REPUBLIC
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FIXED INCOME
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FUND
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PROSPECTUS
AUGUST 1, 1996
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REPUBLIC FIXED INCOME FUND
SIX ST. JAMES AVENUE, BOSTON, MASSACHUSETTS 02116
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ACCOUNT AND GENERAL INFORMATION: (800) 782-8183 (TOLL FREE)
Republic Fixed Income Fund (the "Fund") is a diversified series of Republic
Advisor Funds Trust (the "Trust"), an open-end management investment company
which currently consists of three funds, each of which has different and
distinct investment objectives and policies. Only shares of the Fund are being
offered by this Prospectus. Shares of the Fund are offered primarily to
clients of Republic National Bank of New York ("Republic" or the "Manager")
and its affiliates for which Republic or its affiliates exercise investment
discretion. Republic is the investment manager of the Portfolio. Miller
Anderson & Sherrerd ("MAS" or the "Sub-Adviser") continuously manages the
investments of the Portfolio.
UNLIKE OTHER OPEN-END MANAGEMENT INVESTMENT COMPANIES (MUTUAL FUNDS) WHICH
DIRECTLY ACQUIRE AND MANAGE THEIR OWN PORTFOLIO OF SECURITIES, THE TRUST SEEKS
TO ACHIEVE THE INVESTMENT OBJECTIVE OF THE FUND BY INVESTING ALL OF THE FUND'S
INVESTABLE ASSETS ("ASSETS") IN FIXED INCOME PORTFOLIO (THE "PORTFOLIO"),
WHICH HAS THE SAME INVESTMENT OBJECTIVE AS THE FUND. THE INVESTMENT EXPERIENCE
OF THE FUND WILL CORRESPOND DIRECTLY WITH THE INVESTMENT EXPERIENCE OF THE
PORTFOLIO. THE PORTFOLIO IS A DIVERSIFIED SERIES OF REPUBLIC PORTFOLIOS, WHICH
IS AN OPEN-END MANAGEMENT INVESTMENT COMPANY. SEE "SPECIAL INFORMATION
CONCERNING THE TWO-TIER FUND STRUCTURE".
The investment objective of the Fund is to seek to realize above-average
total return over a market cycle of three to five years, consistent with
reasonable risk, through investment primarily in a diversified portfolio of
U.S. Government securities, corporate bonds, mortgage-backed securities and
other fixed-income securities. The Portfolio's average weighted maturity will
ordinarily exceed five years.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, REPUBLIC OR ANY OTHER BANK, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY. AN INVESTMENT IN THE FUND IS SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
Shares of the Fund are continuously offered for sale at net asset value with
no sales charge by Signature Broker-Dealer Services, Inc. ("SBDS" or the
"Distributor" or the "Sponsor") to customers of a financial institution, such
as a federal or state-chartered bank, trust company or savings and loan
association, that has entered into a shareholder servicing agreement with the
Trust (each a "Shareholder Servicing Agent"). At present, the only Shareholder
Servicing Agents are Republic and its affiliates.
AN INVESTOR SHOULD OBTAIN FROM HIS SHAREHOLDER SERVICING AGENT, AND SHOULD
READ IN CONJUNCTION WITH THIS PROSPECTUS, THE MATERIALS PROVIDED BY THE
SHAREHOLDER SERVICING AGENT DESCRIBING THE PROCEDURES UNDER WHICH SHARES OF
THE FUND MAY BE PURCHASED AND REDEEMED THROUGH SUCH SHAREHOLDER SERVICING
AGENT.
This Prospectus sets forth concisely the information concerning the Fund
that a prospective investor should know before investing. The Trust has filed
with the Securities and Exchange Commission a Statement of Additional
Information, dated August 1, 1996, with respect to the Fund, containing
additional and more detailed information about the Fund, which is hereby
incorporated by reference into this Prospectus. An investor may obtain a copy
of the Statement of Additional Information without charge by contacting the
Fund at the address and telephone number printed above.
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Investors should read this Prospectus and retain it for future reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS AUGUST 1, 1996
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HIGHLIGHTS
THE FUND Page 1
Republic Fixed Income Fund (the "Fund") is a separate series of Republic
Advisor Funds Trust (the "Trust"), a Massachusetts business trust organized on
April 5, 1996, which currently consists of three funds, each of which has
different and distinct investment objectives and policies. The Fund is the
successor to Republic Fixed Income Fund, a series of Republic Funds (the
"Predecessor Fund") which commenced investment operations on January 9, 1995.
The Fund assumed all of the assets and liabilities of the Predecessor Fund in a
reorganization effective July 31, 1996.
INVESTMENT OBJECTIVE, RISKS AND POLICIES Pages 7 and 10
The investment objective of the Fund is to seek to realize above-average total
return over a market cycle of three to five years, consistent with reasonable
risk, through investment primarily in a diversified portfolio of U.S. Government
securities, corporate bonds, mortgage-backed securities and other fixed-income
securities. The Trust seeks to achieve the investment objective of the Fund by
investing all of the Fund's Assets in Fixed Income Portfolio (the "Portfolio"),
which has the same investment objective as the Fund. The Portfolio is a series
of Republic Portfolios (the "Portfolio Trust"), a master trust fund established
under the law of the State of New York and organized on November 1, 1994. The
Portfolio's average weighted maturity will ordinarily exceed five years. There
can be no assurance that the investment objective of the Fund or the Portfolio
will be achieved.
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST Page 25
Republic acts as investment manager to the Portfolio pursuant to an Investment
Management Contract with the Portfolio Trust. For its services, the Manager is
entitled to receive from the Portfolio a fee at the annual rate of 0.20% of the
Portfolio's average daily net assets. The Manager is currently waiving this fee.
MAS continuously manages the investment portfolio of the Portfolio pursuant
to a Sub-Advisory Agreement with the Manager. For its services, the Sub-
Adviser is paid a fee by the Portfolio, computed daily and based on the
Portfolio's average daily net assets, equal on an annual basis to 0.375% on
net assets up to $50 million, 0.25% on net assets over $50 million and up to
$95 million, $300,000 on net assets over $95 million and up to $150 million,
0.20% on net assets over $150 million and up to $250 million, and 0.15% on net
assets over $250 million. See "Management of the Trust and the Portfolio
Trust."
SBDS acts as sponsor and as administrator of the Fund (the "Fund
Administrator") and distributor of shares of the Fund. For its services to the
Fund, the Fund Administrator receives from the Fund a fee payable monthly equal
on an annual basis to 0.05% of the Fund's average daily net assets up to $100
million. Signature Financial Group (Cayman) Limited ("Signature (Cayman)") acts
as administrator of the Portfolio (the "Portfolio Administrator"). For its
services to the Portfolio, the Portfolio Administrator receives from the
Portfolio a fee payable monthly equal on an annual basis to 0.05% of the average
daily net assets of the Portfolio.
PURCHASES AND REDEMPTIONS Pages 30 and 32
Shares of the Fund are continuously offered for sale by the
Distributor at net asset value with no sales charge to customers of a
financial institution such as a federal or state-chartered bank, trust company
or savings and loan association, that has entered into a shareholder servicing
agreement with the Trust (each a "Shareholder Servicing Agent"). At present,
the only Shareholder Servicing Agents are Republic and its affiliates. The
minimum initial investment is $1,000 and the minimum subsequent investment is
$100. The Fund may accept initial and subsequent investments of lesser amounts
in its discretion. No minimum is imposed on reinvested dividends. Shares may
be redeemed without cost at the net asset value per Share next determined
after receipt of the redemption request. See "Purchase of Shares" and
"Redemption of Shares".
DIVIDENDS AND DISTRIBUTIONS Page 32
The Trust declares all of the Fund's net investment income daily as a dividend
to Fund shareholders and distributes all such dividends monthly. Any net
realized capital gains are distributed at least annually. All Fund distributions
will be invested in additional Fund shares, unless the shareholder instructs the
Fund otherwise. See "Dividends and Distributions."
FEE TABLE
The following table summarizes an investor's maximum transaction costs from
investing in Fund shares and the estimated aggregate annual operating expenses
of the Fund and the Portfolio as a percentage of the average daily net assets
of the Fund. The fiscal year ends of the Fund and the Portfolio are both
October 31. The example illustrates the dollar cost of such estimated expenses
on a $1,000 investment in Fund shares. The Trustees of the Trust believe that
the aggregate per share expenses of the Fund and the Portfolio will be less
than or approximately equal to the expenses which the Fund would incur if the
Trust retained the services of an investment adviser on behalf of the Fund and
the Assets of the Fund were invested directly in the type of securities being
held by the Portfolio.
Shareholder Transaction Expenses ............................. None
Annual Fund Operating Expenses
Investment Advisory Fee after waiver* .................... 0.33%
Other Expenses ........................................... 0.50%
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-- Administrative Services Fee ..................... 0.10%
-- Other Operating Expenses ........................ 0.40%
Total Operating Expenses after waiver** ...................... 0.83%
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*Reflects a waiver of the investment management fee payable to Republic and
an investment sub-advisory fee payable to MAS equal on an annual basis to
0.33% of the Fund's average daily net assets. Without such waiver, the
Investment Advisory Fee would be equal on an annual basis to 0.53% of the
Fund's average net assets. See "Management of the Trust and the Portfolio
Trust".
**Total Operating Expenses are shown net of investment management fee
waiver. Without such fee waiver, Total Operating Expenses would be equal
on an annual basis to 1.03% of the Fund's average net assets.
EXAMPLE
A shareholder of the Fund would pay the following expenses on a $1,000
investment in Fund shares, assuming (1) 5% annual return and (2) redemption at
the end of:
1 year ............................................... $ 8
3 years ............................................... $26
THE EXAMPLE SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
FUTURE AGGREGATE EXPENSES OF THE FUND AND THE PORTFOLIO, AND ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the expense table provided above is to assist investors in
understanding the expenses of investing in the Fund and an investor's share of
the aggregate operating expenses of the Fund and the Portfolio. The
information is based on the expenses the Fund and the Portfolio expect to
incur for the current fiscal year of the Portfolio (and the Fund's initial
fiscal period).* For a more detailed discussion on the costs and expenses of
investing in the Fund, see "Management of the Trust and the Portfolio Trust."
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*Assuming average daily net assets of $50 million in the Fund and $75 million
in the Portfolio for the current fiscal year.
FINANCIAL HIGHLIGHTS
The Fund is the successor to Republic Fixed Income Fund, a series of
Republic Funds (the "Predecessor Fund") which commenced investment operations
on January 9, 1995. The Fund assumed all of the assets and liabilities of the
Predecessor Fund in a reorganization effective July 31, 1996. The financial
data shown below is to assist investors in evaluating the performance of the
Fund since commencement of operations through October 31, 1995. The
information shown in the following schedule has been audited by Ernst & Young
LLP, independent auditors, whose report on the Fund's financial statements is
incorporated by reference into the Statement of Additional Information from
the Fund's Annual Report dated October 31, 1995. The Annual Report also
includes management's discussion of fund performance, and may be obtained
without charge upon request. This information should be read in conjunction
with the financial statements.
