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[LOGO OF HANSBERGER APPEARS HERE]
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Hansberger
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Institutional
Series
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PROSPECTUS
JULY 4, 2000
International Growth Fund
Adviser: Hansberger Global Investors, Inc.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation
to the contrary is a criminal offense.
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TABLE OF CONTENTS
Hansberger Institutional Series (the "Trust") is a mutual fund that offers
shares in four separate investment portfolios (Funds). A mutual fund pools
shareholders' money and, using a professional investment manager, invests it
in securities like stocks and bonds. This prospectus gives you important
information about the International Growth Fund (the "Fund") that you should
know before investing and has been arranged into different sections so that
you can easily review this important information. This Fund is appropriate for
long-term institutional investors who seek exposure to global markets and are
comfortable with the risks described here.
For more detailed information about the Fund, please see:
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Risk/Return Summary....................................................... 1
- Principal Investment Strategies and Risks.............................. 1
- Performance Information and Expenses................................... 3
The Fund's Other Investments.............................................. 4
More Information about Risk............................................... 4
The Investment Adviser.................................................... 5
Purchasing, Selling and Exchanging Fund Shares............................ 6
Dividends, Distributions and Taxes........................................ 10
</TABLE>
To Obtain More Information about Hansberger Institutional Series, Please Refer
to the Back Cover of this Prospectus.
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE.
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RISK/RETURN SUMMARY
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FUND SUMMARY
INVESTMENT GOAL High long-term total return
RELATIVE SHARE PRICE Medium to High
VOLATILITY Investing in equity securities of companies,
PRINCIPAL INVESTMENT domiciled in at least three different countries,
STRATEGY which companies and countries the Adviser
anticipates and believes have favorable long-term
prospects
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INVESTMENT STRATEGY
The Fund seeks to achieve its investment objective by investing primarily (at
least 65% of total assets) in the equity securities (common, preferred and
convertible securities) of companies organized or located outside of the
United States. Even though these companies are based outside of the United
States, their securities may be traded on U.S. securities markets and the Fund
may purchase these securities. The Fund will invest in at least three
different countries and expects to be invested in more than three countries,
including countries considered to be emerging market countries. The Fund will
not invest more than 25% of its total assets in emerging markets. The Fund
will primarily invest in common stock.
A substantial amount of the Fund's investments are denominated in other
currencies besides the U.S. dollar, and can be affected by fluctuations in
exchange rates. The Fund's Adviser generally chooses not to hedge the Fund's
currency exposure.
The Adviser anticipates following a flexible investment policy that will allow
it to select those investments best suited to achieve the Fund's investment
objective over the long term. The Adviser uses a disciplined, long-term
approach to international investing. It has an extensive global network of
investment research sources. The Adviser focuses primarily on identifying
successful companies that have favorable, anticipated long-term prospects.
Securities are selected for the Fund's portfolio on the basis of fundamental
company-by-company analysis. In choosing equity instruments, the Fund's
Adviser typically will focus on the market price of a company's securities
relative to its evaluation of the company's long-term earnings and cash flow
potential. In addition, a company's valuation measures, including, but not
limited to price/earnings ratio and price/book ratio will customarily be
considered. The Adviser generally sells a security if the Adviser's price
target is met, the company's fundamentals change, or if the portfolio is fully
invested and a better investment opportunity arises. Although the Fund invests
primarily in mid to large cap companies, there are no limitations on the size
of the companies in which the Fund may invest.
The Adviser will also consider other factors in making portfolio investment
decisions including country and political risks, and economic and market
conditions. The Adviser seeks to broaden the scope and increase the
effectiveness of this fundamental analysis by searching for successful
companies in many countries around the world. This global search provides the
Adviser with more diverse opportunities and flexibility to shift portfolio
investments not only from company to company and industry to industry, but
also country to country, in search of companies with favorable long-term
prospects.
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RISK/RETURN SUMMARY
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WHAT ARE THE RISKS OF INVESTING IN THE INTERNATIONAL GROWTH FUND?
MANAGEMENT RISK
The Fund seeks high long-term total return as its investment goal and has its
own strategies for reaching that goal. The Fund's assets are managed under the
direction of Hansberger Global Investors, Inc. (the "Adviser"). Still,
investing in the Fund involves risks, and there is no guarantee that the Fund
will achieve its goal. The Adviser makes judgments about several factors with
respect to each investment it makes on behalf of the Fund, but these judgments
may not anticipate actual market movements or the impact of economic
conditions on issuers. In fact, no matter how good a job the Adviser does, you
could lose money on your investment in the Fund, just as you could with other
investments. You should consider your own investment goals, time horizon and
risk tolerance before investing in the Fund.
PRICE VOLATILITY
The value of your investment in the Fund is based on the market value (or
price) of the securities the Fund holds. These prices change daily due to
economic and other events that affect the securities markets generally, as
well as those that affect particular companies or governments. These price
movements, sometimes called volatility, will vary depending on the types of
securities the Fund owns and the markets in which they trade. Historically,
the equity markets have moved in cycles, and the value of the Fund's equity
securities may fluctuate drastically from day to day. Individual companies may
report poor results or be negatively affected by industry and/or economic
trends and developments. The prices of securities issued by such companies may
suffer a decline in response to such trends and developments. These factors
contribute to price volatility, which is the principal risk of investing in
the Fund. The effect on the Fund's share price of a change in the value of a
single security will depend on how widely the Fund's holdings are diversified.
INTERNATIONAL INVESTING
Investing in foreign countries poses distinct risks since political,
regulatory and economic events unique to a country or region will affect those
markets and their issuers. These events will not necessarily affect the U.S.
economy or similar issuers located in the United States. In addition,
investments in foreign countries are generally denominated in a foreign
currency. As a result, changes in the value of those currencies compared to
the U.S. dollar may affect (positively or negatively) the value of the Fund's
investments. These currency movements may happen separately from and in
response to events that do not otherwise affect the value of the security in
the issuer's home country. Also, securities traded on foreign markets may be
less liquid (harder to sell) than securities traded domestically.
EMERGING MARKETS
Emerging market countries are countries that the World Bank or the United
Nations considers to be emerging or developing. Emerging markets may be more
likely to experience political turmoil or rapid changes in market or economic
conditions than more developed countries. In addition, the financial stability
of issuers (including governments) in emerging market countries may be more
precarious than in other countries. As a result, there will tend to be an
increased risk of price volatility in the Fund's investments in emerging
market countries, which may be magnified by currency fluctuations relative to
the U.S. dollar.
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RISK/RETURN SUMMARY
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PERFORMANCE INFORMATION
As of July 4, 2000, the International Growth Fund had not commenced operations
and, therefore, does not have a performance history.
FUND FEES AND EXPENSES
Every mutual fund has operating expenses to pay for professional advisory,
shareholder, distribution, administration and custody services and other costs
of doing business. This table describes the highest fees and expenses that you
may currently pay if you hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
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Maximum Sales Charge (Load) Imposed on Purchases........................ None
Purchase Fee (as percentage of amount purchased)*....................... .50%
Redemption Fee (as a percentage of amount redeemed)*.................... .50%
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ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
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Management Fees........................................................ 0.75%
Distribution and Service (12b-1) Fees.................................. None
Other Expenses**....................................................... 0.25%
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Total Annual Fund Operating Expenses................................... 1.00%
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* These transaction fees represent the Adviser's estimate of transaction
costs, which include the costs of acquiring and disposing of the Fund's
portfolio securities. THE TRANSACTION FEES ARE NOT A SALES CHARGE OR LOAD,
AND ARE RETAINED BY THE FUND. The fees do not apply to, and are not charged
in connection with exchanges from one Fund to another, certain
insignificant transactions, including the reinvestment of dividends or
capital gain distributions, or transactions involving shareholders who
previously purchased shares that were not subject to the transaction fees.
** Other expenses are estimated.
For more information about these fees, see "The Investment Adviser" and
"Purchasing, Selling and Exchanging Fund Shares."
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and then redeem all
of your shares at the end of those periods. The Example also assumes that each
year your investment has a 5% return and Fund operating expenses remain the
same. Although your actual costs and returns may be higher or lower, based on
these assumptions your estimated costs would be:
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<CAPTION>
1 YEAR 3 YEARS
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$204 $425
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and, if you do not redeem at the end of one of the indicated time periods,
your estimated costs would be:
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<CAPTION>
1 YEAR 3 YEARS
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$152 $368
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THE FUND'S OTHER INVESTMENTS
This prospectus describes the Fund's primary investment strategies and the
Fund will normally invest at least 65% of its assets in the types of
securities described in this prospectus. However, although the Fund generally
invests in common stock, the Fund may also invest to a lesser extent in
preferred stocks and certain debt securities, rated or unrated, such as
convertible bonds, whether selling at a premium or a discount, and straight
bonds selling at a discount, when the Adviser believes the defensive qualities
are enhanced or the potential for appreciation will equal or exceed that
available from investments in common stock. The Fund may also invest in
warrants or rights to subscribe to or purchase such securities, and sponsored
or unsponsored American Depositary Receipts ("ADRs"), Euro-pean Depositary
Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and other depositary
receipts (collectively, "Depositary Receipts"). The Fund may also lend its
portfolio securities, sell securities short, and borrow money for investment
purposes (i.e., "leverage" its portfolio). In addition, the Fund may invest in
closed-end investment companies holding foreign securities, and enter into
transactions in options on securities, securities indices and foreign
currencies, forward foreign currency contracts, futures contracts and related
options, and swap transactions, as well as other derivative instruments. When
deemed appropriate by the Adviser, the Fund may invest cash balances in
repurchase agreements and other money market investments to maintain liquidity
in an amount sufficient to meet expenses or for day-to-day operating purposes.
These investment techniques are described in detail in the Statement of
Additional Information ("SAI"). Of course, there is no guarantee that the Fund
will achieve its investment goal.
The investments and strategies described throughout this prospectus are those
that the Fund uses under normal conditions. During unusual economic or market
conditions, or for temporary defensive or liquidity purposes, the Fund may
invest up to 100% of its assets in cash, money market instruments, repurchase
agreements and short-term obligations that would not ordinarily be consistent
with the Fund's objectives. The Fund will do so only if the Adviser believes
that the risk of loss outweighs the opportunity for gains or income.
MORE INFORMATION ABOUT RISK
INTERNATIONAL INVESTING
The Fund invests primarily in equity securities of issuers located in foreign
countries. Investment in securities of foreign issuers involves some risks
different from, or in addition to, those affecting investments in securities
of U.S. issuers, including:
REGULATION There may be less government supervision and
regulation of foreign securities exchanges,
brokers and listed companies than in the U.S.
POLITICAL/ECONOMY A foreign jurisdiction might impose or change
withholding taxes, exit levies or other levies
on income payable or profits earned and
realized in connection with foreign securities.
There are risks of seizure, nationalization or
expropriation of a foreign issuer or foreign
deposits, and adoption of foreign governmental
restrictions such as capital or exchange
controls. Many emerging or developing countries
have less stable political and economic
environments than some more developed
countries.
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LIQUIDITY AND CONCENTRATION Many foreign securities markets have
substantially less volume than U.S. national
securities exchanges. Available investments in
emerging countries may be highly concentrated in
a small number of issuers, or the issuers may be
unseasoned and/or have significantly smaller
market capitalization than in the U.S. or more
developed countries. Consequently, securities of
foreign issuers may be less liquid (more
difficult to sell) and more volatile than those
of comparable domestic issuers.
TAXES Dividends and interest paid by foreign issuers
may be subject to withholding and other foreign
taxes, which may decrease the net return on
foreign investments.
BROKERAGE Brokerage commissions, custody charges and
other transaction costs on foreign securities
exchanges are generally higher than in the U.S.
THE INVESTMENT ADVISER
Hansberger Global Investors, Inc. is the Investment Adviser to the Trust. The
Adviser, a wholly-owned subsidiary of Hansberger Group, Inc., with its
principal offices at 515 East Las Olas Blvd., Fort Lauderdale, Florida, as
well as offices in Burlington, Ontario, Hong Kong and Moscow, conducts a
world-wide portfolio management business that provides a broad range of
portfolio management services to customers in the United States and abroad. As
of March 31, 2000 the Adviser had approximately $2.9 billion in assets under
management. See "Investment Adviser" in the SAI.
The Adviser provides the Fund with investment advice and portfolio management
services pursuant to an Investment Advisory Agreement (the "Advisory
Agreement"), and, subject to the supervision of the Board of Trustees, makes
the Fund's day-to-day investment decisions, arranges for the execution of
portfolio transactions and generally manages the Fund's investments. Under the
terms of its Advisory Agreement, the Fund pays the Adviser a monthly advisory
fee, accrued daily based on the Fund's average daily net assets, at the annual
rate of 0.75%. Because the Fund invests internationally, these advisory fees
are higher than those of most investment companies, but the Adviser believes
the fees are comparable to those of investment companies with similar
objectives and policies.
PORTFOLIO MANAGEMENT TEAM
THOMAS R. H. TIBBLES, CFA joined the Adviser in 1999 as a Senior Vice
President. Prior to joining the Adviser he was the Head of the Global Equity
Team at Indago Capital Management in Toronto, an affiliate of Canada Life.
From 1993 to joining Indago, he served as Vice President, International
Equities for Sun Life Investment Management, managing a portfolio of non-North
American equity securities for pension and mutual fund clients. Mr. Tibbles
began his career in the investment industry in 1986.
ERIC H. MELIS, CFA joined the Adviser in 2000 as Vice President. Prior to
joining the Adviser he was Vice President and an international equities
Portfolio Manager for McLean Budden. From 1996 to its amalgamation with McLean
Budden, Mr. Melis was the Director of Quantitative Research for Sun Life
Investment Management. He began his career in the investment industry in 1991.
BARRY A. LOCKHART, CFA joined the Adviser in 1999 as Vice President. Prior to
joining the Adviser he was a portfolio manager of foreign equity securities
for Indago Capital Management. Prior to 1997, Mr. Lockhart was a senior
investment analyst for Canada Life Investment Management with responsibilities
in the U.S., Far East, European and Latin American equity markets. He began
his career in the investment industry in 1989.
5
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PURCHASING, SELLING AND EXCHANGING FUND SHARES
You may purchase, sell (redeem) and exchange shares of the Fund on any day
when the New York Stock Exchange ("NYSE") is open for business (a "Business
Day") so long as the Custodian is also open for business that day. The
purchase price of shares is a Fund's net asset value per share next determined
after receipt of your purchase order, plus any applicable transaction fee; the
amount of any transaction fee is deducted from the total amount of your
investment, and the remaining amount of your investment is invested in Fund
shares. The redemption price of shares is a Fund's net asset value per share
next determined after receipt of your redemption request, less any applicable
transaction fee. The Fund's net asset value per share is determined on each
business day at the regular close of trading of the NYSE (currently 4:00 p.m.,
Eastern Time). Purchase orders and redemption requests received prior to this
time on any business day will be executed at the price computed on that day;
orders and requests received after the regular close of the NYSE will be
executed at the price computed on the next business day. The Trust reserves
the right to refuse any order for purchase of shares.
HOW TO PURCHASE FUND SHARES
How to Open an Account. To open an account, you must complete an Account
Registration Form and send it to the Trust, and either send in your check or
arrange for a wire transfer. Your initial investment must be for at least
$1,000,000 unless you have received a waiver from the Adviser. For purposes of
meeting the required minimum investments, the Trust will aggregate all
accounts under common ownership or control, including accounts of spouses and
minor children. There is no minimum for employer sponsored 401(k) plans that
have more than 100 employee participants.
BY CHECK Make your check (or other negotiable bank draft or money
order) payable to "Hansberger Institutional Series," and
mail it with your completed and signed Account Registration
Form to:
Hansberger Institutional Series
c/o Chase Global Funds Services Company
P.O. Box 2973
73 Tremont Street
Boston, MA 02208
Checks must be drawn on U.S. banks.
BY WIRE Have your bank send a Federal Funds wire or a bank wire to
the Trust, and mail your completed and signed Account
Registration Form to:
Hansberger Institutional Series
c/o Chase Global Funds Services Company
P.O. Box 2973
73 Tremont Street
Boston, MA 02208
The Trust will accept your purchase order before receiving
your Account Registration Form only if you have provided
certain information with your wire.
You must follow these steps to purchase shares by wire:
First, telephone the Trust at 1-800-414-6927 to receive a
wire control number. To be issued an account number, you
will need to provide a written application with your name,
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address, telephone number, Social Security or Tax
Identification Number, the amount being wired, and the name
of the bank sending the wire. Second, instruct your bank to
wire the specified amount to the following account and/or
wire control number (be sure to have your bank include your
account number and the Fund's name):
The Chase Manhattan Bank
ABA Number 021000021
DDA Number 910 2 777076
Attn: Hansberger Institutional Series
Ref: (Fund name, account number, account name,
wire control number).
Federal funds wires cannot be made on any federal holiday
restricting wire transfers, even if the NYSE is open on that
day. Liability of the Fund or its agents for fraudulent or
unauthorized wire instructions may be limited. See
"Telephone Transactions."
Your bank may charge a service fee for sending a federal
funds wire or bank wire.
