) (0.09) (0.04) -- --
Net gains on investments (both
realized and unrealized)..... 5.26 0.72 4.41 3.58 4.43
------------ ------------ ----------- ---------- --------
Total from investment
operations...................... 5.16 0.63 4.37 3.58 4.43
------------ ------------ ----------- ---------- --------
Less: Dividends and distributions
from:
Net investment income........... -- (0.07) (0.39) -- --
In excess of net investment
income....................... -- -- -- (0.03) --
Net realized gain on
investments.................. (1.66) (0.05) (0.51) (0.38) (0.89)
In excess of net realized gain
on investments............... -- -- -- -- --
Tax return of capital........... -- (0.09) -- (0.03) (0.34)
------------ ------------ ----------- ---------- --------
Total dividends and
distributions................... (1.66) (0.21) (0.90) (0.44) (1.23)
------------ ------------ ----------- ---------- --------
Net asset value, end of period.... $ 24.48 $ 20.98 $ 20.56 $ 17.09 $ 13.95
============ ============ =========== ========== ========
Total return...................... 25.26% 3.10% 25.82% 25.76% 41.50%
============ ============ =========== ========== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets end of period.......... $224,430,627 $125,863,140 $63,237,963 $7,736,347 $600,294
============ ============ =========== ========== ========
Ratio of expenses to average net
assets, including expenses of
the Series Portfolios........... 1.43% 1.46% 1.57% 3.63% 15.76%
Ratio of expenses to average net
assets, including expenses of
the Series Portfolios (net of
reimbursement).................. 1.43% 1.45% 1.50% 1.49% 1.33%
Ratio of net investment income to
average net assets.............. (0.45)% (0.47)% (0.26)% (2.48)% (14.58)%
Ratio of net investment income to
average net assets (net of
reimbursement).................. (0.45)% (0.46)% (0.18)% (0.34)% (0.18)%
</TABLE>
- ------------------
* Annualized
** Less than one penny per share
(1) Commencement of operations February 22, 1996
(2) Commencement of operations June 13, 1996
(3) Commencement of operations June 11, 1996
(4) Commencement of operations January 30, 1996
(5) Commencement of operations January 18, 1996
<PAGE> 77
-74-
For the average shares outstanding for each year:
<TABLE>
<CAPTION>
AGGRESSIVE EQUITY(3)
--------------------------------------------------
FOR THE YEAR ENDED
--------------------------------------------------
1999 1998 1997 1996
------------ ----------- ---------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period............ $ 13.84 $ 10.00 $ 9.43 $ 10.00
------------ ----------- ---------- --------
Income from investment operations:
Net investment income......................... (0.15) (0.09) (0.06) 0.05
Net gains on investments (both realized and
unrealized)................................ 8.86 4.24 0.63 (0.58)
------------ ----------- ---------- --------
Total from investment operations................ 8.71 4.15 0.57 (0.53)
------------ ----------- ---------- --------
Less: Dividends and distributions from:
Net investment income......................... -- -- -- (0.04)
Net realized gain on investments.............. (1.59) (0.00)** -- --
In excess of net realized gain on
investments................................ -- -- -- --
Tax return of capital......................... -- (0.31) -- --
------------ ----------- ---------- --------
Total dividends and distributions............... (1.59) (0.31) -- (0.04)
------------ ----------- ---------- --------
Net asset value, end of period.................. 20.96 $ 13.84 $ 10.00 $ 9.43
============ =========== ========== ========
Total return.................................... 64.01 41.79% 6.13% (9.51)%*
============ =========== ========== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets end of period........................ $118,496,343 $34,154,980 $8,855,719 $326,476
============ =========== ========== ========
Ratio of expenses to average net assets,
including expenses of the Series Portfolios... 1.63% 1.87% 2.70% 64.34%*
Ratio of expenses to average net assets,
including expenses of the Series Portfolios
(net of reimbursement)........................ 1.49% 1.50% 1.43% 1.41%*
Ratio of net investment income to average net
assets........................................ (1.07)% (1.19)% (1.81)% (64.36)%*
Ratio of net investment income to average net
assets (net of reimbursement)................. (0.93)% (0.82)% (0.54)% (1.05)%*
</TABLE>
- ------------------
* Annualized
** Less than one penny per share
(1) Commencement of operations February 22, 1996
(2) Commencement of operations June 13, 1996
(3) Commencement of operations June 11, 1996
(4) Commencement of operations January 30, 1996
(5) Commencement of operations January 18, 1996
<PAGE> 78
-75-
For the average shares outstanding for each year:
<TABLE>
<CAPTION>
HIGH YIELD BOND(4)
-------------------------------------------------
FOR THE YEAR ENDED
-------------------------------------------------
1999 1998 1997 1996
----------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period............. $ 11.55 $ 11.38 $ 10.68 $ 10.00
----------- ----------- ---------- --------
Income from investment operations:
Net investment income.......................... 0.90 0.96 0.94 0.21
Net gains on investments (both realized and
unrealized)................................. (0.89) (0.70) 0.37 0.66
----------- ----------- ---------- --------
Total from investment operations................. 0.01 0.26 1.31 0.87
----------- ----------- ---------- --------
Less: Dividends and distributions from:
Net investment income.......................... (1.17) (0.08) (0.58) (0.19)
In excess of net investment income............. (0.01) -- -- --
Net realized gain on investments............... -- (0.01) (0.03) --
In excess of net realized gain on
investments................................. -- -- -- --
Tax return of capital.......................... -- -- -- --
----------- ----------- ---------- --------
Total dividends and distributions................ (1.18) (0.09) (0.61) (0.19)
----------- ----------- ---------- --------
Net asset value, end of period................... $ 10.38 $ 11.55 $ 11.38 $ 10.68
=========== =========== ========== ========
Total return..................................... 0.04% 2.20% 12.28% 9.50%*
=========== =========== ========== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets end of period......................... $38,290,334 $22,994,590 $8,430,804 $738,100
=========== =========== ========== ========
Ratio of expenses to average net assets,
including expenses of the Series Portfolios.... 1.30% 1.40% 1.88% 25.60%*
Ratio of expenses to average net assets,
including expenses of the Series Portfolios
(net of reimbursement)......................... 1.10% 1.10% 1.10% 1.10%*
Ratio of net investment income to average net
assets......................................... 7.78% 7.89% 7.44% (16.15)%*
Ratio of net investment income to average net
assets (net of reimbursement).................. 7.98% 8.19% 8.22% 8.35%*
</TABLE>
- ------------------
* Annualized
** Less than one penny per share
(1) Commencement of operations February 22, 1996
(2) Commencement of operations June 13, 1996
(3) Commencement of operations June 11, 1996
(4) Commencement of operations January 30, 1996
(5) Commencement of operations January 18, 1996
<PAGE> 79
-76-
FOR THE AVERAGE SHARES OUTSTANDING FOR EACH YEAR:
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY(5)
-----------------------------------------------------
FOR THE YEAR ENDED
-----------------------------------------------------
1999 1998 1997 1996
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period......... $ 12.87 $ 11.86 $ 11.27 $ 10.00
------------ ----------- ----------- ----------
Income from investment operations:
Net investment income...................... 0.03 0.06 0.04 0.01
Net gains on investments (both realized and
unrealized)............................. 8.14 1.18 0.83 1.37
------------ ----------- ----------- ----------
Total from investment operations............. 8.17 1.24 0.87 1.38
------------ ----------- ----------- ----------
Less: Dividends and distributions from:
Net investment income...................... -- (0.01) (0.20) (0.01)
In excess of net investment income......... (0.08) -- -- --
Net realized gain on investments........... (0.33) (0.12) (0.08) (0.04)
In excess of net realized gain on
investments............................. -- -- -- (0.04)
Tax return of capital...................... -- (0.10) (0.00)** (0.02)
------------ ----------- ----------- ----------
Total dividends and distributions............ (0.41) (0.23) (0.28) (0.11)
------------ ----------- ----------- ----------
Net asset value, end of period............... $ 20.63 $ 12.87 $ 11.86 $ 11.27
============ =========== =========== ==========
Total return................................. 63.73% 10.47% 7.74% 14.59%*
============ =========== =========== ==========
RATIOS/SUPPLEMENTAL DATA:
Net assets end of period..................... $175,208,902 $63,404,266 $30,063,542 $2,398,279
============ =========== =========== ==========
Ratio of expenses to average net assets,
including expenses of the Series
Portfolios................................. 1.45% 1.53% 1.72% 9.79%*
Ratio of expenses to average net assets,
including expenses of the Series Portfolios
(net of reimbursement)..................... 1.40% 1.40% 1.40% 1.41%*
Ratio of net investment income to average net
assets..................................... 0.10% 0.35% (0.03)% (7.91)%*
Ratio of net investment income to average net
assets (net of reimbursement).............. 0.15% 0.48% 0.29% 0.48%*
</TABLE>
- ------------------
* Annualized
** Less than one penny per share
(1) Commencement of operations February 22, 1996
(2) Commencement of operations June 13, 1996
(3) Commencement of operations June 11, 1996
(4) Commencement of operations January 30, 1996
(5) Commencement of operations January 18, 1996
<PAGE> 80
-77-
For the average shares outstanding for each year:
<TABLE>
<CAPTION>
SHORT HORIZON
-------------------------------------------------
STRATEGIC ALLOCATION FUND
-------------------------------------------------
FOR THE YEAR ENDED
-------------------------------------------------
1999 1998 1997 1996(1)
----------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period............. 10.92 $ 10.70 $ 10.34 $ 10.00
----------- ----------- ---------- --------
Income from investment operations:
Net investment income.......................... 0.49 0.44 0.49 0.18
Net gains on investments (both realized and
unrealized)................................. (0.34) 0.24 0.41 0.36
----------- ----------- ---------- --------
Total from investment operations................. 0.15 0.68 0.90 0.54
----------- ----------- ---------- --------
Less: Dividends and distributions from:
Net investment income.......................... (0.47) (0.41) (0.52) (0.18)
Net realized gain on investments............... (0.04) (0.05) (0.02) (0.01)
Tax return of capital.......................... -- (0.00)** -- (0.01)
----------- ----------- ---------- --------
Total dividends and distributions................ (0.51) (0.46) (0.54) (0.20)
----------- ----------- ---------- --------
Net asset value, end of period................... 10.56 $ 10.92 $ 10.70 $ 10.34
=========== =========== ========== ========
Total return..................................... 1.45% 6.37% 8.69% 7.74%*
=========== =========== ========== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets end of period......................... $16,574,749 $13,019,430 $6,015,072 $742,127
=========== =========== ========== ========
Ratio of expenses to average net assets.......... 0.20% 0.20% 0.02% 0.20%*
Ratio of net investment income to average net
assets......................................... 4.48% 4.00% 4.49% 11.60%*
Portfolio Turnover Rate.......................... 41% 113% 348% 466%
</TABLE>
- ------------------
* Annualized
** Less than one penny per share
(1) Commencement of operations April 15, 1996
(2) Commencement of operations May 1, 1998
<PAGE> 81
-78-
For the average shares outstanding for each year:
<TABLE>
<CAPTION>
SHORT INTERMEDIATE
-------------------------------
HORIZON STRATEGIC
-------------------------------
ALLOCATION FUND
-------------------------------
FOR THE YEAR ENDED
-------------------------------
1999 1998(2)
---------- ------------------
<S> <C> <C>
Net asset value, beginning of period........................ $ 10.04 $ 10.00
---------- ----------
Income from investment operations:
Net investment income..................................... 0.61 0.46
Net gains on investments (both realized and unrealized)... 0.15 (0.09)
---------- ----------
Total from investment operations............................ 0.76 0.37
---------- ----------
Less: Dividends and distributions from:
Net investment income..................................... (0.47) (0.27)
Net realized gain on investments.......................... (0.08) (0.06)
Tax return of capital..................................... -- (0.00)**
---------- ----------
Total dividends and distributions........................... (0.55) (0.33)
---------- ----------
Net asset value, end of period.............................. $ 10.25 $ 10.04
========== ==========
Total return................................................ 7.70% 3.73%*
========== ==========
RATIOS/SUPPLEMENTAL DATA:
Net assets end of period.................................... $9,703,880 $3,657,312
========== ==========
Ratio of expenses to average net assets, including expenses
of the Series Portfolios.................................. 0.20% 0.20%
Ratio of net investment income to average net assets........ 5.91% 6.94%
Portfolio Turnover Rate..................................... 119% 260%
</TABLE>
- ------------------
* Annualized
** Less than one penny per share
(1) Commencement of operations April 15, 1996
(2) Commencement of operations May 1, 1998
<PAGE> 82
-79-
For the average shares outstanding for each year:
<TABLE>
<CAPTION>
INTERMEDIATE HORIZON
----------------------------------------------------
STRATEGIC ALLOCATION FUND
----------------------------------------------------
FOR THE YEAR ENDED
----------------------------------------------------
1999 1998 1997 1996(1)
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.......... 11.83 $ 10.98 $ 10.32 $ 10.00
----------- ----------- ----------- ----------
Income from investment operations:
Net investment income....................... 0.57 0.34 0.48 0.13
Net gains on investments (both realized and
unrealized).............................. 0.96 1.00 0.99 0.42
----------- ----------- ----------- ----------
Total from investment operations.............. 1.53 1.34 1.47 0.55
----------- ----------- ----------- ----------
Less: Dividends and distributions from:
Net investment income....................... (0.49) (0.35) (0.72) (0.13)
Net realized gain on investments............ (0.23) (0.14) (0.08) (0.10)
Tax return of capital....................... -- (0.00)** (0.01) --
----------- ----------- ----------- ----------
Total dividends and distributions............. (0.72) (0.49) (0.81) (0.23)
----------- ----------- ----------- ----------
Net asset value, end of period................ $ 12.64 $ 11.83 $ 10.98 $ 10.32
=========== =========== =========== ==========
Total return.................................. 13.14% 12.27% 14.29% 7.94%*
=========== =========== =========== ==========
RATIOS/SUPPLEMENTAL DATA:
Net assets end of period...................... $94,988,890 $57,365,875 $24,664,668 $2,820,072
=========== =========== =========== ==========
Ratio of expenses to average net assets,
including expenses of the Series
Portfolios.................................. 0.20% 0.20% 0.02% 0.02%
Ratio of net investment income to average net
assets...................................... 4.59% 2.97% 4.26% 7.88%*
Portfolio Turnover Rate....................... 56% 124% 322% 469%
</TABLE>
- ------------------
* Annualized
** Less than one penny per share
(1) Commencement of operations April 15, 1996
(2) Commencement of operations May 1, 1998
<PAGE> 83
-80-
For the average shares outstanding for each year:
<TABLE>
<CAPTION>
INTERMEDIATE LONG HORIZON
----------------------------------------------------
STRATEGIC ALLOCATION FUND
----------------------------------------------------
FOR THE YEAR ENDED
----------------------------------------------------
1999 1998 1997 1996(1)
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.......... 12.32 $ 11.32 $ 10.30 $ 10.00
----------- ----------- ----------- ----------
Income from investment operations:
Net investment income....................... 0.51 0.28 0.09 0.09
Net gains on investments (both realized and
unrealized).............................. 1.80 1.29 1.53 0.47
----------- ----------- ----------- ----------
Total from investment operations.............. 2.31 1.57 1.94 0.56
----------- ----------- ----------- ----------
Less: Dividends and distributions from:
Net investment income....................... (0.46) (0.39) (0.80) (0.09)
Net realized gain on investments............ (0.57) (0.18) (0.11) (0.17)
Tax return of capital....................... -- (0.00)** (0.01) --
----------- ----------- ----------- ----------
Total dividends and distributions............. (1.03) (0.57) (0.92) (0.26)
----------- ----------- ----------- ----------
Net asset value, end of period................ 13.60 $ 12.32 $ 11.32 $ 10.30
=========== =========== =========== ==========
Total return.................................. 19.06% 14.02% 18.95% 8.02%*
=========== =========== =========== ==========
RATIOS/SUPPLEMENTAL DATA:
Net assets end of period...................... 127,900,157 $62,688,689 $25,866,529 $2,173,362
=========== =========== =========== ==========
Ratio of expenses to average net assets,
including expenses of the Series
Portfolios.................................. 0.20% 0.20% 0.20% 0.20%*
Ratio of net investment income to average net
assets...................................... 3.90% 2.33% 3.55% 2.03%*
Portfolio turnover rate....................... 107% 135% 336% 418%
</TABLE>
- ------------------
* Annualized
** Less than one penny per share
(1) Commencement of operations April 15, 1996
(2) Commencement of operations May 1, 1998
<PAGE> 84
-81-
For the average shares outstanding for each year:
<TABLE>
<CAPTION>
LONG HORIZON
-------------------------
STRATEGIC ALLOCATION FUND
-------------------------
FOR THE YEAR ENDED
-------------------------
1999 1998(2)
----------- -----------
<S> <C> <C>
Net asset value, beginning of period........................ 10.08 $ 10.00
----------- -----------
Income from investment operations:
Net investment income..................................... 0.39 0.21
Net gains on investments (both realized and unrealized)... 2.34 0.16
----------- -----------
Total from investment operations............................ 2.73 0.37
----------- -----------
Less: Dividends and distributions from:
Net investment income..................................... (0.27) (0.12)
Net realized gain on investments.......................... (0.22) (0.17)
Tax return of capital..................................... -- (0.00)**
----------- -----------
Total dividends and distributions........................... (0.49) (0.29)
----------- -----------
Net asset value, end of period.............................. 12.32 $ 10.08
=========== ===========
Total return................................................ 27.41% 3.81%*
=========== ===========
RATIOS/SUPPLEMENTAL DATA:
Net assets end of period.................................... 37,930,335 $10,672,299
=========== ===========
Ratio of expenses to average net assets, including expenses
of the Series Portfolios.................................. .20% 0.20%*
Ratio of net investment income to average net assets........ 3.49% 3.35%*
Portfolio turnover rate..................................... 108% 276%
</TABLE>
- ------------------
* Annualized
** Less than one penny per share
(1) Commencement of operations April 15, 1996
(2) Commencement of operations May 1, 1998
<PAGE> 85
A-1
APPENDIX A
STRATEGIC ALLOCATION FUNDS
Under normal circumstances, the Strategic Allocation Funds are allocated among
the Money Market, Bond and Stock Funds, other than the Stock Index Funds as
follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
SHORT HORIZON SHORT/INTERMEDIATE INTERMEDIATE HORIZON
STRATEGIC HORIZON STRATEGIC STRATEGIC
ALLOCATION FUND ALLOCATION FUND ALLOCATION FUND
-----------------------------------------------------------------------------------------
TARGET TARGET TARGET
NORMAL WITHIN NORMAL WITHIN NORMAL WITHIN
RANGE RANGE RANGE RANGE RANGE RANGE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MONEY MARKET 0-20% 10% 0-10% 0% 0-10% 0%
- ------------------------------------------------------------------------------------------------------------------------------------
High Quality Bond 10-30% 20% 5-25% 15% 0-20% 10%
- ------------------------------------------------------------------------------------------------------------------------------------
Intermediate Government Bond 10-30% 20% 0-15% 5% 0-15% 5%
- ------------------------------------------------------------------------------------------------------------------------------------
Core Bond 20-40% 30% 25-45% 35% 15-35% 25%
- ------------------------------------------------------------------------------------------------------------------------------------
High-Yield Bond 0-20% 10% 5-25% 15% 0-20% 10%
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income 0-20% 10% 0-15% 5% 0-20% 9%
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Value N/A N/A 0-15% 4% 0-15% 6%
- ------------------------------------------------------------------------------------------------------------------------------------
Growth & Income N/A N/A 0-15% 5% 0-20% 8%
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Growth N/A N/A 0-15% 4% 0-15% 7%
- ------------------------------------------------------------------------------------------------------------------------------------
Special Equity N/A N/A 0-15% 6% 0-20% 10%
- ------------------------------------------------------------------------------------------------------------------------------------
Aggressive Equity N/A N/A 0-10% 2% 0-10% 3%
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity N/A N/A 0-15% 4% 0-15% 7%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 86
A-2
<TABLE>
<CAPTION>
-----------------------------------------------------------
INTERMEDIATE/LONG LONG HORIZON
HORIZON STRATEGIC STRATEGIC
ALLOCATION FUND ALLOCATION FUND
-----------------------------------------------------------
TARGET TARGET
NORMAL WITHIN NORMAL WITHIN
RANGE RANGE RANGE RANGE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MONEY MARKET 0-10% 0% 0-10% 0%
- ------------------------------------------------------------------------------------------------------
HIGH QUALITY BOND 0-15% 5% 0-10% 0%
- ------------------------------------------------------------------------------------------------------
INTERMEDIATE GOVERNMENT BOND 0-15% 5% 0-10% 0%
- ------------------------------------------------------------------------------------------------------
CORE BOND 0-20% 12% 0-10% 0%
- ------------------------------------------------------------------------------------------------------
HIGH-YIELD BOND 0-15% 8% 0-10% 0%
- ------------------------------------------------------------------------------------------------------
EQUITY INCOME 0-20% 12% 10-30% 18%
- ------------------------------------------------------------------------------------------------------
EQUITY VALUE 0-20% 9% 0-20% 12%
- ------------------------------------------------------------------------------------------------------
GROWTH & INCOME 0-20% 11% 5-25% 15%
- ------------------------------------------------------------------------------------------------------
EQUITY GROWTH 0-20% 10% 5-25% 15%
- ------------------------------------------------------------------------------------------------------
SPECIAL EQUITY 0-20% 14% 10-30% 20%
- ------------------------------------------------------------------------------------------------------
AGGRESSIVE EQUITY 0-10% 4% 0-15% 5%
- ------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY 0-20% 10% 5-25% 15%
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 87
B-1
APPENDIX B
INSTRUCTIONS FOR PURCHASES AND SALES 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
4 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
4 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 fifteen 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
(800) 926-0044 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.