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
THE INDICATED PERIOD:
<TABLE>
<CAPTION>
FOR THE FOR THE PERIOD
SIX MONTHS JANUARY 9, 1995
ENDED (COMMENCEMENT
APRIL 30, 1996 OF OPERATIONS) TO
(UNAUDITED) OCTOBER 31, 1995
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<S> <C> <C>
Net asset value, beginning of period .................. $10.96 $10.00
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INCOME FROM INVESTMENT OPERATIONS:
Net investment income ............................. 0.29 0.46
Net realized and unrealized gain from Portfolio ... (0.19) 0.96
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Total increase from investment operations ......... 0.10 1.42
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LESS DIVIDENDS:
From net investment income ........................ (0.29) (0.46)
Net realized capital gains ........................ (0.37) --
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Total distributions to shareholders ............... (0.66) (0.46)
Net asset value, end of period ........................ $10.40 $10.96
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TOTAL RETURN .......................................... 0.89%(a) 14.37%(a)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) .............. $39,303 $26,128
Ratio of expenses to average net assets (b) ....... 0.83%(c) 0.91%(c)
Ratio of net investment income to average net
assets (b) ...................................... 5.49%(c) 5.63%(c)
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(a) Not annualized.
(b) Reflects a voluntary expense limitation and waiver of fees by affiliated parties of the Fund.
If this limitation had not been in effect, the annualized ratios of expenses and net investment
income to average net assets for the six months ended April 30, 1996 and the period January 9,
1995 (commencement of operations) to October 31, 1995 would have been:
Ratio of expenses to average net assets ......... 1.30%(c) 1.72%(c)
Ratio of net investment income to average net
assets ........................................ 5.01%(c) 4.82%(c)
(c) Annualized.
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INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek to realize above-average
total return over a market cycle of three to five years, consistent with
reasonable risk, through investment in a diversified portfolio of U.S.
Government securities, corporate bonds (including bonds rated below investment
grade commonly referred to as "junk bonds"), foreign fixed income securities,
mortgage-backed securities of domestic issuers and other fixed-income
securities. The Portfolio's average weighted maturity will ordinarily exceed
five years. The investment objective of the Portfolio is the same as the
investment objective of the Fund.
There can be no assurance that the investment objective of the Fund will be
achieved. The investment objective of each of the Fund and the Portfolio may
be changed without investor approval. If there is a change in the investment
objective of the Fund, shareholders should consider whether the Fund remains
an appropriate investment in light of their then-current financial position
and needs. Shareholders of the Fund shall receive 30 days' prior written
notice of any change in the investment objective of the Fund or the Portfolio.
Since the investment characteristics of the Fund will correspond to those of
the Portfolio, the following is a discussion of the various investment
policies of the Portfolio.
INVESTMENT POLICIES
The Portfolio will normally invest at least 65% of its total assets in fixed
income securities. The Portfolio may invest in the following securities, which
may be issued by domestic or foreign entities and denominated in U.S. dollars
or foreign currencies: securities issued, sponsored or guaranteed by the U.S.
government, its agencies or instrumentalities (U.S. Government securities);
corporate debt securities; corporate commercial paper; mortgage pass-throughs,
mortgage-backed bonds, collateralized mortgage obligations ("CMOs") and other
asset-backed securities; variable and floating rate debt securities;
obligations of foreign governments or their subdivisions, agencies and
instrumentalities; obligations of international agencies or supranational
entities; and foreign currency exchange-related securities.
The Sub-Adviser will seek to achieve the Portfolio's objective by investing
at least 80% of the Portfolio's assets in investment grade debt or fixed
income securities. Investment grade debt securities are those rated by one or
more nationally recognized statistical rating organizations ("NRSROs") within
one of the four highest quality grades at the time of purchase (e.g., AAA, AA,
A or BBB by Standard & Poor's Ratings Groups, Inc. ("S&P") or Fitch Investors
Service, Inc. ("Fitch") or Aaa, Aa, A or Baa by Moody's Investors Service,
Inc. ("Moody's")), or in the case of unrated securities, determined by the
Sub-Adviser to be of comparable quality. Securities rated by a NRSRO in the
fourth highest rating category have speculative characteristics and are
subject to greater credit and market risks than higher-rated bonds. See the
Appendix to this Prospectus for a description of the ratings assigned by
Moody's, S&P, and Fitch.
Up to 20% of the Portfolio's assets may be invested in preferred stock,
convertible securities, and in fixed income securities that at the time of
purchase are rated Ba or B by Moody's or BB or B by S&P or rated comparably by
another NRSRO (or, if unrated, are deemed by the Sub-Adviser to be of
comparable quality). Securities rated below "investment grade," i.e., rated
below Baa by Moody's or BBB by S&P, are described as "speculative" by both
Moody's and S&P. Such securities are sometimes referred to as "junk bonds,"
and may be subject to greater market fluctuations, less liquidity and greater
risk. For a complete discussion of the special risks associated with
investments in lower rated securities, see "Additional Risk Factors and
Policies: High Yield/High Risk Securities."
From time to time, the Sub-Adviser may invest more than 50% of the
Portfolio's assets in mortgage-backed securities including mortgage pass-
through securities, mortgage-backed bonds and CMOs, that carry a guarantee
from a U.S. government agency or a private issuer of the timely payment of
principal and interest. For a description of the risks associated with
mortgage-backed securities, see "Additional Risk Factors and Policies:
Mortgage Related Securities." When investing in mortgage-backed securities, it
is expected that the Portfolio's primary emphasis will be in mortgage-backed
securities issued by governmental and government-related organizations such as
the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Association
("FHLMC"). However, the Portfolio may invest without limit in mortgage-backed
securities of private issuers when the Sub-Adviser determines that the quality
of the investment, the quality of the issuer, and market conditions warrant
such investments. Mortgage-backed securities issued by private issuers will be
rated investment grade by Moody's or S&P or, if unrated, deemed by the Sub-
Adviser to be of comparable quality.
A mortgage-backed bond is a collateralized debt security issued by a thrift
or financial institution. The bondholder has a first priority perfected
security interest in collateral consisting usually of agency mortgage pass-
through securities, although other assets including U.S. Treasury securities
(including zero coupon Treasury bonds), agency securities, cash equivalent
securities, whole loans and corporate bonds may qualify. The amount of
collateral must be continuously maintained at levels from 115% to 150% of the
principal amount of the bonds issued, depending on the specific issue
structure and collateral type. For a complete discussion of mortgage-backed
securities, see "Additional Risk Factors and Policies: Mortgage-Related
Securities."
A portion of the Portfolio's assets may be invested in bonds and other fixed
income securities denominated in foreign currencies if, in the opinion of the
Sub-Adviser, the combination of current yield and currency value offer
attractive expected returns. These holdings may be in as few as one foreign
currency bond market (such as the United Kingdom gilt market), or may be
spread across several foreign bond markets. The Portfolio may also purchase
securities of developing countries; however, the Portfolio does not intend to
invest in the securities of Eastern European countries. When the total return
opportunities in a foreign bond market appear attractive in local currency
terms, but where, in the Sub-Adviser's judgment, unacceptable currency risk
exists, currency futures, forwards and options and swaps may be used to hedge
the currency risk. See "Additional Risk Factors and Policies: Foreign
Securities" below and the Statement of Additional Information.
The Portfolio may invest in Eurodollar bank obligations and Yankee bank
obligations. See "Additional Risk Factors and Policies -- Eurodollar and
Yankee Bank Obligations" below. The Portfolio may also invest in Brady Bonds,
which are issued as a result of a restructuring of a country's debt
obligations to commercial banks under the "Brady Plan". See "Additional Risk
Factors and Policies -- Brady Bonds" below.
The Portfolio may also invest in the following instruments on a temporary
basis when economic or market conditions are such that the Sub-Adviser deems a
temporary defensive position to be appropriate: time deposits, certificates of
deposit and bankers' acceptances issued by a commercial bank or savings and
loan association; commercial paper rated at the time of purchase by one or
more NRSRO in one of the two highest categories or, if not rated, issued by a
corporation having an outstanding unsecured debt issue rated high-grade by a
NRSRO; short-term corporate obligations rated high-grade by a NRSRO; U.S.
Government obligations; Government agency securities issued or guaranteed by
U.S. Government-sponsored instrumentalities and federal agencies; and
repurchase agreements collateralized by the securities listed above. The
Portfolio may also purchase securities on a when-issued basis, lend its
securities to brokers, dealers, and other financial institutions to earn
income and borrow money for temporary or emergency purposes.
ADDITIONAL RISK FACTORS AND POLICIES
DERIVATIVES
The Portfolio may invest in various instruments that are commonly known as
derivatives. Generally, a derivative is a financial arrangement the value of
which is based on, or "derived" from, a traditional security, asset, or market
index. A mutual fund, of course, derives its value from the value of the
investments it holds and so might even be called a "derivative." Some
"derivatives" such as mortgage-related and other asset-backed securities are
in many respects like any other investment, although they may be more volatile
or less liquid than more traditional debt securities. There are, in fact, many
different types of derivatives and many different ways to use them. There are
a range of risks associated with those uses. Futures and options are commonly
used for traditional hedging purposes to attempt to protect a fund from
exposure to changing interest rates, securities prices, or currency exchange
rates and for cash management purposes as a low cost method of gaining
exposure to a particular securities market without investing directly in those
securities. The Portfolio may use derivatives for hedging purposes, cash
management purposes, as a substitute for investing directly in fixed income
instruments, and to enhance return when the Sub-Adviser believes the
investment will assist the Portfolio in achieving its investment objective. A
description of the derivatives that the Portfolio may use and some of their
associated risks follows.
OPTIONS AND FUTURES TRANSACTIONS
The Portfolio may use financial futures contracts, options on futures
contracts and options on securities (collectively, "futures and options"). In
addition, the Portfolio may invest in foreign currency futures contracts and
options on foreign currencies and foreign currency futures. Futures contracts
provide for the sale by one party and purchase by another party of a specified
amount of a specific security at a specified future time and price. An option
is a legal contract that gives the holder the right to buy or sell a specified
amount of the underlying security, currency or futures contract at a fixed or
determinable price upon the exercise of the option. A call option conveys the
right to buy and a put option conveys the right to sell a specified quantity
of the underlying instrument.