Letter of Intent. You may make an initial investment of less than $1 million
if you execute a letter of intent ("Letter") which expresses your intention to
invest at least $1 million in the Funds within 13 months. The minimum initial
investment under a Letter is $100,000. If you do not invest at least $1
million in shares of the Funds or other funds advised by the Adviser within
the 13-month period from execution of the Letter, the shares actually
purchased may be involuntarily redeemed and the proceeds sent to you at your
address of record. Any redemption you make during the 13-month period will be
subtracted from the amount of shares purchased for purposes of determining
whether the terms of the Letter have been completed.
How to Add to Your Investment. You may purchase additional shares for your
account at any time by mailing a check or wiring funds to the Trust according
to the procedures above. If wiring funds, please call 1-800-414-6927 to
receive a wire control number. Your check, a cover letter, or your wire
instructions must specify the name of the Fund, the name on your account and
your account number, and you must call the Fund before wiring funds. Your
check or wire must be for at least $100,000.
OTHER PURCHASE INFORMATION
Payment for shares of a Fund must be in United States dollars, unless you have
received the Fund's prior written approval to make payment in other currencies
or by tendering securities.
No share certificates will be issued. All shares purchased for your account
will be confirmed to you and credited to your account on the Fund's books
maintained by the Transfer Agent.
To ensure that checks are collected, you may not redeem shares purchased by
check until payment for the purchase has been received; receipt may take up to
eight business days after purchase. If your purchase is canceled due to
nonpayment or because your check does not clear, you will be responsible for
any loss incurred by the Trust or its agents, and you may be restricted from
making future investments in the Trust. If you are already a shareholder, the
Trust may redeem shares from your account(s) as reimbursement for any such
loss.
If an investment in the Fund is made through a broker that has executed a
dealer agreement with the Trust, the Adviser or one of its affiliates may make
a payment out of its own resources to such dealer in an amount not to exceed
0.25% of the amount invested. Dealers may contact the Adviser for additional
information.
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Investors may also purchase shares of the Fund through banks and registered
broker-dealers who do not have a dealer agreement with the Trust. Those banks
and broker-dealers, who make purchases for their customers, may charge a fee
for such services.
The Trust reserves the right to reject any purchase order for shares if the
Trust or its agents determine that accepting such order would not be in the
best interest of a Fund or its existing shareholders.
HOW THE FUND CALCULATES NAV
NAV for a Fund share is the value of that share's portion of all of the net
assets in the Fund. In calculating NAV, the Fund generally values its
portfolio securities at their market price. If market prices are unavailable
or are unreliable, fair value prices may be determined in good faith using
methods approved by the Board of Trustees. The Fund holds portfolio securities
that are listed on foreign exchanges. These securities may trade on weekends
or other days when the Fund does not calculate NAV. As a result, the value of
these investments may change on days when you cannot purchase or sell Fund
shares.
MINIMUM PURCHASES
To purchase shares of the Fund for the first time, you must invest at least
$1,000,000 in the Fund. To purchase additional shares of the Fund, you must
invest at least $100,000. The Fund may accept investments of smaller amounts
at their discretion.
HOW TO SELL YOUR FUND SHARES
You may sell (usually called "redeem") your shares on any Business Day by
contacting the Fund directly by mail or telephone. Your redemption proceeds
may be more or less than the purchase price of your shares depending on, among
other factors, the market value of the investment securities held by the Fund
at the time you redeem. The sale price of each share will be the next NAV
determined after the Fund receives your request.
BY MAIL Send your redemption request to:
Hansberger Institutional Series
c/o Chase Global Funds Services Company
P.O. Box 2973
73 Tremont Street
Boston, MA 02208
BY TELEPHONE If you have telephone transaction privileges, you can
request a redemption of your shares by calling the Fund at
1-800-414-6927 prior to 4:00 P.M. Eastern Time, to receive
that day's closing net asset value; redemption proceeds will
be mailed to you or wired to your bank.
RECEIVING YOUR MONEY
Normally, the Fund will send your sale proceeds within five Business Days
after it receives your request. Your proceeds can be wired to a bank account
or sent to you by check. IF YOU RECENTLY PURCHASED YOUR SHARES BY CHECK,
REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED (WHICH
MAY TAKE UP TO 15 BUSINESS DAYS).
REDEMPTIONS IN KIND
The Fund may, although it does not intend to do so under normal circumstances,
pay redemption proceeds in whole or in part by a distribution in kind of
securities held in its portfolio, in conformity with applicable SEC rules.
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SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Fund may suspend your right to sell your shares if the NYSE restricts
trading, the SEC declares an emergency or for other reasons. More information
about this is in the SAI.
CLOSING SMALL ACCOUNTS
Due to the relatively high cost of maintaining smaller accounts, the Trust
reserves the right to redeem all of your shares if your redemptions cause your
account value to drop below the minimum required investment. The Trust will
not redeem an account whose value has dropped solely because of market
reductions in net asset value. If at any time your account value does not
equal or exceed the required minimum, you may be notified of this fact. You
will be allowed at least 60 days to add to your invest-ment before any
involuntary redemption is processed.
SIGNATURE GUARANTEES
To protect your account, the Trust and its agents from fraud, signature
guarantees are required for certain redemptions to verify the identity of the
person who has authorized a redemption from your account. A signature
guarantee is not required for redemptions of $50,000 or less, requested by and
payable to all Shareholders of record. Please contact the Trust for further
information.
HOW TO EXCHANGE YOUR SHARES
You may exchange your shares of any Fund in the Hansberger Institutional
Series for shares of any other Fund in the Hansberger Institutional Series on
any Business Day by contacting the Trust directly by mail or telephone. This
exchange privilege may be changed or canceled at any time upon 60 days'
notice. When you exchange shares, you are really selling your shares and
buying other Fund shares. So, your sale price and purchase price will be based
on the NAV next calculated after the Funds receive your exchange request. A
current prospectus for the other Funds in the Trust is available free of
charge by calling 1-800-414-6927.
PURCHASES OR EXCHANGES BY TIMING ACCOUNTS
Market timing or allocation services ("Timing Accounts") generally include
accounts administered so as to redeem or purchase shares based upon certain
predetermined market indicators. The Trust reserves the right to temporarily
or permanently terminate the exchange privilege or reject any specific
purchase order for any Timing Account or any person whose transactions seem to
follow a timing pattern. In addition, the Trust reserves the right to refuse
the purchase side of a redemption and purchase request by any Timing Account,
person, or group if, in the Adviser's judgement, a Fund would be unable to
invest effectively in accordance with its investment objectives and policies,
or would otherwise potentially be adversely affected. A Shareholder's
exchanges into a Fund may be restricted or refused if a Fund receives or
anticipates simultaneous orders affecting significant portions of the Fund's
assets. In particular, a pattern of exchanges, purchases and redemptions that
coincides with a "market timing" strategy may be disruptive to a Fund and
therefore may be refused.
TELEPHONE TRANSACTIONS
Purchasing, selling and exchanging Fund shares over the telephone is extremely
convenient, but not without risk. Although we have certain safeguards and
procedures to confirm the identity of callers and the authenticity of
instructions, the Trust is not responsible for any losses or costs incurred by
following telephone instructions the Trust reasonably believes to be genuine.
If you transact with the Trust over the telephone, you will generally bear the
risk of any loss.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund expects to distribute substantially all of its net investment income
in the form of dividends at least annually. Net capital gains, if any, will be
distributed annually.
You will receive dividends and distributions in the form of additional Fund
shares unless you elect to receive payment in cash. To elect cash payment, you
must check off the appropriate box in the Distribution Option Section on the
Account Registration Form or notify the Fund in writing prior to the date of
the distribution. Your election will be effective for dividends and
distributions paid after the Fund receives your written notice. To cancel your
election, simply send the Fund written notice.
TAXES
PLEASE CONSULT YOUR TAX ADVISER REGARDING YOUR SPECIFIC QUESTIONS ABOUT
FEDERAL, STATE AND LOCAL INCOME TAXES. Below we have summarized some important
tax issues that affect the Funds and their shareholders. This summary is based
on current tax laws, which may change.
The Fund is treated as a separate entity for federal income tax purposes. The
Fund intends to qualify for the special tax treatment afforded regulated
investment companies under Subchapter M of the Internal Revenue Code of 1986,
as amended (the "Code"), so that the Fund will be relieved of federal income
tax on that part of its net investment income and net capital gain (the excess
of net long-term capital gain over net short-term capital loss) that is
distributed to shareholders.
The Fund distributes substantially all of its net investment income
(including, for this purpose, net short-term capital gain) to shareholders.
Dividends from a Fund's net investment income are taxable to shareholders as
ordinary income, whether received in cash or in additional shares.
Distributions of net capital gain are taxable to shareholders as long-term
capital gain, regardless of how long shareholders have held their shares. The
Fund sends reports annually to its shareholders of the federal income tax
status of all distributions made during the preceding year.
The Fund intends to make sufficient distributions or deemed distributions of
its ordinary income and capital gain net income (the excess of short-term and
long-term capital gains over short-term and long-term capital losses) as to
avoid the 4 percent excise tax imposed on undistributed income of regulated
investment companies.
Dividends and other distributions declared by the Fund in October, November or
December of any year and payable to shareholders of record on a date in such
month will be deemed to have been paid by the Fund and received by the
shareholders on the last day of that year if the distributions are paid by the
Fund at any time during the following January.
The sale or redemption of shares may result in taxable gain or loss to the
redeeming shareholder, depending upon whether the fair market value of the
redemption proceeds exceeds or is less than the Shareholder's adjusted basis
in the redeemed shares. The character of such a gain or loss for tax purposes
will depend on how long you have held your shares.
Investment income received by the Fund from sources within foreign countries
may be subject to foreign income taxes withheld at the source. Information on
taxation of the Fund by certain foreign countries is set out in the SAI. To
the extent that a Fund is liable for foreign income taxes so withheld, the
Fund intends to operate so as to meet the requirements of the Code to pass
through to the shareholders credit for foreign income taxes paid. Although the
Fund intends to meet Code requirements to pass through credit for such taxes,
there can be no assurance that the Fund will be able to do so.
10
<PAGE>
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL INFORMATION
ONLY. YOU SHOULD CONSULT YOUR OWN TAX ADVISERS ABOUT THE TAX CONSEQUENCES OF
AN INVESTMENT IN THE FUND. The Fund will distribute substantially all of its
income and capital gains, if any. The dividends and distributions you receive
may be subject to federal, state and local taxation, depending upon your tax
situation. Capital gains distributions may be taxable at different rates
depending on the length of time a Fund holds its portfolio securities. Each
sale or exchange of Fund shares is a taxable event.
MORE INFORMATION ABOUT TAXES IS IN THE FUND'S STATEMENT OF ADDITIONAL
INFORMATION.
11
<PAGE>
HANSBERGER
[LOGO OF HANSBERGER] INSTITUTIONAL
SERIES
INVESTMENT ADVISER
Hansberger Global Investors, Inc.
CUSTODIAN
The Chase Manhattan Bank
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
More information about the Fund is available without charge through the
following:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI dated July 4, 2000 includes more detailed information about the Fund.
The SAI is on file with the SEC and is incorporated by reference into this
prospectus. This means that the SAI, for legal purposes, is a part of this
prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
Additional information about the Trust is available in the Trust's annual and
semi-annual reports to shareholders. In the Trust's annual report you will find
a discussion of the market conditions and investment strategies that
significantly affected a Fund's performance during the last fiscal year. You
may obtain either or both of these reports at no cost by calling 1-800-414-
6927.
TO REQUEST INFORMATION OR ASK QUESTIONS:
BY TELEPHONE: Call 1-800-414-6927
BY MAIL: Write to the Trust at: Hansberger Institutional Series c/o Chase
Global Funds Services Company P.O. Box 2973 73 Tremont Street Boston, MA 02208
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual Reports
of, as well as other information about, Hansberger Institutional Series from
the EDGAR Database on the SEC's website ("http://www.sec.gov").* You may review
and copy documents at the SEC Public Reference Room in Washington, DC (for
information call 1-202-942-8090). You may request documents by mail from the
SEC, upon payment of a duplicating fee, by writing to: Securities and Exchange
Commission, Public Reference Section, Washington, DC 20549-0102. You may also
obtain this information, upon payment of a duplicating fee, by e-mailing the
SEC at the following address: [email protected].
*The Trust's Investment Company Act registration number is 811-7729.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
[LOGO]
HANSBERGER INSTITUTIONAL SERIES
515 East Las Olas Boulevard
Suite 1300
Fort Lauderdale, Florida 33301
Telephone No. 954-522-5150
Hansberger Institutional Series (the "Trust") is an open-end management
investment company currently consisting of four series. The INTERNATIONAL GROWTH
FUND, (the "Fund") is described in this Statement of Additional Information. The
investment adviser of the Fund is Hansberger Global Investors, Inc. (the
"Adviser").
This Statement of Additional Information ("SAI") is not a prospectus and
should be read in conjunction with the prospectus offering shares of the Fund
dated July 4, 2000, as it may be amended or supplemented from time to time (the
"Prospectus"). A copy of the Prospectus may be obtained without charge by
writing to, or calling, the Trust at the address and telephone number listed
above.
This Statement of Additional Information is dated July 4, 2000
--------------------------------------------------------------------------------
This Statement of Additional Information does not constitute an offer to sell
securities.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INVESTMENT POLICIES AND TECHNIQUES................................... 3
Temporary Investments.............................................. 3
Sovereign Debt..................................................... 3
Brady Bonds........................................................ 4
Illiquid and Restricted Securities................................. 5
Short Sales........................................................ 6
Warrants........................................................... 6
Debt Obligations................................................... 6
High Risk Debt Securities.......................................... 7
Lending of Portfolio Securities.................................... 9
Depositary Receipts................................................ 9
Derivative Instruments............................................. 10
Forward Currency Contracts and Options on Foreign Currencies....... 18
Foreign Currency Transactions...................................... 19
When-Issued Securities............................................. 20
Foreign Investment Companies....................................... 20
Repurchase Agreements.............................................. 21
Borrowing.......................................................... 21
Mortgage Dollar Rolls and Reverse Repurchase Agreements............ 22
ADDITIONAL RISK FACTORS.............................................. 22
INVESTMENT RESTRICTIONS.............................................. 25
TRUSTEES AND OFFICERS OF THE TRUST................................... 27
INVESTMENT ADVISER................................................... 29
FUND TRANSACTIONS AND BROKERAGE...................................... 30
CUSTODIAN............................................................ 32
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT......................... 32
TAXES................................................................ 33
DETERMINATION OF NET ASSET VALUE..................................... 35
ADDITIONAL SHAREHOLDER INFORMATION................................... 37
ORGANIZATION OF THE TRUST AND THE FUND............................... 37
PERFORMANCE INFORMATION.............................................. 38
GENERAL INFORMATION.................................................. 42
INDEPENDENT ACCOUNTANTS.............................................. 43
LEGAL COUNSEL........................................................ 43
FINANCIAL STATEMENTS................................................. 43
-------------------------------------------------------------------------
</TABLE>
No Person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information and the Prospectus and, if given or made, such
information or representations may not be relied upon as
having been authorized by the Trust.
2
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's
investment goals and strategies that are described in detail in the Prospectus.
TEMPORARY INVESTMENTS
The Fund may make money market investments pending other investment or
settlement for liquidity, or in adverse market conditions. These money market
investments include obligations of the U.S. Government and its agencies and
instrumentalities, obligations of foreign sovereignties, other debt securities,
commercial paper including bank obligations, certificates of deposit (including
Eurodollar certificates of deposit) and repurchase agreements.
For temporary defensive purposes, during periods in which the Adviser
believes changes in economic, financial or political conditions make it
advisable, the Fund may reduce its holdings in equity and other securities and
may invest up to 100% of its assets in certain short-term (less than twelve
months to maturity) and medium-term (not greater than five years to maturity)
debt securities and in cash (U.S. dollars, foreign currencies, or multicurrency
units). These short-term and medium-term debt securities consist of (a)
obligations of governments, agencies or instrumentalities of any member state of
the Organization for Economic Cooperation and Development ("OECD"); (b) bank
deposits and bank obligations (including certificates of deposit, time deposits
and bankers' acceptances) of banks organized under the laws of any member state
of the OECD, denominated in any currency; (c) floating rate securities and other
instruments denominated in any currency issued by international development
agencies; (d) finance company and corporate commercial paper and other short-
term corporate debt obligations of corporations organized under the laws of any
member state of the OECD meeting the Fund's credit quality standards; and (e)
repurchase agreements with banks and broker-dealers covering any of the
foregoing securities. The short-term and medium-term debt securities in which
the Fund may invest for temporary defensive purposes will be those that the
Adviser believes to be of high quality, i.e., subject to relatively low risk of
loss of interest or principal (there is currently no rating system for debt
securities in most emerging countries). If rated, these securities will be rated
in one of the three highest rating categories by rating services such as Moody's
Investors Service, Inc. or Standard & Poor's Corporation (i.e., rated at least
A).
SOVEREIGN DEBT
The Fund may invest in Sovereign Debt, which may trade at a substantial
discount from face value. The Fund may hold and trade Sovereign Debt of
emerging market countries in appropriate circumstances and participate in debt
conversion programs. Emerging country Sovereign Debt involves a high degree of
risk, is generally lower-quality debt, and is considered speculative in nature.
