File No. 333-10015
811-7763
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. 2 [X]
Post-Effective Amendment No. [ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 [ ]
Amendment No. 2 [X]
MASTERS' SELECT INVESTMENT TRUST
(Formerly Masters Concentrated Select Trust)
(Exact name of registrant as specified in charter)
4 Orinda Way, Suite 230-D
Orinda, CA 94563
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number (including area code): (510) 254-8999
KENNETH E. GREGORY
Masters' Select Investment Trust
4 Orinda Way, Suite 230-D
Orinda, CA 94563
(Name and address of agent for service of process)
With a copy to:
JULIE ALLECTA, ESQ.
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, CA 94104-2878
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of the registration statement.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant
has elected to register an indefinite number of shares of beneficial interest,
$.01 par value.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
Please read this prospectus before investing, and keep it on file for future
reference. It contains important information, including how the Fund invests and
the services available to shareholders.
A Statement of Additional Information (SAI) dated , 1996 has been filed with the
Securities and Exchange Commission (SEC) and is incorporated herein by reference
(legally forms a part of this prospectus). For a free copy of the SAI, call
(800).
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the U.S. Government, the FDIC,
the Federal Reserve Board, or any other U.S. Government agency, and are subject
to investment risk, including the possible loss of principal.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE MASTERS'
SELECT EQUITY
FUND
A No-load Mutual Fund
The Masters' Select Equity Fund is a growth fund that seeks to increase the
value of your investment over the long term by using the combined talents and
favorite stock picking ideas of six highly regarded portfolio managers.
Prospectus
, 1996
Litman/Gregory Fund
Advisors, LLC
4 Orinda Way
Orinda, CA 94563
<PAGE>
Contents
The Fund at a Glance 3 Goal, Strategy and Management
Who May Want to Invest 4
Expenses 4
The Fund in Detail 5 Investment Philosophy; Management; Investment
Managers; Securities, Investment Practices and
Risks; Fundamental Policies and Investment
Restrictions; Breakdown of Expenses, Organization
Your Account 17 Ways to Set Up Your Account
18 How to Buy Shares
20 How to Sell Shares
Shareholder and Account 22 Statements and Reports, Investor Services, Share
Policies Price, Purchases, Redemptions
Dividends, Capital Gains 23 Distribution Options, Taxes
and Taxes
Performance 24
General Information 25
Prospectus 2
<PAGE>
The Fund at a Glance
Goal: The Masters' Select Equity Fund (the "Fund") seeks long term growth of
capital primarily from investment in U.S. equity securities. As with any mutual
fund, there is no assurance that the Fund will achieve this goal. Strategy: The
Fund is sub-advised by six highly regarded investment managers. Each manager
will run a fixed percentage of the Fund's portfolio and invest in a maximum of
15 stocks. This approach is designed to:
- - Combine the efforts of six experienced, world class managers, all with
superior long term public track records at other mutual funds.
- - Access only the favorite stock picking ideas of each manager at any point
in time. This will be achieved by limiting each manager to a maximum of 15
stocks within that manager's segment of the Fund.
- - Deliver a Fund portfolio that is prudently diversified in terms of stocks
(typically 75 to 90) and industries while still allowing the managers to
run portfolio segments focused on only their favorite stocks.
- - Further diversify across different size companies and stock picking styles
by using six portfolio managers, each with a different stock picking
discipline.
The Fund's Advisor has extensive experience evaluating investment managers and
mutual funds. The Advisor has selected investment managers for the Fund that it
believes are superior, based on their track record as well as the Advisor's
subjective assessment of their investment philosophy, analytical support and
other characteristics that it believes are found in superior investment
managers.
Management: Litman/Gregory Fund Advisors, LLC is the Fund's Advisor. The Advisor
is an affiliate of L/G Research, which publishes the No-Load Fund Analyst and
conducts in-depth research on mutual funds and investment management firms. The
Advisor is also affiliated with Litman/Gregory & Company, LLC, an investment
management firm.
The Advisor has contracted with investment managers to manage the day-to-day
stock picking. The individual portfolio managers are as follows:
Shelby Davis: CEO and Chief Investment Officer of Davis Selected Advisers, LP,
the advisor to Davis New York Venture Fund.
Jean-Marie Eveillard: President of Societe Generale Asset Management Corporation
and lead manager of SoGen International and SoGen Overseas Funds.
Foster Friess (and team): President of Friess Associates and also lead portfolio
manager of the Brandywine Fund.
Mason Hawkins: Chief Executive Officer of Southeastern Asset Management and
co-manager of Longleaf Partners Fund.
Spiros "Sig" Segalas: President and Chief Investment Officer of Jennison
Associates Capital Corp. and portfolio manager of Harbor Capital Appreciation
Fund.
Dick Weiss: Member of the Executive Committee at Strong Capital Management, Inc.
and co-manager of
3 Prospectus
<PAGE>
Strong Common Stock Fund.
Fund Closing: In order to ensure the integrity of the Fund's focused approach,
it is expected that the Fund may close to new investors periodically at certain
asset levels. Limiting the Fund's size will allow the investment managers to
maintain their focus on selected securities.
Who May Want to Invest
The Fund is intended for investors who are willing to ride out short-term stock
market fluctuations in pursuit of potentially above average long-term returns.
The value of the Fund's investments will vary from day to day, and generally
reflects market conditions, interest rates, and other company, political or
economic events. In the short term, stock prices can fluctuate dramatically in
response to these factors. When you sell your shares, they may be worth more or
less than what you paid for them. By itself, the Fund does not constitute a
balanced investment plan.
Expenses
Expenses are one of several factors to consider when investing in a mutual fund.
There are usually two types of expenses involved: shareholder transaction
expenses, such as sales loads, and annual operating expenses, such as investment
advisory fees. The Fund has no shareholder transaction expenses.
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Annual Operating Expenses
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Investment advisory fee 1.10%
12b-1 fee None
Other expenses of the Fund .65%
----
Total Fund operating expenses 1.75%
Example: Let's say, hypothetically, that the Fund's annual return is 5% and that
its operating expenses are exactly as just described. For every $1,000 you
invest, here's how much you would pay in total expenses if you close your
account after the number of years indicated:
After 1 year $ 18
After 3 years $ 55
The purpose of the above table is to provide an understanding of the various
annual operating expenses which may be borne directly or indirectly by an
investment in the Fund. This example illustrates the effect of expenses, but it
is not meant to suggest actual or expected costs or returns, all of which may
vary.
Annual operating expenses are paid out of the Fund's assets. The Fund pays an
investment advisory fee to the Advisor equal to 1.10% of the Fund's average net
assets. Each of the investment managers receives a fee for its services from the
Advisor, not from the Fund. The Fund also incurs other expenses for services
such as administrative services, maintaining shareholder records and furnishing
shareholder statements and financial reports. "Other Expenses" in the table have
been estimated. (Total Fund operating expenses are not expected to exceed
1.75%.) The Fund's expenses are factored into its share price and are not
charged directly to shareholder accounts.
For a more complete description of the various costs and expenses, see
"Breakdown of Expenses."
Prospectus 4
<PAGE>
The Fund in Detail
Investment Philosophy
The investment objective of the Fund is growth; that is, the increase in the
value of your investment over the long term. The investment managers selected by
the Advisor invest in securities of companies which they believe have strong
appreciation potential. Under normal circumstances, the Fund intends to be
substantially or fully invested in equity securities, including common stocks
and other securities with the characteristics of common stocks.
The Fund's strategy is based on several fundamental beliefs:
First, the Advisor believes that it is possible to identify investment managers
who will deliver superior performance relative to their peer groups. This belief
is based on the Advisor's extensive experience evaluating and picking stock
mutual funds.
Second, the Advisor believes that at any point in time most investment managers
own a small number of stocks in which they are highly confident. However,
because holding only 10 or 15 stocks is not considered prudent from a
diversification standpoint or practical given the large dollar amounts managed
by most successful managers, most stock mutual funds hold more than 50 stocks.
The Advisor believes that, over time, the performance of most investment
managers' "highest confidence" stocks exceeds that of their more diversified
portfolios.
Third, the Advisor believes that during any given year certain stock picking
styles will generate higher returns than the Standard & Poor's 500 Stock Index
("S&P 500"), while others will lag. By including a variety of stock picking
styles in a single mutual fund the Advisor believes the variability of returns
between stock picking styles can be lessened.
The Fund's six investment managers emphasize different stock picking styles and
invest in stocks with a range of market capitalizations. The portion of the Fund
assigned to each manager is fixed and has been determined with the specific
objective of maintaining exposure to large company stocks at 50% to 75% of the
Fund's total assets, in normal market conditions. These fixed allocations will
be allowed to drift slightly. The Advisor is responsible for re-balancing the
allocations as total assets in the Fund fluctuate.
The Advisor's strategy is to allocate the portfolio's assets among investment
managers who, based on the Advisor's research, are judged to be among the best
in their respective style groups.
The investment managers manage their individual portfolio segments by building a
focused portfolio representing their highest confidence stocks. Each investment
manager's portfolio segment includes a minimum of 5 securities and a maximum of
15 securities. Though the overall Fund may hold more or less securities at any
point in time, it is generally expected that the Fund will hold between 75 and
90 securities.
Under unusual market conditions, for temporary defensive purposes, up to 35% of
the Fund's total assets may be
5 Prospectus
<PAGE>
invested in short term, high quality debt securities. Defensive positions may be
initiated by the individual portfolio managers or by the Advisor.
Management
The Fund is managed by Litman/Gregory Fund Advisors, LLC, 4 Orinda Way, Orinda
CA 94563. The Advisor has overall responsibility for assets under management,
recommends selection of investment managers to the Board of Trustees, evaluates
performance of the investment managers, monitors changes at the investment
managers' organizations which may impact their ability to deliver superior
future performance, determines when to re-balance the investment managers'
assets, and determines the amount of cash equivalents (if any) that may be held
in addition to cash held in each of the investment managers' sub-portfolios. The
Trustees will review the level and appropriateness of the various manager fee
schedules.
Kenneth E. Gregory is a Trustee of the Trust and will be responsible for
monitoring the day-to-day activity of the investment managers. Gregory is also
President of L/G Research, an affiliated firm which publishes the No-Load Fund
Analyst newsletter and conducts research on financial markets and mutual funds.
He has been co-editor of the newsletter since its beginning in 1989. Gregory is
also President and Chief Investment Officer of Litman/Gregory & Company, LLC, a
money management firm. He has held this position since the founding of
Litman/Gregory & Company, a predecessor firm, in 1987. He has been in the
investment business since 1979.
Investment Managers
The Advisor believes that superior investment managers exhibit:
- - Consistently above-average performance relative to an appropriate peer
group. The Advisor measures investment manager performance against
performance composites made up of other advisory firms using a similar
stock picking style and market capitalization. The Advisor maintains its
own database and has developed proprietary software to measure performance
over various time periods.
- - A record of outperforming the S&P 500 over most periods of five years or
longer (U.S. equity managers).
- - The confidence and ability to think and act independently of "Wall Street
herd mentality."
- - The passion for and obsession with stock picking that can result in working
harder and more creatively to get an edge.
- - A focus on the job of stock picking and portfolio management. Thus, the
Advisor seeks investment managers who have attempted to mitigate
non-investment distractions by delegating most business management and
marketing duties.
The Advisor has extensive experience evaluating investment advisory firms using
the above criteria and believes each of the investment managers selected to
participate in the Fund exhibit the qualities mentioned above.
Information on the investment managers is summarized in the grid below and
detailed in the paragraphs that follow.
Prospectus 6
<PAGE>
INVESTMENT MANAGER SUMMARY
<TABLE>
<CAPTION>
Investment
Initial Experience/
Portfolio Allocation of Relevant Fund Size of Stock Picking
Manager Fund Portfolio Experience Companies Style
<S> <C> <C> <C> <C>
Shelby Davis 20% Over 30 years/ Mostly large cap Growth at a
Davis New York reasonable price
Venture Fund
since 1969
Jean-Marie 20% Over 30 years/ No market cap Value oriented
Eveillard SoGen International restrictions and global. At
Fund Since 1979 least 50%
invested in the
U.S.
Foster Friess and 10% Over 25 years/ Small and mid High earnings
team Brandywine Fund cap growth
since 1986
Mason Hawkins 20% Over 25 years/ All sizes but Value
Longleaf Partners mostly mid and
Fund since 1987. large cap
Sprios "Sig" 20% Over 30 years/ Mostly large cap High earnings
Segalas Harbor Capital growth
Appreciation Fund
since 1990.
Richard Weiss 10% Over 20 years/ Small and Growth at a
Strong Common midcap reasonable price
Stock Fund since
1991.
</TABLE>
7 Prospectus
<PAGE>
Shelby Davis/Davis Selected Advisers.
Shelby M. C. Davis is the lead portfolio manager for the segment of the Fund's
assets managed by Davis Selected Advisers LP ("Davis Advisers"), 124 E. Marcy
Street, Santa Fe, NM 87501. Davis has been in the investment business for over
30 years. He has been a portfolio manager for Davis New York Venture Fund since
1969; his son, Christopher C. Davis was named co-portfolio manager in 1995. In
total, Davis Advisers manages over $6.4 billion of mutual fund and ERISA
portfolios including Davis New York Venture Fund. In performing its investment
advisory services, Davis Advisers, while remaining ultimately responsible for
its segment of the Fund's assets, is able to draw on the portfolio management,
research and market expertise of its affiliates (including Davis Selected
Advisers-NY, Inc.). The average annual total return of Davis New York Venture
Fund and the Standard & Poor's 500 Stock Index, through September 30, 1996, is
as follows:
Period Fund S&P 500
One year 14.73% 20.33%
Five years 17.86% 15.23%
Ten years 16.91% 14.96%
(Note: Past performance is not necessarily indicative of future performance of
the Fund.)
