As filed with the Securities and Exchange Commission on
June 2, 1997
File No. 811-07603
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 3 |X|
STANDISH, AYER & WOOD MASTER PORTFOLIO
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(Exact Name of Registrant as Specified in Charter)
P.O. Box 501
George Town, Grand Cayman
Cayman Island, B.W.I.
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(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (809) 949-2001
Richard S. Wood
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02109
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(Name and Address of Agent for Service)
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EXPLANATORY NOTES
This Amendment No. 3 to the Registration Statement on Form N-1A (the
"Amendment") has been filed by the Registrant pursuant to Section 8(b) of the
Investment Company Act of 1940, as amended (the "1940 Act"), and Rule 8b-15
thereunder. However, beneficial interests in the series of the Registrant are
not registered under the Securities Act of 1933, as amended (the "1933 Act"),
because such interests will be issued solely in transactions that are exempt
from registration under the 1933 Act. Investments in the Registrant's series may
only be made by investment companies, insurance company separate accounts,
common or commingled trust funds or similar organizations or entities that are
"accredited investors" within the meaning of Regulation D under the 1933 Act.
The Amendment does not constitute an offer to sell, or the solicitation of an
offer to buy, any beneficial interests in any series of the Registrant.
This Amendment relates to the Standish Diversified Income Portfolio
only and does not affect the registration of any other series of the Registrant.
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STANDISH, AYER & WOOD MASTER PORTFOLIO
STANDISH DIVERSIFIED INCOME PORTFOLIO
PART A
June 2, 1997
THIS PART A DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE
SOLICITATION OF AN OFFER TO BUY, ANY BENEFICIAL INTERESTS IN
STANDISH DIVERSIFIED INCOME PORTFOLIO.
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
Standish, Ayer & Wood Master Portfolio (the "Portfolio Trust")
is a no-load, open-end management investment company which was organized as a
master trust fund under the laws of the State of New York on January 18, 1996.
Beneficial interests in the Portfolio Trust are divided into separate sub-trusts
or series, each having distinct investment objectives and policies, one of
which, the Standish Diversified Income Portfolio (the "Portfolio"), is described
herein. Beneficial interests in the Portfolio are issued solely in transactions
that are exempt from registration under the Securities Act of 1933, as amended
(the "1933 Act"). Investments in the Portfolio Trust may only be made by
investment companies, insurance company separate accounts, common or commingled
trust funds or similar organizations or entities that are "accredited investors"
within the meaning of Regulation D under the 1933 Act. This Registration
Statement does not constitute an offer to sell, or the solicitation of an offer
to buy, any "security" within the meaning of the 1933 Act.
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective. The Portfolio's investment objective is to
maximize total return, consisting primarily of a high level of income. The
Portfolio seeks to achieve its objective by investing in the following three
market sectors: U.S. domestic, high yield, and international and emerging
markets.
Securities. Under normal market conditions, the Portfolio invests at
least 80% of its net assets in income producing securities. The Portfolio may
invest in all types of income producing securities, including bonds, notes
(including structured or hybrid notes), mortgage-backed securities, asset-backed
securities, shares of real estate investment trusts ("REITs"), convertible
securities, Eurodollar and Yankee Dollar
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instruments, preferred stocks (including convertible preferred stock),
tax-exempt securities, warrants and commercial paper and other money market
instruments. These income producing securities may be issued by U.S. and foreign
corporations or entities, U.S. and foreign banks, the U.S. Government, its
agencies, authorities, instrumentalities or sponsored enterprises, and foreign
governments and their political subdivisions. The Portfolio may also invest up
to 10% of its total assets in common stocks.
The Portfolio may purchase securities that pay income on a fixed,
variable, floating, inverse floating, contingent, in-kind or deferred basis. The
Portfolio may enter into repurchase agreements and forward dollar roll
transactions, purchase securities on a when-issued or delayed delivery basis and
engage in short sales.
Country Selection. Although there is no limit on the number of
countries in which issuers of the Portfolio's investments are located, the
Portfolio intends to invest in no fewer than three different countries,
including the United States. The Portfolio limits its investments in securities
of issuers located in any one developed country (excluding the U.S.) to 15% of
its total assets and limits its investments in securities of issuers located in
any one emerging market country to 7% of its total assets.
Under normal market conditions, at least 80% of the Portfolio's total
assets, adjusted to reflect the Portfolio's net currency exposure after giving
effect to currency transactions and positions, are denominated in or hedged
(including cross-hedged) to the U.S. dollar. It is expected that the Portfolio
will employ currency management techniques to seek to manage its foreign
currency exposure within this limit. These techniques include options, futures,
options on futures, forward foreign currency exchange contracts and currency
swaps.
The Portfolio's investments in securities of foreign and emerging
market issuers entail certain risks not customarily associated with investing in
securities of U.S. issuers. In particular, the securities markets in emerging
markets are less liquid, subject to greater price volatility, have smaller
market capitalizations, have less governmental regulations and are not subject
to as extensive and frequent accounting, financial and other reporting
requirements as the securities markets of more developed countries. See
"Description of Securities and Related Risks" herein for a further description
of the risks associated with the Portfolio's investments.
Credit Quality. The Portfolio invests primarily in income producing
securities. The Portfolio's average dollar-weighted credit quality is expected
to be Ba according to Moody's Investors Service, Inc. ("Moody's") or BB
according to Standard & Poor's Ratings Group ("Standard & Poor's"), Duff &
Phelps, Inc. ("Duff"), Fitch Investors Service, Inc. ("Fitch") or IBCA, Ltd.
("IBCA"). Up to 65% of the Portfolio's total assets may be invested in
securities rated, at the time of investment, below investment grade. Although
the Portfolio does not generally invest in securities that are in
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default, it may from time to time so invest up to 10% of its total assets,
including in defaulted bank loans. Standish International Management Company,
L.P. ("SIMCO" or the "Adviser") attempts to select for the Portfolio those
non-investment grade fixed income securities that have the potential for
upgrade.
Non-investment grade securities are securities rated Ba or below by
Moody's or BB or below by Standard and Poor's, Duff, Fitch or IBCA, or, if
unrated, determined by SIMCO to be of comparable credit quality. Non-investment
grade securities, commonly referred to as "junk bonds," are considered
speculative by the rating agencies and generally carry a higher degree of risk
(greater price volatility and greater risk of loss of principal and interest)
than higher rated securities. If a security is rated differently by two or more
rating agencies, SIMCO uses the highest rating to compute the Portfolio's credit
quality and also to determine its rating category. In determining whether
unrated securities are of equivalent credit quality, SIMCO may take into
account, but will not rely entirely on, ratings assigned by foreign rating
agencies. If a security held by the Portfolio is downgraded, SIMCO will
determine whether to retain that security in the Portfolio's portfolio.
Maturity. Under normal market conditions, the Portfolio's average
dollar-weighted effective portfolio maturity will vary from five to thirteen
years.
DESCRIPTION OF SECURITIES
AND RELATED RISKS
General Risks
The Portfolio may invest in fixed income securities and is subject to
risks associated with investments in such securities. These risks include
interest rate risk, default risk and call and extension risk. The Portfolio is
also subject to the risks associated with direct investments in foreign
securities.
Interest Rate Risk. When interest rates decline, the market value of
fixed income securities tends to increase. Conversely, when interest rates
increase, the market value of fixed income securities tends to decline. The
volatility of a security's market value will differ depending upon the
security's duration, the issuer and the type of instrument.
Default Risk/Credit Risk. Investments in fixed income securities are
subject to the risk that the issuer of the security could default on its
obligations causing the Portfolio to sustain losses on such investments. A
default could impact both interest and principal payments.
Call Risk and Extension Risk. Fixed income securities may be subject to
both call risk and extension risk. Call risk exists when the issuer may exercise
a right to
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pay principal on an obligation earlier than scheduled which would cause cash
flows to be returned earlier than expected. This typically results when interest
rates have declined and the Portfolio will suffer from having to reinvest in
lower yielding securities. Extension risk exists when the issuer may exercise a
right to pay principal on an obligation later than scheduled which would cause
cash flows to be returned later than expected. This typically results when
interest rates have increased and the Portfolio will suffer from the inability
to invest in higher yield securities.
Securities and Specific Risks
The following sections include descriptions of specific risks that are
associated with the Portfolio's purchase of a particular type of security or the
utilization of a specific investment technique.
Investing in Non-Investment Grade Fixed Income Securities.
Non-investment grade fixed income securities are considered predominantly
speculative by traditional investment standards. In some cases, these securities
may be highly speculative and have poor prospects for reaching investment grade
standing. Non-investment grade fixed income securities and unrated securities of
comparable credit quality are subject to the increased risk of an issuer's
inability to meet principal and interest obligations. These securities, also
referred to as high yield securities, may be subject to greater price volatility
due to such factors as specific corporate developments, interest rate
sensitivity, negative perceptions of the high yield markets generally and less
secondary market liquidity.
Non-investment grade fixed income securities are often issued in
connection with a corporate reorganization or restructuring or as part of a
merger, acquisition, takeover or similar event. They are also issued by less
established companies seeking to expand. Such issuers are often highly leveraged
and generally less able than more established or less leveraged entities to make
scheduled payments of principal and interest in the event of adverse
developments or business conditions.
The market value of below-investment grade fixed income securities
tends to reflect individual corporate developments to a greater extent than that
of higher rated securities which react primarily to fluctuations in the general
level of interest rates. As a result, the Portfolio's ability to achieve its
investment objective may depend to a greater extent on SIMCO's judgment
concerning the creditworthiness of issuers than funds which invest in
higher-rated securities. Issuers of non-investment grade fixed income securities
may not be able to make use of more traditional methods of financing and their
ability to service debt obligations may be more adversely affected than issuers
of higher rated securities by economic downturns, specific corporate
developments or the issuer's inability to meet specific projected business
forecasts. Negative publicity about the high yield market and investor
perceptions regarding
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lower rated securities, whether or not based on fundamental analysis, may
depress the prices for such securities.
A holder's risk of loss from default is significantly greater for
non-investment grade fixed income securities than is the case for holders of
other debt securities because non-investment grade securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities.
Investment by the Portfolio in defaulted securities poses additional
risk of loss should nonpayment of principal and interest continue in respect of
such securities. Even if such securities are held to maturity, recovery by the
Portfolio of its initial investment and any anticipated income or appreciation
is uncertain. The secondary market for non-investment grade fixed income
securities is dominated by institutional investors, including mutual funds,
insurance companies and other financial institutions. Accordingly, the secondary
market for such securities is not as liquid as, and is more volatile than, the
secondary market for higher rated securities. In addition, market trading volume
for high yield fixed income securities is generally lower and the secondary
market for such securities could contract under adverse market or economic
conditions, independent of any specific adverse changes in the condition of a
particular issuer. These factors may have an adverse effect on the market price
and the Portfolio's ability to dispose of particular portfolio investments. A
less liquid secondary market also may make it more difficult for the Portfolio
to obtain precise valuations of the high yield securities in its portfolio.
Changes in federal and state laws and industry initiatives could adversely
affect the secondary market for non-investment grade fixed income securities and
the financial condition of issuers of these securities.
Non-investment grade fixed income securities also present risks based
on payment expectations. Such securities frequently contain call or redemption
features which permit the issuer to call or repurchase the security from its
holder. If an issuer exercises such a "call option" and redeems the security,
the Portfolio may have to replace the security with a lower yielding security,
resulting in a decreased return for investors. Similarly, if the Portfolio
experiences unexpected net withdrawals, it may be forced to sell its higher
rated more liquid securities, resulting in a decline in the overall credit
quality of the Portfolio and increasing the exposure of the Portfolio to the
risks of non-investment grade fixed income securities.
Credit ratings issued by credit rating agencies are designed to
evaluate the safety of principal and interest payments of rated securities. They
do not, however, evaluate the market value risk of non-investment grade
securities and, therefore, may not fully reflect the true risks of an
investment. In addition, credit rating agencies may or may not make timely
changes in a rating to reflect changes in the economy or in the conditions of
the issuer that affect the market value of the security. Investments in
non-investment grade and comparable unrated obligations will be
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more dependent on SIMCO's credit analysis than would be the case with
investments in investment grade debt obligations.
Investing in Foreign Securities. Investing in the securities of foreign
issuers involves risks that are not typically associated with investing in U.S.
dollar-denominated securities of domestic issuers. Investments in foreign
issuers may be affected by changes in currency rates, changes in foreign or U.S.
laws or restrictions applicable to such investments and in exchange control
regulations (i.e., currency blockage). A decline in the exchange rate of the
currency (i.e., weakening of the currency against the U.S. dollar) in which a
portfolio security is quoted or denominated relative to the U.S. dollar would
reduce the value of the portfolio security. In addition, if the exchange rate
for the currency in which the Portfolio receives interest payments declines
against the U.S. dollar before such income is distributed as dividends to
interestholders, the Portfolio may have to sell portfolio securities to obtain
sufficient cash to enable interestholders that are regulated investment
companies to pay such dividends to their shareholders. Commissions may be higher
and spreads may be greater on transactions in foreign securities than those for
similar transactions in domestic markets. In addition, clearance and settlement
procedures may be different in foreign countries and, in certain markets, such
procedures have on occasion been unable to keep pace with the volume of
securities transactions, thus making it difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
U.S. issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less government
regulation of foreign markets, companies and securities dealers than in the U.S.
Most foreign securities markets may have substantially less trading
volume than U.S. securities markets and securities of many foreign issuers are
less liquid and more volatile than securities of comparable U.S. issuers.
Furthermore, with respect to certain foreign countries, there is a possibility
of nationalization, expropriation or confiscatory taxation, imposition of
withholding or other taxes on dividend or interest payments (or, in some cases,
capital gains), limitations on the removal of funds or other assets, political
or social instability or diplomatic developments which could affect investments
in those countries.
Investing in Emerging Markets. Although the Portfolio invests primarily
in securities of established issuers based in developed foreign countries, it
will also invest in securities of issuers in emerging market countries,
including issuers in Asia, Eastern Europe, Latin and South America and Africa.
The Portfolio may also invest in currencies of such countries and may purchase
certain options traded on the securities and over-the-counter markets of such
countries. Investments in securities of issuers in emerging market countries may
involve a high degree of risk and many
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may be considered speculative. These investments carry all of the risks of
investing in securities of foreign issuers to a heightened degree. These
heightened risks include (i) greater risks of expropriation, confiscatory
taxation, nationalization, and less social, political and economic stability;
(ii) the imposition of limits on daily price changes which, combined with the
small current size of the markets for securities of emerging market issuers and
the currently low or nonexistent volume of trading, can result in decreased
liquidity and in increased price volatility; (iii) certain national policies
which may restrict the Portfolio's investment opportunities including
limitations on aggregate holdings by foreign investors and restrictions on
investing in issuers or industries deemed sensitive to relevant national
interests; and (iv) the absence of developed legal structures governing private
or foreign investment and private property.
Currency Risks. The U.S. dollar value of foreign securities denominated
in a foreign currency will vary with changes in currency exchange rates, which
can be volatile. Accordingly, changes in the value of these currencies against
the U.S. dollar will result in corresponding changes in the U.S. dollar value of
the Portfolio's assets quoted in those currencies. However, under normal market
conditions, at least 80% of the Portfolio's total assets, adjusted to reflect
the Portfolio's net currency exposure after giving effect to currency
transactions and positions, are denominated in or hedged (including
cross-hedged) to the U.S. dollar. Exchange rates are generally affected by the
forces of supply and demand in the international currency markets, the relative
merits of investing in different countries and the intervention or failure to
intervene of U.S. or foreign governments and central banks. Some countries in
emerging markets also may have managed currencies which do not float freely
against the U.S. dollar. In addition, emerging markets may restrict the free
conversion of their currencies into other currencies. Any devaluations in the
currencies in which the Portfolio's securities are denominated may have a
detrimental impact on the Portfolio's net asset value except to the extent such
foreign currency exposure is subject to hedging transactions. The Portfolio
utilizes various investment strategies to seek to minimize the currency risks
described above. These strategies include the use of currency transactions such
as currency forward and futures contracts, cross currency forward and futures
contracts, currency swaps and currency options. The Portfolio's use of currency
transactions may expose it to risks independent of its securities positions.
U.S. Government Securities. The Portfolio may invest in U.S. Government
securities. Generally, these securities include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. Government agencies, instrumentalities
or sponsored enterprises which are supported by (a) the full faith and credit of
the U.S. Treasury (such as the Government National Mortgage Association), (b)
the right of the issuer to borrow from the U.S. Treasury (such as securities of
the Student Loan Marketing Association), (c) the discretionary authority of the
U.S. Government to purchase certain obligations of the issuer (such as the
Federal National Mortgage
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Association and Federal Home Loan Mortgage Corporation) or (d) only the credit
of the agency. No assurance can be given that the U.S. Government will provide
financial support to U.S. Government agencies, instrumentalities or sponsored
enterprises in the future. U.S. Government securities also include Treasury
receipts, zero coupon bonds, deferred interest securities and other stripped
U.S. Government securities, where the interest and principal components of
stripped U.S. Government securities are traded independently ("STRIPS").
