TIP FUNDS
TURNER LARGE CAP GROWTH EQUITY FUND
(formerly, the Turner Ultra Large Cap Growth Fund)
TURNER GROWTH EQUITY FUND
TURNER MIDCAP GROWTH FUND
TURNER SMALL CAP GROWTH FUND
TURNER MICRO CAP GROWTH FUND
TIP TARGET SELECT EQUITY FUND
TURNER FOCUSED LARGE CAP EQUITY FUND
TURNER TOP 20 FUND
TURNER TECHNOLOGY FUND
TURNER INTERNATIONAL GROWTH FUND
TURNER SHORT DURATION GOVERNMENT FUNDS-ONE YEAR PORTFOLIO
TURNER SHORT DURATION GOVERNMENT FUNDS-THREE YEAR PORTFOLIO
TURNER CORE HIGH QUALITY FIXED INCOME FUND
INVESTMENT ADVISER:
TURNER INVESTMENT PARTNERS, INC.
This Statement of Additional Information is not a prospectus and relates only to
the Turner Large Cap Growth Equity Fund ("Large Cap Fund"), Turner Growth Equity
Fund ("Growth Equity Fund"), Turner Midcap Growth Fund ("Midcap Fund"), Turner
Small Cap Growth Fund ("Small Cap Fund"), Turner Micro Cap Growth Fund ("Micro
Cap Fund"), TIP Target Select Equity Fund ("Target Select Fund"), Turner Focused
Large Cap Equity Fund ("Focused Fund"), Turner Top 20 Fund ("Top 20 Fund"),
Turner Technology Fund ("Technology Fund"), Turner International Growth Fund
("International Fund"), Turner Short Duration Government Funds - One Year Fund
("One Year Portfolio"), Turner Short Duration Government Funds-Three Year
Portfolio ("Three Year Portfolio"), and the Turner Core High Quality Fixed
Income Fund ("Fixed Income Fund") (each a "Fund" and, together, the "Funds"). It
is intended to provide additional information regarding the activities and
operations of the TIP Funds (the "Trust") and should be read in conjunction with
the Funds' Prospectuses dated January 31, June 21, and July 1, 1999. The
Prospectuses may be obtained without charge by calling 1-800-224-6312.
TABLE OF CONTENTS
THE TRUST .................................................................S-
INVESTMENT OBJECTIVES......................................................S-
INVESTMENT POLICIES........................................................S-
DESCRIPTION OF PERMITTED INVESTMENTS AND RISK FACTORS......................S-
INVESTMENT LIMITATIONS.....................................................S-
THE ADVISER................................................................S-
THE ADMINISTRATOR..........................................................S-
DISTRIBUTION AND SHAREHOLDER SERVICES......................................S-
TRUSTEES AND OFFICERS OF THE TRUST.........................................S-
COMPUTATION OF YIELD AND TOTAL RETURN......................................S-
PURCHASE AND REDEMPTION OF SHARES..........................................S-
DETERMINATION OF NET ASSET VALUE...........................................S-
TAXES......................................................................S-
PORTFOLIO TRANSACTIONS.....................................................S-
VOTING.....................................................................S-
DESCRIPTION OF SHARES......................................................S-
SHAREHOLDER LIABILITY......................................................S-
LIMITATION OF TRUSTEES' LIABILITY..........................................S-
5% SHAREHOLDERS............................................................S-
EXPERTS....................................................................S-
CUSTODIAN..................................................................S-
LEGAL COUNSEL..............................................................S-
FINANCIAL STATEMENTS.......................................................S-
APPENDIX..................................................................A-1
July 1, 1999
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THE TRUST
This Statement of Additional Information relates only to the Turner Large Cap
Growth Equity Fund ("Large Cap Fund"), Turner Growth Equity Fund ("Growth Equity
Fund"), Turner Midcap Growth Fund ("Midcap Fund"), Turner Small Cap Growth Fund
("Small Cap Fund"), Turner Micro Cap Growth Fund ("Micro Cap Fund"), TIP Target
Select Equity Fund ("Target Select Fund"), Turner Focused Large Cap Equity Fund
("Focused Fund"), Turner Top 20 Fund ("Top 20 Fund"), Turner Technology Fund
("Technology Fund"), Turner International Growth Fund ("International Growth
Fund"), Turner Short Duration Government Funds-One Year Portfolio ("One Year
Portfolio"), Turner Short Duration Government Funds-Three Year Portfolio ("Three
Year Portfolio"), and Turner Core High Quality Fixed Income Fund ("Fixed Income
Fund") (each a "Fund" and, together the "Funds"). Each is a separate series of
TIP Funds (formerly, Turner Funds) (the "Trust"), an open-end management
investment company established as a Massachusetts business trust under a
Declaration of Trust dated January 26, 1996, and amended on February 21, 1997,
which consists of both diversified and non-diversified Funds. The Declaration of
Trust permits the Trust to offer separate series of units of beneficial interest
(the "shares") and separate classes of funds. Each portfolio is a separate
mutual fund and each share of each portfolio represents an equal proportionate
interest in that portfolio. Shareholders may purchase shares in the One Year
Portfolio or the Three Year Portfolio through two separate classes,
Institutional Class and Adviser Class, which provide for variations in
distribution costs, transfer agent fees, voting rights and dividends. All other
Funds in the Trust offer only Institutional Class shares. Except for differences
between the Institutional Class shares and the Adviser Class shares pertaining
to distribution and shareholder servicing, voting rights, dividends and transfer
agent expenses, each share of each series represents an equal proportionate
interest in that series. Please see "Description of Shares" for more
information.
On January 29, 1999, the Micro Cap Fund and the Three Year Portfolio acquired
all of the assets and liabilities of the Alpha Select Turner Micro Cap Growth
Fund and the Alpha Select Turner Short Duration Government Funds-Three Year
Portfolio, respectively. On June 30, 1999, the One Year Portfolio acquired all
of the assets and liabilities of the Alpha Select Turner Short Duration
Government Funds - One Year Portfolio. Historical information presented for
those Funds relates to the Alpha Select Funds. The Trust also offers shares in
the Clover Max Cap Value Fund, Clover Equity Value Fund, Clover Small Cap Value
Fund, Clover Fixed Income Fund, Penn Capital Select Financial Services Fund,
Penn Capital Strategic High Yield Bond Fund, and Penn Capital Value Plus Fund.
Capitalized terms not defined herein are defined in the Prospectus offering
shares of the Funds.
INVESTMENT OBJECTIVES
TURNER LARGE CAP GROWTH EQUITY FUND -- The Large Cap Fund seeks capital
appreciation.
TURNER GROWTH EQUITY FUND -- The Growth Equity Fund seeks capital appreciation.
TURNER MIDCAP GROWTH FUND -- The Midcap Fund seeks capital appreciation.
TURNER SMALL CAP GROWTH FUND -- The Small Cap Fund seeks capital appreciation.
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TURNER MICRO CAP GROWTH FUND -- The Micro Cap Fund seeks capital appreciation.
TIP TARGET SELECT EQUITY FUND -- The Target Select Fund seeks long term growth
of capital primarily from investment in U.S. equity securities.
TURNER FOCUSED LARGE CAP EQUITY FUND -- The Focused Fund seeks long-term capital
appreciation.
TURNER TOP 20 FUND -- The Top 20 Fund seeks long-term capital appreciation.
TURNER TECHNOLOGY FUND -- The Technology Fund seeks long-term capital
appreciation.
TURNER INTERNATIONAL GROWTH FUND -- The International Fund seeks long-term
capital appreciation.
TURNER SHORT DURATION GOVERNMENT FUNDS-ONE YEAR PORTFOLIO & TURNER SHORT
DURATION GOVERNMENT FUNDS-THREE YEAR PORTFOLIO -- The investment objective of
each Fund is to provide maximum total return consistent with preservation of
capital and prudent investment management. Under normal circumstances, the One
Year Portfolio seeks to maintain an average effective duration comparable to or
less than that of one-year U.S. Treasury bills. The Three Year Portfolio seeks
to maintain an average effective duration comparable to or less than that of
three-year U.S. Treasury notes. Effective duration is an indicator of a
security's price volatility or risk associated with changes in interest rates.
Because the Turner Investment Partners, Inc. (the "Adviser") seeks to manage
interest rate risk by limiting effective duration, each Fund may invest in
securities of any maturity.
TURNER CORE HIGH QUALITY FIXED INCOME FUND -- The Fixed Income Fund seeks total
return through current income and capital appreciation.
There can be no assurance that any Fund will achieve its investment objective.
INVESTMENT POLICIES
TURNER LARGE CAP GROWTH EQUITY FUND -- The Large Cap Fund invests primarily
(and, under normal conditions, at least 6 5% of its total assets) in a
diversified portfolio of common stocks of issuers that, at the time of purchase,
have market capitalizations in excess of $10 billion that Adviser, believes to
have strong earnings growth potential. The Fund seeks to purchase securities
that are well diversified across economic sectors and to maintain sector
concentrations that approximate the economic sector weightings comprising the
Russell 200 Growth Index (or such other appropriate index selected by the
Adviser). Any remaining assets may be invested in securities issued by smaller
capitalization companies, warrants and rights to purchase common stocks, and
they may invest up to 10% of its total assets in American Depository Receipts
("ADRs"). The Fund will only purchase securities that are traded on registered
exchanges or the over-the-counter market in the United States. The Fund may
purchase shares of other investment companies and foreign securities.
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TURNER GROWTH EQUITY FUND -- The Growth Equity Fund invests as fully as
practicable (and, under normal conditions, at least 65% of its total assets) in
a portfolio of common stocks that the Adviser believes to have potential for
strong growth in earnings and to be reasonably valued at the time of purchase.
The Fund seeks to purchase securities that are well diversified across economic
sectors and to maintain sector concentrations that approximate the economic
sector weightings of the Russell 1000 Growth Index (or such other appropriate
index selected by the Adviser). The Fund may invest in warrants and rights to
purchase common stocks, and may invest up to 10% of its total assets in ADRs.
The Fund will only purchase securities that are traded on registered exchanges
or the over-the-counter market in the United States.
TURNER MIDCAP GROWTH FUND -- The Midcap Fund invests primarily (and, under
normal conditions, at least 65% of its total assets) in a diversified portfolio
of common stocks of issuers that, at the time of purchase, have market
capitalizations between $1 billion and $8 billion that the Adviser believes to
have strong earnings growth potential. The Fund seeks to purchase securities
that are well diversified across economic sectors and to maintain sector
concentrations that approximate the economic sector weightings comprising the
Russell Midcap Growth Index (or such other appropriate index selected by the
Adviser). Any remaining assets may be invested in securities issued by smaller
capitalization companies and larger capitalization companies, warrants and
rights to purchase common stocks, and it may invest up to 10% of its total
assets in ADRs. The Fund will only purchase securities that are traded on
registered exchanges or the over-the-counter market in the United States. The
Fund may purchase shares of other investment companies.
TURNER SMALL CAP GROWTH FUND -- The Small Cap Fund invests primarily (and, under
normal conditions, at least 65% of its total assets) in a diversified portfolio
of common stocks of issuers with market capitalizations of not more than $2
billion that the Adviser believes to have strong earnings growth potential.
Under normal market conditions, the Fund will maintain a weighted average market
capitalization of less than $2 billion. The Fund seeks to purchase securities
that are well diversified across economic sectors and to maintain sector
concentrations that approximate the economic sector weightings comprising the
Russell 2000 Growth Index (or such other appropriate index selected by the
Adviser). The Fund may invest in warrants and rights to purchase common stocks,
and may invest up to 10% of its total assets in ADRs. The Fund will only
purchase securities that are traded on registered exchanges or the
over-the-counter market in the United States.
TURNER MICRO CAP GROWTH FUND -- The Micro Cap Fund invests primarily (and, under
normal conditions, at least 65% of its total assets) in a diversified portfolio
of common stocks of issuers with market capitalizations of not more than $500
million that the Adviser believes to have strong earnings growth potential.
Under normal market conditions, the Fund will maintain a weighted average market
capitalization of less than $350 million. The Fund will not hold securities with
market capitalizations over $1 billion. The Fund seeks to purchase securities
that are well diversified across economic sectors, and will attempt to maintain
sector concentrations that approximate the economic sector weightings of the
smallest 1/3 of its current benchmark, the Russell 2000 Growth Index. The Micro
Cap Fund will typically invest in companies whose market capitalizations, at the
time of purchase, are $350 million or under. The Fund may invest in warrants and
rights to purchase common stocks, and may invest up to 10% of its total assets
in micro cap stocks of foreign issuers and in ADRs.
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The Micro Cap Fund invests in some of the smallest, most dynamic publicly-traded
companies. These emerging growth companies are typically in the early stages of
a long-term development cycle. In many cases, these companies offer unique
products, services or technologies and often serve special or expanding market
niches. Because of their small size, and less frequent trading activity, the
companies represented in the Fund's portfolio may be overlooked or not closely
followed by investors. Accordingly, their prices may rise either as a result of
improved business fundamentals, particularly when earnings grow faster than
general expectations, or as more investors appreciate the full extent of a
company's underlying business potential. Thus in the opinion of the Fund's
Adviser, they offer substantial appreciation potential for meeting retirement
and other long-term goals.
The Fund's share price can move up and down significantly, even over short
periods of time, due to the volatile nature of micro capitalization stocks. To
manage risk and improve liquidity, Turner expects to invest in numerous small,
publicly traded companies, representing a broad cross-section of U.S.
industries.
TIP TARGET SELECT EQUITY FUND -- The Adviser and Sub-Advisers of the Target
Select Fund will each invest in a maximum of 20 equity securities (hence the
Target Select Equity Fund designation) and as few as 10 that they believe have
the greatest return potential. Such a focused security-selection process permits
each manager to act on only the investment ideas that they think are their
strongest ones. The intent is to avoid diluting performance by owning too many
securities, so that the positive contributions of winning investments will prove
substantial.
The Fund is designed to provide an investment that combines the investment
expertise and best investment ideas of four outstanding money-management firms.
The Adviser and Sub-Advisers will manage a portion of the Fund's portfolio on a
day-to-day basis. Assets for investment will be allocated to each manager by the
Fund's Board of Trustees, based on the recommendation of the Adviser. The
expectation is that the allocations will result in a portfolio invested in a
variety of equity securities with differing capitalizations and valuations,
chosen by differing investment strategies.
The Fund intends to invest primarily (and, under normal circumstances, at least
65% of its total assets) in equity securities of companies that are
headquartered in the United States or do business both in the United States and
abroad. Those securities, however, will be traded principally in the United
States equity market. Selection of equity securities will not be restricted by
market capitalization, and the Fund's Adviser and Sub-Advisers will employ their
own proprietary investment processes in managing assets.