SALES (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.
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 telephone 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.
<PAGE> 88
C-1
APPENDIX C
COMPOSITE PERFORMANCE OF SUBADVISERS
The following table sets forth the composite average annual total returns of all
institutional private accounts and collective investment vehicles managed by the
subadvisers to the High-Yield Bond Fund, Equity Value Fund, Growth & Income
Fund, Equity Growth Fund and Aggressive Equity Fund, where the amounts and
investment vehicles have investment objectives, policies and restrictions
substantially similar to the applicable Fund and have been managed in
substantially the same way that the underlying Portfolio in which each Fund
invests 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. These composite returns 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.
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 of 1940 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 subadvisers'
composites presented below are unaudited. The use of a methodology different
from that used to calculate the performance data 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 unless
otherwise indicated. 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, 1999.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
SINCE
1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DELAWARE INVESTMENT ADVISERS, SUBADVISER TO
HIGH-YIELD BOND FUND
--------------------------------------------------------------------------------------------------------------------
SUBADVISER'S COMPOSITE(1) 0.55% 5.23% 7.77% 8.79% 11.00%
--------------------------------------------------------------------------------------------------------------------
SALOMON BROTHERS HIGH-YIELD CASH PAY
INDEX(2) 0.82% 6.00% 9.50% 10.47% 7.66%
--------------------------------------------------------------------------------------------------------------------
LIPPER HIGH YIELD BOND FUND INDEX(3) 4.78% 5.82% 9.46% 10.34% 10.58%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
ARK ASSET MANAGEMENT CO., INC., SUBADVISER TO
EQUITY VALUE FUND
--------------------------------------------------------------------------------------------------------------------
SUBADVISER'S COMPOSITE(4) -2.97% 9.48% 17.27% 13.74% 15.48%
--------------------------------------------------------------------------------------------------------------------
RUSSELL 1000 VALUE INDEX(5) 7.35% 18.83% 23.07% 15.60% 19.54%
--------------------------------------------------------------------------------------------------------------------
LIPPER VALUE INDEX(6) 10.78% 18.94% 22.10% 15.41% 16.13%
--------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 89
C-2
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
SINCE
1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PUTNAM ADVISORY COMPANY, INC., SUBADVISER TO
GROWTH & INCOME FUND
--------------------------------------------------------------------------------------------------------------------
SUBADVISER'S COMPOSITE(7) 30.30% 33.19% 31.50% 20.89% 21.98%
--------------------------------------------------------------------------------------------------------------------
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE
INDEX(8) 21.14% 27.66% 28.66% 18.25% 18.03%
--------------------------------------------------------------------------------------------------------------------
LIPPER GROWTH FUND
INDEX(6) 34.82% 32.90% 30.73% 19.70% 18.44%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
DRESDNER RCM GLOBAL INVESTORS LLC, SUBADVISER
TO EQUITY GROWTH FUND
--------------------------------------------------------------------------------------------------------------------
SUBADVISER'S COMPOSITE(9) 50.46% 43.11% 36.96% 22.11% 20.86%
--------------------------------------------------------------------------------------------------------------------
RUSSELL 1000 GROWTH INDEX(10) 33.16% 34.07% 32.41% 20.32% 19.19%
--------------------------------------------------------------------------------------------------------------------
LIPPER GROWTH FUND INDEX(11) 34.82% 32.90% 30.73% 19.70% 20.80%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
MONTAG & CALDWELL INCORPORATED
SUBADVISER TO EQUITY GROWTH FUND
--------------------------------------------------------------------------------------------------------------------
SUBADVISER'S COMPOSITE(12) 22.22% 27.38% 30.53% 20.70% 19.35%
--------------------------------------------------------------------------------------------------------------------
RUSSELL 1000 GROWTH INDEX(10) 33.16% 34.07% 32.41% 20.32% 19.19%
--------------------------------------------------------------------------------------------------------------------
LIPPER GROWTH FUND INDEX(11) 34.82% 32.90% 30.73% 19.70% 20.80%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
MCKINLEY CAPITAL MANAGEMENT, INC., SUBADVISER
TO AGGRESSIVE EQUITY FUND
--------------------------------------------------------------------------------------------------------------------
SUBADVISER'S COMPOSITE(13) 64.26% 35.93% 32.51% N/A 30.02%
--------------------------------------------------------------------------------------------------------------------
RUSSELL 2000 GROWTH INDEX(14) 43.09% 17.83% 18.99% 13.51% 18.05%
--------------------------------------------------------------------------------------------------------------------
LIPPER MULTI-CAP FUND INDEX(15) 46.35% 30.95% 28.75% 19.10% 22.74%
--------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commencement of investment operations is January 1, 1980 for the
subadviser's composite. The composite is AIMR compliant for all periods
after January 1, 1993.
(2) The Salomon Brothers High-Yield Cash Pay 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 Lipper High Yield Bond 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 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 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 Standard & Poor's 500 Composite Stock Price Index 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.
<PAGE> 90
C-3
(9) Commencement of investment operations is January 1, 1986 for the
subadviser's composite.
(10) The Russell 1000 Growth Index measures the performance of those
companies included in the Russell 1000 Index with higher price-to-book
ratios and higher forecasted growth values. The Russell 1000 Index
measures the performance of the one thousand largest companies in the
Russell 3000 Index, which represents approximately 90% of the total
market capitalization of the Russell 3000 Index (the Russell 3000 Index
represents approximately 98% of the investable U.S. equity market).
(11) 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".
(12) Commencement of investment operations is January 1, 1986 for the
subadviser's composite.
(13) Commencement of investment operations is October 1, 1990 for the
subadviser's composite.
(14) 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).
(15) 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> 91
C-4
The Statement of Additional Information (SAI) provides more details about the
Funds and their policies. The SAI is incorporated by reference into this
prospectus and is legally part of it.
Additional information about each Fund's investments is available in the Funds'
Annual and Semi-Annual Reports to Shareholders. In the Funds' Annual Report, you
will find a discussion of the market conditions and investment strategies that
significantly affected each Fund's performance.
The Annual and Semi-Annual Reports for the Funds list their portfolio holdings
and describe their performance.
To obtain free copies of the SAI and the Annual and Semi-Annual Reports or to
make other inquiries, please call toll free (800) 926-0044.
The SAI is also available from the Securities and Exchange Commission. You can
find it on the SEC Internet site at http://www.sec.gov. Information about the
Fund (including the SAI) can also be reviewed and copied at the SEC's Public
Reference Room in Washington, DC. You can get information on the operation of
the Public Reference Room by calling the SEC at 1-202-942-8090. You can receive
copies of this information by sending your request and a duplicating fee to the
SEC's Public Reference Section, Washington, DC 20549-0102.
SEC file numbers: 811-7674
811-07495
<PAGE> 92
THE DIVERSIFIED INVESTORS FUNDS GROUP
THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000
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 Core Bond Fund
Diversified Investors High-Yield Bond Fund
BALANCED FUND:
Diversified Investors Balanced Fund
STOCK FUNDS:
Diversified Investors Stock Index Fund
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
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 dated May 1, 2000, as supplemented from time to time (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 for Diversified Class shares, please contact Diversified Investors
Securities Corp., the Funds' Distributor, at the address and telephone number
listed on the next page. To obtain a Prospectus for Stephens Premium Class
shares or Stephens Institutional Class shares, please contact the Transfer Desk
of Stephens Capital Management at (800)-926-0044.
This Statement of Additional Information incorporates by reference the financial
statements of the Funds. These financial statements can be found in the Funds'
annual reports to shareholders, copies of which accompany this Statement of
Additional Information.
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.
<PAGE> 93
THE DIVERSIFIED INVESTORS FUNDS GROUP
THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
FOUR MANHATTANVILLE ROAD
PURCHASE, NEW YORK 10577
800-926-0044
The Diversified Investors Funds Group is a Massachusetts business trust whose
shares currently are divided into sixteen separate series of shares, or funds.
The Diversified Investors Strategic Allocation Funds is a Massachusetts business
trust whose shares currently are divided into five separate series of shares, or
funds. This Statement of Additional Information relates to the shares of each
Fund listed on the first page hereof.
Shares of the Funds are divided into separate classes. Each Fund other than the
Stephens Intermediate Bond Fund and Stephens Select Equity Fund 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 issues Stephens Premium Class shares
and Stephens Institutional Class shares. For more information on classes of
shares, see page 52 and the Prospectuses.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Trusts.................................................. 2
Investment Objectives, Policies and Associated Risk Factors
of the Funds.............................................. 3
Performance Information..................................... 27
Determination of Net Asset Value; Valuation of Securities... 30
Management.................................................. 32
Investment Advisory Services................................ 36
Administrator...............................................
Custodian and Transfer Agent................................ 43
Miscellaneous............................................... 44
Taxation.................................................... 44
Distribution Plans.......................................... 47
Independent Accountants..................................... 50
Description of the Trusts; Fund Shares...................... 50
Financial Statements........................................ 51
Appendix A -- Description of Security Ratings............... A-1
</TABLE>
<PAGE> 94
-2-
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 sixteen 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 Trusts may create additional series from time to time.
Each of the Money Market, Bond (other than Stephens Intermediate Bond), Balanced
and Stock (other than Stephens Select Equity) Funds seeks its investment
objective by investing all of its assets in an underlying Portfolio having the
same investment objectives and policies. All references in this Statement of
Additional Information to one of these Funds include the Fund's underlying
Portfolio, unless otherwise noted. The Stephens Intermediate Bond and Stephens
Select Equity Funds seek their investment objectives by investing directly in
securities pursuant to the investment strategies and techniques described herein
and in the Prospectus for these Funds. Each of the Strategic Allocation Funds
seeks its investment objective by investing in a combination of the Money
Market, Bond and Stock Funds.
Each of the Portfolios (except the S&P 500 Index Master Portfolio) is a series
of Diversified Investors Portfolios. The S&P 500 Index Master Portfolio(1) is a
series of Master Investment Portfolio. Diversified Investors Portfolios and
Master Investment Portfolio are referred to as the "Underlying Portfolio
Trusts."
Diversified Investment Advisors, Inc. ("Diversified") is the investment adviser
of each Portfolio (except the S&P 500 Index Master Portfolio), the Stock Index
Fund, each Strategic Allocation Fund and the Stephens Intermediate Bond and
Stephens Select Equity Funds. Barclays Global Fund Advisors is the investment
adviser of the S&P 500 Index Master Portfolio.
- ---------------
(1) Standard & Poor's does not sponsor S&P 500 Index Master Portfolio, nor is it
affiliated in any way with Barclays Global Fund Advisors or S&P 500 Index
Portfolio. "Standard & Poor's(R)," "S&P 500(R)," and "Standard & Poor's
500(R)" are trademarks of The McGraw-Hill Companies, Inc. The Portfolio is
not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard
& Poor's makes no representation or warranty, express or implied, regarding
the advisability of investing in S&P 500 Index Master Portfolio.
<PAGE> 95
-3-
Diversified delegates the daily management of each Portfolio of which it is the
investment adviser and each of the Stephens Funds to one or more Subadvisers.
Diversified supervises and monitors the Subadvisers. The Subadvisers are as
follows:
<TABLE>
<CAPTION>
FUND OR PORTFOLIO SUBADVISER
<S> <C>
Money Market Portfolio................................ Capital Management Group
High Quality Bond Portfolio........................... Merganser Capital Management Corporation
Intermediate Government Bond Portfolio................ Capital Management Group
Stephens Intermediate Bond Fund....................... Stephens Capital Management
Core Bond Portfolio................................... Payden & Rygel
High-Yield Bond Portfolio............................. Delaware Investment Advisers
Balanced Portfolio.................................... Aeltus Investment Management, Inc.
Payden & Rygel
Equity Value Portfolio................................ Ark Asset Management Co., Inc.
Equity Income Portfolio............................... Asset Management Group
Growth & Income Portfolio............................. Putnam Advisory Company, Inc.
Equity Growth Portfolio............................... Dresdner RCM Global Investors, LLC
Montag & Caldwell Incorporated
Special Equity Portfolio.............................. Husic Capital Management
RS Investment Management, L.P.
Goldman Sachs Asset Management
Westport Asset Management, Inc.
Stephens Select Equity Fund........................... Stephens Capital Management
Aggressive Equity Portfolio........................... McKinley Capital Management, Inc.
International Equity Portfolio........................ Capital Guardian Trust Company
</TABLE>
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.
INVESTMENT POLICIES
The following supplements the discussion of the various investment strategies
and techniques employed by the Funds as set forth in the Prospectuses.
The Stock Index Fund, while not prohibited from investing in the various types
of securities described below or utilizing the investment techniques described
below, will invest primarily in the stocks that make up the Standard & Poor's
500 Composite Stock Price Index (the "S&P 500 Index"), money market and other
short-term instruments and S&P 500 Index futures.
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
<PAGE> 96
-4-
and loan associations and other banking institutions. The Funds have established
certain minimum credit quality standards for bank obligations in which they
invest.
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.
U.S. GOVERNMENT AND AGENCY SECURITIES
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" below for more information.
U.S. Treasury securities 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.
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. Some obligations issued or
guaranteed by U.S. Government agencies and instrumentalities, for example, GNMA
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
<PAGE> 97
-5-
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
purchasers.
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. 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.
Frequently, such obligations are backed 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,
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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 Fund's Subadviser determines that at the time of investment
the obligations are of comparable quality to the other obligations in which the
Fund may invest. The applicable Subadviser, 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 and Stock Index Funds) 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 Fund's Subadviser 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.
ILLIQUID SECURITIES
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.
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. The absence of
a trading market can make it difficult to ascertain a market value for these
investments. In addition, 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
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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.
Rule 144A under the 1933 Act 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 applicable Subadviser will monitor the liquidity of Rule 144A securities for
each Fund under the supervision of the applicable Portfolio Trust's or Trust's
Board of Trustees. In reaching liquidity decisions, the Subadviser 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).
The liquidity of Rule 144A securities could be impaired if trading in these
investments does not develop or if qualified institutional buyers become, for a
time, uninterested in purchasing Rule 144A securities.
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.
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. 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
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agreements also involve the risk that the market value of the securities sold by
the Fund may decline below the repurchase price of those securities.
The Funds may, together with other registered investment companies managed by
the Funds' Subadvisers or their affiliates, transfer uninvested cash balances
into a single joint account, the daily aggregate balance of which will be
invested in one or more repurchase agreements, including tri-party subcustody
repurchase arrangements.
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 foreign securities exchanges,
brokers and listed companies than in the United States.
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 Fund's
Subadviser 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.
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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
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
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.
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
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
affected 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.
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
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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.
The Funds (other than the International Equity Fund) will not routinely enter
into foreign currency hedging transactions with respect to security
transactions; however, the Funds may do so when their Subadvisers 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 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.
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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
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.
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 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.
A Fund may acquire zero coupon obligations when consistent with its investment
objective and policies. 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.
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. or foreign stocks, 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,
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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 may be 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 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 generally 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.
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When a Fund enters into futures contracts, the Fund will establish a segregated
account to cover the Fund's obligations with respect to such futures contracts.
The assets in the account 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 or other trends by the applicable
Subadviser may still not result in a successful transaction.
In addition, futures contracts entail risks. Although the Subadvisers believe
that use of such contracts will benefit the Funds, if the Subadvisers'
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.
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 securities, it may or may not be less risky than ownership of the
futures contract or underlying 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
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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 Diversified Investors Portfolios 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 a 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 a Board 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 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
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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.
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
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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
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 applicable Subadviser's skill and
experience with respect to such instruments. Should stock prices, 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
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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 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. 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 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 applicable Subadviser
will monitor the creditworthiness of dealers with whom a Fund enters into such
options transactions under the general supervision of Diversified and the
applicable Board of Trustees.
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
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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 applicable
Subadviser believes 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. A Fund will not purchase such options unless the
applicable Subadviser believes 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, a Fund 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, it is not expected that more than 40% of a
Fund's total assets would be involved in short sales against the box. The Funds
do not currently intend to engage in such sales.
REAL ESTATE INVESTMENT TRUSTS
Real Estate Investment Trusts ("REITs") pool investors' funds for investment
primarily in income producing real estate or real estate related loans or
interests. A REIT is not taxed on income distributed to its shareholders or
unitholders if it complies with regulatory requirements relating to its
organization, ownership, assets and income and a regulatory requirement that it
distribute to its shareholders or unitholders as least 95% of its taxable income
for each taxable year. Generally, REITs can be classified as Equity REITs,
Mortgage REITs and hybrid REITs. Equity REITs invest the majority of their
assets directly in real property and derive their income primarily through rents
and capital gains from appreciation realized through property sales. Equity
REITs may be affected by changes in the value of the underlying property owned
by the REITs. Mortgage REITs invest the majority of their assets in real
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estate mortgages and derive their income primarily from interest payments.
Mortgage REITs are sensitive to the credit quality of the underlying borrowers.
Hybrid REITs combine the characteristics of both Equity and Mortgage REITs. The
value of REITs may be affected by management skill, cash flow and tax and
regulatory requirements. REITs are also subject to risks generally associated
with investments in real estate. A Fund will indirectly bear its proportionate
share of any expenses, including management fees, paid by a REIT in which it
invests.
LOANS OF PORTFOLIO SECURITIES
Each Fund may lend securities from its portfolio to brokers, dealers and
financial institutions (but not individuals) if cash, U.S. Government securities
or other high quality debt obligations equal to at least 100% of the current
market value of the securities loaned (including accrued interest thereon) plus
the interest payable to the Fund with respect to the loan is maintained with the
Fund. In determining whether or not to lend a security to a particular broker,
dealer or financial institution, the Fund's Subadviser considers all relevant
facts and circumstances, including the size, creditworthiness and reputation of
the broker, dealer or financial institution. Any loans of portfolio securities
are fully collateralized based on values that are marked to market daily. No
Fund enters into any portfolio security lending arrangements having a duration
longer than one year. Any securities that a Fund receives as collateral do not
become part of its portfolio at the time of the loan and, in the event of a
default by the borrower, the Fund will, if permitted by law, dispose of such
collateral except for such part thereof that is a security in which the Fund is
permitted to invest. During the time securities are on loan, the borrower will
pay the Fund any accrued income on those securities, and the Fund may invest the
cash collateral and earned income or receive an agreed-upon fee from a borrower
that has delivered cash-equivalent collateral. In the event of the bankruptcy of
the other party to a securities loan, the 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, a Fund could experience a loss. No Fund will
lend securities having a value that exceeds one-third of the current value of
its total assets. Loans of securities by a Fund are subject to termination at
the Fund's or the borrower's option. A Fund may pay reasonable administrative
and custodial fees in connection with a securities loan and may pay a negotiated
portion of the interest or fee earned with respect to the collateral to the
borrower or the placing broker.
INVESTMENTS IN WARRANTS
The Stock Index Fund may invest up to 5% of net assets at the time of purchase
in warrants (other than those that have been acquired in units or attached to
other securities), including not more than 2% of each of their net assets in
warrants which are not listed on the New York or American Stock Exchange. 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. The prices of warrants do not
necessarily correlate with the prices of the underlying securities. The Stock
Index fund may only purchase warrants on securities in which the Fund may invest
directly.
TEMPORARY DEFENSIVE POSITIONS
Each Fund may, from time to time, take temporary defensive positions that are
inconsistent with the Fund's principal investment strategies in attempting to
respond to adverse market, political or other conditions. When doing so, the
Fund may invest without limit in high quality money market and other short-term
instruments, and may not be pursuing its investment goal. These investments may
result in a lower yield than would be available from investments with a lower
quality or longer term.
CERTAIN OTHER OBLIGATIONS
Each Fund may invest in instruments other than those listed previously, provided
such investments are consistent with the Fund's investment objective, policies
and restrictions.
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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 Subadvisers also make their own evaluations of these
securities. 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
applicable Subadviser will consider such an event in its determination of
whether the Fund should continue to hold the obligation. A description of the
ratings used herein and in the Prospectuses is set forth in Appendix A.