Sovereign Debt Obligations. Investment in sovereign debt obligations
involves special risks not present in corporate debt obligations. The issuer of
the sovereign debt or the governmental authorities that control the repayment of
the debt may be unable or unwilling to repay principal or interest when due, and
the Portfolio may have limited recourse in the event of a default. During
periods of economic uncertainty, the market prices of sovereign debt, and the
Portfolio's net asset value, may be more volatile than prices of U.S. debt
obligations. In the past, certain emerging markets have encountered difficulties
in servicing their debt obligations, withheld payments of principal and interest
and declared moratoria on the payment of principal and interest on their
sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multilateral agencies and other entities
to reduce principal and interest arrearage on their debt. The failure of a
sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of third-party commitments to lend funds to the sovereign debtor,
which may further impair such debtor's ability or willingness to service its
debts.
Brady Bonds. The Portfolio may invest in Brady Bonds. Brady Bonds are
securities created through the exchange of existing commercial bank loans to
public and private entities in certain emerging markets for new bonds in
connection with debt restructurings. In light of the history of defaults of
countries issuing Brady Bonds on their commercial bank loans, investments in
Brady Bonds may be viewed as speculative. Brady Bonds may be fully or partially
collateralized or uncollateralized, are issued in various currencies (but
primarily in U.S. dollars) and are actively traded in over-the-counter secondary
markets. Incomplete collateralization of interest or principal payment
obligations results in increased credit risk. U.S. dollar-denominated
collateralized Brady Bonds, which may be fixed-rate bonds or floating-rate
bonds, are generally collateralized by U.S. Treasury zero coupon bonds having
the same maturity as the Brady bonds.
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Obligations of Supranational Entities. The Portfolio may invest in
obligations of supranational entities designated or supported by governmental
entities to promote economic reconstruction or development and of international
banking institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the "World Bank"), the
European Coal and Steel Community, the Asian Development Bank and the
Inter-American Development Bank. Each supranational entity's lending activities
are limited to a percentage of its total capital (including "callable capital"
contributed by its governmental members at the entity's call), reserves and net
income. There is no assurance that participating governments will be able or
willing to honor their commitments to make capital contributions to a
supranational entity.
Eurodollar and Yankee Dollar Investments. The Portfolio may invest in
Eurodollar and Yankee Dollar instruments. Eurodollar instruments are bonds of
foreign corporate and government issuers that pay interest and principal in U.S.
dollars held in banks outside the United States, primarily in Europe. Yankee
dollar instruments are U.S. dollar denominated bonds typically issued in the
U.S. by foreign governments and their agencies and foreign banks and
corporations. These investments involve risks that are different from
investments in securities issued by U.S. issuers, including potential
unfavorable political and economic developments, foreign withholding or other
taxes, seizure of foreign deposits, currency controls, interest limitations or
other governmental restrictions which might affect payment of principal or
interest.
Corporate Debt Obligations. The Portfolio may invest in corporate debt
obligations of U.S. and foreign and emerging market issuers. Corporate debt
obligations are subject to the risk of an issuer's inability to meet principal
and interest payments on the obligations and may also be subject to price
volatility due to such factors as market interest rates, market perception of
the creditworthiness of the issuer and general market liquidity.
Mortgage-Backed Securities. The Portfolio may invest in privately
issued mortgage-backed securities and mortgage-backed securities issued or
guaranteed by foreign entities or the U.S. Government or any of its agencies,
instrumentalities or sponsored enterprises. Mortgage-backed securities represent
direct or indirect participations in, or are collateralized by and payable from,
mortgage loans secured by real property. Mortgagors can generally prepay
interest or principal on their mortgages whenever they choose. Therefore,
mortgage-backed securities are often subject to more rapid repayment than their
stated maturity date would indicate as a result of principal prepayments on the
underlying loans. This can result in significantly greater price and yield
volatility than is the case with traditional fixed income securities. During
periods of declining interest rates, prepayments can be expected to accelerate,
and thus impair the Portfolio's ability to reinvest the returns
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of principal at comparable yields. Conversely, in a rising interest rate
environment, a declining prepayment rate will extend the average life of many
mortgage-backed securities, increase the Portfolio's exposure to rising interest
rates and prevent the Portfolio from taking advantage of such higher yields.
Asset-Backed Securities. The Portfolio may invest in asset-backed
securities. The principal and interest payments on asset-backed securities are
collateralized by pools of assets such as auto loans, credit card receivables,
leases, installment contracts and personal property. Such asset pools are
securitized through the use of special purpose trusts or corporations. Payments
or distributions of principal and interest on asset-backed securities may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution; however,
privately issued obligations collateralized by a portfolio of privately issued
asset-backed securities do not involve any government-related guaranty or
insurance. Like mortgage-backed securities, asset-backed securities are subject
to more rapid prepayment of principal than indicated by their stated maturity
which may greatly increase price and yield volatility. Asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to mortgage assets and there is the possibility that recoveries on
repossessed collateral may not be available to support payments on these
securities.
Convertible Securities. The Portfolio may invest in convertible
securities consisting of bonds, notes, debentures and preferred stocks.
Convertible debt securities and preferred stock acquired by the Portfolio
entitle the Portfolio to exchange such instruments for common stock of the
issuer at a predetermined rate. Convertible securities are subject both to the
credit and interest rate risks associated with debt obligations and to the stock
market risk associated with equity securities.
Inverse Floating Rate Securities. The Portfolio may invest in inverse
floating rate securities. The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. An inverse floater may be considered to be leveraged to the extent
that its interest rate varies by a magnitude that exceeds the magnitude of the
change in the index rate of interest. The higher the degree of leverage of an
inverse floater, the greater the volatility of its market value.
Zero Coupon and Deferred Payment Securities. The Portfolio may invest
in zero coupon and deferred payment securities. Zero coupon securities are
securities sold at a discount to par value and on which interest payments are
not made during the life of the security. Upon maturity, the holder is entitled
to receive the par value of the security. The Portfolio is required to accrue
income with respect to these securities prior to the receipt of cash payments.
Because the Portfolio will distribute this accrued income to shareholders, to
the extent that shareholders elect to receive dividends in cash rather than
reinvesting such dividends in additional shares, the
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Portfolio will have fewer assets with which to purchase income producing
securities. Deferred payment securities are securities that remain zero coupon
securities until a predetermined date, at which time the stated coupon rate
becomes effective and interest becomes payable at regular intervals. Zero coupon
and deferred payment securities may be subject to greater fluctuation in value
and may have less liquidity in the event of adverse market conditions than
comparably rated securities paying cash interest at regular interest payment
periods.
Structured or Hybrid Notes. The Portfolio may invest in structured or
hybrid notes. The distinguishing feature of a structured or hybrid note is that
the amount of interest and/or principal payable on the note is based on the
performance of a benchmark asset or market other than fixed income securities or
interest rates. Examples of these benchmarks include stock prices, currency
exchange rates and physical commodity prices. Investing in a structured note
allows the Portfolio to gain exposure to the benchmark market while fixing the
maximum loss that it may experience in the event that the market does not
perform as expected. Depending on the terms of the note, the Portfolio may
forego all or part of the interest and principal that would be payable on a
comparable conventional note; the Portfolio's loss cannot exceed this foregone
interest and/or principal. An investment in structured or hybrid notes involves
risks similar to those associated with a direct investment in the benchmark
asset.
Warrants. Warrants acquired by the Portfolio entitle it to buy common
stock from the issuer at a specified price and time. Warrants are subject to the
same market risks as stocks, but may be more volatile in price. The Portfolio's
investment in warrants will not entitle it to receive dividends or exercise
voting rights and will become worthless if the warrants cannot be profitably
exercised before their expiration dates.
Tax Exempt Securities. The Portfolio is managed without regard to
potential tax consequences. If SIMCO believes that tax-exempt securities will
provide competitive returns, the Portfolio may invest up to 10% of its total
assets in tax-exempt securities. The Portfolio's distributions of interest
earned from these investments will be taxable.
Common Stocks. Common stocks are shares of a corporation or other
entity that entitle the holder to a pro rata share of the profits of the
corporation, if any, without preference over any other shareholder or class of
shareholders, including holders of the entity's preferred stock and other senior
equity. Common stock usually carries with it the right to vote and frequently an
exclusive right to do so.
Real Estate Investment Trusts. REITs are pooled investment vehicles
that invest in real estate or real estate loans or interests. Investing in REITs
involves risks similar to those associated with investing in equity securities
of small capitalization companies. REITs are dependent upon management skills,
are not diversified, and
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are subject to risks of project financing, default by borrowers,
self-liquidation, and the possibility of failing to qualify for the exemption
from taxation under the Internal Revenue Code.
INVESTMENT TECHNIQUES AND RELATED RISKS
Strategic Transactions. The Portfolio may, but is not required to,
utilize various investment strategies to seek to hedge market risks (such as
interest rates, currency exchange rates and broad or specific fixed income
market movements), to manage the effective maturity or duration of fixed income
securities, or to enhance potential gain. Such strategies are generally accepted
as part of modern portfolio management and are regularly utilized by many mutual
funds and other institutional investors. Techniques and instruments used by the
Portfolio may change over time as new instruments and strategies are developed
or regulatory changes occur.
In the course of pursuing its investment objective, the Portfolio may
purchase and sell (write) exchange-listed and over-the-counter put and call
options on securities, indices, currencies and other financial instruments;
purchase and sell financial futures contracts and options thereon; enter into
various interest rate transactions such as swaps, caps, floors or collars; enter
into currency transactions such as forward foreign currency exchange contracts,
currency futures contracts, currency swaps and options on currencies or currency
futures; and enter into index, total return and other swap transaction
(collectively, all the above are called "Strategic Transactions"). Strategic
Transactions may be used to seek to protect against possible changes in the
market value of securities held in or to be purchased for the Portfolio's
portfolio resulting from securities markets, currency exchange rate or interest
rate fluctuations, to seek to protect the Portfolio's unrealized gains in the
value of portfolio securities, to facilitate the sale of such securities for
investment purposes, to seek to manage the effective maturity or duration of the
Portfolio's portfolio, or to establish a position in the derivatives markets as
a temporary substitute for purchasing or selling particular securities. In
addition to the hedging transactions referred to in the preceding sentence,
Strategic Transactions may also be used to enhance potential gain in
circumstances where hedging is not involved.
The ability of the Portfolio to utilize Strategic Transactions
successfully will depend on SIMCO's ability to predict pertinent market and
interest rate and currency exchange rate movements, which cannot be assured. The
Portfolio will comply with applicable regulatory requirements when implementing
these strategies, techniques and instruments. The Portfolio's activities
involving Strategic Transactions may be limited by the requirements of the
United States Internal Revenue Code, as amended (the "Code"), for qualification
as a regulated investment company.
Strategic Transactions have risks associated with them including
possible default by the other party to the transaction, illiquidity and, to the
extent SIMCO's
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view as to certain market, interest rate or currency movements is incorrect, the
risk that the use of such Strategic Transactions could result in losses greater
than if they had not been used. The writing of put and call options may result
in losses to the Portfolio, force the purchase or sale, respectively, of
portfolio securities at inopportune times or for prices higher than (in the case
of purchases due to the exercise of put options) or lower than (in the case of
sales due to the exercise of call options) current market values, limit the
amount of appreciation the Portfolio can realize on its investments or cause the
Portfolio to hold a security it might otherwise sell.
The use of options and futures transactions entails certain other
risks. Futures markets are highly volatile and the use of futures may increase
the volatility of the Portfolio's net asset value. In particular, the variable
degree of correlation between price movements of futures contracts and price
movements in the related portfolio position of the Portfolio creates the
possibility that losses on the hedging instrument may be greater than gains in
the value of the Portfolio's position. The writing of options could
significantly increase the Portfolio's portfolio turnover rate and associated
brokerage commissions or spreads. In addition, futures and options markets may
not be liquid in all circumstances and certain over-the-counter options may have
no markets. As a result, in certain markets, the Portfolio might not be able to
close out a transaction without incurring substantial losses. Losses resulting
from the use of Strategic Transactions could reduce net asset value and the net
result may be less favorable than if the Strategic Transactions had not been
utilized. Although the use of futures and options transactions for hedging and
managing effective maturity and duration should tend to minimize the risk of
loss due to a decline in the value of the position, at the same time, they can
limit any potential gain which might result from an increase in value of such
position. The loss incurred by the Portfolio in writing options on futures and
entering into futures transactions is potentially unlimited.
The use of currency transactions can result in the Portfolio incurring
losses as a result of a number of factors including the imposition of exchange
controls, suspension of settlements, or the inability to deliver or receive a
specified currency.
The Portfolio will attempt to limit its net loss exposure resulting
from Strategic Transactions entered into for non-hedging purposes to no more
than 3% of its net assets. In calculating the Portfolio's net loss exposure from
such Strategic Transactions, an unrealized gain from a particular Strategic
Transaction position would be netted against an unrealized loss from a related
position. See Part B for further information regarding the Portfolio's use of
Strategic Transactions.
When-Issued and Delayed Delivery Securities. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Although the Portfolio
will generally purchase securities on a when-issued or delayed delivery basis
with the
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intention of actually acquiring the securities, the Portfolio may dispose of
these securities prior to settlement, if SIMCO deems it appropriate to do so.
The payment obligation and interest rate on these securities is fixed at the
time the Portfolio enters into the commitment, but no income will accrue to the
Portfolio until they are delivered and paid for. Unless the Portfolio has
entered into an offsetting agreement to sell the securities, cash or liquid
assets equal to the amount of the Portfolio's commitment must be segregated and
maintained with the Portfolio's custodian to secure the Portfolio's obligation
and to partially offset the leverage inherent in these securities. The market
value of the securities when they are delivered may be less than the amount paid
by the Portfolio.
Repurchase Agreements. The Portfolio may invest in repurchase
agreements. In a repurchase agreement, the Portfolio buys a security at one
price and simultaneously agrees to sell it back at a higher price. Delays or
losses could result if the other party to the agreement defaults or becomes
insolvent. Repurchase agreements acquired by the Portfolio will always be fully
collateralized as to principal and interest by money market instruments and will
be entered into only with commercial banks, brokers and dealers considered
creditworthy by SIMCO.
Forward Roll Transactions. To seek to enhance current income, the
Portfolio may invest in forward roll transactions involving mortgage-backed
securities. In a forward roll transaction, the Portfolio sells a mortgage-backed
security to a financial institution, such as a bank or broker-dealer, and
simultaneously agrees to repurchase a similar security from the institution at a
later date at an agreed-upon price. The mortgage-backed securities that are
repurchased will bear the same interest rate as those sold, but generally will
be collateralized by different pools of mortgages with different prepayment
histories than those sold. During the period between the sale and repurchase,
the Portfolio will not be entitled to receive interest and principal payments on
the securities sold. Proceeds of the sale will be invested in short-term
instruments, such as repurchase agreements or other short-term securities, and
the income from these investments, together with any additional fee income
received on the sale and the amount gained by repurchasing the securities in the
future at a lower price, will generate income and gain for the Portfolio which
is intended to exceed the yield on the securities sold. Forward roll
transactions involve the risk that the market value of the securities sold by
the Portfolio may decline below the repurchase price of those securities. At the
time that the Portfolio enters into a forward roll transaction, it will place
cash or liquid assets in a segregated account that is marked to market daily
having a value at least equal to the repurchase price (including accrued
interest).
Leverage. The use of forward roll transactions involves leverage.
Leverage allows any investment gains made with the additional monies received
(in excess of the costs of the forward roll transaction) to increase the net
asset value of the Portfolio's shares faster than would otherwise be the case.
On the other hand, if the
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additional monies received are invested in ways that do not fully recover the
costs of such transactions to the Portfolio, the net asset value of the
Portfolio would fall faster than would otherwise be the case.
Short Sales. The Portfolio may engage in short sales and short sales
against the box. In a short sale, the Portfolio sells a security it does not own
in anticipation of a decline in the market value of that security. In a short
sale against the box, the Portfolio either owns or has the right to obtain at no
extra cost the security sold short. A broker holds the proceeds of the short
sale until the settlement date, at which time the Portfolio delivers the
security (or an identical security) to cover the short position. The Portfolio
receives the net proceeds from the short sale. When the Portfolio enters into a
short sale other than against the box, the Portfolio must first borrow the
security to make delivery to the buyer and must place cash or liquid assets in a
segregated account with the Portfolio's custodian that is marked to market
daily. Until the borrowed security is replaced by the Portfolio, the Portfolio
is required to pay to the lender of the security amounts equal to any dividends
or interest which accrue during the period of the loan. To borrow the security,
the Portfolio also may be required to pay a premium, which would increase the
cost of the security sold. The proceeds of the short sale will be retained by
the broker, to the extent necessary to meet margin requirements, until the short
position is closed out. Short sales (other than against the box) involve
unlimited exposure to loss. No securities will be sold short if, after giving
effect to any such short sale, the total market value of all securities sold
short would exceed 10% of the value of the Portfolio's total assets.
Restricted and Illiquid Securities. The Portfolio may invest up to 15%
of its net assets in illiquid investments. Illiquid securities are those that
are not readily marketable, repurchase agreements maturing in more than seven
days, time deposits with a notice or demand period of more than seven days,
certain over-the-counter options, swaps and certain restricted securities. Based
upon continuing review of the trading markets for a specific restricted
security, the security may be determined to be eligible for resale to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933 and,
therefore, be liquid. Also, certain illiquid securities may be determined to be
liquid if they are found to satisfy certain relevant liquidity requirements.
The Portfolio Trust's Board of Trustees has adopted guidelines and
delegated to SIMCO the daily function of determining and monitoring the
liquidity of portfolio securities, including restricted and illiquid securities.