Approximately 20% of the Fund's assets will be managed by Davis. He invests
primarily in large companies using a strategy that takes into account both
growth and value. This approach is often referred to as "growth at a reasonable
price." Davis prefers high quality companies as evidenced by some or all of the
following:
- - Solid top-line (revenue) and unit growth
- - Management with a stake in the business
- - A business plan for the next three to five years
- - Participation in an industry that is capable of earning a good return on
capital
- - Respected by competitors
- - Low cost operations
Davis often seeks to buy companies exhibiting some or all of these
characteristics at depressed prices because they are temporarily out of favor.
When buying out-of-favor stocks, he believes there is often a catalyst which
will eventually push the stock price higher.
Mason Hawkins/Southeastern Asset Management. Mason Hawkins is the lead portfolio
manager for the portion of the Fund's assets run by Southeastern Asset
Management, Inc. (Southeastern), 6075 Poplar Avenue, Memphis, Tennessee 38119.
Hawkins has been in the investment business for over 20 years and founded
Southeastern, which he controls, in 1975. He has managed the Longleaf Partners
Fund since its inception in 1987. In total, Southeastern manages over $6
billion. The average annual total return of Longleaf Partners Fund and the
Standard & Poor's 500 Stock Index, through September 30, 1996, is as follows:
Period Fund S&P 500
One year 14.89% 20.33%
Three years 18.86% 17.42%
Five years 19.81% 15.23%
(Note: Past performance is not necessarily indicative of future performance of
the Fund.)
Approximately 20% of the Fund's assets are managed by Southeastern using a value
oriented approach to picking stocks. The Firm considers
Prospectus 8
<PAGE>
companies of all sizes, although most of its portion of the Fund's assets are
expected to be invested in mid-sized and larger companies. Southeastern focuses
on securities of companies believed to have unrecognized intrinsic value and the
potential to grow their economic worth. Southeastern believes that superior long
term performance can be achieved when positions in financially strong,
well-managed companies are acquired at prices significantly below their business
value and are sold when they approach their corporate worth. Corporate intrinsic
value is determined through careful securities analysis and the use of
established disciplines consistently applied over long periods of time.
Securities which can be identified and purchased at a price significantly
discounted from their intrinsic worth not only protect investment capital from
significant loss but also facilitate major rewards when the true business value
is ultimately recognized. Seeking the largest margin of safety possible,
Southeastern requires at least a 40% market value discount from its appraisal of
an issuer's intrinsic value before purchasing the security. To determine
intrinsic value, current publicly available financial statements are carefully
scrutinized, and two primary methods of appraisal are applied. The first
assesses what is believed to be the real economic value of the issuer's net
assets, and the second examines the issuer's ability to generate free cash flow
after required or maintenance capital expenditures. After free cash flow is
determined, conservative projections about its rate of future growth are made.
The present value of that stream of cash flow plus its terminal value is then
calculated using a discount rate based on expected interest rates. If the
calculations are accurate, the present value would be the price at which buyers
and sellers negotiating at arms length would accept for the whole company. In a
concluding analysis, the asset value determination and/or the discounted free
cash flow value are compared to business transactions of comparable
corporations. Other considerations used in selecting potential investments
include the following:
- - Indications of shareholder oriented management.
- - Evidence of financial strength
- - Potential earnings improvement.
Spiros Segalas/Jennison Associates.
Spiros "Sig" Segalas is the portfolio manager for the segment of the Fund's
assets run by Jennison Associates Capital Corp., 466 Lexington Avenue, New York,
New York 10017. Segalas has been in the investment business for over 30 years
and has been the portfolio manager for the Harbor Capital Appreciation Fund
since May, 1990. He is a founding member and President and Chief Investment
Officer of Jennison Associates Capital Corp., a wholly-owned subsidiary of the
Prudential Insurance Company of America. As of , 1996, Jennison Associates
managed over $17 billion in equity securities. The average annual total return
of Harbor Capital Appreciation Fund and the Standard & Poor's 500 Stock Index,
since May, 1990, when Segalas became portfolio manager through September 30,
1996, is as follows:
9 Prospectus
<PAGE>
Period Fund S&P 500
One year 12.10% 20.33%
Three years 19.01% 17.42%
Five years 18.61% 15.23%
(Note: Past performance is not necessarily indicative of future performance of
the Fund.)
Approximately 20% of the Fund's assets will be run by Segalas. He seeks to
invest in mid-sized and large companies experiencing superior absolute and
relative earnings growth. Earnings predictability and confidence in earnings
forecasts are an important part of the selection process. In considering a stock
for ownership, Segalas considers price/earnings ratios relative to the market as
well as the companies' histories. In addition, he seeks out companies
experiencing some or all of the following:
- - High sales growth
- - High unit growth
- - High or improving returns on assets and equity
- - Strong balance sheet.
Segalas also prefers companies with a competitive advantage such as unique
management, marketing or research and development.
Foster Friess and Team/Friess Associates. Foster Friess is the lead portfolio
manager for the segment of the Fund's assets run by Friess Associates, Inc., 350
Broadway, Jackson, Wyoming 83001. Friess has been in the investment business for
over 25 years and has been manager of the Brandywine Fund since 1986. He is also
President and with his wife, Lynette Friess, sole owner of Friess Associates. In
total Friess manages over $9 billion. The average annual total return of
Brandywine Fund and the Standard & Poor's 500 Stock Index, through September 30,
1996, is as follows:
Period Fund S&P 500
One year 9.95% 20.33%
Five years 19.94% 15.23%
Ten years 19.08% 14.96%
(Note: Past performance is not necessarily indicative of future performance of
the Fund.)
Approximately 10% of the Fund's assets will be run by Friess and his team.
Friess invests in stocks of well-financed issuers which have proven records of
profitability and strong earnings momentum. Emphasis will be placed on companies
with market capitalizations under $5 billion. These companies are likely to be
lesser known companies moving from a lower to higher market share position
within their industry groups rather than the largest and best known companies in
these groups. Friess may, however, purchase common stocks of well known, highly
researched mid-sized companies if the team believes those common stocks offer
particular opportunity for long term capital growth. In selecting investments,
Friess will consider financial characteristics of the issuer, including
historical sales and net income, debt/equity and price/earnings ratios and book
value. Friess may also review research reports of broker-dealers and trade
publications and, in appropriate situations, meet with management. Greater
weight will be given to internal factors, such as product or service
development, than to external factors,
Prospectus 10
<PAGE>
such as interest rate changes, commodity price fluctuations, general stock
market trends and foreign currency exchange values. A particular issuer's
dividend history is not considered important.
Richard T. Weiss/Strong Capital Management.
Richard Weiss is the co-manager for the segment of the Fund's assets run by
Strong Capital Management, Inc., 100 Heritage Reserve, Menomonee Falls,
Wisconsin 53051. Weiss has been in the investment business for over 20 years and
has been the co-manager of the Strong Common Stock Fund since joining Strong in
1991. Weiss is a member of the firm's Executive Committee. Prior to joining
Strong he was the lead manager of the SteinRoe Special Fund commencing in 1981.
In total, Weiss co-manages over $3 billion. Strong Capital Management was
founded in 1974 and is controlled by Richard Strong. The average annual total
return of Strong Common Stock Fund and the Standard & Poor's 500 Stock Index,
through September 30, 1996, is as follows:
Period Fund S&P 500
One year 15.67% 20.33%
Three years 15.09% 17.42%
Five years 18.37% 15.23%
(Note: Past performance is not necessarily indicative of future performance of
the Fund.)
Approximately 10% of the Fund's assets will be run by Weiss. He will invest in
stocks of small and mid-sized companies that are undervalued either because they
are not broadly recognized, are in transition, or are out of favor based on
short-term factors. In seeking attractively valued companies, Weiss focuses on
companies with above average growth potential that also exhibit some or all of
the following:
- - Low institutional ownership and low analyst coverage
- - High quality management
- - Sustainable competitive advantage.
Weiss evaluates the degree of undervaluation relative to his estimate of each
company's private market value. This private market value approach is based on
an assessment of what a private buyer would be willing to pay for the future
cash flow stream of the target company. Based on his experience, Weiss believes
that, except for technology and other high growth stocks, most stocks trade
between 50% and 80% of private market value. When trading at the low end of this
range, companies take steps to prevent takeover, or they are taken over. The
private market value estimate is applied flexibly based on the outlook for the
industry and the company fundamentals.
Jean-Marie Eveillard/Societe Generale Asset Management Corp. Jean-Marie
Eveillard is the portfolio manager for the segment of the Fund's assets run by
Societe Generale Asset Management (SGAM), 1221 Avenue of the Americas, New York,
New York 10020. Eveillard has been in the investment business for over 30 years
and has been the portfolio manager for SoGen International Fund, a multi-asset
global fund, since 1979. Eveillard is also
11 Prospectus
<PAGE>
President of SGAM, an indirect subsidiary of Societe Generale, one of France's
largest banks. SGAM currently manages nearly $5 billion. The average annual
total return of SoGen International Fund, the Standard & Poor's 500 Stock Index
and the Morgan Stanley EAFE Index through September 30, 1996, are as follows:
Period Fund EAFE S&P 500
One year 12.06% 8.61% 20.33%
Five years 13.01% 8.17% 15.23%
Ten years 12.59% 8.67% 14.96%
(Note: Past performance is not necessarily indicative of future performance of
the Fund.)
Because SoGen International Fund invested in fixed income investments as well as
stocks, the above indexes are not ideal benchmarks.
Approximately 20% of the Fund's assets will be run by Eveillard, who will invest
in securities all over the world. At least 50% of his segment must be invested
in U.S. securities. Eveillard is a value investor and uses a bottom-up
orientation that focuses on the fundamentals of a specific security rather than
its immediate environment. In searching for obscure or depressed securities, his
approach is flexible. so that despite an equity focus he will sometimes own
fixed income securities that he believes can deliver equity-type returns.
Eveillard is also flexible in the size of companies looked at (very small to
very large) as well their geographic location (developed or emerging markets).
Eveillard's time horizon is three to five years, and his indifference to short
term issues allows him to consider companies that have become bargains offering
long term value due to temporary problems. Eveillard avoids a "black box"
approach to assessing value. In particular, whenever possible, he looks for an
imbalance between his estimate of what a reasonable buyer would pay for the
entire company, and the price for the security in the public market.
It is expected that Eveillard will limit his segment of the Fund's portfolio to
$150 million. When his allocation reaches this limit, it is likely that the Fund
will add an additional manager to manage new cash flows that would otherwise
have been allocated to Eveillard.
The investment methods used by these managers in selecting securities for the
Fund varies. The segment of the Fund's portfolio managed by an investment
manager will, under normal circumstances, differ from the segments managed by
the other investment managers with respect to portfolio composition, turnover,
issuer capitalization and issuer financial condition. Since selections are made
independently by each investment manager, it is possible that a security held by
one portfolio segment may also be held by other portfolio segments of the Fund
or that several managers may simultaneously favor the same industry segment. The
Advisor will monitor the overall portfolio on a daily basis to ensure that such
overlaps do not create an unintended industry concentration or lack of
diversification. The allocation of Fund assets to each investment manager is not
expected to change materially.
In the event an investment manager were no longer able to continue to manage a
segment of the Fund's portfolio, the Advisor would select a replacement
investment manager with an investment style comparable to that
Prospectus 12
<PAGE>
of the investment manager being replaced. In addition, if an investment manager
is no longer able to manage all of the assets allocated to it, as a result of
the growth of the Fund, the Advisor would select an additional manager with a
comparable style. The Advisor would use the same criteria as those used in the
original selection of investment managers.
The Advisor has applied for an exemptive order from the Securities and Exchange
Commission which, if received, would permit the Advisor, subject to certain
conditions, to select new Managers with the approval of the Board of Trustees,
but without obtaining shareholder approval. The order would also permit the
Advisor to change the terms of agreements with the Managers or continue the
employment of a Manager after an event which would otherwise cause the automatic
termination of services. Shareholders would be notified of any Manager changes.
Shareholders have the right to terminate arrangements with a Manager by vote of
a majority of the outstanding shares of the Fund. The order would also permit
the Fund to disclose Manager's fees only in the aggregate in its registration
statement.
Each investment manager selects the brokers and dealers to execute transactions
for the segment of the Fund being managed by that manager.
Securities, Investment Practices and Risks
Under normal circumstances, the Fund intends to be substantially or fully
invested in equity securities, including common stocks and other securities with
the characteristics of common stocks. These securities include, but are not
limited to, those issued by small companies and foreign companies.
Small Companies. The Fund will typically invest 20% to 30% of its assets in
small companies. While smaller companies generally have potential for rapid
growth, investments in smaller companies also often involve greater risks
because they may lack the management experience, financial resources, product
diversification and competitive strengths of larger companies. In addition, in
many instances the securities of smaller companies may be less liquid than those
of larger companies.
Foreign Securities. The Fund may invest up to 25% of its total assets in foreign
securities, including depositary receipts. Under normal circumstances the
Advisor expects that the total invested in foreign securities will be less than
15% of total assets. American Depositary Receipts (ADRs) are receipts issued by
a U.S. bank or trust company evidencing ownership of underlying securities
issued by a foreign issuer. European and Global Depositary Receipts (EDRs and
GDRs) are bearer receipts designed for use in foreign securities markets.