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 a Fund (or a 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 (except in limited circumstances as
permitted by applicable rules and regulations) will either hold a meeting of its
shareholders and cast its vote as instructed by shareholders, or otherwise vote
in accordance with applicable law. 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 (OTHER THAN THE
STOCK INDEX FUND AND THE S&P 500 INDEX MASTER PORTFOLIO)
Fundamental Policies. As a matter of fundamental policy, no Money Market, Bond,
Balanced or Stock Portfolio (or Money Market, Bond, Balanced or Stock Fund,
except for the Stock Index Fund and the S&P 500 Index Master Portfolio) 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
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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 Trusts 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 Trust (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).
(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.
For purposes of restriction (1) above, arrangements with respect to securities
lending are not treated as borrowing.
As a matter of fundamental policy, the Stock Index Fund may not (except that no
investment restriction of the Fund shall prevent the Fund from investing all of
its assets in an open-end investment company with the same or a similar
investment objective as the Fund):
(1) Borrow money, except that as a temporary measure for extraordinary or
emergency purposes it may borrow in an amount not to exceed 1/3 of the
current value of its net assets, including the amount borrowed, or purchase
any securities at any time at which borrowings exceed 5% of the total
assets of the Fund taken at market value. It is intended that the Fund
would borrow money only from banks and only to accommodate requests for the
repurchase of shares of the Fund while effecting an orderly liquidation of
portfolio securities.
(2) Underwrite securities issued by other persons except that all or any
portion of the assets of the Fund may be invested in one or more investment
companies, to the extent not prohibited by the 1940 Act, the rules and
regulations thereunder, and exemptive orders granted under such Act, and
except insofar as the Fund may technically be deemed an underwriter under
the Securities Act in selling a security.
(3) Make loans to other persons except (a) through the lending of its
portfolio securities and provided that any such loan not exceed 30% of the
Fund's total assets (taken at market value), (b) through the use of
repurchase agreements or fixed time deposits or the purchase of short-term
obligations or (c) by purchasing all or a portion of an issue of debt
securities of types commonly distributed privately to financial
institutions. The purchase of short-term commercial paper or a portion of
an issue of debt securities which is part of an issue to the public shall
not be considered the making of a loan.
<PAGE> 114
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(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
in the ordinary course of business (the foregoing shall not be deemed to
preclude the Fund from purchasing or selling futures contracts or options
thereon, and the Fund reserves the freedom of action to hold and to sell
real estate acquired as a result of the ownership of securities by the
Fund).
(5) Concentrate its investments in any particular industry, but if it is
deemed appropriate for the achievement of the Fund's investment objective,
up to 25% of its assets, at market value at the time of each investment,
may be invested in any one industry, except that positions in futures
contracts shall not be subject to this restriction and except that this
restriction shall not apply to any industry in which the S&P 500 Index (or
any other index which the Fund selects to track its performance) becomes
concentrated to the extent the Fund likewise becomes concentrated.
(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.
Non-Fundamental Policies. Each Fund (other than the Stock Index Fund and the
Stephens Intermediate Bond and Stephens Select Equity Funds) will not, as a
matter of operating policy, acquire any securities of registered open-end
investment companies or registered unit investment trusts in reliance on Section
12(d)(1)(F) or 12(d)(1)(G) of the 1940 Act. This policy does not prevent a Fund
from investing in securities of registered open-end investment companies or
registered unit investment trusts in reliance on any other provision of
applicable law or regulation.
Each Portfolio will not, as a matter of operating policy, acquire any securities
of registered open-end investment companies or registered unit investment trusts
in reliance on Section 12(d)(1)(F) or Section 12(d)(1)(G) of the 1940 Act.
These policies may be changed by the Board of Trustees of Diversified Investors
Portfolios 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.
<PAGE> 115
-23-
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. 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).
S&P 500 INDEX MASTER PORTFOLIO
As a matter of fundamental policy, the S&P 500 Index Master Portfolio may not:
(1) Invest more than 5% of its assets in the obligations of any single
issuer, except that up to 25% of the value of its total assets may be
invested, and securities issued or guaranteed by the U.S. Government,
or its agencies or instrumentalities may be purchased, without regard
to such limitation.
(2) Hold more than 10% of the outstanding voting securities of any single
issuer. This Investment Restriction applies only with respect to 75% of
its total assets.
(3) Invest in commodities, except that the Portfolio may purchase and sell
(i.e., write) options, forward contracts, futures contracts, including
those relating to indexes, and options on futures contracts or indexes.
(4) Purchase, hold or deal in real estate, or oil, gas or other mineral
leases or exploration or development programs, but the Portfolio may
purchase and sell securities that are secured by real estate or issued
by companies that invest or deal in real estate.
(5) Borrow money, except to the extent permitted under the 1940 Act, except
that the Portfolio may borrow up to 20% of the current value of its net
assets for temporary purposes only in order to meet redemptions, and
these borrowings may be secured by the pledge of up to 20% of the
current value of its net assets (but investments may not be purchased
while any such outstanding borrowing in excess of 5% of its net assets
exists). For purposes of this investment restriction, the Portfolio's
entry into options, forward contracts, futures contracts, including
those relating to indexes, and options on future contracts or indexes
shall not constitute borrowing to the extent certain segregated
accounts are established and maintained by the Portfolio.
(6) Make loans to others, except through the purchase of debt obligations
and the entry into repurchase agreements. However, the Portfolio may
lend its portfolio securities in an amount not to exceed one-third of
the value of its total assets. Any loans of portfolio securities will
be made according to guidelines established by the Securities and
Exchange Commission and Master Investment Portfolio's Board of
Trustees.
(7) Act as an underwriter of securities of other issuers, except to the
extent the Portfolio may be deemed an underwriter under the Securities
Act of 1933, as amended, by virtue of disposing of portfolio
securities.
(8) Invest 25% or more of its total assets in the securities of issuers in
any particular industry or group of closely related industries and
except that there shall be no limitation with respect to investments in
(i) obligations of the U.S. Government, its agencies or
instrumentalities; and (ii) any industry in which the S&P 500 Index
becomes concentrated to the same degree during the same period.
<PAGE> 116
-24-
(9) Issue any senior security (as such term is defined in Section 18(f) of
the 1940 Act), except to the extent the activities permitted in
Investment Restriction Nos. 3 and 5 may be deemed to give rise to a
senior security.
(10) Purchase securities on margin, but the Portfolio may make margin
deposits in connection with transactions in options, forward
contracts, futures contracts, including those related to indexes, and
options on futures contracts or indexes.
Non-fundamental Policies: The S&P 500 Index Master Portfolio may not as a matter
of operating policy:
(1) Invest in the securities of a company for the purpose of exercising
management or control, but the Portfolio will vote the securities it
owns in its portfolio as a shareholder in accordance with its views.
(2) Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to
the purchase of securities on a when-issued or forward commitment basis
and the deposit of assets in escrow in connection with writing covered
put and call options and collateral and initial or variation margin
arrangements with respect to options, forward contracts, futures
contracts, including those relating to indexes, and options on futures
contracts or indexes.
(3) Purchase, sell or write puts, calls or combinations thereof, except as
may be described in the Portfolio's offering documents.
(4) Purchase securities of any company having less than three years'
continuous operations (including operations of any predecessors) unless
the securities are fully guaranteed or insured by the U.S. Government,
a state, commonwealth, possession, territory, the District of Columbia
or by an entity in existence at least three years, or the securities
are backed by the assets and revenues of any of the foregoing, if such
purchase would cause the value of its investments in all such companies
to exceed 5% of the value of its total assets.
(5) Enter into repurchase agreements providing for settlement in more than
seven days after notice or purchase securities which are illiquid, if,
in the aggregate, more than 15% of the value of the Portfolio's net
assets would be so invested.
(6) Purchase securities of other investment companies, except to the extent
permitted under the 1940 Act.
(7) Purchase or retain securities of any issuer if the officers or Trustees
of Diversified Investors Trust, Master Investment Portfolio, or either
Barclays or Diversified owning beneficially more than one-half of one
percent (0.5%) of the securities of the issuer together owned
beneficially more than 5% of such securities.
The non-fundamental policies (1) through (7) may be changed by the Board of
Trustees of the Master Investment Portfolio at any time.
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 applicable Subadviser believes
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.
<PAGE> 117
-25-
BROKERAGE TRANSACTIONS. Each Fund's advisers may use brokers or dealers for Fund
transactions who also provide brokerage and research services to the Fund or
other accounts over which the advisers exercise investment discretion. A Fund
may "pay up" for brokerage services, meaning that it is authorized to pay a
broker or dealer who provides these brokerage and research services a commission
for executing a portfolio transaction which is higher than the commission than
may otherwise have been charged. However, a Fund will "pay up" only if the
applicable adviser determines in good faith that the higher commission is
reasonable in relation to the brokerage and research services provided, viewed
in terms of either the particular transaction or all of the accounts over which
the adviser exercises investment discretion.
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 Fund's Subadviser or its affiliates. If, however, the Fund and other
investment companies or accounts managed by the Subadviser 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 the Fund or the
size of the position obtainable for the Fund. In addition, when purchases or
sales of the same security for the 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.
The following Portfolios paid the approximate brokerage commissions indicated
for the fiscal years noted below:
BALANCED PORTFOLIO
Fiscal year ended December 31, 1997: $324,465
Fiscal year ended December 31, 1998: $488,301
Fiscal year ended December 31, 1999: $
EQUITY INCOME PORTFOLIO
Fiscal year ended December 31, 1997: $659,256
Fiscal year ended December 31, 1998: $855,733
Fiscal year ended December 31, 1999: $
EQUITY VALUE PORTFOLIO
Fiscal year ended December 31, 1997: $548,229
Fiscal year ended December 31, 1998: $890,565
Fiscal year ended December 31, 1999: $
GROWTH & INCOME PORTFOLIO
Fiscal year ended December 31, 1997: $390,268
Fiscal year ended December 31, 1998: $728,627
Fiscal year ended December 31, 1999: $
EQUITY GROWTH PORTFOLIO
Fiscal year ended December 31, 1997: $483,139
Fiscal year ended December 31, 1998: $853,305
Fiscal year ended December 31, 1999: $
SPECIAL EQUITY PORTFOLIO
Fiscal year ended December 31, 1997: $1,017,376
Fiscal year ended December 31, 1998: $1,495,526
Fiscal year ended December 31, 1999: $
AGGRESSIVE EQUITY PORTFOLIO
Fiscal year ended December 31, 1997: $48,943
Fiscal year ended December 31, 1998: $114,263
Fiscal year ended December 31, 1999: $
<PAGE> 118
-26-
INTERNATIONAL EQUITY PORTFOLIO
Fiscal year ended December 31, 1997: $295,967
Fiscal year ended December 31, 1998: $414,060
Fiscal year ended December 31, 1999: $
<PAGE> 119
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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. 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 Diversified or the
Fund's Subadviser 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., Morningstar, Inc., CDA and other
publications.
The annualized current seven-day yield of the Diversified Class shares of the
Money Market Fund for the year ended December 31, 1999 was 4.93%. For the same
period, the annualized effective seven-day yield, based upon dividends declared
daily and reinvested monthly, of the Diversified Class shares of the Money
Market Fund was 5.05%.
ALL OTHER FUNDS:
The yield quotation of each class will be based on the annualized net investment
income per share of the Class over a 30-day period. The current yield for each
class is calculated 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.
<PAGE> 120
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TOTAL RETURNS
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 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 MONY
Group, Inc. ("MONY") (formerly known as The Mutual Life Insurance Company of New
York) set forth below contributed all of its assets to the corresponding
Portfolio of Diversified Investors Portfolios in which the corresponding Fund
invests its assets:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
MONY POOLED SEPARATE
FUND ACCOUNT
- ------------------------------------------------------------------------------------------
<S> <C>
Money Market Pooled Account No. 4
- ------------------------------------------------------------------------------------------
High Quality Bond Pooled Account No. 15
- ------------------------------------------------------------------------------------------
Intermediate Government Bond Pooled Account No. 10d
- ------------------------------------------------------------------------------------------
Core 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
- ------------------------------------------------------------------------------------------
</TABLE>
Pooled Separate Account performance will only be included, however, from the
date that the Pooled Separate Account adopted investment objectives, policies
and practices that are, and was managed in a manner that is, in all material
respects the same as the applicable Fund. This Pooled Separate Account
performance has been adjusted in a one-time recalculation to reflect fees,
charges and expenses in effect at the time the Portfolios commenced operations.
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.
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 Stephens 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.
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.
<PAGE> 121
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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.
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.
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.
<PAGE> 122
-30-
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.
The performance of the Strategic Allocation Funds may also be compared to
benchmarks consisting of a combination of unmanaged indices, such as the Lehman
Aggregate Bond Index, the Russell 1000 Value Index, the Russell 2000 Small Cap
Index, the Salomon 90-Day Treasury Index, and the EAFE GDP Equity Index. When a
Strategic Allocation Fund's performance is compared to such a combined
benchmark, the percentage of each unmanaged index included in the benchmark will
be disclosed.
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 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 Trusts and the Trusts.
Equity securities are valued at the last sale price as of 4:00 p.m. (or the
earlier close of regular trading on the Exchange) 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
<PAGE> 123
-31-
amortized cost, which approximates fair value as determined by the applicable
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 Boards of
Trustees of the applicable Trust or Portfolio Trust.
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,
Diversified, under the supervision of the Board of Trustees of the applicable
Trust or Portfolio Trust, in good faith, will establish a conversion rate for
such currency.
A determination of fair value used in calculating net asset value must be made
in good faith utilizing procedures approved by the Boards of Trustees of the
Trusts and the Portfolio Trusts. 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 New York Stock 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.
<PAGE> 124
-32-
MANAGEMENT
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 other than the S&P 500 Index Master
Portfolio is supervised by the Board of Trustees of Diversified Investors
Portfolios. The S&P 500 Index Master Portfolio is supervised by the Board of
Trustees of the Master Investment Portfolio.
The respective Trustees and officers of each Trust and the Portfolio Trusts 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
a Portfolio Trust, as the case may be. Unless otherwise indicated, the address
of each Trustee and officer of the Trusts and Diversified Investors Portfolios
is Four Manhattanville Road, Purchase, New York 10577 and the address of each
Trustee and officer of the Master Investment Portfolio is 111 Center Street,
Little Rock, Arkansas 72201.
TRUSTEES OF EACH TRUST
ROBERT LESTER LINDSAY Retired. Executive Vice President, The MONY
Group, Inc. (f/k/a The Mutual Life Insurance
Company of New York) (prior to July 1989);
His address is Two Huguenot Center, Tenafly,
New Jersey 07670-2520. Age: 65.
NIKHIL MALVANIA Management Consultant and Principal, Redding
Consultants (since 1999); Partner,
Deaner-Malvania Associates (1991 to 1999).
Manager and Vice President, Strategic
Planning Associates (prior to 1991). His
address is 88 Perry Street, New York, New
York 10014. His business address is The
Equitable Life Assurance Society, 1290
Avenue of the Americas, New York, NY 10104.
Age: 48.
MARK MULLIN* Vice President, Diversified (since April,
1995). Portfolio Manager, AEGON Netherlands
(April 1993 to March 1995). Age: 36.
JOYCE GALPERN NORDEN Vice President, Institutional Advancement,
Reconstructionist Rabbinical College (since
September 1996). Co-Director, Woman's Health
Clinical Research Program Medical Center,
University of Pennsylvania (1993 - September
1995). Her address is 505 Redleaf Road,
Wynnewood, Pennsylvania 19096. Age: 60.
TOM A. SCHLOSSBERG* President and Chief Executive Officer,
Diversified (since December 1993). Executive
Vice President and Head of Pension
Operations, The MONY Group, Inc. (The Mutual
Life Insurance Company of New York) (January
1993 to December 1993). Age: 50.
TRUSTEES OF DIVERSIFIED INVESTORS PORTFOLIOS
In addition to the Trustees below, Messrs. Schlossberg and Mullin serve as
Trustees of Diversified Investors Portfolios.
NEAL M. JEWELL Consultant (since 1995). Independent
Trustee, EAI Select (a registered investment
company) (since 1995); Executive
<PAGE> 125
-33-
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: 65.
EUGENE M. MANNELLA Executive Vice President, Investment
Management Services, Inc. (since August
1993). President, Brooks Asset Management
LLC; President Arapahs Partners LLC; Senior
Vice President, Lehman Brothers Inc. (May
1986 to August 1993). His address is Two
Orchard Neck Road, Center Moriches, New York
11934. Age: 46.
PATRICIA L. SAWYER President and Executive Search Consultant,
Smith & Sawyer LLC (since 1990). Her address
is Smith & Sawyer LLP, P.O. Box 8063, Vero
Beach, Florida 32963. Age: 49.
OFFICERS OF EACH TRUST AND DIVERSIFIED INVESTORS PORTFOLIOS
Mr. Schlossberg is President, Chief Executive Officer and Chairman of the Board.
Each other officer also holds the same position indicated with each Trust and
Diversified Investors Portfolios.
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); Vice President and Assistant
Secretary, AUSA Life Insurance Company, Inc.
(since March, 1995). Age: 44.
ALFRED C. SYLVAIN Treasurer; Vice President (since April
1994), Treasurer and Assistant Secretary
(since November 1993) of Diversified;
Director (since February 1995) and Treasurer
(since January 1994) of DISC. Age: 48.
JOHN F. HUGHES Assistant Secretary; Vice President and
Senior Counsel, Diversified (since November
1993); Vice President, AUSA Life Insurance
Company (since November, 1993) Assistant
Secretary, DISC (since November 1993). Age:
58.
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."
TRUSTEES OF THE MASTER INVESTMENT PORTFOLIOS
JACK S. EUPHRAT Private Investor. His address is 415 Walsh
Road, Atherton, California 94027. Age: 77.
R. GREG FELTUS* Senior Executive Vice President of Stephens
Inc.; Manager of Financial Services Group;
President of Stephens Insurance Services,
Inc.; Senior Vice President of Stephens
Sports Management Inc.; and President of
Investors Brokerage Insurance, Inc. Age: 48.
<PAGE> 126
-34-
W. RODNEY HUGHES Private Investor. His address is 31 Dellwood
Court, San Rafael, California 94901. Age:
73.
OFFICERS OF THE MASTER INVESTMENT PORTFOLIO
Mr. Feltus is President of the Master Investment Portfolio.
RICHARD H. BLANK, JR. Chief Operating Officer, Secretary and
Treasurer of Master Investment Portfolios;
Vice President of Stephens Inc.; Director of
Stephens Sports Management Inc.; and
Director of Capo Inc. Age: 43.
COMPENSATION
For the fiscal year ended December 31, 1999, the Trusts provided the following
compensation to the Trustees.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
TOTAL
AGGREGATE PENSION OR COMPENSATION
AGGREGATE COMPENSATION RETIREMENT FROM THE TRUSTS
COMPENSATION FROM THE BENEFITS ESTIMATED AND
FROM THE STRATEGIC ACCRUED AS PART ANNUAL FUND COMPLEX
DIVERSIFIED ALLOCATION OF BENEFITS UPON PAID
NAME OF PERSON, POSITION INVESTORS TRUST TRUST FUND EXPENSES RETIREMENT TO TRUSTEES
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tom A. Schlossberg
Trustee None None None None None
-------------------------------------------------------------------------------------------------------------------------
Robert L. Lindsay
Trustee $9,750 $3,250 None None $13,000
-------------------------------------------------------------------------------------------------------------------------
Nikhil Malvania
Trustee $9,750 $3,250 None None $13,000
-------------------------------------------------------------------------------------------------------------------------
Mark Mullin
Trustee None None None None None
-------------------------------------------------------------------------------------------------------------------------
Joyce Galpern Norden
Trustee $9,750 $3,250 None None $13,000
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 127
-35-
For the fiscal year ended December 31, 1999, Diversified Investors Portfolios
provided the following compensation to its Trustees.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
TOTAL
AGGREGATE PENSION OR COMPENSATION
COMPENSATION RETIREMENT FROM THE TRUSTS
FROM BENEFITS ESTIMATED AND
DIVERSIFIED ACCRUED AS PART ANNUAL FUND COMPLEX
INVESTORS OF BENEFITS UPON PAID
NAME OF PERSON, POSITION PORTFOLIOS FUND EXPENSES RETIREMENT TO TRUSTEES
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tom A. Schlossberg
Trustee None None None None
------------------------------------------------------------------------------------------------------------------------
Neal M. Jewell
Trustee $9,750 None $4,500 $14,250
------------------------------------------------------------------------------------------------------------------------
Eugene M. Mannella
Trustee $9,750 None $4,500 $14,250
------------------------------------------------------------------------------------------------------------------------
Mark Mullin
Trustee None None None None
------------------------------------------------------------------------------------------------------------------------
Patricia L. Sawyer
Trustee $9,750 None $4,500 $14,250
------------------------------------------------------------------------------------------------------------------------
</TABLE>
For the fiscal year ended February 29, 2000, the Master Investment Portfolio
provided the following compensation to its Trustees:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
TOTAL
AGGREGATE PENSION OR COMPENSATION
COMPENSATION RETIREMENT FROM THE TRUSTS
FROM THE BENEFITS ESTIMATED AND
MASTER ACCRUED AS PART ANNUAL FUND COMPLEX
INVESTMENT OF BENEFITS UPON PAID
NAME OF PERSON, POSITION PORTFOLIO FUND EXPENSES RETIREMENT TO TRUSTEES(1)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jack S. Euphrat
Trustee None None None $11,250
--------------------------------------------------------------------------------------------------------------------------
R. Greg Feltus
Trustee None None None None
--------------------------------------------------------------------------------------------------------------------------
Thomas S. Goho
Trustee None None None $11,250
--------------------------------------------------------------------------------------------------------------------------
W. Rodney Hughes
Trustee None None None $11,000
--------------------------------------------------------------------------------------------------------------------------
J. Tucker Morse
Trustee None None None $11,000
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Master Investment Portfolio and Masterworks Funds Inc. are considered to
be members of the same fund complex as such term is defined in Form N-1A
under the 1940 Act (the "Barclays Fund Complex"). Stagecoach Funds, Inc.,
Stagecoach Trust and Life & Annuity Trust together form a separate fund
complex (the "Wells Fargo Fund Complex"). Each of the Trustees and the
principal officer of the Master Investment Portfolio serves in the
identical capacity as directors/trustees and/or officer of each
registered open-ended management investment company in both the Barclays
and Wells Fargo Fund Complexes. The Trustees are compensated by other
companies and trusts within the fund complexes for their services as
Directors/Trustees to such companies and trusts.