The Board of Trustees, however, retains oversight and is ultimately responsible
for such determinations. The purchase price and subsequent valuation of illiquid
securities normally reflect a discount, which may be significant, from the
market price of comparable securities for which a liquid market exists.
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Portfolio Turnover. A high rate of portfolio turnover (100% or more)
involves correspondingly higher transaction costs which must be borne directly
by the Portfolio and thus indirectly by its interestholders. It may also result
in the Portfolio's realization of larger amounts of short-term capital gains,
distributions from which are taxable to interestholders as ordinary income and
may, under certain circumstances, make it more difficult for interestholders to
qualify as a regulated investment company under the Code. It is expected that
the Portfolio's turnover rate will not exceed 200% for the current fiscal year.
Short-Term Trading. The Portfolio will sell a portfolio security
without regard to the length of time such security has been held if, in SIMCO's
view, the security meets the criteria for disposal.
Temporary Defensive Investments. The Portfolio may maintain cash
balances and purchase money market instruments for cash management and liquidity
purposes. The Portfolio may adopt a temporary defensive position during adverse
market conditions by investing without limit in U.S. and non-U.S. dollar
denominated high quality money market instruments, including short-term U.S.
Government securities, negotiable certificates of deposit, non-negotiable fixed
time deposits, bankers' acceptances, commercial paper, floating-rate notes and
repurchase agreements.
Investment Restrictions. The investment objective and investment
policies set forth in this Part A are not fundamental and may be changed by the
Board of Trustees without the approval of interestholders. The Portfolio has
adopted fundamental policies which may not be changed without the approval of
the Portfolio's interestholders. See "Investment Restrictions" in Part B. If any
percentage restriction is adhered to at the time of investment, a subsequent
increase or decrease in the percentage resulting from a change in the value of
the Portfolio's assets will not constitute a violation of the restriction. If
there is a change in the Portfolio's investment objective, shareholders should
consider whether the Portfolio remains an appropriate investment in light of
their then current financial situation.
ITEM 5. MANAGEMENT OF THE FUND.
Trustees. The Portfolio is a separate investment series of Standish,
Ayer & Wood Master Portfolio, a master trust fund organized under the laws of
the State of New York. Under the terms of the Declaration of Trust, the affairs
of the Portfolio are managed under the supervision of the Trustees of the
Portfolio Trust.
A majority of the Trustees who are not "interested persons" (as defined
in the 1940 Act) of the Portfolio Trust 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 Portfolio Trust and
investors in the Portfolio Trust, up to and including creating separate boards
of trustees. See "Management of
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the Portfolio" in Part B for more information about the Trustees and officers of
the Portfolio Trust.
Investment Adviser. SIMCO, One Financial Center, Boston, Massachusetts
02111, serves as investment adviser to the Portfolio pursuant to an investment
advisory agreement and manages the Portfolio's investments and affairs subject
to the supervision of the Trustees of the Portfolio Trust. SIMCO is a Delaware
limited partnership organized in 1991 and is a registered investment adviser
under the Investment Advisers Act of 1940. The general partner of the Adviser is
Standish, Ayer & Wood, Inc. ("Standish") which holds a 99.98% partnership
interest. The limited partners, who each hold a 0.01% interest in SIMCO, are
Walter M. Cabot, Sr., a Director of and Senior Adviser to SIMCO and Standish,
and D. Barr Clayson, Chairman of the Board of SIMCO and Managing Director of
Standish. Ralph S. Tate, Managing Director of Standish, is President and a
Director of SIMCO. Richard S. Wood, Vice President and a Managing Director of
Standish and the President of the Trust, is the Executive Vice President of
SIMCO.
Standish and SIMCO provide fully discretionary management services and
counseling and advisory services to a broad range of clients throughout the
United States and abroad. As of March 31, 1997, Standish or its affiliate,
SIMCO, managed approximately $30 billion of assets.
The Portfolio's portfolio manager is Delores S. Driscoll, who has been
primarily responsible for the day-to-day management of the Portfolio's portfolio
since its inception on June 2, 1997. During the past five years, Ms. Driscoll
has served as a Director of SIMCO and Managing Director of Standish.
Subject to the supervision and direction of the Trustees of the
Portfolio Trust, the Adviser manages the Portfolio in accordance with its stated
investment objective and policies, recommends investment decisions for the
Portfolio, places orders to purchase and sell securities on behalf of the
Portfolio and permits the Portfolio to use the name "Standish." For its services
to the Portfolio, the Adviser receives a monthly fee equal on an annual basis to
0.50% of the Portfolio's average daily net assets.
Administrator of the Portfolio. IBT Trust Company (Cayman) Ltd., P.O.
Box 501, Grand Cayman, Cayman Islands, BWI, serves as the administrator to the
Portfolio (the "Portfolio Administrator") pursuant to a written administration
agreement with the Portfolio Trust on behalf of the Portfolio. The Portfolio
Administrator provides the Portfolio Trust with office space for managing its
affairs, and with certain clerical services and facilities. For its services to
the Portfolio Trust, the Portfolio Administrator will receive a fee from the
Portfolio in the amount of $7,500 annually. The Portfolio's administration
agreement can be terminated by either party on not more than 60 days' written
notice.
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Expenses. The Portfolio bears the expenses of its operations other than
those incurred by the Advisor under the investment advisory agreement. Among
other expenses, the Portfolio pays investment advisory fees; bookkeeping, share
pricing and custodian fees and expenses; expenses of notices and reports to
interest-holders; expenses of the Portfolio's administrator; legal and auditing
fees; any registration and reporting fees and expenses; and Trustees' fees and
expenses. Expenses of the Portfolio Trust which relate to more than one of its
series are allocated among such series by the Adviser and Standish in an
equitable manner, primarily on the basis of relative net asset values.
Portfolio Transactions. Subject to the supervision of the Trustees of
the Portfolio Trust, the Adviser selects the brokers and dealers that execute
orders to purchase and sell portfolio securities for the Portfolio. The Adviser
will generally seek to obtain the best available price and most favorable
execution with respect to all transactions for the Portfolio. The Adviser may
also consider the extent to which a broker or dealer provides research to the
Adviser.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio Trust was organized as a trust under the laws of the
State of New York on January 18, 1996. Under the Declaration of Trust, the
Trustees are authorized to issue beneficial interests in separate series of the
Portfolio Trust. Each investor is entitled to a vote in proportion to the amount
of its investment in the Portfolio. Investments in the Portfolio may not be
transferred, but an investor may withdraw all or any portion of his investment
at any time at net asset value. Investors in the Portfolio (e.g., investment
companies, insurance company separate accounts and common and commingled trust
funds) will not be liable for the obligations of the Portfolio although they
will bear the risk of loss of their entire respective interests in the
Portfolio. However, there is a risk that interest-holders in the Portfolio may
be held personally liable as partners for the Portfolio's obligations. Because
the Portfolio Trust's Declaration of Trust disclaims interest-holder liability
and provides for indemnification against such liability, the risk of an investor
in the Portfolio 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.
The Portfolio Trust reserves the right to create and issue any number
of series, in which case investments in each series would participate equally in
earnings and assets of the particular series. Currently, the Portfolio Trust has
six series: Standish Fixed Income Portfolio, Standish Equity Portfolio, Standish
Small Capitalization Equity Portfolio, Standish Global Fixed Income Portfolio,
Standish Small Capitalization Equity Portfolio II and Standish Diversified
Income Portfolio.
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Investments in the Portfolio have no pre-emptive or conversion rights
and are fully paid and non-assessable, except as set forth above. The Portfolio
Trust is not required and has no current intention to hold annual meetings of
investors, but the Portfolio Trust will hold special meetings of investors when
in the judgment of the Trustees it is necessary or desirable to submit matters
for an investor vote. Changes in fundamental policies will be submitted to
investors for approval. Investors have under certain circumstances (e.g. upon
application and submission of certain specified documents to the Trustees by a
specified percentage of the aggregate value of the Portfolio Trust's outstanding
interests) the right to communicate with other investors in connection with
requesting a meeting of investors for the purpose of removing one or more
Trustees. Investors also have the right to remove one or more Trustees without a
meeting by a declaration in writing by a specified number of investors. Upon
liquidation of a Portfolio, investors would be entitled to share pro rata in the
net assets of the Portfolio available for distribution to investors.
Inquiries concerning the Portfolio should be made by contacting the
Portfolio at the Portfolio Trust's registered office in care of the Portfolio
Administrator, P.O. Box 501, Cardinal Avenue, George Town, Grand Cayman, Cayman
Islands, British West Indies.
Please see Item 7 for a discussion of the Portfolio's dividend policy.
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in transactions
that are exempt from registration under the 1933 Act. See "General Description
of Registrant" above.
An investment in the Portfolio may be made without a sales load by
certain eligible investors. All investments are made at the net asset value next
determined after an order and payment for the investment is received by the
Portfolio or its agent by the designated cutoff time for each accredited
investor. There is no minimum initial or subsequent investment in the Portfolio.
However, because the Portfolio intends to be as fully invested at all times as
is reasonably practicable in order to enhance the yield on its assets,
investments must be made in federal funds (i.e., monies credited to the account
of the Portfolio Trust's custodian bank by a Federal Reserve Bank). The
Portfolio Trust reserves the right to cease accepting investments in the
Portfolio at any time or to reject any investment order.
The net asset value of the Portfolio is computed in U.S. dollars each
day on which the New York Stock Exchange ("NYSE") is open for trading ("Business
Day") (and on such other days as are deemed necessary in order to comply with
Rule 22c-1 under the 1940 Act). This determination is made as of the close of
regular trading on the NYSE which is normally 4:00 p.m., New York time (the
"Valuation Time").
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Fixed income securities (other than money market instruments) for which
accurate market prices are readily available are valued at their current market
value on the basis of quotations, which may be furnished by a pricing service or
provided by dealers in such securities. Securities not listed on an exchange or
national securities market, certain mortgage-backed and asset-backed securities
and securities for which there were no reported transactions are valued at the
last quoted bid prices. Fixed income securities for which accurate market prices
are not readily available and all other assets are valued at fair value as
determined in good faith by Standish in accordance with procedures approved by
the Trustees, which may include the use of yield equivalents or matrix pricing.
Money market instruments with less than sixty days remaining to maturity when
acquired by the Portfolio are valued on an amortized cost basis unless the
Trustees determine that amortized cost does not represent fair value. If the
Portfolio acquires a money market instrument with more than sixty days remaining
to its maturity, it is valued at current market value until the sixtieth day
prior to maturity and will then be valued at amortized cost based upon the value
on such date unless the Trustees determine during such sixty-day period that
amortized cost does not represent fair value.
Each investor in the Portfolio may add to or reduce its investment in
the Portfolio on each Business Day. At each Valuation Time on each such Business
Day, the value of each investor's beneficial interest in the Portfolio will be
determined by multiplying the net asset value of the Portfolio by the
percentage, effective for that day, that 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, will then be effected. The investor's
percentage of the aggregate beneficial interests in the Portfolio will then be
recomputed as the percentage equal to the fraction (i) the numerator of which is
the value of such investor's investment in the Portfolio as of the Valuation
Time, on such Business 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 Business Day, and (ii) the denominator of which is the
aggregate net asset value of the Portfolio as of the Valuation Time, on such
Business 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 will then be applied to
determine the value of the investor's interest in the Portfolio as of the
Valuation Time, on the following Business Day.
The net income of the Portfolio shall consist of (i) all income
accrued, less the amortization of any premium, on the assets of the Portfolio,
less (ii) all actual and accrued expenses of the Portfolio determined in
accordance with generally accepted accounting principles ("Net Income").
Interest income includes discount earned (including both original issue and
market discount) in discount paper accrued ratably to the date of maturity and
any net realized gains or losses on the assets of the Portfolio. All the Net
Income of the Portfolio is allocated pro rata among the
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investors in the Portfolio. The Net Income is accrued daily and reflected in
each investor's interest in the Portfolio.
Under the anticipated method of operation of the Portfolio, it is
expected that the Portfolio will not be subject to any U.S. federal or state
income tax. However, any investor in the Portfolio that is subject to U.S.
federal income taxation will take into account its share (as determined in
accordance with the governing instrument of the Portfolio) of the Portfolio's
items of income, gain, loss, deduction and credit in determining its income tax
liability, if any. The determination of such share will be made in a manner that
is intended to comply with the Code and applicable tax regulations.
It is intended that the Portfolio's assets, income and distributions
will be managed in such a way that any investor in the Portfolio that is
otherwise eligible to be treated as a regulated investment company should be
able to satisfy the requirements of Subchapter M of the Code, assuming that the
investor invests all of its investment securities (as such terms are used in the
1940 Act) in the Portfolio.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the Portfolio may withdraw all or any portion of its
investment at the net asset value next determined after receipt by the Portfolio
or its agent, by the close of trading (normally 4:00 p.m. Eastern Time) on the
NYSE or, as of such earlier times at which the Portfolio's net asset value is
calculated on each Business Day, by a withdrawal request in proper form. The
proceeds of a withdrawal will be paid by the Portfolio in federal funds normally
on the Business Day the withdrawal is effected, but in any event within five
Business Days following receipt of the request. The Portfolio reserves the right
to pay redemptions in kind. Investments in the Portfolio may not be transferred.
The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal proceeds postponed
during any period in which the NYSE 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.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
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APPENDIX
KEY TO MOODY'S CORPORATE
BOND AND FOR SOVEREIGN,
SUBNATIONAL AND SOVEREIGN
RELATED ISSUES
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. Their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
STANDARD & POOR'S RATINGS
DEFINITIONS
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA- Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated 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 debt in higher rated
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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 regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
STANDARD & POOR'S
CHARACTERISTICS OF SOVEREIGN
DEBT OF FOREIGN COUNTRIES
AAA- Stable, predictable governments with demonstrated track record of
responding flexibly to changing economic and political circumstances
Key players in the global trade and financial system:
- - Prosperous and resilient
economies, high per capita
incomes
- - Low fiscal deficits and
government debt, low inflation
- - Low external debt AA- Stable, predictable governments with demonstrated track
record of responding to changing economic and political circumstances
- - Tightly integrated into global
trade and financial system
- - Differ from AAAs only to a small
degree because:
- - Economies are smaller, less
prosperous and generally more
vulnerable to adverse external
influences (e.g., protection and
terms of trade shocks)
- - More variable fiscal deficits,
government debt and inflation
- - Moderate to high external debt
A- Politics evolving toward more open, predictable forms of governance in
environment of rapid economic and social change
- - Established trend of integration
into global trade and financial
system
- - Economies are smaller, less
prosperous and generally more
vulnerable to adverse external
influences (e.g., protection and
terms of trade shocks), but
- - Usually rapid growth in output
and per capita incomes
- - Manageable through variable
fiscal deficits, government debt
and inflation
- - Usually low but variable debt
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- - Integration into global trade and
financial system growing but
untested
- - Low to moderate income
developing economies but
variable performance and quite
vulnerable to adverse external
influences
- - Variable to high fiscal deficits,
government debt and inflation
- - Very high and variable debt, often
graduates of Brady plan but track
record not well established
BBB-- Political factors a source of significant uncertainty, either because
system is in transition or due to external threats, or both, often in
environment of rapid economic and social change
- - Integration into global trade and
financial system growing but
untested
- - Economies less prosperous and
often more vulnerable to adverse
external influences
- - Variable to high fiscal deficits,
government debt and inflation
- - High and variable external debt
BB-- Political factors a source of major uncertainty, either because system is
in transition or due to external threats, or both, often in environment of rapid
economic and social change - Integration into global trade and
financial system growing but
untested
- - Low to moderate income
developing economies, but
variable performance and quite
vulnerable to adverse external
influences
- - Variable to high fiscal deficits,
government debt and inflation
- - Very high and variable debt, often
graduates of Brady Plan but track
record not well established
In the case of sovereign, subnational and sovereign related issuers, the
Portfolio uses the foreign currency or domestic (local) currency rating
depending upon how a security in the portfolio is denominated. In the case where
the Portfolio holds a security denominated in a domestic (local) currency and
one of the rating services does not provide a domestic (local) currency rating
for the issuer, the Portfolio will use the foreign currency rating for the
issuer; in the case where the Portfolio holds a security denominated in a
foreign currency and one of the rating services does not provide a foreign
currency rating for the issuer, the Portfolio will treat the security as being
unrated.
A-24
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Dated June 2, 1997
STANDISH, AYER & WOOD MASTER PORTFOLIO
STANDISH DIVERSIFIED INCOME PORTFOLIO
PART B
ITEM 10. COVER PAGE.
This Part B expands upon and supplements the information contained in
Part A of Standish Diversified Income Portfolio (the "Portfolio"), a separate
investment series of Standish, Ayer & Wood Master Portfolio (the "Portfolio
Trust"). This Part B should be read in conjunction with such Part A. NEITHER
PART A NOR THIS PART B CONSTITUTES AN OFFER TO SELL, OR THE SOLICITATION OF AN
OFFER TO BUY, ANY BENEFICIAL INTERESTS IN THE STANDISH DIVERSIFIED INCOME
PORTFOLIO.
ITEM 11. TABLE OF CONTENTS. PAGE
General Information and History........................................ B-1
Investment Objective and Policies...................................... B-1
Management of the Portfolio............................................ B-19
Control Persons and Principal Holders of Securities.................... B-22
Investment Advisory and Other Services................................. B-23
Brokerage Allocations and Other Practices.............................. B-24
Capital Stock and Other Securities..................................... B-25
Purchase, Redemption and Pricing of Securities Being Offered........... B-26
Tax Status............................................................. B-28
Underwriters........................................................... B-33
Calculation of Performance Data........................................ B-33
Financial Statements................................................... B-33
ITEM 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
ITEM 13. INVESTMENT OBJECTIVE AND POLICIES.