The use of options and futures is a highly specialized activity which
involves investment strategies and risks different from those associated with
ordinary portfolio securities transactions, and there can be no guarantee that
their use will increase the Portfolio's return. While the use of these
instruments by the Portfolio may reduce certain risks associated with owning
its portfolio securities, these techniques themselves entail certain other
risks. If the Sub-Adviser applies a strategy at an inappropriate time or
judges market conditions or trends incorrectly, options and futures strategies
may lower the Portfolio's return. Certain strategies limit the Portfolio's
potential to realize gains as well as limit its exposure to losses. The
Portfolio could also experience losses if the prices of its options and
futures positions were poorly correlated with its other investments. There can
be no assurance that a liquid market will exist at a time when the Portfolio
seeks to close out a futures contract or a futures option position. Most
futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single day; once the daily limit
has been reached on a particular contract, no trades may be made that day at a
price beyond that limit. In addition, certain of these instruments are
relatively new and without a significant trading history. As a result, there
is no assurance that an active secondary market will develop or continue to
exist. Lack of a liquid market for any reason may prevent the Portfolio from
liquidating an unfavorable position and the Portfolio would remain obligated
to meet margin requirements until the position is closed. In addition, the
Portfolio will incur transaction costs, including trading commissions and
options premiums, in connection with its futures and options transactions, and
these transactions could significantly increase the Portfolio's turnover rate.
The Portfolio will not enter into futures contracts or options thereon to
the extent that its outstanding obligations to purchase securities under these
contracts in combination with its outstanding obligations with respect to
options transactions would exceed 35% of its total assets. The Portfolio will
use financial futures contracts and related options only for "bona fide
hedging" purposes, as such term is defined in applicable regulations of the
Commodity Futures Trading Commission, or, with respect to positions in
financial futures and related options that do not qualify as "bona fide
hedging" positions, will enter such non-hedging positions only to the extent
that assets committed to initial margin deposits on such instruments, plus
premiums paid for open futures options positions, less the amount by which any
such positions are "in-the-money," do not exceed 5% of the Portfolio's net
assets. The Portfolio will segregate assets or "cover" its positions
consistent with requirements under the Investment Company Act of 1940, as
amended ("1940 Act"). The Portfolio may also purchase and write put and call
options on foreign currencies for the purpose of protecting against declines
in the dollar value of foreign portfolio securities and against increases in
the U.S. dollar cost of foreign securities to be acquired.
FOREIGN SECURITIES
Investing in securities issued by companies whose principal business
activities are outside the United States may involve significant risks not
present in domestic investments. For example, there is generally less publicly
available information about foreign companies, particularly those not subject
to the disclosure and reporting requirements of the U.S. securities laws.
Foreign issuers are generally not bound by uniform accounting, auditing, and
financial reporting requirements and standards of practice comparable to those
applicable to domestic issuers. Investments in foreign securities also involve
the risk of possible adverse changes in investment or exchange control
regulations, expropriation or confiscatory taxation, other taxes imposed by
the foreign country on the Fund's earnings, assets, or transactions,
limitation on the removal of cash or other assets of the Portfolio, political
or financial instability, or diplomatic and other developments which could
affect such investments. Further, economies of particular countries or areas
of the world may differ favorably or unfavorably from the economy of the
United States. Changes in foreign exchange rates will affect the value of
securities denominated or quoted in currencies other than the U.S. dollar.
Foreign securities often trade with less frequency and volume than domestic
securities and therefore may exhibit greater price volatility. Furthermore,
dividends and interest payments from foreign securities may be withheld at the
source. Additional costs associated with an investment in foreign securities
may include higher custodial fees than apply to domestic custodial
arrangements, and transaction costs of foreign currency conversions.
FORWARD FOREIGN CURRENCY CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
Forward foreign currency exchange contracts ("forward contracts") are
intended to minimize the risk of loss to the Portfolio from adverse changes in
the relationship between the U.S. dollar and foreign currencies. The Portfolio
may not enter into such contracts for speculative purposes. The Portfolio has
no specific limitation on the percentage of assets it may commit to forward
contracts, subject to its stated investment objective and policies, except
that the Portfolio will not enter into a forward contract if the amount of
assets set aside to cover the contract would impede portfolio management.
A forward contract is an obligation to purchase or sell a specific currency
for an agreed price at a future date which is individually negotiated and
privately traded by currency traders and their customers. A forward contract
may be used, for example, when the Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency in order to
"lock in" the U.S. dollar price of the security.
The Portfolio may also combine forward contracts with investments in
securities denominated in other currencies in order to achieve desired credit
and currency exposures. Such combinations are generally referred to as
synthetic securities. For example, in lieu of purchasing a foreign bond, the
Portfolio may purchase a U.S. dollar-denominated security and at the same time
enter into a forward contract to exchange U.S. dollars for the contract's
underlying currency at a future date. By matching the amount of U.S. dollars
to be exchanged with the anticipated value of the U.S. dollar-denominated
security, the Portfolio may be able to lock in the foreign currency value of
the security and adopt a synthetic investment position reflecting the credit
quality of the U.S. dollar-denominated security.
There is a risk in adopting a synthetic investment position to the extent
that the value of a security denominated in U.S. dollars or other foreign
currency is not exactly matched with the Portfolio's obligation under the
forward contract. On the date of maturity the Portfolio may be exposed to some
risk of loss from fluctuations in that currency. Although the Sub-Adviser will
attempt to hold such mismatching to a minimum, there can be no assurance that
the Sub-Adviser will be able to do so. When the Portfolio enters into a
forward contract for purposes of creating a synthetic security, it will
generally be required to hold high-grade, liquid securities or cash in a
segregated account with a daily value at least equal to its obligation under
the forward contract.
HIGH YIELD/HIGH RISK SECURITIES
Securities rated lower than Baa by Moody's or lower than BBB by S&P are
sometimes referred to as "high yield" or "junk" bonds. In addition, securities
rated Baa (Moody's) and BBB (S&P) are considered to have some speculative
characteristics.
Investing in high yield securities involves special risks in addition to the
risks associated with investments in higher rated debt securities. High yield
securities may be regarded as predominately speculative with respect to the
issuer's continuing ability to meet principal and interest payments. Analysis
of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities, and the ability of
the Portfolio to achieve its investment objective may, to the extent of its
investments in high yield securities, be more dependent upon such
creditworthiness analysis than would be the case if the Portfolio were
investing in higher quality securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of high yield securities have been found to be less sensitive to
interest rate changes than more highly rated investments, but more sensitive
to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates,
for example, could cause a decline in high yield security prices because the
advent of a recession could lessen the ability of a highly leveraged company
to make principal and interest payments on its debt securities. If the issuer
of high yield securities defaults, the Portfolio may incur additional expenses
to seek recovery. In the case of high yield securities structured as zero
coupon or payment-in-kind securities, the market prices of such securities are
affected to a greater extent by interest rate changes and, therefore, tend to
be more volatile than securities which pay interest periodically and in cash.
The secondary markets on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect and cause large fluctuations
in the daily net asset value of the Portfolio. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield securities, especially in a thinly traded
market.
The use of credit ratings as the sole method of evaluating high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit
ratings in a timely fashion to reflect events since the security was last
rated. The Sub-Adviser does not rely solely on credit ratings when selecting
securities for the Portfolio, and develops its own independent analysis of
issuer credit quality. If a credit rating agency changes the rating of a
security held by the Portfolio, the Portfolio may retain the security if the
Sub-Adviser deems it in the best interest of investors.
ZERO COUPON OBLIGATIONS
The Portfolio may invest in zero coupon obligations, which are fixed-income
securities that do not make regular interest payments. Instead, zero coupon
obligations are sold at substantial discounts from their face value. The
Portfolio accrues income on these investments for tax and accounting purposes,
which is distributable to shareholders and which, because no cash is received
at the time of accrual, may require the liquidation of other portfolio
securities to satisfy the Portfolio's distribution obligations, in which case
the Portfolio will forego the purchase of additional income-producing assets
with these funds. The difference between a zero coupon obligation's issue or
purchase price and its face value represents the imputed interest an investor
will earn if the obligation is held until maturity. Zero coupon obligations
may offer investors the opportunity to earn higher yields that those available
on ordinary interest-paying obligations of similar credit quality and
maturity. However, zero coupon obligation prices may also exhibit greater
price volatility than ordinary fixed-income securities because of the manner
in which their principal and interest are returned to the investor.
MORTGAGE-RELATED SECURITIES
Mortgage-Backed Securities. The Portfolio may invest in mortgage-backed
certificates and other securities representing ownership interests in mortgage
pools, including CMOs. Interest and principal payments on the mortgages
underlying mortgage-backed securities are passed through to the holders of the
mortgage-backed securities. Mortgage-backed securities currently offer yields
higher than those available from many other types of fixed-income securities,
but because of their prepayment aspects, their price volatility and yield
characteristics will change based on changes in prepayment rates. Generally,
prepayment rates increase if interest rates fall and decrease if interest
rates rise. For many types of mortgage-backed securities, this can result in
unfavorable changes in price and yield characteristics in response to changes
in interest rates and other market conditions. For example, as a result of
their prepayment aspects, the Portfolio's mortgage-backed securities may have
less potential for capital appreciation during periods of declining interest
rates than other fixed income securities of comparable maturities, although
such obligations may have a comparable risk of decline in market value during
periods of rising interest rates.
Mortgage-backed securities have yield and maturity characteristics that are
dependent on the mortgages underlying them. Thus, unlike traditional debt
securities, which may pay a fixed rate of interest until maturity when the
entire principal amount comes due, payments on these securities include both
interest and a partial payment of principal. In addition to scheduled loan
amortization, payments of principal may result from the voluntary prepayment,
refinancing or foreclosure of the underlying mortgage loans. Such prepayments
may significantly shorten the effective durations of mortgage-backed
securities, especially during periods of declining interest rates. Similarly,
during periods of rising interest rates, a reduction in the rate of
prepayments may significantly lengthen the effective durations of such
securities.
Investment in mortgage-backed securities poses several risks, including
prepayment, market, and credit risk. Prepayment risk reflects the risk that
borrowers may prepay their mortgages faster than expected, thereby affecting
the investment's average life and perhaps its yield. Whether or not a mortgage
loan is prepaid is almost entirely controlled by the borrower. Borrowers are
most likely to exercise prepayment options at the time when it is least
advantageous to investors, generally prepaying mortgages as interest rates
fall, and slowing payments as interest rates rise. Besides the effect of
prevailing interest rates, the rate of prepayment and refinancing of mortgages
may also be affected by home value appreciation, ease of the refinancing
process and local economic conditions.