Any remaining assets of the Fund may be invested in securities of foreign
issuers, shares of other investment companies, ADRs and REITs. The Fund may also
invest up to 15% of its net assets in illiquid securities, invest up to 25% of
its total assets in convertible securities, including convertible securities
rated below investment grade, purchase unregistered securities that are eligible
for re-sale pursuant to Rule 144A under the Securities Act, and purchase fixed
income securities, including securities rated below investment grade. In
addition, the Fund may effect short sales, purchase securities on a when-issued
basis, and may enter into futures and options transactions. Debt securities
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rated below investment grade, i.e., rated lower than BBB by Standard & Poor's
Corporation ("S&P") and/or Baa by Moody's Investor Services, Inc. ("Moody's") or
unrated securities of comparable quality, are also known as "junk bonds." The
maximum percentage of the Fund's assets that may be invested in securities rated
below investment grade is 25%.
Under normal circumstances, the Adviser and each of the Sub-Advisers may invest
a portion of the assets under its management in the money market instruments
described below in order to maintain liquidity, or if securities meeting the
Fund's investment objective and policies are not otherwise reasonably available
for purchase, provided that such Instruments do not exceed 25% of the Fund's
total assets. For temporary defensive purposes during periods when the Adviser
determines that market conditions warrant, the Adviser and each Sub-Adviser may
invest up to 100% of the assets under their management in money market
instruments and in cash.
TURNER FOCUSED LARGE CAP EQUITY FUND -- The Focused Fund invests primarily (and,
under normal conditions, at least 80% of its total assets) in a portfolio of
common stocks of issuers that, at the time of purchase, have market
capitalizations in excess of $5 billion that the Adviser, believes to have
strong earnings growth potential. Any remaining assets may be invested in
securities issued by smaller capitalization companies, warrants and rights to
purchase common stocks, convertible and preferred stocks, and in ADRs. The Fund
will generally purchase securities that are traded on registered exchanges or
the over-the-counter market in the United States. The Fund may also purchase
shares of other investment companies and foreign securities. The Fund's overall
portfolio will contain a total of 15-30 stocks of Turner's best large
capitalization ideas.
TURNER TOP 20 FUND -- The Top 20 Fund invests primarily (and, under normal
conditions, at least 80% of its total assets) in a portfolio of common stocks of
issuers with a variety of sectors and market capitalizations that the Adviser
believes to have strong earnings growth potential. Any remaining assets may be
invested in warrants and rights to purchase common stocks, convertible and
preferred stocks, and ADRs. The Fund will generally purchase securities that are
traded on registered exchanges or the over-the-counter market in the United
States. The Fund may also purchase shares of other investment companies and
foreign securities.
TURNER TECHNOLOGY FUND -- The Technology Fund invests primarily (and, under
normal conditions, at least 80% of its total assets) in a portfolio of common
stocks of technology companies. The Fund may invest in warrants and rights to
purchase common stocks, convertible and preferred stocks, stocks of foreign
issuers and ADRs.
The Fund invests in dynamic, publicly-traded technology companies. These
emerging growth companies are typically in the early stages of a long-term
development cycle. In many cases, these companies offer unique products,
services or technologies and often serve special or expanding market niches.
Because of their small size and less frequent trading activity, the small
technology companies represented in the Fund's portfolio may be overlooked or
not closely followed by investors. Accordingly, their prices may rise either as
a result of improved business fundamentals, particularly when earnings grow
faster than general expectations, or as more investors appreciate the full
extent of a company's underlying business potential. The Adviser will seek to
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capture these price increases. Most of the technology companies that the Fund
will invest in will be located in the U.S.
The Fund's share price can move up and down significantly, even over short
periods of time, due to the volatile nature of many technology stocks. To manage
risk and improve liquidity, Turner expects to invest in numerous publicly traded
companies, representing a broad cross-section of U.S. and foreign technology
companies.
TURNER INTERNATIONAL GROWTH FUND -- The International Fund seeks to provide
long-term capital appreciation by investing primarily in a diversified portfolio
of ADRs and equity securities of non-U.S. issuers.
Under normal circumstances, at least 80% of the International Fund's assets will
be invested in ADRs and equity securities of non-U.S. issuers located in at
least three countries other than the United States. Most of the securities that
the Fund will invest in will be located in Europe and other developed foreign
countries.
Certain securities of non-U.S. issuers purchased by the Fund will be listed on
recognized foreign exchanges, but securities generally will be purchased in
over-the-counter markets, on U.S.-registered exchanges, or in the form of
sponsored or unsponsored ADRs traded on registered exchanges or NASDAQ, or
sponsored or unsponsored European Depositary Receipts ("EDRs"), Continental
Depositary Receipts ("CDRs") or Global Depositary Receipts ("GDRs"). The Fund
expects its investments to emphasize large, intermediate and small
capitalization companies.
The Fund may also invest in warrants and rights to purchase common stocks,
convertible and preferred stocks, and securities of other investment companies.
Although permitted to do so, the Fund does not currently intend to invest in
securities issued by passive foreign investment companies or to engage in
securities lending.
TURNER SHORT DURATION GOVERNMENT FUNDS B ONE YEAR PORTFOLIO & TURNER SHORT
DURATION GOVERNMENT FUNDS B THREE YEAR PORTFOLIO (TOGETHER, THE "SHORT DURATION
FUNDS") -- Under normal market conditions, each Fund invests at least 65% of the
value of its total assets in obligations either issued or guaranteed by the U.S.
Government, its agencies or instrumentalities ("U.S. Government securities").
Certain of the obligations, including U.S. Treasury bills, notes and bonds and
mortgage-related securities of the Government National Mortgage Association
("GNMA"), are issued or guaranteed by the U.S. Government. Other securities
issued by U.S. Government agencies or instrumentalities are supported only by
the credit of the agency or instrumentality, such as those issued by the Federal
Home Loan Bank, while others, such as those issued by Fannie Mae and the Student
Loan Marketing Association, have an additional line of credit with the U.S.
Treasury.
The balance of each Fund's assets may be invested in cash and high grade debt
securities, shares of other investment companies, including privately issued
mortgage-related securities and general obligation bonds and notes of various
states and their political subdivisions, rated within the three highest grades
assigned by S&P (AAA, AA or A), Moody's (Aaa, Aa or A), or Fitch Investor
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Services, Inc. ("Fitch") (AAA, AA or A), or, if unrated by S&P, Moody's and/or
Fitch, judged by the Adviser to be of comparable quality. A further description
of S&P's, Moody's and Fitch's ratings is included in the Appendix to the
Statement of Additional Information.
The relative proportions of the Funds' net assets invested in the different
types of permissible investments will vary from time to time depending upon the
Adviser's assessment of the relative market value of the sectors in which the
Funds invest. In addition, the Funds may purchase securities that are trading at
a discount from par when the Adviser believes there is a potential for capital
appreciation.
The Short Duration Funds may enter into forward commitments or purchase
securities on a when issued basis, and may invest in variable or floating rate
obligations.
TURNER CORE HIGH QUALITY FIXED INCOME FUND -- The Fixed Income Fund invests as
fully as practicable (and, under normal conditions, at least 65% of its total
assets) in a portfolio of fixed income securities of varying levels of quality
and maturity, that, in the Adviser's opinion, are undervalued in the market. To
determine a security's fair market value, the Adviser will focus on the yield
and credit quality of particular securities based upon third-party evaluations
of quality as well as the Adviser's own research and analysis of the issuer. The
Adviser will attempt to diversify the Fund's holdings across the yield curve by
holding short, intermediate and long-term securities. Normally, the Fund will
maintain a dollar-weighted average portfolio duration that approximates the
average duration range of the Fund's benchmark index, the Lehman Brothers
Aggregate Bond Index (currently 4.5 years). Duration is a measure of the
expected life of a fixed income security on a cash flow basis.
For example, assuming a portfolio duration of eight years, an increase in
interest rates of 1%, a parallel shift in the yield curve, and no change in the
spread relationships among securities, the value of the portfolio would decline
8%. Using the same assumptions, if interest rates decrease 1%, the value of the
portfolio would increase 8%. The Adviser considers duration an accurate measure
of a security's expected life and sensitivity to interest rate changes. The
Adviser may increase or decrease this average weighted duration when, in the
Adviser's opinion, market conditions warrant.
The Fund will purchase the following types of securities if, at the time of
purchase, such securities either have been classified as investment grade by a
nationally recognized statistical rating organization ("NRSRO") or are
determined by the Adviser to be of comparable quality: (i) obligations issued or
guaranteed as to principal and interest by the U.S. Government or its agencies
or instrumentalities ("U.S. Government securities"); (ii) corporate bonds and
debentures of U.S. and foreign issuers rated in one of the four highest rating
categories; (iii) privately issued mortgage-backed securities rated in the
highest rating category; (iv) asset-backed securities rated in the two highest
rating categories; (v) receipts evidencing separately traded interest and
principal component parts of U.S. Government obligations ("Receipts"); (vi)
commercial paper rated in one of the two highest rating categories; (vii)
obligations of U.S. commercial banks and savings and loan institutions that have
net assets of at least $500 million as of the end of their most recent fiscal
year ("bank obligations"); (viii) obligations issued or guaranteed by the
government of Canada; (ix) obligations of supranational entities rated in one of
the four highest rating categories; (x) loan participations; (xi) repurchase
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agreements involving any of the foregoing securities; and (xii) shares of other
investment companies. Investment grade bonds include securities rated BBB by S&P
or Baa by Moody's, which may be regarded as having speculative characteristics
as to repayment of principal. If a security is downgraded to below investment
grade, the Adviser will review the situation and take appropriate action.
Securities rated below investment grade will not constitute more than 5% of the
Fund's total assets.
GENERAL INVESTMENT POLICIES
Each Fund may purchase securities on a when-issued basis and borrow money.
Each Fund may enter into futures and options transactions.
Each Fund may invest up to 15% (10% for the Short Duration Funds) of its net
assets in illiquid securities.
Each Fund, except the Large Cap, Midcap and Short Duration Funds, may purchase
convertible securities.
Each Fund may enter into repurchase agreements.
Each Fund may purchase fixed income securities, including variable and floating
rate instruments and zero coupon securities.
Each Fund may purchase Rule 144A securities and other restricted securities.
Each Fund may purchase obligations of supranational entities.
Each Fund may, for temporary defensive purposes, invest up to 100% of its total
assets in money market instruments (including U.S. Government securities, bank
obligations, commercial paper rated in the highest rating category by an NRSRO,
repurchase agreements involving the foregoing securities), shares of money
market investment companies and cash.
DESCRIPTION OF PERMITTED INVESTMENTS AND RISK FACTORS
AMERICAN DEPOSITARY RECEIPTS ("ADRS")
ADRs are securities, typically issued by a U.S. financial institution (a
"depositary"), that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer and deposited with the depositary. ADRs
may be available through "sponsored" or "unsponsored" facilities. A sponsored
facility is established jointly by the issuer of the security underlying the
receipt and a depositary, whereas an unsponsored facility may be established by
a depositary without participation by the issuer of the underlying security.
Holders of unsponsored depositary receipts generally bear all the costs of the
unsponsored facility. The depositary of an unsponsored facility frequently is
under no obligation to distribute shareholder communications received from the
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issuer of the deposited security or to pass through, to the holders of the
receipts, voting rights with respect to the deposited securities.
ASSET-BACKED SECURITIES
Asset-backed securities are secured by non-mortgage assets such as company
receivables, truck and auto loans, leases and credit card receivables. Such
securities are generally issued as pass-through certificates, which represent
undivided fractional ownership interests in the underlying pools of assets. Such
securities also may be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity,
such as a trust, organized solely for the purpose of owning such assets and
issuing such debt.
BORROWING
The Funds may borrow money equal to 5% of their total assets for temporary
purposes to meet redemptions or to pay dividends. Borrowing may exaggerate
changes in the net asset value of a Fund's shares and in the return on the
Fund's portfolio. Although the principal of any borrowing will be fixed, a
Fund's assets may change in value during the time the borrowing is outstanding.
The Funds may be required to liquidate portfolio securities at a time when it
would be disadvantageous to do so in order to make payments with respect to any
borrowing. The Funds may be required to segregate liquid assets in an amount
sufficient to meet their obligations in connection with such borrowings. In an
interest rate arbitrage transaction, a Fund borrows money at one interest rate
and lends the proceeds at another, higher interest rate. These transactions
involve a number of risks, including the risk that the borrower will fail or
otherwise become insolvent or that there will be a significant change in
prevailing interest rates.
CONVERTIBLE SECURITIES
Convertible securities are corporate securities that are exchangeable for a set
number of another security at a prestated price. Convertible securities
typically have characteristics of both fixed income and equity securities.
Because of the conversion feature, the market value of a convertible security
tends to move with the market value of the underlying stock. The value of a
convertible security is also affected by prevailing interest rates, the credit
quality of the issuer and any call provisions.
DERIVATIVES
Derivatives are securities that derive their value from other securities,
financial instruments or indices. The following are considered derivative
securities: options on futures, futures, options (e.g., puts and calls), swap
agreements, mortgage-backed securities (e.g., CMOs, REMICs, IOs and POs), when
issued securities and forward commitments, floating and variable rate
securities, convertible securities, "stripped" U.S. Treasury securities (e.g.,
Receipts and STRIPs), privately issued stripped securities (e.g., TGRs, TRs, and
CATs). See elsewhere in the "Description of Permitted Investments" for
discussions of these various instruments.
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EQUITY SECURITIES
Equity securities include common stocks, preferred stocks, warrants, rights to
acquire common or preferred stocks, and securities convertible into or
exchangeable for common stocks. Investments in equity securities in general are
subject to market risks that may cause their prices to fluctuate over time. The
value of securities convertible into equity securities, such as warrants or
convertible debt, is also affected by prevailing interest rates, the credit
quality of the issuer and any call provision. Fluctuations in the value of
equity securities in which an equity Fund invests will cause the net asset value
of the Fund to fluctuate. An investment in an equity Fund may be more suitable
for long-term investors who can bear the risk of short-term principal
fluctuations.
FIXED INCOME SECURITIES
The market value of fixed income investments will change in response to interest
rate changes and other factors. During periods of falling interest rates, the
values of outstanding fixed income securities generally rise. Conversely, during
periods of rising interest rates, the values of such securities generally
decline. Moreover, while securities with longer maturities tend to produce
higher yields, the prices of longer maturity securities are also subject to
greater market fluctuations as a result of changes in interest rates. Changes by
recognized agencies in the rating of any fixed income security and in the
ability of an issuer to make payments of interest and principal also affect the
value of these investments. Changes in the value of these securities will not
necessarily affect cash income derived from these securities, but will affect
the investing Fund's net asset value.