Depositary receipts may be sponsored or unsponsored; unsponsored depositary
receipts are organized without the cooperation of the foreign issuer of the
underlying securities. As a result, information about the issuer may not be as
current or complete as for sponsored receipts, and the prices of unsponsored
receipts may be more volatile. The Fund may also invest in foreign exchange
forward contracts or currency futures or options on foreign currency in
connection with its investments in foreign securities.
There are special risks associated with investing in foreign securities,
including increased political and economic risk, as well as exposure to currency
fluctuations. The Fund may also invest in foreign securities of issuers in
emerging or developing countries, which involve greater risks than other foreign
investments. Emerging markets may be more volatile than both the U.S. and more
developed foreign markets, and there are other risks more fully described in the
SAI.
* * *
The following paragraphs describe briefly some of the other securities the Fund
may buy and some of the strategies that may be used by the
13 Prospectus
<PAGE>
Fund, as well as some of the risks associated with investing in the Fund. More
information on this subject is contained in the SAI.
Options on Securities and Securities Indices. The Fund may buy call options on
securities in order to fix the cost of a future purchase or to attempt to
enhance return. The Fund may buy put options on securities to hedge against a
decline in the value of securities it owns. The Fund may also write (sell) put
and covered call options on securities in which it is authorized to invest. The
Fund may also purchase and write options on U.S. securities indices. Options
transactions will be entered into for hedging purposes and not for speculation.
The Fund's ability to use these instruments successfully will depend on an
investment manager's ability to predict accurately movements in the prices of
securities, interest rates and the securities markets. There is no assurance
that liquid secondary markets for options will always exist, and the correlation
between hedging instruments and the securities or sectors being hedged may be
imperfect. The requirement to cover obligations may impede portfolio management
or the ability to meet redemption requests. It may also be necessary to defer
closing out options positions to avoid adverse tax consequences.
U.S. Government Securities. The Fund may invest in direct obligations of the
United States, such as Treasury bills, notes and bonds, as well as obligations
of U.S. agencies and instrumentalities. Not all securities issued by agencies
and instrumentalities of the U.S. Government are backed by the full faith and
credit of the United States. Some, such as securities issued by the Federal
National Mortgage Association, are supported solely or primarily by the
creditworthiness of the issuer. If an obligation is not backed by the full faith
and credit of the United States, the Fund must look principally to the agency or
instrumentality issuing or guaranteeing the security for repayment and may not
be able to assert a claim against the U.S. Government if the agency or
instrumentality does not meet its commitments. The Fund may also invest in
mortgage-backed securities.
Repurchase Agreements. The Fund may enter into repurchase agreements, in which
the Fund buys securities and the seller agrees to repurchase them from the Fund
at a mutually agree-upon time and price. The period of maturity is normally
overnight or a few days. The resale price is higher than the purchase price,
reflecting the Fund's rate of return. Each repurchase agreement is fully
collateralized, but if the seller defaults, the Fund may incur a loss. The Fund
only enters into repurchase agreements with institutions which meet certain
creditworthiness and other criteria.
Illiquid Securities. The Fund may invest up to 15% of its net assets in
securities that at the time of purchase have legal or contractual restrictions
on resale or are otherwise illiquid.
Securities Lending. The Fund may lend up to 10% of its portfolio securities to
financial institutions in order to increase the Fund's income.
Borrowing. The Fund may borrow from banks in an amount up to 20% of its
Prospectus 14
<PAGE>
total assets, but only for temporary, extraordinary or emergency purposes. The
Fund may also engage in reverse repurchase agreements.
Junk Bonds. The Fund may invest up to 10% of its total assets in debt securities
rated below investment grade by a recognized rating agency or in unrated
securities determined by an investment manager to be of comparable quality.
These securities are subject to greater risk of loss of income and principal
than higher-rated bonds, as well as greater market risk and greater price
volatility.
Other Information. The Fund may also engage in transactions in stock index
futures and may sell short "against the box," which is a way of locking in
unrealized gains; it does not currently intend to engage in any other short
sales. The Fund may invest up to 5% of its total assets in securities on a
when-issued or delayed-delivery basis.
The Advisor does not expect the Fund's portfolio turnover rate to exceed 100%.
Fundamental Policies and Investment Restrictions
A fundamental policy is one which cannot be changed without the vote of a
majority of the Fund's outstanding shares, as defined in the Investment Company
Act of 1940 (the "1940 Act"). The Fund's investment objective is a fundamental
policy, as is its policy to be a diversified fund and not to concentrate in
securities of issuers in any one industry. Most of the limits and restrictions
set forth above are not fundamental policies and may be changed by the Board of
Trustees without shareholder approval. A complete description of the Fund's
fundamental policies and investment restrictions is contained in the SAI.
- --------------------------------------------------------------------------------
Breakdown of Expenses
Breakdown of Expenses
Like all mutual funds, the Fund pays expenses related to its daily operations.
Expenses paid out of the Fund's assets are reflected in its share price; they
are neither billed directly to shareholders nor deducted from shareholder
accounts.
The Fund pays an investment advisory fee to the Advisor each month, at the
annual rate of 1.10% of the Fund's average daily net assets. This fee is higher
than that paid by most mutual funds. The Advisor (not the Fund) pays the
investment managers, each of which is also compensated monthly on the basis of
the assets committed to their individual discretion.
While the investment advisory fee is a significant component of the Fund's
annual operating expenses, the Fund also pays other expenses. The Fund pays a
monthly administration fee to Investment Company Administration Corporation for
such services as preparing various reports and regulatory filings and monitoring
the activities of other service providers to the Fund, at the annual rate of
0.10% on the first $200 million of its average net assets, subject to an annual
15 Prospectus
<PAGE>
minimum of $40,000. The Fund also pays other expenses, such as legal, audit,
custodian and transfer agency fees, as well as the compensation of Trustees who
are not affiliated with the Advisor or any of the investment managers.
Assuming the Fund has total assets of $75 million or less, the specific fees
that the Advisor is obligated to pay each Manager annually are as follows:
Southeastern Asset Management, 0.75% of its allocated portion; Davis Selected
Advisors, L.P., 0.60% of its allocated portion; Strong Capital Management, Inc.,
0.75% of its allocated portion; Jennison Associates Capital Corp., 0.75% of the
first $10,000,000 of its allocated portion, 0.50% of the next $30,000,000 of its
allocated portion, and 0.35% of the remainder of its allocated portion; Friess
Associates, 1.00% of its allocated portion; and Societe Generale Asset
Management, 0.75% of its allocated portion.
The Advisor has agreed to reimburse the Fund for any ordinary operating expenses
above 1.75% of the Fund's average net assets. The Advisor reserves the right to
be repaid by the Fund if expenses subsequently fall below the specified limit in
future years. But the Fund's operating expenses including any repayments will
never be allowed to exceed 1.75% of average annual net assets. This expense
limitation arrangement is guaranteed by the Advisor for at least the first year
of the Fund's operations. After that, it may be terminated at any time, subject
to approval by the Board of Trustees and prior notice to shareholders. This
expense limitation will decrease the Fund's expenses and boost its performance.
Organization
The Masters' Select Equity Fund is a series of Masters' Select Investment Trust
(the Trust), an open-end management investment company, organized as a Delaware
business trust on August 1, 1996.
The Trust is governed by a Board of Trustees, responsible for protecting the
interests of shareholders. The Trustees are experienced executives who meet
throughout the year to oversee the activities of the Fund, review the
compensation arrangements between the Advisor and the investment managers,
review contractual arrangements with companies that provide services to the Fund
and review performance. The majority of Trustees are not otherwise affiliated
with the Advisor or any of the investment managers. Information about the
Trustees and officers is contained in the SAI.
The Fund may hold special meetings and mail proxy materials. These meetings may
be called to elect or remove Trustees, change fundamental policies, approve an
investment advisory contract, or for other purposes. Shareholders not attending
these meetings are encouraged to vote by proxy. The Fund will mail proxy
materials in advance, including a voting card and information about the
proposals to be voted on. The number of votes you are entitled to is based on
the number of shares of the Fund you own.
Prospectus 16
<PAGE>
================================================================================
Ways to Set Up Your Account
================================================================================
Individual or Joint Account
For your general investment needs
Individual accounts are owned by one person. Joint accounts can have two or more
owners (tenants).
- --------------------------------------------------------------------------------
Retirement
To shelter your retirement savings from taxes
Retirement plans allow individuals to shelter investment income and capital
gains from current taxes. In addition, contributions to these accounts may be
tax deductible. Retirement accounts require special applications and typically
have lower minimums.
Individual Retirement Accounts (IRAs) allow anyone of legal age and under 70 1/2
with earned income to invest up to $2000 per tax year. Individuals can also
invest in a spouse's IRA if the spouse has earned income of less than $250 and
the combined contributions do not exceed $2,250.
- - Rollover IRAs retain special tax advantages for certain distributions from
employer-sponsored retirement plans.
- - Simplified Employee Pension Plans (SEP-IRAs) provide small business owners
or those with self-employed income (and their eligible employees) with many
of the same advantages as a Keogh, but with fewer administrative
requirements.
- - Other retirement plans, such as Keogh or corporate profit sharing plans,
403(b) plans and 401(k) plans, may invest in the Fund. All of these
accounts need to be established by the plan's trustee. The Fund does not
offer prototypes of these plans.
- --------------------------------------------------------------------------------
Gifts or Transfers to Minor (UGMA, UTMA)
To invest for a child's education or other future needs
These custodial accounts provide a way to give money to a child and obtain tax
benefits. An individual can give up to $10,000 a year per child without paying
federal gift tax. Depending on state laws, you can set up a custodial account
under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors
Act (UTMA).
- --------------------------------------------------------------------------------
Trust
For money being invested by a trust
The trust must be established before an account can be opened.
- --------------------------------------------------------------------------------
Business or Organization
For investment needs of corporations, associations, partnerships or other groups
Does not require a special application.
17 Prospectus
<PAGE>
Your Account
How to Buy Shares
You can open a new account by mailing in an application with a check for $5,000
or more.
After your account is open, you may add to it by:
- - mailing a check or money order along with the form at the bottom of your
account statement, or a letter;
- - wiring money from your bank; or
- - making automatic investments.
The Fund is a no-load fund, which means you pay no sales commissions of any
kind. Once each business day, the Fund calculates its share price: the share
price is the Fund's net asset value (NAV). Shares are purchased at the next
share price calculated after your investment is received and accepted. Share
price is normally calculated at 4 p.m. Eastern time.
If you are investing through a tax-sheltered retirement plan, such as an IRA,
for the first time, you will need a special application. Retirement investing
also involves its own investment procedures. Call (800) 000-0000 for more
information and a retirement application.
If you buy shares by check and then sell those shares within two weeks, the
payment may be delayed for up to seven business days to ensure that your
purchase check has cleared.
National Financial Data Services is the Fund's Transfer and Dividend Paying
Agent; its address is 1004 Baltimore, 5th Floor; Kansas City, MO 64105, and its
mailing address is P.O. Box 419929, Kansas City, MO 64141-6929.
First Fund Distributors, Inc., 4455 E. Camelback Road, Suite 261E, Phoenix AZ
85018, an affiliate of the administrator, is the Fund's principal underwriter.
================================================================================
Minimum Investments
================================================================================
To Open an Account* $5,000
For automatic investment plans $2,500
For retirement accounts $1,000
To Add to an Account* $250
For retirement accounts $250
Through automatic investment plans $100
Minimum Balance $2,500
For retirement accounts $250
* The minimum investment requirements may be waived from time to time by the
Distributor.
For Information:(800) 000-0000
To Invest
By Mail:
By Wire: Call:
(800) 000-0000 to set up an account and arrange a wire transfer
Prospectus 18
<PAGE>
================================================================================
How to Buy Shares
================================================================================
Mail [GRAPHIC]
- --------------------------------------------------------------------------------
To open an account:
- - Complete and sign the new account application. Make your check or money
order payable to "Masters' Select Equity Fund."
Mail to the address on the new account application or, for overnight
delivery, send to:
To add to an account:
- - Make your check or money order payable to "Masters' Select Equity Fund."
Put your account number on your check.
Mail your check and the stub from the bottom of your account statement (or
enclose a note with your name, address and account number) to the address
on your account statement or, for overnight delivery, send to:
- --------------------------------------------------------------------------------
Wire [GRAPHIC]
- --------------------------------------------------------------------------------
To open an account:
- - Call 1-800-000-0000 for instructions on opening an account by wire.
To add to an account:
- - Call 1-800-000-0000 for instructions on adding to an account by wire.
- --------------------------------------------------------------------------------
Automatic Investment Plan [GRAPHIC]
- --------------------------------------------------------------------------------
To open an account:
- - If you sign up for the Automatic Investment Plan when you open your
account, the minimum initial investment is $2,500.
- - Complete and sign the Automatic Investment Plan section of the new account
application.
To add to an account:
- - Sign up for the Automatic Investment Plan or call 1-800-000-0000 for
instructions on how to establish this Plan.
19 Prospectus
<PAGE>
How to Sell Shares
You can arrange to take money out of your account at any time by selling
(redeeming) some or all of your shares. Your shares will be sold at the next net
asset value per share (share price) calculated after your order is received and
accepted. The share price is normally calculated at 4 p.m.
Eastern time.
To sell shares in a non-retirement account, you may use any of the methods
described on these two pages.
To sell shares in a retirement account, your request must be made in writing.
Certain requests must include a signature guarantee. It is designed to protect
you and the Fund from fraud. Your request must be made in writing and include a
signature guarantee if any of the following situations apply:
- - You wish to redeem more than $100,000 worth of shares,
- - Your account registration has changed within the last 30 days,
- - The check is being mailed to a different address from the one on your
account (record address), or
- - The check is being made payable to someone other than the account owner.