Market risk reflects the risk that the price of the security may fluctuate
over time. The price of mortgage-backed securities may be particularly
sensitive to prevailing interest rates, the length of time the security is
expected to be outstanding, and the liquidity of the issue. In a period of
unstable interest rates, there may be decreased demand for certain types of
mortgage-backed securities, and a fund invested in such securities wishing to
sell them may find it difficult to find a buyer, which may in turn decrease
the price at which they may be sold.
Credit risk reflects the risk that the Portfolio may not receive all or part
of its principal because the issuer or credit enhancer has defaulted on its
obligations. Obligations issued by U.S. government-related entities are
guaranteed as to the payment of principal and interest, but are not backed by
the full faith and credit of the U.S. government. The performance of private
label mortgage-backed securities, issued by private institutions, is based on
the financial health of those institutions.
For further information, see the Statement of Additional Information.
Stripped Mortgage-Backed Securities. The Portfolio may invest in Stripped
Mortgage-Backed Securities ("SMBS") which are derivative multi-class mortgage
securities. SMBS may be issued by agencies or instrumentalities of the U.S.
Government and private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose entities of the foregoing. The
Portfolio's investments in SMBS will be limited to 10% of net assets.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. One type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In some
cases, one class will receive all of the interest (the interest-only or IO
class), while the other class will receive all of the principal (the
principal-only or PO class). The cash flows and yields on IO and PO classes
can be extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets. For example, a rapid
or slow rate of principal payments may have a material adverse effect on the
yield to maturity of IOs or POs, respectively. If the underlying mortgage
assets experience greater than anticipated prepayments of principal, an
investor may fail to recoup fully its initial investment in an IO class of a
stripped mortgage-backed security. Conversely, if the underlying mortgage
assets experience slower than anticipated prepayments of principal, the yield
on a PO class will be affected more severely than would be the case with a
traditional mortgage-backed security.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these
securities were only recently developed. As a result, established trading
markets have not yet developed and, accordingly, certain of these securities
may be deemed illiquid and subject to the Portfolio's limitations on
investment in illiquid securities. For further information on these
securities, see the Statement of Additional Information.
Other Asset-Backed Securities. The Portfolio may invest in securities
representing interests in other types of financial assets, such as credit card
receivables, automobile loan and lease receivables, aircraft lease
receivables, home equity loan receivables, manufactured housing receivables,
equipment loan and lease receivables, and student loan receivables. Such
securities are subject to many of the same risks as are mortgage-backed
securities, including prepayment risks and risks of foreclosure. They may or
may not be secured by the receivables themselves or may be unsecured
obligations of their issuers. For further information on these securities, see
the Statement of Additional Information.
EURODOLLAR AND YANKEE BANK OBLIGATIONS
The Portfolio may invest in Eurodollar bank obligations and Yankee bank
obligations. Eurodollar bank obligations are dollar-denominated certificates
of deposit and time deposits issued outside the U.S. capital markets by
foreign branches of U.S. banks and by foreign banks. Yankee bank obligations
are dollar-denominated obligations issued in the U.S. capital markets by
foreign banks. Eurodollar and Yankee obligations are subject to the same risks
that pertain to domestic issues, notably credit risk, market risk and
liquidity risk. Additionally, Eurodollar (and to a limited extent Yankee bank)
obligations are subject to certain sovereign risks. One such risk is the
possibility that a sovereign country might prevent capital, in the form of
dollars, from freely flowing across its borders. Other risks include: adverse
political and economic developments, the extent and quality of government
regulation of financial markets and institutions, the imposition of foreign
withholding taxes, and the expropriation or nationalization of foreign
issuers.
REPURCHASE AGREEMENTS
The Portfolio may invest in repurchase agreements collateralized by U.S.
Government securities, certificates of deposit and certain bankers'
acceptances. Repurchase agreements are transactions by which the Portfolio
purchases a security and simultaneously commits to resell that security to the
seller (a bank or securities dealer) at an agreed upon price on an agreed upon
date (usually within seven days 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 date of maturity of the purchased security. The Sub-
Adviser will continually monitor the value of the underlying securities to
ensure that their value, including accrued interest, always equals or exceeds
the repurchase price. Repurchase agreements are considered to be loans
collateralized by the underlying security under the 1940 Act, and therefore
will be fully collateralized.
The use of repurchase agreements involves certain risks. For example, if the
seller of the agreements defaults on its obligation to repurchase the
underlying securities at a time when the value of these securities has
declined, the Portfolio may incur a loss upon disposition of them. If the
seller of the agreement becomes insolvent and subject to liquidation or
reorganization under the Bankruptcy Code or other laws, a bankruptcy court may
determine that the underlying securities are collateral not within the control
of the Portfolio and therefore subject to sale by the trustee in bankruptcy.
Finally, it is possible that the Portfolio may not be able to substantiate its
interest in the underlying securities. While the Portfolio Trust's management
acknowledges these risks, it is expected that they can be controlled through
stringent security selection criteria and careful monitoring procedures.
ILLIQUID INVESTMENTS
The Portfolio may invest up to 15% of its net assets in securities that are
illiquid by virtue of the absence of a readily available market, or because of
legal or contractual restrictions on resale. This policy does not limit the
acquisition of securities (i) eligible for resale to qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933 or (ii)
commercial paper issued pursuant to Section 4(2) under the Securities Act of
1933 that are determined to be liquid in accordance with guidelines
established by the Portfolio Trust's Board of Trustees. There may be delays in
selling these securities and sales may be made at less favorable prices. The
Portfolio has a separate policy that no more than 10% of its net assets may be
invested in securities which are restricted as to resale, including Rule 144A
and Section 4(2) securities.
The Sub-Adviser may determine that a particular Rule 144A security is liquid
and thus not subject to the Portfolio's limits on investment in illiquid
securities, pursuant to guidelines adopted by the Board of Trustees. Factors
that the Sub-Adviser must consider in determining whether a particular Rule
144A security is liquid include the frequency of trades and quotes for the
security, the number of dealers willing to purchase or sell the security and
the number of other potential purchasers, dealer undertakings to make a market
in the security, and the nature of the security and the nature of the market
for the security (i.e., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of transfer). Investing in Rule 144A
securities could have the effect of increasing the level of the Portfolio's
illiquidity to the extent that qualified institutions might become, for a
time, uninterested in purchasing these securities.
BRADY BONDS
A portion of the Portfolio's assets may be invested in certain debt
obligations customarily referred to as Brady Bonds, which are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring under a plan introduced by
former Treasury Secretary Nicholas F. Brady (the "Brady Plan"). Brady Bonds
have been issued only recently and, accordingly, do not have a long payment
history. They may be collateralized or uncollateralized and issued in various
currencies (although most are dollar-denominated) and are actively traded in
the over-the-counter secondary market. Brady Bonds have been issued by the
governments of Argentina, Costa Rica, Mexico, Nigeria, Uruguay, Venezuela,
Brazil and the Philippines, as well as other emerging markets countries. Most
Brady Bonds are currently rated below BBB by S&P or Baa by Moody's. In light
of the risk characteristics of Brady Bonds (including uncollateralized
repayment of principal at maturity for some instruments) and, among other
factors, the history of default with respect to commercial bank loans by
public and private entities of countries issuing Brady Bonds, investments in
Brady Bonds should be viewed as speculative. For further information on these
securities, see the Statement of Additional Information.
FLOATING AND VARIABLE RATE OBLIGATIONS
Certain obligations that the Portfolio may purchase may have a floating or
variable rate of interest, i.e., the rate of interest varies with changes in
specified market rates or indices, such as the prime rates, and at specified
intervals. Certain floating or variable rate obligations that may be purchased
by the Portfolio may carry a demand feature that would permit the holder to
tender them back to the issuer of the underlying instrument, or to a third
party, at par value prior to maturity. The demand features of certain floating
or variable rate obligations may permit the holder to tender the obligations
to foreign banks, in which case the ability to receive payment under the
demand feature will be subject to certain risks, as described under "Foreign
Securities," above.
INVERSE FLOATING RATE OBLIGATIONS
The Portfolio may invest in inverse floating rate obligations ("inverse
floaters"). Inverse floaters have coupon rates that vary inversely at a
multiple of a designated floating rate, such as LIBOR (London Inter-Bank
Offered Rate). Any rise in the reference rate of an inverse floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an inverse floater causes an increase
in the coupon rate. In addition, like most other fixed-income securities, the
value of inverse floaters will generally decrease as interest rates increase.
Inverse floaters may exhibit substantially greater price volatility than fixed
rate obligations having similar credit quality, redemption provisions and
maturity, and inverse floater CMOs exhibit greater price volatility than the
majority of mortgage pass-through securities or CMOs. In addition, some
inverse floater CMOs exhibit extreme sensitivity to changes in prepayments. As
a result, the yield to maturity of an inverse floater CMO is sensitive not
only to changes in interest rates, but also to changes in prepayment rates on
the related underlying mortgage assets.
BANKING INDUSTRY AND SAVINGS AND LOAN INDUSTRY OBLIGATIONS
As a temporary defensive measure, the Portfolio may invest in certificates
of deposit, time deposits, bankers' acceptances, and other short-term debt
obligations issued by commercial banks and savings and loan associations
("S&Ls"). Certificates of deposit are receipts from a bank or S&L for funds
deposited for a specified period of time at a specified rate of return. Time
deposits in banks or S&Ls are generally similar to certificates of deposit but
are uncertificated. Bankers' acceptances are time drafts drawn on commercial
banks by borrowers, usually in connection with international commercial
transactions. The Portfolio may not invest in time deposits maturing in more
than seven days. The Portfolio will limit its investment in time deposits
maturing from two business days through seven calendar days to 15% of its
total assets.
The Portfolio will not invest in any obligation of a commercial bank unless
(i) the bank has total assets of at least $1 billion, or the equivalent in
other currencies or, in the case of domestic banks which do not have total
assets of at least $1 billion, the aggregate investment made in any one such
bank is limited to $100,000 and the principal amount of such investment is
insured in full by the Federal Deposit Insurance Corporation (the "FDIC"),
(ii) in the case of U.S. banks, it is a member of the FDIC and (iii) in the
case of foreign branches of U.S. banks, the security is deemed by the Sub-
Adviser to be of an investment quality comparable with other debt securities
which may be purchased by the Portfolio.
The Portfolio may also invest in obligations of U.S. banks, foreign branches
of U.S. banks (Eurodollars) and U.S. branches of foreign banks (Yankee
dollars) as a temporary defensive measure. Euro and Yankee dollar investments
will involve some of the same risks as investing in foreign securities, as
described above and in the Statement of Additional Information.