The issuer or governmental authorities that control Sovereign Debt repayment
("sovereign debtors") may be unable or unwilling to repay principal or interest
when due in accordance with the terms of the debt. A sovereign debtor's
willingness or ability to repay principal and interest due in a timely manner
may be affected by, among other factors, its cash flow situation, the extent of
its foreign reserves, the availability of sufficient foreign exchange on the
date a payment is due, the relative size of the debt service burden to the
economy as a whole, the sovereign debtor's policy towards the International
Monetary Fund (the "IMF") and the political constraints to which the sovereign
debtor may be subject. Sovereign debtors may also be dependent on expected
3
<PAGE>
disbursements from foreign governments, multilateral agencies and others abroad
to reduce principal and interest arrearage on their debt. The commitment of
these third parties to make such disbursements may be conditioned on the
sovereign debtor's implementation of economic reforms or economic performance
and the timely service of the debtor's obligations. The sovereign debtor's
failure to meet these conditions may cause these third parties to cancel their
commitments to provide funds to the sovereign debtor, which may further impair
the debtor's ability or willingness to timely service its debts. In certain
instances, the Fund may invest in Sovereign Debt that is in default as to
payments of principal or interest. The Fund holding non-performing Sovereign
Debt may incur additional expenses in connection with any restructuring of the
issuer's obligations or in otherwise enforcing its rights thereunder.
BRADY BONDS
The Fund may invest in Brady Bonds as part of its investment in Sovereign
Debt of countries that have restructured or are in the process of restructuring
their Sovereign Debt pursuant to the Brady Plan. Brady Bonds are issued under
the framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external indebtedness. The Brady Plan
contemplates, among other things, the debtor nation's adoption of certain
economic reforms and the exchange of commercial bank debt for newly issued
bonds. In restructuring its external debt under the Brady Plan framework, a
debtor nation negotiates with its existing bank lenders as well as the World
Bank or IMF. The World Bank or IMF supports the restructuring by providing funds
pursuant to loan agreements or other arrangements that enable the debtor nation
to collateralize the new Brady Bonds or to replenish reserves used to reduce
outstanding bank debt. Under these loan agreements or other arrangements with
the World Bank or IMF, debtor nations have been required to agree to implement
certain domestic monetary and fiscal reforms. The Brady Plan sets forth only
general guiding principles for economic reform and debt reduction, emphasizing
that solutions must be negotiated on a case-by-case basis between debtor nations
and their creditors.
Brady Bonds are recent issues and do not have a long payment history.
Agreements implemented under the Brady Plan are designed to achieve debt and
debt-service reduction through specific options negotiated by a debtor nation
with its creditors. As a result, each country offers different financial
packages. Options have included the exchange of outstanding commercial bank debt
for bonds issued at 100% of face value of such debt, bonds issued at a discount
of face value of such debt, and bonds bearing an interest rate that increases
over time and the advancement of the new money for bonds. The principal of
certain Brady Bonds has been collateralized by U.S. Treasury zero coupon bonds
with a maturity equal to the final maturity of the Brady Bonds. Collateral
purchases are financed by the IMF, World Bank and the debtor nations' reserves.
Interest payments may also be collateralized in part in various ways.
Brady Bonds are often viewed as having three or four valuation components:
(i) the collateralized repayment of principal at final maturity; (ii) the
collateralized interest payments; (iii) the uncollateralized interest payments;
and (iv) any uncollateralized and of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds can be viewed as
speculative.
4
<PAGE>
ILLIQUID AND RESTRICTED SECURITIES
The Fund may invest in securities that are neither listed on a stock
exchange nor traded over the counter, including privately placed securities.
These securities may present a higher degree of business and financial risk,
which can result in substantial losses. In the absence of a public trading
market for these securities, they may be less liquid than publicly traded
securities. Although these securities may be resold in privately negotiated
transactions, the prices realized from these sales could be less than those
originally paid by the Fund or less than what the Fund may consider the fair
value of such securities. Further, companies whose securities are not publicly
traded may not be subject to disclosure and other investor protection
requirements that might apply if their securities were publicly traded. If such
securities are required to be registered under the securities laws of one or
more jurisdictions before being resold, the Fund may be required to bear the
costs of registration. As a general matter, the Fund may not invest more than
15% of its net assets in illiquid securities, including securities for which
there is no readily available secondary market, nor more than 10% of its total
assets in securities that are restricted from sale to the public without
registration ("Restricted Securities") under the U.S. Securities Act of 1933, as
amended (the "1933 Act"). Subject to these limits, however, the Fund may invest
up to 25% of its total assets in Restricted Securities that can be offered and
sold to qualified institutional buyers under Rule 144A under the 1933 Act ("144A
Securities"). The Board of Trustees has adopted guidelines and delegated to the
Adviser, subject to the Board's supervision, the daily function of determining
and monitoring the liquidity of 144A Securities. Rule 144A Securities may become
illiquid if qualified institutional buyers are not interested in acquiring them.
Investors should note that investments of 5% of the Fund's total assets may be
considered a speculative activity and may involve greater risk and expense to
the Fund. Although no definitive liquidity criteria are used, the Board of
Trustees has directed the Adviser to examine factors such as (i) the nature of
the market (including the institutional private resale market) for a security,
(ii) the terms of certain instruments permitting disposition to the issuer
thereof or a third party (e.g., certain repurchase obligations and demand
instruments), (iii) availability of market quotations (e.g., for securities
quoted in the PORTAL system), and (iv) other permissible relevant factors.
Restricted Securities may be sold only in privately negotiated transactions
or in a public offering under an effective registration statement under the 1933
Act. If registration becomes necessary, the Fund may have to pay all or part of
the registration costs; in addition, considerable time may elapse between the
Fund's decision to sell and the time it may be permitted to sell a security
under an effective registration statement. If adverse market conditions
developed during such a period, the Fund might obtain a less favorable price
than prevailed when it decided to sell. Restricted Securities will be priced at
fair value, determined in good faith by the Adviser and reported to the Board of
Trustees. If, through appreciation of Restricted Securities or depreciation of
other securities, the Fund finds that more than 15% of its net assets are
invested in illiquid securities, including illiquid Restricted Securities, it
will take such steps, if any, as the Trustees deem advisable to protect
liquidity.
The Fund may sell OTC options and may need to segregate assets or cover its
obligations as writer of such options. Assets used as cover for OTC options
written by the Fund will be considered illiquid unless such options are sold to
qualified dealers who agree that the Fund may repurchase any OTC option it
writes at a maximum price to be calculated by a formula set forth in the option
agreement. The cover for an OTC option written subject to this procedure will be
considered illiquid only to the extent that the maximum repurchase price under
the formula exceeds the intrinsic value of the OTC option.
5
<PAGE>
SHORT SALES
The Fund may from time to time sell securities short without limitation,
although initially it has no intention to sell securities short. In a short
sale, the Fund sells securities it does not own (but has borrowed) in
anticipation of a decline in the securities' market price. The Fund must
arrange through a broker to borrow these securities and will become obligated to
replace the borrowed securities at whatever their market price may be at the
time of replacement. The Fund may have to pay a premium to borrow the
securities and must pay any dividends or interest payable on the securities
until they are replaced.
The Fund's obligation to replace the securities borrowed in connection with
a short sale will be secured. The proceeds the Fund receives from the short
sale will be held on behalf of the broker until the Fund replaces the borrowed
securities, and the Fund will deposit collateral with the broker; this
collateral will consist of cash or liquid, high-grade debt obligations. In
addition, the Fund will deposit collateral in a segregated account with the
Custodian; this collateral will consist of cash or liquid, high grade debt
obligations equal to any difference between the market value of (1) the
securities sold at the time they were sold short and (2) any collateral
deposited with the broker in connection with the short sale (not including the
proceeds of the short sale).
The Fund may also sell short "against the box" that is, sell a security
that the Fund owns or has the right to acquire, for delivery at a specified date
in the future. This allows the Fund to hedge unrealized gains on portfolio
securities. If the Fund sells securities short against the box, it may protect
unrealized gains, but will lose the opportunity to profit on such securities if
the price rises.
WARRANTS
The Fund may buy warrants, which give the holder the right, but not the
obligation, to buy stock of an issuer ("underlying stock") at a given price
(usually higher than the price of the underlying stock when the warrant is
issued) prior to a specified expiration date or perpetually. Warrants may trade
separately or in connection with the acquisition of securities. The Fund will
not purchase warrants, valued at the lower of cost or market value, in excess of
5% of the Fund's net assets; this limit includes warrants that are not listed on
any stock exchange, and such warrants are limited to 2% of the Fund's net
assets. Warrants acquired by the Fund in units or attached to securities are not
subject to these limits. Warrants do not carry dividend or voting rights on the
underlying stock, and do not represent any rights in the assets of the issuer.
As a result, warrants may be considered more speculative than certain other
investments. A warrant's value does not necessarily change with the value of the
underlying stock. A warrant ceases to have value if it expires unexercised.
DEBT OBLIGATIONS; GENERAL
The Fund may invest in debt obligations. Issuers of debt obligations are
contractually obliged to pay interest at a specified rate on specified dates and
to repay principal on a specified maturity date. Certain debt obligations
(usually intermediate- and long-term bonds) allow the issuer to redeem or "call"
a bond before its maturity. Issuers are most likely to call debt when interest
rates are falling.
6
<PAGE>
Price Volatility. The market value of debt generally varies inversely to
changes in interest rates; when interest rates decline, a debt obligation's
price usually rises, and when interest rates rise, a debt obligation's price
usually declines.
Maturity. In general, the longer the maturity of a debt obligation, the
higher its yield and the more sensitive it is to changes in interest rates.
Conversely, the shorter the maturity, the lower the yield but the greater the
price stability. "Commercial paper" is generally considered the shortest form of
debt, and "bond" generally refers to securities with maturities over two years.
Bonds with maturities of three years or less are considered short-term, bonds
with maturities between three and seven years are considered intermediate-term,
and bonds with maturities greater than seven years are considered long-term.
Credit Quality. The value of debt may also be affected by changes in the
issuer's credit rating or financial condition. Lower quality ratings indicate a
higher degree of risk as to payment of interest and return of principal. To
compensate investors for taking on increased risk, issuers considered less
creditworthy generally must offer investors higher interest rates than issuers
with better credit ratings.
In conducting its credit research and analysis, the Adviser considers both
qualitative and quantitative factors to evaluate creditworthiness of individual
issuers. The Adviser also relies, in part, on credit ratings compiled by a
number of rating organizations. See the "Appendix of Ratings" set forth in the
back of this SAI.
HIGH RISK DEBT SECURITIES ("JUNK BONDS")
The Fund may invest up to 20% of its net assets in non-investment grade
debt securities. Debt securities rated below Baa by Moody's Investors Service
("Moody's") or BBB by Standard & Poor's Corporation ("S&P"), or of comparable
quality, are considered below investment grade. Non-investment grade debt
securities ("high risk debt securities") may include (i) debt not in default but
rated as low as C by Moody's, S&P, or Fitch Investors Service, Inc. ("Fitch"),
CC by Thomson BankWatch ("TBW") or ICBA, or CCC by Duff & Phelps, Inc. ("D&P");
(ii) commercial paper rated as low as C (or D if in default) by S&P, Not Prime
by Moody's, F-S (or D if in default) by Fitch, Duff 4 (or Duff 5 if in default)
by Duff, TBW-4 by TBW, or D by ICBA; and (iii) unrated debt securities of
comparable quality. The Fund may also buy debt in default (rated D by S&P or TBW
or Fitch, C by ICBA, DD by Duff, or of comparable quality) and commercial paper
in default (rated D by S&P or Fitch, Not Prime by Moody's, Duff 5 by Duff, TBW-4
by TBW, D by ICBA, or of comparable quality). Such securities, while generally
offering higher yields than investment grade securities with similar maturities,
involve greater risks, including the possibility of (or actual) default or
bankruptcy. They are regarded as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal.
The market for high-risk debt securities is relatively new and its growth
has paralleled a long economic expansion. It is not clear how this market would
withstand a prolonged recession or economic downturn, which could severely
disrupt this market and adversely affect the value of such securities.
Market values of high-risk debt securities tend to reflect individual
corporate developments to a greater extent, and tend to be more sensitive to
economic conditions, than do higher rated securities. As a result, high-risk
debt securities generally involve more credit risks than higher rated
7
<PAGE>
debt. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of high-risk debt may experience financial
stress and may not have sufficient revenues to meet their payment obligations.
An issuer's ability to service its debt obligations may also be adversely
affected by specific corporate developments, its own inability to meet specific
projected business forecasts, or unavailability of additional financing. The
risk of loss due to default by an issuer is significantly greater for high-risk
debt than for higher rated debt because the high-risk debt is generally
unsecured and often subordinated.
If the issuer of high-risk debt defaulted, the Fund might incur additional
expenses in seeking recovery. Periods of economic uncertainty and changes would
also generally result in increased volatility in the market prices of these
securities and thus in the Fund's net asset value.
If the Fund invested in high-risk debt experiences unexpected net
redemptions in a rising interest rate market, it may be forced to liquidate a
portion of its portfolio without regard to their investment merits. Due to the
limited liquidity of high-risk debt securities, the Fund may be forced to
liquidate these securities at a substantial discount. Any such liquidation
would reduce the Fund's asset base over which expenses could be allocated and
could result in a reduced rate of return for the Fund.
Payment Expectations. During periods of falling interest rates, issuers of
high-risk debt securities that contain redemption, call or prepayment provisions
are likely to redeem or repay the securities and refinance with other debt at a
lower interest rate. If the Fund holds debt securities that are refinanced or
otherwise redeemed, it may have to replace the securities with a lower yielding
security, which would result in a lower return.
Credit Ratings. Credit ratings evaluate safely of principal and interest
payments, but do not evaluate the market value risk of high-risk securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
rating agencies may not make timely changes in a rating to reflect changes in
the economy or in the condition 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 high-risk securities will depend
more heavily on the Adviser's credit analysis than investment-grade debt
securities. The Adviser will monitor the Fund's investments and evaluate whether
to dispose of or retain high-risk securities whose credit quality may have
changed.
Liquidity and Valuation. The Fund may have difficulty disposing of certain
high-risk securities with a thin trading market. Not all dealers maintain
markets in all these securities, and for many such securities there is no
established retail secondary market. The Adviser anticipates that such
securities may be sold only to a limited number of dealers or institutional
investors. To the extent a secondary trading market does exist, it is generally
not as liquid as that for higher-rated securities; a lack of a liquid secondary
market may adversely affect the market price of a security, which may in turn
affect the Fund's net asset value and ability to dispose of particular
securities in order to meet liquidity needs or to respond to a specific economic
event, or may make it difficult for the Fund to obtain accurate market
quotations for valuation purposes. Market quotations on many high-risk
securities may be available only from a limited number of dealers and may not
necessarily represent firm bids or prices for actual sales. During periods of
thin trading, the spread between bid and asked prices is likely to increase
significantly, and adverse publicity and investor perceptions (whether or not
based on fundamental analysis) may decrease the value and liquidity of a high-
risk security.
8
<PAGE>
Legislation. Legislation has from time to time been or may be proposed that
is designed to limit the use of certain high-risk debt. It is not possible to
predict the effect of such legislation on the market for high-risk debt.
However, any legislation that may be proposed or enacted could have a material
adverse effect on the value of these securities, the existence of a secondary
trading market for the securities and, as a result, the Fund's net asset values.
LENDING OF PORTFOLIO SECURITIES
The Fund is authorized to lend up to 33 1/3% of the total market value of
its portfolio securities to brokers, dealers, domestic and foreign banks or
other financial institutions for the purpose of increasing its net investment
income; however, currently, the Fund does not intend to engage in such lending.
Any such loan must be fully secured; however, there may be risks of delay in
recovery of the securities or even loss of rights in the collateral should the
borrower of the securities fail financially.
In determining whether to lend securities to a particular investor, the
Adviser will consider, and during the period of the loan will monitor, all
relevant facts and circumstances, including the borrower's creditworthiness. The
borrower must maintain collateral with the Custodian, either in cash, money
market instruments, or a letter of credit, in an amount at least equal to the
market value of the securities loaned, plus accrued interest and dividends or
other income, determined on a daily basis and adjusted accordingly.
The Fund will retain authority to terminate any loan of its portfolio
securities at any time. The Fund may pay reasonable administrative and custodial
fees in connection with a loan and may pay the borrower or placing broker a
negotiated portion of the interest earned on cash or money market instruments
held as collateral. On any loan, the Fund will receive reasonable interest or a
flat fee from the borrower and amounts equivalent to any dividends, interest or
other distributions on the securities loaned.
The Fund will retain record ownership of loaned securities to exercise
beneficial rights, such as voting and subscription rights and rights to
dividends, interest or other distributions, when retaining such rights is
considered to be in the Fund's interest.