CODE OF ETHICS
The Trustees of The Diversified Investors Funds Group (the "Trust") and The
Diversified Investors Strategic Allocation Funds (The "SAFs") has adopted a Code
of Ethics (the "Code"). This Code
<PAGE> 128
-36-
prohibits specific types of personal securities transactions which would create
a conflict of interest. It also establishes reporting requirements and
preventive procedures pursuant to the provisions of Rule 17j-1(b)(1) under the
1940 Act.
Diversified Investment Advisors, Inc. and Diversified Investors Securities
Corp., the investment adviser and the broker-dealer, respectively adopted Codes
of Ethics substantially identical to this Code.
PRINCIPAL HOLDERS OF SECURITIES
At March 31, 2000, the Trustees and officers of the Trusts and the Portfolio
Trusts as a group held less than 1% of the outstanding shares of each class of
each Fund. The following investors owned of record or beneficially more than 5%
of the outstanding Diversified Class shares of the following Funds.
At March 31, 2000, AUSA Life Insurance Company, Inc. ("AUSA"), Four
Manhattanville Road, Purchase, New York 10577, and The MONY Group, Inc.
("MONY"), 1740 Broadway, New York, New York 10019, owned the following
percentage interests of the outstanding beneficial interests of the Portfolios
indicated (all such interests being held in separate accounts of AUSA and MONY,
respectively):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
AUSA MONY
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Money Market 23.15% 21.44%
- ----------------------------------------------------------------------------------------------------
High Quality Bond 46.97% 24.34%
- ----------------------------------------------------------------------------------------------------
Intermediate Government Bond 43.86% 17.36%
- ----------------------------------------------------------------------------------------------------
Core Bond 28.33% 38.43%
- ----------------------------------------------------------------------------------------------------
High-Yield Bond 30.20% 10.23%
- ----------------------------------------------------------------------------------------------------
Balanced 59.24% 1.78%
- ----------------------------------------------------------------------------------------------------
Stock Index
- ----------------------------------------------------------------------------------------------------
Equity Income 57.38% 24.58%
- ----------------------------------------------------------------------------------------------------
Equity Value 22.75% 5.07%
- ----------------------------------------------------------------------------------------------------
Growth & Income 46.85% 3.54%
- ----------------------------------------------------------------------------------------------------
Equity Growth 63.67% --
- ----------------------------------------------------------------------------------------------------
Special Equity 44.30% 19.63%
- ----------------------------------------------------------------------------------------------------
Aggressive Equity 38.01% --
- ----------------------------------------------------------------------------------------------------
International Equity 38.19% 15.73%
- ----------------------------------------------------------------------------------------------------
</TABLE>
At March 31, 2000, all of the outstanding Stephens Premium Class shares and all
of the outstanding Stephens Institutional Class shares were owned in nominee
name by Stephens Inc., Special Custody Account for the Exclusive Benefit of
Customers, 111 Center Street, Little Rock, Arkansas 72203.
At March 31, 2000, the S&P 500 Stock Fund of Master Works Funds Inc., 111 Center
Street, Little Rock, Arkansas 72201, owned approximately 66.5% of the
outstanding voting securities of the S&P 500 Index Master Portfolio and could be
considered a controlling person of the Portfolio for purposes of the 1940 Act.
At March 31, 2000, Mass Mutual Indexed Equity Fund, 1295 State Street,
Springfield, Massachusetts 01111, owned approximately 11.94% of the outstanding
voting securities of the Portfolio.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISERS
Diversified manages the assets of (a) each of the Stephens Intermediate Bond,
Stock Index, Stephens Select Equity and Strategic Allocation Funds and (b) each
Portfolio (except the S&P 500 Index Master Portfolio), in each case pursuant to
an Investment Advisory Agreement (the "Diversified Advisory Agreement") with the
Trust or Diversified Investors Portfolios, as the case may be, with respect to
each
<PAGE> 129
-37-
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 Diversified Investors Portfolios may
determine, Diversified provides general investment advice to each such Fund and
each Portfolio.
Barclays Global Fund Advisors manages the assets of the S&P 500 Index Master
Portfolio pursuant to an Investment Advisory Agreement with the Master
Investment Portfolio (the "Barclays Advisory Agreement"). Subject to such
further policies as the Board of Trustees of the Diversified Investors Trust may
determine, Diversified provides general supervision of the Stock Index Fund's
investment in the S&P 500 Index Master Portfolio.
Barclays provides investment guidance and policy direction in connection with
the management of the S&P 500 Index Master Portfolio's assets. As of December
31, 1999, Barclays and its affiliates provided advisory services for
approximately $650 billion in assets.
Barclays, Barclays Bank PLC, the indirect parent of Barclays, and their
affiliates deal, trade and invest for their own account in the types of
securities in which the S&P 500 Index Master Portfolio may invest and may have
deposit, loan and commercial banking relationships with the issuers of
securities purchased by the S&P 500 Index Master Portfolio.
For the Stephens Intermediate Bond and Stephens Select Equity Funds and each
Portfolio (except the S&P 500 Index Master Portfolio), Diversified has entered
into an Investment Subadvisory Agreement (each a "Subadvisory Agreement") with a
Subadviser.
The Diversified Advisory Agreement and each Subadvisory Agreement provides that
Diversified 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 its interest) or by a vote of a majority of the Board of
Trustees of the Trust or Diversified Investors Portfolios, as the case may be,
or by Diversified on not more than 60 days' nor less than 30 days' written
notice, or by the applicable Subadviser or not less than 90 days' written
notice, and will automatically terminate in the event of its assignment. Each
agreement provides that neither Diversified nor the Subadviser nor their
personnel shall be liable for any error of judgment or 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 Diversified Advisory Agreement and the
Subadvisory Agreement, as the case may be. The Barclays Advisory Agreement is
terminable without penalty on 60 days written notice by either party.
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 N.V., 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 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 $26 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 more than 500,000 participants and has 750 employees
dedicated to retirement plan investment and administration. Its employees
average more than seven years of retirement plan experience.
<PAGE> 130
-38-
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 4,000 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 Diversified Investors Portfolios, including
a majority of the Trustees who are not "interested persons" of Diversified
Investors Portfolios. With respect to the Stephens Intermediate Bond and
Stephens 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 Funds.
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.
Each of the Diversified Investors Portfolios has obtained an exemptive order
from the Securities and Exchange Commission which permits the Portfolios to
obtain the services of one or more subadvisers without investor or shareholder
approval. The exemptive order also permits the terms of sub-advisory agreements
to be changed and the employment of subadvisers to be continued after events
that would otherwise cause an automatic termination of a sub-advisory agreement,
in each case without shareholder approval if those changes or continuation are
approved by the Portfolio's Board of Trustees. If a subadviser were added or
changed without shareholder approval, the Prospectuses would be revised and
shareholders notified. Before each individual Portfolio relies on the exemptive
order, the Portfolio's investors must approve it. To date, the Care Bond,
Balanced, Equity, Growth and Special Equity Portfolios' investors have approved
the exemptive order.
Highly disciplined manager evaluation on both a quantitative and qualitative
basis is an ongoing process. Diversified's Manager Monitoring Group gathers and
analyzes performance data 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
<PAGE> 131
-39-
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.
SUBADVISERS
The Subadvisers make the day-to-day investment decisions for the Portfolios
(other than the S&P 500 Index Master Portfolio, which is advised by Barclays
Global Fund Advisors) and for the Stephens Intermediate Bond and Stephens Select
Equity Funds, subject in all cases to the general supervision of Diversified.
The Subadvisers are listed below.
MONEY MARKET PORTFOLIO
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
Capital Management Group. Capital Management Group is a division of 1740
Advisers, Inc., a wholly-owned subsidiary of The MONY Group, Inc.
HIGH QUALITY BOND PORTFOLIO
Merganser Capital Management Corporation. Merganser was formed in 1984 and is
owned by certain of its employees.
CORE BOND PORTFOLIO
Payden & Rygel. Payden was formed in April of 1984 and is owned by Joan A.
Payden, John P. Isaacson and Scott A. King
STEPHENS INTERMEDIATE BOND FUND
STEPHENS SELECT EQUITY FUND
Stephens Capital Management. Stephens Capital Management is a division of
Stephens Inc., which is an indirect, wholly-owned subsidiary of Stephens Group,
Inc.
HIGH-YIELD BOND PORTFOLIO
Delaware Investment Advisers. Delaware Investment Advisers is a series of
Delaware Management Business Trust. Delaware is indirectly owned by Lincoln
National Corporation.
BALANCED PORTFOLIO
Aeltus Investment Management, Inc.
Payden & Rygel
Aeltus Investment Management, Inc. Aeltus was formed in November of 1972 and is
an indirect wholly-owned subsidiary of Aetna, Inc.
Payden & Rygel. Payden was formed in April of 1984 and is owned by Joan A.
Payden, John P. Isaacson and Scott A. King
EQUITY INCOME PORTFOLIO
Asset Management Group. Asset Management Group is a division of 1740 Advisers,
Inc., which is a wholly-owned subsidiary of The MONY Group, Inc.
EQUITY VALUE PORTFOLIO
Ark Asset Management Co., Inc. Ark was formed in August of 1989 and is owned by
Ark Asset Holdings, Inc. Ark Asset Holdings, Inc. is owned by Ark employees.
<PAGE> 132
-40-
GROWTH & INCOME PORTFOLIO
Putnam Advisory Company, Inc. Putnam is owned by Putnam Investments, Inc., which
is in turn, other than a minority interest, owned by employees, owned by Marsh &
McLennan Companies, Inc.
EQUITY GROWTH PORTFOLIO
Dresdner RCM Global Investors LLC
Montag & Caldwell Incorporated
Dresdner RCM Global Investors LLC was established in 1996, when Dresdner Bank AG
acquired RCM Capital Management, LLC.
Montag & Caldwell Incorporated was established in 1945 and is owned by Alleghany
Corporation.
SPECIAL EQUITY PORTFOLIO
Goldman Sachs Asset Management
Husic Capital Management
RS Investment Management, L.P.
Westport Asset Management, Inc.
Goldman Sachs Asset Management is a separate operating division of Goldman,
Sachs & Co., a worldwide investment banking firm, with numerous offices
throughout the United States and globally. Goldman, Sachs & Co. acquired Liberty
Investment Management, Inc., the predecessor firm, in January of 1997. In the
late spring or early summer of 1999, the Goldman Sachs Group, L.P., the holding
company that controls Goldman, Sachs & Co., will pursue an initial public
offering. Simultaneously with the offering, the Goldman Sachs Group, L.P. will
merge into The Goldman Sachs Group, Inc.
Husic Capital Management was formed in 1986 and is owned by Frank J. Husic &
Co., a California corporation.
RS Investment Management, L.P. was established in 1994 and is owned by certain
of its employees.
Westport Asset Management, Inc. was formed in 1983 and is owned by certain of
its employees.
AGGRESSIVE EQUITY PORTFOLIO
McKinley Capital Management, Inc. McKinley was formed in March of 1991 and is
owned by Robert B. Gillam. In 1998 and 1999 McKinley awarded equity interest to
key employees.
INTERNATIONAL EQUITY PORTFOLIO
Capital Guardian Trust Company. Capital Guardian was formed in 1968 and is owned
by Capital Group International, Inc., which is owned by The Capital Group
Companies, Inc.
ADVISORY FEES
The Advisers' fees with respect to each Fund are described in the Prospectuses.
Each of the Subadvisers is entitled to receive a fee from Diversified at an
annual percentage of each Fund's average daily net assets.
<PAGE> 133
-41-
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:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
PORTFOLIO EARNED WAIVED
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $ 553,205 $ --
- ----------------------------------------------------------------------------------------
High Quality Bond 707,143 --
- ----------------------------------------------------------------------------------------
Intermediate Government Bond 340,670 15,525
- ----------------------------------------------------------------------------------------
Government/Corporate Bond 1,174,374 --
- ----------------------------------------------------------------------------------------
High-Yield Bond 182,367 46,946
- ----------------------------------------------------------------------------------------
Balanced 1,547,690 --
- ----------------------------------------------------------------------------------------
Equity Income 4,950,239 --
- ----------------------------------------------------------------------------------------
Equity Value 882,508 56,044
- ----------------------------------------------------------------------------------------
Growth & Income 1,679,535 --
- ----------------------------------------------------------------------------------------
Equity Growth 2,405,212 --
- ----------------------------------------------------------------------------------------
Special Equity 4,986,640 --
- ----------------------------------------------------------------------------------------
Aggressive Equity 182,991 61,577
- ----------------------------------------------------------------------------------------
International Equity 1,434,770 16,399
- ----------------------------------------------------------------------------------------
Short Horizon Strategic Allocation 7,102 --
- ----------------------------------------------------------------------------------------
Intermediate Horizon Strategic Allocation 26,257 --
- ----------------------------------------------------------------------------------------
Intermediate/Long Horizon Strategic Allocation 26,906 --
- ----------------------------------------------------------------------------------------
</TABLE>
<PAGE> 134
-42-
For the fiscal year ended December 31, 1998, Diversified earned and voluntarily
waived advisory fees as indicated with respect to the following Funds and
Portfolios:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
PORTFOLIO EARNED WAIVED
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $ 654,703 $ --
- ----------------------------------------------------------------------------------------
High Quality Bond 753,726 --
- ----------------------------------------------------------------------------------------
Intermediate Government Bond 491,360 2,380
- ----------------------------------------------------------------------------------------
Intermediate Bond 12,711 12,711
- ----------------------------------------------------------------------------------------
Government/Corporate Bond 1,606,383 --
- ----------------------------------------------------------------------------------------
Balanced 2,065,391 --
- ----------------------------------------------------------------------------------------
Equity Income 5,830,442 --
- ----------------------------------------------------------------------------------------
Equity Value 2,104,570 42,746
- ----------------------------------------------------------------------------------------
Growth & Income 3,258,008 --
- ----------------------------------------------------------------------------------------
Equity Growth 3,276,416 11,336
- ----------------------------------------------------------------------------------------
Special Equity 6,306,553 5,925
- ----------------------------------------------------------------------------------------
Select Equity -- --
- ----------------------------------------------------------------------------------------
Aggressive Equity 470,377 51,355
- ----------------------------------------------------------------------------------------
High-Yield Bond 423,436 27,930
- ----------------------------------------------------------------------------------------
International Equity 2,029,625 30,764
- ----------------------------------------------------------------------------------------
Short Horizon Strategic Allocation 18,752
- ----------------------------------------------------------------------------------------
Short/Intermediate Horizon Strategic Allocation 2,667 --
- ----------------------------------------------------------------------------------------
Intermediate Horizon Strategic Allocation 77,416 --
- ----------------------------------------------------------------------------------------
Intermediate/Long Horizon Strategic Allocation 84,894 --
- ----------------------------------------------------------------------------------------
Long Horizon Strategic Allocation 7,044 --
- ----------------------------------------------------------------------------------------
</TABLE>
ADMINISTRATOR
Diversified provides administrative services to the Funds (other than the Stock
Index and Strategic Allocation Funds) under the Administrative Services and
Transfer Agency Services Agreement with Diversified Investors Trust. These
administrative services include regulatory reporting and the provision of office
facilities, 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. Diversified acts as Administrator to
the Strategic Allocation Funds, the Stock Index Fund and the Portfolios pursuant
to the respective Advisory Agreements and receives no additional compensation
for providing such administrative services.
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 Diversified
Investors Portfolios, by majority vote of the investors in Diversified Investors
Portfolios (with the vote of each being in proportion to its interest) 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.
<PAGE> 135
-43-
The table below shows the total dollar amounts paid to Diversified during each
of the past three fiscal years under the Administrative Services and Transfer
Agency Services Agreement with Diversified Investors Trust for each Fund listed.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
YEAR YEAR YEAR
ENDED ENDED ENDED
12/31/99 12/31/98 12/31/97
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
>Money Market 127,340 46,057
- ----------------------------------------------------------------------------------------------
High Quality Bond 41,881 12,485
- ----------------------------------------------------------------------------------------------
Intermediate Government Bond 47,617 10,766
- ----------------------------------------------------------------------------------------------
Intermediate Bond 38,134 N/A
- ----------------------------------------------------------------------------------------------
Government/Corporate Bond 128,256 32,264
- ----------------------------------------------------------------------------------------------
Balanced 230,507 96,418
- ----------------------------------------------------------------------------------------------
Equity Income 271,046 108,499
- ----------------------------------------------------------------------------------------------
Equity Value 155,106 25,218
- ----------------------------------------------------------------------------------------------
Growth & Income 352,106 89,771
- ----------------------------------------------------------------------------------------------
Equity Growth 287,621 111,789
- ----------------------------------------------------------------------------------------------
Special Equity 284,099 106,285
- ----------------------------------------------------------------------------------------------
Select Equity N/A N/A
- ----------------------------------------------------------------------------------------------
Aggressive Equity 57,689 11,835
- ----------------------------------------------------------------------------------------------
High-Yield Bond 54,840 18,353
- ----------------------------------------------------------------------------------------------
International Equity 149,103 52,034
- ----------------------------------------------------------------------------------------------
</TABLE>
Stephens Inc. located at 111 Center Street, Little Rock, Arkansas 72201, and
Barclays Global Investors, N.A., located at 45 Fremont Street, San Francisco, CA
94105, serve as the S&P 500 Index Master Portfolio's co-administrators pursuant
to a Co-Administration Agreement with the Portfolio. Under the Co-Administration
Agreement, Stephens and Barclays Global Investors provide general supervision of
the operations of the Portfolio, other than the provision of investment advice.
The administrative services provided to the Portfolio also include coordination
of the other services provided to the Portfolio, compilation of information for
reports to the SEC and state securities commissions, preparation of proxy
statements and interest holder reports and general supervision of data
compilation in connection with preparing periodic reports to the Portfolio's
Board of Trustees and Officers. In addition, Stephens furnishes office space and
certain facilities to conduct business, and compensates the Portfolio's
trustees, officers and employees who are affiliated with Stephens. Stephens has
delegated certain of its administrative duties to Investors Bank & Trust
Company. Stephens and Barclays Global Investors will not be entitled to receive
compensation for these services for so long as each receives compensation for
providing co-administration services to a fund that invests in the Portfolio.
Stephens also services as the placement agent of the Portfolio's shares.
CUSTODIAN AND TRANSFER AGENT
Pursuant to the Administrative and Transfer Agency Services Agreement (or the
Advisory Agreement in the case of the Stock Index Fund) 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
<PAGE> 136
-44-
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
Trusts, 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 Trusts.
MISCELLANEOUS
STRATEGIC ALLIANCE AGREEMENT
Diversified and Stephens have entered into a Strategic Alliance Agreement
pursuant to which Diversified has agreed (subject to and consistent with its
fiduciary and other responsibilities, including those under the Investment
Company Act of 1940 and the Investment Advisers Act of 1940), among other
things, to (a) recommend the establishment of the Stephens Institutional Class
and the Stephens Premium Class of the Funds, (b) recommend the establishment of
the Stephens Intermediate Bond and Select Equity Funds, and (c) provide services
necessary to establish such Classes and Funds. Under the terms of the Agreement,
Diversified would retain from all revenues attributable to the Stephens
Institutional Class and the Stephens Premium Class of the Funds ("Gross
Revenues") a fee equal to the following percentages of the average daily net
assets attributable to the Stephens Institutional Class Shares and the Stephens
Premium Class Shares of the Funds: 0.14% of the first $250 million in assets;
0.125% of the next $500 million in assets; 0.09% of the next $750 million in
assets; 0.04% of the next $250 million in assets; 0.02% of the next $250 million
in assets; and 0.01% of all assets over $2 billion. In addition, Diversified
shall be entitled to pay (or be reimbursed) from Gross Revenues, fees and
expenses attributable to ongoing registration and compliance regarding the
shares of the Stephens Institutional Class and the Stephens Premium Class,
including costs attributable to registration, custodial, accounting and legal
services. All other Gross Revenues are to be retained by Stephens.