Part A contains additional information about the investment objective
and policies of the Portfolio. This Part B should be read only in conjunction
with Part A. This section contains supplemental information concerning the types
of securities and other instruments in which the Portfolio may invest, the
investment policies and
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portfolio strategies that the Portfolio may utilize and certain risks attendant
to those investments, policies and strategies.
Fixed Income Obligations. The Portfolio may make a variety of
investments, including investment in long-term, intermediate-term and short-term
senior and subordinated corporate debt and other fixed income obligations. Such
securities may be unrated or rated in the non-investment grade rating categories
of Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group
("Standard & Poor's") or another rating organization. Bonds rated BB or below by
Standard & Poor's or Ba or below by Moody's (or comparable rated and unrated
securities) are commonly referred to as "junk bonds" and are considered
speculative; the ability of their issuers to make principal and interest
payments may be questionable. In some cases, such bonds may be highly
speculative, have poor prospects for reaching investment grade standing and be
in default. As a result, investment in such bonds will entail greater risks than
those associated with investment grade bonds (i.e., bonds rated AAA, AA, A or
BBB by Standard & Poor's or Aaa, Aa, A or Baa by Moody's). 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.
The amount of high yield, fixed income securities proliferated in the
1980s and early 1990s as a result of increased merger and acquisition and
leveraged buyout activity. Such securities are also issued by less-established
corporations desiring to expand. Risks associated with acquiring the securities
of such issuers generally are greater than is the case with higher rated
securities because such issuers are often less creditworthy companies or are
highly leveraged and generally less able than more established or less leveraged
entities to make scheduled payments of principal and interest.
The market values of high yield, fixed income securities tends to
reflect individual corporate developments to a greater extent than do those of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Issuers of such high yield securities may not be able
to make use of more traditional methods of financing and their ability to
service debt obligations may be more adversely affected than issuers of higher
rated securities by economic downturns, specific corporate developments or the
issuers' inability to meet specific projected business forecasts. These
non-investment grade securities also tend to be more sensitive to economic
conditions than higher-rated securities. Negative publicity about the high yield
bond market and investor perceptions regarding lower rated securities, whether
or not based on Portfolio fundamental analysis, may depress the prices for such
securities.
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Since investors generally perceive that there are greater risks
associated with non-investment grade securities of the type in which the
Portfolio invests, the yields and prices of such securities may tend to
fluctuate more than those for higher rated securities. In the lower quality
segments of the fixed-income securities market, changes in perceptions of
issuers' creditworthiness tend to occur more frequently and in a more pronounced
manner than do changes in higher quality segments of the fixed-income securities
market, resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In addition,
the prices of fixed-income securities fluctuate in response to the general level
of interest rates. Fluctuations in the prices of portfolio securities subsequent
to their acquisition will not affect cash income from such securities but will
be reflected in the Portfolio's net asset value.
The risk of loss from default for the holders of high yield,
fixed-income securities is significantly greater than is the case for holders of
other debt securities because such high yield, fixed-income securities are
generally unsecured and are often subordinated to the rights of other creditors
of the issuers of such securities. The Portfolio may be required to liquidate
other portfolio securities in order to enable certain of its interest holders to
satisfy their annual distribution obligations in respect of accrued interest
income on securities which are subsequently written off, even though the
Portfolio has not received any cash payments of such interest.
The secondary market for high yield, fixed-income securities is
dominated by institutional investors, including mutual fund Portfolios,
insurance companies and other financial institutions. Accordingly, the secondary
market for such securities is not as liquid as and is more volatile than the
secondary market for higher-rated securities. In addition, the trading volume
for high yield, fixed-income securities is generally lower than that of higher
rated securities and the secondary market for high yield, fixed-income
securities could contract under adverse market or economic conditions
independent of any specific adverse changes in the condition of a particular
issuer. These factors may have an adverse effect on the Portfolio's ability to
dispose of particular portfolio investments. Prices realized upon the sale of
such lower rated or unrated securities, under these circumstances, may be less
than the prices used in calculating the Portfolio's net asset value. A less
liquid secondary market also may make it more difficult for the Portfolio to
obtain precise valuations of the high yield securities in its portfolio.
Proposed federal legislation could adversely affect the secondary
market for high yield securities and the financial condition of issuers of these
securities. The form of any proposed legislation and the probability of such
legislation being enacted is uncertain.
B-3
<PAGE>
Non-investment grade or high yield, fixed-income securities also
present risks based on payment expectations. High yield, fixed-income securities
frequently contain "call" or buy-back features which permit the issuer to call
or repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, the Portfolio may have to replace such
security with a lower yielding security, resulting in a decreased return for
investors. In addition, if the Portfolio experiences unexpected net redemptions
of the Portfolio's shares, it may be forced to sell its higher rated securities,
resulting in a decline in the overall credit quality of the Portfolio's
portfolio and increasing the exposure of the Portfolio to the risks of high
yield securities. The Portfolio may also incur additional expenses to the extent
that it is required to seek recovery upon a default in the payment of principal
or interest on a portfolio security.
Credit ratings issued by credit rating agencies are designed to
evaluate the safety of principal and interest payments of rated securities. They
do not, however, evaluate the market value risk of non-investment grade
securities and, therefore, may not fully reflect the true risks of an
investment. In addition, credit rating agencies may or may not make timely
changes in a rating to reflect changes in the economy or in the conditions of
the issuer that affect the market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of investment quality.
Investments in non-investment grade and comparable unrated obligations will be
more dependent on the Adviser's credit analysis than would be the case with
investments in investment-grade debt obligations. The Adviser employs its own
credit research and analysis, which includes a study of existing debt, capital
structure, ability to service debt and to pay dividends, the issuer's
sensitivity to economic conditions, its operating history and the current trend
of earnings. The Adviser continually monitors the investments in the Portfolio's
portfolio and evaluates whether to dispose of or to retain non-investment grade
and comparable unrated securities whose credit ratings or credit quality may
have changed.
Money Market Instruments and Repurchase Agreements. Money market
instruments include short-term U.S. and foreign Government securities,
commercial paper (promissory notes issued by corporations to finance their
short-term credit needs), negotiable certificates of deposit, non-negotiable
fixed time deposits, bankers' acceptances and repurchase agreements. U.S.
Government securities include securities which are direct obligations of the
U.S. Government backed by the full faith and credit of the United States, and
securities issued by agencies and instrumentalities of the U.S. Government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the U.S. Treasury or may be backed by the credit of the federal
agency or instrumentality itself. Agencies and instrumentalities of the U.S.
Government include, but are not limited to, Federal Land Banks, the Federal Farm
Credit Bank, the Central Bank for Cooperatives, Federal Intermediate Credit
Banks, Federal Home Loan Banks and the Federal National Mortgage Association.
B-4
<PAGE>
The Portfolio may invest in commercial paper rated "P-1" or "P-2" by
Moody's, "A-1" or "A-2" by Standard & Poor's, Duff-1 or Duff-2 by Duff & Phelps
("Duff"), or in commercial paper that is unrated.
A repurchase agreement is an agreement under which the Portfolio
acquires money market instruments (generally U.S. Government securities) from a
commercial bank, broker or dealer, subject to resale to the seller at an
agreed-upon price and date (normally the next business day). The resale price
reflects an agreed-upon interest rate effective for the period the instruments
are held by the Portfolio and is unrelated to the interest rate on the
instruments. The instruments acquired by the Portfolio (including accrued
interest) must have an aggregate market value in excess of the resale price and
will be held by the custodian bank for the Portfolio until they are repurchased.
The Trustees will monitor the standards that SIMCO will use in reviewing the
creditworthiness of any party to a repurchase agreement with the Portfolio.
The use of repurchase agreements involves certain risks. For example,
if the seller defaults on its obligation to repurchase the instruments acquired
by the Portfolio at a time when their market value has declined, the Portfolio
may incur a loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by the Portfolio are collateral for a loan by the Portfolio
and therefore are 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
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
Strategic Transactions. The Portfolio may, but is not required to,
utilize various other investment strategies as described below to seek to hedge
various market risks (such as interest rates, currency exchange rates, and broad
or specific fixed-income market movements), to manage the effective maturity or
duration of fixed-income securities, or to enhance potential gain. Such
strategies are generally accepted as part of modern portfolio management and are
regularly utilized by many mutual funds and other institutional investors.
Techniques and instruments used by the Portfolio may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing its investment objective, the Portfolio may
purchase and sell (write) exchange-listed and over-the-counter put and call
options on securities, indices and other financial instruments; purchase and
sell financial futures contracts and options thereon; enter into various
interest rate transactions such as swaps, caps, floors or collars; and enter
into various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic
B-5
<PAGE>
Transactions"). Strategic Transactions may be used to seek to protect against
possible changes in the market value of securities held in or to be purchased
for the Portfolio's portfolio resulting from securities market, interest rate or
currency exchange rate fluctuations, to protect the Portfolio's unrealized gains
in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to manage the effective maturity or duration
of the Portfolio's portfolio, or to establish a position in the derivatives
markets as a temporary substitute for purchasing or selling particular
securities. In addition to the hedging transactions referred to in the preceding
sentence, Strategic Transactions may also be used to seek to enhance potential
gain in circumstances where hedging is not involved although the Portfolio will
attempt to limit its net loss exposure resulting from Strategic Transactions
entered into for such purposes to not more than 3% of its net assets at any one
time and, to the extent necessary, the Portfolio will close out transactions in
order to comply with this limitation. (Transactions such as writing covered call
options are considered to involve hedging for the purposes of this limitation.)
In calculating the Portfolio's net loss exposure from such Strategic
Transactions, an unrealized gain from a particular Strategic Transaction
position would be netted against an unrealized loss from a related Strategic
Transaction position. For example, if SIMCO anticipates that the Belgian franc
will appreciate relative to the French franc, the Portfolio may take a long
forward currency position in the Belgian franc and a short foreign currency
position in the French franc. Under such circumstances, any unrealized loss in
the Belgian franc position would be netted against any unrealized gain in the
French franc position (and vice versa) for purposes of calculating the
Portfolio's net loss exposure. The ability of the Portfolio to utilize these
Strategic Transactions successfully will depend on SIMCO's ability to predict
pertinent market and interest rate movements, which cannot be assured. The
Portfolio will comply with applicable regulatory requirements when implementing
these strategies, techniques and instruments. The Portfolio's activities
involving Strategic Transactions may be limited by the requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company.
Risks of Strategic Transactions. The use of Strategic Transactions has
associated risks including possible default by the other party to the
transaction, illiquidity and, to the extent SIMCO's view as to certain market,
currency exchange rate or interest rate movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Writing put and call options may result in losses to the
Portfolio, force the purchase or sale, respectively, of portfolio securities at
inopportune times or for prices higher than (in the case of purchases due to the
exercise of put options) or lower than (in the case of sales due to the exercise
of call options) current market values, limit the amount of appreciation the
Portfolio can realize on its investments or cause the Portfolio to hold a
security it might otherwise sell. The use of currency transactions can result in
the Portfolio incurring losses as a result of a number of factors including the
imposition
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of exchange controls, suspension of settlements, or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Portfolio creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Portfolio's
position. Writing options could significantly increase the Portfolio's portfolio
turnover rate and, therefore, associated brokerage commissions or spreads. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Portfolio might not be able to close out a transaction without
incurring substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time, in certain
circumstances, they tend to limit any potential gain which might result from an
increase in value of such position. The loss incurred by the Portfolio in
writing options on futures and entering into futures transactions is potentially
unlimited; however, as described above, the Portfolio will attempt to limit its
net loss exposure resulting from Strategic Transactions entered into for
non-hedging purposes to not more than 3% of its net assets at any one time.
Futures markets are highly volatile and the use of futures may increase the
volatility of the Portfolio's net asset value. Finally, entering into futures
contracts would create a greater ongoing potential financial risk than would
purchases of options where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value and the net result may be less favorable than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options
typically have similar structural characteristics and operational mechanics
regardless of the underlying instrument on which they are purchased or sold.
Thus, the following general discussion relates to each of the particular types
of options discussed in greater detail below. In addition, many Strategic
Transactions involving options require segregation of the Portfolio's assets in
special accounts, as described below under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for
the payment of a premium, the right to sell, and the writer the obligation to
buy (if the option is exercised), the underlying security, commodity, index,
currency or other instrument at the exercise price. For instance, the
Portfolio's purchase of a put option on a security might be designed to protect
its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the
Portfolio the right to sell such instrument at the option exercise price. A call
option, in consideration for the payment of a premium, gives the purchaser of
the option the right to buy, and the seller the obligation to sell (if the
option is exercised), the underlying instrument at the exercise price. The
Portfolio
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<PAGE>
may purchase a call option on a security, futures contract, index, currency or
other instrument to seek to protect the Portfolio against an increase in the
price of the underlying instrument that it intends to purchase in the future by
fixing the price at which it may purchase such instrument. An American style put
or call option may be exercised at any time during the option period while a
European style put or call option may be exercised only upon expiration or
during a fixed period prior thereto. The Portfolio is authorized to purchase and
sell exchange listed options and over-the-counter options ("OTC options").
Exchange listed options are issued by a regulated intermediary such as the
Options Clearing Corporation ("OCC"), which guarantees the performance of the
obligations of the parties to such options. The discussion below uses the OCC as
an example, but is also applicable to other financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security or currency, although in the future
cash settlement may become available. Index options and Eurodollar instruments
are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Portfolio's ability to close out its position as a purchaser or
seller of an exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. There is no assurance that a liquid option
market on an exchange will exist. In the event that the relevant market for an
option on an exchange ceases to exist, outstanding options on that exchange
would generally continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The Portfolio
will generally sell (write) OTC options (other than OTC currency options) that
are subject
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to a buy-back provision permitting the Portfolio to require the Counterparty to
sell the option back to the Portfolio at a formula price within seven days. OTC
options purchased by the Portfolio, and portfolio securities "covering" the
amount of the Portfolio's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are subject to the
Portfolio's restriction on illiquid securities, unless determined to be liquid
in accordance with procedures adopted by the Board of Trustees. For OTC options
written with "primary dealers" pursuant to an agreement requiring a closing
purchase transaction at a formula price, the amount which is considered to be
illiquid may be calculated by reference to a formula price. The Portfolio
expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in the OTC option market. As a result, if the Counterparty
fails to make delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Portfolio or fails to make a cash
settlement payment due in accordance with the terms of that option, the
Portfolio will lose any premium it paid for the option as well as any
anticipated benefit of the transaction. Accordingly, SIMCO must assess the
creditworthiness of each such Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC option will be satisfied. The Portfolio will engage in OTC
option transactions only with U.S. Government securities dealers recognized by
the Federal Reserve Bank of New York as "primary dealers," or broker-dealers,
domestic or foreign banks or other financial institutions which have received,
combined with any credit enhancements, a long-term debt rating of A from
Standard & Poor's or Moody's or an equivalent rating from any other nationally
recognized statistical rating organization ("NRSRO") or which issue debt that is
determined to be of equivalent credit quality by SIMCO.
If the Portfolio sells (writes) a call option, the premium that it
receives may serve as a partial hedge, to the extent of the option premium,
against a decrease in the value of the underlying securities or instruments in
its portfolio or will increase the Portfolio's income. The sale (writing) of put
options can also provide income.
The Portfolio may purchase and sell (write) put and call options on
securities including U.S. Treasury and agency securities, mortgage-backed and
asset-backed securities, foreign sovereign debt, corporate debt securities,
equity securities (including convertible securities) and Eurodollar instruments
that are traded on U.S. and foreign securities exchanges and in the OTC markets,
and on securities indices, currencies, swaps and futures contracts.
All calls sold by the Portfolio must be "covered" (i.e., the Portfolio
must own the securities or the futures contract subject to the call) or must
meet the asset segregation requirements described below as long as the call is
outstanding. In
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addition, the Portfolio may cover a written call option or put option by
entering into an offsetting forward contract and/or by purchasing an offsetting
option or any other option which, but virtue of its exercise price or otherwise,
reduces the Portfolio's net exposure on its written option position. Even though
the Portfolio will receive the option premium to help offset any loss, the
Portfolio may incur a loss if the exercise price is below the market price for
the security subject to the call at the time of exercise. A call sold by the
Portfolio also exposes the Portfolio during the term of the option to possible
loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Portfolio to hold a
security or instrument which it might otherwise have sold.
The Portfolio will not sell put options if, as a result, more than 50%
of the Portfolio's assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that the
Portfolio may be required to buy the underlying security at a price above the
market price.
Options on Securities Indices and Other Financial Indices. The
Portfolio may also purchase and sell (write) call and put options on securities
indices and other financial indices. Options on securities indices and other
financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement. For example, an option on an index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the index upon which the option is based exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the differential between the closing
price of the index and the exercise price of the option, which also may be
multiplied by a formula value. The seller of the option is obligated, in return
for the premium received, to make delivery of this amount upon exercise of the
option. In addition to the methods described above, the Portfolio may cover call
options on a securities index by owning securities whose price changes are
expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities in its
portfolio.