Investment grade bonds include securities rated BBB by S&P or Baa by Moody's,
which may be regarded as having speculative characteristics as to repayment of
principal. If a security is downgraded, the Adviser will review the situation
and take appropriate action.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security at a specified future
time and at a specified price. An option on a futures contract gives the
purchaser the right, in exchange for a premium, to assume a position in a
futures contract at a specified exercise price during the term of the option. A
Fund may use futures contracts and related options for bona fide hedging
purposes, to offset changes in the value of securities held or expected to be
acquired or be disposed of, to minimize fluctuations in foreign currencies, or
to gain exposure to a particular market or instrument. A Fund will minimize the
risk that it will be unable to close out a futures contract by only entering
into futures contracts which are traded on national futures exchanges. In
addition, a Fund will only sell covered futures contracts and options on futures
contracts.
Stock and bond index futures are futures contracts for various stock and bond
indices that are traded on registered securities exchanges. Stock and bond index
futures contracts obligate the seller to deliver (and the purchaser to take) an
amount of cash equal to a specific dollar amount times the difference between
the value of a specific stock or bond index at the close of the last trading day
of the contract and the price at which the agreement is made.
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Stock and bond index futures contracts are bilateral agreements pursuant to
which two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the stock or bond index
value at the close of trading of the contract and the price at which the futures
contract is originally struck. No physical delivery of the stocks or bonds
comprising the Index is made; generally contracts are closed out prior to the
expiration date of the contracts.
No price is paid upon entering into futures contracts. Instead, a Fund would be
required to deposit an amount of cash or U.S. Treasury securities known as
"initial margin." Subsequent payments, called "variation margin," to and from
the broker, would be made on a daily basis as the value of the futures position
varies (a process known as "marking to market"). The margin is in the nature of
a performance bond or good-faith deposit on a futures contract.
There are risks associated with these activities, including the following: (1)
the success of a hedging strategy may depend on an ability to predict movements
in the prices of individual securities, fluctuations in markets and movements in
interest rates; (2) there may be an imperfect or no correlation between the
changes in market value of the securities held by the Fund and the prices of
futures and options on futures; (3) there may not be a liquid secondary market
for a futures contract or option; (4) trading restrictions or limitations may be
imposed by an exchange; and (5) government regulations may restrict trading in
futures contracts and futures options.
A Fund may enter into futures contracts and options on futures contracts traded
on an exchange regulated by the Commodities Futures Trading Commission ("CFTC"),
as long as, to the extent that such transactions are not for "bona fide hedging
purposes," the aggregate initial margin and premiums on such positions
(excluding the amount by which such options are in the money) do not exceed 5%
of a Fund's net assets. A Fund may buy and sell futures contracts and related
options to manage its exposure to changing interest rates and securities prices.
Some strategies reduce a Fund's exposure to price fluctuations, while others
tend to increase its market exposure. Futures and options on futures can be
volatile instruments and involve certain risks that could negatively impact a
Fund's return.
In order to avoid leveraging and related risks, when a Fund purchases futures
contracts, it will collateralize its position by depositing an amount of cash or
liquid securities, equal to the market value of the futures positions held, less
margin deposits, in a segregated account with its custodian. Collateral equal to
the current market value of the futures position will be marked to market on a
daily basis.
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ILLIQUID SECURITIES
Illiquid securities are securities that cannot be disposed of within seven
business days at approximately the price at which they are being carried on the
Fund's books. Illiquid securities include demand instruments with demand notice
periods exceeding seven days, securities for which there is no active secondary
market, and repurchase agreements with durations or maturities over seven days
in length.
INVESTMENT COMPANY SHARES
Each Fund may invest in shares of other investment companies, to the extent
permitted by applicable law and subject to certain restrictions. These
investment companies typically incur fees that are separate from those fees
incurred directly by the Fund. A Fund's purchase of such investment company
securities results in the layering of expenses, such that shareholders would
indirectly bear a proportionate share of the operating expenses of such
investment companies, including advisory fees, in addition to paying Fund
expenses. Under applicable regulations, a Fund is prohibited from acquiring the
securities of another investment company if, as a result of such acquisition:
(1) the Fund owns more than 3% of the total voting stock of the other company;
(2) securities issued by any one investment company represent more than 5% of
the Fund's total assets; or (3) securities (other than treasury stock) issued by
all investment companies represent more than 10% of the total assets of the
Fund. See also "Investment Limitations."
LEVERAGING
Leveraging a Fund creates an opportunity for increased net income, but, at the
same time, creates special risk considerations. For example, leveraging may
exaggerate changes in the net asset value of a Fund's shares and in the yield on
the Fund's portfolio. Although the principal of such borrowings will be fixed, a
Fund's assets may change in value during the time the borrowing is outstanding.
Leveraging creates interest expenses for a Fund which could exceed the income
from the assets retained. To the extent the income derived from securities
purchased with borrowed funds exceeds the interest that a Fund will have to pay,
the Fund's net income will be greater than if leveraging were not used.
Conversely, if the income from the assets retained with borrowed funds is not
sufficient to cover the cost of leveraging, the net income of the Fund will be
less than if leveraging were not used, and therefore the amount available for
distribution to stockholders as dividends will be reduced. Because the SEC staff
believes both reverse repurchase agreements and dollar roll transactions are
collateralized borrowings, the SEC staff believes that they create leverage,
which is a speculative factor. The requirement that such transactions be fully
collateralized by assets segregated by the Fund's Custodian does impose a
practical limit on the leverage created by such transactions. The Adviser will
not use leverage if as a result the effective duration of the portfolios of the
Three Year Portfolio would not be comparable or less than that of a three-year
U.S. Treasury note, respectively.
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LOWER-RATED SECURITIES
Lower-rated securities are lower-rated bonds commonly referred to as "junk
bonds" or high-yield securities. These securities are rated lower than Baa by
Moody's and/or lower than BBB by S&P. The Funds may invest in securities rated
in the lowest ratings categories established by Moody's or by S&P. These ratings
indicate that the obligations are speculative and may be in default. In
addition, the Funds may invest in unrated securities of comparable quality
subject to the restrictions stated in the Funds' Prospectus.
CERTAIN RISK FACTORS RELATING TO HIGH-YIELD, HIGH-RISK SECURITIES
The descriptions below are intended to supplement the discussion in the
Prospectus.
GROWTH OF HIGH-YIELD, HIGH-RISK BOND MARKET
The widespread expansion of government, consumer and corporate debt within the
U.S. economy has made the corporate sector more vulnerable to economic downturns
or increased interest rates. Further, an economic downturn could severely
disrupt the market for lower rated bonds and adversely affect the value of
outstanding bonds and the ability of the issuers to repay principal and
interest. The market for lower-rated securities may be less active, causing
market price volatility and limited liquidity in the secondary market. This may
limit the Funds' ability to sell such securities at their market value. In
addition, the market for these securities may be adversely affected by
legislative and regulatory developments. Credit quality in the junk bond market
can change suddenly and unexpectedly, and even recently issued credit ratings
may not fully reflect the actual risks imposed by a particular security.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES
Lower rated bonds are somewhat sensitive to adverse economic changes and
corporate developments. During an economic down turn or substantial period of
rising interest rates, highly leveraged issuers may experience financial stress
that would adversely affect their ability to service their principal and
interest payment obligations, to meet projected business goals, and to obtain
additional financing. If the issuer of a bond defaulted on its obligations to
pay interest or principal or entered into bankruptcy proceedings, the Funds may
incur losses or expenses in seeking recovery of amounts owed to it. In addition,
periods of economic uncertainty and change can be expected to result in
increased volatility of market prices of high-yield bonds and the Funds' net
asset values.
PAYMENT EXPECTATIONS
High-yield, high-risk bonds may contain redemption or call provisions. If an
issuer exercised these provisions in a declining interest rate market, the Funds
would have to replace the securities with a lower yielding security, resulting
in a decreased return for investors. Conversely, a high-yield, high-risk bond's
value will decrease in a rising interest rate market, as will the value of the
Funds' assets. If the Funds experience significant unexpected net redemptions,
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this may force them to sell high-yield, high-risk bonds without regard to their
investment merits, thereby decreasing the asset base upon which expenses can be
spread and possibly reducing the Funds' rates of return.
LIQUIDITY AND VALUATION
There may be little trading in the secondary market for particular bonds, which
may affect adversely the Funds' ability to value accurately or dispose of such
bonds. Adverse publicity and investor perception, whether or not based on
fundamental analysis, may decrease the values and liquidity of high-yield,
high-risk bonds, especially in a thin market.
TAXES
The Funds may purchase debt securities (such as zero-coupon, pay-in-kind or
other types of securities) that contain original issue discounts. Original issue
discount that accrues in a taxable year is treated as earned by each Fund and
therefore is subject to the distribution requirements of the tax code even
though the such Fund has not received any interest payments on such obligations
during that period. Because the original issue discount earned by the Funds in a
taxable year may not be represented by cash income, the Funds may have to
dispose of other securities and use the proceeds to make distributions to
shareholders.
MONEY MARKET INSTRUMENTS
Money market securities are high-quality, dollar-denominated, short-term debt
instruments. They consist of: (i) bankers' acceptances, certificates of
deposits, notes and time deposits of highly-rated U.S. banks and U.S. branches
of foreign banks; (ii) U.S. Treasury obligations and obligations issued or
guaranteed by the agencies and instrumentalities of the U.S. Government; (iii)
high-quality commercial paper issued by U.S. and foreign corporations; (iv) debt
obligations with a maturity of one year or less issued by corporations with
outstanding high-quality commercial paper ratings; and (v) repurchase agreements
involving any of the foregoing obligations entered into with highly-rated banks
and broker-dealers.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are instruments that entitle the holder to a share of
all interest and principal payments from mortgages underlying the security. The
mortgages backing these securities include conventional fifteen- and thirty-year
fixed rate mortgages, graduated payment mortgages, adjustable rate mortgages,
and balloon mortgages. During periods of declining interest rates, prepayment of
mortgages underlying mortgage-backed securities can be expected to accelerate.
Prepayment of mortgages which underlie securities purchased at a premium often
results in capital losses, while prepayment of mortgages purchased at a discount
often results in capital gains. Because of these unpredictable prepayment
characteristics, it is often not possible to predict accurately the average life
or realized yield of a particular issue.
GOVERNMENT PASS-THROUGH SECURITIES: These are securities that are issued or
guaranteed by a U.S. Government agency representing an interest in a pool of
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mortgage loans. The primary issuers or guarantors of these mortgage-backed
securities are the GNMA, Fannie Mae and the Federal Home Loan Mortgage
Corporation ("FHLMC"). Fannie Mae and FHLMC as GNMA certificates are, but Fannie
Mae and FHLMC securities are supported by the instrumentalities' right to borrow
from the U.S. Treasury. GNMA, Fannie Mae and FHLMC each guarantee timely
distributions of interest to certificate holders. GNMA and Fannie Mae also each
guarantee timely distributions of scheduled principal.
PRIVATE PASS-THROUGH SECURITIES: These are mortgage-backed securities issued by
a non-governmental entity, such as a trust. While they are generally structured
with one or more types of credit enhancement, private pass-through securities
typically lack a guarantee by an entity having the credit status of a
governmental agency or instrumentality.
CMOs: CMOs are debt obligations of multiclass pass-through certificates issued
by agencies or instrumentalities of the U.S. Government or by private
originators or investors in mortgage loans. In a CMO, series of bonds or
certificates are usually issued in multiple classes. Principal and interest paid
on the underlying mortgage assets may be allocated among the several classes of
a series of a CMO in a variety of ways. Each class of a CMO is issued with a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date.
REMICs: A REMIC is a CMO that qualifies for special tax treatment under the Code
and invests in certain mortgages principally secured by interests in real
property. Guaranteed REMIC pass-through certificates ("REMIC Certificates")
issued by Fannie Mae or FHLMC represent beneficial ownership interests in a
REMIC trust consisting principally or mortgage loans or Fannie Mae, FHLMC or
GNMA-guaranteed mortgage pass-through certificates.
STRIPPED MORTGAGE-BACKED SECURITIES("SMBs"): SMBs are usually structured with
two classes that receive specified proportions of the monthly interest and
principal payments from a pool of mortgage securities. One class may receive all
of the interest payments, while the other class may receive all of the principal
payments. SMBs are extremely sensitive to changes in interest rates because of
the impact thereon of prepayment of principal on the underlying mortgage
securities. The market for SMBs is not as fully developed as other markets; SMBs
therefore may be illiquid.
NON-DIVERSIFICATION
The Target Select, Top 20 and Focused Funds are a non-diversified companies, as
defined in the Investment Company Act of 1940, as amended (the "1940 Act"),
which means that a relatively high percentage of assets of each Fund may be
invested in the obligations of a limited number of issuers. Although the Adviser
or the Sub-Advisers generally do not intend to invest more than 5% of a Fund's
assets in any single issuer (with the exception of securities which are issued
or guaranteed by a national government), the value of the shares of each Fund
may be more susceptible to a single economic, political or regulatory occurrence
than the shares of a diversified investment company would be. The Funds intend
to satisfy the diversification requirements necessary to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
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"Code"), which requires that each Fund be diversified (i.e., not invest more
than 5% of its assets in the securities in any one issuer) as to 50% of its
assets.
OBLIGATIONS OF SUPRANATIONAL ENTITIES
Obligations of supranational entities are obligations of entities established
through the joint participation of several governments, such as the Asian
Development Bank, the Inter-American Development Bank, International Bank of
Reconstruction and Development (World Bank), African Development Bank, European
Economic Community, European Investment Bank and the Nordic Investment Bank.
OPTIONS
A put option gives the purchaser of the option the right to sell, and the writer
of the option the obligation to buy, the underlying security at any time during
the option period. A call option gives the purchaser of the option the right to
buy, and the writer of the option the obligation to sell, the underlying
security at any time during the option period. The premium paid to the writer is
the consideration for undertaking the obligations under the option contract. The
initial purchase (sale) of an option contract is an "opening transaction." In
order to close out an option position, a Fund may enter into a "closing
transaction," which is simply the sale (purchase) of an option contract on the
same security with the same exercise price and expiration date as the option
contract originally opened. If a Fund is unable to effect a closing purchase
transaction with respect to an option it has written, it will not be able to
sell the underlying security until the option expires or the Fund delivers the
security upon exercise.