Pursuant to the Strategic Alliance Agreement, Diversified has agreed (subject to
and consistent with its fiduciary and other responsibilities, including those
under the Investment Company Act of 1940 and the Investment Advisers Act of
1940) not to recommend that additional classes of shares of The Diversified
Investors Funds Group be established if such shares would be available for sales
through a competitor of Stephens in certain markets in which Stephens
participates. The Agreement renews automatically each year for a one-year period
unless terminated by any party upon written notice to the other party.
ADDITIONAL EXPENSES OF THE FUNDS
In addition to amounts payable as described elsewhere in this Statement of
Additional Information, each Fund is responsible for its own expenses, including
the compensation of Trustees that are not affiliated with Diversified, any
government fees, taxes, accounting and legal fees, expenses of communicating
with shareholders, interest expense and insurance premiums. Each Fund is also
responsible for its proportionate share of the expenses of the corresponding
Portfolio, if any.
TAXATION
TAXATION OF THE FUNDS AND PORTFOLIOS
FEDERAL TAXATION OF THE FUNDS. Each Fund is treated as a separate entity for
federal tax purposes. Each Fund has elected to be treated, and intends to
qualify each year as a regulated investment company
<PAGE> 137
-45-
("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. provided all such requirements are met, no U.S. federal
income or excise taxes generally will be required to be paid by the Funds. 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, tax-qualified retirement plans ("Plans") which hold the
shares of a Fund on their participants' behalf would not, in that event, incur
any income tax liability on such distributions provided such Plans remain exempt
from federal income tax. Similarly, 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 "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.
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 Trusts and includes a disproportionate share of
any unrealized receivables held by the Portfolio Trusts, 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 Trusts 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.
FEDERAL TAXATION OF THE PORTFOLIOS. 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. If the Portfolio
Trusts are treated for tax purposes as a partnership as expected, none would 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 Trusts'
income, gains, losses, deductions, credits and tax preference items, without
regard to whether it has received any cash distributions from the Portfolio
Trusts. The Portfolio Trusts have advised the Funds that they intend 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.
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 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.
CERTAIN STATE 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. Diversified
Investors Portfolios is organized as a New York trust. Diversified Investors
Portfolios is not subject to any income or franchise tax in the State of New
York. 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.
<PAGE> 138
-46-
TAXATION OF SHAREHOLDERS
TAXATION OF DISTRIBUTIONS. 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 federal income 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. 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.
Distributions to taxable investors may also be subject to state and local income
taxes, although in that case 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.
DIVIDENDS-RECEIVED DEDUCTION. A portion of the dividends received from a Fund
investing in corporate stocks of U.S. issuers (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.
BUYING A DIVIDEND. 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.
SPECIAL CONSIDERATIONS FOR NON U.S. PERSONS. 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 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.
BACKUP WITHHOLDING. 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 applicable to Non U.S.
Persons.
DISPOSITION 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
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. 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
<PAGE> 139
-47-
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.
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.
CERTAIN DEBT INSTRUMENTS. 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.
OPTIONS, ETC. A Fund's transactions in options, futures contracts and forward
contracts and short sales "against the box" 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.
FOREIGN INVESTMENTS. 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.
The foregoing should not be viewed as a comprehensive discussion of the items
referred to nor as covering all provisions relevant to investors. 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 PLANS
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,
<PAGE> 140
-48-
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 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.
<PAGE> 141
-49-
The table below shows the total dollar amounts paid to the Distributor during
each of the last three fiscal years under the Distribution Agreement with
respect to each class of shares of the Funds.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
YEAR YEAR YEAR
ENDED ENDED ENDED
12/31/99 12/31/98 12/31/97
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET
DIVERSIFIED CLASS 94,032 38,381
STEPHENS PREMIUM CLASS 141 --
STEPHENS INSTITUTIONAL CLASS 11,944 --
------------------------------------------------------------
HIGH QUALITY BOND
DIVERSIFIED CLASS 34,09 10,404
------------------------------------------------------------
INTERMEDIATE GOVERNMENT BOND
DIVERSIFIED CLASS 39,681 8,972
------------------------------------------------------------
INTERMEDIATE BOND
STEPHENS PREMIUM CLASS 8,280 --
STEPHENS INSTITUTIONAL CLASS 23,499 --
------------------------------------------------------------
CORE BOND
DIVERSIFIED CLASS 106,880 26,886
------------------------------------------------------------
BALANCED
DIVERSIFIED CLASS 192,089 80,348
------------------------------------------------------------
EQUITY INCOME
DIVERSIFIED CLASS 225,871 90,416
------------------------------------------------------------
EQUITY VALUE
DIVERSIFIED CLASS 101,902 21,105
STEPHENS PREMIUM CLASS 5,469 --
STEPHENS INSTITUTIONAL CLASS 21,884 --
------------------------------------------------------------
GROWTH & INCOME
DIVERSIFIED CLASS 293,422 74,809
------------------------------------------------------------
EQUITY GROWTH
DIVERSIFIED CLASS 230,315 93,157
STEPHENS PREMIUM CLASS 506 --
STEPHENS INSTITUTIONAL CLASS 8,863 --
------------------------------------------------------------
SPECIAL EQUITY
DIVERSIFIED CLASS 223,254 88,571
STEPHENS PREMIUM CLASS 2,640 --
STEPHENS INSTITUTIONAL CLASS 10,855 --
------------------------------------------------------------
SELECT EQUITY
STEPHENS PREMIUM CLASS -- --
STEPHENS INSTITUTIONAL CLASS -- --
------------------------------------------------------------
AGGRESSIVE EQUITY
DIVERSIFIED CLASS 48,074 9,862
------------------------------------------------------------
HIGH-YIELD BOND
DIVERSIFIED CLASS 41,637 15,294
STEPHENS PREMIUM CLASS 811 --
STEPHENS INSTITUTIONAL CLASS 3,252 --
------------------------------------------------------------
INTERNATIONAL EQUITY
DIVERSIFIED CLASS 112,375 43,362
STEPHENS PREMIUM CLASS 2,570 --
STEPHENS INSTITUTIONAL CLASS 9,307 --
---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 142
-50-
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP serves as the Funds' and the Portfolios' (except for
the S&P 500 Index Master Portfolio) independent accountants providing audit and
accounting services including (a) audit of the annual financial statements, (b)
assistance and consultation with respect to filings with the SEC and (c)
preparation of annual income tax returns. KPMG Peat Marwick LLP is the
independent accountant of the S&P 500 Index Master Portfolio.
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
sixteen 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 and net asset values 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. Because the Trusts 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.
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 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
<PAGE> 143
-51-
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.
FINANCIAL STATEMENTS
The financial statements of The Diversified Investors Funds Group, The
Diversified Investors Strategic Allocation Funds and Diversified Investors
Portfolios as of December 31, 1999 have been filed with the Securities and
Exchange Commission as part of the annual reports of The Diversified Investors
Funds Group and The Diversified Investors Strategic Allocation Funds, 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.
<PAGE> 144
A-1
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 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.
<PAGE> 145
A-2
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> 146
INVESTMENT ADVISER OF CERTAIN FUNDS
AND THE PORTFOLIOS, ADMINISTRATOR
AND TRANSFER AGENT
Diversified Investment Advisors, Inc.
Four Manhattanville Road
Purchase, NY 10577
INVESTMENT ADVISER OF THE S&P 500 INDEX MASTER PORTFOLIO
Barclays Global Fund Advisors
45 Fremont Street
San Francisco, California 94105
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 and
Diversified Investors Intermediate Government
Bond Portfolio:
Capital Management Group
1740 Broadway
New York, NY 10019
Core Bond Portfolio:
Payden & Rygel
333 South Grand Avenue, 32nd Floor
Los Angeles, CA 90071
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:
Aeltus Investment Management, Inc.
10 State House Square
Hartford, CT 06103-3602
Payden & Rygel
333 South Grand Avenue, 32nd Floor
Los Angeles, CA 90071
Diversified Investors Equity Income Portfolio:
Asset Management Group
1740 Broadway
New York, NY 10019
<PAGE> 147
Diversified Investors Equity Value Portfolio:
Ark Asset Management Co., Inc.
125 Broad Street
New York, NY 10041
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 Incorporated
3455 Peachtree Road, N.E., Suite 1200
Atlanta, Georgia 30326
Diversified Investors Special Equity Portfolio:
Husic Capital Management
555 California Street, Suite 2900
San Francisco, CA 94104
Goldman Sachs Asset Management
2502 Rocky Point Drive
Tampa, FL 33607
Westport Asset Management, Inc.
253 Riverside Avenue
Westport, CT 06880
RS Investment Management, L.P.
388 Market Street, Suite 200
San Francisco, CA 94111
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> 148
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
KPMG Peat Marwick LLP (Master Investment Portfolios only)
3 Embarcadero Center
San Francisco, California 94111
<PAGE> 149
2537 (REV. 5/00)
<PAGE> 150
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
<TABLE>
<C> <S>
(a)(1) Declaration of Trust of the Registrant. *
(a)(2) Amended and Restated Establishment and Designation of Series
of Shares of Beneficial Interest. **
(b) By-Laws of the Registrant. *
(d)(1) Investment Advisory Agreement between the Registrant and
Diversified Investment Advisors, Inc. ("Diversified"). ***
(d)(3) Form of Investment Subadvisory Agreement between Diversified
and Husic Capital Management L.P.
(d)(4) Form of Investment Subadvisory Agreement between Diversified
and Payden & Rygel.
(e) Distribution Agreement between the Registrant and
Diversified Investors Securities Corp. ("DISC"). ***
(g) Custodian Agreement between the Registrant and Investors
Bank & Trust Company. ***
(h)(1) Administrative and Transfer Agency Services Agreement
between the Registrant and Diversified. ***
(i)(1) Opinion of Counsel. ***
(i)(2) Consent of Counsel. *****
(j) Consent of Independent Auditors.*****
(l) Investor Representation Letter of Initial Shareholder. ***
(n) Financial Data Schedules. *****
(p) Powers of Attorney. ****
(q) Code of Ethics.
</TABLE>
- ---------------
* Incorporated herein by reference from Pre-Effective Amendment No. 2 to
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.
** Incorporated herein by reference from Post-Effective Amendment No. 2 to
the Registration Statement as filed with the Commission on February 13,
1998.
*** Incorporated herein by reference from Pre-Effective Amendment No. 1 to the
Registration Statement as filed with the Commission on May 13, 1996.
**** 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 at a later date.
ITEM 24. 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 25. 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
C-1
<PAGE> 151
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 26. 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 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 27. PRINCIPAL UNDERWRITERS.
(a) Diversified Investors Securities Corp. is the principal underwriter
(the "Distributor") of the Registrant. The Distributor also serves 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 Schedules A and C thereof (File No. 8-45671),
the text of which is hereby incorporated herein by reference.
(c) Not applicable.
ITEM 28. 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 29. MANAGEMENT SERVICES.
Not applicable.
ITEM 30. UNDERTAKINGS.
Not applicable.
C-2
<PAGE> 152
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets the
requirements of Securities Act Rule 485(a) for effectiveness of this Post-
Effective Amendment to the Registration Statement and has duly caused this
Post-Effective Amendment to the 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 2nd day of March, 2000.
THE DIVERSIFIED INVESTORS
FUNDS GROUP
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
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities indicated on March 2, 2000.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
/s/ TOM A. SCHLOSSBERG Trustee, President, Chief Executive Officer and Chairman
- --------------------------------------------- of the Board of Trustees
Tom A. Schlossberg
* /s/ ROBERT LESTER LINDSAY Trustee
- ---------------------------------------------
Robert Lester Lindsay
* /s/ NIKHIL MALVANIA Trustee
- ---------------------------------------------
Nikhil Malvania
* /s/ MARK MULLIN Trustee
- ---------------------------------------------
Mark Mullin
* /s/ JOYCE GALPERN NORDEN Trustee
- ---------------------------------------------
Joyce Galpern Norden
* /s/ ALFRED C. SYLVAIN Treasurer, Chief Financial Officer and Principal
- --------------------------------------------- Accounting Officer
Alfred C. Sylvain
*By: /s/ ROBERT F. COLBY
---------------------------------------
Robert F. Colby
Attorney-in-fact pursuant to powers of
attorney previously filed
</TABLE>
C-3
<PAGE> 153
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
- ----------- DESCRIPTION
<C> <S>
(d)(3) Form of Investment Subadvisory Agreement between Diversified
and Husic Capital Management L.P.
(d)(4) Form of Investment Subadvisory Agreement between Diversified
and Payden & Rygel.
(i)(2) Consent of Counsel.*
(j) Consent of Independent Auditors.*
(n) Financial Data Schedules. *
(q) Code of Ethics.
</TABLE>
<PAGE> 1
INVESTMENT SUBADVISORY AGREEMENT
INVESTMENT SUBADVISORY AGREEMENT, dated as of November 16, 1999, by and
between Diversified Investment Advisors, Inc., a Delaware corporation
("Diversified") and Husic Capital Management, a California limited partnership
(hereinafter "Subadvisor" or "Husic")
WITNESSETH:
WHEREAS, Diversified has been organized to operate as an investment
advisor registered under the Investment Advisers Act of 1940 and has been
retained to provide investment advisory services to the Special Equity
Portfolio ("Portfolio"), a series of Diversified Investors Portfolios, a
diversified open-end management investment company registered under the
Investment Company Act of 1940 ("1940 Act");
WHEREAS, Diversified desires to retain the Subadvisor to furnish it with
portfolio investment advisory services in connection with Diversified's
investment advisory activities on behalf of the Portfolio, and the Subadvisor
is willing to furnish such services to Diversified;
NOW, THEREFORE, in consideration of the mutual covenants and agreements of
the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Duties of the Subadvisor. In accordance with and subject to the
Investment Advisory Agreement between the Portfolio and Diversified, attached
hereto as Schedule A (the "Advisory Agreement"), Diversified hereby appoints
the Subadvisor to perform the portfolio investment advisory services described
herein for the investment and reinvestment of such amount of the Portfolio's
assets as is determined from time to time by the Portfolio's Board of Trustees
and communicated in writing to the Subadvisor, subject to the control and
direction of Diversified and the Diversified Investors Portfolios' Board of
Trustees, for the period and on the terms hereinafter set forth.
The Subadvisor shall provide Diversified with such investment advice and
supervision as the latter may from time to time reasonably consider necessary
for the proper supervision of the Subadvisor's portion of the Portfolio's
assets. The Subadvisor shall furnish continuously an investment program and
shall determine from time to time what securities shall be purchased, sold or
exchanged and what portion of the assets of the Portfolio under the control of
the Subadvisor shall be held uninvested, subject always to the provisions of
the 1940 Act and to the Portfolio's then-current Registration Statement on Form
N-1A.
In particular, the Subadvisor shall, without limiting the foregoing: (i)
continuously review, supervise and implement the investment program of the
<PAGE> 2
Portfolio under their control; (ii) monitor regularly the relevant securities
for the Portfolio to determine if adjustments are warranted and, if so, to make
such adjustments; (iii) determine, in the Subadvisor's discretion, the
securities to be purchased or sold or exchanged in order to keep the Portfolio
in balance with its designated investment strategy; (iv) determine, in the
Subadvisor's discretion, whether to exercise warrants or other rights with
respect to the Portfolio's securities; (v) determine, in the Subadvisor's
discretion, whether the merit of an investment has been substantially impaired
by extraordinary events or financial conditions, thereby warranting the removal
of such securities from the Portfolio; (vi) as promptly as practicable after the
end of each calendar month, furnish a report showing: (a) all transactions
during such month, (b) all assets of the Portfolio on the last day of such
month, rates of return, and (c) such other information relating to the Portfolio
as Diversified may reasonably request; (vii) meet at least four times per year
with Diversified and with such other persons as may be designated on reasonable
notice and at reasonable locations, at the request of Diversified, to discuss
general economic conditions, performance, investment strategy, and other matters
relating to the Portfolio; (viii) provide the Portfolio with records concerning
the Subadvisor's activities which the Portfolio is required by law to maintain
as requested in writing; and (ix) render regular reports as requested to the
Portfolio's officers and Directors concerning the Subadvisor's discharge of the
foregoing responsibilities.
The Subadvisor shall also make recommendations to Diversified as to the
manner in which voting rights, rights to consent to corporate action and any
other rights pertaining to the Portfolio's securities shall be exercised, and
Subadvisor shall be responsible for effecting such recommendations.
Should the Board of Trustees at any time make any definite determination
as to investment policy with respect to the Portfolio and notify the Subadvisor
thereof in writing, the Subadvisor shall be bound by such determination for the
period, if any, specified in such notice or until similarly notified in writing
that such policy has been revoked. The initial Statement of Investment Policy
and Guidelines is attached hereto as Appendix I ("Guidelines").
The Subadvisor shall take, on behalf of the Portfolio, all actions which
it deems necessary to implement the investment policies determined as provided
above, and in particular to place all orders for the purchase or sale of
Portfolio securities for the Portfolio's account with brokers or dealers
selected by it, and to that end the Subadvisor is authorized as the agent of
the Portfolio to give instructions to the custodian of the Portfolio as to
deliveries of securities and payments of cash for the account of the Portfolio.
Subject to the primary objective of obtaining best execution, the Subadvisor
may place orders for the purchase and sale of portfolio securities with such
broker/dealers who provide statistical, factual and financial information and
services to the Portfolio, to the Subadvisor, or to any other fund or account
for which the Subadvisor provides investment advisory services and may
2
<PAGE> 3
place such orders with broker/dealers who sell shares of the Portfolio or who
sell shares of any other fund for which the Subadvisor provides investment
advisory services. Broker/dealers who sell shares of the funds of which Husic is
investment advisor shall only receive orders for the purchase or sale of
portfolio securities to the extent that the placing of such orders is in
compliance with the Rules of the Securities and Exchange Commission and the
National Association of Securities Dealers, Inc. Diversified understands and
agrees that Subadvisor's brokerage practices shall be consistent with the
disclosure in Schedule F of Subadvisor's Form ADV, as amended from time to time,
and that Subadvisor's brokerage practices so disclosed shall be deemed
acceptable for purposes of this Agreement.
Notwithstanding the provisions of the previous paragraph and subject to
such policies and procedures as may be adopted by the Board of Trustees and
officers of the Portfolio and communicated in writing to Subadvisor, the
Subadvisor may pay a member of an exchange, broker or dealer an amount of
commission for effecting a securities transaction in excess of the amount of
commission another member of an exchange, broker or dealer would have charged
for effecting that transaction, in such instances where the Subadvisor has
determined in good faith that such amount of commission was reasonable in
relation to the value of the brokerage and research services provided by such
member, broker or dealer, viewed in terms of either that particular transaction
or the Subadvisor's overall responsibilities with respect to the Portfolio and
to other funds and separate accounts for which the Subadvisor exercises
investment discretion.
2. Allocation of Charges and Expenses. The Subadvisor shall furnish at
its own expense all necessary services, facilities and personnel in connection
with its responsibilities under Section 1 above. It is understood that the
Portfolio will pay all of its own expenses and liabilities including, without
limitation, compensation and out-of-pocket expenses of Trustees not affiliated
with the Subadvisor or Diversified; governmental fees; interest charges; taxes;
membership dues; fees and expenses of independent auditors, of legal counsel and
of any transfer agent, administrator, distributor, shareholder servicing agents,
registrar or dividend disbursing agent of the Portfolio; expenses of
distributing and redeeming shares and servicing shareholder accounts; expenses
of preparing, printing and mailing prospectuses, shareholder reports, notices,
proxy statements and reports to governmental officers and commissions and to
shareholders of the Portfolio; expenses connected with the execution, recording
and settlement of Portfolio security transactions; insurance premiums; fees and
expenses of the custodian for all services to the Portfolio, including
safekeeping of funds and securities and maintaining required books and accounts;
expenses of calculating the net asset value of shares of the Portfolio; expenses
of shareholder meetings; expenses of litigation and other extraordinary or
non-recurring events and expenses relating to the issuance, registration and
qualification of shares of the Portfolio.
3
<PAGE> 4
3. Compensation of the Subadvisor. For the services to be rendered,
Diversified shall pay to the Subadvisor an investment advisory fee computed in
accordance with the terms of Schedule B herewith attached. If the Subadvisor
serves for less than the whole of any period specified, its compensation shall
be prorated.