You should be able to obtain a signature guarantee from a bank, broker-dealer,
credit union (if authorized under state law), securities exchange or
association, clearing agency or savings association. A notary public cannot
provide a signature guarantee.
The Fund may close small accounts. Due to the relatively high cost of
maintaining smaller accounts, the shares in your account (unless it is a
retirement plan or Uniform Gifts or Transfers to Minors Act accounts) may be
redeemed by the Fund if, due to redemptions you have made, the total value of
your account is reduced to less than $2,500. If the Fund determines to make such
an involuntary redemption, you will first be notified that the value of your
account is less than $2,500, and you will be allowed 30 days to make an
additional investment to bring the value of your account to at least $2,500
before the Fund takes any action.
Selling Shares by Letter
Write a "letter of instruction" with:
- - Your name,
- - Your Fund account number,
- - The dollar amount or number of shares to be redeemed, and
- - Any other applicable requirements listed in the table at right.
- - Unless otherwise instructed, the Fund will send a check to the record
address. Mail your letter to:
Selling Shares by Telephone
If you accepted the telephone redemption option when you filled out your new
account application, you can sell shares simply by calling 1-800-000-0000. The
amount you wish redeemed (up to $000,000) will be wired to your bank account.
Prospectus 20
<PAGE>
================================================================================
How to Sell Shares
================================================================================
<TABLE>
<CAPTION>
By Phone All account types - Maximum check request: $ 00,000
(800) 000-0000 except retirement
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Mail or in Person Individual, Joint Tenant, - The letter of instructions must be
Sole Proprietorship, signed be all persons required to sign
UGMA, UTMA for transactions, exactly as their
names appear on the account.
Retirement Account - The account owner should complete a
retirement distribution form.Call
(800) 000-0000 to request one.
Trust - The trustee must sign the letter
indicating capacity as trustee. If the
trustee's name is not in the account
registration, provide a copy of the trust
document certified within the last 60 days.
Business or Organization - At least one person authorized by
corporate resolutions to act on the account
must sign the letter.
- Include a corporate resolution with
corporate seal or a signature guarantee.
Executor, Administrator, - Call (800) 000-0000 for instructions.
Conservator, Guardian
- ---------------------------------------------------------------------------------------------
Wire All account types - You must sign up for the wire feature before
except retirement using it. To verify that it is in place, call
(800) 000-0000. Minimum wire: $5,000.
- Your wire redemption request must be received
by the Fund before 4 p.m. Eastern time for
money to be wired the next business day.
</TABLE>
21 Prospectus
<PAGE>
Shareholder and Account Policies
Statements, Reports and Inquiries
Statements and reports that the Fund sends you include the following:
- - Confirmation statements (after every transaction that affects your account
balance or your account registration)
- - Financial reports (every six months)
If you have questions about your account, you may call the Transfer Agent at
(800) 000-0000.
Investor Services
The Fund offers the following services to investors:
A systematic withdrawal plan lets you set up periodic redemptions from your
account.
Regular Investment Plan: One easy way to pursue your financial goals is to
invest money regularly. The Fund offers a convenient service that lets you
transfer money into your Fund account automatically. While regular investment
plans do not guarantee a profit and will not protect you against loss in a
declining market, they can be an excellent way to invest for retirement, a home,
educational expenses, and other long term financial goals. Certain restrictions
apply for retirement accounts. Call (800) 000-0000 for more information.
Share Price
The Fund is open for business each day the New York Stock Exchange (NYSE) is
open. The Fund calculates its NAV as of the close of business of the NYSE,
normally 4 p.m. Eastern time.
The Fund's NAV is the value of a single share. The NAV is computed by adding the
value of the Fund's investments, cash, and other assets, subtracting its
liabilities and then dividing the result by the number of shares outstanding.
The NAV is also the redemption price (price to sell one share).
The Fund's assets are valued primarily on the basis of market quotations. If
quotations are not readily available, assets are valued by a method that the
Board of Trustees believes accurately reflects fair value.
Purchases
- - All of your purchases must be made in U.S. dollars, and checks must be
drawn on U.S. banks.
- - The Fund does not accept cash, credit cards or third-party checks.
- - If your check does not clear, your purchase will be cancelled and you will
be liable for any losses or fees the Fund or its transfer agent incurs.
- - Your ability to make automatic investments may be immediately terminated if
any item is unpaid by your financial institution.
- - The Fund reserves the right to reject any purchase order. For example, a
purchase order may be refused if, in the Advisor's opinion, it is so large
that it would disrupt management of the Fund. Order may also be rejected
from persons believed by the Advisor to be "market timers."
Prospectus 22
<PAGE>
Certain financial institutions that have entered into sales agreements with the
Fund may enter confirmed purchase orders on behalf of customers by phone, with
payment to follow no later than the time when the Fund is priced on the
following business day. If payment is not received by that time, the financial
institution could be held liable for resulting fees or losses.
These institutions may charge you a fee if you buy or sell shares through them.
Redemptions
- - Normally, redemption proceeds will be mailed to you on the next business
day, but if making immediate payment could adversely affect the Fund, it
may take up to seven days to pay you.
- - Redemptions may be suspended or payment dates postponed when the New York
Stock Exchange (NYSE) is closed (other than weekends or holidays), when
trading on the NYSE is restricted, or as permitted by the SEC.
Dividends, Capital Gains, and Taxes
The Fund distributes substantially all of its net income and capital gains, if
any, to shareholders each year. Normally, dividends and capital gains are
distributed in December.
Distribution Options
When you open an account, specify on your application how you want to receive
your distributions. If the option you prefer is not listed on the application,
call (800) 000-0000 for instructions. The Fund offers three options:
1. Reinvestment Option. Your dividend and capital gain distributions will be
automatically reinvested in additional shares of the Fund. If you do not
indicate a choice on your application, you will be assigned this option.
2. Income-Earned Option. Your capital gain distributions will be automatically
reinvested, but you will be sent a check for each dividend distribution.
3. Cash Option. You will be sent a check for your dividend and capital gain
distributions.
For retirement accounts, all distributions are automatically reinvested. When
you are over 59 1/2 years old, you can receive distributions in cash.
When the Fund deducts a distribution from its NAV, the reinvestment price is the
Fund's NAV at the close of business that day. Cash distribution checks will be
mailed within seven days.
Understanding Distributions
As a Fund shareholder, you are entitled to your share of the Fund's net income
and gains on its investments. The Fund passes its earnings along to its
investors as distributions.
The Fund earns dividends from stocks and interest from short term investments.
These are passed along as dividend distributions. The Fund realizes capital
gains whenever it sells securities for a higher price than it paid for them.
These are passed along as capital gain distributions.
23 Prospectus
<PAGE>
Taxes
As with any investment, you should consider how your investment in the Fund will
be taxed. If your account is not a tax-deferred retirement account, you should
be aware of these tax implications.
Taxes on distributions. Distributions are subject to federal income tax, and may
also be subject to state or local taxes. If you live outside the United States,
your distributions could also be taxed by the country in which you reside. Your
distributions are taxable when they are paid, whether you take them in cash or
reinvest them. However, distributions declared in December and paid in January
are taxable as if they were paid on December 31.
For federal tax purposes, the Fund's income and short term capital gain
distributions are taxed as dividends; long term capital gain distributions are
taxed as long term capital gains. Every January, the Fund will send you and the
IRS a statement showing the taxable distributions.
Taxes on transactions. Your redemptions are subject to capital gains tax. A
capital gain or loss is the difference between the cost of your shares and the
price you receive when you sell them.
Whenever you sell shares of the Fund, the Fund will send you a confirmation
statement showing how many shares you sold and at what price. You will also
receive a consolidated transaction statement every January. However, it is up to
you or your tax preparer to determine whether the sales resulted in a capital
gain and, if so, the amount of the tax to be paid. Be sure to keep your regular
account statements; the information they contain will be essential in
calculating the amount of your capital gains.
"Buying a dividend." If you buy shares just before the Fund deducts a
distribution from its NAV, you will pay the full price for the shares and then
receive a portion of the price back in the form of a taxable distribution.
There are tax requirements that all funds must follow in order to avoid federal
taxation. In its effort to adhere to these requirements, the Fund may have to
limit its investment activity in some types of instruments.
When you sign your account application, you will be asked to certify that your
Social Security or taxpayer identification number is correct and that you are
not subject to 31 % withholding for failing to report income to the IRS. If you
violate IRS regulations, the IRS can require a fund to withhold 31% of your
taxable distributions and redemptions.
Performance
Mutual fund performance is commonly measured as total return. Total return is
the change in value of an investment over a given period, assuming reinvestment
of any dividends and capital gains. Total return reflects the Fund's performance
over a stated period of time. An average annual total return is a hypothetical
rate of return that, if achieved annually, would have produced the same total
return if performance had been constant over the entire period. Average annual
total return smooths out variations in performance; it is not the same as actual
year-by-year results.
Total return and average annual total
Prospectus 24
<PAGE>
return are based on past results and are not a prediction of future performance.
They do not include the effect of income taxes paid by shareholders. The Fund
may sometimes show its performance compared to certain performance rankings,
averages or stock indices (described more fully in the SAI).
General Information
The Fund is the only existing series of shares of Masters' Select Investment
Trust (the Trust). The Board of Trustees may at its own discretion, create
additional series of shares. The Declaration of Trust contains an express
disclaimer of shareholder liability for the Trust's acts or obligations and
provides for indemnification and reimbursement of expenses out of the Trust's
property for any shareholder held personally liable for its obligations.
Shareholders are entitled to one vote for each full share held (and fractional
votes for fractional shares) and may vote in the election of Trustees and on
other matters submitted to meetings of shareholders. It is not contemplated that
regular annual meetings of shareholders will be held.
The Declaration of Trust provides that the shareholders have the right to remove
a Trustee. Upon the written request of the record holders of ten percent of the
Trust's shares, the Trustees will call a meeting of shareholders to vote on the
removal of a Trustee. In addition, ten shareholders holding the lesser of
$25,000 worth or one per cent of the shares may communicate with other
shareholders to request a meeting to remove a Trustee. No amendment may be made
to the Declaration of Trust that would have a material adverse effect on
shareholders without the approval of the holders of more than 50% of the Trust's
shares. Shareholders have no pre-emptive or conversion rights. Shares when
issued are fully paid and non-assessable, except as set forth above.
The legality of share issuance is passed upon by Heller, Ehrman, White &
McAuliffe, San Francisco, California.
25 Prospectus
<PAGE>
THE MASTERS' SELECT EQUITY FUND
Statement of Additional Information
Dated , 1996
This Statement of Additional Information is not a prospectus, and it should be
read in conjunction with the prospectus dated , 1996, as may be amended
from time to time, of The Masters' Select Equity Fund (the "Fund"), a series of
Masters' Concentrated Select Trust (the "Trust"). Litman/Gregory Fund Advisors,
LLC (the "Advisor") is the Advisor of the Fund. The Advisor has retained six
investment managers as sub-advisers ("Managers"), each responsible for portfolio
management of a segment of the Fund's total assets. A copy of the prospectus may
be obtained from the Fund at [address], telephone [telephone number].
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Cross-reference to sections
Page in the prospectus
---- ---------------------------
<S> <C> <C>
Introduction to the Masters' Select Equity Fund...... B-2 The Fund at a Glance
Investment Objective and Policies.................... B-4 The Fund at a Glance; The Fund in
Detail
Management........................................... B-21 The Fund in Detail: Management,
Investment Managers, Breakdown of
Expenses, Organization
Portfolio Transactions and Brokerage................. B-24 The Fund in Detail: Investment Managers
Net Asset Value...................................... B-25 Your Account: How to Buy Shares
Taxation ........................................... B-26 Taxes
Dividends and Distributions.......................... B-28 Dividends, Capital Gains, and Taxes
Performance Information.............................. B-28 Performance
General Information.................................. B-29 General Information
Appendix ........................................... B-30 Not applicable
Statement of Assets and Liabilities.................. B-31 Not applicable
Notes to Statement of Assets and Liabilities......... B-31 Not applicable
</TABLE>
B-1
<PAGE>
INTRODUCTION TO THE MASTERS' SELECT EQUITY FUND
The Masters' Select Equity Fund is a new Fund designed to access the
favorite stock picking ideas of six of the mutual fund industry's most
successful portfolio managers. Today there are hundreds of equity mutual funds
available to investors. Typically, these funds invest in a well diversified
portfolio of 50 to 200 stocks by focusing on a particular stock picking
approach. Without a doubt there are many good funds to choose from. However, we
think there is a better way.
The Masters' Select Equity Fund takes a different approach. We marshal
the efforts of six world class investment managers, with each focusing on their
specialty and, within that specialty, concentrating on only their most
compelling investment ideas. Working independently, and representing a variety
of stock picking styles, each manager contributes a minimum of 5 and a maximum
of 15 stocks to the Fund's portfolio. By limiting each manager's holdings to
only their most compelling ideas, the Fund seeks to isolate the stock picker's
skill in a way traditional funds cannot. And, while benefiting from each
manager's very focused portfolio, the overall Fund is well-diversified with the
six managers directing a total Fund portfolio of up to 90 stocks in a variety of
industries. The Fund will be closed at a level that will protect the integrity
of the concept.
The following provides more detailed answers to commonly asked
questions about the Masters' Select Equity Fund.
Q: How is the Fund structured?
A: The Fund's portfolio is divided up into six parts, each being managed by a
different sub-advisor/stock picker. Each stock picker works independently
investing their portion of the Fund's portfolio in not more than 15 securities
(typically stocks). Each of the sub-advisors are well known, highly respected
stock fund managers, possessing what we believe are exceptional track records.