LOANS OF PORTFOLIO SECURITIES
The Portfolio may lend its securities to qualified brokers, dealers, banks
and other financial institutions for the purpose of realizing additional
income. Loans of securities will be collateralized by cash, letters of credit,
or securities issued or guaranteed by the U.S. Government or its agencies. The
collateral will equal at least 100% of the current market value of the loaned
securities. In addition, the Portfolio will not lend its portfolio securities
to the extent that greater than one-third of its total assets, at fair market
value, would be committed to loans at that time.
FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED SECURITIES
The Portfolio may purchase and sell securities on a when-issued or firm-
commitment basis, in which a security's price and yield are fixed on the date
of the commitment but payment and delivery are scheduled for a future date. On
the settlement date, the market value of the security may be higher or lower
than its purchase or sale price under the agreement. If the other party to a
when-issued or firm-commitment transaction fails to deliver or pay for the
security, the Portfolio could miss a favorable price or yield opportunity or
suffer a loss. The Portfolio will not earn interest on securities until the
settlement date. The Portfolio will maintain in a segregated account with the
custodian cash or liquid, high-grade debt securities equal (on a daily marked-
to-market basis) to the amount of its commitment to purchase the securities on
a when-issued basis.
SWAPS, CAPS, FLOORS AND COLLARS
The Portfolio may enter into swap contracts and other similar instruments in
accordance with its policies. A swap is an agreement to exchange the return
generated by one instrument for the return generated by another instrument.
The payment streams are calculated by reference to a specified index and
agreed upon notional amount. The term specified index includes currencies,
fixed interest rates, prices and total return on interest rate indices, fixed-
income indices, stock indices and commodity indices (as well as amounts
derived from arithmetic operations on these indices). For example, the
Portfolio may agree to swap the return generated by a fixed-income index for
the return generated by a second fixed-income index. The currency swaps in
which the Portfolio may enter will generally involve an agreement to pay
interest streams calculated by reference to interest income linked to a
specified index in one currency in exchange for a specified index in another
currency. Such swaps may involve initial and final exchanges that correspond
to the agreed upon notional amount.
The swaps in which the Portfolio may engage also include rate caps, floors
and collars under which one party pays a single or periodic fixed amount(s)
(or premium) and the other party pays periodic amounts based on the movement
of a specified index.
The Portfolio will usually enter into swaps on a net basis, i.e., the two
return streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two returns. The Portfolio's
obligations under a swap agreement will be accrued daily (offset against any
amounts owing to the Portfolio) and any accrued but unpaid net amounts owed to
a swap counterparty will be covered by the maintenance of a segregated account
consisting of cash, U.S. Government securities, or high-grade debt
obligations, to avoid any potential leveraging. The Portfolio will not enter
into any swap agreement unless the unsecured commercial paper, senior debt or
the claims-paying ability of the counterparty is rated AA or A-1 or better by
S&P or Aa or P-1 or better by Moody's, rated comparably by another NRSRO or
determined by the Sub-Adviser to be of comparable quality.
Interest rate swaps do not involve the delivery of securities, other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Portfolio is contractually obligated to make. If the other party to an
interest rate swap defaults, the Portfolio's risk of loss consists of the net
amount of interest payments that the Portfolio is contractually entitled to
receive. In contrast, currency swaps usually involve the delivery of the
entire principal value of one designated currency in exchange for the other
designated currency. Therefore, the entire principal value of a currency swap
is subject to the risk that the other party to the swap will default on its
contractual delivery obligations. If there is a default by the counterparty,
the Portfolio may have contractual remedies pursuant to the agreements related
to the transaction. The swap market has grown substantially in recent years
with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps, floors and collars
are more recent innovations for which standardized documentation has not yet
been fully developed and, accordingly, they are less liquid than swaps.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Sub-Adviser is incorrect in its forecasts of
market values, interest rates and currency exchange rates, the investment
performance of the Portfolio would be less favorable than it would have been
if this investment technique were not used.
PORTFOLIO TURNOVER
The Sub-Adviser manages the Portfolio generally without regard to
restrictions on portfolio turnover, except those imposed by provisions of the
federal tax laws regarding short-term trading. In general, the Portfolio will
not trade for short-term profits, but when circumstances warrant, investments
may be sold without regard to the length of time held. The Portfolio's annual
turnover rate may exceed 100% due to changes in portfolio duration, yield
curve strategy or commitments to forward delivery mortgage-backed securities.
However, it is expected that the annual turnover rate for the Portfolio will
not exceed 250%. For the period from January 9, 1995 (commencement of
operations) to October 31, 1995, the portfolio turnover rate was 100%. Because
the Portfolio may have a portfolio turnover rate of 100% or more, transaction
costs incurred by the Portfolio, and the realized capital gains and losses of
the Portfolio, may be greater than those of a fund with a lesser portfolio
turnover rate. See "Portfolio Transactions" and "Tax Matters" below.
INVESTMENT RESTRICTIONS
Each of the Portfolio and the Fund has adopted certain investment
restrictions designed to reduce exposure to specific situations (except that
none of these investment restrictions shall prevent the Fund from investing
all of its Assets in a registered investment company with substantially the
same investment objective). Some of these investment restrictions are:
(1) with respect to 75% of its assets, the Portfolio (Fund) will not
purchase securities of any issuer if, as a result, more than 5% of the
Portfolio's (Fund's) total assets taken at market value would be
invested in the securities of any single issuer, except that this
restriction does not apply to securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities;
(2) with respect to 75% of its assets, the Portfolio (Fund) will not
purchase a security if, as a result, the Portfolio (Fund) would hold
more than 10% of the outstanding voting securities of any issuer;
(3) the Portfolio (Fund) will not invest more than 5% of its total assets in
the securities of issuers (other than securities issued or guaranteed by
U.S. or foreign governments or political subdivisions thereof) which
have (with predecessors) a record of less than three years of continuous
operation;
(4) the Portfolio (Fund) will not acquire any securities of companies within
one industry if, as a result of such acquisition, more than 25% of the
value of the Portfolio's (Fund's) total assets would be invested in
securities of companies within such industry; provided, however, that
there shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, or
instruments issued by U.S. banks when the Portfolio (Fund) adopts a
temporary defensive position;
(5) the Portfolio (Fund) will not make loans except (i) by purchasing debt
securities in accordance with its investment objective and policies, or
entering into repurchase agreements and (ii) by lending its portfolio
securities;
(6) the Portfolio (Fund) will not borrow money (including from a bank or
through reverse repurchase agreements or forward dollar roll
transactions involving mortgage-backed securities or similar investment
techniques entered into for leveraging purposes), except that the
Portfolio (Fund) may borrow as a temporary measure to satisfy redemption
requests or for extraordinary or emergency purposes, provided that the
Portfolio (Fund) maintains asset coverage of at least 300% for all such
borrowings;
(7) the Portfolio (Fund) will not issue senior securities, except as
permitted under the 1940 Act; and,
(8) the Portfolio (Fund) will not invest its assets in securities of any
investment company, except by purchase in the open market involving only
customary brokers' commissions or in connection with mergers,
acquisitions of assets or consolidations and except as may otherwise be
permitted by the 1940 Act; provided, however, that the Portfolio shall
not invest in the shares of any open-end investment company unless (1)
the Portfolio's Sub-Adviser waives any investment advisory fees with
respect to such assets and (2) the Portfolio pays no sales charge in
connection with the investment.
Limitations (1), (2), (4), (5), (6) and (7) and certain other limitations
described in the Statement of Additional Information are fundamental and may
be changed only with the approval of the holders of a "majority of the
outstanding voting securities" (as defined in the 1940 Act) of the Portfolio
or the Fund, as the case may be. The other investment restrictions described
here and in the Statement of Additional Information are not fundamental
policies meaning that the Board of Trustees of the Portfolio Trust may change
them without investor approval. If a percentage limitation on investment or
utilization of assets as set forth above is adhered to at the time an
investment is made, a later change in percentage resulting from changes in the
value or total cost of the Portfolio's assets will not be considered a
violation of the restriction, and the sale of securities will not be required.
SPECIAL INFORMATION CONCERNING THE TWO-TIER FUND STRUCTURE
The Trust, which is an open-end investment company, seeks to achieve the
investment objective of the Fund by investing all of the Fund's Assets in the
Portfolio, a series of a separate open-end investment company with the same
investment objective as the Fund. Other mutual funds or institutional
investors may invest in the Portfolio on the same terms and conditions as the
Fund. However, these other investors may have different sales commissions and
other operating expenses which may generate different aggregate performance
results. Information concerning other investors in the Portfolio is available
by calling the Sponsor at (617) 423-0800. The two-tier investment fund
structure has been developed relatively recently, so shareholders should
carefully consider this investment approach.
The investment objective of the Fund may be changed without the approval of
the shareholders of the Fund and the investment objective of the Portfolio may
be changed without the approval of the investors in the Portfolio.
Shareholders of the Fund shall receive 30 days prior written notice of any
change in the investment objective of the Fund or the Portfolio. For a
description of the investment objective, policies and restrictions of the
Portfolio, see "Investment Objective and Policies" above.
Except as permitted by the Securities and Exchange Commission, whenever the
Trust is requested to vote on a matter pertaining to the Portfolio, the Trust
will hold a meeting of the shareholders of the Fund and, at the meeting of
investors in the Portfolio, the Trust will cast all of its votes in the same
proportion as the votes of the Fund's shareholders even if all Fund
shareholders did not vote. Even if the Trust votes all its shares at the
Portfolio meeting, other investors with a greater pro rata ownership in the
Portfolio could have effective voting control of the operations of the
Portfolio.
The Trust may withdraw the Fund's investment in the Portfolio as a result of
certain changes in the Portfolio's investment objective, policies or
restrictions or if the Board of Trustees of the Trust determines that it is
otherwise in the best interests of the Fund to do so. Upon any such
withdrawal, the Board of Trustees of the Trust would consider what action
might be taken, including the investment of all of the assets of the Fund in
another pooled investment entity or the retaining of an investment adviser to
manage the Fund's assets in accordance with the investment policies described
above with respect to the Portfolio. In the event the Trustees of the Trust
were unable to accomplish either, the Trustees will determine the best course
of action.
As with traditionally structured funds which have large investors, the
actions of such large investors may have a material affect on smaller
investors. For example, if a large investor withdraws from the Portfolio, a
small remaining fund may experience higher pro rata operating expenses,
thereby producing lower returns. Additionally, the Portfolio may become less
diverse, resulting in increased portfolio risk.
For descriptions of the management and expenses of the Portfolio, see
"Management of the Trust and the Portfolio Trust" below and in the Statement
of Additional Information.
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST
The business and affairs of the Trust and the Portfolio Trust are managed
under the direction of their respective Boards of Trustees. The Trustees of
each of the Trust and the Portfolio Trust are Frederick C. Chen, Alan S.