A Fund may purchase put and call options to protect against a decline in the
market value of the securities in its portfolio or to anticipate an increase in
the market value of securities that the Fund may seek to purchase in the future.
A Fund purchasing put and call options pays a premium therefor. If price
movements in the underlying securities are such that exercise of the options
would not be profitable for a Fund, loss of the premium paid may be offset by an
increase in the value of the Fund's securities or by a decrease in the cost of
acquisition of securities by the Fund.
A Fund may write covered call options as a means of increasing the yield on its
portfolio and as a means of providing limited protection against decreases in
its market value. When a Fund sells an option, if the underlying securities do
not increase or decrease to a price level that would make the exercise of the
option profitable to the holder thereof, the option generally will expire
without being exercised and the Fund will realize as profit the premium
received for such option. When a call option written by a Fund is exercised, the
Fund will be required to sell the underlying securities to the option holder at
the strike price, and will not participate in any increase in the price of such
securities above the strike price. When a put option written by a Fund is
exercised, the Fund will be required to purchase the underlying securities at
the strike price, which may be in excess of the market value of such securities.
A Fund may purchase and write options on an exchange or over the counter. Over
the counter options ("OTC options") differ from exchange-traded options in
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several respects. They are transacted directly with dealers and not with a
clearing corporation, and therefore entail the risk of non-performance by the
dealer. OTC options are available for a greater variety of securities and for a
wider range of expiration dates and exercise prices than are available for
exchange-traded options. Because OTC options are not traded on an exchange,
pricing is done normally by reference to information from a market maker. It is
the position of the SEC that OTC options are generally illiquid.
A Fund may purchase and write put and call options on foreign currencies (traded
on U.S. and foreign exchanges or over-the-counter markets) to manage its
exposure to exchange rates. Call options on foreign currency written by a Fund
will be "covered," which means that the Fund will own an equal amount of the
underlying foreign currency. With respect to put options on foreign currency
written by a Fund, the Fund will establish a segregated account with its
Custodian consisting of cash or liquid, high grade debt securities in an amount
equal to the amount the Fund would be required to pay upon exercise of the put.
A Fund may purchase and write put and call options on indices and enter into
related closing transactions. Put and call options on indices are similar to
options on securities except that options on an index give the holder the right
to receive, upon exercise of the option, an amount of cash if the closing level
of the underlying index is greater than (or less than, in the case of puts) the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the index and the exercise price of the option,
expressed in dollars multiplied by a specified number. Thus, unlike options on
individual securities, all settlements are in cash, and gain or loss depends on
price movements in the particular market represented by the index generally,
rather than the price movements in individual securities. A Fund may choose to
terminate an option position by entering into a closing transaction. The ability
of a Fund to enter into closing transactions depends upon the existence of a
liquid secondary market for such transactions.
All options written on indices must be covered. When a Fund writes an option on
an index, it will establish a segregated account containing cash or liquid
securities with its custodian in an amount at least equal to the market value of
the option and will maintain the account while the option is open or will
otherwise cover the transaction.
Each Short Duration Fund will not engage in transactions involving interest rate
futures contracts for speculation but only as a hedge against changes in the
market values of debt securities held or intended to be purchased by the Fund
and where the transactions are appropriate to reduce the Fund's interest rate
risks. There can be no assurance that hedging transactions will be successful. A
Fund also could be exposed to risks if it could not close out its futures or
options positions because of any illiquid secondary market.
Futures and options have effective durations which, in general, are closely
related to the effective duration of the securities which underlie them. Holding
purchased futures or call option positions (backed by segregated cash or other
liquid securities) will lengthen the duration of a Short Duration Fund's
portfolio.
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Risk Factors: Risks associated with options transactions include: (1) the
success of a hedging strategy may depend on an ability to predict movements in
the prices of individual securities, fluctuations in markets and movements in
interest rates; (2) there may be an imperfect correlation between the movement
in prices of options and the securities underlying them; (3) there may not be a
liquid secondary market for options; and (4) while a Fund will receive a premium
when it writes covered call options, it may not participate fully in a rise in
the market value of the underlying security.
PORTFOLIO TURNOVER
An annual portfolio turnover rate in excess of 100% may result from the
Adviser's investment strategy. Portfolio turnover rates in excess of 100% may
result in higher transaction costs, including increased brokerage commissions,
and higher levels of taxable capital gain.
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RECEIPTS
Receipts are sold as zero coupon securities, which means that they are sold at a
substantial discount and redeemed at face value at their maturity date without
interim cash payments of interest or principal. This discount is accreted over
the life of the security, and such accretion will constitute the income earned
on a security for both accounting and tax purposes. Because of these features,
such securities may be subject to greater interest rate volatility than interest
paying investments.
REITS
The Funds may invest in real estate investment trusts ("REITs"), which pool
investors' funds for investment in income producing commercial 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 with a regulatory requirement that it
distribute to its shareholders or unitholders at 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 from rents
and capital gains from appreciation realized through property sales. Mortgage
REITs invest the majority of their assets in real estate mortgages and derive
their income primarily from interest payments. Hybrid REITs combine the
characteristics of both Equity and Mortgage REITs. A shareholder in a Fund
should realize that by investing in REITs indirectly through the Fund, he or she
will bear not only his or her proportionate share of the expenses of the Fund,
but also indirectly, similar expenses of underlying REITs.
A Fund may be subject to certain risks associated with the direct investments of
the REITs. REITs may be affected by changes in the of their underlying
properties and by defaults by borrowers or tenants. Mortgage REITs may be
affected by the quality of the credit extended. Furthermore, REITs are dependent
on specialized management skills. Some REITs may have limited diversification
and may be subject to risks inherent in financing a limited number of
properties. REITs depend generally on their ability to generate cash flow to
make distributions to shareholders or unitholders, and may be subject to
defaults by borrowers and to self-liquidations. In addition, the performance of
a REIT may be affected by its failure to qualify for tax-free pass-through of
income under the Code or its failure to maintain exemption from registration
under the 1940 Act.
REPURCHASE AGREEMENTS
Repurchase agreements are agreements by which a Fund obtains a security and
simultaneously commits to return the security to the seller (a member bank of
the Federal Reserve System or primary securities dealer as recognized by the
Federal Reserve Bank of New York) at an agreed upon price (including principal
and interest) on 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 underlying 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.
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Repurchase agreements are considered to be loans by a Fund for purposes of its
investment limitations. The repurchase agreements entered into by a Fund will
provide that the underlying security at all times shall have a value at least
equal to 102% of the resale price stated in the agreement (the Adviser monitors
compliance with this requirement). Under all repurchase agreements entered into
by a Fund, the Trust's Custodian or its agent must take possession of the
underlying collateral. However, if the seller defaults, the Fund could realize a
loss on the sale of the underlying security to the extent that the proceeds of
sale, including accrued interest, are less than the resale price provided in the
agreement including interest. In addition, even though the Bankruptcy Code
provides protection for most repurchase agreements, if the seller should be
involved in bankruptcy or insolvency proceedings, a Fund may incur delay and
costs in selling the underlying security or may suffer a loss of principal and
interest if the Fund is treated as an unsecured creditor and is required to
return the underlying security to the seller's estate.
REVERSE DOLLAR ROLL TRANSACTIONS
Each Short Duration Fund may enter into reverse dollar roll transactions, which
involve a purchase by a Fund of an eligible security from a financial
institution concurrently with an agreement by the Fund to resell a similar
security to the institution at a later date at an agreed-upon price. Reverse
dollar roll transactions are fully collateralized in a manner similar to loans
of the Fund's portfolio securities.
REVERSE REPURCHASE AGREEMENT AND DOLLAR ROLL TRANSACTIONS
A reverse repurchase agreement involves a sale by a Fund of securities that it
holds to a bank, broker-dealer or other financial institution concurrently with
an agreement by the Fund to repurchase the same securities at an agreed-upon
price and date. A dollar roll transaction involves a sale by a Fund of an
eligible security to a financial institution concurrently with an agreement by
the Fund to repurchase a similar eligible security from the institution at a
later date at an agreed-upon price. Each Fund will fully collateralize its
reverse repurchase agreements and dollar roll transactions in an amount at least
equal to the Fund's obligations under the reverse repurchase agreement or dollar
roll transaction by cash or other liquid securities that the Fund's custodian
segregates from other Fund assets.
RIGHTS
Rights give existing shareholders of a corporation the right, but not the
obligation, to buy shares of the corporation at a given price, usually below the
offering price, during a specified period.
RULE 144A SECURITIES
Rule 144A securities are securities exempt from registration on resale pursuant
to Rule 144A under the 1933 Act. Rule 144A securities are traded in the
institutional market pursuant to this registration exemption, and, as a result,
may not be as liquid as exchange-traded securities since they may only be resold
to certain qualified institutional investors. Due to the relatively limited size
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of this institutional market, these securities may affect the Fund's liquidity
to the extent that qualified institutional buyers become, for a time,
uninterested in purchasing such securities. Nevertheless, Rule 144A securities
may be treated as liquid securities pursuant to guidelines adopted by the
Trust's Board of Trustees.
SECURITIES LENDING
In order to generate additional income, a Fund may lend its securities pursuant
to agreements requiring that the loan be continuously secured by collateral
consisting of cash or securities of the U.S. Government or its agencies equal to
at least 100% of the market value of the loaned securities. A Fund continues to
receive interest on the loaned securities while simultaneously earning interest
on the investment of cash collateral. Collateral is marked to market daily.
There may be risks of delay in recovery of the securities or even loss of rights
in the collateral should the borrower of the securities fail financially or
become insolvent.
SECURITIES OF FOREIGN ISSUERS
The Funds may invest in securities of foreign issuers with a strong U.S. trading
presence and in sponsored and unsponsored ADRs. Investments in the securities of
foreign issuers may subject the Funds to investment risks that differ in some
respects from those related to investments in securities of U.S. issuers. Such
risks include future adverse political and economic developments, possible
imposition of withholding taxes on income, possible seizure, nationalization or
expropriation of foreign deposits, possible establishment of exchange controls
or taxation at the source or greater fluctuation in value due to changes in
exchange rates. Foreign issuers of securities often engage in business practices
different from those of domestic issuers of similar securities, and there may be
less information publicly available about foreign issuers. In addition, foreign
issuers are, generally speaking, subject to less government supervision and
regulation than are those in the United States. Investments in securities of
foreign issuers are frequently denominated in foreign currencies and the value
of a Fund's assets measured in U.S. dollars may be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations,
and the Funds may incur costs in connection with conversions between various
currencies. Moreover, investments in emerging market nations may be considered
speculative, and there may be a greater potential for nationalization,
expropriation or adverse diplomatic developments (including war) or other events
which could adversely effect the economies of such countries or investments in
such countries.
SHORT SALES
A short sale is "against the box" if at all times during which the short
position is open, a Fund owns at least an equal amount of the securities or
securities convertible into, or exchangeable without further consideration for,
securities of the same issue as the securities that are sold short.
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U.S. GOVERNMENT AGENCY OBLIGATIONS
Certain Federal agencies, such as the GNMA, have been established as
instrumentalities of the United States Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the United States Government, are either backed by the full faith
and credit of the United States (e.g., GNMA securities) or supported by the
issuing agencies' right to borrow from the Treasury. The issues of other
agencies are supported by the credit of the instrumentality (e.g., Fannie Mae
securities).
U.S. GOVERNMENT SECURITIES
U.S. Government Securities are bills, notes and bonds issued by the U.S.
Government and backed by the full faith and credit of the United States.
U.S. TREASURY OBLIGATIONS
U.S. Treasury Obligations are bills, notes and bonds issued by the U.S.
Treasury, and separately traded interest and principal component parts of such
obligations that are transferable through the Federal book-entry system known as
Separately Traded Registered Interested and Principal Securities ("STRIPS") and
Coupon Under Book Entry Safekeeping ("CUBES").
VARIABLE AND FLOATING RATE INSTRUMENTS
Certain obligations may carry variable or floating rates of interest, and may
involve a conditional or unconditional demand feature. Such instruments bear
interest at rates which are not fixed, but which vary with changes in specified
market rates or indices. The interest rates on these securities may be reset
daily, weekly, quarterly or some other reset period, and may have a floor or
ceiling on interest rate changes. There is a risk that the current interest rate
on such obligations may not accurately reflect existing market interest rates. A
demand instrument with a demand notice exceeding seven days may be considered
illiquid if there is no secondary market for such security.
WARRANTS
Warrants are instruments giving holders the right, but not the obligation, to
buy equity or fixed income securities of a company at a given price during a
specified period.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
When-issued or delayed delivery securities are subject to market fluctuations
due to changes in market interest rates and it is possible that the market value
at the time of settlement could be higher or lower than the purchase price if
the general level of interest rates has changed. Although a Fund generally
purchases securities on a when-issued or forward commitment basis with the
intention of actually acquiring securities for its investment portfolio, a Fund
may dispose of a when-issued security or forward commitment prior to settlement
if it deems appropriate.
S-23
<PAGE>
YEAR 2000
The Trust depends on the smooth functioning of computer systems in almost every
aspect of its business. Like other mutual funds, business and individuals around
the world, the Trust could be adversely affected if the computer systems used by
its service providers do not properly process dates on and after January 1, 2000
and distinguish between the year 2000 and the year 1900. The Trust has asked its
service providers whether they expect to have their computer systems adjusted
for the year 2000 transition, and received assurances from each that its system
is expected to accommodate the year 2000 without material adverse consequences
to the Trust. The Trust and its shareholders may experience losses if these
assurances prove to be incorrect or as a result of year 2000 computer
difficulties experienced by issuers of portfolio securities or third parties,
such as custodians, banks, broker-dealers or others with which the Trust does
business.
Furthermore, many foreign countries are not as prepared as the U.S. for the year
2000 transition. As a result, computer difficulties in foreign markets and with
foreign institutions as a result of the year 2000 may add to the possibility of
losses to the Funds' shareholders.
ZERO COUPON SECURITIES
Zero coupon obligations are debt securities that do not bear any interest, but
instead are issued at a deep discount from par. The value of a zero coupon
obligation increases over time to reflect the interest accredit. Such
obligations will not result in the payment of interest until maturity, and will
have greater price volatility than similar securities that are issued at par and
pay interest periodically.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
The following investment limitations are fundamental policies of each Fund which
cannot be changed with respect to a Fund without the consent of the holders of a
majority of that Fund's outstanding shares. The term "majority of the
outstanding shares" means the vote of (i) 67% or more of a Fund's shares present
at a meeting, if more than 50% of the outstanding shares of a Fund are present
or represented by proxy, or (ii) more than 50% of a Fund's outstanding shares,
whichever is less.