4. Covenants and Representations of the Subadvisor. The Subadvisor
agrees that it will not deal with itself, or with the Trustees of the Portfolio
or with Diversified, or the Portfolio's principal underwriter or distributor as
principals in making purchases or sales of securities or other property for the
account of the Portfolio, except as permitted by the 1940 Act, and will comply
with all other provisions of the Declaration of Trust and any current
Registration Statement on Form N-1A of the Portfolio relative to the
Subadvisor, Advisor and its Trustees and officers.
5. Representations and Warranties of Diversified. Diversified represents
and warrants to Subadvisor and agrees with Subadvisor as follows. Diversified
has the requisite legal capacity and authority to execute, deliver and perform
its obligations under this Agreement. This Agreement has been duly authorized,
executed and delivered by Diversified and is the legal, valid and binding
agreement of Diversified, enforceable against Diversified in accordance with
its terms. Diversified's execution of this Agreement and the performance of its
obligations hereunder do not conflict with or violate any provisions of the
governing documents (if any) of Diversified or the Portfolio or any obligations
by which Diversified or the Portfolio is bound, whether arising by contract,
operation of law or otherwise. Diversified is experienced in engaging
subadvisors and is aware of the risks associated with such engagements,
including the risk that the Portfolio could suffer substantial diminution in
value.
6. Allocation of Investments. Diversified acknowledges and understands
that Subadvisor engages in an investment advisory business apart from managing
the Portfolio. This will create conflicts of interest with the Portfolio over
Subadvisor's time devoted to managing the Portfolio and the allocation of
investment opportunities among accounts (including the Portfolio) managed by
Subadvisor. Subadvisor will attempt to resolve all such conflicts in a manner
that is generally fair to all of its clients. Diversified confirms that
Subadvisor may give advice and take action with respect to any of its other
clients that may differ from advice given or the timing or nature of action
taken with respect to the Portfolio so long as it is Subadvisor's policy, to the
extent practicable, to allocate investment opportunities to the Portfolio over
a period of time on a fair and equitable basis relative to other clients.
Nothing in this Agreement shall be deemed to obligate Subadvisor to acquire for
the Portfolio any security that Subadvisor or Subadvisor's officers, partners,
employees or affiliates may acquire for Subadvisor's or their own
4
<PAGE> 5
accounts or for the account of any other client, if, in the absolute discretion
of Subadvisor, it is not practical or desirable to acquire such Security for
the Portfolio.
7. Limits on Duties. The Subadvisor shall be responsible only for
managing the assets in good faith and in accordance with the Portfolio's
Guidelines and shall have no responsibility whatsoever for, and shall incur no
liability on account of (i) diversification, selection, establishment or
modification of such Guidelines (ii) advice on, or management of, any other
assets for Diversified or the Portfolio, (iii) filing of any tax or information
returns or forms, withholding or paying any taxes, or seeking any exemption or
refund, (iv) registration with any government or agency, or (v) administration
of the plans and trusts investing through the Portfolio, or (vi) overall
Portfolio compliance with the requirements of the 1940 Act, which requirements
are outside of the Subadvisor's control, or compliance with Subchapter M of the
Internal Revenue Code of 1986, as amended, and Husic and its partners, officers
and employees shall to the fullest extent permitted by applicable law (and
subject to the applicable provisions of Section 17(i) of the 1940 Act), be
indemnified and held harmless by Diversified for Husic's actions or omissions
in carrying out the terms and provisions of this Agreement, and including,
without limitation, against any actual or alleged loss, claim, damage,
expense, (including without limitation, reasonable attorneys fees and costs),
costs and settlement related to or resulting from indemnification to the
Portfolio, or any shareholder thereof and, brokers and commission merchants,
fines, taxes, penalties and interest. To the extent permitted under applicable
law, Diversified agrees that Subadvisor will not be liable to Diversified or
the Portfolio for any losses incurred by Diversified or the Portfolio that
arise out of or are in any way connected with any recommendation or other act
or failure to act of Subadvisor under this Agreement, including, but not
limited to, any error in judgment with respect to the Portfolio, so long as
such recommendation or other act or failure to act does not constitute a breach
of Subadvisor's fiduciary duty to Diversified or the Portfolio, or a breach of
applicable law, or a breach of the terms of this Agreement. Should any such
breach occur the indemnification by Diversified, referred to above, shall be
inapplicable.
The Subadvisor may apply to Diversified at any time for instructions and
may consult counsel for Diversified or its own counsel with respect to any
matter arising in connection with the duties of the Subadvisor. Also, the
Subadvisor shall be protected in acting upon advice of Diversified and/or
Diversified's counsel and upon any document which Subadvisor reasonably
believes to be genuine and to have been signed by the proper person or persons.
8. Exclusivity. Subadvisor represents to Diversified that during the term
of this Agreement Subadvisor will not enter into any further agreement to
subadvise any similar portfolio, any collective trust, open-end investment
company registered under the Investment Company Act of 1940, Variable Insurance
Contract registered under the Investment Company Act of 1940, or insurance
company separate account
5
<PAGE> 6
that are offered to the types of employee benefit plans (referenced in Schedule
C) without providing Diversified with written notice after agreement is reached.
It is understood that Subadvisor shall not be limited by this section 8 with
respect to any other portfolio that it may offer (such as a small, medium or
large capitalization specific portfolio, a portfolio that includes a significant
portion devoted to non-U.S. securities or a commingled vehicle that is not
sponsored by a provider of bundled services to the types of employee benefit
plans specified on Schedule C).
9. Duration, Termination and Amendments of this Agreement. This
Agreement shall become effective as of the day and year first above written and
shall govern the relations between the parties hereto thereafter, and, unless
terminated earlier as provided below, shall remain in force for two years, on
which date it will terminate unless its continuance thereafter is specifically
approved at least annually (a) by the vote of a majority of the Trustees of the
Portfolio who are not "interested persons" with respect to this Agreement or of
the Subadvisor or Diversified at an in person meeting specifically called for
the purpose of voting on such approval, and (b) by the Board of Trustees of the
Portfolio or by vote of a majority of the outstanding voting securities of the
Portfolio. However, if the shareholders of the Portfolio fail to approve the
Agreement as provided herein; the Subadvisor may continue to serve hereunder in
the manner and to the extent permitted by the Investment Company Act of 1940 and
Rules thereunder.
This Agreement may be terminated at any time without the payment of any
penalty by the Trustees, or by the vote of a majority of the outstanding voting
securities of the Portfolio, or by Diversified. The Subadvisor may terminate the
Agreement only upon giving 90 days' advance written notice to Diversified. This
Agreement shall automatically terminate in the event of its assignment.
This Agreement may be amended only if such amendment is approved by the
vote of a majority of the outstanding voting securities of the Portfolio and by
vote of a majority of the Board of Trustees of the Portfolio who are not parties
to this Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such approval.
The terms "specifically approved at least annually", "vote of a majority of
the outstanding voting securities", "assignment", "affiliated person", and
"interested persons", when used in this Agreement, shall have the respective
meanings specified in, and shall be construed in a manner consistent with, the
1940 Act, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
10. Certain Records. Any records to be maintained and preserved pursuant
to the provisions of Rule 31a-1 and Rule 31a-2 adopted under the 1940 Act which
are prepared or maintained by the Subadvisor on behalf of the Portfolio are the
6
<PAGE> 7
property of the Portfolio and will be surrendered promptly to the Portfolio on
request.
11. Survival of Compensation Rates. All rights to compensation under this
Agreement and the provisions of Section 7 hereof, shall survive the termination
of this Agreement.
12. Entire Agreement. This Agreement states the entire agreement of the
parties with respect to investment advisory services to be provided to the
Portfolio by the Subadvisor and may not be amended except in a writing signed
by the parties hereto and approved in accordance with Section 9 hereof.
13. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.
14. Change of Management and Pending Litigation. Subadvisor represents to
Diversified that it will disclose to Diversified promptly after it has
knowledge of any significant change or variation in its management structure or
personnel or any significant change or variation in its management style or
investment philosophy. In addition, Subadvisor represents to Diversified that
it will similarly disclose to Diversified, promptly after it has knowledge, the
existence of any pending legal action being brought against it whether in the
form of a lawsuit or a non-routine investigation by any federal or state
governmental agency.
Diversified represents to Subadvisor that any information received by
Diversified pursuant to this section will be kept strictly confidential and
will not be disclosed to any third party.
15. Use of Name and Confidentiality. Subadvisor hereby agrees that
Diversified may use the Subadvisor's name in its marketing or advertising
materials. Diversified agrees to allow the Subadvisor a reasonable time to
examine and approve any such materials prior to use. Except as required by law,
(a) Subadvisor agrees to maintain in strict confidence all financial
information regarding Diversified that is furnished to Subadvisor by
Diversified (except that Diversified consents to disclosure of Diversified's
identity as a client of Subadvisor), and (b) Diversified agrees to maintain in
strict confidence all investment advice and information furnished to
Diversified by Subadvisor. Notwithstanding anything to the contrary above,
Diversified consents to the use and disclosure by Subadvisor of Subadvisor's
investment experience and performance with respect to the Portfolio, without
disclosing the identity of Diversified in connection with such experience or
performance. Subadvisor may disclose identity of Diversified in its
representative client list.
7
<PAGE> 8
16. Severability. The invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any and all
other provisions hereof.
17. Delivery of Information. Diversified acknowledges receipt of
Subadvisor's brochure required to be delivered under the Investment Advisers
Act of 1940 (including the information in Part II of Subadvisor's Form ADV).
Upon written request by Diversified, Subadvisor agrees to deliver annually,
without charge, Subadvisor's brochure required by the Investment Advisers Act
of 1940.
18. Third-Party Beneficiaries. Neither party intends for this
Agreement to benefit any third party not expressly named in this Agreement.
19. Binding Arbitration. The parties waive their right to seek
remedies in court, including any right to a jury trial. The parties agree that
in the event of any dispute between the parties arising out of, relating to or
in connection with this Agreement or the Portfolio, such dispute shall be
resolved exclusively by arbitration to be conducted only in New York, New York
in accordance with the rules of JAMS/ENDISPUTE applying the laws of New York.
Disputes shall not be resolved in any other forum or venue. The parties agree
that such arbitration shall be conducted by a retired judge who is experienced
in resolving disputes regarding the securities business, that discovery shall
not be permitted except as required by the rules of JAMS/ENDISPUTE, that the
arbitration award shall not include factual findings or conclusions of law and
that no punitive damages shall be awarded. The parties understand that any
party's right to appeal or to seek modification of any ruling or award of the
arbitrator is severely limited. Any award rendered by the arbitrator shall be
final and binding, and judgment may be entered on it in any court of competent
jurisdiction in New York, New York or as otherwise provided by law.
Notwithstanding the foregoing, the Subadvisor may bring an action in any
court of competent jurisdiction in New York, New York for equitable relief to
compel performance of the indemnification and defense obligations of
Diversified under Section 7 of this Agreement.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties thereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
Diversified Investment Advisors, Inc.
By: /s/ John F. Hughes
---------------------------------
Husic Capital Management
By: /s/ Cynthia A. Slaherty
---------------------------------
9
<PAGE> 10
APPENDIX I
November 16, 1999
STATEMENT OF INVESTMENT POLICY AND GUIDELINES
FOR THE
HUSIC CAPITAL MANAGEMENT
SMALL CAPITALIZATION PORTFOLIO
<PAGE> 11
2
STATEMENT OF INVESTMENT POLICY AND GUIDELINES
FOR
THE HUSIC CAPITAL MANAGEMENT
SMALL CAPITALIZATION PORTFOLIO
TABLE OF CONTENTS
I. PURPOSE
II. OBJECTIVES
III. INVESTMENT GUIDELINES
IV. PERFORMANCE EVALUATION
V. COMMUNICATION
VI. OTHER
<PAGE> 12
3
STATEMENT OF INVESTMENT POLICY AND GUIDELINES
FOR
THE HUSIC CAPITAL MANAGEMENT
SMALL CAPITALIZATION PORTFOLIO
I. PURPOSE
The purpose of this Statement of Investment Policy and Guidelines is to
communicate the Husic Small Capitalization Portfolio investment objectives,
guidelines and performance evaluation standards adopted by Diversified
Investment Advisors and its sub-advisor, Husic Capital Management.
This statement is intended to (1) help the sub-advisor understand Diversified's
investment goals (2) identify portfolio management activities to be employed by
the sub-adviser to achieve those goals, and (3) supply Diversified with a tool
to monitor and evaluate the operations and performance of the fund.
II. OBJECTIVES AND CONSTRAINTS
The primary objectives of the fund are:
- - To provide a high level of capital appreciation through investment in a
diversified portfolio of common stocks of small to medium size companies.
- - To outperform the Russell 2000 Growth Index over full market cycles.
- - To achieve mid-second quartile or better performance among a group of peer
funds as defined by recognized reporting services and consulting
organizations (e.g., Lipper, Frank Russell, Callan).
The primary constraint of the fund is:
- - To manage the portfolio without excessive risk relative to the Russell 2000
Growth Index, or peer funds, as measured by annualized standard deviation
over 3-5 year periods.
<PAGE> 13
4
III. INVESTMENT GUIDELINES
A) Permissible securities:
----------------------
In addition to legal requirements specified in the Diversified prospectus to
conform with SEC requirements:
- - Common stocks of small to medium size companies as defined below. As of August
1999, small capitalization firms range from $50 million to $1.9 billion, and
mid-cap companies are defined to be greater than $1.9 billion and less than
$8.4 billion.
- - Preferred stocks of small to medium size companies.
- - Convertible debt securities of small to medium size U.S. corporations.
- - ADR's up to 10% of portfolio holdings.
- - Any security residing in the Russell 2000 Growth Index.
B) Prohibited Securities, and Limitations and Restrictions on Permissible
Investments:
- -------------------------------------------------------------------------
- - No more than 5% of the assets (at cost) of the portfolio may be invested in
the securities of any one issuer (other than U.S. government securities).
- - Any combination of three names may not exceed 25% of the market value of the
portfolio, with no single name exceeding 9% of the market value of the
portfolio.
- - No more than 25% of the assets of the portfolio may be invested in securities
of issuers in any one industry.
- - No more than 5% of the voting securities of any one issuer may be acquired.
- - Non-public illiquid securities may not exceed 15% of the portfolio under
normal market conditions (i.e., 144A).
- - The portfolio may not borrow funds except for temporary or emergency purposes.
C) Leverage:
---------
The portfolio may not be leveraged beyond short-term (e.g., one to two week)
marginal cash overdraft borrowing (e.g., 1-5% of the portfolio) resulting from
temporary cash management.
D) Derivatives:
------------
- - Derivatives may not be used for speculative purposes.
- - Exchange traded Russell 2000 Index futures can be used for hedging purposes
either to securitize cash inflows or to immunize securities for redemption
requests.
- - Exchange traded covered call options may be utilized up to the extent of the
individual security holding as part of the sales strategy, but should not
exceed 20% of the portfolio.
- - No uncovered call writing is permitted.
<PAGE> 14
5
E) Quality
-------
- - Non-dollar foreign securities are prohibited.
F) Capitalization Guidelines Relative to Benchmark
-----------------------------------------------
- - At least 75% of the market value of the portfolio should be invested in
securities with an average weighted market cap between 10% and 200% of the
average weighted market cap of the Russell 2000 Growth Index
- - Not more than 25% of the market value of the portfolio should be invested in
securities with an average weighted market cap between 200% and 1000% of the
average weighted market cap of the Russell 2000 Growth Index, unless the
security resides in the Russell 2000 Growth Index
- - No securities with a market cap above 1000% of the average weighted market cap
of the Russell 2000 Growth Index, unless it still resides in that Index
G) Risk Controls
-------------
- - Standard deviation of return not more than 25% greater than the Russell 2000
Growth Index, or the median in a peer universe, over 3-5 year periods
- - A minimum of 30 securities in the portfolio at all times
- - A maximum of 50% in any one sector (as defined by Frank Russell Co.)
- - Tracking error targeted to not exceed 10% with respect to the Russell 2000
Growth Index over a three year period
- - Elimination of any holding that exceeds cap guidelines established in
section F by current calendar quarter-end
H) Cash Management
---------------
- - Typical cash balances will be maintained in a range of 0-6% under normal
circumstances.
- - Cash balances will not be less than zero except during temporary overdraft
positions to efficiently manage short-term cash requirements during periods of
unusual market conditions (e.g., one to seven business days)
<PAGE> 15
6
IV. PERFORMANCE EVALUATION
- -- The performance benchmark for the fund will be the Russell 2000 Growth
Index. It is expected that the fund will outperform the benchmark by at
least 400 basis points over 3-5 year periods.
- -- Additionally, it is expected that the fund will be in the upper second
quartile of peer universes (specify -- Lipper, Russell, Callan or
Morningstar), or better, over full market cycles.
- -- The foregoing performance objectives are to be accomplished without taking
excessive risk. Specifically, volatility should not exceed the risk
control guidelines established in section (G) over 3-5 year periods, and
the Sharpe ratio should exceed the peer universe average.
V. COMMUNICATION
- -- Monthly -- conference calls to explain to designated Diversified analysts:
the current portfolio position, recent trades and their rationale, market
outlook for the fund, and expected portfolio actions.
- -- Quarterly -- portfolio manager writeups covering material similar to
monthly conference calls, but also including material specified by
Diversified's communications department.
- -- Annually -- meetings between interested parties to reaffirm or change the
Investment Policy Statement, Bi-annual visits by Diversified personnel at
the sub-advisor site to update due diligence.
- -- As needed on an ad hoc basis to explain major market moves between other
communications.
- -- Immediate notification regarding sub-advisor change in ownership, change
in personnel involved in management of the account, conflicts of interest,
pending lawsuits or government investigations, change in investment
philosophy or discipline, or large absolute changes in assets under
management.
VI. OTHER
- -- Explanation of best execution trading practices, including soft dollar
arrangements
- -- Evidence of disaster recovery plan, including Y2K, and EURO conversion
plans
- -- Cooperation with outside audits (Diversified's or its clients' auditors,
SEC).
Signed Cynthia A. Slaherty
---------------------------------
(Husic Capital Management)
Signed [Illegible]
---------------------------------
(Diversified Investment Advisors)
<PAGE> 16
SCHEDULE A
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of January 3, 1994 by and between the Special Equity
Portfolio, a series of Diversified Investors Portfolios (herein called the
"Portfolio"), and Diversified Investment Advisors, Inc. a Delaware corporation
(herein called "Diversified").
WHEREAS, the Portfolio is registered as a diversified, open-end,
management investment company under the Investment Company Act of 1940 (the
"1940 Act"); and
WHEREAS, Diversified has been organized to operate as an investment
advisor registered under the Investment Advisers Act of 1940; and
WHEREAS, the Portfolio desires to retain Diversified to render investment
advisory services, and Diversified is willing to so render such services on the
terms hereinafter set forth;
NOW, THEREFORE, this Agreement
WITNESSETH:
In consideration of the promises and mutual covenants herein contained, it
is agreed between the parties hereto as follows:
1. The Portfolio hereby appoints Diversified to act as investment advisor to
the Portfolio for the period and on the terms set forth in this Agreement.
Diversified accepts such appointment and agrees to render the services herein
set forth for the compensation herein provided.
2. (a) Diversified shall, at its expense, (i) employ sub-advisors or
associate with itself such entities as it believes appropriate to assist it in
performing its obligations under this Agreement and (ii) provide all services,
equipment and facilities necessary to perform its obligations under this
Agreement.
(b) The Portfolio shall be responsible for all of its expenses and
liabilities, including, but not limited to: compensation and out-of-pocket
expenses of Trustees not affiliated with any subadvisor or Diversified;
governmental fees; interest charges; taxes; membership dues; fees and expenses
of independent auditors, of legal counsel and of any transfer agent,
administrator, distributor, shareholder servicing agents, registrar or dividend
disbursing agent
<PAGE> 17
-3-
good faith that such commission was reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the overall responsibilities of
Diversified with respect to the accounts as to which it exercises investment
discretion.
In placing orders with brokers and/or dealers, Diversified intends to seek
best price and execution for purchases and sales and may effect transactions
through itself and its affiliates on a securities exchange provided that the
commissions paid by the Portfolio are "reasonable and fair" compared to
commissions received by other broker-dealers having comparable execution
capability in connection with comparable transactions involving similar
securities and provided that the transactions in connection with which such
commissions are paid are effected pursuant to procedures established by the
Board of the Trustees of the Portfolio. All transactions are effected pursuant
to written authorizations from the Portfolio conforming to the requirements of
Section 11(a) of the Securities Exchange Act of 1934 and Rule 11a2-2(T)
thereunder. Pursuant to such authorizations, an affiliated broker-dealer may
transmit, clear and settle transactions for the Portfolio that are executed on a
securities exchange provided that it arranges for unaffiliated brokers to
execute such transactions.