DEPOSITARY RECEIPTS
The Fund may invest in sponsored or unsponsored depositary receipts and
other similar instruments, including American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs")
(collectively, "Depositary Receipts"). Depositary Receipts are typically issued
by a financial institution ("depository") and evidence ownership interests in a
security or a pool of securities ("underlying securities") that have been
deposited with the depository. In ADRs, the depository is typically a U.S.
financial institution and a foreign issuer issues the underlying securities. In
other Depositary Receipts, the depository may be a foreign or a U.S. entity, and
the underlying securities may have a foreign or a U.S. issuer. Depositary
Receipts will not necessarily be denominated in the same currency as their
underlying securities. Generally, ADRs are issued in registered form,
denominated in U.S. dollars, and designed for use in the U.S. securities
markets. Other Depositary Receipts, such GDRs and EDRs, may be issued in bearer
form and denominated in other currencies, and are generally designed for use in
securities markets outside the U.S. While the two types of Depositary Receipt
facilities ("unsponsored" or "sponsored") are similar, there are differences
regarding a holders' rights and obligations and the
9
<PAGE>
practices of market participants. A depositary may establish an unsponsored
facility without participation by (or acquiescence of) the underlying issuer;
typically, however, the depositary requests a letter of non-objection from the
underlying issuer prior to establishing the facility. Holders of unsponsored
Depositary Receipts generally bear all the costs of the facility. The depositary
usually charges fees upon the deposit and withdrawal of the underlying
securities, the conversion of dividends into U.S. dollars or other currency, the
disposition of non-cash distributions, and the performance of other services.
The depositary of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the underlying issuer or to
pass through voting rights to Depositary Receipt holders with respect to the
underlying securities.
Sponsored Depositary Receipt facilities are created in generally the same
manner as unsponsored facilities, except that sponsored Depositary Receipts are
established jointly by a depositary and the underlying issuer through a deposit
agreement. The deposit agreement sets out the rights and responsibilities of the
underlying issuer, the depositary and the Depositary Receipt holders. With
sponsored facilities, the underlying issuer typically bears some of the costs of
the Depositary Receipts (such as dividend payment fees of the depositary),
although most sponsored Depositary Receipt holders may bear costs such as
deposit and withdrawal fees. Depositories of most sponsored Depositary Receipts
agree to distribute notices of shareholder meetings, voting instructions, and
other shareholder communications and information to the Depositary Receipt
holders at the underlying issuer's request.
For purposes of the Fund's investment policies, investments in Depositary
Receipts will be deemed to be investments in the underlying securities. Thus, a
Depositary Receipt representing ownership of common stock will be treated as
common stock.
DERIVATIVE INSTRUMENTS
General Description. The Fund may invest in a variety of derivative
instruments, including structured notes, swaps, options, futures contracts
(sometimes referred to as "futures"), options on futures contacts, and forward
contracts to hedge its other investments, or for risk management.
The use of these instruments is subject to regulation by the U.S.
Securities and Exchange Commission ("SEC"), options and futures exchanges upon
which the instruments may be traded, the U.S. Commodity Futures Trading
Commission ("CFTC") and state regulatory authorities. In addition, the Fund's
ability to use these instruments will be limited by tax considerations.
In addition to the investments and techniques described below and in the
Prospectus, the Adviser may use additional instruments and other hedging
techniques as they become available, to the extent that they are consistent with
the Fund's investment limitations and applicable regulation.
Special Risks of These Instruments. Derivative instruments present special
considerations and risks. Risks pertaining to particular individual instruments
are described in the following sections.
First, successful use of these instruments depends on the Adviser's ability
to predict movements in the overall securities and currency markets, which
requires different skills than predicting changes in the prices of individual
securities. There can be no assurance that any particular strategy adopted will
succeed.
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Second, correlation between the price movements of a hedging instrument and
the price movements of the investment being hedged may be imperfect or even
non-existent. For example, if the value of an instrument used in a short hedge
(such as writing a call option, buying a put option, or selling a futures
contract) increased by less than the decline in value of the hedged investment,
the hedge would not be fully successful. Imperfect correlation could be due to
factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which these instruments are
traded. The effectiveness of any hedge using instruments on indices will depend
on the degree of correlation between price movements in the index and price
movements in the hedged investments.
Third, while successful hedging strategies can reduce the risk of loss,
they can also reduce opportunity for gain by offsetting the positive effect of
favorable price movements in the hedged investments. For example, if the Fund
entered into a short hedge because the Adviser projected a decline in the price
of a portfolio security, but the price of that security increased, the Fund's
gain from that increase could be offset by a decline in the price of the hedging
instrument. Moreover, if the price of the hedging instrument declined by more
than the increase in the price of the hedged security, the Fund could suffer a
loss.
Fourth, if the Fund is unable to close out its positions in derivative
instruments, assets maintained as "cover" might be required to continue to be
maintained until the hedge position expired or matured. The requirements might
impair the Fund's ability to sell a portfolio security at an advantageous time.
The Fund's ability to close out a position in an instrument prior to expiration
or maturity depends on the existence of a liquid secondary market or, in the
absence of such a market, the ability and willingness of the counterparty to the
transaction to close out the position. There is no assurance that any hedging
position can be closed out at a time and price favorable to the Fund.
General Limitation on Certain Derivative Transactions. The Trust has filed
a notice of eligibility for exclusion from the definition of the term "commodity
pool operator" with the CFTC and the U.S. National Futures Association, which
regulate trading in the futures markets. Pursuant to Rule 4.5 of the regulations
under the U.S. Commodity Exchange Act (the "CEA"), the notice of eligibility
includes representations that the Fund will use futures contracts and related
options solely for bona fide hedging purposes within the meaning of CFTC
regulation, provided that the Fund may hold other positions in futures contracts
and related options that do not qualify as a bona fide hedging position if the
aggregate initial margin deposits and premiums required to establish these
positions, less the amount by which any such options positions are "in the
money," do not exceed 5% of the Fund's net assets. Adoption of these guidelines
does not limit the percentage of the Fund's assets at-risk to 5%.
In addition, (i) the aggregate value of securities underlying call options
on securities written by the Fund or obligations underlying put options on
securities written by the Fund determined as of the date of the options are
written will not exceed 25% of the Fund's net assets, (ii) the aggregate
premiums paid on all options purchased by the Fund and which are being held will
not exceed 20% of the Fund's net assets; (iii) the Fund will not purchase put or
call options, other than hedging positions, if, as a result thereof, more than
5% of its total assets would be so invested; and (iv) the aggregate margin
deposit required on all futures and options on futures transactions being held
will not exceed 5% of the Fund's total assets.
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Transactions using options (other than purchased options) expose the Fund
to counterparty risk. To the extent required by SEC guidelines, the Fund will
not enter into any such transactions unless it owns either (1) an offsetting
("covered") position in securities, other options, or futures or (2) cash and
liquid high grade debt obligations with value sufficient at all times to cover
its potential obligations to the extent not covered as provided in (1) above.
The Fund will also set aside cash and/or appropriate liquid assets in a
segregated custodial account if required to do so by the SEC and CFTC
regulations. Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding option or futures contract is open,
unless they are replaced with similar assets. As a result, the commitment of a
large portion of the Fund's assets to segregated accounts as a cover could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
Structured Notes. Structured notes are Derivatives on which the amount of
principal repayment and or interest payments is based upon the movement of one
or more factors. These factors include, but are not limited to, currency
exchange rates, interest rates (such as the prime lending rate and LIBOR) and
stock indices such as the S&P 500 Index. In some cases, the impact of the
movements of these factors may increase or decrease through the use of
multipliers or deflators. The use of structured notes allows the Fund to tailor
its investments to the specific risks and returns the Adviser wishes to accept
while avoiding or reducing certain other risks.
Swaps, Caps, Collars and Floors. The Fund may enter into various types of
privately negotiated or over-the-counter derivatives transactions, including
swap transactions ("Swaps"), Caps, Floors, Collars, similar transactions and
related options. A Swap is a privately-negotiated derivatives contract in which
two parties agree, on specified payment dates, to make or exchange payments
calculated by reference to a specified rate, index or asset and an agreed
"notional amount". Some common examples of underlying rates, indices and assets
include: the market value of a single equity or debt security, a group or
"basket" of securities or a stock or fixed-income index; fixed and floating
interest rates; foreign currency exchange rates; and various commodity prices or
indices. For example, the Fund may enter into an equity Swap on the value of a
single common stock. The Swap is a separate contract that does not require
ownership of the underlying stock. In the Swap, the Fund will agree with a swap
dealer to make payments based upon changes in the value of the stock. For
example, on a specified payment date, if the value of the stock has increased,
one party (such as the Fund) will receive a payment equal to the amount of that
increase for the time period involved and the notional number of shares, as well
as receiving equivalent payments after any distribution of a dividend on the
security and perhaps making certain interest-like payments on specified dates.
If the value of the stock has decreased, then rather than receiving a payment,
the first party (such as the Fund, in this example) would be obligated to make a
payment to the other party to the Swap. The Fund can take either position in the
Swap; that is, the Fund may be the party that receives a payment following an
increase in value and pays following a decrease or vice versa. In some cases,
the Fund may also make or receive additional payments on the effective date
and/or termination date of the Swap. Swaps are very flexible financing tools
whose terms can be negotiated between the parties.
The Fund may enter into various Swaps that may be based upon the value of
various single debt and equity securities, baskets or indices. One example of a
situation in which the Fund may use an equity swap is to mimic some of the
benefits of ownership of "local shares" in a country in which the Fund, as a
foreigner, is prohibited from owning local shares. The terms of the Swaps
actually entered by the Fund may vary from the typical example described here.
In addition, the Fund may also enter into interest-rate and currency Swaps. Both
interest-rate and currency Swaps
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involve exchanges of payment streams. In the case of interest-rate Swaps, the
notional amount is used to calculate the size of the payments, but generally is
not exchanged; in certain currency Swaps, payment of the entire notional amount
in the two applicable currencies may be exchanged by the parties on the
effective date of the Swap and in some cases a reverse exchange may be made on
the termination date.
In addition to Swaps, the Fund may enter into Caps, Floors and Collars
relating to securities, interest rates or currencies. In a Cap or Floor, the
buyer pays a premium (which is generally, but not always a single up-front
amount) for the right to receive payments from the other party if, on specified
payment dates, the applicable rate, index or asset is greater than (in the case
of a Cap) or less than (in the case of a Floor) an agreed level, for the period
involved and the applicable notional amount. A Collar is a combination
instrument in which the same party buys a Cap and sells a Floor. Depending upon
the terms of the Cap and Floor comprising the Collar, the premiums will
partially or entirely offset each other. The notional amount of a Cap, Collar or
Floor is used to calculate payments, but is not itself exchanged. The Fund may
be both buyer and seller of these instruments. In addition, the Fund may engage
in combinations of put and call options on securities (also commonly known as
"collars"), which may involve physical delivery of securities. Puts, calls, and
securities collars are described in more detail under "Options" below. Like
Swaps, Caps, Floors and Collars are very flexible products. The terms of the
transactions entered by the Fund may vary from the typical examples described
here.
The Fund may enter into these over-the-counter derivative transactions
with a number of dealers, generally using standard forms of master agreement
documentation customized to suit the needs and circumstances of the Fund and the
dealers. These instruments are not traded on an organized exchange or, generally
speaking, through a clearinghouse. Because they are privately negotiated
bilateral contracts, in each case, the Fund and the dealer are each exposed to
the credit risk that the other party will not meet its obligations. This risk
will be greater with some derivative transactions than others, depending upon
the nature, size and terms of the transaction, as well as the creditworthiness
of the dealer. The size of the Fund's potential loss upon default by the dealer
or by the Fund itself is primarily related to the market value of the
transactions at the time of the default; since markets move both up and down, it
is also possible that the Fund could realize a gain. Consistent with market
practices, the Fund will generally make and receive payments on a net basis and
will, to the extent feasible, document Swaps, Caps, Floors and Collars with a
single dealer under a single master agreement to obtain the risk-reduction and
other benefits, where permitted by applicable law, of netting upon default or
other early termination. Events of default, other termination events, damage
calculations and remedies are among the legal terms specified in the
documentation.
The Fund's obligations will be accrued daily (offset against any amounts
owing to the Fund) and any accrued but unpaid net amounts owed to a Swap
Counterparty will be covered by the maintenance of a segregated account
consisting of cash or liquid securities to avoid any potential leveraging of the
Fund. To the extent that these Swaps, Caps, Floors, and Collars are entered into
for hedging purposes, the Adviser believes such obligations do not constitute
"senior securities" under the Investment Company Act of 1940 (the "1940 Act")
and, accordingly, will not treat them as being subject to the Fund's borrowing
restrictions.
The over-the-counter derivatives markets have grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized documentation. As a result,
these markets have become increasingly liquid. Different
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product and geographic segments of these markets have developed at different
rates and are subject to different risks. As a result, both the liquidity and
the risks associated with individual derivative transactions will vary greatly.
The use of over-the-counter derivatives is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary Fund securities transactions. If the Adviser is incorrect in its
forecasts of market values, interest rates, and currency exchange rates, the
investment performance of the Fund would be less favorable than it would have
been if this investment technique were not used.
Options. The Fund may also write (i.e., sell) covered put options. The
writer of a put incurs an obligation to buy the security underlying the option
from the put's purchaser at the exercise price at any time on or before the
termination date, at the purchaser's election (certain options the Fund writes
will be exercisable by the purchaser only on a specific date). Generally, a put
is "covered" if the Fund maintains cash, U.S. government securities or other
liquid high grade debt obligations equal to the exercise price of the option or
if the Fund holds a put on the same underlying security with a similar or higher
exercise price.
The Fund may purchase calls to close out covered call positions or to
protect against an increase in the price of a security it anticipates
purchasing. The Fund may purchase puts on securities that it holds only
to protect itself against a decline in the value of those securities. If the
Fund were to purchase a put on a security it holds, and the value of that
underlying security were to fall below the exercise price of the put, in an
amount greater than the premium paid for the option, the Fund would incur no
additional loss. The Fund may also purchase puts to close out written put
positions in a manner similar to call option closing purchase transactions.
There are no other limits on the Fund's ability to purchase call and put
options.
The Fund may also purchase put or call options on individual securities or
baskets of securities. When the Fund purchases a call, it acquires the right to
buy the underlying security at the exercise price on or before the termination
date, and when the Fund purchases a put, it acquires the right to sell the
underlying security at the exercise price on or before the termination date.
The Fund may purchase or write put and call options on securities, indices
and foreign currency, and enter into closing transactions with respect to such
options to terminate an existing position. The purchase of call options serves
as a long hedge, and the purchase of put options serves as a short hedge.
Writing put or call options can enable the Fund to enhance income by reason of
the premiums paid by the purchaser of such options. Writing call options serves
as a limited short hedge because declines in the value of the hedged investment
would be offset to the extent of the premium received for writing the option.
However, if the security appreciates to a price higher than the exercise price
of the call option, it can be expected that the option will be exercised and the
Fund will be obligated to sell the security at less than its market value or
will be obligated to purchase the security at a price greater than that at which
the security must be sold under the option. All or a portion of any assets used
as cover for OTC options written by the Fund would be considered illiquid to the
extent described above under "Illiquid and Restricted Securities." Writing put
options serves as a limited long hedge because increases in the value of the
hedged investment would be offset to the extent of the premium received for
writing the option. However, if the security depreciates to a price lower than
the exercise price of the put option, it can be expected that the put option
will be exercised and the Fund will be obligated to purchase the security at
more than its market value.
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The value of an option position will reflect, among other things, the
historical price volatility of the underlying investment, the current market
value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying
investment, and general market conditions. Options that expire unexercised have
no value. Options used by the Fund may include European-style options, which are
exercisable only at expiration. American-style options are exercisable at any
time prior to the expiration date.
The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize the profit or
limit the loss on an option position prior to its exercise or expiration.
The Fund may purchase or write both exchange-traded and OTC options.
Exchange-traded options are issued by a clearing organization affiliated with
the exchange on which the option is listed that, in effect, guarantees
completion of every exchange-traded option transaction. OTC options are
contracts between the Fund and the counterparty to the transaction (usually a
securities dealer or a bank) with no clearing organization guarantee. Thus, when
the Fund purchases or writes an OTC option, it relies on the counterparty to
make or take delivery of the underlying investment upon exercise of the option.
Failure by the counterparty to do so would result in the loss of any premium
paid by the Fund, as well as the loss of any expected benefit of the
transaction.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the counterparty, or by a
transaction in the secondary market if any such market exists. Although the Fund
will enter into OTC options only with counterparties that are expected to be
capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option at a
favorable price prior to expiration. In the event of insolvency of the
counterparty, the Fund might be unable to close out an OTC option position at
any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by the Fund could cause material losses because the Fund would be unable
to sell the investment used as a cover for the written option until the option
expires or is exercised.
The Fund may engage in options transactions on indices in much the same
manner as the options on securities discussed above, except that index options
may serve as a hedge against overall fluctuations in the securities markets in
general.
The writing and purchasing of options is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The primary risks associated with
the use of options on securities are (i) imperfect correlation between the
change in market value of the securities the Fund holds and the prices of
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options relating to the securities purchased or sold by the Fund; and (ii)
possible lack of a liquid secondary market for an option. Options not traded on
an exchange (OTC options) are often considered illiquid and may be difficult to
value. The Adviser believes that the Fund will minimize its risk of being unable
to close out an options contract by transacting in options only if there appears
to be a liquid secondary market for those options.