Q: Why is each manager limited to 15 holdings?
A: We have studied, interviewed and analyzed mutual funds and their stock
pickers for years and have come to believe that most stock pickers/fund managers
own a handful of stocks at any point in time in which they have a higher degree
of confidence than the other stocks that round out their portfolios. We believe
these "high confidence" stocks, on average, over a market cycle, have the
potential to out-perform the manager's total portfolio.
Q: What support is there for this highly focused approach to investing?
A: There are a number of arguments in favor of a highly focused approach to
investing. First, is basic common sense. We believe it is unlikely that a stock
picker will do as well with his/her 30th, 50th or 100th pick as with his or her
favorite 10 or 15. Secondly, in talking to managers over the years we've learned
that many invest their own portfolios in fewer stocks than they use for their
own funds. Third, if we look at the few funds that are more focused, we find
some of the best performers in the industry (Longleaf Partners, Sequoia Fund,
CGM Capital Development, Baron Asset, Clipper, Oakmark, FPA Capital). And of
course there is Warren Buffett, arguably the greatest investor alive, who is
famous for investing in a small handful of good businesses. Finally, we are
familiar with a number of fund managers who have told us about (or showed us)
their superior performance on separate accounts or private funds they run in a
less diversified fashion. Focused investing isn't necessary to be a successful
investor. But, in the hands of superior investors, we believe it significantly
raises the odds of superior performance.
Q: If this approach of focusing on a small group of compelling investment ideas
is so good, why haven't many similar funds been formed already?
A: There are two reasons why focused or minimally diversified funds are not
common. First, a portfolio of only 15 stocks is potentially risky precisely
because of the limited diversification. Second, most good stock funds attract
billions of dollars. With a portfolio in the billions, the fund's manager loses
flexibility to invest in only a few stocks. So, in order to invest the sizable
asset base, funds often expand the number of stocks in their portfolios as they
grow.
Q: How does the Masters' Select Equity Fund solve these problems? A: The
multi-manager approach solves the diversification problem. By including six
managers, each with a portfolio
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of not more than 15 stocks, we can "capture" each manager's most compelling
ideas, while at the same time provide investors with a very diversified
portfolio. Typically, we expect the Fund to hold 75 to 90 stocks. We will avoid
the asset growth problem by closing the Fund at a level that will not allow the
managers to stray from the Fund's strategy.
Q: What are the stock picking styles represented in the Fund?
A: There are a mix of styles represented. They include: mid/large cap value,
mid/large cap growth-at-a-reasonable price, mid/large cap earnings momentum,
small cap earnings momentum, small-cap growth-at-a-reasonable price, and global
value.
Q: Why is there such a mix of styles?
A: In designing the Fund, one of our objectives was to structure the portfolio
so that it would make sense as a core equity fund holding for most investors. We
believe a mix of stock picking styles will help to smooth out the performance
over time. For example, whether a particular market environment favors value
stocks over growth, big cap over small, this Fund should always have a portion
of its portfolio participating in the strong segment. It will never be totally
invested in an out-of-favor segment (for example, a big cap value fund in a big
cap growth market).
Q: How did we decide on the allocations to styles and managers, and will these
change?
A: Because we wanted the Fund to make sense as a core holding, appealing to a
broad group of investors, we chose to overweight U.S. big cap stocks. Each big
cap manager will be allocated 20% of the portfolio (for a total of 60%). The
global value manager will also receive a 20% weighting. The two small cap
managers will each run 10%. These initial allocations may drift slightly over
time. As the Fund's advisor, we will determine when to re-balance back to the
original allocations. The overall effect is to create a very diversified Fund
with enough small cap exposure (20% to 25% at any point in time) and aggressive
growth exposure (30% -- this includes 10% of the small cap exposure) to give the
Fund some drive in a bull market. At the same time, we believe there is enough
out-of-sync international exposure (10% to 15% in normal circumstances) and more
conservative big cap exposure to keep the Fund's risk profile in line with the
overall stock market.
Q: Who are the sub-advisors?
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
SUB-ADVISOR INITIAL RELEVANT STYLE IN MASTERS'
ALLOCATION FUND EXPERIENCE FUND
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shelby Davis 20% New York Venture Fund Large/mid-cap growth-at-a-
reasonable price
- -------------------------------------------------------------------------------------------------------------------
Jean-Marie Eveillard 20% Sogen Overseas Global value
Sogen International
- -------------------------------------------------------------------------------------------------------------------
Mason Hawkins 20% Longleaf Partners Large/mid-cap value
- -------------------------------------------------------------------------------------------------------------------
Spiros "Sig" Segalas 20% Harbor Capital Appreciation Large cap earnings
momentum
- -------------------------------------------------------------------------------------------------------------------
Foster Friess/team 10% Brandywine Fund Small/mid cap earnings
momentum
- -------------------------------------------------------------------------------------------------------------------
Dick Weiss 10% Strong Common Stock Small cap growth-at-a-
reasonable price
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Q: How were the sub-advisors selected?
A: We sought our favorite managers in each style category. Our evaluation
process is both quantitative and qualitative. On the quantitative side we study
the records of stock pickers with an eye to consistency of performance and
superior performance over a market cycle, relative to the appropriate peer
group. On the qualitative side we look for traits we have come to believe are
common in great stock pickers. These include a passion for their job that often
borders on obsession; the ability to think independently with the conviction
level to act on those thoughts; and a focus on the job of stock picking (limited
business related or marketing distractions). In addition, all the managers are
very experienced
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and have a long-term focus. We believe this group of managers brings together in
a single Fund an unprecedented level of talent and experience.
Q: How will the managers work together? Is there potential for egos to get in
the way?
A: This will not be a Fund run by committee. Each sub-advisor will work
independently of the others and for this reason we don't envision any conflicts.
We also don't expect to have overlapping portfolios because of the differing
market caps and investment styles the managers employ. However, as the Fund's
overall advisor, part of Litman/Gregory's role will be to watch for excessive
overlap or industry concentration.
Q: How will we evaluate the managers?
A: In terms of performance, evaluation will be relative to an appropriate peer
group. We will measure performance against style benchmarks we have created and
against the better managers in a particular style group. Our evaluation horizon
will be long-term. We will not focus on performance of one year or less. In
general, we do not believe short-term performance evaluation adds value and it
can put undue pressure on a manager. Moreover, the 15-stock portfolios each
manager will run make a short-term evaluation horizon even less appropriate. Our
expectation is to focus more heavily on performance over two to three years.
From a qualitative standpoint we will monitor the sub-advisors' focus, staff
continuity, and other factors which will impact our confidence in each manager's
ability to perform well in the future.
Q: What will the Fund's risk level be?
A: This is an equity fund so it will exhibit equity market risk. When the
overall stock market is declining, it is likely that this Fund will decline as
well. At times declines will be severe. Though we can't say for sure, based on
our many years of experience constructing portfolios of mutual funds, we believe
the Fund's broad diversification will result in risk over a market cycle that is
similar to that of the S&P 500 (the overall U.S. stock market).
Q: Who is this Fund for?
A: We believe the Masters' Select Equity Fund is appropriate for most investors
looking for long-term stock market exposure. We believe the combination of style
diversification, some (limited) foreign exposure, and proven managers with
superior track records make the Fund appropriate as a core holding for the
equity portion of most investor's portfolios. For less active investors this
Fund may make sense for the entire equity portion of the portfolio. For active
investors, the Fund may be a core position that is supplemented by various types
of equity funds depending on the objectives of the investor. For investors who
believe in a combination of indexing and active management, the potential for
higher market cycle performance from this Fund may make it an appropriate
complement to an indexed portfolio.
Q: What are reasonable performance expectations for the Masters' Select Equity
Fund?
A: Though there can be no guarantees, we believe this Fund, built on the concept
of isolating the most compelling stock picks of a gifted group of stock pickers,
is likely to deliver superior performance over a market cycle. However, we
believe it is important to point out that we don't believe this Fund will be a
chart topping fund year-in and year-out. The diversification that we believe
will smooth out the performance over time is also likely to keep this Fund off
the top of the charts over short time periods.
Q: What will the expense level be?
A: Expenses will begin at 1.75%. These will decline as the Fund's assets grow.
If we achieve the asset growth we expect, we believe the expenses will decline
to levels lower than that of the average equity fund. The Fund is a no-load, no
12b-1 fund.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Fund is to provide long-term growth of
capital. There is no assurance that the Fund will achieve its objective. The
discussion below supplements information contained in the prospectus as to
investment policies of the Fund. Convertible Securities and Warrants
The Fund may invest in convertible securities and warrants. A
convertible security is a fixed income security
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<PAGE>
(a debt instrument or a preferred stock) which may be converted at a stated
price within a specified period of time into a certain quantity of the common
stock of the same or a different issuer. Convertible securities are senior to
common stocks in an issuer's capital structure, but are usually subordinated to
similar non-convertible securities. While providing a fixed income stream
(generally higher in yield than the income derivable from common stock but lower
than that afforded by a similar nonconvertible security), a convertible security
also affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance in
the convertible security's underlying common stock.
A warrant gives the holder a right to purchase at any time during a
specified period a predetermined number of shares of common stock at a fixed
price. Unlike convertible debt securities or preferred stock, warrants do not
pay a fixed dividend. Investments in warrants involve certain risks, including
the possible lack of a liquid market for resale of the warrants, potential price
fluctuations as a result of speculation or other factors, and failure of the
price of the underlying security to reach or have reasonable prospects of
reaching a level at which the warrant can be prudently exercised (in which event
the warrant may expire without being exercised, resulting in a loss of the
Fund's entire investment therein).
Other Corporate Debt Securities
The Fund may invest in non-convertible debt securities of foreign and
domestic companies over a cross-section of industries. The debt securities in
which the Fund may invest will be of varying maturities and may include
corporate bonds, debentures, notes and other similar corporate debt instruments.
The value of a longer-term debt security fluctuates more widely in response to
changes in interest rates than do shorter-term debt securities.
Risks of Investing in Debt Securities
There are a number of risks generally associated with an investment in
debt securities (including convertible securities). Yields on short,
intermediate, and long-term securities depend on a variety of factors, including
the general condition of the money and bond markets, the size of a particular
offering, the maturity of the obligation, and the rating of the issue.
Debt securities with longer maturities tend to produce higher yields
and are generally subject to potentially greater capital appreciation and
depreciation than obligations with short maturities and lower yields. The market
prices of debt securities usually vary, depending upon available yields. An
increase in interest rates will generally reduce the value of such portfolio
investments, and a decline in interest rates will generally increase the value
of such portfolio investments. The ability of the Fund to achieve its investment
objective also depends on the continuing ability of the issuers of the debt
securities in which the Fund invests to meet their obligations for the payment
of interest and principal when due.
Risks of Investing in Lower-Rated Debt Securities
As set forth in the prospectus, the Fund may invest a portion of its
net assets in debt securities rated below "Baa" by Moody's or "BBB" by S&P or
below investment grade by other recognized rating agencies, or in unrated
securities of comparable quality under certain circumstances. Securities with
ratings below "Baa" and/or "BBB" are commonly referred to as "junk bonds." Such
bonds are subject to greater market fluctuations and risk of loss of income and
principal than higher rated bonds for a variety of reasons, including the
following:
Sensitivity to Interest Rate and Economic Changes. The economy and
interest rates affect high yield securities differently from other securities.
For example, the prices of high yield bonds have been found to be less sensitive
to interest rate changes than higher-rated investments, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which would adversely affect
their ability to service their principal and interest obligations, to meet
projected business goals, and to obtain additional financing. If the issuer of a
bond defaults, the Fund may incur additional expenses to seek recovery. In
addition, periods of economic uncertainty and changes can be expected to result
in increased volatility of market prices of high yield bonds and the Fund's
asset values.
Payment Expectations. High yield bonds present certain risks based on
payment expectations. For example, high yield bonds may contain redemption and
call provisions. If an issuer exercises these provisions in a declining interest
rate market, the Fund would have to replace the security with a lower yielding
security, resulting in a decreased return
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<PAGE>
for investors. Conversely, a high yield bond's value will decrease in a rising
interest rate market, as will the value of the Fund's assets. If the Fund
experiences unexpected net redemptions, it may be forced to sell its high yield
bonds without regard to their investment merits, thereby decreasing the asset
base upon which the Fund's expenses can be spread and possibly reducing the
Fund's rate of return.
Liquidity and Valuation. To the extent that there is no established
retail secondary market, there may be thin trading of high yield bonds, and this
may impact a Manager's ability to accurately value high yield bonds and the
Fund's assets and hinder the Fund's ability to dispose of the bonds. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield bonds, especially
in a thinly traded market.
Credit Ratings. Credit ratings evaluate the safety of principal and
interest payments, not the market value risk of high yield bonds. Also, since
credit rating agencies may fail to timely change the credit ratings to reflect
subsequent events, a Manager must monitor the issuers of high yield bonds in the
Fund's portfolio to determine if the issuers will have sufficient cash flow and
profits to meet required principal and interest payments, and to assure the
bonds' liquidity so the Fund can meet redemption requests. The Fund will not
necessarily dispose of a portfolio security when its rating has been changed.
Short-Term Investments
The Fund may invest in any of the following securities and instruments:
Bank Certificates or Deposit, Bankers' Acceptances and Time Deposits.
The Fund may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Fund will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such bank obligations are fully insured by the U.S.