No Fund may:
1. (i) Purchase securities of any issuer (except securities issued or
guaranteed by the United States Government, its agencies or
instrumentalities and repurchase agreements involving such securities)
if, as a result, more than 5% of the total assets of the Fund would be
invested in the securities of such issuer; or (ii) acquire more than
10% of the outstanding voting securities of any one issuer. This
restriction applies to 75% of each Fund's total assets.
2. Purchase any securities which would cause 25% or more of the total
assets of the Fund to be invested in the securities of one or more
issuers conducting their principal business activities in the same
S-24
<PAGE>
industry, provided that this limitation does not apply to investments
in obligations issued or guaranteed by the U.S. Government or its
agencies and instrumentalities and repurchase agreements involving such
securities. This limitation does not apply to the Technology Fund.
3. Borrow money in an amount exceeding 33 1/3% of the value of its total
assets, provided that, for purposes of this limitation, investment
strategies which either obligate the Fund to purchase securities or
require the Fund to segregate assets are not considered to be
borrowings. Asset coverage of at least 300% is required for all
borrowings, except where the Fund has borrowed money for temporary
purposes in amounts not exceeding 5% of its total assets. Each Fund
will not purchase securities while its borrowings exceed 5% of its
total assets.
4. Make loans if, as a result, more than 33 1/3% of its total assets would
be lent to other parties, except that each Fund may (i) purchase or
hold debt instruments in accordance with its investment objective and
policies; (ii) enter into repurchase agreements; and (iii) lend its
securities.
5. Purchase or sell real estate, physical commodities, or commodities
contracts, except that each Fund may purchase (i) marketable securities
issued by companies which own or invest in real estate (including real
estate investment trusts), commodities, or commodities contracts; and
(ii) commodities contracts relating to financial instruments, such as
financial futures contracts and options on such contracts.
6. Issue senior securities (as defined in the Investment Company Act of
1940 (the "1940 Act")) except as permitted by rule, regulation or order
of the Securities and Exchange Commission (the "SEC").
7. Act as an underwriter of securities of other issuers except as it may
be deemed an underwriter in selling a portfolio security.
8. Invest in interests in oil, gas, or other mineral exploration or
development programs and oil, gas or mineral leases.
The foregoing percentages (except with respect to the limitation on borrowing)
will apply at the time of the purchase of a security and shall not be considered
violated unless an excess or deficiency occurs immediately after or as a result
of a purchase of such security.
S-25
<PAGE>
NON-FUNDAMENTAL POLICIES
The following investment limitations are non-fundamental policies of each Fund
and may be changed with respect to a Fund by the Board of Trustees.
No Fund may:
1. Pledge, mortgage or hypothecate assets except to secure borrowings
permitted by the Fund's fundamental limitation on borrowing.
2. Invest in companies for the purpose of exercising control.
3. Purchase securities on margin or effect short sales, except that each
Fund may (i) obtain short-term credits as necessary for the clearance
of security transactions; (ii) provide initial and variation margin
payments in connection with transactions involving futures contracts
and options on such contracts; and (iii) make short sales "against the
box" or in compliance with the SEC's position regarding the asset
segregation requirements imposed by Section 18 of the 1940 Act.
4. Invest its assets in securities of any investment company, except as
permitted by the 1940 Act.
5. Purchase or hold illiquid securities, i.e., securities that cannot be
disposed of for their approximate carrying value in seven days or less
(which term includes repurchase agreements and time deposits maturing
in more than seven days) if, in the aggregate, more than 15% of its net
assets would be invested in illiquid securities.
In addition, each Fund will invest no more than 5% of its net assets in short
sales, unregistered securities, futures contracts, options and investment
company securities. Unregistered securities sold in reliance on the exemption
from registration in Section 4(2) of the 1933 Act and securities exempt from
registration on re-sale pursuant to Rule 144A of the 1933 Act may be treated as
liquid securities under procedures adopted by the Board of Trustees.
THE ADVISER
Turner Investment Partners, Inc., 1235 Westlakes Drive, Suite 350, Berwyn,
Pennsylvania 19312, is a professional investment management firm founded in
March, 1990. Robert E. Turner is the Chairman and controlling shareholder of the
Adviser. As of March 31, 1999, the Adviser had discretionary management
authority with respect to approximately $3.3 billion of assets. The Adviser has
provided investment advisory services to investment companies since 1992.
The Adviser serves as the investment adviser for each Fund under an investment
advisory agreement (the "Advisory Agreement"). Under the Advisory Agreement, the
Adviser makes the investment decisions for the assets of each Fund and
continuously reviews, supervises and administers each Fund's investment program,
S-26
<PAGE>
subject to the supervision of, and policies established by, the Trustees of the
Trust. The Adviser makes recommendations to the Trustees with respect to the
appropriate allocation of assets to each of the Target Select Fund's
Sub-Advisers, and directly manages assets of the Fund not allocated to the
Sub-Advisers.
The Advisory Agreement provides that the Adviser shall not be protected against
any liability to the Trust or its shareholders by reason of willful misfeasance,
bad faith or gross negligence on its part in the performance of its duties or
from reckless disregard of its obligations or duties thereunder.
The Advisory Agreement provides that if, for any fiscal year, the ratio of
expenses of any Fund (including amounts payable to the Adviser but excluding
interest, taxes, brokerage, litigation, and other extraordinary expenses)
exceeds limitations established by any state in which the shares of the Fund are
registered, the Adviser will bear the amount of such excess. The Adviser will
not be required to bear expenses of any Fund to an extent which would result in
the Fund's inability to qualify as a regulated investment company under
provisions of the Internal Revenue Code of 1986, as amended (the "Code").
The continuance of the Advisory Agreement as to any Fund after the first two
years must be specifically approved at least annually (i) by the vote of the
Trustees or by a vote of the shareholders of that Fund, and (ii) by the vote of
a majority of the Trustees who are not parties to the Advisory Agreement or
"interested persons" of any party thereto, cast in person at a meeting called
for the purpose of voting on such approval. The Advisory Agreement will
terminate automatically in the event of its assignment, and is terminable at any
time without penalty by the Trustees of the Trust or, with respect to any Fund,
by a majority of the outstanding shares of that Fund, on not less than 30 days'
nor more than 60 days' written notice to the Adviser, or by the Adviser on 90
days' written notice to the Trust.
For the fiscal years ended September 30, 1996, 1997, and 1998, the Funds paid
(had reimbursed) the following advisory fees:
<TABLE>
<CAPTION>
Advisory Fees Paid Advisory Fees Waived
--------------------------------------- ----------------------------------
1996 1997 1998 1996 1997 1998
-------- -------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Large Cap Fund ** $ 0 $ (79,930) ** $ 2,281 $ 15,530
Growth Equity Fund $666,476 $694,046 $ 664,499 $ 0 $24,250 $ 76,793
Midcap Fund ** $ 0 $ 92,465 ** $13,244 $ 42,799
Small Cap Fund $197,634 $762,604 $1,458,689 $82,694 $73,594 $226,626
Micro Cap Fund ** ** $ (97,006) ** ** $ 16,354
Fixed Income Fund ** ** ** ** ** **
</TABLE>
S-27
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
One Year Portfolio Fiscal Year Fiscal Year Fiscal Fiscal Year Fiscal Year Fiscal Period
Ended 2/28/97 Ended 2/28/98 Period Ended Ended Ended Ended 9/30/98
$ 0 $ (94,700) 9/30/98 2/28/97 2/28/98 $ 1,596
$ (67,178) $ 1,671 $ 2,792
Three Year Portfolio Fiscal Year Fiscal Year Fiscal Fiscal Year Fiscal Year Fiscal Period
Ended 2/28/97 Ended 2/28/98 Period Ended Ended Ended Ended 9/30/98
$ 0 $ (117,540) 9/30/98 2/28/97 2/28/98 $ 20,056
$ (80,828) $ 32,092 $ 41,761
Focused Fund ** ** ** ** ** **
Top 20 Fund ** ** ** ** ** **
Technology Fund ** ** ** ** ** **
International Fund ** ** ** ** ** **
</TABLE>
- ------------
** Not in operation during the period.
As described in the prospectus, the Focused Large Cap, Top 20, Technology and
International Growth Funds are subject to base investment advisory fees that may
be adjusted if a Fund out- or under-performs a stated benchmark. Set forth below
is information about the advisory fee arrangements of these Funds:
<TABLE>
<S> <C> <C> <C> <C> <C>
Fund Benchmark Required Excess Base Advisory Fee Highest Possible Lowest Possible
Performance Advisory Fee Advisory Fee
Focused S&P 500 Index +/- 2.5% 1.00% 1.30% .70%
Fund
Top 20 Fund S&P 500 Index +/- 2.5% 1.10% 1.50% .70%
Technology Fund PSE Technology +/- 2.0% 1.10% 1.50% .70%
Index
International MSCI EAFE Index +/- 2.0% 1.00% 1.30% .70%
Fund
</TABLE>
The performance adjustment works as follows: If the Top 20 Fund outperforms the
S&P 500 Index by more than 2.5%, Turner's advisory fees will increase from 1.10%
to 1.50%. If, however, the Fund underperforms its benchmark by 2.5%, Turner's
advisory fees would go down to 0.70%. These performance-based fees will only be
charged once a Fund has been in operation for at least one year, and will comply
with all applicable SEC rules.
S-28
<PAGE>
THE SUB-ADVISERS
The Target Select Fund currently has three Sub-Advisers -- Clover Capital
Management, Inc., Penn Capital Management Company, Inc., and Chartwell
Investment Partners (each a "Sub-Adviser" and collectively, the "Sub-Advisers").
Each Sub-Adviser will manage a portion of the Fund's assets, which allocation is
determined by the Trustees upon the recommendation of the Adviser. Each
Sub-Adviser makes the investment decisions for the assets of the Fund allocated
to it, and continuously reviews, supervises and administers a separate
investment program, subject to the supervision of, and policies established by,
the Trustees of the Trust. For its services, each of the Sub-Advisers is
entitled to receive a fee from Turner Investment Partners, which is calculated
daily and paid monthly, at an annual rate of 0.80% of the average daily net
assets of the Fund allocated to it. Currently, the Adviser and each Sub-Adviser
has been allocated assets in the range of 15-30% of the Fund's total assets.
CLOVER CAPITAL MANAGEMENT, INC. ("Clover Capital"), 11 Tobey Village Office
Park, Pittsford, New York 14354, is a professional investment management firm
founded in 1984 by Michael Edward Jones, CFA, and Geoffrey Harold Rosenberger,
CFA, who are Managing Directors of Clover Capital and who control all of the
Clover Capital's outstanding voting stock. Michael Jones, Managing Director of
Clover Capital, is the portfolio manager of the portion of the Fund's assets
managed by Clover Capital. As of September 30, 1998, the Clover Capital had
discretionary management authority with respect to approximately $1.9 billion of
assets. In addition to sub-advising the Fund and the Clover Funds, separate
investment portfolios of the Trust, Clover provides advisory services to pension
plans, religious and educational endowments, corporations, 401(k) plans, profit
sharing plans, individual investors and trusts and estates.
PENN CAPITAL MANAGEMENT COMPANY, INC. ("Penn Capital"), 52 Haddonfield-Berlin
Road, Suite 1000, Cherry Hill, New Jersey 08034, is a professional investment
management firm founded in 1987 and registered as an investment adviser under
the Investment Advisers Act. Richard A. Hocker is a founding partner and Chief
Investment Officer of Penn Capital and portfolio manager of the portion of the
assets of the Fund managed by Penn Capital, an investment management firm that
manages the investment portfolios of institutions and high net worth
individuals. As of September 30, 1998, Penn Capital had assets under management
of approximately $374 million. Penn Capital employs a staff of 17 and manages
monies in a variety of investment styles through either separate account
management or one of its private investment funds. In addition, Penn Capital
serves as investment adviser to the Penn Capital Funds, three separate
portfolios of the Trust.
CHARTWELL INVESTMENT PARTNERS ("Chartwell"), 1235 Westlakes Drive, Suite 330,
Berwyn, Pennsylvania 19312, is a professional investment management firm founded
in 1997 and registered as an investment adviser under the Investment Advisers
Act. Chartwell was founded by a team of experienced investment professionals who
had been employees of Delaware Management Company of Philadelphia, Pennsylvania.
The portion of the assets of the Fund managed by Chartwell will be managed by a
team of investment professionals with extensive investment experience. The
portion of the assets of the Fund managed by Chartwell will be managed by a team
of investment professionals with extensive investment experience. Chartwell
currently manages approximately $2.7 billion in assets for institutional
clients.
S-29
<PAGE>
THE ADMINISTRATOR
The Trust and SEI Investments Mutual Funds Services (the "Administrator") have
entered into an administration agreement (the "Administration Agreement"). The
Administration Agreement provides that the Administrator shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the Trust in
connection with the matters to which the Administration Agreement relates,
except a loss resulting from willful misfeasance, bad faith or gross negligence
on the part of the Administrator in the performance of its duties or from
reckless disregard by it of its duties and obligations thereunder. The
Administration Agreement shall remain in effect for a period of three (3) years
after the effective date of the agreement and shall continue in effect for
successive periods of one (1) year unless terminated by either party on not less
than 90 days' prior written notice to the other party.
The continuance of the Administration Agreement must be specifically approved at
least annually (i) by the vote of a majority of the Trustees or by the vote of a
majority of the outstanding voting securities of the Fund, and (ii) by the vote
of a majority of the Trustees of the Trust who are not parties to the
Administration Agreement or an "interested person" (as that term is defined in
the 1940 Act) of any party thereto, cast in person at a meeting called for the
purpose of voting on such approval. The "Administration Agreement is terminable
at any time as to any Fund without penalty by the Trustees of the Trust, by a
vote of a majority of the outstanding shares of the Fund or by the Manager on
not less than 30 days' nor more than 60 days' written notice.