General Characteristics of Futures. The Portfolio may enter into
financial futures contracts or purchase or sell put and call options on such
futures. Futures are generally bought and sold on the commodities exchanges
where they are listed and involve payment of initial and variation margin as
described below. All futures contracts entered into by the Portfolio are traded
on U.S. exchanges or boards of trade that are licensed and regulated by the
Commodity Futures Trading Commission ("CFTC") or on certain foreign exchanges.
The sale of futures contracts creates a firm
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obligation by the Portfolio, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to index futures and Eurodollar
instruments, the net cash amount). The purchase of futures contracts creates a
corresponding obligation by the Portfolio, as purchaser, to purchase a financial
instrument at a specific time and price. Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such position
upon exercise of the option.
The Portfolio's use of financial futures and options thereon will in
all cases be consistent with applicable regulatory requirements and in
particular the regulations of the CFTC relating to exclusions from regulation as
a commodity pool operator. Those regulations currently provide that the
Portfolio may use commodity futures and option positions (i) for bona fide
hedging purposes without regard to the percentage of assets committed to margin
and option premiums, or (ii) for other purposes permitted by the CFTC to the
extent that the aggregate initial margin and option premiums required to
establish such non-hedging positions (net of the amount that the positions were
"in the money" at the time of purchase) do not exceed 5% of the net asset value
of the Portfolio's portfolio, after taking into account unrealized profits and
losses on such positions. Typically, maintaining a futures contract or selling
an option thereon requires the Portfolio to deposit, with its custodian for the
benefit of a futures commission merchant, or directly with the futures
commission merchant, as security for its obligations an amount of cash or other
specified assets (initial margin) which initially is typically 1% to 10% of the
face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
directly with the futures commission merchant thereafter on a daily basis as the
value of the contract fluctuates. The purchase of an option on financial futures
involves payment of a premium for the option without any further obligation on
the part of the Portfolio. If the Portfolio exercises an option on a futures
contract it will be obligated to post initial margin (and potential subsequent
variation margin) for the resulting futures position just as it would for any
position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price, nor that
delivery will occur. The segregation requirements with respect to futures
contracts and options thereon are described below.
Currency Transactions. The Portfolio may engage in currency
transactions with Counterparties to seek to hedge the value of portfolio
holdings denominated in particular currencies against fluctuations in relative
value or to enhance potential gain. Currency transactions include currency
contracts, exchange listed currency futures, exchange listed and OTC options on
currencies, and currency swaps. A forward currency contract involves a privately
negotiated obligation to purchase or
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sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional (agreed-upon)
difference among two or more currencies and operates similarly to an interest
rate swap, which is described below. The Portfolio may enter into
over-the-counter currency transactions with Counterparties which have received,
combined with any credit enhancements, a long term debt rating of A by Standard
& Poor's or Moody's, respectively, or that have an equivalent rating from a
nationally rated statistical rating organization ("NRSRO") or (except for OTC
currency options) whose obligations are determined to be of equivalent credit
quality by SIMCO.
The Portfolio's transactions in forward currency contracts and other
currency transactions such as futures, options, options on futures and swaps
will generally be limited to hedging involving either specific transactions or
portfolio positions. See "Strategic Transactions." Transaction hedging is
entering into a currency transaction with respect to specific assets or
liabilities of the Portfolio, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
The Portfolio will not enter into a transaction to seek to hedge
currency exposure to an extent greater, after netting all transactions intended
wholly or partially to offset other transactions, than the aggregate market
value (at the time of entering into the transaction) of the securities held in
its portfolio that are denominated or generally quoted in or currently
convertible into such currency, other than with respect to proxy hedging as
described below.
The Portfolio may also seek to cross-hedge currencies by entering into
transactions to purchase or sell one or more currencies that are expected to
decline in value in relation to other currencies to which the Portfolio has or
in which the Portfolio expects to have portfolio exposure. For example, the
Portfolio may hold a French security and SIMCO may believe that French francs
will deteriorate against German marks. The Portfolio would sell French francs to
reduce its exposure to that currency and buy German marks. This strategy would
be a hedge against a decline in the value of French francs, although it would
expose the Portfolio to declines in the value of the German mark relative to the
U.S. dollar.
To seek to reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of portfolio securities, the Portfolio may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
the Portfolio's portfolio is exposed is difficult to hedge or to hedge against
the U.S. dollar. Proxy hedging entails entering into a forward contract to sell
a currency whose changes in
B-12
<PAGE>
value are generally considered to be linked to a currency or currencies in which
certain of the Portfolio's portfolio securities are or are expected to be
denominated, and to buy U.S. dollars. The amount of the contract would not
exceed the value of the Portfolio's securities denominated in linked currencies.
For example, if SIMCO considers that the Austrian schilling is linked to the
German deutschemark (the "D- mark"), and a portfolio contains securities
denominated in schillings and SIMCO believes that the value of schillings will
decline against the U.S. dollar, SIMCO may enter into a contract to sell D-marks
and buy dollars. Proxy hedging involves some of the same risks and
considerations as other transactions with similar instruments. Currency
transactions can result in losses to the Portfolio if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Further, there is the risk that the perceived linkage between various currencies
may not be present or may not be present during the particular time that the
Portfolio is engaging in proxy hedging. If the Portfolio enters into a currency
hedging transaction, it will comply with the asset segregation requirements
described below.
Risks of Currency Transactions. Currency transactions are subject to
risks different from those of other portfolio transactions. Because currency
control is of great importance to the issuing governments and influences
economic planning and policy, purchases and sales of currency and related
instruments can be negatively affected by government exchange controls,
blockages, and manipulations or exchange restrictions imposed by governments.
These can result in losses to the Portfolio if it is unable to deliver or
receive currency or funds in settlement of obligations and could also cause
hedges it has entered into to be rendered useless, resulting in full currency
exposure as well as incurring transaction costs. Buyers and sellers of currency
futures are subject to the same risks that apply to the use of futures
generally. Further, settlement of a currency futures contract for the purchase
of most currencies must occur at a bank based in the issuing nation. Trading
options on currency futures is relatively new, and the ability to establish and
close out positions on such options is subject to the maintenance of a liquid
market which may not always be available. Currency exchange rates may fluctuate
based on factors extrinsic to that country's economy.
Combined Transactions. The Portfolio may enter into multiple
transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts) and multiple interest rate transactions, structured notes and any
combination of futures, options, currency and interest rate transactions
("component transactions") instead of a single Strategic Transaction, as part of
a single or combined strategy when, in the opinion of SIMCO, it is in the best
interests of the Portfolio to do so. A combined transaction will usually contain
elements of risk that are present in each of its component transactions.
Although combined transactions are normally entered into based on SIMCO's
judgment that the combined strategies will reduce risk or otherwise more
effectively achieve the desired portfolio management goal, it is possible that
the
B-13
<PAGE>
combination will instead increase such risks or hinder achievement of the
portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into
which the Portfolio may enter are interest rate, currency, index and total
return swaps and the purchase or sale of related caps, floors and collars. The
Portfolio expects to enter into these transactions primarily for hedging
purposes, including, but not limited to, preserving a return or spread on a
particular investment or portion of its portfolio, protecting against currency
fluctuations, as a duration management technique or protecting against an
increase in the price of securities the Portfolio anticipates purchasing at a
later date. Swaps, caps, floors and collars may also be used to enhance
potential gain in circumstances where hedging is not involved although, as
described above, the Portfolio will attempt to limit its net loss exposure
resulting from swaps, caps, floors and collars and other Strategic Transactions
entered into for such purposes to not more than 3% of its net assets at any one
time. The Portfolio will not sell interest rate caps, floors or collars where it
does not own securities or other instruments providing the income stream the
Portfolio may be obligated to pay. Interest rate swaps involve the exchange by
the Portfolio with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. A currency swap is an
agreement to exchange cash flows on a notional amount of two or more currencies
based on the relative value differential among them and an index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain rate of return
within a predetermined range of interest rates or values.
The Portfolio will usually enter into swaps on a net basis, i.e., the
two payment 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 payments. The Portfolio will not
enter into any swap, cap, floor or collar transaction unless, at the time of
entering into such transaction, the unsecured long-term debt of the
Counterparty, combined with any credit enhancements, is rated at least A by
Standard & Poor's or Moody's or has an equivalent rating from an NRSRO or the
Counterparty issues debt that is determined to be of equivalent credit quality
by SIMCO. 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
B-14
<PAGE>
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. Swaps, caps, floors and collars are considered illiquid
for purposes of the Portfolio's policy regarding illiquid securities, unless it
is determined, based upon continuing review of the trading markets for the
specific security, that such security is liquid. The Trustees have adopted
guidelines and delegated to SIMCO the daily function of determining and
monitoring the liquidity of swaps, caps, floors and collars. The Trustees,
however, retain oversight focusing on factors such as valuation, liquidity and
availability of information and they are ultimately responsible for such
determinations. The staff of the SEC currently takes the position that swaps,
caps, floors and collars are illiquid, and are subject to the Portfolio's
limitation on investing in illiquid securities.
Risks of Strategic Transactions Outside the United States. When
conducted outside the United States, Strategic Transactions may not be regulated
as heavily as in the United States, may not involve a clearing mechanism and
related guarantees, and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) lesser availability than in the United States of data on which to make
trading decisions, (ii) delays in the Portfolio's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iii) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, (iv) lower trading
volume and liquidity, and (v) other complex foreign political, legal and
economic factors. At the same time, Strategic Transactions may offer advantages
such as trading in instruments that are not currently traded in the United
States or arbitrage possibilities not available in the United States.
Eurodollar Contracts. The Portfolio may make investments in Eurodollar
contracts. Eurodollar contracts are U.S. dollar-denominated futures contracts or
options thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The
Portfolio might use Eurodollar futures contracts and options thereon to hedge
against changes in LIBOR, to which many interest rate swaps and fixed income
instruments are linked.
Use of Segregated Accounts. The Portfolio will hold securities or other
instruments whose values are expected to offset its obligations under the
Strategic Transactions. The Portfolio will cover Strategic Transactions as
required by interpretive positions of the staff of the SEC. The Portfolio will
not enter into Strategic Transactions that expose the Portfolio to an obligation
to another party unless it owns either (i) an offsetting position in securities
or other options, futures
B-15
<PAGE>
contracts or other instruments or (ii) cash, receivables or liquid securities
with a value sufficient to cover its potential obligations. The Portfolio may
have to comply with any applicable regulatory requirements for Strategic
Transactions, and if required, will set aside cash and other assets in a
segregated account with its custodian bank in the amount prescribed. In that
case, the Portfolio's custodian would maintain the value of such segregated
account equal to the prescribed amount by adding or removing additional cash or
other assets to account for fluctuations in the value of the account and the
Portfolio's obligations on the underlying Strategic Transactions. Assets held in
a segregated account would not be sold while the Strategic Transaction is
outstanding, unless they are replaced with similar assets. As a result, there is
a possibility that segregation of a large percentage of the Portfolio's assets
could impede portfolio management or the Portfolio's ability to meet redemption
requests or other current obligations.
"When-Issued" and "Delayed Delivery" Securities. The Portfolio may
purchase securities on a "when-issued" or "delayed delivery" basis. Delivery and
payment for securities purchased on a when-issued or delayed delivery basis will
normally take place 15 to 45 days after the date of the transaction. The payment
obligation and interest rate on the securities are fixed at the time that the
Portfolio enters into the commitment, but interest will not accrue to the
Portfolio until delivery of and payment for the securities. Although the
Portfolio will only make commitments to purchase "when-issued" and "delayed
delivery" securities with the intention of actually acquiring the securities,
the Portfolio may sell the securities before the settlement date if deemed
advisable by SIMCO. Unless the Portfolio has entered into an offsetting
agreement to sell the securities purchased on a "when- issued" or "forward
commitment" basis, cash or liquid obligations with a market value equal to the
amount of the Portfolio's commitment will be segregated with the Portfolio's
custodian bank. If the market value of these securities declines, additional
cash or securities will be segregated daily so that the aggregate market value
of the segregated securities equals the amount of the Portfolio's commitment.
Securities purchased on a "when-issued" and "delayed delivery" basis
may have a market value on delivery which is less than the amount paid by the
Portfolio. Changes in market value may be based upon the public's perception of
the creditworthiness of the issuer or changes in the level of interest rates.
Generally, the value of "when-issued" securities will fluctuate inversely to
changes in interest rates, i.e., they will appreciate in value when interest
rates fall and will decline in value when interest rates rise.
Portfolio Turnover. It is not the policy of the Portfolio to purchase
or sell securities for trading purposes. However, the Portfolio does not place
any restrictions on portfolio turnover and may sell any portfolio security
without regard to the period of time it has been held, except as may be
necessary to maintain the status of certain of its interest holders as a
regulated investment company under the
B-16
<PAGE>
Code. The Portfolio may therefore generally change its portfolio investments at
any time in accordance with SIMCO's appraisal of factors affecting any
particular issuer or market, or relevant economic conditions. It is expected
that the Portfolio's turnover rate will not exceed 200% for the current fiscal
year.
INVESTMENT RESTRICTIONS
The Portfolio has adopted the following fundamental policies. Each of
the Portfolio's fundamental policies cannot be changed unless the change is
approved by the "vote of the outstanding voting securities" of the Portfolio,
which phrase as used herein means the lesser of (i) 67% or more of the voting
securities of the Portfolio present at a meeting, if the holders of more than
50% of the outstanding voting securities of the Portfolio are present or
represented by proxy, or (ii) more than 50% of the outstanding voting securities
of the Portfolio.
As a matter of fundamental policy, the Portfolio may not:
1. Issue senior securities. For purposes of this restriction, borrowing
money in accordance with paragraph 2 below, making loans in accordance
with paragraph 6 below, the issuance of shares of beneficial interest
in multiple classes or series, the deferral of trustees' fees, the
purchase or sale of options, futures contracts, forward commitments and
repurchase agreements entered into in accordance with the Portfolio's
investment policies or within the meaning of paragraph 5 below, are not
deemed to be senior securities.
2. Borrow money, except in amounts not to exceed 33 1/3% of the value of
the Portfolio's total assets (including the amount borrowed) taken at
market value (i) from banks for temporary or short-term purposes or for
the clearance of transactions, (ii) in connection with the redemption
of portfolio shares or to finance failed settlements of portfolio
trades without immediately liquidating portfolio securities or other
assets, (iii) in order to fulfill commitments or plans to purchase
additional securities pending the anticipated sale of other portfolio
securities or assets and (iv) the Portfolio may enter into reverse
repurchase agreements and forward roll transactions. For purposes of
this investment restriction, investments in short sales, futures
contracts, options on futures contracts, securities or indices and
forward commitments shall not constitute borrowing.
3. Underwrite the securities of other issuers, except to the extent that,
in connection with the disposition of portfolio securities, the
Portfolio may be deemed to be an underwriter under the Securities Act
of 1933.
4. Purchase or sell real estate except that the Portfolio may (i) acquire
or lease office space for its own use, (ii) invest in securities of
issuers that invest in real
B-17
<PAGE>
estate or interests therein, (iii) invest in securities that are
secured by real estate or interests therein, (iv) purchase and sell
mortgage-related securities and (v) hold and sell real estate acquired
by the Portfolio as a result of the ownership of securities.
5. Purchase or sell commodities or commodity contracts, except the
Portfolio may purchase and sell options on securities, securities
indices and currency, futures contracts on securities, securities
indices and currency and options on such futures, forward foreign
currency exchange contracts, forward commitments, securities index put
or call warrants and repurchase agreements entered into in accordance
with the Portfolio's investment policies.
6. Make loans, except that the Portfolio (1) may lend portfolio securities
in accordance with the Portfolio's investment policies up to 33 1/3% of
the Portfolio's total assets taken at market value, (2) enter into
repurchase agreements, and (3) purchase all or a portion of an issue of
debt securities, bank loan participation interests, bank certificates
of deposit, bankers' acceptances, debentures or other securities,
whether or not the purchase is made upon the original issuance of the
securities.
7. With respect to 75% of its total assets, purchase securities of an
issuer (other than the U.S. Government, its agencies, instrumentalities
or authorities or repurchase agreements collateralized by U.S.
Government securities and other investment companies), if: (a) such
purchase would cause more than 5% of the Portfolio's total assets taken
at market value to be invested in the securities of such issuer; or (b)
such purchase would at the time result in more than 10% of the
outstanding voting securities of such issuer being held by the
Portfolio.
8. Invest more than 25% of its total assets in the securities of one or
more issuers conducting their principal business activities in the same
industry (excluding the U.S. Government or its agencies or
instrumentalities). For the purposes of this restriction, state and
municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone companies
are considered to be a separate industry from water, gas or electric
utilities; personal credit finance companies and business credit
finance companies are deemed to be separate industries; and
wholly-owned finance companies are considered to be in the industry of
their parents if their activities are primarily related to financing
the activities of their parents. This restriction does not apply to
investments in municipal securities which have been pre-refunded by the
use of obligations of the U.S. Government or any of its agencies or
instrumentalities.
B-18
<PAGE>
The following restrictions are not fundamental policies and may be
changed by the Trustees of the Portfolio Trust without investor approval in
accordance with applicable laws, regulations or regulatory policy. The Portfolio
may not:
a. Purchase securities on margin (except that the Portfolio may
obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities).
b. Invest in the securities of an issuer for the purpose of
exercising control or management, but it may do so where it is
deemed advisable to protect or enhance the value of an
existing investment.
c. Purchase the securities of any other investment company except
to the extent permitted by the 1940 Act.
d. Invest more than 15% of its net assets in securities which are
illiquid.
e. Purchase additional securities if the Portfolio's borrowings
exceed 5% of its net assets.