Government. If the Fund holds instruments of foreign banks or financial
institutions, it may be subject to additional investment risks that are
different in some respects from those incurred by a fund which invests only in
debt obligations of U.S. domestic issuers. See "Foreign Investments" below. Such
risks include future political and economic developments, the possible
imposition of withholding taxes by the particular country in which the issuer is
located on interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry depends largely upon the availability and cost of funds for the
purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks
are, among other things, required to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower, and subject to
other regulations designed to promote financial soundness. However, such laws
and regulations do not necessarily apply to foreign bank obligations that the
Fund may acquire.
In addition to purchasing certificates of deposit and bankers'
acceptances, to the extent permitted under its investment objectives and
policies stated above and in its prospectus, the Fund may make interest-bearing
time or other interest-bearing deposits in commercial or savings banks. Time
deposits are non-negotiable deposits maintained at a banking institution for a
specified period of time at a specified interest rate.
Savings Association Obligations. The Fund may invest in certificates of
deposit (interest-bearing time deposits) issued by savings banks or savings and
loan associations that have capital, surplus and undivided profits in excess of
B-6
<PAGE>
$100 million, based on latest published reports, or less than $100 million if
the principal amount of such obligations is fully insured by the U.S.
Government.
Commercial Paper, Short-Term Notes and Other Corporate Obligations. The
Fund may invest a portion of its assets in commercial paper and short-term
notes. Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper and short-term notes will normally have
maturities of less than nine months and fixed rates of return, although such
instruments may have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at
the time of purchase "A-2" or higher by S&P, "Prime-1" or "Prime-2" by Moody's,
or similarly rated by another nationally recognized statistical rating
organization or, if unrated, will be determined by a Manager to be of comparable
quality. These rating symbols are described in Appendix A.
Corporate obligations include bonds and notes issued by corporations to
finance longer-term credit needs than supported by commercial paper. While such
obligations generally have maturities of ten years or more, the Fund may
purchase corporate obligations which have remaining maturities of one year or
less from the date of purchase and which are rated "AA" or higher by S&P or "Aa"
or higher by Moody's.
Money Market Funds
The Fund may under certain circumstances invest a portion of its assets
in money market funds. The Investment Company Act of 1940 (the "1940 Act")
prohibits the Fund from investing more than 5% of the value of its total assets
in any one investment company. or more than 10% of the value of its total assets
in investment companies as a group, and also restricts its investment in any
investment company to 3% of the voting securities of such investment company.
The Advisor and the Managers will not impose advisory fees on assets of the Fund
invested in a money market mutual fund. However, an investment in a money market
mutual fund will involve payment by the Fund of its pro rata share of advisory
and administrative fees charged by such fund.
Government Obligations
The Fund may make short-term investments in U.S. Government
obligations. Such obligations include Treasury bills, certificates of
indebtedness, notes and bonds, and issues of such entities as the Government
National Mortgage Association ("GNMA"), Export-Import Bank of the United States,
Tennessee Valley Authority, Resolution Funding Corporation, Farmers Home
Administration, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Farm Credit Banks, Federal Land Banks, Federal Housing Administration,
Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation, and the Student Loan Marketing Association.
Some of these obligations, such as those of the GNMA, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of United States, are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the FNMA, are supported by
the discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law.
The Fund may invest in sovereign debt obligations of foreign countries.
A sovereign debtor's willingness or ability to repay principal and interest in a
timely manner may be affected by a number of factors, including 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 toward
principal international lenders and the political constraints to which it may be
subject. Emerging market governments could default on their sovereign debt. Such
sovereign debtors also may be dependent on expected disbursements from foreign
governments, multilateral agencies and other entities abroad to reduce principal
and interest arrearages on their debt. The commitments on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a sovereign debtor's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to meet
such conditions could result in the cancellation of such third parties'
commitments to lend funds to the sovereign debtor, which may further impair such
debtor's ability or willingness to service its debt in a timely manner.
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<PAGE>
Zero Coupon Securities
The Fund may invest up to 35% of its net assets in zero coupon
securities issued by the U.S. Treasury. Zero coupon Treasury securities are U.S.
Treasury notes and bonds which have been stripped of their unmatured interest
coupons and receipts, or certificates representing interests in such stripped
debt obligations or coupons. Because a zero coupon security pays no interest to
its holder during its life or for a substantial period of time, it usually
trades at a deep discount from its face or par value and will be subject to
greater fluctuations of market value in response to changing interest rates than
debt obligations of comparable maturities which make current distributions of
interest.
Variable and Floating Rate Instruments
The Fund may acquire variable and floating rate instruments. Such
instruments are frequently not rated by credit rating agencies; however, unrated
variable and floating rate instruments purchased by the Fund will be determined
by a Manager under guidelines established by the Trust's Board of Trustees to be
of comparable quality at the time of the purchase to rated instruments eligible
for purchase by the Fund. In making such determinations, a Manager will consider
the earning power, cash flow and other liquidity ratios of the issuers of such
instruments (such issuers include financial, merchandising, bank holding and
other companies) and will monitor their financial condition. An active secondary
market may not exist with respect to particular variable or floating rate
instruments purchased by the Fund. The absence of such an active secondary
market could make it difficult for the Fund to dispose of the variable or
floating rate instrument involved in the event of the issuer of the instrument
defaulting on its payment obligation or during periods in which the Fund is not
entitled to exercise its demand rights, and the Fund could, for these or other
reasons, suffer a loss to the extent of the default. Variable and floating rate
instruments may be secured by bank letters of credit.
Mortgage-Related Securities
The Fund may invest in mortgage-related securities. Mortgage-related
securities are derivative interests in pools of mortgage loans made to U.S.
residential home buyers, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations. The Fund may also invest in debt
securities which are secured with collateral consisting of U.S. mortgage-related
securities, and in other types of U.S. mortgage-related securities.
U.S. Mortgage Pass-Through Securities. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments of principal resulting from the
sale of the underlying residential property, refinancing or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities (such as
securities issued by GNMA) are described as "modified pass-throughs." These
securities entitle the holder to receive all interest and principal payments
owed on the mortgage pool, net of certain fees, at the scheduled payment dates
regardless of whether or not the mortgagor actually makes the payment.
The principal governmental guarantor of U.S. mortgage-related
securities is GNMA, a wholly owned United States Government corporation within
the Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the United States Government, the
timely payment of principal and interest on securities issued by institutions
approved by GNMA (such as savings and loan institutions, commercial banks and
mortgage bankers) and backed by pools of mortgages insured by the Federal
Housing Agency or guaranteed by the Veterans Administration.
Government-related guarantors include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders and subject to general regulation by the Secretary of Housing and
Urban Development. FNMA purchases conventional residential mortgages not insured
or guaranteed by any government agency from a list of approved seller/services
which include state and federally chartered savings and loan associations,
mutual savings banks, commercial banks and credit unions and mortgage bankers.
FHLMC is a government-sponsored corporation created to
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<PAGE>
increase availability of mortgage credit for residential housing and owned
entirely by private stockholders. FHLMC issues participation certificates which
represent interests in conventional mortgages from FHLMC's national portfolio.
Pass-through securities issued by FNMA and participation certificates issued by
FHLMC are guaranteed as to timely payment of principal and interest by FNMA and
FHLMC, respectively, but are not backed by the full faith and credit of the
United States Government.
Although the underlying mortgage loans in a pool may have maturities of
up to 30 years, the actual average life of the pool certificates typically will
be substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Prepayment rates vary widely
and may be affected by changes in market interest rates. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening the
actual average life of the pool certificates. Conversely, when interest rates
are rising, the rate of prepayments tends to decrease, thereby lengthening the
actual average life of the certificates. Accordingly, it is not possible to
predict accurately the average life of a particular pool.
Collateralized Mortgage Obligations ("CMOs"). A domestic or foreign CMO
in which the Fund may invest is a hybrid between a mortgage-backed bond and a
mortgage pass-through security. Like a bond, interest is paid, in most cases,
semiannually. CMOs may be collateralized by whole mortgage loans, but are more
typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC, FNMA or equivalent foreign entities.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal and
interest received from the pool of underlying mortgages, including prepayments,
is first returned to the class having the earliest maturity date or highest
maturity. Classes that have longer maturity dates and lower seniority will
receive principal only after the higher class has been retired.
Foreign Investments and Currencies
The Fund may invest in securities of foreign issuers that are not
publicly traded in the United States. The Fund may also invest in depositary
receipts and in foreign currency futures contracts and may purchase and sell
foreign currency on a spot basis.
Depositary Receipts. Depositary Receipts ("DRs") include American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global
Depositary Receipts ("GDRs") or other forms of depositary receipts. DRs are
receipts typically issued in connection with a U.S. or foreign bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation.
Risks of Investing in Foreign Securities. Investments in foreign
securities involve certain inherent risks, including the following:
Political and Economic Factors. Individual foreign economies of certain
countries may differ favorably or unfavorably from the United States' economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, diversification and balance of payments
position. The internal politics of certain foreign countries may not be as
stable as those of the United States. Governments in certain foreign countries
also continue to participate to a significant degree, through ownership interest
or regulation, in their respective economies. Action by these governments could
include restrictions on foreign investment, nationalization, expropriation of
goods or imposition of taxes, and could have a significant effect on market
prices of securities and payment of interest. The economies of many foreign
countries are heavily dependent upon international trade and are accordingly
affected by the trade policies and economic conditions of their trading
partners. Enactment by these trading partners of protectionist trade legislation
could have a significant adverse effect upon the securities markets of such
countries.
Currency Fluctuations. The Fund may invest in securities denominated in
foreign currencies. Accordingly, a change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar
value of the Fund's assets denominated in that currency. Such changes will also
affect the Fund's income. The value of the Fund's assets may also be affected
significantly by currency restrictions and exchange control regulations enacted
from time to time.
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Market Characteristics. The Managers expect that many foreign
securities in which the Fund invest will be purchased in over-the-counter
markets or on exchanges located in the countries in which the principal offices
of the issuers of the various securities are located, if that is the best
available market. Foreign exchanges and markets may be more volatile than those
in the United States. While growing in volume, they usually have substantially
less volume than U.S. markets, and the Fund's portfolio securities may be less
liquid and more volatile than U.S. Government securities. Moreover, settlement
practices for transactions in foreign markets may differ from those in United
States markets, and may include delays beyond periods customary in the United
States. Foreign security trading practices, including those involving securities
settlement where Fund assets may be released prior to receipt of payment or
securities, may expose the Fund to increased risk in the event of a failed trade
or the insolvency of a foreign broker-dealer.
Transactions in options on securities, futures contracts, futures
options and currency contracts may not be regulated as effectively on foreign
exchanges as similar transactions in the United States, and may not involve
clearing mechanisms and related guarantees. The value of such positions also
could be adversely affected by the imposition of different exercise terms and
procedures and margin requirements than in the United States. The value of the
Fund's positions may also be adversely impacted by delays in its ability to act
upon economic events occurring in foreign markets during non-business hours in
the United States.
Legal and Regulatory Matters. Certain foreign countries may have less
supervision of securities markets, brokers and issuers of securities, and less
financial information available to issuers, than is available in the United
States.
Taxes. The interest payable on certain of the Fund's foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to the Fund's shareholders.
Costs. To the extent that the Fund invests in foreign securities, its
expense ratio is likely to be higher than those of investment companies
investing only in domestic securities, since the cost of maintaining the custody
of foreign securities is higher.
Emerging markets. Some of the securities in which the Fund may invest
may be located in developing or emerging markets, which entail additional risks,
including less social, political and economic stability; smaller securities
markets and lower trading volume, which may result in a less liquidity and
greater price volatility; national policies that may restrict the Fund's
investment opportunities, including restrictions on investment in issuers or
industries, or expropriation or confiscation of assets or property; and less
developed legal structures governing private or foreign investment.
In considering whether to invest in the securities of a foreign
company, a Manager considers such factors as the characteristics of the
particular company, differences between economic trends and the performance of
securities markets within the U.S. and those within other countries, and also
factors relating to the general economic, governmental and social conditions of
the country or countries where the company is located. The extent to which the
Fund will be invested in foreign companies and countries and depository receipts
will fluctuate from time to time within the limitations described in the
prospectus, depending on a Manager's assessment of prevailing market, economic
and other conditions.
Options on Securities and Securities Indices
Purchasing Put and Call Options. The Fund may purchase covered "put"
and "call" options with respect to securities which are otherwise eligible for
purchase by the Fund and with respect to various stock indices subject to
certain restrictions. The Fund will engage in trading of such derivative
securities exclusively for hedging purposes.
If the Fund purchases a put option, the Fund acquires the right to sell
the underlying security at a specified price at any time during the term of the
option (for "American-style" options) or on the option expiration date (for
"European-style" options). Purchasing put options may be used as a portfolio
investment strategy when a Manager perceives significant short-term risk but
substantial long-term appreciation for the underlying security. The put option
acts as an insurance policy, as it protects against significant downward price
movement while it allows full participation in any upward movement. If the Fund
is holding a stock which it feels has strong fundamentals, but for some reason
may be weak in the near term, the Fund may purchase a put option on such
security, thereby giving itself the right to sell such security at a certain
strike price throughout the term of the option. Consequently, the Fund will
exercise the put only if the price of such security falls below the strike price
of the put. The difference between the put's strike price and the market price
of the underlying security on the date the Fund exercises the put, less
transaction costs, will be the amount
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by which the Fund will be able to hedge against a decline in the underlying
security. If during the period of the option the market price for the underlying
security remains at or above the put's strike price, the put will expire
worthless, representing a loss of the price the Fund paid for the put, plus
transaction costs. If the price of the underlying security increases, the profit
the Fund realizes on the sale of the security will be reduced by the premium
paid for the put option less any amount for which the put may be sold.