The Administrator, a Massachusetts business trust, has its principal business
offices at Oaks, Pennsylvania 19456. SEI Investments Management Corporation
("SIMC"), a wholly-owned subsidiary of SEI Investments Company ("SEI
Investments"), is the owner of all beneficial interest in the Administrator. SEI
Investments and its subsidiaries and affiliates, including the Administrator,
are leading providers of funds evaluation services, trust accounting systems,
and brokerage and information services to financial institutions, institutional
investors, and money managers. The Administrator and its affiliates also serve
as administrator or sub-administrator to the following other mutual funds: The
Achievement Funds Trust, The Advisors' Inner Circle Fund, Alpha Select Funds,
The Arbor Fund, ARK Funds, Armada Funds, Bishop Street Funds, Boston 1784
Funds(R), CNI Charter Funds, CrestFunds(R), Inc., CUFUND, The Expedition Funds,
First American Funds, Inc., First American Investment Funds, Inc., First
American Strategy Funds, Inc., HighMark Funds, Huntington Funds, The Nevis Fund,
Inc., Oak Associates Funds, The Parkstone Advantage Fund, The PBHG Funds, Inc.,
PBHG Insurance Series Fund, Inc., The Pillar Funds, SEI Asset Allocation Trust,
SEI Daily Income Trust, SEI Index Funds, SEI Institutional International Trust,
SEI Institutional Investments Trust, SEI Institutional Managed Trust, SEI Liquid
Asset Trust, SEI Tax Exempt Trust, STI Classic Funds, STI Classic Variable
Trust, and UAM Funds, Inc. II.
For the fiscal years ended September 30, 1996, 1997, and 1998, the Funds paid
the following administrative fees (net of waivers):
S-30
<PAGE>
<TABLE>
<CAPTION>
Administrative Fees Paid
----------------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------- ----------------- -------------
Large Cap Fund * $3,057 $ 31,129
Growth Equity Fund $136,587 $110,759 $114,049
Midcap Fund * $9,404 $46,823
Small Cap Fund $68,682 $98,104 $181,597
Micro Cap Fund * * $42,470
Target Select Fund * * $0
Focused Fund * * *
Top 20 Fund * * *
Technology Fund * * *
International Fund * * *
One Year Portfolio Fiscal Year Fiscal Year Ended Fiscal Period
Ended 2/28/97 2/28/98 Ended 9/30/98
$ $802 $510
Three Year Portfolio Fiscal Year Fiscal Year Ended Fiscal Period
Ended 2/28/97 2/28/98 Ended 9/30/98
$ $11,964 $6,418
Fixed Income Fund * * *
</TABLE>
- ---------------
* Not in operation during the period.
DISTRIBUTION AND SHAREHOLDER SERVICES
SEI Investments Distribution Co. (the "Distributor"), a wholly-owned subsidiary
of SEI Investments, and the Trust are parties to a distribution agreement (the
"Distribution Agreement") with respect to shares of the Funds. The Distributor
receives no compensation for distribution of shares of the Funds.
The Distribution Agreement shall remain in effect for a period of two years
after the effective date of the agreement and is renewable annually. The
Distribution Agreement may be terminated by the Distributor, by a majority vote
of the Trustees who are not interested persons and have no financial interest in
the Distribution Agreement or by a majority vote of the outstanding securities
of the Trust upon not more than 60 days' written notice by either party or upon
assignment by the Distributor.
The Short Duration Funds have adopted a shareholder service plan for Adviser
Class shares (the "Adviser Class Service Plan") under which firms, including the
Distributor, that provide shareholder and administrative services may receive
compensation therefore. Under the Adviser Class Service Plan, the Distributor
S-31
<PAGE>
may provide those services itself, or may enter into arrangements under which
third parties provide such services and are compensated by the Distributor.
Under such arrangements, the Distributor may retain as profit any difference
between the fee it receives and the amount it pays such third parties. In
addition, the Funds may enter into such arrangements directly. Under the Adviser
Class Service Plan, the Distributor is entitled to receive a fee at an annual
rate of up to 0.25% of each Fund's average daily net assets attributable to
Adviser Class shares that are subject to the arrangement in return for provision
of a broad range of shareholder and administrative services, including:
maintaining client accounts; arranging for bank wires; responding to client
inquiries concerning services provided for investments; changing dividend
options; account designations and addresses; providing sub-accounting; providing
information on share positions to clients; forwarding shareholder communications
to clients; processing purchase, exchange and redemption orders; and processing
dividend payments.
TRUSTEES AND OFFICERS OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws of the Commonwealth of Massachusetts. The Trustees have approved contracts
under which, as described above, certain companies provide essential management
services to the Trust. The Trustees and executive officers of the Trust and
their principal occupations for the last five years are set forth below. Each
may have held other positions with the named companies during that period. The
Trust pays the fees for unaffiliated Trustees.
The Trustees and Executive Officers of the Trust, their respective dates of
birth, and their principal occupations for the last five years are set forth
below. Each may have held other positions with the named companies during that
period. Unless otherwise noted, the business address of each Trustee and each
Executive Officer is SEI Investments Company, Oaks, Pennsylvania 19456. Certain
officers of the Trust also serve as officers of some or all of the following:
The Achievement Funds Trust, The Advisors' Inner Circle Fund, Alpha Select
Funds, The Arbor Fund, ARK Funds, Armada Funds, Bishop Street Funds, Boston 1784
Funds(R), CNI Charter Funds, CrestFunds(R), Inc., CUFUND, The Expedition Funds,
First American Funds, Inc., First American Investment Funds, Inc., First
American Strategy Funds, Inc., HighMark Funds, Huntington Funds, The Nevis Fund,
Inc., Oak Associates Funds, The Parkstone Advantage Fund, The Parkstone Group of
Funds, The PBHG Funds, Inc., PBHG Insurance Series Fund, Inc., The Pillar Funds,
SEI Asset Allocation Trust, SEI Daily Income Trust, SEI Index Funds, SEI
Institutional International Trust, SEI Institutional Investments Trust, SEI
Institutional Managed Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust, STI
Classic Funds and STI Classic Variable Trust, each of which is an open-end
management investment company managed by SEI Investments Mutual Funds Services
or its affiliates and distributed by SEI Investments Distribution Co.
ROBERT E. TURNER (DOB 11/26/56) - Trustee* - Chairman and Chief Investment
Officer of Turner Investment Partners, Inc. ("Turner"), since 1990.
RICHARD A. HOCKER (DOB 07/21/46) - Trustee* - CEO and Chairman of the Board of
Covenant Bank, 1988-1997. Director of Bedminister Bioconversion Corporation,
since 1988. Chief Investment Officer and Senior Vice President of Penn Capital
Management Co., Inc., since 1987.
S-32
<PAGE>
MICHAEL E. JONES (DOB 12/24/54) - Trustee* - Senior Vice President, Investment
Adviser and Portfolio Manager with Clover Capital Management Inc., since 1984.
Principal of CCM Securities Inc.
ALFRED C. SALVATO (DOB 01/09/58) - Trustee** - Treasurer, Thomas Jefferson
University Health Care Pension Fund, since 1995, and Assistant Treasurer,
1988-1995.
JANET F. SANSONE (DOB 08/11/45) - Trustee** - Corporate Vice President of Human
Resources of Frontier Corporation (telecommunications company), since 1993.
JOHN T. WHOLIHAN (DOB 12/12/37) - Trustee** - Professor, Loyola Marymount
University, since 1984.
STEPHEN J. KNEELEY (DOB 02/09/63) - President and Chief Executive Officer -
Chief Operating Officer of Turner Investment Partners, Inc., since 1990.
JANET RADER ROTE (DOB 08/24/60) - Vice President and Assistant Secretary -
Director of Compliance of Turner Investment Partners, Inc., since 1992.
TODD B. CIPPERMAN (DOB 02/14/66) - Vice President and Assistant Secretary - Vice
President and Assistant Secretary of SEI, the administrator and distributor
since 1995. Associate, Dewey Ballantine, 1994-1995. Associate, Winston and
Strawn, 1991-1994.
KEVIN P. ROBINS (DOB 04/15/61) - Vice President, Assistant Secretary - Senior
Vice President, General Counsel and Assistant Secretary of SEI, Senior Vice
President, General Counsel and Secretary of the Administrator and Distributor
since 1994. Vice President and Assistant Secretary of SEI, the Administrator and
Distributor 1992-1994. Associate, Morgan, Lewis & Bockius LLP, 1988-1992.
ROBERT DELLACROCE (DOB 12/17/63) - Controller and Chief Accounting Officer -
Director, Funds Administration and Accounting of SEI since 1994. Senior Audit
Manager, Arthur Andersen LLP, 1986-1994.
LYDIA A. GAVALIS (DOB 06/05/64) - Vice President and Assistant Secretary - vice
President and Assistant Secretary of the Manager and the Distributor since 1998.
Assistant General Counsel and Director of Arbitration, Philadelphia Stock
Exchange, 1989-1998.
KATHY HEILIG (DOB 12/21/58) - Vice President and Assistant Secretary - Treasurer
of SEI Investments Company since 1997; Assistant Controller of SEI Investment
since 1995; Vice President of SEI Investments Company since 1991.
LYNDA J. STRIEGEL (DOB 10/30/48) - Vice President and Assistant Secretary of the
Manager and the Distributor since 1998. Senior Asset Management counsel, Barnett
Banks, Inc. (1997-1998). Partner, Groom and Nordberg, Chartered, 1996-1997.
Associate General Counsel, Riggs Bank N.A., 1991-1995.
S-33
<PAGE>
JAMES W. JENNINGS (DOB 01/15/37) - Secretary - Partner, Morgan, Lewis & Bockius
LLP, counsel to the Trust, Turner, the Administrator and Distributor.
JOHN H. GRADY, JR. (DOB 06/01/61) - Assistant Secretary - 1701 Market Street,
Philadelphia, Pennsylvania 19103, Partner, Morgan, Lewis & Bockius LLP, Counsel
to the Trust, Turner, the Administrator and the Distributor.
EDWARD B. BAER (DOB 09/27/68) - Assistant Secretary - 1701 Market Street,
Philadelphia, Pennsylvania 19103, Associate, Morgan, Lewis & Bockius LLP,
Counsel to the Trust, Turner, the Administrator and the Distributor, since 1995.
Attorney, Aquila Management Corporation, 1994.
--------------------------
The following table exhibits Trustee compensation for the fiscal year ended
September 30, 1998.
<TABLE>
<CAPTION>
Aggregate Pension or Estimated Total Compensation From
Compensation From Retirement Annual Registrant and Fund
Registrant for the Benefits Accrued Benefits Complex Paid to Trustees
Name of Person, Fiscal Year Ended as Part of Fund Upon for the Fiscal Year
Position September 30, 1998 Expenses Retirement Ended September 30, 1998
--------------- ------------------ ---------------- ---------- ------------------------
<S> <C> <C> <C> <C>
Robert Turner* $0 N/A N/A $0 for service on two
Boards
Richard A. Hocker* $0 N/A N/A $0 for service on one
Board
Michael E. Jones* $0 N/A N/A $0 for service on one
Board
Alfred C. Salvato** $8,000 N/A N/A $12,500 for service on
two Boards
Janet F. Sansone** $8,000 N/A N/A $8,000 for service on
one Board
John T. Wholihan** $10,233.87 N/A N/A $10, 233.87 for service
on one Board
</TABLE>
- -----------------
* Messrs. Robert Turner, Richard Hocker and Michael Jones are Trustees who may
be deemed to be "interested persons" of the Trust as the term is defined in the
1940 Act. The Trust pays fees only to the Trustees who are not interested
persons of the Trust. Compensation of Officers and interested persons of the
Trust is paid by the adviser or the manager.
** Member of the Audit Committee.
The Trustees and Officers of the Trust own less than 1% of the outstanding
shares of the Trust.
COMPUTATION OF YIELD AND TOTAL RETURN
From time to time the Trust may advertise yield and total return of the Funds.
These figures will be based on historical earnings and are not intended to
indicate future performance. No representation can be made concerning actual
future yields or returns. The yield of a Fund refers to the annualized income
generated by an investment in the Fund over a specified 30-day period. The yield
S-34
<PAGE>
is calculated by assuming that the income generated by the investment during
that 30-day period is generated in each period over one year and is shown as a
percentage of the investment. In particular, yield will be calculated according
to the following formula:
Yield = 2[((a-b)/cd + 1)(6) - 1] where a = dividends and interest earned during
the period; b = expenses accrued for the period (net of reimbursement); c = the
current daily number of shares outstanding during the period that were entitled
to receive dividends; and d = the maximum offering price per share on the last
day of the period.
For the 30-day period ended September 30, 1998, the Large Cap, Growth Equity,
Midcap and Small Cap, and Target Select Funds' yields were each 0%. For the
30-day period ended September 30, 1998, the Three Year Portfolio's yield was
5.62%. The Fixed Income Fund was not in operation during this period.
The total return of a Fund refers to the average compounded rate of return to a
hypothetical investment for designated time periods (including but not limited
to, the period from which the Fund commenced operations through the specified
date), assuming that the entire investment is redeemed at the end of each
period. In particular, total return will be calculated according to the
following formula: P (1 + T)(n) = ERV, where P = a hypothetical initial payment
of $1,000; T = average annual total return; n = number of years; and ERV =
ending redeemable value, as of the end of the designated time period, of a
hypothetical $1,000 payment made at the beginning of the designated time period.
For the fiscal year ended September 30, 1998, and for the period from January
31, 1997 (commencement of operations of the Turner Large Cap Growth Equity Fund
of The Advisors' Inner Circle Fund) through September 30, 1998, the total return
for the Large Cap Fund was 17.26% and 24.52%, respectively. For the fiscal year
ended September 30, 1998, and for the period from March 11, 1992 (commencement
of operations of the Turner Growth Equity Fund of The Advisors' Inner Circle
Fund) through September 30, 1998, the total return for the Growth Equity Fund
was 10.71% and 16.52%, respectively. For the fiscal year ended September 30,
1998, and for the period from October 1, 1996 (commencement of operations of the
Turner Midcap Growth Fund of The Advisors' Inner Circle Fund) through September
30, 1998, the total return for the Midcap Fund was 1.24% and 20.66%,
respectively. For the fiscal year ended September 30, 1998 and the period from
February 7, 1994 (commencement of operations of the Turner Small Cap Portfolio
of The Advisors' Inner Circle Fund) through September 30, 1998, the total return
for the Small Cap Fund was -16.90% and 20.56%, respectively. For the period from
February 27, 1998 (commencement of operations for the Turner Micro Cap Growth
Fund) through September 30, 1998, the total return for the Micro Cap Fund was
(1.20)% (cumulative since inception). For the period from December 31, 1997
(commencement of operations of the Turner Target Select Equity Fund) through
September 30, 1998, the total return for the Target Select Fund was 25.45%. For
the fiscal year ended September 30, 1998, and for the period from March 1, 1994
(commencement of operations of the Turner Short Duration Government Funds - One
Year Portfolio) through September 30, 1998, the total return for the One Year
Portfolio was 6.22% and 6.25%, respectively. For the fiscal year ended September
30, 1998, and for the period from March 1, 1994 (commencement of operations of
the Turner Short Duration Government Funds - Three Year Portfolio) through
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<PAGE>
September 30, 1998, the total return for the Three Year Portfolio was 8.07% and
6.72%, respectively. The Focused, Top 20, Technology, International, and Fixed
Income Funds were not in operation during these periods.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions may be made through the DST, 330 West 9th Street,
Kansas City, Missouri 64105, (the "Transfer Agent") on days when the New York
Stock Exchange is open for business. Currently, the weekdays on which the Fund
is closed for business are: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Shares of each Fund are offered on a
continuous basis.