If any percentage restriction described above is adhered to at the time
of investment, a subsequent increase or decrease in the percentage resulting
from a change in the value of the Portfolio's assets will not constitute a
violation of the restriction.
ITEM 14. MANAGEMENT OF THE PORTFOLIO.
Trustees and Officers of the Portfolio Trust. The Trustees and
executive officers of the Portfolio Trust are listed below. All executive
officers of the Portfolio Trust are affiliates of SIMCO, the Portfolio's
investment adviser.
<TABLE>
<CAPTION>
Name, Address and Date Position Held Principal Occupation
of Birth with Trust During Past 5 Years
- --------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
*D. Barr Clayson, 7/29/35 Vice President and Trustee Vice President and Managing
c/o Standish, Ayer & Wood, Director,
Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Chairman and Director,
Boston, MA 02111 Standish International
Management Company, L.P.
B-19
<PAGE>
Name, Address and Date Position Held Principal Occupation
of Birth with Trust During Past 5 Years
- --------------------------------------- -------------------------------------- --------------------------------------
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board
c/o Decision Resources, Inc. and Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 02154 through 1989, Senior V.P.
Arthur D. Little
Benjamin M. Friedman, 8/5/44 Trustee William Joseph Maier
c/o Harvard University Professor of Political Economy,
Cambridge, MA 02138 Harvard University
John H. Hewitt, 4/11/35 Trustee Trustee, The Peabody
P.O. Box 307 Foundation; Trustee,
So. Woodstock, VT 05071 Visiting Nurse Alliance of
Vermont
and New Hampshire
*Edward H. Ladd, 1/3/38 Trustee and Vice President Chairman of the Board and
c/o Standish, Ayer & Wood, Managing Director, Standish,
Inc. Ayer &
One Financial Center Wood, Inc. since 1990;
Boston, MA 02111 formerly President of Standish,
Ayer & Wood, Inc.
Director of
Standish International
Management Company, L.P.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street Associates
c/o Essex Street Associates (family investment trust office);
P.O. Box 5600 Director, Holyoke Mutual
Beverly Farms, MA 01915 Insurance Company
*Richard S. Wood, 5/21/54 President and Trustee Vice President, Secretary,
c/o Standish, Ayer & Wood, and Managing Director,
Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Executive Vice President and
Boston, MA 02111 Director,
Standish International
Management Company, L.P.
James E. Hollis III, 11/21/48 Executive Vice President and Vice President and Director,
c/o Standish, Ayer & Wood, Treasurer Standish, Ayer & Wood, Inc.
Inc.
One Financial Center
Boston, MA 02111
B-20
<PAGE>
Name, Address and Date Position Held Principal Occupation
of Birth with Trust During Past 5 Years
- --------------------------------------- -------------------------------------- --------------------------------------
Paul G. Martins, 3/10/56 Vice President Vice President, Standish, Ayer
c/o Standish, Ayer & Wood, & Wood, Inc. since October
Inc. 1996; formerly Senior Vice
One Financial Center President, Treasurer and Chief
Boston, MA 02111 Financial Officer of Liberty
Financial Bank Group (1993-95);
prior to 1993, Corporate
Controller, The Berkeley
Financial Group
Beverly E. Banfield, 7/6/56 Vice President Vice President and Compliance
c/o Standish, Ayer & Wood, Officer,
Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Assistant Vice President and
Boston, MA 02111 Compliance Officer,
Freedom Capital Management
Corp. (1989-1992)
Lavinia B. Chase, 6/4/46 Vice President Vice President and Associate
c/o Standish, Ayer & Wood, Director,
Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Anne P. Herrmann, 1/26/56 Vice President and Secretary Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Standish, Ayer & Wood, Inc.
Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Senior Operations, Manager,
c/o Standish, Ayer & Wood, Standish, Ayer & Wood, Inc.
Inc. since December 1995; formerly
One Financial Center Vice President, Scudder,
Boston, MA 02111 Stevens and Clark
*Indicates that Trustee is an interested person of the Portfolio Trust for
purposes of the 1940 Act.
</TABLE>
B-21
<PAGE>
Compensation of Trustees and Officers. The Portfolio Trust pays no
compensation to the Trustees of the Portfolio Trust that are affiliated with the
Adviser or to the Portfolio Trust's officers.
The following table estimates the amount of fees to be paid to the
Portfolio Trust's Trustees during the Portfolio's initial fiscal year ending
December 31, 1997:
<TABLE>
<CAPTION>
Pension or
Estimated Retirement
Aggregate Benefits Accrued Total Compensation
Compensation as Part of from
from the Portfolio's Portfolio and Other
Name of Trustee Portfolio* Expenses Funds in Complex**
--------------- --------- -------- -----------------
<S> <C> <C> <C>
D. Barr Clayson $0 $0 $0
Samuel C. Fleming $67 $0 $49,250
Benjamin M. Friedman $67 $0 $45,500
John H. Hewitt $75 $0 $45,500
Edward H. Ladd $0 $0 $0
Caleb Loring, III $67 $0 $45,500
Richard S. Wood $0 $0 $0
- --------------------
* Estimated. The Portfolio is newly organized and has not paid any
Trustees' fees.
** As of the date of this Part B there were 22 registered investment
companies (or series thereof), in the fund complex, six of which were
series of the Portfolio Trust. Total compensation is based on
historical data for the year ended December 31, 1996.
</TABLE>
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of May 31, 1997, the Trustees and officers of the Portfolio Trust as
a group beneficially owned (i.e., had voting and/or investment power) less than
1% of the then outstanding interests of the Portfolio. As of the close of
business on June 2, 1997, the Standish Diversified Income Fund beneficially
owned approximately 100% of the then outstanding interests of the Portfolio and
therefore controlled the Portfolio. The Standish Diversified Income Fund is a
separate diversified series of the Standish, Ayer & Wood Investment Trust, an
open end investment company, located at One Financial Center, Boston, MA 02111.
Registered investment companies investing in the Portfolio have
informed the Portfolio that whenever such an investor is requested to vote on
matters pertaining to the fundamental policies of the Portfolio, the investment
company will hold a
B-22
<PAGE>
meeting of shareholders and will cast its votes as instructed by the company's
shareholders.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
Investment Adviser of the Portfolio Trust. SIMCO serves as the adviser
to the Portfolio pursuant to a written investment advisory agreement. SIMCO is a
Delaware limited partnership organized in 1991 and is registered under the
Investment Advisers Act of 1940. The General Partner of the Adviser is Standish,
Ayer & Wood, Inc. ("Standish"), One Financial Center, Boston, MA 02111, which
holds a 99.98% partnership interest. The Limited Partners, who each hold a 0.01%
interest in SIMCO, are Walter M. Cabot, Sr., a Director of and a Senior Adviser
to Standish, and D. Barr Clayson, Chairman of the Board of SIMCO and a Managing
Director of Standish. Ralph S. Tate, a Managing Director of Standish, is
President and a Director of SIMCO. Richard S. Wood, a Managing Director and Vice
President of Standish and the President of the Trust, is the Executive Vice
President of SIMCO.
The following, constituting all of the Directors and all of the
shareholders of Standish, are the Standish controlling persons: Caleb F.
Aldrich, Nicholas S. Battelle, Walter M. Cabot, Sr., David H. Cameron, Karen K.
Chandor, D. Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A.
Flaherty, Maria D. Furman, James E. Hollis III, Raymond J. Kubiak, Edward H.
Ladd, Laurence A. Manchester, George W. Noyes, Arthur H. Parker, Howard B.
Rubin, Austin C. Smith, David C. Stuehr, Ralph S. Tate, and Richard S. Wood.
Certain services provided by the Adviser under the advisory agreement
are described in Part A. These services are provided without reimbursement by
the Portfolio for any costs incurred. Under the investment advisory agreement,
the Adviser is paid a fee at the annual rate of 0.50% of the Portfolio's average
daily net asset value. The advisory fees are payable monthly.
The Portfolio bears expenses of its operations other than those
incurred by the Adviser pursuant to the investment advisory agreement. Among
other expenses, the Portfolio will pay share pricing and shareholder servicing
fees and expenses; custodian fees and expenses; legal and auditing fees and
expenses; expenses of prospectuses, statements of additional information and
shareholder reports; registration and reporting fees and expenses; and Trustees'
fees and expenses.
Unless terminated as provided below, the investment advisory agreement
continues in full force and effect from year to year but only so long as each
such continuance is approved annually (i) by either the Trustees of the
Portfolio Trust or by the "vote of a majority of the outstanding voting
securities" of the Portfolio, and, in either event (ii) by vote of a majority of
the Trustees of the Portfolio Trust who are not parties to the investment
advisory agreement or "interested persons" (as defined
B-23
<PAGE>
in the 1940 Act) of any such party, cast in person at a meeting called for the
purpose of voting on such approval. The investment advisory agreement may be
terminated at any time without the payment of any penalty by vote of the
Trustees of the Portfolio Trust or by the "vote of a majority of the outstanding
voting securities" of the Portfolio or by the Adviser, on sixty days' written
notice to the other parties. The investment advisory agreement terminates in the
event of its assignment as defined in the 1940 Act.
In an attempt to avoid any potential conflict with portfolio
transactions for the Portfolio, the Adviser and the Portfolio Trust have each
adopted extensive restrictions on personal securities trading by personnel of
the Adviser and its affiliates. These restrictions include: pre-clearance of all
personal securities transactions and a prohibition of purchasing initial public
offerings of securities. These restrictions are a continuation of the basic
principle that the interests of the Portfolio and its investors come before
those of the Adviser and its employees.
Administrator of the Portfolio
IBT Trust Company (Cayman) Ltd., P.O. Box 501, Grand Cayman, Cayman
Islands, BWI, serves as the administrator to the Portfolio (the "Portfolio
Administrator") pursuant to a written administration agreement with the
Portfolio Trust on behalf of the Portfolio. The Portfolio Administrator provides
the Portfolio Trust with office space for managing its affairs, and with certain
clerical services and facilities. For its services to the Portfolio Trust, the
Portfolio Administrator currently receives a fee from the Portfolio in the
amount of $7,500 annually. The Portfolio's administration agreement can be
terminated by either party on not more than sixty days' written notice.
Custodian
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111, serves as custodian of all cash and securities of the Portfolio.
Independent Accountants
Coopers & Lybrand, P.O. Box 219, Grand Cayman, Cayman Islands, BWI,
serves as independent accountants for the Portfolio Trust and will audit the
Portfolio's financial statements annually.
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
The Adviser is responsible for placing the Portfolio's portfolio
transactions and will do so in a manner deemed fair and reasonable to the
Portfolio and not according to any formula. The primary consideration in all
portfolio transactions will be
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prompt execution of orders in an efficient manner at the most favorable price.
In selecting broker-dealers and in negotiating commissions, the Adviser will
consider the firm's reliability, the quality of its execution services on a
continuing basis and its financial condition. In addition, if the Adviser
determines in good faith that the amount of commissions charged by a broker is
reasonable in relation to the value of the brokerage and research services
provided by such broker, the Portfolio may pay commissions to such broker in an
amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (ii) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts, and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance and settlement). Research services furnished by firms through which
the Portfolio effects securities transactions may be used by the Adviser in
servicing other accounts; not all of these services may be used by the Adviser
in connection with the Portfolio generating the soft dollar credits. The
investment advisory fee paid by the Portfolio under the investment advisory
agreements will not be reduced as a result of the Adviser's receipt of research
services.
The Adviser also places portfolio transactions for other advisory
accounts. The Adviser will seek to allocate portfolio transactions equitably
whenever concurrent decisions are made to purchase or sell securities for the
Portfolio and another advisory account. In some cases, this procedure could have
an adverse effect on the price or the amount of securities available to the
Portfolio. In making such allocations, the main factors considered by the
Adviser will be the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held, and
opinions of the persons responsible for recommending the investment.
Because most of the Portfolio's securities transactions are effected on
a principal basis involving a "spread" or "dealer mark-up," the Portfolio has
not paid any brokerage commissions during the past three years.
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is a series of Standish, Ayer & Wood Master Portfolio, an
open-end management investment company registered under the Investment Company
Act of 1940, as amended. The Portfolio Trust was organized as a master trust
fund under the laws of the State of New York on January 18, 1996. Interests in
the Portfolio have no preemptive or conversion rights, and are fully paid and
non-assessable, except as set forth in Part A. The Portfolio normally will not
hold meetings of holders of such interests except as required under the 1940
Act. The Portfolio would be required to
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hold a meeting of holders in the event that at any time less than a majority of
its Trustees holding office had been elected by holders. The Trustees of the
Portfolio continue to hold office until their successors are elected and have
qualified. Holders holding a specified percentage of interests in the Portfolio
may call a meeting of holders in the Portfolio for the purpose of removing any
Trustee. A Trustee of the Portfolio may be removed upon a majority vote of the
interests held by holders in the Portfolio qualified to vote in the election.
The 1940 Act requires the Portfolio to assist its holders in calling such a
meeting. Upon liquidation of the Portfolio, holders in the Portfolio would be
entitled to share pro rata in the net assets of the Portfolio available for
distribution to holders. Each holder in the Portfolio is entitled to a vote in
proportion to its percentage interest in the Portfolio.
ITEM 19. PURCHASE, REDEMPTION AND PRICING OF SECURITIES BEING
OFFERED.
Beneficial interests in the Portfolio are issued solely in transactions
that are exempt from registration under the Securities Act of 1933. See "General
Description of Registrant," "Purchase of Securities Being Offered" and
"Redemption or Repurchase" in Part A.
The value of the Portfolio's net assets (i.e., the value of its
securities and other assets less its liabilities, including expenses payable or
accrued) is determined each day on which the New York Stock Exchange is open (a
"Business Day"). Currently, the New York Stock Exchange is not open on weekends,
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. Each investor in the Portfolio
may add to or reduce its investment in the Portfolio on each Business Day. As of
4:00 p.m. (Eastern time) on each Business Day, the value of each investor's
interest in the Portfolio will be determined by multiplying the net asset value
of the Portfolio by the percentage representing that investor's share of the
aggregate beneficial interests in the Portfolio. Any additions or reductions
which are to be effected on that day will then be effected. The investor's
percentage of the aggregate beneficial interests in the Portfolio will then be
recomputed as the percentage equal to the fraction (i) the numerator of which is
the value of such investor's investment in the Portfolio as of 4:00 p.m. on such
day plus or minus, as the case may be, the amount of net additions to or
reductions in the investor's investment in the Portfolio effected on such day,
and (ii) the denominator of which is the aggregate net asset value of the
Portfolio as of 4:00 p.m. on such day plus or minus, as the case may be, the
amount of the net additions to or reductions in the aggregate investments in the
Portfolio by all investors in the Portfolio. The percentage so determined will
then be applied to determine the value of the investor's interest in the
Portfolio as of 4:00 p.m. on the following Business Day.
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Portfolio securities that are fixed income securities (other than money
market instruments) for which accurate market prices are readily available are
valued at their current market value on the basis of quotations, which may be
furnished by a pricing service or provided by dealers in such securities. Fixed
income securities for which accurate market prices are not readily available and
other assets are valued at fair value as determined in good faith by the Adviser
in accordance with procedures approved by the Trustees, which may include the
use of yield equivalents or matrix pricing.
Money market instruments with less than sixty days remaining to
maturity when acquired by the Portfolio are valued on an amortized cost basis.
If the Portfolio acquires a money market instrument with more than sixty days
remaining to its maturity, it is valued at current market value until the
sixtieth day prior to maturity and will then be valued at amortized cost based
upon the value on such date unless the Trustees determine during such sixty-day
period that amortized cost does not represent fair value.
Generally, the close of trading on foreign securities exchanges occurs
each day at various times prior to the close of trading on the New York Stock
Exchange. Securities held by the Portfolio (whose principal trading markets are
such foreign exchanges) will be priced according to values obtained at the close
of trading on the relevant exchange. Foreign currency exchange rates are also
generally determined prior to the close of regular trading on the New York Stock
Exchange. Occasionally, events which affect the values of such securities and
such exchange rates may occur between the times at which they are determined and
the close of regular trading on the New York Stock Exchange and will therefore
not be reflected in the computation of the Portfolio's net asset value. If
events materially affecting the value of such securities occur during such
period, then these securities are valued at their fair value as determined in
good faith by the Trustees.
The Portfolio intends to pay redemption proceeds in cash for all
interests redeemed but, under certain conditions, the Portfolio may make payment
wholly or partly in portfolio securities, in conformity with a rule of the SEC.
The Portfolio will select such securities in a manner it considers equitable,
regardless of which securities were deposited by the investor or the composition
of the Portfolio's portfolio at the time of the redemption in-kind. Portfolio
securities paid upon withdrawal or reduction of an interest-holder's investment
in the Portfolio will be valued at their then current market value. The
Portfolio Trust has elected to be governed by the provisions of Rule 18f-1 under
the 1940 Act which limits the Portfolio's obligation to make cash redemption
payments to any investor during any 90-day period to the lesser of $250,000 or
1% of the Portfolio's net asset value at the beginning of such period. An
investor may incur brokerage costs in converting portfolio securities received
upon redemption to cash. The Portfolio intends that it will not redeem an
investor's interest in-kind except in circumstances in which the particular
investor is
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permitted to redeem in-kind or in the event that the particular investor
completely withdraws its interest in the Portfolio.