Parsow, Larry M. Robbins and Michael Seely. Additional information about the
Trustees, as well as the executive officers of the Trust and the Portfolio
Trust, may be found in the Statement of Additional Information under the
caption "Management of the Trust and the Portfolio Trust -- Trustees and
Officers".
A majority of the disinterested Trustees have adopted written procedures
reasonably appropriate to deal with potential conflicts of interest arising
from the fact that the same individuals are Trustees of the Trust and of the
Portfolio Trust. Under the conflicts of interest procedures, the Trustees will
review on a quarterly basis any potential conflicts of interests after
consulting with Fund counsel, the Manager and the Fund Administrator. If a
potential conflict of interest arises, the Board of Trustees of the entity
that may be adversely affected will take such action as is reasonably
appropriate to resolve the conflict, up to and including establishing a new
Board of Trustees for such entity. See "Management of the Trust and the
Portfolio Trust" in the Statement of Additional Information for more
information about the Trustees and the executive officers of the Trust and the
Portfolio Trust.
INVESTMENT MANAGER
Republic, whose address is 452 Fifth Avenue, New York, New York 10018,
serves as investment manager to the Portfolio pursuant to an Investment
Management Contract with the Portfolio Trust. Subject to the general guidance
and the policies set by the Trustees of the Portfolio Trust, Republic provides
general supervision over the investment management functions performed by the
Sub-Adviser. For its services under the Investment Management Contract, the
Manager is entitled to receive from the Portfolio a fee, payable monthly, at
the annual rate of 0.20% of the Portfolio's average daily net assets. The
Manager is currently waiving this fee.
Republic is a wholly owned subsidiary of Republic New York Corporation, a
registered bank holding company. As of December 31, 1995 Republic was the 20th
largest commercial bank in the United States measured by deposits and the 19th
largest commercial bank measured by shareholder equity.
Republic and its affiliates may have deposit, loan and other commercial
banking relationships with the issuers of obligations purchased for the
Portfolio, including outstanding loans to such issuers which may be repaid in
whole or in part with the proceeds of obligations so purchased.
Based upon the advice of counsel, Republic believes that the performance of
investment advisory and other services for the Portfolio will not violate the
Glass-Steagall Act or other applicable banking laws or regulations. However,
future statutory or regulatory changes, as well as future judicial or
administrative decisions and interpretations of present and future statutes
and regulations, could prevent Republic from continuing to perform such
services for the Portfolio. If Republic were prohibited from acting as
investment manager to the Portfolio, it is expected that the Trust's Board of
Trustees would recommend to Fund shareholders approval of a new investment
advisory agreement with another qualified investment adviser selected by the
Board or that the Board would recommend other appropriate action.
SUB-ADVISER
MAS continuously manages the investment portfolio of the Portfolio pursuant
to a Sub-Advisory Agreement with the Manager. For its services, the Sub-
Adviser is paid a fee by the Portfolio, computed daily and based on the
Portfolio's average daily net assets, equal to 0.375% of net assets up to $50
million, 0.25% of net assets over $50 million up to $95 million, $300,000 of
net assets over $95 million up to $150 million, 0.20% of net assets over $150
million up to $250 million, and 0.15% of net assets over $250 million. It is
the responsibility of the Sub-Adviser not only to make investment decisions
for the Portfolio, but also to place purchase and sale orders for the
portfolio transactions of the Portfolio. See "Portfolio Transactions."
MAS, whose address is One Tower Bridge, West Conshohocken, Pennsylvania
19428, is a Pennsylvania limited partnership founded in 1969. MAS provides
investment services to employee benefit plans, endowment funds, foundations
and other institutional investors. As of March 31, 1996, MAS had in excess of
$36.2 billion in assets under management.
On January 3, 1996, Morgan Stanley Group Inc. acquired MAS in a transaction
in which Morgan Stanley Asset Management Holdings Inc., an indirect wholly
owned subsidiary of Morgan Stanley Group Inc., became the sole general partner
of MAS. Morgan Stanley Asset Management Holdings Inc. and two other wholly
owned subsidiaries of Morgan Stanley Group Inc. became the limited partners of
MAS. Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries are engaged in a wide range of financial services.
Kenneth B. Dunn, whose business experience for the past five years is
provided below, is the individual portfolio manager responsible for management
of the Portfolio.
Partner, MAS, since prior to 1991. Portfolio Manager, MAS Fixed Income
and MAS Domestic Fixed Income Portfolios, since 1987; MAS Fixed Income
II Portfolio, since 1990; MAS Mortgage-Backed Securities and Special
Purpose Fixed Income Portfolios, since 1992; and MAS Municipal and PA
Municipal Portfolios, since 1994.
DISTRIBUTOR AND SPONSOR
SBDS whose address is 6 St. James Avenue, Boston, Massachusetts 02116, acts
as sponsor and principal underwriter and distributor of the Fund's shares
pursuant to a Distribution Contract with the Trust.
ADMINISTRATOR AND PORTFOLIO ADMINISTRATOR
Pursuant to Administrative Services Agreements, SBDS and Signature (Cayman)
provide each of the Fund and the Portfolio, respectively, with general office
facilities, and supervise the overall administration of the Fund and the
Portfolio including, among other responsibilities, the preparation and filing
of all documents required for compliance by the Fund and the Portfolio with
applicable laws and regulations and arranging for the maintenance of books and
records of the Fund and the Portfolio. For its services to the Fund, SBDS
receives from the Fund fees payable monthly equal on an annual basis (for the
Fund's then-current fiscal year) to 0.05% of the Fund's average daily net
assets up to $100 million. The Administrator receives no compensation from the
Fund with respect to the Fund's assets over $100 million. The administrative
services fees of the Fund are subject to an annual minimum fee. See the
Statement of Additional Information. For its services to the Portfolio,
Signature (Cayman) receives from the Portfolio fees payable monthly equal on
an annual basis (for the Portfolio's then-current fiscal year) to 0.05% of the
Portfolio's average daily net assets.
SBDS and Signature (Cayman) provide persons satisfactory to the respective
Boards of Trustees to serve as officers of the Trust and the Portfolio Trust.
Such officers, as well as certain other employees of the Trust and of the
Portfolio Trust, may be directors, officers or employees of SBDS, Signature
(Cayman) or their affiliates.
SBDS, Signature (Cayman) and their affiliates also serve as administrator
and distributor of other investment companies. SBDS and Signature (Cayman) are
wholly owned subsidiaries of Signature Financial Group, Inc.
FUND ACCOUNTING AGENT
Pursuant to respective fund accounting agreements, Signature Financial
Services, Inc. ("Signature") serves as fund accounting agent to each of the
Fund and the Portfolio. For its services to the Fund, Signature receives from
the Fund fees payable monthly equal on an annual basis to $12,000. For its
services to the Portfolio, Signature receives fees payable monthly equal on an
annual basis to $40,000.
TRANSFER AGENT AND CUSTODIAN
Each of the Trust and the Portfolio Trust has entered into a Transfer Agency
Agreement with Investors Bank & Trust Company ("IBT") pursuant to which IBT
acts as transfer agent (the "Transfer Agent") for the Fund and the Portfolio.
The Transfer Agent maintains an account for each shareholder of the Fund
(unless such account is maintained by the shareholder's Shareholder Servicing
Agent) and investor in the Portfolio, performs other transfer agency functions
and acts as dividend disbursing agent for the Fund. Pursuant to respective
Custodian Agreements, IBT also acts as the custodian (the "Custodian") of the
assets of the Fund and the Portfolio. The Portfolio Trust's Custodian
Agreement provides that the Custodian may use the services of sub-custodians
with respect to the Portfolio. The Custodian's responsibilities include
safeguarding and controlling the Fund's cash and the Portfolio's cash and
securities, and handling the receipt and delivery of securities, determining
income and collecting interest on the Portfolio's investments, maintaining
books of original entry for portfolio accounting and other required books and
accounts, and calculating the daily net asset value of the Portfolio.
Securities held for the Portfolio may be deposited into the Federal Reserve-
Treasury Department Book Entry System or the Depository Trust Company. The
Custodian does not determine the investment policies of the Fund or the
Portfolio or decide which securities will be purchased or sold for the
Portfolio. Assets of the Portfolio may, however, be invested in securities of
the Custodian and the Portfolio Trust may deal with the Custodian as principal
in securities transactions for the Portfolio. For its services, IBT receives
such compensation as may from time to time be agreed upon by it and the Trust
or the Portfolio Trust.
SHAREHOLDER SERVICING AGENTS
The Trust has entered into a shareholder servicing agreement (a "Servicing
Agreement") with each Shareholder Servicing Agent pursuant to which a
Shareholder Servicing Agent, as agent for its customers, among other things:
answers customer inquiries regarding account status and history, the manner in
which purchases and redemptions of Shares may be effected and certain other
matters pertaining to the Fund; assists shareholders in designating and
changing dividend options, account designations and addresses; provides
necessary personnel and facilities to establish and maintain shareholder
accounts and records; assists in processing purchase and redemption
transactions; arranges for the wiring of funds; transmits and receives funds
in connection with customer orders to purchase or redeem Shares; verifies and
guarantees shareholder signatures in connection with redemption orders and
transfers and changes in shareholder-designated accounts; furnishes (either
separately or on an integrated basis with other reports sent to a shareholder
by a Shareholder Servicing Agent) monthly and year-end statements and
confirmations of purchases and redemptions; transmits, on behalf of the Trust,
proxy statements, annual reports, updated prospectuses and other
communications from the Trust to the Fund's shareholders; receives, tabulates
and transmits to the Trust proxies executed by shareholders with respect to
meetings of shareholders of the Fund or the Trust; and provides such other
related services as the Trust or a shareholder may request.
The Trust understands that some Shareholder Servicing Agents also may impose
certain conditions on their customers, subject to the terms of this
Prospectus, in addition to or different from those imposed by the Trust, such
as requiring a different minimum initial or subsequent investment, account
fees (a fixed amount per transaction processed), compensating balance
requirements (a minimum dollar amount a customer must maintain in order to
obtain the services offered), or account maintenance fees (a periodic charge
based on a percentage of the assets in the account or of the dividends paid on
those assets). Each Shareholder Servicing Agent has agreed to transmit to its
customers who are holders of Shares appropriate prior written disclosure of
any fees that it may charge them directly and to provide written notice at
least 30 days prior to the imposition of any transaction fees.