Futures Contracts. The Fund may buy and sell financial futures contracts,
stock and bond index futures contracts, foreign currency futures contracts and
options on any of the foregoing for hedging purposes only. A financial futures
contract is an agreement between two parties to buy or sell a specified debt
security at a set price on a future date. An index futures contract is an
agreement to take or make delivery of an amount of cash based on the difference
between the value of the index at the beginning and at the end of the contract
period. A futures contract on a foreign currency is an agreement to buy or sell
a specified amount of a currency for a set price on a future date.
When the Fund enters into a futures contract, it must make an initial
deposit, known as "initial margin," as a partial guarantee of its performance
under the contract. As the value of the security, index or currency fluctuates,
either party to the contract is required to make additional margin payments,
known as "variation margin," to cover any additional obligation it may have
under the contract. In addition, when the Fund enters into a futures contract,
it will segregate assets or "cover" its position in accordance with the 1940
Act.
The purchaser of futures or call options thereon can serve as a long hedge,
and the sale of futures or the purchase of put options thereon can serve as a
short hedge. Writing covered call options on futures contracts can serve as a
limited short hedge, and writing covered put options on futures contracts can
serve as limited long hedge, using a strategy similar to that used for writing
covered options in securities. The Fund's hedging may include purchases of
futures as an offset against the effect of expected increases in securities
prices or currency exchange rates and sales of futures as an offset against the
effect of expected declines in securities prices or currency exchange rates. The
Fund's futures transactions may be entered into for hedging purposes or risk
management. The Fund may also write put options on futures contracts while at
the same time purchasing call options on the same futures contracts in order to
create synthetically a long futures contract position. Such options would have
the same strike prices and expiration dates. The Fund will engage in this
strategy only when the Adviser believes it is more advantageous to the Fund than
is purchasing the futures contract.
To the extent required by regulatory authorities, the Fund will only enter
into futures contracts that are traded on national futures exchanges and are
standardized as to maturity date and underlying financial instrument. Futures
exchanges and trading are regulated under the CEA by the CFTC. Although
techniques other than sales and purchases of futures contracts could be used to
reduce the Fund's exposure to market, currency, or interest rate fluctuations,
the Fund may be able to hedge its exposure more effectively and perhaps at a
lower cost through using futures contracts.
A futures contract provides for the future sale by one party and purchase
by another party of a specified amount of a specific instrument (e.g., debt
security) or currency for a specified price at a designated date, time and
place. An index futures contract is an agreement pursuant to which the parties
agree to take or make delivery of an amount of cash equal to the difference
between the value of the index at the close of the last trading day of the
contract and the price at which the index futures contract was originally
written. Transactions costs are incurred
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when a futures contract is bought or sold and margin deposits must be
maintained. A futures contract may be satisfied by delivery or purchase, as the
case may be, of the instrument, the currency, or by payment of the change in the
cash value of the index. More commonly, futures contracts are closed out prior
to delivery by entering into an offsetting transaction in a matching futures
contract. Although the value of an index might be a function of the value of
certain specified securities, no physical delivery of those securities is made.
If the offsetting purchase price is less than the original sale price, the Fund
realizes a gain; if it is more, the Fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The transaction costs
must also be included in these calculations. There can be no assurance, however,
that the Fund will be able to enter into an offsetting transaction with respect
to a particular futures contract at a particular time. If the Fund is not able
to enter into an offsetting transaction, it will continue to be required to
maintain the margin deposits on the futures contract.
No price is paid by the Fund upon entering into a futures contract.
Instead, at the inception of a futures contract, the Fund is required to deposit
in a segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash,
U.S. government securities or other liquid, high grade debt obligations, in an
amount generally equal to 10% or less of the contract value. Margin must also be
deposited when writing a call or put option on a futures contract, in accordance
with applicable exchange rules. Unlike margin in securities transactions,
initial margin on futures contracts does not represent a borrowing, but rather
is in the nature of a performance bond or good-faith deposit that is returned to
the Fund at the termination of the transaction if all contractual obligations
have been satisfied. Under certain circumstances, such as periods of high
volatility, the Fund may be required by an exchange to increase the level of its
initial margin payment, and initial margin requirements might be increased
generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker.
When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a call or put option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Fund does not have sufficient cash to meet
daily variation margin requirements, it might need to sell securities at a time
when such sales are disadvantageous. Purchasers and sellers of futures positions
and options on futures can enter into offsetting closing transactions by selling
or purchasing, respectively, an instrument identical to the instrument held or
written. Positions in futures and options on futures may be closed only on an
exchange or board of trade that provides a secondary market. The Fund intends to
enter into futures transactions only on exchanges or boards of trade where there
appears to be a liquid secondary market. However, there can be no assurance that
such a market will exist for a particular contract at a particular time.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or option on a futures contract can
vary from the previous day's settlement price; once that limited is reached, no
trades may be made that day at a price beyond the limit. Daily price limits do
not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
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If the Fund were unable to liquidate a future or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the future or option or to maintain cash or securities
in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or options on futures contracts
might not correlate perfectly with movements in the prices of the investments
being hedged. For example, all participants in the futures and options on
futures contracts markets are subject to daily variation margin calls and might
be compelled to liquidate futures or options on futures contracts positions
whose prices are moving unfavorably to avoid being subject to further calls.
These liquidations could increase price volatility of the instruments and
distort the normal price relationship between the futures or options and the
investments being hedged. Also, because initial margin deposit requirements in
the futures markets are less onerous than margin requirements in the securities
markets, there might be increased participation by speculators in the futures
markets. This participation also might cause temporary price distortions. In
addition, activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.
The risk of loss in trading on futures contracts and related options in
some strategies can be substantial, due both to the low margin deposits required
and the extremely high degree of leverage involved in futures pricing. Gains and
losses on futures and related options depend on the Adviser's ability to predict
correctly the direction of stock prices, interest rates, and other economic
factors. In the opinion of the Trustees, the risk that Fund will be unable to
close out a futures position or related options contract will be minimized by
only entering into futures contracts or related options transactions for which
there appears to be a liquid secondary market.
FORWARD CURRENCY CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
The Fund may enter into forward currency contracts; such transactions may
serve as long hedges (for example, if the Fund seeks to buy a security
denominated in a foreign currency, it may purchase a forward currency contract
to lock in the $US price of the security) or as short hedges (the Fund
anticipates selling a security denominated in a foreign currency may sell a
forward currency contract to lock in the U.S. dollar equivalent of the
anticipated sale proceeds).
The Fund may seek to hedge against changes in the value of a particular
currency by using forward contracts on another foreign currency or a basket of
currencies, the value of which the Adviser believes will have a position
correlation to the values of the currency being hedged. In addition, the Fund
may use forward currency contracts to shift exposure to foreign currency
fluctuations from one country to another. For example, if the Fund owns
securities denominated in a foreign currency and the Adviser believes that
currency will decline relative to another currency, it might enter into a
forward contract to sell an appropriate amount of the first foreign currency,
with payment to be made in the second currency. Transactions that use two
foreign currencies are sometimes referred to as "cross hedges." Use of different
foreign currency magnifies the risk that movements in the price of the
instrument will not correlate or will correlate unfavorably with the foreign
currency being hedged.
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The cost to the Fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When the Fund enters into a forward currency contract, it relies on the
counterparty to make or to take delivery of the underlying currency at the
maturity of the contract. Failure by the counterparty to do so would result in
the loss of any expected benefit of the transaction.
As is the case with future contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument held or written. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the counterparty. Thus, there can be no assurance
that the Fund will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the counterparty, the Fund might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Fund would continue
to be subject to market risk with respect to the position, and would continue to
be required to maintain a position in securities denominated in the foreign
currency or to maintain cash or securities in a segregated account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
The Fund may purchase put and call options and write covered put and call
options on foreign currencies for the purpose of protecting against declines in
the U.S. dollar value of foreign currency denominated portfolio securities and
against increases in the U.S. dollar cost of such securities to be acquired. As
in the case of other kinds of options, however, the writing of an option on a
foreign currency constitutes only a partial hedge, up to the amount of the
premium received, and the Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on a foreign currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate movements
adverse to the Fund's position, it may forfeit the entire amount of the premium
plus related transaction costs. Options on foreign currencies to be written or
purchased by the Fund are traded on U.S. and foreign exchanges or over-the-
counter.
FOREIGN CURRENCY TRANSACTIONS
Although the Fund values its assets daily in U.S. dollars, the Fund is not
required to convert their holdings of foreign currencies to U.S. dollars on a
daily basis. The Fund's foreign currencies generally will be held as "foreign
currency call accounts" at foreign branches of foreign or domestic banks. These
accounts bear interest at negotiated rates and are payable upon relatively short
demand periods. If a bank became insolvent, the Fund could suffer a loss of some
or all of the amounts deposited. The Fund may convert foreign currency to U.S.
dollars from time to time. Although
19
<PAGE>
foreign exchange dealers generally do not charge a stated commission or fee for
conversion, the prices posted generally include a "spread," which is the
difference between the prices at which the dealers are buying and selling
foreign currencies.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a when-issued or delayed-delivery
basis. The price of debt obligations purchased on a when-issued basis is fixed
at the time the Fund commits to purchase, but delivery and payment for the
securities ("settlement") takes place at a later date. The price of these
securities may be expressed in yield terms; the Fund will enter into these
transactions in order to lock in the yield (price) available at the time of
commitment. Normally, the settlement date on when-issued securities occurs
within one month of purchase commitment, but may take longer, albeit not more
than 120 days after the trade date.
At the time the Fund commits to purchase a security on a when-issued basis,
it will record the transaction and reflect the value of that security in
determining its net asset value. The Adviser does not believe that any Fund's
net asset value will be adversely affected by purchases of securities on a
when-issued basis.
While when-issued securities may be sold prior to settlement, the Adviser
intends to purchase such securities with the purpose of actually acquiring them
unless a sale appears desirable for investment reasons. The Fund will maintain a
separate account with the Custodian, with a segregated portfolio of cash and
marketable securities at least equal in value to that Fund's commitments to
purchase when-issued securities. Such segregated securities will mature (or, if
necessary, be sold) on or before the settlement date. When the time comes for
the Fund to pay for when-issued securities, it will meet its obligations from
the then-available cash flow, the sale of the securities held in this separate
account, the sale of other securities; although it would not normally expect to
do so, the Fund may also meet this obligation from the sale of the when-issued
securities themselves, which may have increased or decreased in market value.
Between purchase and settlement, the Fund assumes the ownership risk of the
when-issued securities, including the risk of fluctuations in the securities'
market value due to, among other factors, a change in the general level of
interest rates. However, no interest accrues to the Fund during this period. The
Fund's current policy is to limit its aggregate when-issued commitments to 15%
of the market value of its total assets less liabilities, other than the
obligations created by these commitments.
FOREIGN INVESTMENT COMPANIES
Some of the countries in which the Fund may invest may not permit, or may
place economic restrictions on, direct investment by outside investors.
Investments in such countries may only be permitted through foreign
government-approved or -authorized investment vehicles, which may include other
investment companies. The Fund may also invest in registered or unregistered
closed-end investment companies that invest in foreign securities. Investing
through such vehicles may involve frequent or layered fees or expenses and may
also be subject to limitation under the 1940 Act. Under the 1940 Act, generally
the Fund may invest up to 10% of its assets in shares of investment companies
and up to 5% of its assets in any one investment company as long as the
investment does not represent more than 3% of the voting stock of the acquired
investment company. If the Fund invests in investment companies, shareholders
will bear not only their
20
<PAGE>
proportionate share of the Fund's expenses (including operating expenses and the
fees of the Adviser), but also, indirectly, the similar expenses of the
underlying investment companies.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with brokers, dealers or
banks ("counterparties") that the Adviser has determined meet the credit
guidelines established by the Board of Trustees. Repurchase agreements will be
fully collateralized, and may be viewed for purposes of the 1940 Act as a loan
of money by the Fund to the counterparty. In a repurchase agreement, the Fund
buys a security from a counterparty that has agreed to repurchase it at a
mutually agreed upon date and repurchase price, reflecting the interest rate
effective for the term of the repurchase agreement. The term of a repurchase
agreement is usually from overnight to one week and never exceeds one year;
repurchase agreements with a maturity in excess of seven days are considered
illiquid. The counterparty's obligation to repurchase is secured by the value of
the underlying security; when the Fund enters into a repurchase agreement, it
always receives, as collateral, underlying securities with a market value at
least equal to the purchase price (including accrued interest), and the Adviser
will monitor, on an ongoing basis, the value of the underlying securities to
ensure that such value always equals or exceeds the repurchase price plus
accrued interest. The Fund may incur a loss if the counterparty defaults and the
collateral value declines, or if bankruptcy proceedings are commenced regarding
the counterparty and the Fund's realization upon the collateral is delayed or
limited.
The Fund may, under certain circumstances, deem repurchase agreements
collateralized by U.S. government securities to be investments in U.S.
government securities.
BORROWING
The Fund may borrow money from U.S.-regulated banks. The 1940 Act and the
Fund's fundamental investment policies restrict such borrowing to 33 1/3% of the
Fund's total assets (including the amount borrowed) less all liabilities and
indebtedness other than the borrowing. Borrowing creates leverage, which is a
speculative characteristic; leverage from borrowing will magnify declines as
well as increases in the Fund's net asset value per share and net yield. The
Fund will borrow only on a secured basis, and only when the Adviser believes
that borrowing will benefit the Fund after taking into account considerations
such as the costs of borrowing and the likely investment returns on securities
purchased with borrowed monies.
The Fund will secure all borrowings; either the Custodian will segregate
the Fund's assets securing the borrowing for the benefit of the lenders or
similar arrangements will be made with a suitable sub-custodian. If assets used
to secure the borrowing decrease in value, the Fund may be required to pledge
additional collateral to the lender in the form of cash or securities to avoid
liquidation of those assets. Proceeds of borrowing may be used for investment
purposes, to meet redemptions or to pay dividends.
The Fund may also engage in mortgage dollar roll transactions and reverse
repurchase agreements, which may be considered a form of borrowing. In
addition, the Fund may borrow up to an additional one-third of its total assets
from banks for temporary or emergency purposes. The Fund will not purchase
securities when bank borrowings exceed one-third of its total assets.
21
<PAGE>
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
The Fund may engage in reverse repurchase agreements to facilitate
portfolio liquidity, a practice common in the mutual fund industry, or for
arbitrage transactions discussed below. In a reverse repurchase agreement, the
Fund would sell a security and enter into an agreement to repurchase the
security at a specified future date and price. The Fund generally retains the
right to interest and principal payments on the security. Since the Fund
receives cash upon entering into a reverse repurchase agreement, it may be
considered a borrowing. (See "Borrowing" above.) When required by guidelines of
the SEC, the Fund will set aside permissible liquid assets in a segregated
account to secure its obligations to repurchase the security.
The Fund may also enter into mortgage dollar rolls, in which the Fund would
sell mortgage-backed securities for delivery in the current month and
simultaneously contract to purchase substantially similar securities on a
specified future date. While the Fund would forego principal and interest paid
on the mortgage-backed securities during the roll period, it would be
compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any equivalent to a lower forward
price. At the time the Fund would enter into a mortgage dollar roll, it would
set aside permissible liquid assets in a segregated account to secure its
obligation for the forward commitment to buy mortgage-backed securities.
Mortgage dollar roll transactions may be considered a borrowing by the Fund.
(See "Borrowing" above.)
The mortgage dollar rolls and reverse repurchase agreements entered into by
the Fund may be used as arbitrage transactions in which the Fund will maintain
an offsetting position in investment grade debt obligations or repurchase
agreements that mature on or before the settlement date on the related mortgage
dollar roll or reverse repurchase agreements. Sine the Fund will receive
interest on the securities or repurchase agreements in which it invests the
transaction proceeds, such transactions may involve leverage. However, since
such securities or repurchase agreements will be high quality and will mature on
or before the settlement date of the mortgage dollar roll or reverse repurchase
agreement, the Adviser believes that such arbitrage transactions do not present
the risks to the Fund that are associated with other types of leverage.
ADDITIONAL RISK FACTORS
FOREIGN INVESTMENT
Investment in securities of foreign issuers and in foreign branches of
domestic banks, involves some risks different from, or in addition to, those
affecting investments in securities of U.S. issuers:
Information. Publicly available information about foreign issuers and
economies may be limited. Foreign issuers are not generally subject to uniform
accounting, auditing and financial and other reporting standards and
requirements comparable to those applicable to U.S. companies. Statistical
information about the economy in an emerging market country may be unavailable,
or if available may be unreliable or not directly comparable to information
regarding the economy of the U.S. or other more developed countries.
Regulation. There may be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than in the U.S.
22
<PAGE>
Liquidity and Concentration. Many foreign securities markets have
substantially less volume than U.S. national securities exchanges. Available
investments in emerging countries may be highly concentrated in a small number
of issuers, or the issuers may be unseasoned and/or have significantly smaller
market capitalization than in the U.S. or more developed countries.
Consequently, securities of foreign issuers may be less liquid and more volatile
than those of comparable domestic issuers.
Brokerage. Brokerage commissions and other transaction costs of foreign
securities exchanges are generally higher that in the U.S.
Taxes. Dividends and interest paid by foreign issuers may be subject to
withholding and other foreign taxes, which may decrease the net return on
foreign investments as compared to dividends and interest paid to the Fund by
U.S. companies. It is expected that the Fund's shareholders will be able to
claim a credit for U.S. tax purposes for any such foreign taxes, although there
can be no assurance that they will be able to do so. See "TAXES".