ITEM 20. TAX STATUS.
The Portfolio is treated as a partnership for federal income tax
purposes. As such, the Portfolio is not subject to federal income taxation.
Instead, each investor in the Portfolio that is subject to U.S. federal income
taxation must take into account, in computing its federal income tax liability
(if any), its share of the Portfolio's income, gains, losses, deductions,
credits and tax preference items, without regard to whether it has received any
cash distributions from the Portfolio. Because at least one investor in the
Portfolio has qualified and elected to be treated as a "regulated investment
company" ("RIC") under Subchapter M of the Code, the Portfolio normally must
satisfy the applicable source of income and diversification requirements in
order for this investor and any other investor that is a RIC to satisfy them.
The Portfolio will allocate at least annually among its investors the
Portfolio's net investment income, net realized capital gains, and any other
items of income, gain, loss, deduction or credit. The Portfolio will make
allocations to its investors in a manner intended to comply with the Code and
applicable regulations and will make moneys available for withdrawal at
appropriate times and in sufficient amounts to enable an investor that seeks to
qualify as a RIC to satisfy the tax distribution requirements that apply to the
investor and that must be satisfied in order to avoid Federal income and/or
excise tax on the investor. For purposes of applying the requirements of the
Code regarding qualification as a RIC, the investor will be deemed (i) to own
its proportionate share of each of the assets of the Portfolio and (ii) to be
entitled to the gross income of the Portfolio attributable to such share.
If the Portfolio invests in zero coupon securities, certain increasing
rate or deferred interest securities or, in general, other securities with
original issue discount (or with market discount if the Portfolio elects to
include market discount in income currently), the Portfolio must accrue income
on such investments prior to the receipt of the corresponding cash payments.
However, an investor must distribute, at least annually, all or substantially
all of its net income, including its distributive share of such income accrued
by the Portfolio, to its shareholders to qualify as a RIC under the Code and
avoid federal income and excise taxes. Therefore, the Portfolio may have to
dispose of its portfolio securities under disadvantageous circumstances to
generate cash, or may have to leverage itself by borrowing the cash, to enable
its investors to satisfy the distribution requirements.
Limitations imposed by the Code on RICs may, due to the fact that one
or more of such companies invest in the Portfolio, restrict the Portfolio's
ability to enter into futures, options or currency forward transactions.
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Certain options, futures or currency forward transactions undertaken by
the Portfolio may cause the Portfolio to recognize gains or losses from marking
to market even though the Portfolio's positions have not been sold or terminated
and affect the character as long-term or short-term (or, in the case of certain
options, futures or forward contracts relating to foreign currency, as ordinary
income or loss) and timing of some capital gains and losses realized by the
Portfolio and allocable to its investors. Any net mark to market gains may also
have to be distributed by an investor that is a RIC to satisfy the distribution
requirements referred to above even though no corresponding cash amounts may
concurrently be received, possibly requiring the disposition by the Portfolio of
portfolio securities or borrowing to obtain the necessary cash. Also, certain
losses on transactions involving options, futures or forward contracts and/or
offsetting or successor positions may be deferred rather than being taken into
account currently in calculating the Portfolio's taxable income or gain. Certain
of the applicable tax rules may be modified if one or more of certain tax
elections are available and are made. Because the income, gains and losses of an
investor that is a RIC consist primarily of its share of the income, gains and
losses of the Portfolio, which are directly affected by the provisions described
in this paragraph, these transactions may affect the amount, timing and
character of the distributions to shareholders by such an investor. The
Portfolio will take into account the special tax rules applicable to options,
futures or forward contracts in order to seek to minimize any potential adverse
tax consequences.
The Federal income tax rules applicable to dollar rolls, currency swaps
and interest rate swaps, caps, floors and collars are unclear in certain
respects, and the Portfolio may be required to account for these instruments
under tax rules in a manner that, under certain circumstances, may limit its
transactions in these instruments. Due to possible unfavorable consequences
under present tax law, the Portfolio does not currently intend to acquire
"residual" interests in real estate mortgage investment conduits ("REMICs"),
although it may acquire "regular" interests in REMICs.
Foreign exchange gains and losses realized by the Portfolio in
connection with certain transactions, if any, involving foreign
currency-denominated debt securities, certain foreign currency futures and
options, foreign currency forward contracts, foreign currencies, or payables or
receivables denominated in a foreign currency are subject to Section 988 of the
Code, which generally causes such gains and losses to be treated as ordinary
income and losses and may affect the amount, timing and character of
distributions to shareholders of an investor that is a RIC. In some cases,
elections may be available that would alter this treatment. Any such
transactions that are not directly related to the Portfolio's investment in
stock or securities, possibly including speculative currency positions or
currency derivatives not used for hedging purposes, may increase the amount of
gain it is deemed to recognize from the sale of certain investments held for
less than three months. The share of such gain of an investor qualifying as a
RIC (plus any such gain the investor may realize from other
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sources) is limited under the Code to less than 30% of such investor's gross
income for its taxable year, and such transactions could under future Treasury
regulations produce income not among the types of "qualifying income" from which
the investor must derive at least 90% of its gross income for its taxable year.
The Portfolio may be subject to withholding and other taxes imposed by
foreign countries with respect to investments in foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes in some cases. Shareholders of an investor that qualifies as a RIC may be
entitled to claim U.S. foreign tax credits or deductions with respect to such
taxes, subject to certain provisions and limitations contained in the Code, only
if more than 50% of the value of the investor's total assets at the close of any
taxable year were to consist of stock or securities of foreign corporations. In
that event, the investor may file an election with the Internal Revenue Service
pursuant to which shareholders of the investor will be required to (i) include
in ordinary gross income (in addition to taxable dividends actually received)
their pro rata share of foreign income taxes paid by the Portfolio and allocable
to the investor even though not actually received by such shareholders, and (ii)
treat such respective pro rate portions as foreign income taxes paid by such
shareholders. The investments of the Portfolio are such that investors that are
RICs may, but will not necessarily, be able to meet the 50% requirement
described above for any particular taxable year.
If the Portfolio acquires stock in certain foreign corporations that
receive at least 75% of their annual gross income from passive sources (such as
interest, dividends, rents, royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies"), an investor could be subject to Federal income tax and
additional interest charges on its allocable portion of "excess distributions"
actually or constructively received from such companies or gain from the actual
or deemed sale or other disposition (possibly including dispositions deemed to
occur when an investor's interest in the Portfolio is reduced by a withdrawal or
otherwise) of stock in such companies, even if all income or gain actually
realized and allocated to the investor is timely distributed to its
shareholders. An investor that is a RIC would not be able to pass through to its
shareholders any credit or deduction for such a tax. Certain elections may, if
available, ameliorate these adverse tax consequences, but any such election
could require the investor to recognize taxable income or gain without the
concurrent receipt of cash. The Portfolio may limit and/or manage stock
holdings, if any, in passive foreign investment companies to minimize each
investor's tax liability or maximize its return from these investments.
Investment in debt obligations by the Portfolio that are at risk of or
in default presents special tax issues for its investors. Tax rules are not
entirely clear about issues such as when the Portfolio may cease to accrue
interest, original issue discount, or market discount, when and to what extent
deductions may be taken for
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bad debts or worthless securities, how payments received on obligations in
default should be allocated between principal and income, and whether exchanges
of debt obligations in a workout context are taxable. These and other issues
will be addressed by the Portfolio, in the event that it holds such obligations,
in order to reduce the risk of its investors who intend to qualify as RICs,
distributing insufficient income to preserve their status as a RIC or becoming
subject to Federal income or excise tax.
For purposes of the dividends received reduction available to
corporations, dividends, if any, received by the Portfolio from U.S. domestic
corporations in respect of the stock of such corporations held by the Portfolio,
for U.S. Federal income tax purposes, for at least a minimum holding period,
generally 46 days, and allocated to an investor that is a RIC should be eligible
to be distributed and designated by such an investor and treated by its
corporate shareholders as qualifying dividends, subject to the limitations and
requirements applicable to such shareholders under the Code. The Portfolio's
dividend income from U.S. corporations, if any, probably will generally qualify
for this deduction.
There are certain tax issues that will be relevant to only certain of
the investors, such as investors who contribute assets rather than cash to the
Portfolio. It is intended that such contributions of assets will not be taxable,
provided certain requirements are met. Such investors are advised to consult
their own tax advisors as to the tax consequences of an investment in the
Portfolio.
Non-U.S. Investors
The following is a discussion of the principal U.S. federal income tax
consequences of an investment in the Portfolio by an entity that is organized or
established under Non-U.S. laws and that is or would be properly classified as a
corporation under the entity classification principles of U.S. tax law (a
"Foreign Investor"). This discussion assumes that, without considering the
effect, if any, of an investment in the Portfolio, the Foreign Investor will not
be engaged in a trade or business in the U.S. and that the Foreign Investor will
not have any activities in or connections with the U.S. other than its
investment in the Portfolio. This discussion also assumes that the Portfolio
will be classified as a partnership for U.S. federal income tax purposes.
The Portfolio intends to operate so as not to be considered to be
engaged in a trade or business in the U.S. under special U.S. federal income tax
provisions applicable to certain entities the principal business of which is
trading in stocks or securities for their own account. In accordance with such
provisions, the Portfolio intends to maintain its principal office outside the
U.S. and to conduct at least a substantial portion of certain of its activities
outside the U.S. If the Portfolio is not engaged in a trade or business in the
U.S., then a Foreign Investor in the Portfolio
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will generally not incur any U.S. taxes in respect of the ownership or
disposition of its interest in the Portfolio, including upon the allocation or
distribution to it of the ordinary income and capital gains realized by the
Portfolio, with the exception described in the next sentence. Foreign Investors
may be subject to nonresident alien withholding tax (which would be withheld by
the Portfolio or its agent and paid to U.S. tax authorities) at the rate of 30%
(or a reduced rate if an income tax treaty rate reduction is available) on
certain amounts treated as ordinary income allocated to them by the Portfolio,
except to the extent a U.S. withholding tax exemption may be available. Such an
exemption will generally be available principally for (i) interest income that
qualifies as "portfolio interest" under U.S. tax law, (ii) other interest from
certain short-term debt obligations or bank deposits, and (iii) interest and
dividends that are treated as non-U.S. source income under the Code (e.g., in
general, interest or dividends paid with respect to the Portfolio's investments
in stock or securities of non-U.S. companies or non-U.S. governmental entities,
which may be subject to withholding or other taxes imposed by the countries in
which such issuers are located). Such an exemption will not, however, be
available for dividend income the Portfolio receives with respect to its
investments in stock of U.S. corporations, certain U.S.-source interest that
does not qualify as portfolio interest, and possibly certain other income. U.S.
withholding taxes could also apply to gains attributable to any interests held
by the Portfolio in U.S. real property other than interests held solely as a
creditor, but the Portfolio anticipates that it will generally not hold the
types of interest in U.S. real property to which these withholding taxes apply.
If the Portfolio were considered to be engaged in a U.S. trade or
business for U.S. federal income tax purposes, any Foreign Investor in the
Portfolio would also be considered to be engaged in a U.S. trade or business and
would be subject to U.S. federal income tax on its allocable share of any income
of the Portfolio which is considered to be effectively connected with such U.S.
trade or business ("Effectively Connected Income"). The tax on Effectively
Connected Income would be imposed on a net basis at the rates applicable to U.S.
taxpayers generally (and the after-tax amount of such income could also be
subject to a separate branch profits tax at a 30% rate). The Portfolio would be
required to withhold tax from the portion of its Effectively Connected Income
which is allocable to Foreign Investors at the highest rates applicable to U.S.
taxpayers (whether or not distributions are made by the Portfolio to such
Foreign Investors during the taxable year). To the extent the income of the
Portfolio constitutes Effectively Connected Income, a Foreign Investor may also
be subject to U.S. federal income tax on some or all of the gain it recognizes
on the disposition of its interest in the Portfolio. As stated above, the
Portfolio intends to operate in a manner that will not result in the Portfolio's
income being treated as Effectively Connected Income.
The U.S. nonresident alien withholding taxes which may be applicable to
a Foreign Investor's allocable share of some of the Portfolio's income might in
some cases be reduced or eliminated under a tax treaty between the U.S. and the
foreign
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country of which the Foreign Investor is a resident, if that country has an
income tax treaty with the U.S., the Foreign Investor qualifies for benefits
under that treaty, the treaty applies to investments made through partnership
entities like the Portfolio, and any other applicable requirements can be
satisfied. Prospective Foreign Investors should consult their tax advisors
regarding the potential applicability to them of an income tax treaty and the
procedures for qualifying for treaty benefits.
Massachusetts Taxation
A Foreign Investor or U.S. investor that is properly classified as a
corporation under U.S. federal and Massachusetts tax principles (collectively,
an "Investor") might be required to pay Massachusetts corporate excise tax if
the Investor or the Portfolio has sufficient activities in or contacts with the
Commonwealth of Massachusetts ("tax nexus") to be subject to Massachusetts
taxing jurisdiction. The Portfolio intends to conduct its operations so that it
should not have tax nexus with Massachusetts and has obtained an opinion of
Price Waterhouse LLC generally to the effect that, based on and subject to
certain assumptions and representations, an Investor that is not otherwise
subject to Massachusetts taxation will not become subject to Massachusetts
taxation solely by virtue of investing in the Portfolio. The Portfolio has also
applied for a letter ruling from the Massachusetts Department of Revenue (the
"Department") to confirm this conclusion. If the Department takes a contrary
position, the Portfolio may consider possible alternative approaches for
avoiding Massachusetts corporate tax liability for Investors. It should be noted
that, under present Massachusetts tax law, an Investor that qualifies as a RIC
under the Code will not be required to pay any Massachusetts income or
Massachusetts corporate excise or franchise tax even if tax nexus with
Massachusetts does exist as a result of investing in the Portfolio.
ITEM 21. UNDERWRITERS.
Not applicable.
ITEM 22. CALCULATION OF PERFORMANCE DATA.
Not applicable.
ITEM 23. FINANCIAL STATEMENTS.
Investors will receive the Portfolio's annual reports audited by the
Portfolio's independent accountants and unaudited semi-annual reports.
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STANDISH, AYER & WOOD MASTER PORTFOLIO
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS
Not applicable.
(b) EXHIBITS
1(a). Declaration of Trust of the Registrant.*
1(b). Establishment and Designation of Series for Standish Small
Capitalization Equity Portfolio II.**
1(c). Establishment and Designation of Series for Standish
Diversified Income Portfolio.+
2. By-Laws of the Registrant.*
5(a). Form of Investment Advisory Agreement between the Registrant,
with respect to Standish Fixed Income Portfolio, and Standish,
Ayer & Wood, Inc. ("Standish").*
5(b). Form of Investment Advisory Agreement between the Registrant,
with respect to Standish Equity Portfolio, and Standish.*
5(c). Form of Investment Advisory Agreement between the Registrant,
with respect to Standish Small Capitalization Equity
Portfolio, and Standish.*
5(d). Form of Investment Advisory Agreement between the Registrant,
with respect to Global Fixed Income Portfolio, and Standish
International Management Company, L.P. ("SIMCO").*
5(e). Investment Advisory Agreement between the Registrant with
respect to Standish Small Capitalization Equity Portfolio II
and Standish.**
5(f). Investment Advisory Agreement between the Registrant with
respect to Standish Diversified Income Portfolio and SIMCO.+
8(a). Master Custody Agreement between the Registrant and Investors
Bank & Trust Company.*
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8(b). Amendment dated October 5, 1996 to Master Custody Agreement
with respect to Standish Small Capitalization Portfolio II.**
8(c). Form of Amendment dated June 2, 1997 to Master Custody
Agreement with respect to Standish Diversified Income
Portfolio.+
9(a). Administration Agreement between the Registrant and IBT Trust
Company (Cayman) Ltd.*
9(b). Amendment dated October 5, 1996 to the Administration
Agreement with respect to Standish Small Capitalization Equity
Portfolio II.**
9(c). Form of Amendment dated June 2, 1997 to the Administration
Agreement with respect to Standish Diversified Income
Portfolio.+
19(a). Power of Attorney (Richard S. Wood).***
19(b). Power of Attorney (Samuel C. Fleming, Benjamin M. Friedman,
John H. Hewitt, Edward H. Ladd, Caleb Loring III, Richard S.
Wood and D. Barr Clayson).***
19(c). Power of Attorney (Anne P. Herrmann).***
19(d). Power of Attorney (James E. Hollis III).***
- ------------------------
+ Filed herewith
* Filed as an exhibit to Registrant's Registration Statement on Form N-1A
(File No. 811-07603) on April 25, 1996 and incorporated by reference
herein.
** Filed as an exhibit to Amendment No. 1 to the Registrant's Registration
Statement on Form N-1A (File No. 811-07603) on October 10, 1996 and
incorporated by reference herein.
*** Filed as an exhibit to Amendment No. 2 to the Registrant's Registration
Statement on Form N-1A (File No. 811-07603) on April 30, 1997 and
incorporated by reference herein.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
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TITLE OF CLASS NUMBER OF RECORD HOLDERS
Series of Beneficial Interests (as of May 1, 1997)
Standish Fixed Income Portfolio 2
Standish Equity Portfolio 2
Standish Small Capitalization Equity 2
Portfolio
Standish Small Capitalization Equity 2
Portfolio II
Standish Global Fixed Income Portfolio 2
Standish Diversified Income Portfolio 0
ITEM 27. INDEMNIFICATION.