The Glass-Steagall Act prohibits certain financial institutions from
engaging in the business of underwriting securities of open-end investment
companies, such as shares of the Fund. The Trust engages banks as Shareholder
Servicing Agents on behalf of the Fund only to perform administrative and
shareholder servicing functions as described above. The Trust believes that
the Glass-Steagall Act should not preclude a bank from acting as a Shareholder
Servicing Agent. There is presently no controlling precedent regarding the
performance of shareholder servicing activities by banks. Future changes in
either federal statutes or regulations relating to the permissible activities
of banks, as well as future judicial or administrative decisions and
interpretations of present and future statutes and regulations, could prevent
a bank from continuing to perform all or part of its servicing activities. If
a bank were prohibited from so acting, its shareholder customers would be
permitted to remain Fund shareholders, and alternative means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the Fund might occur and a shareholder serviced by such bank
might no longer be able to avail himself of any automatic investment or other
services then being provided by such bank. The Trustees of the Trust do not
expect that shareholders of the Fund would suffer any adverse financial
consequences as a result of these occurrences.
OTHER EXPENSES
The Fund bears all costs of its operations other than expenses specifically
assumed by the Distributor, Manager or the Sub-Adviser. See "Management of the
Trust -- Expenses and Expense Limits" in the Statement of Additional
Information. Trust expenses directly attributable to the Fund are charged to
the Fund; other expenses are allocated proportionately among all the
portfolios in the Trust in relation to the net assets of each portfolio.
PORTFOLIO TRANSACTIONS
To the extent consistent with applicable legal requirements, the Sub-Adviser
may place orders for the purchase and sale of portfolio investments for the
Portfolio with Republic New York Securities Corporation, subject to obtaining
best price and execution for a particular transaction. See the Statement of
Additional Information.
DETERMINATION OF NET ASSET VALUE
The net asset value of each of the Shares is determined on each day on which
the New York Stock Exchange is open for trading ("Fund Business Day"). This
determination is made once during each such day as of 4:00 p.m., New York
time, by dividing the value of the Fund's net assets (i.e., the value of its
investment in the Portfolio and other assets less its liabilities, including
expenses payable or accrued) by the number of Shares outstanding at the time
the determination is made.
The value of the Fund's investment in the Portfolio is also determined once
daily at 4:00 p.m., New York time, on each day the New York Stock Exchange is
open for regular trading ("Portfolio Business Day").
The determination of the value of the Fund's investment in the Portfolio is
made by subtracting from the value of the total assets of the Portfolio the
amount of the Portfolio's liabilities and multiplying the difference by the
percentage, effective for that day, which represents the Fund's share of the
aggregate beneficial interests in the Portfolio.
Values of assets held by the Portfolio are determined on the basis of their
market or other fair value, as described in the Statement of Additional
Information.
PURCHASE OF SHARES
Shares may be purchased through Shareholder Servicing Agents without a sales
load at their net asset value next determined after an order is received by a
Shareholder Servicing Agent if it is transmitted to and accepted by the
Distributor. Purchases are therefore effected on the same day the purchase
order is received by the Distributor provided such order is received prior to
4:00 p.m., New York time, on any Fund Business Day. The Trust intends the Fund
to be as fully invested at all times as is reasonably practicable in order to
enhance the yield on its assets. Each Shareholder Servicing Agent is
responsible for and required to promptly forward orders for shares to the
Distributor.
All purchase payments are invested in full and fractional Shares. The Trust
reserves the right to cease offering Shares for sale at any time or to reject
any order for the purchase of Shares.
An investor may purchase Shares by authorizing his Shareholder Servicing
Agent to purchase such Shares on his behalf through the Distributor.
Exchange Privilege. By contacting his Shareholder Servicing Agent, a
shareholder may exchange some or all of his Shares for shares of one or more
of the following investment companies at net asset value without a sales
charge: Republic U.S. Government Money Market Fund (Adviser Class), Republic
New York Tax Free Money Market Fund (Adviser Class), Republic New York Tax
Free Bond Fund (Adviser Class), Republic Equity Fund (Adviser Class), Republic
International Equity Fund, Republic Small Cap Equity Fund, and such other
Republic Funds or other registered investment companies for which Republic
serves as investment adviser as Republic may determine. An exchange may result
in a change in the number of Shares held, but not in the value of such Shares
immediately after the exchange. Each exchange involves the redemption of the
Shares to be exchanged and the purchase of the shares of the other Republic
Fund which may produce a gain or loss for tax purposes.
The exchange privilege (or any aspect of it) may be changed or discontinued
upon 60 days' written notice to shareholders and is available only to
shareholders in states in which such exchanges legally may be made. A
shareholder considering an exchange should obtain and read the prospectus of
the other Republic Fund and consider the differences in investment objectives
and policies before making any exchange.
Shares are being offered only to customers of Shareholder Servicing Agents.
Shareholder Servicing Agents may offer services to their customers, including
specialized procedures for the purchase and redemption of Shares, such as pre-
authorized or automatic purchase and redemption programs. Each Shareholder
Servicing Agent may establish its own terms, conditions and charges, including
limitations on the amounts of transactions, with respect to such services.
Charges for these services may include fixed annual fees, account maintenance
fees and minimum account balance requirements. The effect of any such fees
will be to reduce the net return on the investment of customers of that
Shareholder Servicing Agent. Conversely, certain Shareholder Servicing Agents
may (although they are not required by the Trust to do so) credit to the
accounts of their customers from whom they are already receiving other fees
amounts not exceeding such other fees or the fees received by the Shareholder
Servicing Agent from the Fund, which will have the effect of increasing the
net return on the investment of such customers of those Shareholder Servicing
Agents.
Shareholder Servicing Agents may transmit purchase payments on behalf of
their customers by wire directly to the Fund's custodian bank by following the
procedures described above.
For further information on how to direct a Shareholder Servicing Agent to
purchase Shares, an investor should contact his Shareholder Servicing Agent
(see back cover for address and phone number).
REDEMPTION OF SHARES
A shareholder may redeem all or any portion of the Shares in his account at
any time at the net asset value next determined after a redemption order in
proper form is received by the Transfer Agent. Redemptions are effected on the
same day the redemption order is furnished by the shareholder to his
Shareholder Servicing Agent and is transmitted to and received by the Transfer
Agent provided such order is received prior to 4:00 p.m., New York time, on
any Fund Business Day. Shares redeemed earn dividends up to and including the
Fund Business Day prior to the day the redemption is effected.
The proceeds of a redemption are normally paid from the Fund in federal
funds on the next Fund Business Day on which the redemption is effected, but
in any event within seven days. The right of any shareholder to receive
payment with respect to any redemption may be suspended or the payment of the
redemption proceeds postponed during any period in which the New York Stock
Exchange is closed (other than weekends or holidays) or trading on such
Exchange is restricted or, to the extent otherwise permitted by the 1940 Act,
if an emergency exists.
A shareholder may redeem Shares only by authorizing his Shareholder
Servicing Agent to redeem such Shares on his behalf (since the account and
records of such a shareholder are established and maintained by his
Shareholder Servicing Agent). For further information as to how to direct a
Shareholder Servicing Agent to redeem Shares, a shareholder should contact his
Shareholder Servicing Agent (see back cover for address and phone number).
DIVIDENDS AND DISTRIBUTIONS
The Trust declares all of the Fund's net investment income daily as a
dividend to Fund shareholders. Dividends substantially equal to all of the
Fund's net investment income earned during the month are distributed in that
month to Fund shareholders of record. Generally, the Fund's net investment
income consists of the interest and dividend income it earns, less expenses.
In computing interest income, premiums are not amortized nor are discounts
accrued on long-term debt securities in the Portfolio, except as required for
federal income tax purposes.
The Fund's net realized short-term and long-term capital gains, if any, are
distributed to shareholders annually. Additional distributions are also made
to the Fund's shareholders to the extent necessary to avoid application of the
4% non-deductible federal excise tax on certain undistributed income and net
capital gains of regulated investment companies.
Unless a shareholder elects to receive dividends in cash (subject to the
policies of the shareholder's Shareholder Servicing Agent), dividends are
distributed in the form of additional Shares (purchased at their net asset
value without a sales charge).
Certain mortgage-backed securities may provide for periodic or unscheduled
payments of principal and interest as the mortgages underlying the securities
are paid or prepaid. However, such principal payments (not otherwise
characterized as ordinary discount income or bond premium expense) will not
normally be considered as income to the Portfolio and therefore will not be
distributed as dividends to Fund shareholders. Rather, these payments on
mortgage-backed securities generally will be reinvested by the Portfolio in
accordance with its investment objective and policies.
TAX MATTERS
This discussion is intended for general information only. An investor should
consult with his own tax advisor as to the tax consequences of an investment
in the Fund, including the status of distributions from the Fund under
applicable state or local law.
Each year, the Trust intends to qualify the Fund and elect that the Fund be
treated as a separate "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). To so qualify, the
Fund must meet certain income, distribution and diversification requirements.
Provided such requirements are met and all investment company taxable income
and net realized capital gains of the Fund are distributed to shareholders in
accordance with the timing requirements imposed by the Code, generally no
federal income or excise taxes will be paid by the Fund on amounts so
distributed.
Dividends and capital gains distributions, if any, paid to shareholders are
treated in the same manner for federal income tax purposes whether received in
cash or reinvested in additional shares of the Fund. Shareholders must treat
dividends, other than long-term capital gain dividends, as ordinary income.
Dividends designated by the Fund as long-term capital gain dividends are
taxable to shareholders as long-term capital gain regardless of the length of
time the shares of the Fund have been held by the shareholders. Certain
dividends declared in October, November, or December of a calendar year to
shareholders of record on a date in such a month are taxable to shareholders
(who otherwise are subject to tax on dividends) as though received on December
31 of that year if paid to shareholders during January of the following
calendar year.
Foreign Tax Withholding. Income received by the Portfolio from sources
within foreign countries may be subject to withholding and other income or
similar taxes imposed by such countries. If more than 50% of the value of the
Portfolio's total assets at the close of its taxable year consists of
securities of foreign corporations, the Fund will be eligible and intends to
elect to treat its share of any non-U.S. income and similar taxes it pays (or
which are paid by the Portfolio) as though the taxes were paid by the Fund's
shareholders. Pursuant to this election, a shareholder will be required to
include in gross income (in addition to taxable dividends actually received)
his pro rata share of the foreign taxes paid by the Fund or Portfolio, and
will be entitled either to deduct (as an itemized deduction) his pro rata
share of foreign income and similar taxes in computing his taxable income or
to use it as a foreign tax credit against his U.S. federal income tax
liability, subject to limitations. No deduction for foreign taxes may be
claimed by a shareholder who does not itemize deductions, but such a
shareholder may be eligible to claim the foreign tax credit. Shareholders will
be notified within 60 days after the close of the Fund's taxable year whether
the foreign taxes paid by the Fund or Portfolio will be treated as paid by the
Fund's shareholders for that year. Furthermore, foreign shareholders may be
subject to U.S. tax at the rate of 30% (or lower treaty rate) of the income
resulting from the Fund's election to treat any foreign taxes paid by it as
paid by its shareholders, but will not be able to claim a credit or deduction
for the foreign taxes treated as having been paid by them.