Political/Economy. Political and economic developments may present risks. A
foreign jurisdiction might impose or change withholding taxes on income payable
in connection with foreign securities. There are risks of seizure,
nationalization or expropriation of a foreign issuer or foreign deposits, and
adoption of foreign governmental restrictions such as exchange controls. Many
emerging or developing countries, and may face external stresses (including war)
as well as internal ones (including hyperinflation, currency depreciation,
limited resource self-sufficiency, and balance of payments issues and associated
social unrest). It may be more difficult to obtain a judgement in a court
outside the U.S.
Currency Exchange. Securities of foreign issuers are frequently denominated
in foreign currencies, and the Fund may temporarily hold uninvested reserves in
bank deposits in foreign currencies. The exchange rates between the U.S. dollar
and the currencies of emerging market countries may be volatile, and changes in
currency rates and exchange control regulations may affect (favourably or
unfavorably) the value of the Fund's assets in U.S. dollars. The Fund may incur
costs in converting between currencies.
Repatriation Restrictions. Foreign governments may delay or restrict
repatriation of the Fund's investment income or other assets. If, for any
reason, the Fund were unable, through borrowing or otherwise, to distribute an
amount equal to substantially all of its investment company taxable income (as
defined for U.S. tax purposes) within required time periods, the Fund would
cease to qualify for the favorable tax treatment afforded regulated investment
companies under the U.S. Internal Revenue Code of 1986, as amended (the "Code").
INVESTING IN SMALLER CAPITALIZATION STOCKS
The Adviser believes that the issuers of smaller capitalization stocks
often have sales and earnings growth rates which exceed those of larger
companies, and that such growth rates may in turn be reflected in more rapid
share price appreciation. However, investing in smaller capitalization stocks
can involve greater risk than is customarily associated with investing in stocks
of larger, more established companies. For example, smaller capitalization
companies often have limited product lines, markets, or financial resources, may
be dependent for management on one or a few key persons, and can be more
susceptible to losses. Also, their securities may be thinly traded (and
23
<PAGE>
therefore have to be sold at a discount from current prices or sold in small
lots over an extended period of time), may be followed by fewer investment
research analysts and may be subject to wider price swings and thus may create a
greater chance of loss than securities of larger capitalization companies.
Transaction costs in stocks of smaller capitalization companies may be higher
than those of larger capitalization companies.
INVESTING IN LOWER RATED DEBT SECURITIES
The Fund may invest in lower rated or unrated debt securities. Debt
considered below investment grade may be referred to as "junk bonds" or "high
risk" securities. The emerging country debt securities in which the Fund may
invest are subject to significant risk and will not be required to meet any
minimum rating standard or equivalent. Debt securities are subject to the risk
of the issuer's inability to meet principal and interest payments (credit risk)
and may also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the issuer's creditworthiness and general
market liquidity (market risk). Lower rated or unrated securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in general levels of
interest rates. The market values of debt securities tend to vary inversely with
interest rate levels. Yields and market values of lower rated and unrated debt
will fluctuate over time, reflecting not only changing interest rates but also
the market's perception of credit quality and the outlook for economic growth.
When economic conditions appear to be deteriorating, medium to lower rated
securities may decline in value due to heightened concern over credit quality,
regardless of prevailing interest rates. The Adviser will consider credit risk
and market risk in making debt security investment decisions for the Fund.
Investors should carefully consider the relative risks of investing in the Fund
that purchases lower rated and unrated debt securities, and should understand
that such securities are not generally meant for short-term investing.
The U.S. market for lower rated and unrated corporate debt is relatively
new and its recent growth paralleled a long period of economic expansion and an
increase in merger, acquisition and leveraged buyout activity. In addition,
trading markets for debt securities of issuers located in emerging countries may
be limited. Adverse economic developments may disrupt the market for U.S.
corporate lower rated and unrated debt securities and for emerging country debt
securities. Such disruptions may severely affect the ability of issuers,
especially highly leveraged issuers, to service their debt obligations or to
repay their obligations upon maturity. In addition, the secondary market for
lower rated and unrated debt securities, which is concentrated in relatively few
market makers, may not be as liquid as the secondary market for more highly
rated securities. As a result, the Adviser could find it more difficult to sell
these securities or may be able to sell the securities only at prices lower than
if such securities were widely traded. 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 Fund's net asset value.
FOREIGN CUSTODIANS AND SECURITIES DEPOSITORIES
Rules adopted under the 1940 Act, permit the Fund to maintain its foreign
securities and cash in the custody of certain eligible non-U.S. banks and
securities depositories (collectively, "foreign custodian"). Pursuant to these
rules, the Fund's assets invested in foreign countries may be held by foreign
custodians that are approved by the Fund's Board of Trustees or by a foreign
custody manager selected by the Board. The Board or the fund's foreign custody
manager will consider a number of factors in determining whether a foreign
custodian can provide reasonable
24
<PAGE>
care, including but not limited to: the financial strength of the institution;
the general reputation, standing and operating history of the institution; the
practices, procedures and internal controls of the institution; and whether the
Fund will have jurisdiction over the custodian. Certain banks in foreign
countries may not be eligible foreign custodians for the Fund, which may
preclude the Fund from purchasing securities in which it would otherwise invest;
banks that are eligible foreign custodians may be recently organized or
otherwise lack extensive operating experience.
INVESTMENT RESTRICTIONS
The following are fundamental investment limitations of the Fund. These
fundamental limitations may not be changed without shareholder approval.
In accordance with these limitations, the Fund will not:
1. Invest in real estate or mortgages on real estate (although the Fund may
invest in marketable securities secured by real estate or interests therein
or issued by companies or investment trusts which invest in real estate or
interests therein); invest in other open-end investment companies (except
in connection with a merger, consolidation, acquisition or reorganization);
invest in interests (other than debentures or equity stock interests) in
oil, gas or other mineral exploration or development programs; or purchase
or sell commodity contracts (except futures contracts, as described
herein).
2. Purchase any security (other than obligations of the U.S. Government, its
agencies or instrumentalities) if, as a result, as to 75% of the Fund's
total assets (i) more than 5% of the Fund's total assets would then be
invested in securities of any single issuer, or (ii) the Fund would then
own more than 10% of the voting securities of any single issuer.
3. Act as an underwriter (except to the extent that it may distribute shares
of the Fund); issue senior securities except as set forth in investment
restrictions 5 and 6 below; or purchase on margin, except that the Fund may
make margin payments in connection with futures, options and currency
transactions.
4. Loan money, except that the Fund may (i) purchase a portion of an issue of
publicly distributed bonds, debentures, notes and other evidences of
indebtedness, (ii) enter into repurchase agreements and (iii) lend its
portfolio securities.
5. Borrow money, except that the Fund may engage in dollar roll transactions
and reverse repurchase agreements, and may borrow money from banks in an
amount not exceeding one-third of the value of its total assets (including
the amount borrowed).
6. Mortgage, pledge or hypothecate its assets (except as may be necessary in
connection with permitted borrowings); provided, however, this does not
prohibit escrow, collateral or margin arrangements in connection with its
use of options, futures contracts and options on future contracts.
7. Invest 25% or more of its total assets in a single industry. For purposes
of this restriction, a foreign government is deemed to be an "industry"
with respect to securities issued by it.
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<PAGE>
If the Fund receives from an issuer of securities held by the Fund
subscription rights to purchase securities of that issuer, and if the Fund
exercises such subscription rights at a time when the Fund's portfolio holdings
of securities of that issuer would otherwise exceed the limits set forth in
Investment Restrictions 2 or 7 above, it will not constitute a violation if,
prior to receipt of securities upon exercise of such rights, and after
announcement of such rights, the Fund has sold at least as many securities of
the same class and value as it would receive on exercise of such rights.
ADDITIONAL RESTRICTIONS
The Fund has adopted the following additional restrictions which are not
fundamental and which may be changed without Shareholder approval, to the extent
permitted by applicable law, regulation or regulatory policy. Under these
restrictions, the Fund may not:
1. Purchase or retain securities of any company in which Trustees or officers
of the Trust or of the Adviser, individually owning more than 1/2 of 1% of
the securities of such company, in the aggregate own more than 5% of the
securities of such company.
2. Invest more than 5% of the value of its total assets in securities of
issuers which have been in continuous operation less than three years.
3. Invest more than 5% of its net assets in warrants whether or not listed on
the New York or American Stock Exchanges, and more than 2% of its net
assets in warrants that are not listed on those exchanges. Warrants
acquired in units or attached to securities are not included in this
restriction.
4. Purchase or sell real estate limited partnership interests.
5. Purchase or sell interests in oil, gas and mineral leases (other than
securities of companies that invest in or sponsor such programs).
6. Invest for the purpose of exercising control over management of any
company.
7. Invest more than 15% of the Fund's net assets in securities that are not
readily marketable (including repurchase agreements maturing in more than
seven days and over-the-counter options purchased by the Fund). Rule 144A
securities determined by the Board of Trustees to be liquid are not subject
to this limitation.
Whenever any investment policy or investment restriction states a maximum
percentage of the Fund's assets which may be invested in any security or other
property, it is intended that such maximum percentage limitation be determined
immediately after and as a result of that Fund's acquisition of such security or
property. The value of the Fund's assets is calculated as described herein under
the heading "DETERMINATION OF NET ASSET VALUE."
26
<PAGE>
TRUSTEES AND OFFICERS OF THE TRUST
The name, age, address, principal occupation during the past five years and
other information about each Trustee and officer of the Trust is shown below.
Each Trustee who is considered to be an "interested person," as defined in the
1940 Act, of the Trust is indicated by an asterisk.
<TABLE>
<CAPTION>
OFFICES WITH PRINCIPAL OCCUPATION
NAME AND ADDRESS THE TRUST DURING THE PAST FIVE YEARS
---------------- --------- --------------------------
<S> <C> <C>
THOMAS L. HANSBERGER* President and Chairman, Chief Executive Officer,
(67) Trustee President and Treasurer, Hansberger 515
East Las Olas Blvd. Global Investors, Inc., 1994 to present;
Fort Lauderdale, FL Chairman, Chief Executive Officer,
President and Treasurer, Hansberger
Group, Inc., 1999 to present; Chairman and
Chief Executive Officer, Templeton
Worldwide, 1992 to 1993; Director and
Chief Executive Officer, Templeton,
Galbraith & Hansberger Ltd., 1985 to
1992.
J. CHRISTOPHER JACKSON, Vice President and Senior Vice President and
ESQ.* (48) Trustee General Counsel, Hansberger Global
515 East Las Olas Blvd. Investors, Inc. 1996 to present;
Fort Lauderdale, Fl Senior Vice President, General Counsel
and Assistant Secretary, Hansberger Group,
Inc., 1999 to present; Vice President,
Associate General Counsel and Assistant
Secretary, Van Kampen American Capital,
Inc., 1986 to 1996.
KATHRYN B. MCGRATH, Trustee Partner, Morgan, Lewis & Bockius
ESQ.* (55) LLP, 1990 to present.
1800 M. Street, N.W.
Washington, DC
STUART B. ROSS (63) Trustee Executive Vice President, Xerox
100 First Stamford Place Corporation, 1990 to present; Chief
Stamford, CT Executive Officer, Xerox Financial
Services, Inc., 1990 to present.
WILLIAM F. WATERS, ESQ. Trustee Retired; former Senior Vice President,
(68) Merrill Lynch & Co., 1984 to 1996.
640 Hollow Tree Ridge Road
Darien, CT
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C>
CHARLES F. GULDEN (38) Vice President Managing Director, Hansberger Global
515 East Las Olas Blvd. Investors, Inc. 1996 to present; Vice
Fort Lauderdale, FL President and Director of Research &
Portfolio Management, Templeton
Worldwide, 1989 to 1996.
WESLEY E. FREEMAN (50) Vice President Managing Director, Hansberger Global
515 East Las Olas Blvd. Investors, Inc. 1996 to present; Executive
Fort Lauderdale, FL Vice President for Institutional Business
Development, Templeton Worldwide,
1989 to 1996.
THOMAS A. CHRISTENSEN, Treasurer Chief Financial Officer, 1998 to present; Vice
Jr. (29) President and Controller, Hansberger Global
515 East Las Olas Blvd. Investors, Inc. 1996 to 1998; Chief Financial
Fort Lauderdale, FL Officer, Hansberger Group, Inc., 1999 to
present; Accountant, Arthur Andersen LLP,
1993 to 1996.
KIMBERLEY SCOTT (37) Secretary Senior Vice President, Chief Administrative
515 East Las Olas Blvd. Officer Chief Compliance Officer and Assistant
Fort Lauderdale, FL Treasurer, Hansberger Global Investors, Inc.,
1994 to present; Senior Vice President and
Secretary, Hansberger Group, Inc., 1999 to
present; Executive Assistant and Portfolio
Supervisor, Templeton Worldwide, 1992 to
1994.
KARL O. HARTMANN, ESQ. (45) Assistant Secretary Senior Vice President and General Counsel,
73 Tremont Street Chase Global Funds Services Company, 1991 to
Boston, MA present.
HELEN A. ROBICHAUD, ESQ. (48) Assistant Secretary Vice President and Associate General Counsel,
73 Tremont Street Chase Global Funds Services Company, 1994 to
Boston, MA present.
</TABLE>
The Trust pays each Trustee who is not a director, officer, partner or
employee of the Adviser, any affiliated company, or legal counsel to the Adviser
("Disinterested Trustee"), an annual fee of $3,500, plus $500 per Board meeting.
In addition, the Trust reimburses each Disinterested Trustee for travel and
other expenses incurred in connection with attendance at such meetings. Messrs.
Hansberger, Ross and Waters are members of the Audit Committee of the Board of
Trustees, but receive no compensation for attendance at committee meetings.
Other officers and Trustees receive no compensation or expense reimbursement
from the Trust. For the fiscal year ending December 31, 1999, the Trust paid the
following amounts to Trustees and officers of the Trust:
28
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================
Pension or Total Compensation
Aggregate Retirement from Registrant
Compensation Benefits Estimated and Fund Complex
From Registrant Accrued as part Annual Benefits Paid to Directors
Name of Person, for Fiscal Year of Fund Upon for Fiscal Year
Position Ended 1999 Expenses Retirement Ended 1999
===========================================================================================
<S> <C> <C> <C> <C>
Stuart B. Ross, $5,500 N/A N/A $5,500 for service
Trustee on one board
William F. Waters $5,500 N/A N/A $5,500 for service
Trustee on one board
</TABLE>
As of March 12, 2000, the officers and Trustees of the Trust, in the
aggregate, beneficially owned less than 1% of the outstanding shares of each
Fund.
INVESTMENT ADVISER
Hansberger Global Investors, Inc. (the "Adviser") is the investment adviser
to the Fund. The Adviser, a Delaware corporation, is wholly owned subsidiary of
Hansberger Group, Inc. and is controlled by Mr. Thomas L. Hansberger who founded
the Adviser in 1994. A brief description of the investment advisory agreement
("Advisory Agreement") is set forth in the Prospectus under "The Investment
Advisor."
The Advisory Agreement, dated October 17, 1996, will continue in effect
only if such continuance is approved annually by either the Board of Trustees or
by vote of a majority of the Fund's outstanding voting securities (as defined in
the 1940 Act), and in either case by the vote of a majority of the Trust's
trustees who are neither parties to the Advisory Agreement nor interested
persons of any such party, cast in person at a meeting called for the purpose of
voting on such approval. The Advisory Agreement is terminable, without penalty,
on 60 days' written notice by the Board of Trustees, by vote of majority of the
Fund's outstanding voting securities, or by the Adviser, and will terminate
automatically in the event of its assignment.
The Adviser is responsible for investment decisions and supplies investment
research and portfolio management. At its expense, the Adviser provides office
space and all necessary office facilities, equipment and personnel for servicing
the investments of the Fund. The Adviser places all orders for the purchase and
sale of the Fund's portfolio securities at the Fund's expense.
Except for expenses assumed by the Adviser as set forth above, the Fund is
responsible for all its other expenses, including, without limitation, interest
charges, taxes, brokerage commissions, and similar expenses, expenses of issue,
sale, repurchase, or redemption of shares; expenses of registering or qualifying
shares for sale; expenses for printing and distribution costs of Prospectuses
and quarterly financial statements mailed to existing shareholders; and charges
of custodians, transfer agents (including the printing and mailing of reports
and notices to shareholders); registrars; auditing and legal services, clerical
services related to record keeping and shareholder relations, and fees for
Trustee who are not "interested persons" of the Adviser.
29
<PAGE>
As compensation for its services, the Fund pays to the Adviser a fee as
described in the Prospectus. The Fund has not commenced operations as of
December 31, 1999, therefore, advisory fees were not paid as of December 31,
1999.
Both the Fund and the Adviser have adopted a code of ethics that complies
with the requirements of Rule 17j-1 under the 1940 Act. Each of these codes of
ethics permit the personnel subject to those codes to invest in securities,
including securities that may be purchased by the Fund.