If the Fund purchases a call option, it acquires the right to purchase
the underlying security at a specified price at any time during the term of the
option. The purchase of a call option is a type of insurance policy to hedge
against losses that could occur if the Fund has a short position in the
underlying security and the security thereafter increases in price. The Fund
will exercise a call option only if the price of the underlying security is
above the strike price at the time of exercise. If during the option period the
market price for the underlying security remains at or below the strike price of
the call option, the option will expire worthless, representing a loss of the
price paid for the option, plus transaction costs. If the call option has been
purchased to hedge a short position of the Fund in the underlying security and
the price of the underlying security thereafter falls, the profit the Fund
realizes on the cover of the short position in the security will be reduced by
the premium paid for the call option less any amount for which such option may
be sold.
Prior to exercise or expiration, an option may be sold when it has
remaining value by a purchaser through a "closing sale transaction," which is
accomplished by selling an option of the same series as the option previously
purchased. The Fund generally will purchase only those options for which a
Manager believes there is an active secondary market to facilitate closing
transactions.
Writing Call Options. The Fund may write covered call options. A call
option is "covered" if the Fund owns the security underlying the call or has an
absolute right to acquire the security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount as are held in a segregated account by the Custodian). The writer of
a call option receives a premium and gives the purchaser the right to buy the
security underlying the option at the exercise price. The writer has the
obligation upon exercise of the option to deliver the underlying security
against payment of the exercise price during the option period. If the writer of
an exchange-traded option wishes to terminate his obligation, he may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. A writer may not effect a closing
purchase transaction after it has been notified of the exercise of an option.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price, expiration date or both. Also, effecting
a closing transaction will permit the cash or proceeds from the concurrent sale
of any securities subject to the option to be used for other investments of the
Fund. If the Fund desires to sell a particular security from its portfolio on
which it has written a call option, it will effect a closing transaction prior
to or concurrent with the sale of the security.
The Fund will realize a gain from a closing transaction if the cost of
the closing transaction is less than the premium received from writing the
option or if the proceeds from the closing transaction are more than the premium
paid to purchase the option. The Fund will realize a loss from a closing
transaction if the cost of the closing transaction is more than the premium
received from writing the option or if the proceeds from the closing transaction
are less than the premium paid to purchase the option. However, because
increases in the market price of a call option will generally reflect increases
in the market price of the underlying security, any loss to the Fund resulting
from the repurchase of a call option is likely to be offset in whole or in part
by appreciation of the underlying security owned by the Fund.
Stock Index Options. The Fund may also purchase put and call options
with respect to the S&P 500 and other stock indices. Such options may be
purchased as a hedge against changes resulting from market conditions in the
values of securities which are held in the Fund's portfolio or which it intends
to purchase or sell, or when they are economically appropriate for the reduction
of risks inherent in the ongoing management of the Fund.
The distinctive characteristics of options on stock indices create
certain risks that are not present with stock options generally. Because the
value of an index option depends upon movements in the level of the index rather
than the price of a particular stock, whether the Fund will realize a gain or
loss on the purchase or sale of an option on an index depends upon movements in
the level of stock prices in the stock market generally rather than movements in
the price of a particular stock. Accordingly, successful use by the Fund of
options on a stock index would be subject to a Manager's ability to predict
correctly movements in the direction of the stock market generally. This
requires different
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skills and techniques than predicting changes in the price of individual stocks.
Index prices may be distorted if trading of certain stocks included in
the index is interrupted. Trading of index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this were to occur, the Fund would not be able
to close out options which it had purchased, and if restrictions on exercise
were imposed, the Fund might be unable to exercise an option it holds, which
could result in substantial losses to the Fund. It is the policy of the Fund to
purchase put or call options only with respect to an index which a Manager
believes includes a sufficient number of stocks to minimize the likelihood of a
trading halt in the index.
Risks Of Investing in Options. There are several risks associated with
transactions in options on securities and indices. Options may be more volatile
than the underlying instruments and, therefore, on a percentage basis, an
investment in options may be subject to greater fluctuation than an investment
in the underlying instruments themselves. There are also significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objective. In addition, a liquid secondary market for particular options may
be absent for reasons which include the following: there may be insufficient
trading interest in certain options; restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of option of underlying securities; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the facilities of
an exchange or clearing corporation may not at all times be adequate to handle
current trading volume; or one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in that class or series of options) would
cease to exist, although outstanding options that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events. The
extent to which the Fund may enter into options transactions may be limited by
the Internal Revenue Code (the "Code") requirements for qualification of the
Fund as a regulated investment company. See "Dividends and Distributions" and
"Taxation."
In addition, when trading options on foreign exchanges, many of the
protections afforded to participants in United States option exchanges will not
be available. For example, there may be no daily price fluctuation limits in
such exchanges or markets, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the Fund as an option writer
could lose amounts substantially in excess of its initial investment, due to the
margin and collateral requirements typically associated with such option
writing. See "Dealer Options" below.
Dealer Options. The Fund will engage in transactions involving dealer
options as well as exchange-traded options. Certain risks are specific to dealer
options. While the Fund might look to a clearing corporation to exercise
exchange-traded options, if the Fund were to purchase a dealer option it would
need to rely on the dealer from which it purchased the option to perform if the
option were exercised. Failure by the dealer to do so would result in the loss
of the premium paid by the Fund as well as loss of the expected benefit of the
transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options may not. Consequently, the Fund may generally be able to realize
the value of a dealer option it has purchased only by exercising or reselling
the option to the dealer who issued it. Similarly, when the Fund writes a dealer
option, the Fund may generally be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to whom the Fund originally wrote the option. While the Fund will seek to enter
into dealer options only with dealers who will agree to and which are expected
to be capable of entering into closing transactions with the Fund, there can be
no assurance that the Fund will at any time be able to liquidate a dealer option
at a favorable price at any time prior to expiration. Unless the Fund, as a
covered dealer call option writer, is able to effect a closing purchase
transaction, it will not be able to liquidate securities (or other assets) used
as cover until the option expires or is exercised. In the event of insolvency of
the other party, the Fund may be unable to liquidate a dealer option. With
respect to options written by the Fund, the inability to enter into a closing
transaction may result in material losses to the Fund. For example, because the
Fund must maintain a secured position with respect to any call option on a
security it writes, the Fund may not sell the
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assets which it has segregated to secure the position while it is obligated
under the option. This requirement may impair the Fund's ability to sell
portfolio securities at a time when such sale might be advantageous.
The Staff of the Securities and Exchange Commission (the "Commission")
has taken the position that purchased dealer options are illiquid securities.
The Fund may treat the cover used for written dealer options as liquid if the
dealer agrees that the Fund may repurchase the dealer option it has written for
a maximum price to be calculated by a predetermined formula. In such cases, the
dealer option would be considered illiquid only to the extent the maximum
purchase price under the formula exceeds the intrinsic value of the option.
Accordingly, the Fund will treat dealer options as subject to the Fund's
limitation on illiquid securities. If the Commission changes its position on the
liquidity of dealer options, the Fund will change its treatment of such
instruments accordingly.
Foreign Currency Options. The Fund may buy or sell put and call options
on foreign currencies. A put or call option on a foreign currency gives the
purchaser of the option the right to sell or purchase a foreign currency at the
exercise price until the option expires. The Fund will use foreign currency
options separately or in combination to control currency volatility. Among the
strategies employed to control currency volatility is an option collar. An
option collar involves the purchase of a put option and the simultaneous sale of
call option on the same currency with the same expiration date but with
different exercise (or "strike") prices. Generally, the put option will have an
out-of-the-money strike price, while the call option will have either an
at-the-money strike price or an in-the-money strike price. Foreign currency
options are derivative securities. Currency options traded on U.S. or other
exchanges may be subject to position limits which may limit the ability of the
Fund to reduce foreign currency risk using such options.
As with other kinds of option transactions, the writing of an option on
foreign currency will constitute only a partial hedge, up to the amount of the
premium received. The Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations: however, in the event of exchange rate
movements adverse to the Fund's position, the Fund may forfeit the entire amount
of the premium plus related transaction costs.
Spread Transactions. The Fund may purchase covered spread options from
securities dealers. These covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives the
Fund the right to put a securities that it owns at a fixed dollar spread or
fixed yield spread in relationship to another security that the Fund does not
own, but which is used as a benchmark. The risk to the Fund, in addition to the
risks of dealer options described above, is the cost of the premium paid as well
as any transaction costs. The purchase of spread options will be used to protect
the Fund against adverse changes in prevailing credit quality spreads, i.e., the
yield spread between high quality and lower quality securities. This protection
is provided only during the life of the spread options.
Forward Currency Contracts
The Fund may enter into forward currency contracts in anticipation of
changes in currency exchange rates. A forward currency contract is an obligation
to purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. For example, the Fund might purchase a
particular currency or enter into a forward currency contract to preserve the
U.S. dollar price of securities it intends to or has contracted to purchase.
Alternatively, it might sell a particular currency on either a spot or forward
basis to hedge against an anticipated decline in the dollar value of securities
it intends to or has contracted to sell. Although this strategy could minimize
the risk of loss due to a decline in the value of the hedged currency, it could
also limit any potential gain from an increase in the value of the currency.
Futures Contracts and Related Options
The Fund may invest in futures contracts and options on futures
contracts as a hedge against changes in market conditions or interest rates. The
Fund will trade in such derivative securities for bona fide hedging purposes and
otherwise in accordance with the rules of the Commodity Futures Trading
Commission ("CFTC"). The Fund will segregate liquid assets in a separate account
with its Custodian when required to do so by CFTC guidelines in order to cover
its obligation in connection with futures and options transactions.
No price is paid or received by the Fund upon the purchase or sale of a
futures contract. When it enters into a domestic futures contract, the Fund will
be required to deposit in a segregated account with its Custodian an amount of
cash or U.S. Treasury bills equal to approximately 5% of the contract amount.
This amount is known as initial margin.
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The margin requirements for foreign futures contracts may be different.
The nature of initial margin in futures transactions is different from
that of margin in securities transactions. Futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon termination of the
futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments (called variation margin) to and from the broker will be
made on a daily basis as the price of the underlying stock index fluctuates, to
reflect movements in the price of the contract making the long and short
positions in the futures contract more or less valuable. For example, when the
Fund has purchased a stock index futures contract and the price of the
underlying stock index has risen, that position will have increased in value and
the Fund will receive from the broker a variation margin payment equal to that
increase in value. Conversely, when the Fund has purchased a stock index futures
contract and the price of the underlying stock index has declined, the position
will be less valuable and the Fund will be required to make a variation margin
payment to the broker.
At any time prior to expiration of a futures contract, the Fund may
elect to close the position by taking an opposite position, which will operate
to terminate the Fund's position in the futures contract A final determination
of variation margin is made on closing the position. Additional cash is paid by
or released to the Fund, which realizes a loss or a gain.
In addition to amounts segregated or paid as initial and variation
margin, the Fund must segregate liquid assets with its custodian equal to the
market value of the futures contracts, in order to comply with Commission
requirements intended to ensure that the Fund's use of futures is unleveraged.
The requirements for margin payments and segregated accounts apply to both
domestic and foreign futures contracts.
Stock Index Futures Contracts. The Fund may invest in futures contracts
on stock indices. Currently, stock index futures contracts can be purchased or
sold with respect to the S&P 500 Stock Price Index on the Chicago Mercantile
Exchange, the Major Market Index on the Chicago Board of Trade, the New York
Stock Exchange Composite Index on the New York Futures Exchange and the Value
Line Stock Index on the Kansas City Board of Trade. Foreign financial and stock
index futures are traded on foreign exchanges including the London International
Financial Futures Exchange, the Singapore International Monetary Exchange, the
Sydney Futures Exchange Limited and the Tokyo Stock Exchange.
Interest Rate or Financial Futures Contracts. The Fund may invest in
interest rate or financial futures contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, a contract is made to purchase or sell a bond in the future for
a set price on a certain date. Historically, the prices for bonds established in
the futures markets have generally tended to move in the aggregate in concert
with cash market prices, and the prices have maintained fairly predictable
relationships.
The sale of an interest rate or financial futures contract by the Fund
would create an obligation by the Fund, as seller, to deliver the specific type
of financial instrument called for in the contract at a specific future time for
a specified price. A futures contract purchased by the Fund would create an
obligation by the Fund, as purchaser, to take delivery of the specific type of
financial instrument at a specific future time at a specific price. The specific
securities delivered or taken, respectively, at settlement date, would not be
determined until at or near that date. The determination would be in accordance
with the rules of the exchange on which the futures contract sale or purchase
was made.
Although interest rate or financial futures contracts by their terms
call for actual delivery or acceptance of securities, in most cases the
contracts are closed out before the settlement date without delivery of
securities. Closing out of a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the Fund's entering
into a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
The Fund will deal only in standardized contracts on recognized
exchanges. Each exchange guarantees performance under contract provisions
through a clearing corporation, a nonprofit organization managed by the exchange
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membership. Domestic interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange. A public market now exists in
domestic futures contracts covering various financial instruments including
long-term United States Treasury bonds and notes; GNMA modified pass-through
mortgage-backed securities; three-month United States Treasury bills; and 90-day
commercial paper. The Fund may trade in any futures contract for which there
exists a public market, including, without limitation, the foregoing
instruments. International interest rate futures contracts are traded on the
London International Financial Futures Exchange, the Singapore International
Monetary Exchange, the Sydney Futures Exchange Limited and the Tokyo Stock
Exchange.