It is currently the Trust's policy to pay all redemptions in cash. The Trust
retains the right, however, to alter this policy to provide for redemptions in
whole or in part by a distribution in-kind of securities held by a Fund in lieu
of cash. Shareholders may incur brokerage charges on the sale of any such
securities so received in payment of redemptions.
The Trust reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period on which trading on
the New York Stock Exchange is restricted, or during the existence of an
emergency (as determined by the SEC by rule or regulation) as a result of which
disposal or valuation of a Fund's securities is not reasonably practicable, or
for such other periods as the SEC has by order permitted. The Trust also
reserves the right to suspend sales of shares of any Fund for any period during
which the New York Stock Exchange, the Adviser, the Administrator, the Transfer
Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
The securities of each Fund are valued by the Administrator. The Administrator
may use an independent pricing service to obtain valuations of securities. The
pricing service relies primarily on prices of actual market transactions as well
as on trade quotations obtained from third parties. However, the pricing service
may use a matrix system to determine valuations of fixed income securities. This
system considers such factors as security prices, yields, maturities, call
features, ratings and developments relating to specific securities in arriving
at valuations. The procedures used by the pricing service and its valuation are
reviewed by the officers of the Trust under the general supervision of the
Trustees.
If there is no readily ascertainable market value for a security, the
Administrator will make a good faith determination as to the "fair value" of the
security.
Some Funds may hold portfolio securities that are listed on foreign exchanges.
These securities may trade on weekends or other days when the Funds do not
calculate NAV. As a result, the value of these investments may change on days
when you cannot purchase or sell Fund shares.
Securities with remaining maturities of 60 days or less will be valued by the
amortized cost method, which involves valuing a security at its cost on the date
of purchase and thereafter (absent unusual circumstances) assuming a constant
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<PAGE>
amortization of maturity of any discount or premium, regardless of the impact of
fluctuations in general market rates of interest on the value of the instrument.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by this method, is higher or lower than the
price the Trust would receive if it sold the instrument.
TAXES
The following is only a summary of certain tax considerations generally
affecting the Funds and their shareholders, and is not intended as a substitute
for careful tax planning. Shareholders are urged to consult their tax advisors
with specific reference to their own tax situations, including their state and
local tax liabilities.
S-37
<PAGE>
FEDERAL INCOME TAX
The following is only a summary of certain additional federal tax considerations
generally affecting the Funds and their shareholders that are not discussed in
the Funds' Prospectus. No attempt is made to present a detailed explanation of
the federal, state or local tax treatment of the Funds or their shareholders and
the discussion here and in the Funds' Prospectus is not intended as a substitute
for careful tax planning.
The discussion of federal income tax consequences is based on the Internal
Revenue Code of 1986 (the "Code") and the regulations issued thereunder as in
effect on the date of this Statement of Additional Information. New legislation,
as well as administrative changes or court decisions, may significantly change
the conclusions expressed herein, and may have a retroactive effect with respect
to the transactions contemplated herein.
Each Fund intends to qualify as a "regulated investment company" ("RIC") as
defined under Subchapter M of the Code. By following such a policy, each Fund
expects to eliminate or reduce to a nominal amount the federal taxes to which it
may be subject.
In order to qualify for treatment as a RIC under the Code, each Fund must
distribute annually to its shareholders at least the sum of 90% of its net
interest income excludable from gross income plus 90% of its investment company
taxable income (generally, net investment income plus net short-term capital
gain) ("Distribution Requirement") and also must meet several additional
requirements. Among these requirements are the following: (i) at least 90% of
the Fund's gross income each taxable year must be derived from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock or securities, or certain other income (including
gains from options, futures or forward contracts); (ii) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. Government securities,
securities of other RICs and other securities, with such other securities
limited, in respect to any one issuer, to an amount that does not exceed 5% of
the value of the Fund's assets and that does not represent more than 10% of the
outstanding voting securities of such issuer; and (iii) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its assets
may be invested in securities (other than U.S. Government securities or the
securities of other RICs) of any one issuer, or of two or more issuers which are
engaged in the same, similar or related trades or business if the Fund owns at
least 20% of the voting power of such issuer.
Notwithstanding the Distribution Requirement described above, which requires
only that the Fund distribute at least 90% of its annual investment company
taxable income and does not require any minimum distribution of net capital gain
(the excess of net long-term capital gain over net short-term capital loss), the
Funds will be subject to a nondeductible 4% federal excise tax to the extent it
fails to distribute by the end of any calendar year 98% of its ordinary income
for that year and 98% of its capital gain net income (the excess of short- and
long-term capital gains over short- and long-term capital losses) for the
one-year period ending on October 31 of that year, plus certain other amounts.
Each Fund intends to make sufficient distributions to avoid liability for the
federal excise tax. A Fund may in certain circumstances be required to liquidate
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<PAGE>
Fund investments in order to make sufficient distributions to avoid federal
excise tax liability at a time when the investment advisor might not otherwise
have chosen to do so, and liquidation of investments in such circumstances may
affect the ability of a Fund to satisfy the requirements for qualification as a
RIC.
Any gain or loss recognized on a sale, exchange or redemption of shares of a
Fund by a shareholder who is not a dealer in securities will generally, for
individual shareholders, be treated as a long-term capital gain or loss if the
shares have been held for more than twelve months, and otherwise will be treated
as short-term capital gain or loss. However, if shares on which a shareholder
has received a net capital gain distribution are subsequently sold, exchanged or
redeemed and such shares have been held for six months or less, any loss
recognized will be treated as a long-term capital loss to the extent of the net
capital gain distribution. Long-term capital gains are currently taxed at a
maximum rate of 20% and short-term capital gains are currently taxed at ordinary
income tax rates.
In certain cases, a Fund will be required to withhold, and remit to the United
States Treasury, 31% of any distributions paid to a shareholder who (1) has
failed to provide a correct taxpayer identification number, (2) is subject to
backup withholding by the Internal Revenue Service, or (3) has not certified to
that Fund that such shareholder is not subject to backup withholding.
If any Fund fails to qualify as a RIC for any taxable year, it will be taxable
at regular corporate rates. In such an event, all distributions (including
capital gains distributions) will be taxable as ordinary dividends to the extent
of the Fund's current and accumulated earnings and profits, and such
distributions may generally be eligible for the corporate dividends-received
deduction.
Funds may, in certain circumstances involving tax-free reorganizations, accept
securities that are appropriate investments as payment for Fund shares (an
"In-Kind Purchase"). An In-Kind Purchase may result in adverse tax consequences
under certain circumstances to either the investors transferring securities for
shares (an "In-Kind Investors") or to investors who acquire shares of the Fund
after a transfer ("new shareholders"). As a result of an In-Kind Purchase, the
Funds may acquire securities that have appreciated in value or depreciated in
value from the date they were acquired. If appreciated securities were to be
sold after an In-Kind Purchase, the amount of the gain would be taxable to new
shareholders as well as to In-Kind Investors. The effect of this for new
shareholders would be to tax them on a distribution that represents a return of
the purchase price of their shares rather than an increase in the value of their
investment. The effect on In-Kind Investors would be to reduce their potential
liability for tax on capital gains by spreading it over a larger asset base. The
opposite may occur if the Funds acquire securities having an unrealized capital
loss. In that case, In-Kind Investors will be unable to utilize the loss to
offset gains, but, because an In-Kind Purchase will not result in any gains, the
inability of In-Kind Investors to utilize unrealized losses will have no
immediate tax effect. For new shareholders, to the extent that unrealized losses
are realized by the Funds, new shareholders may benefit by any reduction in net
tax liability attributable to the losses. The Adviser cannot predict whether
securities acquired in any In-Kind Purchase will have unrealized gains or losses
on the date of the In-Kind Purchase. Consistent with its duties as investment
adviser, the Adviser will, however, take tax consequences to investors into
account when making decisions to sell portfolio assets, including the impact of
realized capital gains on shareholders of the Funds.
S-39
<PAGE>
The Funds may use a tax management technique known as "highest in, first out."
Using this technique, the portfolio holdings that have experienced the smallest
gain or largest loss are sold first in an effort to minimize capital gains and
enhance after-tax returns.
STATE TAXES
No Fund is liable for any income or franchise tax in Massachusetts if it
qualifies as a RIC for federal income tax purposes. Distributions by any Fund to
shareholders and the ownership of shares may be subject to state and local
taxes.
PORTFOLIO TRANSACTIONS
The Adviser is authorized to select brokers and dealers to effect securities
transactions for the Funds. The Adviser will seek to obtain the most favorable
net results by taking into account various factors, including price, commission,
if any, size of the transactions and difficulty of executions, the firm's
general execution and operational facilities and the firm's risk in positioning
the securities involved. While the Adviser generally seeks reasonably
competitive spreads or commissions, a Fund will not necessarily be paying the
lowest spread or commission available. The Adviser seeks to select brokers or
dealers that offer a Fund best price and execution or other services which are
of benefit to the Fund.
The Adviser may, consistent with the interests of the Funds, select brokers on
the basis of the research services they provide to the Adviser. Such services
may include analyses of the business or prospects of a company, industry or
economic sector, or statistical and pricing services. Information so received by
the Adviser will be in addition to and not in lieu of the services required to
be performed by the Adviser under the Advisory Agreement. If, in the judgment of
the Adviser, a Fund or other accounts managed by the Adviser will be benefitted
by supplemental research services, the Adviser is authorized to pay brokerage
commissions to a broker furnishing such services which are in excess of
commissions which another broker may have charged for effecting the same
transaction. These research services include advice, either directly or through
publications or writings, as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities; furnishing of analyses and
reports concerning issuers, securities or industries; providing information on
economic factors and trends; assisting in determining portfolio strategy;
providing computer software used in security analyses; and providing portfolio
performance evaluation and technical market analyses. The expenses of the
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information, such services may not be used exclusively, or at all,
with respect to a Fund or account generating the brokerage, and there can be no
guarantee that the Adviser will find all of such services of value in advising
that Fund.
It is expected that the Funds may execute brokerage or other agency transactions
through the Distributor, which is a registered broker-dealer, for a commission
in conformity with the 1940 Act, the Securities Exchange Act of 1934 and rules
promulgated by the SEC. Under these provisions, the Distributor is permitted to
receive and retain compensation for effecting portfolio transactions for a Fund
on an exchange if a written contract is in effect between the Trust and the
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<PAGE>
Distributor expressly permitting the Distributor to receive and retain such
compensation. These rules further require that commissions paid to the
Distributor by a Fund for exchange transactions not exceed "usual and customary"
brokerage commissions. The rules define "usual and customary" commissions to
include amounts which are "reasonable and fair compared to the commission, fee
or other remuneration received or to be received by other brokers in connection
with comparable transactions involving similar securities being purchased or
sold on a securities exchange during a comparable period of time." The Trustees,
including those who are not "interested persons" of the Trust, have adopted
procedures for evaluating the reasonableness of commissions paid to the
Distributor and will review these procedures periodically.
Because no Fund markets its shares through intermediary brokers or dealers, it
is not the Funds' practice to allocate brokerage or principal business on the
basis of sales of its shares which may be made through such firms. However, the
Adviser may place portfolio orders with qualified broker-dealers who recommend a
Fund's shares to clients, and may, when a number of brokers and dealers can
provide best net results on a particular transaction, consider such
recommendations by a broker or dealer in selecting among broker-dealers.
For the fiscal years ended September 30, 1996, 1997, and 1998, the Funds'
portfolio turnover rates were as follows:
<TABLE>
Portfolio Turnover Rate
------------------------------------------------------------------------------
1996 1997 1998
------------------------- ------------------- ---------------------
<S> <C> <C> <C>
Large Cap Fund * 346.47% 234.93%
Growth Equity Fund 147.79% 178.21% 249.58%
Midcap Fund * 348.29% 304.29%
Small Cap Fund 149.00% 130.68% 167.73%
Micro Cap Fund * * 128.53%
Target Select Fund * * 803.02%
International Fund * * *
Focused Fund * * *
Top 20 Fund * * *
Technology Fund * * *
One Year Portfolio For the Fiscal Year Ended For the Fiscal Year For the Fiscal Period
2/28/97 Ended 2/28/98 Ended 9/30/98
81.82% 68.80% 96.56%
Three Year Portfolio For the Fiscal Year Ended For the Fiscal Year For the Fiscal Period
2/28/97 Ended 2/28/98 Ended 9/30/98
279.00% 197.03% 121.63%
Fixed Income Fund * * *
</TABLE>
- ---------------
* Not in operation during the period.
Amounts designated as "--" are either $0 or have been rounded to $0.
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<PAGE>
The brokerage commissions paid for each Fund for the fiscal years ended
September 30, 1996, 1997, and 1998 were as follows:
<TABLE>
<CAPTION>
Total Dollar Amount of Brokerage Commissions Paid
-------------------------------------------------
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Large Cap Fund * $2,586 $10,622
Growth Equity Fund $369,573 $335,291 $464,404
Midcap Fund * $17,029 $123,834
Small Cap Fund $128,154 $235,029 $465,825
Micro Cap Fund * * $6,974
Target Select Fund * * $13,856
Focused Fund * * *
Top 20 Fund * * *
Technology Fund * * *
International Fund * * *
One Year Portfolio N/A N/A N/A
Three Year Portfolio N/A N/A N/A
Fixed Income Fund * * *
</TABLE>
- -------------------
*Not in operation during the period.