FUND TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the
Fund and for the placement of the Fund's investment business and the negotiation
of the commissions to be paid on such transactions. It is the policy of the
Adviser to seek the best execution at the best security price available with
respect to each transaction, in light of the overall quality of brokerage and
research services provided to the Adviser or the Fund. In over-the-counter
transactions, orders are placed directly with a principal market maker unless
it is believed that better price and execution can be obtained using a broker.
In determining the abilities of a broker or dealer to obtain best execution, the
Adviser considers relevant factors including: the ability and willingness of the
broker or dealer to facilitate the Fund's portfolio transaction by participating
therein for its own account; speed, efficiency and confidentiality; familiarity
with the market for a particular security; and the reputation and perceived
soundness of the broker. The best price to the Fund means the best net price
without regard to the mix between purchase or sale price and commissions, if
any. In selecting broker-dealers and in negotiating commissions, the Adviser
considers a variety of factors, including best price and execution, the full
range of brokerage services provided by the broker, as well as its capital
strength and stability, and the quality of the research and research services
provided by the broker. Consistent with the foregoing primary considerations,
the Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD") and such other policies as the Trustees may determine, the Adviser may
consider sales of shares of the Trust as a factor in the selection of broker-
dealers to execute the Fund's portfolio transactions. However, since shares of
the Fund are not marketed through intermediary brokers or dealers, it is not the
Fund's practice to allocate brokerage or principal business on the basis of
sales of shares which may be made through such firms.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer a commission for effecting a transaction in excess of
the amount of commission another broker or dealer would have charged for
effecting the transaction in recognition of the value of the brokerage and
research services provided by the broker or dealer. Brokerage and research
services include (a) 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; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement, and custody).
In carrying out the provisions of the Advisory Agreement, the Adviser may
cause the Fund to pay, to a broker that provides brokerage and research services
to the Adviser, a commission for effecting a securities transaction in excess of
the amount another broker would have charged for effecting the transaction. The
Adviser believes it is important to its investment decision-making process to
have access to independent research. The Advisory Agreements provide that such
higher commissions will not be paid by the Fund unless the Adviser determines in
good faith that such
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amount of commission is reasonable in relation to the value of the brokerage or
research services provided by such broker or dealer, viewed in terms of either
that particular transaction or the Adviser's overall responsibilities with
respect to the accounts for which it exercises investment discretion. The
investment advisory fees paid by the Fund under its Advisory Agreement are not
reduced as a result of the Adviser's receipt of research services.
Generally, research services provided by brokers may include information on
the economy, industries, groups of securities, individual companies, statistical
information, accounting and tax law interpretations, political developments,
legal developments affecting portfolio securities, technical market action,
pricing and appraisal services, credit analysis, risk measurement analysis,
performance analysis, and analysis of corporate responsibility issues. Such
research services are primarily in the form of written reports, telephone
contacts, and personal meetings with security analysts. In addition, such
research services may be provided in the form of access to various computer-
generated data, computer hardware and software, and meetings arranged with
corporate and industry spokesperson, economists, academicians, and government
representatives. In some cases, research services are generated by third parties
but are provided to the Adviser by or through brokers. Such brokers may pay for
all or a portion of computer hardware and software costs relating to the pricing
of securities.
Where the Adviser itself receives both administrative benefits and research
and brokerage services from the services provided by brokers, it makes a good
faith allocation between the administrative benefits and the research and
brokerage services, and will pay for any administrative benefits with cash. In
making good faith allocations of costs between administrative benefits and
research and brokerage services, a conflict of interest may exist by reason of
the Adviser's allocation of the costs of such benefits and services between
those that primarily benefit the Adviser and those that primarily benefit the
Fund and other advisory clients.
From time to time, the Adviser may purchase securities for the Fund in a
fixed price offering. In these situations, the seller may be a member of the
selling group that will, in addition to selling the securities to the Fund and
other advisory clients, provide the Adviser with research. The NASD has adopted
rules expressly permitting these types of arrangements under certain
circumstances. Generally, the seller will provide research "credits" in these
situations at a rate that is higher than the rate available for typical
secondary market transactions. These arrangements may not fall within the safe
harbor of Section 28(e).
Twice a year, the Adviser, through a committee of its securities analysts,
will consider the amount and nature of research and research services provided
by brokers, as well as the extent to which such services are relied upon, and
attempt to allocate a portion of the brokerage business of the Fund and other
advisory clients on the basis of that consideration. In addition, brokers may
suggest a level of business they would like to receive in order to continue to
provide such services. The actual brokerage business received by a broker may be
more or less than the suggested allocations, depending upon the Adviser's
evaluation of all applicable considerations.
The Adviser may direct the purchase of securities on behalf of the Fund and
other advisory clients in secondary market transactions, in public offerings
directly from an underwriter, or in privately negotiated transactions with an
issuer. When the Adviser believes the circumstances so warrant, securities
purchased in public offerings may be resold shortly after acquisition in the
immediate aftermarket for the security in order to take advantage of price
appreciation from the public offering price or for other reasons. Short-term
trading of securities acquired in public
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offerings, or otherwise, may result in higher portfolio turnover and associated
brokerage expenses.
The Adviser is responsible for selecting brokers in connection with foreign
securities transactions. The fixed commissions paid in connection with most
foreign stock transactions are usually higher than negotiated commissions on
U.S. stock transactions. Foreign stock exchanges and brokers are subject to less
government supervision and regulation as compared with the U.S. exchanges and
brokers. In addition, foreign security settlements may in some instances be
subject to delays and related administrative uncertainties.
The Adviser places portfolio transactions for other advisory accounts,
including other mutual funds managed by the Adviser. Research services furnished
by firms through which the Fund effects its securities transactions may be used
by the Adviser in servicing all of its accounts; not all of such services may be
used by the Adviser in connection with the Fund. In the opinion of the Adviser,
it is not possible to measure separately the benefits from research services to
each of the accounts (including the Fund) managed by the Adviser. Because the
volume and nature of the trading activities of the accounts are not uniform, the
amount of commissions in excess of those charged by another broker paid by each
account for brokerage and research services will vary. However, in the opinion
of the Adviser, such costs to the Fund will not be disproportionate to the
benefits received by it on a continuing basis.
If purchase or sale of securities consistent with the investment policies
of the Fund and one or more of these other clients served by the Adviser is
considered at or about the same time, transactions in such securities will be
allocated among the Fund and such other clients pursuant to guidelines deemed
fair and reasonable by the Adviser. Generally, under those guidelines, the Fund
and other participating clients will be allocated at least $25,000 of the
relevant security, with any remaining shares allocated on a pro rata basis. In
the event that there are not enough securities available to allocate each
participating client $25,000 worth of the security, the Adviser will use a
random allocation procedure, randomly selecting one participating client to
commence allocation.
It is anticipated that the annual portfolio turnover rate of the Fund will
not exceed 100% under normal circumstances.
CUSTODIAN
The Chase Manhattan Bank, 4 Chase Metro Tech Center, 18th Floor, Brooklyn,
New York 11245, serves as custodian of the assets of the Trust and has custody
of all of its securities and cash. The Custodian delivers and receives payment
for securities sold, receives and pays for securities purchased, collects income
from investments, and performs other duties, all as directed by the officers of
the Trust. In addition, the Trust, with the approval of the Board of Trustees
and subject to the rules of the SEC, may have sub-custodians in those foreign
countries in which it invests its assets. The Custodian and sub-custodians are
in no way responsible for any of the investment policies or decisions of the
Fund.
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
Chase Global Funds Services Company, a subsidiary of The Chase Manhattan
Bank, 73 Tremont Street, Boston MA 02108-3913, (the "Administrator" or "Transfer
Agent") provides administrative services to the Fund pursuant to an
Administration Agreement (the "Administration Agreement"). Services provided
under the Administration Agreement are subject to supervision by
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officers of the Trust and the Board of Trustees, and include day-to-day
administration of matters related to the existence of the Fund, maintenance of
its records, preparation of reports, supervision of the Fund's arrangements with
its custodian, and assistance in preparing the Fund's registration statements
under federal and state laws. Also under the Administration Agreement, the
Administrator (through its agents) provides dividend disbursing and transfer
agent services to the Fund. For its services under the Administration Agreement,
the Trust pays the Administrator a monthly fee in proportion to the Trust's
combined average daily net assets at the following annual rate: 0.12% of the
first $500 million in average daily net assets, 0.08% for the next $500 million,
and 0.06 for average net assets over $1 billion.
From time to time, the Fund, directly or indirectly through arrangements
with the Adviser or Administrator, may pay amounts to third parties that provide
transfer agent and other administrative services relating to the Fund to persons
who beneficially own interests in the Fund, such as participants in 401(k)
plans.
These services may include, among other things, sub-accounting services,
answering inquiries relating to the Fund, transmitting, on behalf of the Fund,
proxy statements, annual reports, updated Prospectuses, other communications
regarding the Fund, and related services as the Fund or beneficial owners may
reasonably request. In such cases, the Fund will not pay fees at a rate that is
greater than the rate the Fund is currently paying the Administrator for
providing these services to Fund shareholders.
TAXES
GENERAL
As indicated under "Taxes" in the Prospectus, the Fund intends to continue
to qualify annually for treatment as a regulated investment company ("RIC")
under Subchapter M of the Internal Revenue Code of 1986, as amended ("the
Code"). This qualification does not involve government supervision of the
Fund's management practices or policies.
In order to qualify for treatment as a RIC under the Code, the Fund must
distribute annually to its shareholders at least the sum of 90% of its net
investment income excludable from gross income plus 90% of its investment
company taxable income (generally, net investment income plus net short-term
capital gain) (the "Distribution Requirement") and also must meet several
additional requirements. Among these requirements are the following: (a) at
least 90% of the Fund's gross income each taxable year must be derived from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of stock or securities, or certain other income
(the "Income Requirement"); and (b) diversify its holdings so that; (i) at the
close of each quarter of the Fund's taxable year, at least 50% of the value of
its total assets must be represented by cash and cash items, U.S. Government
securities, securities of other RICs and other securities, with such other
securities limited, in respect to any one issuer, to an amount that does not
exceed 5% of the value of the Fund's assets and that does not represent more
than 10% of the outstanding voting securities of such issuer; and (ii) at the
close of each quarter of the Fund's taxable year, not more than 25% of the value
of its assets may be invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer or of two or more
issuers which are engaged in the same, similar or related trades or businesses
if the Fund owns at least 20% of the voting power of such issuers.
Notwithstanding the Distribution Requirement described above, which only
requires the Fund to distribute at least 90% of its annual investment company
taxable income
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and does not require any minimum distribution of net capital gain (the excess of
net long-term capital gain over net short-term capital loss), a Fund will be
subject to a nondeductible 4% excise tax to the extent it fails to distribute by
the end of any calendar year 98% of its ordinary income for that year and 98% of
its capital gain net income for the one-year period ending on October 31 of that
year, plus certain other amounts. The Fund intends to make sufficient
distributions to avoid liability for the 4% federal excise tax. Any gain or loss
recognized on a sale or redemption of shares of the Fund by a Shareholder who is
not a dealer in securities will generally be treated as long-term capital gain
or loss if the shares have been held for more than one year and short-term if
for a year or less. If shares on which a net capital gain distribution has been
received are subsequently sold or redeemed, and such shares have been held for
six months or less, any loss recognized by a shareholder will be treated as
long-term capital loss to the extent of the long-term capital gain
distributions.
FOREIGN TRANSACTIONS
Dividends and interest received by the Fund may be subject to income,
withholding, or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors. If more than 50% of the value of
the Fund's total assets at the close of its taxable year consists of securities
of foreign corporations, the Fund will be eligible to, and currently intends to,
file an election with the Internal Revenue Service that would enable its
shareholders, in effect, to receive the benefit of the foreign tax credit with
respect to any foreign and U.S. possessions income taxes paid by the Fund.
Pursuant to the elections, the Fund would treat those taxes as dividends paid to
its shareholders and each shareholder would be required to (1) include in gross
income, and treat as paid by him, his proportionate share of those taxes, (2)
treat his share of those taxes and any dividend paid by the Fund that represents
income from foreign or U.S. possessions sources as his own income from those
sources, and (3) either deduct the taxes deemed paid by him in computing his
taxable income, or alternatively, use the foregoing information in calculating
the foreign tax credit against his federal income tax. The Fund will report to
its shareholders shortly after each taxable year their respective shares of its
income from sources within, and taxes paid to, foreign countries and U.S.
possessions if it makes this election.
The Fund maintains its accounts and calculates its income in U.S.
dollars. In general, gain or loss (1) from the disposition of foreign currencies
and forward currency contracts, (2) from the disposition of foreign-currency-
denominated debt securities that are attributable to fluctuations in exchange
rates between the date the securities are acquired and their disposition date,
and (3) attributable to fluctuations in exchange rates between the time the Fund
accrues interest or other receivables or expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects those
receivables or pays those liabilities, will be treated as ordinary income or
loss. A foreign-currency-denominated debt security acquired by the Fund may bear
interest at a high normal rate that takes into account expected decreases in the
value of the principal amount of the security due to anticipated currency
devaluations; in that case, the Fund would be required to include the interest
in income as it accrues but generally would realize a currency loss with respect
to the principal only when the principal was received (through disposition or
upon maturity).
The Fund may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation that, in general, meets either of the
following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for
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the production of, passive income. Under certain circumstances, the Fund will be
subject to federal income tax on a portion of any "excess distribution" received
on the stock or of any gain on disposition of the stock (collectively, "PFIC
income"), plus interest thereon, even if the Fund distributes the PFIC income as
a taxable dividend to its shareholders. The balance of the PFIC income will be
included in the Fund's investment company taxable income and, accordingly, will
not be taxable to it to the extent that income is distributed to its
shareholders. If the Fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Fund will be required to include in income each year its pro
rata share of the qualified electing fund's annual ordinary earnings and net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) - which probably would have to be distributed to its shareholders
to satisfy the Distribution Requirement and avoid imposition of the Excise Tax -
even if those earnings and gain were not received by the Fund. In most instances
it will be very difficult, if not impossible, to make this election because of
certain of its requirements.
Pursuant to recent legislation, the Fund would be entitled to elect to
"mark-to-market" their stock in a PFIC. "Marking-to-market," in this context,
generally means recognizing as taxable gain for each taxable year the excess, as
of the end of that year, of the fair market value of each such PFIC's stock over
the adjusted basis in that stock (including mark-to-market gain for each prior
year for which an election was in effect).
DERIVATIVE INSTRUMENTS
The use of derivatives strategies, such as purchasing and selling (writing)
options and futures and entering into forward currency contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the gains and losses the Fund realizes in connection
therewith.
Gains from the disposition of foreign currencies (except certain gains
therefrom that may be excluded by future regulations), and income from
transactions in options, futures, and forward currency contracts derived by the
Fund with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
For federal income tax purposes, the Fund is required to recognize as
income for each taxable year its net unrealized gains and losses on options,
futures, or forward currency contracts that are subject to section 1256 of the
Code ("Section 1256 Contracts") and are held by the Fund as of the end of the
year, as well as gains and losses on Section 1256 Contracts actually realized
during the year. Except for Section 1256 Contracts that are part of a "mixed
straddle" and with respect to which the Fund makes a certain election, any gain
or loss recognized with respect to Section 1256 Contracts is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the Section 1256 Contract.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund is determined by dividing the
total market value of the Fund's investments and other assets, less any
liabilities, by the total number of the Fund's outstanding shares. Net asset
value per share is determined as of the regular close of trading (currently 4:00
p.m., Eastern time) of the New York Stock Exchange ("NYSE") on each day that the
NYSE is open for business. The NYSE is open for trading Monday through Friday
except on the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good
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Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Additionally, if any of the holidays falls on a Sunday, the NYSE
will not be open for trading on the succeeding Monday, unless unusual business
conditions exist, such as the ending of a monthly or yearly accounting period.
Price information on listed securities is taken from the exchange where the
security is primarily traded. Securities listed on a U.S. securities exchange
for which market quotations are available are valued at the last quoted sale
price on the day the valuation is made. Securities listed on a foreign exchange
are valued at their closing price. Unlisted securities and listed securities not
traded on the valuation date for which market quotations are not readily
available are valued at a price within a range not exceeding the current asked
price nor less than the current bid price. The current bid and asked prices are
determined based on the average bid and asked prices quoted on such valuation
date by reputable brokers.
Debt securities are valued by a pricing service that utilizes electronic
data processing techniques to determine values for normal institutional-sized
trading units of debt securities without regard to sale or bid prices when such
values are believed to more accurately reflect the fair market value for such
securities. Otherwise, sale or bid prices are used when such values are believed
to more accurately reflect the fair market value for such securities. Any
securities or other assets for which market quotations are not readily available
are valued at fair value as determined in good faith by the Board of Trustees.
Debt securities having remaining maturities of 60 days or less when purchased
are valued by the amortized cost method when the Board of Trustees has
determined that the fair value of such securities is their amortized cost. Under
this method of valuation, a security is initially valued at its acquisition
cost, and thereafter, accretion of any discount or amortization of any premium
is assumed each day, regardless of the impact of the fluctuating rates on the
market value of the instrument.
The value of other assets and securities for which no quotations are
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determine the prices in
accordance with the above-stated procedures are determined in good faith using
methods determined by the Board of Trustees. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the mean of the bid price and
asked price for such currencies against the U.S. dollar last quoted by any major
bank.