The Fund generally will be required to withhold federal income tax at a rate
of 31% ("backup withholding") from dividends paid, capital gain distributions,
and redemption proceeds to shareholders if (1) the shareholder fails to
furnish the Fund with the shareholder's correct taxpayer identification number
("TIN") or social security number and to make such certifications as the Fund
may require, (2) the Internal Revenue Service notifies the shareholder or the
Fund that the shareholder has failed to report properly certain interest and
dividend income to the Internal Revenue Service and to respond to notices to
that effect, or (3) when required to do so, the shareholder fails to certify
that he is not subject to backup withholding. Backup withholding is not an
additional tax and any amounts withheld may be credited against the
shareholder's federal income tax liability. Dividends from the Fund
attributable to the Fund's net investment income and short-term capital gains
generally will be subject to U.S. withholding tax when paid to shareholders
treated under U.S. tax law as nonresident alien individuals or foreign
corporations, estates, partnerships or trusts.
The Trust is organized as a Massachusetts business trust and, under current
law, is not liable for any income or franchise tax in the Commonwealth of
Massachusetts as long as each series of the Trust (including the Fund)
qualifies as a "regulated investment company" under the Code.
For additional information relating to the tax aspects of investing in the
Fund, see the Statement of Additional Information.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (par value $0.001
per share) and to divide or combine the shares into a greater or lesser number
of shares without thereby changing the proportionate beneficial interests in
the Trust. The shares of each series participate equally in the earnings,
dividends and assets of the particular series. Currently, the Trust has three
series of shares, each of which constitutes a separately managed fund. The
Trust reserves the right to create additional series of shares.
Each share of the Fund represents an equal proportionate interest in the
Fund with each other share. Shares have no preference, preemptive, conversion
or similar rights. Shares when issued are fully paid and non-assessable,
except as set forth below. Shareholders are entitled to one vote for each
share held on matters on which they are entitled to vote. The Trust is not
required and has no current intention to hold annual meetings of shareholders,
although the Trust will hold special meetings of Fund shareholders when in the
judgment of the Trustees of the Trust it is necessary or desirable to submit
matters for a shareholder vote. Shareholders of each series generally vote
separately, for example, to approve investment advisory agreements or changes
in fundamental investment policies or restrictions, but shareholders of all
series may vote together to the extent required under the 1940 Act, such as in
the election or selection of Trustees, principal underwriters and accountants
for the Trust. Under certain circumstances the shareholders of one or more
series could control the outcome of these votes.
The series of the Portfolio Trust will vote separately or together in the
same manner as the series of the Trust. Under certain circumstances, the
investors in one or more series of the Portfolio Trust could control the
outcome of these votes.
Shareholders of the Fund have under certain circumstances (e.g., upon
application and submission of certain specified documents to the Trustees by a
specified number of shareholders) the right to communicate with other
shareholders of the Trust in connection with requesting a meeting of
shareholders of the Trust for the purpose of removing one or more Trustees.
Shareholders of the Trust also have the right to remove one or more Trustees
without a meeting by a declaration in writing subscribed to by a specified
number of shareholders. Upon liquidation or dissolution of the Fund,
shareholders of the Fund would be entitled to share pro rata in the net assets
of the Fund available for distribution to shareholders.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders of such a business
trust may, under certain circumstances, be held personally liable as partners
for its obligations. However, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
both inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Portfolio Trust is organized as a master trust fund under the laws of
the State of New York. The Portfolio is a separate series of the Portfolio
Trust, which currently has two other series. The Portfolio Trust's Declaration
of Trust provides that the Fund and other entities investing in the Portfolio
(e.g., other investment companies, insurance company separate accounts and
common and commingled trust funds) are each liable for all obligations of the
Portfolio. However, the risk of the Fund incurring financial loss on account
of such liability is limited to circumstances in which both inadequate
insurance existed and the Portfolio itself was unable to meet its obligations.
Accordingly, the Trustees of the Trust believe that neither the Fund nor its
shareholders will be adversely affected by reason of the investment of all of
the Assets of the Fund in the Portfolio.
Each investor in the Portfolio, including the Fund, may add to or reduce its
investment in the Portfolio on each Portfolio Business Day. At 4:00 p.m., New
York time on each Portfolio Business Day, the value of each investor's
beneficial interest in the Portfolio is determined by multiplying the net
asset value of the Portfolio by the percentage, effective for that day, which
represents that investor's share of the aggregate beneficial interests in the
Portfolio. Any additions or withdrawals, which are to be effected on that day,
are then effected. The investor's percentage of the aggregate beneficial
interests in the Portfolio is then recomputed as the percentage equal to the
fraction (i) the numerator of which is the value of such investor's investment
in the Portfolio as of 4:00 p.m., New York time on such day plus or minus, as
the case may be, the amount of any additions to or withdrawals from the
investor's investment in the Portfolio effected on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of
4:00 p.m., New York time on such day plus or minus, as the case may be, the
amount of the net additions to or withdrawals from the aggregate investments
in the Portfolio by all investors in the Portfolio. The percentage so
determined is then applied to determine the value of the investor's interest
in the Portfolio as of 4:00 p.m., New York time on the following Portfolio
Business Day.
PERFORMANCE INFORMATION
Yield and total return data for the Fund may from time to time be included
in advertisements about the Trust. "Total return" is expressed in terms of the
average annual compounded rate of return of a hypothetical investment in the
Fund over periods of 1, 5 and 10 years. All total return figures reflect the
deduction of a proportional share of Fund expenses on an annual basis, and
assume that all dividends and distributions are reinvested when paid. "Yield"
refers to the income generated by an investment in the Fund over the 30-day
(or one month) period ended on the date of the most recent balance sheet of
the Fund included in the Trust's registration statement with respect to the
Fund. See the Statement of Additional Information for further information
concerning the calculation of yield and total return data.
Historical total return information for any period or portion thereof prior
to the establishment of the Fund will be that of the Portfolio, adjusted to
assume that all charges, expenses and fees of the Fund and the Portfolio which
are presently in effect were deducted during such periods.
Since these total return and yield quotations are based on historical
earnings and since the Fund's total return and yield fluctuate from day to
day, these quotations should not be considered as an indication or
representation of the Fund's total return or yield in the future. Any
performance information should be considered in light of the Fund's investment
objective and policies, characteristics and quality of the Fund's portfolio
and the market conditions during the time period indicated, and should not be
considered to be representative of what may be achieved in the future. From
time to time the Trust may also use comparative performance information in
such advertisements, including the performance of unmanaged indices, the
performance of the Consumer Price Index (as a measure for inflation), and data
from Lipper Analytical Services, Inc. and other industry publications.
A Shareholder Servicing Agent may charge its customers direct fees in
connection with an investment in the Fund, which will have the effect of
reducing the net return on the investment of customers of that Shareholder
Servicing Agent. Conversely, the Trust has been advised that certain
Shareholder Servicing Agents may credit to the accounts of their customers
from whom they are already receiving other fees amounts not exceeding such
other fees or the fees received by the Shareholder Servicing Agent from the
Fund, which will have the effect of increasing the net return on the
investment of such customers of those Shareholder Servicing Agents. Such
customers may be able to obtain through their Shareholder Servicing Agent
quotations reflecting such decreased return.
SHAREHOLDER INQUIRIES
All shareholder inquiries should be directed to the Trust, 6 St. James
Avenue, Boston, Massachusetts 02116.
GENERAL AND ACCOUNT INFORMATION (800) 782-8183 (TOLL FREE)
--------------------
The Trust's Statement of Additional Information, dated August 1, 1996, with
respect to the Fund contains more detailed information about the Fund,
including information related to (i) the Fund's investment restrictions, (ii)
the Trustees and officers of the Trust and the Manager, Sub-Adviser and
Sponsor of the Fund, (iii) portfolio transactions, (iv) the Fund's shares,
including rights and liabilities of shareholders, and (v) additional yield
information, including the method used to calculate the total return and yield
of the Fund.
<PAGE>
APPENDIX
The characteristics of corporate debt obligations rated by Moody's are
generally as follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements. The
future of such bonds cannot be considered as well assured.
B -- Bonds which are rated B generally lack characteristics of a desirable
investment.
Caa -- Bonds rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds rated Ca are speculative to a high degree.
C -- Bonds rated C are the lowest rated class of bonds and are regarded as
having extremely poor prospects.
The characteristics of corporate debt obligations rated by S&P are generally
as follows:
AAA -- This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA -- Bonds rated AA also qualify as high quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A -- Debt rated A 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 debts in higher rated categories.
BBB -- Debt rated BBB 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.
BB -- Debt rated BB is predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with terms of the obligation.
BB indicates the lowest degree of speculation; CC indicates the highest degree
of speculation.
BB, B, CCC AND CC -- Debt in these ratings is predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with
terms of the obligation. BB indicates the lowest degree of speculation and CC
the highest.
A bond rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by the rating services from other sources which they consider
reliable. The ratings may be changed, suspended or withdrawn as a result of
changes in or unavailability of, such information, or for other reasons.
The characteristics of corporate debt obligations rated by Fitch are
generally as follows:
AAA -- Bonds 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.
AA -- Bonds 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 "-+".
A -- Bonds 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.
BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to 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.
BB -- Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B -- Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payments of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC -- Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC -- Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C -- Bonds are in imminent default in payment of interest or principal.
DDD, DD AND D-- Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the obligor.
DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used 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 DDD, DD, or D categories.
RATINGS OF COMMERCIAL PAPER
Commercial paper rated A-1 by S&P has the following characteristics:
liquidity ratios are adequate to meet cash requirements; the issuer's long-
term debt is rated A or better; the issuer has access to at least two
additional channels of borrowing; and basic earnings and cash flow have an
upward trend with allowances made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a strong position
within the industry.
Commercial paper rated Prime-1 by Moody's is the highest commercial paper
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation
of the issuer's products in relation to competition and consumer acceptance;
(4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings
over a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. Relative
strength or weakness of the above factors determine how the issuer's
commercial paper is rated with various categories.
<PAGE>
REPUBLIC
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FIXED INCOME
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FUND
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INVESTMENT ADVISER
Republic National Bank of New York
452 Fifth Avenue
New York, NY 10018
ADMINISTRATOR, DISTRIBUTOR AND SPONSOR
Signature Broker-Dealer Services, Inc.
6 St. James Avenue
Boston, MA 02116
(617) 423-0800
CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
(800) 782-8183
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
99 High Street
Boston, MA 02110
LEGAL COUNSEL
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005
SHAREHOLDER SERVICING AGENT
Republic National Bank of New York
452 Fifth Avenue
New York, NY 10018