Diversified shall determine from time to time the manner in which voting
rights, rights to consent to corporate action and any other rights pertaining to
the Portfolio's securities shall be exercised, provided, however, that should
the Board of Trustees at any time make any definite determination as to
investment policy and notify Diversified thereof in writing, Diversified shall
be bound by such determination for the period, if any, specified in such notice
or until similarly notified that such determination has been revoked.
Diversified will determine what portion of securities owned by the Portfolio
shall be invested in securities described by the policies of the Portfolio and
what portion, if any, should be held uninvested. Diversified will determine
whether and to what extent to employ various investment techniques available to
the Portfolio. In effecting transactions with respect to securities or other
property for the account of the Portfolio, Diversified may deal with itself and
its affiliates, with the Trustees of the Portfolio or with other entities to the
extent such actions are permitted by the 1940 Act.
(b) Diversified also shall provide to the Portfolio administrative
assistance in connection with the operation of the Portfolio, which shall
include compliance with all reasonable requests of the Portfolio for
information, including information required in connection with the Portfolio's
filings with the Securities and Exchange Commission and state securities
commissions.
<PAGE> 18
-4-
(c) As manager of the assets of the Portfolio, Diversified shall make
investments for the account of the Portfolio in accordance with Diversified's
best judgement and within the Portfolio's investment objectives, guidelines,
and restrictions, the 1940 Act and the provisions of the Internal Revenue Code
of 1986 relating to regulated investment companies subject to policy decisions
adopted by the Board of Trustees.
(d) Diversified shall furnish to the Board of Trustees periodic reports on
the investment performance of the Portfolio and on the performance of its
obligations under this Agreement and shall supply such additional reports and
information as the Portfolio's officers or Board of Trustees shall reasonably
request.
(e) On occasions when Diversified deems the purchase or sale of a security
to be in the best interest of the Portfolio as well as other customers,
Diversified, to the extent permitted by applicable law, may aggregate the
securities to be so sold or purchased in order to obtain the best execution or
lower brokerage commissions, if any. Diversified may also on occasion purchase
or sell a particular security for one or more customers in different amounts.
On either occasion, and to the extent permitted by applicable law and
regulations, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by Diversified in the manner
it considers to be the most equitable and consistent with its fiduciary
obligations to the Portfolio and to such other customers.
(f) Diversified shall also provide the Portfolio with the following
services as may be required:
(i) providing office space, equipment and clerical personnel
necessary for maintaining the organization of the Portfolio and
for performing administrative and management functions;
(ii) supervising the overall administration of the Portfolio,
including negotiation of contracts and fees with and the
monitoring of performance and billings of the Portfolio's
transfer agent, custodian and other independent contractors or
agents;
(iii) preparing and, if applicable, filing all documents required for
compliance by the Portfolio with applicable laws and
regulations, including registration statements, registration fee
filings, semi-annual and annual reports to investors, proxy
statements and tax returns;
<PAGE> 19
-5-
(iv) preparation of agendas and supporting documents for and minutes
of meeting of Trustees, committees of Trustees and investors; and
(v) maintaining books and records of the Portfolio.
4. Diversified shall give the Portfolio the benefit of Diversified's best
judgment and efforts in rendering services under this Agreement. As an
inducement to Diversified's undertaking to render these services, the Portfolio
agrees that Diversified shall not be liable under this Agreement for any mistake
in judgment or in any other event whatsoever provided that nothing in this
Agreement shall be deemed to protect or purport to protect Diversified against
any liability to the Portfolio or its investors to which Diversified would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of the Adviser's duties under this Agreement or
by reason of the Adviser's reckless disregard of its obligations and duties
hereunder.
5. In consideration of the services to be rendered by Diversified under
this Agreement, the Portfolio shall pay Diversified a fee accrued daily and
paid monthly at an annual rate equal to .80% of the Portfolio's average daily
net assets. If the fees payable to Diversified pursuant to this paragraph 5
begin to accrue before the end of any month or if this Agreement terminates
before the end of any month, the fees for the period from that date to the end
of that month or from the beginning of that month to the date of termination,
as the case may be, shall be prorated according to the proportion which the
period bears to the full month in which the effectiveness or termination
occurs. For purposes of calculating the monthly fees, the value of the net
assets of the Portfolio shall be computed in the manner specified in its
Regulation Statement on Form N-1A for the computation of net asset value. For
purposes of this Agreement, a "business day" is any day the New York Stock
Exchange is open for trading.
In compliance with the requirements of Rule 31a-3 under the 1940 Act,
Diversified hereby agrees that all records which it maintains for the Portfolio
are property of the Portfolio and further agrees to surrender promptly to the
Portfolio any such records upon the Portfolio's request. Diversified further
agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act
any such records required to be maintained by Rule 31a-1 under the 1940 Act.
6. This Agreement shall be effective as to the Portfolio as of the date
the Portfolio commences investment operations after this Agreement shall have
been approved by the Board of Trustees of the Portfolio and the investor(s) in
the Portfolio in the manner
<PAGE> 20
-6-
contemplated by Section 15 of the 1940 Act and, unless sooner terminated as
provided herein, shall continue until the second anniversary of the date hereof.
Thereafter, if not terminated, this Agreement shall continue in effect as to the
Portfolio for successive periods of 12 months each, provided such continuance is
specifically approved at least annually by the vote of a majority of those
members of the Board of Trustees of the Portfolio who are not parties to this
Agreement or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval; and either (a) by the vote of
a majority of the full Board of Trustees or (b) by vote of a majority of the
outstanding voting securities of the Portfolio; provided, however, that this
Agreement may be terminated by the Portfolio at any time, without the payment of
any penalty, by the Board of Trustees of the Portfolio or by vote of a majority
of the outstanding voting securities of the Portfolio on 60 days' written notice
to Diversified, or by Diversified as to the Portfolio at any time, without
payment of any penalty, on 90 days' written notice to the Portfolio. This
Agreement will immediately terminate in the event of its assignment. (As used in
this Agreement, the terms "majority of the outstanding voting securities",
"interested person" and "assignment" shall have the same meanings as such terms
have in the 1940 Act and the rule and regulatory constructions thereunder.)
7. Except to the extent necessary to perform Diversified's obligations
under this Agreement, nothing herein shall be deemed to limit or restrict the
right of Diversified, or any affiliate of Diversified, or any employee of
Diversified, to engage in any other business or devote time and attention to the
management or other aspects of any other business, whether of a similar or
dissimilar nature, or to render services of any kind to any other trust,
corporation, firm, individual or association.
8. The investment management services of Diversified to the Portfolio
under this Agreement are not to be deemed exclusive as to Diversified and
Diversified will be free to render similar services to others.
Each party agrees to perform such further acts and execute such further
documents as are necessary to effectuate the purposes hereof.
No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge, or termination is
sought and no material amendment of this Agreement shall be effective until
approved by vote of the holders of a majority of the outstanding voting
securities of the Portfolio.
This Agreement embodies the entire agreement and understanding between the
parties hereto and supersedes all prior agreements and understandings relating
to the subject matter
<PAGE> 21
-7-
hereof. The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. Should any part of this
Agreement be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby. This
Agreement shall be binding and shall inure to the benefit of the parties
hereto and their respective successors, to the extent permitted by law.
9. This Agreement shall be construed in accordance with the laws of the
State of New York provided that nothing herein shall be construed in a manner
inconsistent with the requirements of 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the day and year first above
written.
Attest: Diversified Investors Portfolios
/s/ John F. Hughes By: /s/ Tom Schlossberg
- ----------------------------------- ----------------------------------
Tom Schlossberg
Chairman and President
Attest: Diversified Investment Advisors, Inc.
/s/ Catherine A. Mohr By: /s/ Gerald L. Katz
- ----------------------------------- ----------------------------------
Gerald L. Katz
Vice President and CFO
<PAGE> 22
SCHEDULE B
The Subadvisor shall be compensated for its services under this Agreement on
the basis of the below-described annual fee schedule. The fee schedule shall
only be amended by agreement between the parties.
FEE SCHEDULE
.40% OF THE FIRST $250M OF NET ASSETS
.25% OF NET ASSETS BETWEEN $250M AND $350M
.20% OF NET ASSETS IN EXCESS OF $350M
Net assets are equal to the market value of the Subadvisor's portion of the
Portfolio. Fees will be calculated by multiplying the arithmetic average of the
beginning and ending monthly net assets by the fee schedule and dividing by
twelve. The sum of the three consecutive months will be paid in arrears on
calendar quarters.
Husic agrees that if at anytime during the term of this Subadvisory Agreement,
Husic offers another of its clients a lower fee than that set forth in this
Schedule B for the management of a similarly structured small-cap growth
separate account then Diversified will also be charged the lower rate.
Diversified will benefit from the lower rate from the first day that it is in
effect for Husic's other client. It is understood and agreed by both Husic and
Diversified that this paragraph is applicable solely to Diversified's small-cap
growth Portfolio and not to any other fund/assets which Husic now manages or
may manage in the future on Diversified's behalf.
<PAGE> 23
SCHEDULE C
Target market for 401(a), 403(b) and 457 plans is those plans between $1 and
$250 million.
<PAGE> 1
INVESTMENT SUBADVISORY AGREEMENT
INVESTMENT SUBADVISORY AGREEMENT, dated as of August 19, 1999, by and
between Diversified Investment Advisors, Inc., a Delaware corporation
("Diversified"), and Payden & Rygel, a California corporation ("Subadvisor").
WITNESSETH:
WHEREAS, Diversified has been organized to operate as an investment
advisor registered under the Investment Advisers Act of 1940, and has been
retained to provide investment advisory services to the Core Bond Portfolio
("Portfolio"), a series of Diversified Investors Portfolios, a diversified
open-end management investment company registered under the Investment Company
Act of 1940 ("1940 Act");
WHEREAS, Diversified desires to retain the Subadvisor to furnish it with
portfolio investment advisory services in connection with Diversified's
investment advisory activities on behalf of the Portfolio, and the Subadvisor
is willing to furnish such services to Diversified;
NOW, THEREFORE, in consideration of the mutual covenants and agreements of
the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Duties of the Subadvisor. In accordance with and subject to the
Investment Advisory Agreement between the Portfolio and Diversified, attached
hereto as Schedule A (the "Advisory Agreement"), Diversified hereby appoints
the Subadvisor to perform the portfolio investment advisory services described
herein for the investment and reinvestment of the Portfolio's assets, subject
to the control and direction of Diversified and the Diversified Investors
Portfolios' Board of Trustees, for the period and on the terms hereinafter set
forth.
The Subadvisor shall provide Diversified with such investment advice and
supervision as the latter may from time to time consider necessary for the
proper supervision of the Portfolio's assets. The Subadvisor shall furnish
continuously an investment program and shall determine from time to time what
securities shall be purchased, sold or exchanged and what portion of the assets
of the Portfolio shall be held uninvested, subject always to the provisions of
the 1940 Act and to the Portfolio's then-current Registration Statement on Form
N-1A.
<PAGE> 2
In particular, the Subadvisor shall, without limiting the foregoing: (i)
continuously review, supervise and implement the investment program of the
Portfolio; (ii) monitor regularly the relevant securities for the Portfolio to
determine if adjustments are warranted and, if so, to make such adjustments;
(iii) determine, in the Subadvisor's discretion, the securities to be purchased
or sold or exchanged in order to keep the Portfolio in balance with its
designated investment strategy; (iv) determine, in the Subadvisor's discretion,
whether to exercise warrants or other rights with respect to the Portfolio's
securities; (v) determine, in the Subadvisor's discretion, whether the merit of
an investment has been substantially impaired by extraordinary events or
financial conditions, thereby warranting the removal of such securities from
the Portfolio; (vi) as promptly as practicable after the end of each calendar
month, furnish a report showing: (a) all transactions during such month, (b)
all assets of the Portfolio on the last day of such month, rates of return, and
(c) such other information relating to the Portfolio as Diversified may
reasonably request; (vii) meet at least four times per year with Diversified
and with such other persons as may be designated on reasonable notice and at
reasonable locations, at the request of Diversified, to discuss general economic
conditions, performance, investment strategy, and other matters relating to the
Portfolio; (viii) provide the Portfolio with records concerning the Subadvisor's
activities which the Portfolio is required by law to maintain; and (ix) render
regular reports to the Portfolio's officers and Directors concerning the
Subadvisor's discharge of the foregoing responsibilities.
The Subadvisor shall also make recommendations to Diversified as to the
manner in which voting rights, rights to consent to corporate action and any
other rights pertaining to the Portfolio's securities shall be exercised.
Should the Board of Trustees at any time make any definite determination
as to investment policy with respect to the Portfolio and notify the Subadvisor
thereof in writing, the Subadvisor shall be bound by such determination for
the period, if any, specified in such notice or until similarly notified that
such policy has been revoked. The initial Statement of Investment Policy and
Guidelines is attached hereto as Appendix I.
The Subadvisor shall take, on behalf of the Portfolio, all actions which
it deems necessary to implement the investment policies determined as provided
above, and in particular to place all orders for the purchase or sale of
Portfolio securities for the Portfolio's account with brokers or dealers
selected by it, and to that end the Subadvisor is authorized as the agent of
the Portfolio to give instructions to the custodian of the Portfolio as to
deliveries of securities and payments of cash for the account of the Portfolio.
Subject to the primary objective of obtaining the best available prices and
execution, the Subadvisor may place orders for the purchase and sale of
portfolio securities with such broker/dealers who provide statistical, factual
and financial information and services to the Portfolio, to the Subadvisor, or
to any other fund or account for which the Subadvisor provides investment
advisory services and may place such orders with brokers/dealers who sell
shares of the
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Portfolio or who sell shares of any other fund for which the Subadvisor
provides investment advisory services. Broker/dealers who sell shares of the
funds of which Payden & Rygel is investment advisor shall only receive orders
for the purchase or sale of portfolio securities to the extent that the placing
of such orders is in compliance with the Rules of the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc.
Notwithstanding the provisions of the previous paragraph and subject to
such policies and procedures as may be adopted by the Board of Trustees and
officers of the Portfolio, the Subadvisor may pay a member of an exchange,
broker or dealer an amount of commission for effecting a securities transaction
in excess of the amount of commission another member of an exchange, broker or
dealer would have charged for effecting that transaction, in such instances
where the Subadvisor has determined in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and
research services provided by such member, broker or dealer, viewed in terms of
either that particular transaction or the Subadvisor's overall responsibilities
with respect to the Portfolio and to other funds and separate accounts for
which the Subadvisor exercises investment discretion.
2. Allocation of Charges and Expenses. The Subadvisor shall furnish at
its own expense all necessary services, facilities and personnel in connection
with its responsibilities under Section 1 above. It is understood that the
Portfolio will pay all of its own expenses and liabilities including, without
limitation, compensation and out-of-pocket expenses of Trustees not affiliated
with the Subadvisor or Diversified; governmental fees; interest charges; taxes;
membership dues; fees and expenses of independent auditors, of legal counsel and
of any transfer agent, administrator, distributor, shareholder servicing agents,
registrar or dividend disbursing agent of the Portfolio; expenses of
distributing and redeeming shares and servicing shareholder accounts; expenses
of preparing, printing and mailing prospectuses, shareholder reports, notices,
proxy statements and reports to governmental officers and commissions and to
shareholders of the Portfolio; expenses connected with the execution, recording
and settlement of Portfolio security transactions; insurance premiums; fees and
expenses of the custodian for all services to the Portfolio, including
safekeeping of funds and securities and maintaining required books and accounts;
expenses of calculating the net asset value of shares of the Portfolio; expenses
of shareholder meetings; expenses of litigation and other extraordinary or
non-recurring events and expenses relating to the issuance, registration and
qualification of shares of the Portfolio.
3. Compensation of the Subadvisor. For the services to be rendered,
Diversified shall pay to the Subadvisor an investment advisory fee computed in
accordance with the terms of Schedule B herewith attached. If the Subadvisor
serves for less than the whole of any period specified, its compensation shall
be prorated.
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4. Covenants and Representations of the Subadvisor. The Subadvisor agrees
that it will not deal with itself, or with the Trustees of the Portfolio or with
Diversified, or the principal underwriter or distributor as principals in
making purchases or sales of securities or other property for the account of
the Portfolio, except as permitted by the 1940 Act, and will comply with all
other provisions of the Declaration of Trust and any current Registration
Statement on Form N-1A of the Portfolio relative to the Subadvisor, Advisor and
its Trustees and officers.
5. Limits on Duties. The Subadvisor shall be responsible only for managing
the assets in good faith and in accordance with the investment objectives,
fundamental policies and restrictions, and shall have no responsibility
whatsoever for, and shall incur no liability on account of (i) diversification,
selection or establishment of such investment objectives, fundamental policies
and restrictions (ii) advice on, or management of, any other assets for
Diversified or the Portfolio, (iii) filing of any tax or information returns or
forms, withholding or paying any taxes, or seeking any exemption or refund,
(iv) registration with any government or agency, or (v) administration of the
plans and trusts investing through the Portfolio, or (vi) overall Portfolio
compliance with the requirements of the 1940 Act, which requirements are
outside of the Subadvisor's control, and Subchapter M of the Internal Revenue
Code of 1986, as amended, and shall be indemnified and held harmless by
Diversified for any loss in carrying out the terms and provisions of this
Agreement, including reasonable attorney's fees, indemnification to the
Portfolio, or any shareholder thereof and, brokers and commission merchants,
fines, taxes, penalties and interest. Subadvisor, however, shall be liable for
any liability, damages, or expenses of Diversified arising out of the
negligence, malfeasance or violation of applicable law by any of its employees
in providing management under this Agreement; and, in such cases, the
indemnification by Diversified, referred to above, shall be inapplicable.
The Subadvisor may apply to Diversified at any time for instructions and
may consult counsel for Diversified or its own counsel with respect to any
matter arising in connection with the duties of the Subadvisor. Also, the
Subadvisor shall be protected in acting upon advice of Diversified and/or
Diversified's counsel and upon any document which Subadvisor reasonably
believes to be genuine and to have been signed by the proper person or persons.
6. Exclusivity. Subadvisor represents to Diversified that during the term
of this Agreement Subadvisor will not manage any portfolio, any collective
trust, open-end investment company registered under the Investment Company Act
of 1940, Variable Insurance Contract registered under the Investment Company
Act of 1940, or insurance company separate account that are offered to the
types of employee benefit plans referred to in Schedule C and sponsored by
competitors of Diversified in providing services to such types of employee
benefit plans referred to in Schedule C and sponsored by competitors of
Diversified in providing services to such types of employee benefit plans
without providing Diversified with 60 days prior written notice. It is
understood that Subadvisor shall not be limited by this section 6
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with respect to any other portfolio that it may offer (such as a small, medium
or large capitalization specific portfolio, a portfolio that includes a
significant portion devoted to non-U.S. securities or a commingled vehicle that
is not sponsored by a provider of bundled services to the types of employee
benefit plans specified on Schedule C).
7. Duration, Termination and Amendments of this Agreement. This Agreement
shall become effective as of the day and year first above written and shall
govern the relations between the parties hereto thereafter, and, unless
terminated earlier as provided below, shall remain in force for two years, on
which date it will terminate unless its continuance thereafter is specifically
approved at least annually (a) by the vote of a majority of the Trustees of the
Portfolio who are not "interested persons" to this Agreement or of the
Subadvisor or Diversified at an in person meeting specifically called for the
purpose of voting on such approval, and (b) by the Board of Trustees of the
Portfolio or by vote of a majority of the outstanding voting securities of the
Portfolio. However, if the shareholders of the Portfolio fail to approve the
Agreement as provided herein, the Subadvisor may continue to serve hereunder in
the manner and to the extent permitted by the Investment Company Act of 1940 and
Rules thereunder.
This Agreement may be terminated at any time without the payment of any
penalty by the Trustees, or by the vote of a majority of the outstanding voting
securities of the Portfolio, or by Diversified. The Subadvisor may terminate
the Agreement only upon giving 90 days' advance written notice to Diversified.
This Agreement shall automatically terminate in the event of its assignment.
This Agreement may be amended only if such amendment is approved by the
vote of a majority of the outstanding voting securities of the Portfolio and by
vote of a majority of the Board of Trustees of the Portfolio who are not
parties to this Agreement or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such approval.
The terms "specifically approved at least annually", "vote of a majority
of the outstanding voting securities", "assignment", "affiliated person", and
"interested persons", when used in this Agreement, shall have the respective
meanings specified in, and shall be construed in a manner consistent with, the
1940 Act, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
8. Certain Records. Any records to be maintained and preserved pursuant to
the provisions of Rule 31a-1 and Rule 31a-2 adopted under the 1940 Act which
are prepared or maintained by the Subadvisor on behalf of the Portfolio are the
property of the Portfolio and will be surrendered promptly to the Portfolio on
request.
9. Survival of Compensation Rates. All rights to compensation under this
Agreement shall survive the termination of this Agreement.