The calculation of net asset value does not usually take place
contemporaneously with the determination of the prices of the portfolio
securities used in such calculation. Trading in securities on foreign securities
exchanges and over-the-counter markets is normally completed well before the
regular close of trading on the NYSE on each business day on which the NYSE is
open for trading. In addition, foreign securities trading in a particular
country or countries may not take place on all business days the NYSE is open.
Furthermore, trading takes place in various foreign markets on days which are
not business days on which the NYSE is open and on which the Fund's net asset
value is not calculated. As a result, events affecting the values of portfolio
securities that occur between the time their prices are determined and the close
of the NYSE will not be reflected in the Fund's calculation of net asset values
unless the Adviser determines that the particular event may materially affect
net asset value, in which case an adjustment will be made.
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ADDITIONAL SHAREHOLDER INFORMATION
TELEPHONE EXCHANGE AND REDEMPTION PRIVILEGES
Shares of the Fund and any other mutual funds sponsored by the Adviser may
be exchanged for each other without charge at relative net asset values once
per six-month period. Exchanges will be effected by redemption of shares of the
Fund held and purchase of shares of the Fund for which Fund shares are being
exchanged (the "New Fund"). For federal income tax purposes, any such exchange
constitutes a sale upon which a capital gain or loss will be realized, depending
upon whether the value of the shares being exchanged is more or less than the
shareholder's adjusted cost basis. If you are interested in exercising any of
these exchange privileges, you should obtain Prospectuses of other sponsored
funds from the Adviser. Upon a telephone exchange, the transfer agent
establishes a new account in the New Fund with the same registration and
dividend and capital gains options as the redeemed account, unless otherwise
specified, and confirms the purchase to you.
The Telephone Exchange and Redemption Privileges are available only in
states where shares of the New Fund may be sold, and may be modified or
discontinued at any time. See "Purchasing, Selling and Exchanging Fund Shares"
in the Prospectus.
SIGNATURE GUARANTEES
The signature(s) of redeeming shareholders must generally be guaranteed by
an "eligible guarantor," including: (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchange,
registered securities associations and clearing agencies; (3) securities
broker-dealers which are members of a national securities exchange or clearing
agency or which have minimum net capital of $100,000, or (4) institutions that
participate in the Securities Transfer Agent Medallion Program ("STAMP") or
other recognized signature medallion program. A notarized signature will not be
sufficient. If shares are registered in more than one name, the signature of
each of the redeeming shareholders must be guaranteed. See "Purchasing, Selling
and Exchanging Fund shares" in the Prospectus.
REDEMPTIONS IN KIND
If the Board of Trustees determines that it would be detrimental to the
best interests of the remaining shareholders of the Fund to make payment wholly
or partly in cash, the Fund may pay the redemption proceeds in whole or in part
by a distribution-in-kind of portfolio securities, in conformity with applicable
rules of the SEC. Distributions-in-kind will be made in readily marketable
securities. Investors may incur brokerage charges on the sale of portfolio
securities received in distributions-in-kind.
ORGANIZATION OF THE TRUST AND THE FUND
The Trust was organized as a Massachusetts business trust under a
Declaration of Trust dated July 25, 1996. The Declaration of Trust permits the
Trust to issue an indefinite number of units of beneficial interest ("shares"),
with or without par value.
The Trust may issue shares in any number of "series"; each series of the
Trust is a separate portfolio and functions as a separate mutual fund, although
each series would share a common board
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of trustees, and may share an adviser, administrator, transfer agent, or
custodian. All consideration received by the Trust for shares of any series, and
all assets of that series, belong only to that series and are subject to that
series' liabilities. The International Growth Fund, International Value Fund,
Emerging Markets Fund and All Countries Fund are currently the only series of
the Trust. The Fund currently offers only one class of shares. The trustees may,
however, create and issue additional series of shares and may create and issue
shares of additional classes of one or more series.
Except as described below, the shares of the Fund, when issued, will be
fully paid, non-assessable, fully transferable and redeemable at the option of
the holder. The shares have no preference as to conversion, exchange, dividends,
retirement or other features and have no preemptive rights. Each share entitles
the shareholder of record to one vote. All shareholders of the Fund may vote as
a single class on each matter presented to shareholders for action except with
respect to any matter that affects one or more series or class solely or in a
matter different from others, in which case the shares of the affected series or
class are entitled to vote separately. The shares of the Trust have
non-cumulative rights, which means that the holders of more than 50% of the
shares voting for the election of Trustees can elect 100% of the Trustees if
they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of the Fund may be presumed to "control" (as defined in the
1940 Act) the Fund.
The Trust is not required to hold annual shareholder meetings; shareholder
meetings will be held from time to time for the election of Trustees under
certain circumstances, or to seek approval for changes to the operations of the
Trust or the Fund. A Trustee may be removed from office by the remaining
Trustees, or by the shareholders at a special meeting called on the written
request of shareholders owning at least 10% of the Trust's outstanding shares.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for
his or her own willful defaults and, if reasonable care has been exercised in
the selection of officers, agents, employees or investment advisers, shall not
be liable for any neglect or wrongdoing of any such person. The Declaration of
Trust also provides that the Trust will indemnify its Trustees and officers
against liabilities and expenses incurred in connection with actual or
threatened litigation in which they may be involved because of their offices
with the Trust unless it is determined in the manner provided in the Declaration
of Trust that they have not acted in good faith in the reasonable belief that
their actions were in the best interests of the Trust. However, nothing in the
Declaration of Trust shall protect or indemnify a Trustee against any liability
for his or her willful misfeasance, bad faith, gross negligence or reckless
disregard of his or her duties.
PERFORMANCE INFORMATION
The Fund's historical performance or return may be shown in the form of
"average annual total return," "total return" and "cumulative total return."
From time to time, the Adviser may voluntarily waive all or a portion of its
management fee and/or absorb certain expenses for the Fund. Without waivers and
absorption of expenses, performance results will be lower. No historical
performance represents the future performance of the Fund.
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AVERAGE ANNUAL TOTAL RETURN
The average annual return total of the Fund is computed by finding the
average annual compounded rates of return over designated time periods that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)/n=ERV
P = a hypothetical initial payment of $10,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $10,000 payment made at
the beginning of the stated periods at the end of the stated
periods.
TOTAL RETURN
Calculation of the Fund's total return is not subject to a standardized
formula. Total return performance for a specific period is calculated by first
taking an investment (assumed below to be $10,000) ("initial investment") in the
Fund's shares on the first day of the period and computing the "ending value" of
that investment at the end of the period. The total return percentage is then
determined by subtracting the initial investment from the ending value and
dividing the remainder by the initial investment and expressing the result as a
percentage. The calculation assumes that all income and capital gains dividends
paid by the Fund have been reinvested at net asset value on the reinvestment
dates during the period. Total return may also be shown as the increased dollar
value of the hypothetical investment over the period.
CUMULATIVE TOTAL RETURN
Cumulative total return represents the simple change in value of an
investment over a stated period and may be quoted as a percentage or as a dollar
amount. Total returns and cumulative total returns may be broken down into their
components of income and capital (including capital gains and changes in share
price) in order to illustrate the relationship between these factors and their
contributions to total return.
The Fund's performance figures will be based upon historical results and
will not represent future performance. The Fund's shares are sold at net asset
value per share. The Fund's returns and net asset value will fluctuate and
shares are redeemable at the then current net asset value, which may be more or
less than original cost. Factors affecting the Fund's performance include
general market conditions, operating expenses, and investment management. Any
additional fees charged by a dealer or other financial services firm will reduce
the returns described in this section.
COMPARISONS
U.S Treasury Bills, Notes or Bonds. Investors may want to compare the
performance of the Fund to that of U.S. Treasury bills, notes or bonds, which
are issued by the U.S. government. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the United States Treasury. The market value of such instruments will generally
fluctuate
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inversely with interest rates prior to maturity and will equal par value at
maturity. Generally, the values of obligations with shorter maturities will
fluctuate less than those with longer maturities.
Certificate of Deposit. Investors may want to compare the Fund's
performance to that of certificates of deposit offered by banks and other
depository institutions. Certificates of deposit may offer fixed or variable
interest rates and principal is guaranteed and may be insured. Withdrawal of the
deposits prior to maturity normally will be subject to a penalty. Rates offered
by banks and other depository institutions are subject to change at any time
specified by the issuing institution.
Money Market Fund. Investors may want to compare performance of the Fund to
that of money market funds. Money market fund yields will fluctuate and shares
are not insured, but share values usually remain stable.
Lipper Analytical Services, Inc. ("Lipper") and Other Independent Ranking
Organizations. From time to time, in marketing and other fund literature, the
Fund's performance may be compared to the performance of other mutual funds in
general or to the performance of particular types of mutual funds, with similar
investment goals, as tracked by independent organizations. Among these
organizations, Lipper, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives and assets, may be
cited. Lipper performance figures are based on changes in net asset value, with
all income and capital gain dividends reinvested. Such calculations do not
include the effect of any sales charges imposed by other funds. The Fund will be
compared to Lipper's appropriate funding category, that is, by fund objective
and portfolio holdings. The Fund's performance may also be compared to the
average performance of its Lipper category.
Morningstar, Inc. The Fund's performance may also be compared to the
performance of other mutual funds by Morningstar, Inc., which ranks funds on the
basis of historical risk and total return. Morningstar's rankings range from
five stars (highest) to one star (lowest) and represent Morningstar's assessment
of the historical risk level and total return of the Fund as a weighted average
for 3, 5 and 10 year periods. Rankings are not absolute and do not represent
future results.
Independent Sources. Evaluations of Fund performance made by independent
sources may also be used in advertisements concerning the Fund, including
reprints of, or selections from, editorials or articles above the Fund,
especially those with similar objectives. Sources for Fund performance
information and articles about the Fund may include publications such as Money,
Forbes, Kiplinger's, Smart Money, Morningstar, Inc., Financial World, Business
Week, U.S. News and World Report, The Wall Street Journal, Barron's and a
variety of investment newsletters.
Indices. The Fund may compare its performance to a wide variety of indices
including the Consumer Price Index; Dow Jones Average of 30 Industrials; NASDAQ
Over-the-Counter Composite Index; Standard & Poor's 500 Stock Index; Standard &
Poor's 400 Mid-Cap Stock Index; Standard & Poor's 600 Small-Cap Index; Wilshire
4500 Index; Wilshire 5000 Index; Wilshire Small Cap Index; Wilshire Small Cap
Growth Index; Wilshire Small Cap Value Index; Wilshire Midcap 750 Index;
Wilshire Midcap Growth Index; Wilshire Midcap Value Index; Wilshire Large Cap
Growth Index; Russell 1000 Index; Russell 1000 Growth Index; Russell 2000 Index;
Russell 2000 Small Stock Index; Russell 2000 Growth Index; Russell 2000 Value
Index; Russell 2500 Index; Russell 3000 Stock Index; Russell Mid Cap Index;
Russell Mid Cap Growth Index; Russell Mid Cap Value Index; Value Line Index;
Morgan Stanley Capital International
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EAFE(R) Index; Morgan Stanley Capital International World Index; Morgan Stanley
Capital International All Country World Index; and Salomon Brothers World Index.
In addition, the Fund may compare its performance to certain other indices
that measure stock market performance in geographic areas in which the Fund may
invest. The market prices and yields of the stocks in these indices will
fluctuate. The Fund may also compare its portfolio weighting to the EAFE Index
weighting, which represents the relative capitalization of the major overseas
markets on a dollar-adjusted basis.
There are differences and similarities between the investments that the
Fund may purchase for its portfolio and the investments measured by these
indices.
Historical Information. Because the Fund's investments are denominated
primarily in foreign currencies, the strength or weakness of the U.S. dollar
against these currencies may account for part of the Fund's investment
performance. Historical information regarding the value of the dollar versus
foreign currencies may be used from time to time in advertisements concerning
the Fund. Such historical information is not indicative of future fluctuations
in the value of the U.S. dollar against these currencies. Marketing materials
may cite country and economic statistics and historical stock market performance
for any of the countries in which the Fund invests, including the following:
population growth, gross domestic product, inflation rate, average stock market
price earnings ratios and the total value of stock markets. Sources for such
statistics may include official publications of various foreign governments,
exchanges, or investment research firms. In addition, marketing materials may
cite the Adviser's views or interpretations of such statistical data or
historical performance.
Historical Asset Class Returns. From time to time, marketing materials may
portray the historical returns of various asset classes. Such presentations will
typically compare the average annual rates of return of inflation, U.S. Treasury
bills, bonds, common stocks, and small stocks. There are important differences
between each of these investments that should be considered in viewing any such
comparison. The market value of stocks will fluctuate with market conditions,
and small-stock prices generally will fluctuate more than large-stock prices.
Bond prices generally will fluctuate inversely with interest rates and other
market conditions, and the prices of bonds with longer maturities generally will
fluctuate more than those of shorter-maturity bonds. Interest rates for bonds
may be fixed at the time of issuance, and the payment of principal and interest
may be guaranteed by the issuer and, in the case of U.S. Treasury obligations,
backed by the full faith and credit of the U.S. Treasury.
Other Funds Advised by Hansberger. Hansberger Global Investors, Inc.
advises a number of mutual funds investing in a variety of markets. The Fund may
be compared, from time to time, to other mutual funds advised by Hansberger
Global Investors, Inc. based on a risk/reward profile. In general, the degree of
risk associated with any investment product varies directly with that product's
potential level of reward. This correlation or any fund's individual profile may
be described or discussed in marketing materials; this discussion will not be
used to compare the risk and reward potential of the Fund with that of any
mutual fund or investment product other than those advised by Hansberger Global
Investors, Inc. Marketing materials may also discuss the relationship between
risk and reward as it relates to an individual investor's portfolio.
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ADDITIONAL FUND INFORMATION
Portfolio Characteristics. In order to present a more complete picture of
the Fund's portfolio, marketing materials may include various actual or
estimated portfolio characteristics, including but not limited to median market
capitalizations, earnings per share, alphas, betas, price/earnings ratios,
returns on equity, dividend yields, capitalization ranges, growth rates,
price/book ratios, top holdings, sector breakdowns, asset allocations, quality
breakdowns, and breakdowns by geographic region.
Measures of Volatility and Relative Performance. Occasionally statistics
may be used to specify Fund volatility or risk. The general premise is that
greater volatility connotes greater risk undertaken in achieving performance.
Measures of volatility or risk are generally used to compare the Fund's net
asset value or performance relative to a market index. One measure of volatility
is beta. Beta is the volatility of the Fund relative to the total market as
represented by the Standard & Poor's 500 Stock Index. A beta of more than 1.00
indicates volatility greater than the market, and a beta of less than 1.00
indicates volatility less than the market. Another measure of volatility or risk
is standard deviation. Standard deviation is a statistical tool that measures
the degree to which the Fund's performance has varied from its average
performance during a particular time period.
Standard deviation = the square root of [ x/1/ = x/n/
---------
n - l
where [ = "the sum of,"
x/l/ = each individual return during the time period,
x/m/ = the average return over the time period, and
n = the number of individual returns during the time period.
Statistics may also be used to discuss the Fund's relative performance.
One such measure is alpha. Alpha measures the actual return of the Fund compared
to the expected return of the Fund given its risk (as measured by beta). The
expected return is based on how the market as a whole performed, and how the
particular fund has historically performed against the market. Specifically,
alpha is the actual return less the expected return. The expected return is
computed by multiplying the advance or decline in a market representation by the
fund's beta. A positve alpha quantifies the value that the fund manager has
added, and a negative alpha quantifies the value that the fund manager has lost.
Other measures of volatility and relative performance may be used as
appropriate. However, all such measures will fluctuate and do not represent
results.
GENERAL INFORMATION
BUSINESS PHILOSOPHY
The Adviser is an independent investment adviser, owned by professionals
active in its management. Recognizing that the investors are the focus of its
business, the Adviser strives for excellence both in investment management and
in the service provided to investors. This commitment affects many aspects of
the business, including professional staffing, product development, investment
management, and service delivery.
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The increasing complexity of the capital markets requires specialized
skills and processes for each asset class and style. Therefore, the Adviser
believes that active management should produce greater returns than a passively
managed index. The Adviser has brought together a group of top-flight investment
professionals with diverse product expertise, and each concentrates on their
investment specialty. The Adviser believes that people are the firm's most
important asset. For this reason, continuity of professionals is critical to the
firm's long-term success.
INVESTMENT ENVIRONMENT
Discussions of economic, social and political conditions and their impact
on the Fund may be used in advertisements and sales materials. Such factors that
may affect the Fund include changes in interest rates, political developments,
the competitive environment, consumer behavior, industry trends, technological
advances, macroeconomic trends, and the supply and demand of various financial
instruments. In addition, marketing materials may cite the Adviser's views or
interpretations of such factors.
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP, 225 Franklin Street, Boston, MA 02110, are the
independent accountants for the Trust, providing audit services and assistance
and consultation with respect to the preparation of filings with the SEC.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP serves as legal counsel for the Trust.
FINANCIAL STATEMENTS
The Fund's fiscal year ends on December 31st of each year. The Fund will
send annual and semi-annual reports to its shareholders; the financial
statements appearing in annual reports are audited by the Trust's independent
accountants.
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