The total amount of securities of each Broker/Dealer held by each Fund for the
fiscal year ended September 30, 1998 were as follows:
<TABLE>
<CAPTION>
Total Amount of
Name of Securities Held by Each
Fund Broker/Dealer Fund Type of Security
- ---- -------------- ----------------------- --------------------
<S> <C> <C> <C>
Large Cap Fund Morgan Stanley $ 243,000 Repurchase Agreement
Growth Fund Morgan Stanley $ 1,411,000 Repurchase Agreement
Midcap Fund Morgan Stanley $ 1,246,000 Repurchase Agreement
Small Cap Fund J. P. Morgan $ 5,612,000 Repurchase Agreement
Micro Cap Fund Morgan Stanley $ 114,765 Repurchase Agreement
</TABLE>
S-42
<PAGE>
VOTING
Each share held entitles the shareholder of record to one vote for each dollar
invested. In other words, each shareholder of record is entitled to one vote for
each dollar of net asset value of the shares held on the record date for the
meeting. Shares issued by each Fund have no preemptive, conversion, or
subscription rights. Each whole share shall be entitled to one vote and each
fractional share shall be entitled to a proportionate fractional vote. Each
Fund, as a separate series of the Trust, votes separately on matters affecting
only that Fund. Voting rights are not cumulative. Shareholders of each Class of
each Fund will vote separately on matters pertaining solely to that Fund or that
Class. As a Massachusetts business trust, the Trust is not required to hold
annual meetings of shareholders, but approval will be sought for certain changes
in the operation of the Trust and for the election of Trustees under certain
circumstances.
In addition, a Trustee may be removed by the remaining Trustees or by
shareholders at a special meeting called upon written request of shareholders
owning at least 10% of the outstanding shares of the Trust. In the event that
such a meeting is requested, the Trust will provide appropriate assistance and
information to the shareholders requesting the meeting.
Where the Trust's Prospectuses or Statements of Additional Information state
that an investment limitation or a fundamental policy may not be changed without
shareholder approval, such approval means the vote of (i) 67% or more of the
affected Fund's shares present at a meeting if the holders of more than 50% of
the outstanding shares of the Fund are present or represented by proxy, or (ii)
more than 50% of the affected Fund's outstanding shares, whichever is less.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
portfolios and shares of each portfolio. Each share of a portfolio represents an
equal proportionate interest in that portfolio with each other share. Shares are
entitled upon liquidation to a pro rata share in the net assets of the
portfolio, after taking into account additional distribution and shareholder
servicing expenses attributable to the Adviser Class Shares. Shareholders have
no preemptive rights. The Declaration of Trust provides that the Trustees of the
Trust may create additional series of shares or separate classes of funds. All
consideration received by the Trust for shares of any portfolio or separate
class and all assets in which such consideration is invested would belong to
that portfolio or separate class and would be subject to the liabilities related
thereto. Share certificates representing shares will not be issued.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust could, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. Even if, however, the Trust were held to be a partnership, the
possibility of the shareholders' incurring financial loss for that reason
appears remote because the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for obligations of the Trust, and requires
that notice of such disclaimer be given in each agreement, obligation or
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<PAGE>
instrument entered into or executed by or on behalf of the Trust or the
Trustees, and because the Declaration of Trust provides for indemnification out
of the Trust property for any shareholder held personally liable for the
obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his
own willful defaults and, if reasonable care has been exercised in the selection
of officers, agents, employees or investment advisers, shall not be liable for
any neglect or wrongdoing of any such person. The Declaration of Trust also
provides that the Trust will indemnify its Trustees and officers against
liabilities and expenses incurred in connection with actual or threatened
litigation in which they may be involved because of their offices with the Trust
unless it is determined in the manner provided in the Declaration of Trust that
they have not acted in good faith in the reasonable belief that their actions
were in the best interests of the Trust. However, nothing in the Declaration of
Trust shall protect or indemnify a Trustee against any liability for his willful
misfeasance, bad faith, gross negligence or reckless disregard of his duties.
5% SHAREHOLDERS
As of January 5, 1999, the following persons were the only persons who were
record owners (or to the knowledge of the Trust, beneficial owners) of 5% or
more of the shares of the Portfolios. The Trust believes that most of the shares
referred to below were held by the persons indicated in accounts for their
fiduciary, agency, or custodial customers.
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES FUND'S SHARES
---- ------------------------------------ ---------------- -------------
<S> <C> <C> <C>
Turner Large Cap Growth Equity Charles Schwab & Co. Inc. 247,398.5700 67.26%
Fund Attn: Mutual Funds/Team S
4500 Cherry Creek Dr. S Fl 3
Denver, CO 80209
Turner Growth Equity Fund Starr Commonwealth 607,210.1730 7.09%
13725 Starr Commonwealth Rd.
Albion, MI 49224-9580
Saxon & Co. TTEE 498,422.5920 5.82%
FBO C/F
Duane Morrise & Hecke LLP
A/C# 20-35-002-1029077
P.O. Box 7780-1888
Philadelphia, PA 19182-0001
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Retirement Plan for Employees of 768,167.7060 8.96%
Bridgeport Hospital
C/O People's Bank Trust Dept.
850 Main Street 13th Fl
Bridgeport, CT 06604-4917
Saul & Co. 2,506,871.7060 29.25%
FBO Sheet Metal Annuity
C/O First Union National Bank
A/C 1546000537
1525 W. WT Harris Blvd. #1151
Charlotte, NC 28262-8522
Charles Schwab & Co. Inc. 493,306.2980 5.76%
Attn: Mutual Funds/Team S
4500 Cherry Creek Dr. S Fl 3
Denver, CO 80209
Citicorp USA Inc. Pledgee 822,376.2690 9.60%
McNeil Children's Trust
Loan Collateral Account
C/O Carole McNeil
P.O. Box 803598
Dallas, TX 75380-3598
Turner Midcap Growth Fund Charles Schwab & Co. Inc. 594,501.3600 30.29%
Attn: Mutual Funds/Team S
4500 Cherry Creek Dr. S Fl. 3
Denver, CO 80209
Sheet Metal Workers Local #19 224,808.6650 11.45%
Supplemental Unemployment
Benefit Fund
1301 S Columbus Blvd.
Philadelphia, PA 19147-5505
Concord Trust Company 166,719.7830 8.49%
1601 Elm St. Ste 1725
Dallas, TX 75201-7254
Turner Small Cap Growth Fund Donaldson Lufkin Jenrette 392,195.2570 5.56%
SECS Corp.
Pershing Division
P.O. Box 2052
Jersey City, NJ 07399
Charles Schwab & Co. Inc. 3,667,318.2940 52.00%
Attn: Mutual Funds/Team S
4500 Cherry Creek Dr. S Fl. 3
Denver, CO 80209
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Turner Micro Cap Growth Charles Schwab & Co. Inc. 79,930.5400 23.20%
Attn: Mutual Funds/Team S
4500 Cherry Creek Dr. S Fl 3
Denver, CO 80209
Robert E. Turner 20,530.3850 5.96%
Carolyn W. Turner JTWROS
9 Horseshoe Ln
Paoli, PA 19301-1909
Carolyn Turner TR 20,000.0000 5.80%
Robert E. Turner Jr. Trust
9 Horseshoe Ln.
Paoli, PA 19301-1909
John C. Weber Jr. TR 50,001.2550 14.51%
John C. Weber Trust
8000 N. MacArthur Blvd.,
Apt. 2024
Irving, TX 75063-4101
Christina Weber TR 50,000.0000 14.51%
Christina Weber Trust
DTD 00/00/00
117 W. 12th St.
New York, NY 10011-8200
Chester C. Weber TR 47,214.3530 13.70%
U/A 7/30/1993
Chester C. Weber Trust
P.O. Box 2108
Ocala, FL 34478-2108
Turner Target Select Equity Charles Schwab & Co. Inc. 12,521.5620 13.68%
Fund Attn: Mutual Funds/Team S
4500 Cherry Creek Dr. S Fl 3
Denver, CO 80209
Boyd L. Newsom 4,826.0050 5.27%
2912 Golfing Green Dr.
Dallas, TX 75234-4938
Carolyn Turner TR 32,999.3990 19.09%
U/A
Robert E. Turner Jr., Trust
9 Horseshoe Ln.
Paoli, PA 19301-1909
</TABLE>
S-46
<PAGE>
<TABLE>
<S> <C> <C> <C>
Robert & Carolyn Turner Foundation 17,466.3990 19.09%
9 Horseshoe Ln.
Paoli, PA 19302-1909
Turner Short Duration Solon Asset Management Corp. 14,876.8240 25.08%
Government Funds - One Year 1981 N. Broadway, Ste. 325
Portfolio Walnut Creek, CA 95496-3873
James I. Midanek 3,320.4430 5.60%
375 La Casa Via
Walnut Creek, CA 94598-4842
Charles Schwab & Co. Inc. 37,633.3430 63.45%
Attn: Mutual Funds/Team S
4500 Cherry Creek Dr. S Fl. 3
Denver, CO 80209
Turner Short Duration DonaldsonBryn Mawr 814,837.0940 74.07%
Government Funds-Three Year Attn: Jerry Berenson
Portfolio 101 N. Merion Ave.
Bryn Mawr, PA 19010-2899
Charles Schwab & Co. Inc. 200,202.3260 18.20%
101 Montgomery St.
San Francisco, CA 94104-4122
</TABLE>
CUSTODIAN
First Union National Bank, Broad and Chestnut Streets, P.O. Box 7618,
Philadelphia, Pennsylvania 19101 acts as the custodian (the "Custodian") of the
Trust. The Custodian holds cash, securities and other assets of the Trust as
required by the Investment Company Act of 1940, as amended (the "1940 Act").
EXPERTS
The financial statements incorporated by reference into this Statement of
Additional Information and the Financial Highlights included in the prospectuses
have been audited by Ernst & Young LLP, 2001 Market Street, Philadelphia,
Pennsylvania 19103, independent public accountants, as indicated by their
report, with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
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LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, Pennsylvania
19103, serves as counsel to the Trust.
FINANCIAL STATEMENTS
The Trust's financial statements for the fiscal year ended September 30, 1998,
including notes thereto and the report of Ernst & Young LLP thereon, are herein
incorporated by reference. A copy of the 1998 Annual Report must accompany the
delivery of this Statement of Additional Information.
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APPENDIX
The following descriptions are summaries of published ratings.
DESCRIPTION OF CORPORATE BOND RATINGS
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a
rating indicates an extremely strong capacity to pay principal and interest.
Bonds rated AA by S&P also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and differs from AAA issues only in
small degree. Debt rated A by S&P has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher rated
categories.
Bonds rated BBB by S&P 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.
Bonds rated Aaa by Moody's 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 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. Bonds rated Aa by Moody's are
judged by Moody's to be of high quality by all standards. Together with bonds
rated Aaa, 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 in Aaa securities.
Bonds rated A by Moody's 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 sometime in the future. Debt rated
Baa by Moody's is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Fitch uses plus and minus signs with a rating symbol to indicate the relative
position of a credit within the rating category. Plus and minus signs, however,
are not used in the AAA category. Bonds rated AAA by Fitch are considered to be
investment grade and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events. Bonds rated AA by
Fitch are considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+. Bonds rated A by Fitch
are considered to be investment grade and of high credit quality. The obligor's
ability to pay interest and repay principal is considered to be strong, but may
be more vulnerable to adverse changes in economic conditions and circumstances
than bonds with higher ratings. Bonds rated BBB by Fitch are considered to be
investment grade and of satisfactory credit quality. The obligor's ability to
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pay interest and repay principal is considered to be adequate. Adverse changes
in economic conditions and circumstances, however, are more likely to have
adverse impact on these bonds, and therefore impair timely payment. The
likelihood that the ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
Bonds rated AAA by Duff are judged by Duff to be of the highest credit quality,
with negligible risk factors being only slightly more than for risk-free U.S.
Treasury debt. Bonds rated AA by Duff are judged by Duff to be of high credit
quality with strong protection factors and risk that is modest but that may vary
slightly from time to time because of economic conditions. Bonds rated A by Duff
are judged by Duff to have average but adequate protection factors. However,
risk factors are more variable and greater in periods of economic stress. Bonds
rated BBB by Duff are judged by Duff as having below average protection factors
but still considered sufficient for prudent investment, with considerable
variability in risk during economic cycles.
Obligations rated AAA by IBCA have the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial, such
that adverse changes in business, economic or financial conditions are unlikely
to increase investment risk significantly. Obligations for which there is a very
low expectation of investment risk are rated AA by IBCA. Capacity for timely
repayment of principal and interest is substantial. Adverse changes in business,
economic or financial conditions may increase investment risk albeit not very
significantly. Obligations for which there is a low expectation on investment
risk are rated A by IBCA. Capacity for timely repayment of principal and
interest is strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk. Obligations for which there is
currently a low expectation of investment risk are rated BBB by IBCA. Capacity
for timely repayment of principal and interest is adequate, although adverse
changes in business, economic or financial conditions are more likely to lead to
increased investment risk than for obligations in higher categories.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Commercial paper rated A by Standard & Poor's Corporation ("S&P") is regarded by
S&P as having the greatest capacity for timely payment. Issues rated A are
further refined by use of the numbers 1, 1 +, and 2 to indicate the relative
degree of safety. Issues rated A-1+ are those with an "overwhelming degree" of
credit protection. Those rated A-1, the highest rating category, reflect a "very
strong" degree of safety regarding timely payment. Those rated A-2, the second
highest rating category, reflect a satisfactory degree of safety regarding
timely payment but not as high as A-1.
Commercial paper issues rated Prime-1 or Prime-2 by Moody's Investors Service,
Inc. ("Moody's") are judged by Moody's to be of "superior" quality and "strong"
quality respectively on the basis of relative repayment capacity.
F-1+ (Exceptionally Strong) is the highest commercial paper rating Fitch
assigns; paper rated F-1+ is regarded as having the strongest degree of
assurance for timely payment. Paper rated F-1 (Very Strong) reflects an
assurance of timely payment only slightly less in degree than paper rated F-1+.
The rating F-2 (Good) reflects a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues rated F-1+ or
F-1.
The rating Duff-1 is the highest commercial paper rating assigned by Duff. Paper
rated Duff-1 is regarded as having very high certainty of timely payment with
excellent liquidity factors which are supported by good fundamental protection
factors. Risk factors are minor. Duff has incorporated gradations of 1+ and 1-
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to assist investors in recognizing quality differences within this highest tier.
Paper rated Duff-1+ has the highest certainty of timely payment, with
outstanding short-term liquidity and safety just below risk-free U.S. Treasury
short-term obligations. Paper rated Duff-1- has high certainty of timely payment
with strong liquidity factors which are supported by good fundamental protection
factors. Risk factors are very small. Paper rated Duff-2 is regarded as having
good certainty of timely payment, good access to capital markets (although
ongoing funding may enlarge total financing requirements) and sound liquidity
factors and company fundamentals. Risk factors are small.
The designation A1, the highest rating by IBCA, indicates that the obligation is
supported by a strong capacity for timely repayment. Those obligations rated A1+
are supported by the highest capacity for timely repayment. Obligations rated
A2, the second highest rating, are supported by a satisfactory capacity for
timely repayment, although such capacity may be susceptible to adverse changes
in business, economic or financial conditions.
A-3