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10. Entire Agreement. This Agreement states the entire agreement of the
parties with respect to investment advisory services to be provided to the
Portfolio by the Subadvisor and may not be amended except in a writing signed
by the parties hereto and approved in accordance with Section 7 hereof.
11. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.
12. Change of Management and Pending Litigation. Subadvisor represents to
Diversified that it will disclose to Diversified promptly after it has knowledge
of any significant change or variation in its management structure or personnel
or any significant change or variation in its management style or investment
philosophy. In addition, Subadvisor represents to Diversified that it will
similarly disclose to Diversified, promptly after it has knowledge, the
existence of any pending legal action being brought against it whether in the
form of a lawsuit or a non-routine investigation by any federal or state
governmental agency.
Diversified represents to Subadvisor that any information received by
Diversified pursuant to this section will be kept strictly confidential and
will not be disclosed to any third party.
13. Use of Name. Subadvisor hereby agrees that Diversified may use the
Subadvisor's name in its marketing or advertising materials. Diversified agrees
to allow the Subadvisor to examine and approve any such materials prior to use.
IN WITNESS WHEREOF, the parties thereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
Diversified Investment Advisors, Inc.
By: /s/ John F. Hughes
-----------------------------------
John F. Hughes
Payden & Rygel
By: /s/ Brian W. Matthews
-----------------------------------
Brian W. Matthews
Managing Principal
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CODE OF ETHICS FOR
THE DIVERSIFIED INVESTORS FUNDS GROUP
THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
DIVERSIFIED INVESTORS PORTFOLIOS
The Diversified Investors Funds Group (the "Trust"), The Diversified
Investors Strategic Allocation Funds (the "SAFs") The Diversified Investors
Strategic Variable Funds (the "Variable SAFs") and Diversified Investors
Portfolios (the "Series Portfolio", together with the Trust and the SAFs, and
the Variable SAFs the "Trusts") have determined to adopt this revised Code of
Ethics (the "Code") as of February 20, 1996, to specify and prohibit certain
types of personal securities transactions deemed to create a conflict of
interest and to establish reporting requirements and preventive procedures
pursuant to the provisions of Rule 17j-1(b)(1) under the Investment Company Act
of 1940 (the "1940 Act").
I. RULES APPLICABLE TO TRUSTEES, OFFICERS AND ACCESS PERSONS OF THE TRUSTS
A. Definitions
1. An "Access Person" means (i) any trustee, director, officer or
Advisory Person (as defined below) of the Trusts, the Investment
Advisor (as defined below) or any Subadvisor (as defined below)
or (ii) any director or officer of the Distributor (as defined
below) who, in the ordinary course of his or her business, makes,
participates in or obtains information regarding the purchase or
sale of securities for any of the Trusts for which the principal
underwriter so acts or whose functions or duties as part of the
ordinary course of his or her business relate to the making of
any recommendation to any of the Trusts regarding the purchase or
sale of securities, or (iii) notwithstanding the provisions of
clause (i) above, where the Investment Advisor or Subadvisor is
primarily engaged in a business or businesses other than advising
registered investment companies or other advisory clients, any
trustee, director, officer or advisory person of the Investment
Advisor or Subadvisor who, with respect to any of the Trusts,
makes any recommendation or participates in the determination of
which recommendation shall be made, or whose principal function
or duties relate to the determination of which recommendation
shall be made to any of the Trusts or who in connection with his
or her duties, obtains any information concerning securities
recommendations being made by such investment advisor to any of
the Trusts.
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2. An "Advisory Person" means any employee of any of the Trusts, the
Investment Advisor or any Subadvisor (or any company in a control
relationship to any of the Trusts or such advisors) who, in
connection with his or her regular functions or duties, makes,
participates in or obtains information regarding the purchase or
sale of securities by any of the Trusts or whose functions relate
to any recommendations with respect to such purchases or sales
and any natural person in a control relationship with the Trusts
or such advisors who obtains information regarding the purchase
or sale of securities.
3. "Beneficial Ownership" shall be interpreted subject to the
provisions of Rule 16a-1(A) (exclusive of Section (a)(1) of such
Rule) of the Securities Exchange Act of 1934, a copy of which is
attached hereto.
4. "Control" shall have the same meaning as set forth in Section
2(a)(9) of the 1940 Act.
5. "Disinterested Trustee" means a Trustee who is not an "interested
person" within the meaning of Section 2(a)(19) of the 1940 Act.
An "interested person" includes any person who is a trustee,
director, officer, employee or owner of 5% or more of the
outstanding stock of the Advisor. Affiliates of brokers or
dealers are also "interested persons", except as provided in
Rule 2a19-1 under the 1940 Act.
6. "Distributor" shall mean Diversified Investors Securities Corp.
or any other broker-dealer registered under the Securities
Exchange Act of 1934, as amended, that enters into an agreement
to act as principal underwriter to any Trust as contemplated in
Section 15(b) of the 1940 Act.
7. "Investment Advisor" shall mean Diversified Investment Advisors,
Inc. or any other investment advisor registered under the
Investment Advisers Act of 1940, as amended (the "Advisers Act")
that contracts with any Trust for the provision of advisory
services as contemplated in Section 15(a) of the 1940 Act.
8. "Portfolio Manager" means any officer or employee of any of the
Trusts, Investment Advisor or a Subadvisor (or any company in a
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control relationship to any of the Trusts or such advisors) who
decides, or participates in deciding, which securities will be
purchased or sold on behalf of that Trust.
9. "Purchase or sale of a security" includes, among other things, the
writing of an option to purchase or sell a security or the purchase or
sale of a future or index on a security or option thereon.
10. "Security" shall have the meaning as set forth in Section 2(a)(36) of
the 1940 Act (in effect, all securities), except that it shall not
include securities issued by the U.S. Government (or any other
"government security" as that term is defined in the 1940 Act),
bankers' acceptances, bank certificates of deposit, commercial paper,
such other money market instruments as may be designated by the
trustees of the Trusts, and shares of registered open-end investment
companies.
11. A security is "being considered for purchase or sale" when a
recommendation to purchase or sell the security has been made and
communicated and, with respect to the person making the
recommendation, when such person seriously considers making such a
recommendation.
12. "Subadvisor" shall mean any investment advisor registered under the
Advisers Act that the Investment Advisor contracts with to provide
day-to-day investment advisory services to any Trust or a portfolio
thereof.
13. "Unaffiliated Trustee" means a Trustee of the Trusts who is not an
officer, trustee, director, employee or owner of 5% or more of the
outstanding stock of the Advisor or the Advisor's parent or any
subsidiary of the Advisor or its parent. The term includes all
Disinterested Trustees.
B. Avoiding Conflicts of Interest
NO ACCESS PERSON SHALL ENTER INTO OR ENGAGE IN A SECURITY TRANSACTION OR
BUSINESS ACTIVITY OR RELATIONSHIP WHICH MAY RESULT IN ANY FINANCIAL OR
OTHER CONFLICT OF INTEREST BETWEEN SUCH PERSON AND THE TRUSTS AND EACH SUCH
PERSON SHALL AT ALL TIMES AND IN ALL MATTERS ENDEAVOR TO
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PLACE THE INTERESTS OF THE TRUSTS BEFORE HIS OR HER PERSONAL INTERESTS.
C. Statement of General Principles on Personal Investment Activities
PERSONAL INVESTMENT ACTIVITIES ENGAGED IN BY AN ACCESS PERSON SHALL BE
SUBJECT TO THE FOLLOWING GENERAL PRINCIPLES:
1. AS SET FORTH IN SECTION I.B. ABOVE, NO PERSONAL INVESTMENT ACTIVITIES
SHALL CONFLICT WITH THE DUTY TO PLACE THE INTERESTS OF THE TRUSTS
BEFORE ANY PERSONAL INTERESTS;
2. ALL PERSONAL INVESTMENT ACTIVITIES SHALL BE CONDUCTED CONSISTENT WITH
THE REQUIREMENTS AND STANDARDS SET FORTH IN THIS CODE OF ETHICS IN
SUCH A MANNER AS TO AVOID ANY ACTUAL OR POTENTIAL CONFLICT OF INTEREST
OR ANY ABUSE OF ANY INDIVIDUAL'S POSITION OF TRUST; AND
3. NO ACCESS PERSON SHALL, DIRECTLY OR INDIRECTLY, OTHERWISE TAKE
INAPPROPRIATE ADVANTAGE OF HIS OR HER POSITIONS WITH THE TRUSTS.
D. Prohibited Personal Investment Activities
1. No Access Person shall purchase or sell, directly or indirectly, any
security in which he or she has, or by reason of such transaction
acquires, any direct or indirect beneficial ownership and which he or
she knows or should have known at the time of such purchase or sale:
a. is being considered for purchase or sale by any of the Trusts; or
b. is being purchased or sold by any of the Trusts.
Without limiting the generality of the foregoing, (i) no Portfolio
Manager may purchase or sell any security within seven (7) calendar
days before and after any portfolio of a Trust that he or
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she manages trades in that security and (ii) no person who is an
Advisory Person by virtue of his or her affiliation with a Subadvisor
may purchase or sell any security on the same day there is a pending
buy or sell order in that security by the Trust which is advised by
such Subadvisor.
2. No Advisory Person of any of the Trusts shall acquire any securities
in an initial public offering.
3. No Advisory Person of any of the Trusts shall acquire any securities
in a private placement exempt from the registration requirements of
the Securities Act of 1933, as amended, pursuant to section 4(2) of
that Act without prior written approval by any designated review
officer or the Treasurer, Secretary, Assistant Treasurer or Assistant
Secretary of the Trusts (the "Review Officer"). Prior to granting any
such approval, the Review Officer shall take into account, among
other factors, whether the investment opportunity represented by such
private placement should be reserved for the Trusts and whether the
opportunity is being offered to such Advisory Person by the virtue of
his or her position with a Trust. Any Advisory Person granted
permission to invest in a private placement must disclose such
investment if he or she is subsequently involved in consideration by
a Trust of an investment in the same or an affiliated issuer and the
Trust's decision with respect to such investment shall be subject to
an independent review by Advisory Persons of the Trust with no
personal interest in such issuer.
4. No Advisory Person of any of the Trusts shall purchase and sell, or
sell and purchase, the same (or equivalent) securities within sixty
(60) calendar days without the prior written approval of a Review
Officer. Prior to granting any such approval, the Review Officer
shall determine that no abuses exist and the equities of the
situation strongly support an exemption.
5. No Advisory Person of any of the Trusts shall accept any gift or
other thing of more than de minimis value from any person or entity
that does business with or on behalf of any of the Trusts.
6. No Advisory Person of any of the Trusts shall serve on the governing
board of any publicly traded companies without the
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prior written approval of the Review Officer. Prior to granting any
such approval, the Review Officer shall determine that such board
service is consistent with the interests of the Trusts and shall
ensure that appropriate "Chinese Wall" or other procedures are in
place to isolate such Advisory Person from persons making investment
decisions as to securities of any such company.
E. Exempted Transactions
The prohibitions of Section I.C. and I.D. above shall not apply to:
1. Purchases or sales effected in any account over which such person has
no direct or indirect influence or control;
2. purchases or sales which are nonvolitional on the part of the person
or the Trusts;
3. purchases which are part of an automatic dividend reinvestment plan;
4. purchases effected upon the exercise of rights issued by an issuer
pro rata to all holders of a class of its securities, to the extent
such rights were acquired from such issuer, and sales of such rights
so acquired; and
5. purchases and sales which receive prior approval in writing by the
Review Officer (a) as only remotely potentially harmful to any of the
Trusts because they would be very unlikely to affect a highly
institutional market or because they clearly are not economically
related to the securities to be purchased or sold or held by any of
the Trusts or client or (b) as not representing any danger of the
abuses prescribed by Rule 17j-1, but only if in each case the
prospective purchaser has identified to the Review Officer all
factors of which he or she is aware which are potentially relevant to
a conflicts of interest analysis, including the existence of any
substantial economic relationship between his or her transactions and
securities held or to be held by any of the Trusts.
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II. REPORTING
A. Quarterly Requirements for all Interested Trustees, Officers and
Access Persons
1. Each Access Person, other than the Disinterested Trustees, shall
file with the Review Officer confidential quarterly reports
containing the information required in Section II.A.2 of this
Code with respect to all transactions during the preceding
quarter in any securities in which such person has, or by reason
of such transaction acquires, any direct or indirect beneficial
ownership, provided that (i) no Access Person shall be required
to report transactions effected for any account over which such
Access Person has no direct or indirect influence or control
(except that such access person must file a written certification
stating that he or she has no direct or indirect influence or
control over the account in question) and (ii) an Access Person
who is an Access Person of the Investment Advisor or a Subadvisor
shall file such Access Person's reports unless such reports would
duplicate information recorded pursuant to Rules 204-2(a)(12) or
204-2(a)(13) of the Investment Advisers Act of 1940, in which
case no such reports need be filed by such Access Person pursuant
to this Code. All such Access Persons shall file reports, even
when no transactions have been effected, representing that no
transactions subject to reporting requirements were effected.
2. Every Report shall be made no later than 10 days after the end of
the calendar quarter in which the transaction to which the report
relates was effected, and shall contain the following
information:
a. the date of the transaction, the title and the number of
shares and the principal amount of each security involved;
b. the nature of the transaction (i.e., purchase, sale or any
other type of acquisition or disposition);
c. the price at which the transaction was effected; and
d. the name of the broker, dealer or bank with or through whom
the transaction was effected.
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3. Any report may contain a statement that it shall not be
construed as an admission by the person making the report that he
or she has any direct or indirect beneficial ownership in the
security to which the report relates.
4. Each Access Person shall request any broker-dealer with which he
or she maintains a general securities account to send duplicate
copies of statements and confirmations to the Trusts.
B. Quarterly Requirements for Disinterested Trustees
1. Every Disinterested Trustee shall file with the Review Officer a
report containing the information required in the above Section
II.A of this Code of Ethics with respect to transactions in any
securities in which such person has, or by reason or such
transactions acquires, any direct or indirect beneficial
ownership, except exempted transactions listed under Section
IE.1, if such Trustee, at the time of that transaction, knew or
should have known, in the ordinary course of pursuing his or her
official duties as Trustee, that during the 15-day period
immediately preceding or after the transaction by the Trustee:
a. such security was being purchased or sold by any of the
Trusts; or
b. such security was being considered for purchase or sale of
the portfolio of any of the Trusts.
2. Notwithstanding the preceding sentence, any Disinterested Trustee
may, at his or her option, report the information described in
Section II.A.2 with respect to any one or more transactions and
may include a statement that the report shall not be construed as
an admission that the person knew or should have known of
portfolio transactions by the Trusts in such securities.
C. Annual Reporting by Access Persons and Advisory Persons of Securities
Holdings
1. All Access Persons of any of the Trusts shall provide an annual
report to the Trusts certifying that (i) he or she has read and
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understood this Code of Ethics and recognizes that he or she is
subject thereto and (ii) he or she has complied with the
requirements of this Code of Ethics and has disclosed or reported
all personal securities transactions required to be disclosed or
reported pursuant to the requirements of this Code of Ethics.
2. All Advisory Persons of any of the Trusts shall disclose through
a written report to the Trusts all securities beneficially owned
by such individual upon the commencement of such individual's
employment and shall update such report on an annual basis
thereafter.
D. Annual Report to Boards of Trustees
The Secretary of the Trusts shall cause to be prepared and delivered
annually to each of the Boards of Trustees of the Trusts a
report:
1. summarizing existing procedures concerning personal investing and
reviewing any changes effected in such procedures during the
year;
2. identifying any violations requiring significant remedial action
during the past year; and
3. identifying any recommended changes in existing restrictions or
procedures based upon the Trusts' experience under this Code of
Ethics, evolving industry practice or developments in applicable
laws or regulations.
III. COORDINATION WITH CODES OF ETHICS OF THE DISTRIBUTOR, THE INVESTMENT
ADVISOR AND THE SUBADVISORS
A. Distributor and Investment Advisor Codes of Ethics
Each of the Investment Advisor and the Distributor have adopted a Code of
Ethics in a form substantially similar to this Code of Ethics with such
changes therein necessary to reflect the different services provided by
these entities. In accordance with certain contractual arrangements, the
Trusts, the Investment Advisor and the Distributor share certain trustees,
officers and employees, including personnel responsible for compliance with
this Code of Ethics. Accordingly, reports or reviews
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required under the Code of Ethics of two or more of the Investment
Advisor, the Distributor or the Trusts will be made jointly to the
extent possible to avoid unnecessary duplication of procedures.
B. Subadvisors Codes of Ethics
Each Subadvisor shall adopt, and deliver to the Trusts a copy of, a
Code of Ethics pursuant to Rule 17j-1(b)(1) of the 1940 Act which
seeks to ensure that all individuals who are Access Persons of any of
the Trusts by virtue of their affiliation with a Subadvisor comply
with the terms of this Code of Ethics by providing procedures and
restrictions substantially equivalent to those set forth herein,
except to the extent variations therein are expressly approved by the
Boards of Trustees of the Trusts. Accordingly, requirements for
reports, reviews and other procedures set forth herein shall be
satisfied for individuals who are Access Persons of the Funds by
virtue of their affiliation with a Subadvisor by equivalent procedures
effected by such Subadvisor. Each Subadvisor shall submit, quarterly,
a certification to the Trusts which states:
1. The Code of Ethics of the Subadvisor in the form delivered to the
Trusts remains in full force and effect and satisfies the
requirements of Section 17(j) of the 1940 Act and Rule 17j-1
thereunder; and
2. no material violations of the Code of Ethics of the Subadvisor
relating to Access Persons of any of the Trusts occurred during
the period since delivery of the last certification (if any
material violations have occurred, the certification shall
include all relevant details).
IV. REVIEW
In reviewing transactions, the Review Officer shall take into account the
exemptions allowed under Section I.E. Before making a determination that a
violation has been committed, the Review Officer shall give such person an
opportunity to supply additional information regarding the transaction in
question.
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V. SANCTIONS
A. Sanctions for Violations by Interested Trustees (except Unaffiliated
Trustees), Officers and Access Persons.
If the Review Officer determines that a violation of this Code has
occurred, he or she shall so advise the appropriate Board of Trustees,
and that Board may impose such sanctions as it deems appropriate,
including, inter alia, a letter of censure or suspension or
termination of the employment of the violator. Without limiting the
generality of the foregoing, any financial profits realized by an
individual through prohibited personal investment activities described
in Section I.D. may be required to be disgorged. All material
violations of the Code and any sanctions imposed as a result thereto
shall be reported to the appropriate Board of Trustees.
B. Sanctions for Violations by Disinterested and Unaffiliated Trustees
If the Review Officer determines that any Disinterested Trustee has
violated this Code, he or she shall so advise the President of the
Trust or Series Portfolio, as appropriate, and also a committee
consisting of the Disinterested Trustees (other than the person whose
transaction is at issue) and shall provide the committee with the
report, the record of pertinent actual or contemplated portfolio
transactions of the Trust or Series Portfolio, as appropriate, and any
additional information supplied by such person. The committee, at its
option, shall either impose such sanctions as it deems appropriate or
refer the matter to the full Board of Trustees of the Trust or Series
Portfolio, as appropriate, which shall impose such sanctions as it
deems appropriate.
VI. MISCELLANEOUS
A. Access Persons
The Secretary or Assistant Secretary of each of the Trusts will
identify all Access Persons who are under a duty to make reports to
the Trusts and will inform such persons of such duty, except that
persons who are Access Persons by virtue of their affiliation with a
Subadvisor shall be identified and informed by an appropriate officer
of that Subadvisor. Any failure by the Secretary or Assistant
Secretary to notify any person
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of his or her duties under this Code shall not relieve such person of
his or her obligations hereunder.
B. Records
Diversified Investors Securities Corp. shall maintain records in the
manner and to the extent set forth below, which records may be
maintained on microfilm under the conditions described in
Rule 31a-2(f) under the 1940 Act, and shall be available for
examination by representatives of the Securities and Exchange
Commission ("SEC"):
1. a copy of this Code and any other code which is, or at any time
within the past five years has been, in effect shall be preserved
in an easily accessible place;
2. a record of any violation of this Code and of any action taken as
a result of such violation shall be preserved in an easily
accessible place for a period of not less than five years
following the end of the fiscal year in which the violation
occurs;
3. a copy of each report made pursuant to this Code shall be
preserved for a period of not less than five years from the end
of the fiscal year in which it is made, the first two years in an
easily accessible place; and
4. a list of all persons who are required, or within the past five
years have been required, to make reports pursuant to this Code
shall be maintained in an easily accessible place.
C. Confidentiality
All reports of securities transactions and any other information filed
pursuant to this Code shall be treated as confidential, except that
the same may be disclosed to the Boards of Trustees of the Trusts, to
any regulatory or self-regulatory authority or agency upon its request
or as required by law or court or administrative order.
D. Interpretation of Provisions
The Board of Trustees of the Trusts may from time to time adopt such
interpretations of this Code as they deem appropriate.