Reference is hereby made to Article V of the Registrant's Declaration
of Trust, filed as an Exhibit herewith.
Under the Registrant's Declaration of Trust, any past or present
Trustee or officer of the Registrant is indemnified to the fullest extent
permitted by law against liability and all expenses reasonably incurred by him
in connection with any action, suit or proceeding to which he may be a party or
is otherwise involved by reason of his being or having been a Trustee or officer
of the Registrant. The Declaration of Trust of the Registrant does not authorize
indemnification where it is determined, in the manner specified in the
Declaration, that such Trustee or officer has not acted in good faith in the
reasonable belief that his actions were in the best interest of the Registrant.
Moreover, the Declaration does not authorize indemnification where such Trustee
or officer is liable to the Registrant or its investors by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of his or her
duties.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by any such Trustee, officer or controlling person
against the Registrant in connection with the securities being registered, and
the Commission is still of the same opinion, the Registrant will, unless in the
opinion of its counsel the
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matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT
ADVISER.
Standish, Ayer & Wood, Inc. and Standish International Management Company, L.P.:
The business and other connections of the officers and Directors of
Standish, the investment adviser to all series of the Registrant, other than
Standish Global Fixed Income Portfolio and Standish Diversified Income Portfolio
are listed on the Form ADV of Standish as currently on file with the Commission
(File No. 801-584). The business and other connections of the officers and
partners and Standish Diversified Income Portfolio of SIMCO, the investment
adviser to Standish Global Fixed Income Portfolio are listed on the Form ADV of
SIMCO as currently on file with the Commission (File No. 801-639338). The
following sections of each such Form ADV are incorporated herein by reference:
(a) Items 1 and 2 of Part 2;
(b) Section IV, Business Background, of each Schedule D.
ITEM 29. PRINCIPAL UNDERWRITERS.
Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
The Registrant maintains the records required by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 to 31a-3 inclusive thereunder at
its registered office, located in care of IBT Trust Company (Cayman) Ltd., The
Bank of Nova Scotia Building, George Town, Grand Cayman, Cayman Islands, British
West Indies. Certain records, including records relating to the Registrant's
shareholders and the physical possession of its securities, may be maintained
pursuant to Rule 31a-3 at the main offices of the Registrant's custodian.
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
Not applicable.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, as
amended, the Registrant has duly caused this Amendment to its Registration
Statement on Form N-1A to be signed on its behalf by the undersigned, thereto
duly authorized, in Tucker's Town, Bermuda on the 2nd day of June, 1997.
STANDISH, AYER & WOOD MASTER
PORTFOLIO
By: /s/ Richard S. Wood
Name: Richard S. Wood
Title: President
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
1(c). Establishment and Designation of Series for Standish Diversified Income
Portfolio.
5(f). Investment Advisory Agreement between the Registrant with respect to
Standish Diversified Income Portfolio and Standish.
8(c). Form of Amendment dated June 2, 1997 to Master Custody Agreement
with respect to Standish Diversified Income Portfolio.
9(c). Form of Amendment dated June 2, 1997 to the Administration
Agreement with respect to Standish Diversified Income Portfolio.
STANDISH, AYER & WOOD MASTER PORTFOLIO
Certificate of Designation
The undersigned, being the Treasurer of Standish, Ayer & Wood Master
Portfolio (the "Portfolio Trust"), a trust with non-transferable Interests, DOES
HEREBY CERTIFY that, pursuant to the authority conferred upon the Trustees of
the Portfolio Trust by Article VI, ss.6.2 of the Agreement and Declaration of
Trust, dated January 18, 1996 (the "Declaration of Trust"), and by the
affirmative vote of a Majority of the Trustees at a meeting duly called and held
on February 28 and March 1, 1997, the Declaration of Trust is amended as set
forth in this Certificate of Designation.
A. There is hereby established and designated an additional
Series of the Portfolio Trust: "Standish Diversified Income
Portfolio" (the "New Series").
B. The Interests in the New Series have the following relative
rights and preferences:
(1) ASSETS BELONGING TO NEW SERIES. All consideration
received by the Portfolio Trust for the issue or sale
of Interests in the New Series, together with all
assets in which such consideration is invested or
reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from
the sale, exchange or liquidation of such assets, and
any funds or payments derived from any reinvestment
of such proceeds in whatever form the same may be,
shall be held by the Trustees in a separate trust for
the benefit of the Holders of Interests in the New
Series and shall irrevocably belong to the New Series
for all purposes, and shall be so recorded upon the
books of account of the Portfolio Trust. Such
consideration, assets, income, earnings, profits, and
proceeds thereof, including any proceeds derived from
the sale, exchange or liquidation of such assets, and
any funds or payments derived from any reinvestment
of such proceeds, in whatever form the same may be,
are herein referred to as "assets belonging to" the
New Series. No Series shall have any right to or
interest in the assets belonging to the New Series,
and no Holder shall have any right or interest with
respect to the assets belonging to any Series in
which it does not hold an Interest.
(2) LIABILITIES BELONGING TO NEW SERIES. The assets
belonging to the New Series shall be charged with the
liabilities in respect of the New Series and all
expenses, costs, charges and reserves attributable to
the New Series. The liabilities, expenses,
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<PAGE>
costs, charges and reserves so charged to the New
Series are herein referred to as "liabilities
belonging to" the New Series. No Series shall be
liable for or charged with the liabilities belonging
to the New Series, and no Holder shall be subject to
any liabilities belonging to any Series in which it
does not hold an Interest.
(3) VOTING. On each matter submitted to a vote of the
Holders, each Holder shall be entitled to a vote
proportionate to its Interest as recorded on the
books of the Portfolio Trust. Each Series shall vote
as a separate class except as to voting for Trustees,
as otherwise required by the 1940 Act, or if
determined by the Trustees to be a matter which
affects all Series. As to any matter which does not
affect the interest of all Series, only the Holders
in the one or more affected Series shall be entitled
to vote. On each matter submitted to a vote of the
Holders, a Holder may apportion its vote with respect
to a proposal in the same proportion as its own
shareholders voted with respect to that proposal.
C. The assets and liabilities of the Portfolio Trust existing on
the date hereof shall, except as provided in paragraph B
above, remain allocated among the Series designated as
Standish Equity Portfolio, Standish Global Fixed Income
Portfolio, Standish Small Capitalization Equity Portfolio,
Standish Fixed Income Portfolio and Standish Small
Capitalization Equity Portfolio II.
D. The Trustees shall have the right at any time and from time to
time to reallocate the assets and expenses or to change the
designation of any Series now or hereafter created, or to
otherwise change the relative rights and preferences of any
such Series, provided that such change shall not adversely
affect the rights of Holders.
E. The Interests of the Portfolio Trust outstanding on the date
set forth in the resolution of the Trustees establishing and
designating the New Series of the Portfolio Trust shall remain
classified as Interests of the Series designated as:
Standish Equity Portfolio
Standish Global Fixed Income Portfolio
Standish Small Capitalization Equity Portfolio
Standish Fixed Income Portfolio
Standish Small Capitalization Equity Portfolio II
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<PAGE>
F. The Trustees shall have exclusive power without the
requirement of Holder approval to establish and designate
additional Series of the Portfolio Trust and, subject to the
provisions of the Declaration of Trust and the 1940 Act, to
fix and determine the rights of Holders of Interests in such
Series, including with respect to the price, terms and manner
of purchase and redemption, dividends and other distributions,
rights on liquidation, sinking or purchase fund provisions,
conversion rights and conditions under which the Holders of
the several Series shall have separate voting rights or no
voting rights.
G. All capitalized terms not defined herein shall have the same
meanings as are assigned to those terms in the Declaration of
Trust.
The Trustees further direct that, upon the execution of this
Certificate of Designation, the Portfolio Trust take all necessary action to
file a copy of this Certificate of Designation at any place required by law or
by the Declaration of Trust.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Designation in Tucker's Town, Bermuda this 1st day of March, 1997.
By: /s/ James E. Hollis III
James E. Hollis III
Its: Treasurer
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INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of the 2nd day of June, 1997, by and between
Standish, Ayer & Wood Master Portfolio, an unincorporated trust organized under
the laws of the State of New York (the "Portfolio Trust") and Standish, Ayer &
Wood, Inc., a Massachusetts corporation (the "Adviser").
W I T N E S S E T H:
WHEREAS, the Portfolio Trust is engaged in business as an open-end
management investment company and is so registered under the Investment Company
Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the assets held by the Trustees of the Portfolio Trust may be
divided into separate funds, each with its own separate investment portfolio,
investment objectives, policies and purposes; and
WHEREAS, the Adviser is engaged in the business of rendering investment
advisory and management services, and is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Portfolio Trust desires to retain the Adviser to furnish
investment advisory services to the Standish Diversified Income Portfolio (the
"Portfolio"), a separate fund of the Portfolio Trust, and the Adviser is willing
to furnish such services;
NOW, THEREFORE, it is hereby agreed between the parties hereto as
follows:
1. Appointment of the Adviser. The Portfolio Trust hereby appoints the
Adviser to act as investment adviser of the Portfolio for the period and on the
terms herein set forth. The Adviser accepts such appointment and agrees to
render the services herein set forth, for the compensation herein provided. The
Adviser shall for all purposes herein be deemed an independent contractor and
shall, unless expressly otherwise provided, have no authority to act for or
represent the Portfolio in any way nor shall otherwise be deemed an agent of the
Portfolio.
2. Duties of the Adviser.
(a) The Adviser, at its expense, will furnish continuously an
investment program for the Portfolio, will determine, subject to the overall
supervision and review of the Trustees of the Portfolio Trust what investments
shall be purchased, held, sold or exchanged by the Portfolio and what portion,
if any, of the assets of the Portfolio will be held uninvested, and shall, on
behalf of the Portfolio Trust, make changes in the investments of the Portfolio.
Subject always to the supervision of the Trustees of the Portfolio Trust and to
the provisions of the Portfolio Trust's
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<PAGE>
Agreement and Declaration of Trust and Bylaws and of the 1940 Act, the Adviser
will also manage, supervise and conduct the other affairs and business of the
Portfolio and matters incidental thereto. Notwithstanding the foregoing, the
Adviser shall not be required to perform any such non-investment advisory
services that may, in the opinion of counsel to the Portfolio Trust, cause the
Portfolio to be engaged in a "trade or business within the United States", as
such term is used in Section 864 of the Internal Revenue Code of 1986, or any
successor statute. The Adviser, and any affiliate thereof, shall be free to
render similar services to other investment companies and other clients and to
engage in other activities, so long as the services rendered hereunder are not
impaired.
(b) The Portfolio shall bear the expenses of its operations, including
legal and auditing services, taxes and governmental fees, certain insurance
premiums, costs of notices and reports to interest-holders, typesetting and
printing of registration and financial statements for regulatory purposes and
for distribution to existing and prospective interest-holders, bookkeeping and
interest pricing expenses, fees and disbursements of the Portfolio Trust's
custodian, administrator, transfer and dividend disbursing agent or registrar,
or interest and other like expenses properly payable by the Portfolio Trust.
3. Compensation of the Adviser.
(a) As full compensation for the services and facilities furnished by
the Adviser under this Agreement, the Portfolio Trust agrees to pay to the
Adviser a fee equal at an annual rate to 0.50% of the Portfolio's average daily
net assets. Such fees shall be accrued when computed and payable monthly. For
purposes of calculating such fee, the Portfolio's average daily net asset value
shall be determined by taking the average of all determinations of net asset
value made in the manner provided in the Portfolio's current prospectus and
statement of additional information.
(b) The compensation payable to the Adviser hereunder for any period
less than a full month during which this Agreement is in effect shall be
prorated according to the proportion which such period bears to a full month.
4. Limitation of Liability of Adviser. The Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Portfolio Trust in connection with any investment policy or the purchase, sale
or retention of any securities on the recommendation of the Adviser; provided,
however, that nothing herein contained shall be construed to protect the Adviser
against any liability to the Portfolio Trust by reason of willful misfeasance,
bad faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties under this Agreement.
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<PAGE>
5. Term and Termination.
(a) This Agreement shall become effective on the date hereof. Unless
terminated as herein provided, this Agreement shall remain in full force and
effect until December 31, 1998 and shall continue in full force and effect for
successive periods of one year thereafter, but only so long as each such
continuance is approved annually (1) by either the Trustees of the Portfolio
Trust or by vote of a majority of the outstanding voting securities (as defined
in the 1940 Act) of the Portfolio, and, in either event, (ii) by vote of a
majority of the Trustees of the Portfolio Trust who are not parties to this
Agreement or "interested persons" (as defined in the 1940 Act) of any such
party, cast in person at a meeting called for the purpose of voting on such
approval.
(b) This Agreement may be terminated at any time without the payment of
any penalty by vote of the Trustees of the Portfolio Trust or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio or by the Adviser, on sixty days' written notice to the other
party.
(c) This Agreement shall automatically and immediately terminate in the
event of its assignment as defined in the 1940 Act.
6. Limitation of Liability. The phrase "Standish, Ayer & Wood Master
Portfolio" means and refers to the Trustees from time to time serving under the
Agreement and Declaration of Trust of the Portfolio Trust dated January 18,
1996, as the same may subsequently thereto have been, or subsequently hereto be,
amended. It is expressly agreed that the obligations of the Portfolio Trust
hereunder shall not be binding upon any of the Trustees, interest-holders,
nominees, officers, agents or employees of the Portfolio Trust, personally, but
shall bind only the trust property of the Portfolio Trust as provided in the
Agreement and Declaration of Trust of the Portfolio Trust. The execution and
delivery of this Agreement have been authorized by the Trustees and
interest-holders of the Portfolio and this Agreement has been signed by an
authorized officer of the Portfolio Trust, acting as such, and neither such
authorization by such Trustees and interest-holders nor such execution and
delivery by such officer shall be deemed to have been made by any of them, but
shall bind only the trust property of the Portfolio Trust as provided in the
Agreement and Declaration of Trust.
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<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
duly executed as of the date first written above.
STANDISH, AYER & WOOD MASTER
PORTFOLIO, on behalf of STANDISH
DIVERSIFIED INCOME PORTFOLIO
Attest:
/s/ Anne P. Herrmann /s/ Richard S. Wood
Anne P. Herrmann Richard S. Wood, President
(Executed outside the United States)
STANDISH, AYER & WOOD, INC.
Attest:
/s/ Anne P. Herrmann By: /s/ James E. Hollis III
Anne P. Herrmann James E. Hollis III
Its: Executive Vice President
-4-
STANDISH, AYER & WOOD MASTER PORTFOLIO
P.O. Box 501
George Town, Grand Cayman
Cayman Island, B.W.I.
June 2, 1997
Investors Bank & Trust Company
One First Canadian Place
King Street West, Suite 2000
P.O. Box231
Toronto, Canada M5X 1C8
Re: Custodian Agreement (the "Agreement")
Ladies and Gentlemen:
Attached is an amendment to AppendixA (the "Amendment") to the Agreement between
Standish, Ayer & Wood Master Portfolio (the "Trust") and you. Pursuant to ss.17
of the Agreement, the Trust proposes that the Agreement be amended to include an
additional series of the Trust named in the Amendment in bold.
Please indicate your acceptance of the foregoing by executing the four originals
of this letter agreement, returning two to the Trust and retaining two for your
records.
Very truly yours,
Standish, Ayer & Wood Master Portfolio Investors Bank & Trust Company
By: ___________________________ By:____________________________
Name:___________________________ Name:_________________________
Title:____________________________ Title:__________________________
<PAGE>
CUSTODIAN AGREEMENT
between Standish, Ayer & Wood Master Portfolio
and Investors Bank & Trust Company
APPENDIX A
(Revised June 2, 1997)
Standish Fixed Income Portfolio
Standish Equity Portfolio
Standish Small Capitalization Equity Portfolio
Standish Global Fixed Income Portfolio
Standish Small Capitalization Equity Portfolio II
Standish Diversified Income Portfolio
STANDISH, AYER & WOOD MASTER PORTFOLIO
P.O. Box 501
George Town, Grand Cayman
Cayman Island, B.W.I.
June 2, 1997
IBT Trust Company (Cayman), Ltd.
The Bank of Nova Scotia Building
Cardinal Avenue
George Town
Cayman, Cayman Islands, B.W.I.
Re: Administration Agreement (the "Agreement")
Ladies and Gentlemen:
Attached is AppendixA (the "Amendment") to the Agreement between Standish, Ayer
& Wood Master Portfolio (the "Trust") and you. Pursuant to ss.23 of the
Agreement, the Trust proposes that the Agreement be amended to include an
additional series of the Trust named in the Amendment in bold.
Please indicate your acceptance of the foregoing by executing the four originals
of this letter agreement, returning two to the Trust and retaining two for your
records.
Very truly yours,
Standish, Ayer & Wood Master Portfolio IBT Trust Company (Cayman), Ltd.
By: ___________________________ By:____________________________
Name:___________________________ Name:_________________________
Title:____________________________ Title:__________________________
<PAGE>
ADMINISTRATION AGREEMENT
between Standish, Ayer & Wood Master Portfolio
and IBT Trust Company (Cayman), Ltd.
APPENDIX A
(Revised June 2, 1997)
Standish Fixed Income Portfolio
Standish Equity Portfolio
Standish Small Capitalization Equity Portfolio
Standish Global Fixed Income Portfolio
Standish Small Capitalization Equity Portfolio II
Standish Diversified Income Portfolio