Foreign Currency Futures Contracts. The Fund may use foreign currency
future contracts for hedging purposes. A foreign currency futures contract
provides for the future sale by one party and purchase by another party of a
specified quantity of a foreign currency at a specified price and time. A public
market exists in futures contracts covering several foreign currencies,
including the Australian dollar, the Canadian dollar, the British pound, the
German mark, the Japanese yen, the Swiss franc, and certain multinational
currencies such as the European Currency Unit ("ECU"). Other foreign currency
futures contracts are likely to be developed and traded in the future. The Fund
will only enter into futures contracts and futures options which are
standardized and traded on a U.S. or foreign exchange, board of trade, or
similar entity, or quoted on an automated quotation system.
Risks of Transactions in Futures Contracts. There are several risks
related to the use of futures as a hedging device. One risk arises because of
the imperfect correlation between movements in the price of the futures contract
and movements in the price of the securities which are the subject of the hedge.
The price of the future may move more or less than the price of the securities
being hedged. If the price of the future moves less than the price of the
securities which are the subject of the hedge, the hedge will not be fully
effective, but if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on the
future. If the price of the future moves more than the price of the hedged
securities, the Fund will experience either a loss or a gain on the future which
will not be completely offset by movements in the price of the securities which
are subject to the hedge.
To compensate for the imperfect correlation of movements in the price
of securities being hedged and movements in the price of the futures contract,
the Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the historical volatility of the
prices of such securities has been greater than the historical volatility over
such time period of the future. Conversely, the Fund may buy or sell fewer
futures contracts if the historical volatility of the price of the securities
being hedged is less than the historical volatility of the futures contract
being used. It is possible that, when the Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance while the
value of securities held in the Fund's portfolio may decline. If this occurs,
the Fund will lose money on the future and also experience a decline in value in
its portfolio securities. However, the Advisor believes that over time the value
of a diversified portfolio will tend to move in the same direction as the market
indices upon which the futures are based.
Where futures are purchased to hedge against a possible increase in the
price of securities before the Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead. If the Fund then decides not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, it will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the stock index or cash market due to certain market distortions.
All participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the index or
cash market and futures markets. In addition, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may also cause temporary price distortions. As a result of price distortions in
the futures market and the imperfect correlation between movements in the cash
market and the price of securities and movements in the price of futures, a
correct forecast of general trends by a Manager may still not result in a
successful hedging transaction over a very short time
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frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Fund may
intend to purchase or sell futures only on exchanges or boards of trade where
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. When futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the futures contract can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, as described above, there is no guarantee that the price of the
securities will in fact correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Successful use of futures by the Fund is also subject to a Manager's
ability to predict correctly movements in the direction of the market. For
example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting stocks held in its portfolio and stock prices
increase instead, the Fund will lose part or all of the benefit of the increased
value of the stocks which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
In the event of the bankruptcy of a broker through which the Fund
engages in transactions in futures contracts or options, the Fund could
experience delays and losses in liquidating open positions purchased or sold
through the broker, and incur a loss of all or part of its margin deposits with
the broker.
Options on Futures Contracts. As described above, the Fund may purchase
options on the futures contracts they can purchase or sell. A futures option
gives the holder, in return for the premium paid, the right to buy (call) from
or sell (put) to the writer of the option a futures contract at a specified
price at any time during the period of the option. Upon exercise, the writer of
the option is obligated to pay the difference between the cash value of the
futures contract and the exercise price. Like the buyer or seller of a futures
contract, the holder or writer of an option has the right to terminate its
position prior to the scheduled expiration of the option by selling, or
purchasing an option of the same series, at which time the person entering into
the closing transaction will realize a gain or loss. There is no guarantee that
such closing transactions can be effected.
Investments in futures options involve some of the same considerations
as investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also entails the risk
that changes in the value of the underlying futures contract will not be fully
reflected in the value of the option. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contracts. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Fund because the
maximum amount at risk is limited to the premium paid for the options (plus
transaction costs).
Restrictions on the Use or Futures Contracts and Related Options. The
Fund will not engage in transactions in futures contracts or related options for
speculation, but only as a hedge against changes resulting from market
conditions in the values of securities held in the Fund's portfolio or which it
intends to purchase and where the transactions are economically appropriate to
the reduction of risks inherent in the ongoing management of the Fund. The
B-16
<PAGE>
Fund may not purchase or sell futures or purchase related options if,
immediately thereafter, more than 25% of its net assets would be hedged. The
Fund also may not purchase or sell futures or purchase related options if,
immediately thereafter, the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for such options would exceed 5% of
the market value of the Fund's net assets.
These restrictions, which are derived from current federal regulations
regarding the use of options and futures by mutual funds, are not "fundamental
restrictions" and may be changed by the Trustees of the Trust if applicable law
permits such a change and the change is consistent with the overall investment
objective and policies of the Fund.
The extent to which the Fund may enter into futures and options
transactions may be limited by the Code requirements for qualification of the
Fund as a regulated investment company. See "Taxation."
Repurchase Agreements
The Fund may enter into repurchase agreements with respect to its
portfolio securities. Pursuant to such agreements, the Fund acquires securities
from financial institutions such as banks and broker-dealers as are deemed to be
creditworthy by the Advisor or a Manager, subject to the seller's agreement to
repurchase and the Fund's agreement to resell such securities at a mutually
agreed upon date and price. The repurchase price generally equals the price paid
by the Fund plus interest negotiated on the basis of current short-term rates
(which may be more or less than the rate on the underlying portfolio security).
Securities subject to repurchase agreements will be held by the Custodian or in
the Federal Reserve/Treasury Book-Entry System or an equivalent foreign system.
The seller under a repurchase agreement will be required to maintain the value
of the underlying securities at not less than 102% of the repurchase price under
the agreement. If the seller defaults on its repurchase obligation, the Fund
holding the repurchase agreement will suffer a loss to the extent that the
proceeds from a sale of the underlying securities are less than the repurchase
price under the agreement. Bankruptcy or insolvency of such a defaulting seller
may cause the Fund's rights with respect to such securities to be delayed or
limited. Repurchase agreements are considered to be loans under the 1940 Act.
Reverse Repurchase Agreements.
The Fund may enter into reverse repurchase agreements. The Fund
typically will invest the proceeds of a reverse repurchase agreement in money
market instruments or repurchase agreements maturing not later than the
expiration of the reverse repurchase agreement. The Fund may use the proceeds of
reverse repurchase agreements to provide liquidity to meet redemption requests
when sale of the Fund's securities is disadvantageous.
The Fund causes the custodian to segregate liquid assets, such as cash,
U.S. Government securities or other high grade liquid debt securities equal in
value to its obligations (including accrued interest) with respect to reverse
repurchase agreements. In segregating such assets, the custodian either places
such securities in a segregated account or separately identifies such assets and
renders them unavailable for investment. Such assets are marked to market daily
to ensure full collateralization is maintained.
Dollar Roll Transactions
The Fund may enter into dollar roll transactions. A dollar roll
transaction involves a sale by the Fund of a security to a financial institution
concurrently with an agreement by the Fund to purchase a similar security from
the institution at a later date at an agreed-upon price. The securities that are
repurchased will bear the same interest rate as those sold, but generally will
be collateralized by different pools of mortgages with different prepayment
histories than those sold. During the period between the sale and repurchase,
the Fund will not be entitled to receive interest and principal payments on the
securities sold. Proceeds of the sale will be invested in additional portfolio
securities of the Fund, and the income from these investments, together with any
additional fee income received on the sale, may or may not generate income for
the Fund exceeding the yield on the securities sold.
At the time the Fund enters into a dollar roll transaction, it causes
its custodian to segregate liquid assets such as cash, U.S. Government
securities or other high-grade liquid debt securities having a value equal to
the purchase price for the similar security (including accrued interest) and
subsequently marks the assets to market daily to ensure that full
collateralization is maintained.
When-Issued Securities, Forward Commitments and Delayed Settlements
The Fund may purchase securities on a "when-issued," forward commitment
or delayed settlement basis. In this event, the Custodian will set aside cash or
liquid portfolio securities equal to the amount of the commitment in a separate
B-17
<PAGE>
account. Normally, the Custodian will set aside portfolio securities to satisfy
a purchase commitment. In such a case, the Fund may be required subsequently to
place additional assets in the separate account in order to assure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that the Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash.
The Fund does not intend to engage in these transactions for
speculative purposes but only in furtherance of its investment objectives.
Because the Fund will set aside cash or liquid portfolio securities to satisfy
its purchase commitments in the manner described, the Fund's liquidity and the
ability of a Manager to manage it may be affected in the event the Fund's
forward commitments, commitments to purchase when-issued securities and delayed
settlements ever exceeded 15% of the value of its net assets.
The Fund will purchase securities on a when-issued, forward commitment
or delayed settlement basis only with the intention of completing the
transaction. If deemed advisable as a matter of investment strategy, however,
the Fund may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a taxable capital gain or loss. When the Fund engages in when-issued,
forward commitment and delayed settlement transactions, it relies on the other
party to consummate the trade. Failure of such party to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price credited to
be advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of the Fund starting on the day the Fund agrees to
purchase the securities. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date.
Zero-Coupon, Step-Coupon and Pay-in-Kind Securities
The Fund may invest in zero-coupon, step-coupon and pay-in-kind
securities. These securities are debt securities that do not make regular cash
interest payments. Zero-coupon and step-coupon securities are sold at a deep
discount to their face value. Pay-in-kind securities pay interest through the
issuance of additional securities. Because these securities do not pay current
cash income, the price of these securities can be volatile when interest rates
fluctuate. While these securities do not pay current cash income, the Code
requires the holders of these securities to include in income each year the
portion of the original issue discount (or deemed discount) and other non-cash
income on the securities accruing that year. The Fund may be required to
distribute a portion of that discount and income and may be required to dispose
of other portfolio securities, which may occur in periods of adverse market
prices, in order to generate cash to meet these distribution requirements.
Borrowing
The Fund is authorized to borrow money from time to time for temporary,
extraordinary or emergency purposes or for clearance of transactions in amounts
up to 20% of the value of its total assets at the time of such borrowings. The
use of borrowing by the Fund involves special risk considerations that may not
be associated with other funds having similar objectives and policies. Since
substantially all of the Fund's assets fluctuate in value, whereas the interest
obligation resulting from a borrowing will be fixed by the terms of the Fund's
agreement with its lender, the asset value per share of the Fund will tend to
increase more when its portfolio securities increase in value and to decrease
more when its portfolio assets decrease in value than would otherwise be the
case if the Fund did not borrow funds. In addition, interest costs on borrowings
may fluctuate with changing market rates of interest and may partially offset or
exceed the return earned on borrowed funds. Under adverse market conditions, the
Fund might have to sell portfolio securities to meet interest or principal
payments at a time when fundamental investment considerations would not favor
such sales.
Lending Portfolio Securities
The Fund may lend its portfolio securities in an amount not exceeding
30% of its total assets to financial institutions such as banks and brokers if
the loan is collateralized in accordance with applicable regulations. Under the
present regulatory requirements which govern loans of portfolio securities, the
loan collateral must, on each business day, at least equal the value of the
loaned securities and must consist of cash, letters of credit of domestic banks
or domestic branches of foreign banks, or securities of the U.S. Government or
its agencies. To be acceptable as collateral, letters of credit must obligate a
bank to pay amounts demanded by the Fund if the demand meets the terms of the
letter. Such
B-18
<PAGE>
terms and the issuing bank would have to be satisfactory to the Fund. Any loan
might be secured by any one or more of the three types of collateral. The terms
of the Fund's loans must permit the Fund to reacquire loaned securities on five
days' notice or in time to vote on any serious matter and must meet certain
tests under the Code.
Short Sales
The Fund is authorized to make short sales of securities it owns or has
the right to acquire at no added cost through conversion or exchange of other
securities it owns (referred to as short sales "against the box") and to make
short sales of securities which it does not own or have the right to acquire.
In a short sale that is not "against the box," the Fund sells a
security which it does not own, in anticipation of a decline in the market value
of the security. To complete the sale, the Fund must borrow the security
(generally from the broker through which the short sale is made) in order to
make delivery to the buyer. The Fund is then obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement. The
Fund is said to have a "short position" in the securities sold until it delivers
them to the broker. The period during which the Fund has a short position can
range from one day to more than a year. Until the security is replaced, the
proceeds of the short sale are retained by the broker, and the Fund is required
to pay to the broker a negotiated portion of any dividends or interest which
accrue during the period of the loan. To meet current margin requirements, the
Fund is also required to deposit with the broker additional cash or securities
so that the total deposit with the broker is maintained daily at 150% of the
current market value of the securities sold short (100% of the current market
value if a security is held in the account that is convertible or exchangeable
into the security sold short within 90 days without restriction other than the
payment of money).
Short sales by the Fund that are not made "against the box" create
opportunities to increase the Fund's return but, at the same time, involve
specific risk considerations and may be considered a speculative technique.
Since the Fund in effect profits from a decline in the price of the securities
sold short without the need to invest the full purchase price of the securities
on the date of the short sale, the Fund's net asset value per share will tend to
increase more when the securities it has sold short decrease in value, and to
decrease more when the securities it has sold short increase in value, than
would otherwise be the case if it had not engaged in such short sales. The
amount of any gain will be decreased, and the amount of any loss increased, by
the amount of any premium, dividends or interest the Fund may be required to pay
in connection with the short sale. Furthermore, under adverse market conditions
the Fund might have difficulty purchasing securities to meet its short sale
delivery obligations, and might have to sell portfolio securities to raise the
capital necessary to meet its short sale obligations at a time when fundamental
investment considerations would not favor such sales.
If the Fund makes a short sale "against the box," the Fund would not
immediately deliver the securities sold and would not receive the proceeds from
the sale. The seller is said to have a short position in the securities sold
until it delivers the securities sold, at which time it receives the proceeds of
the sale. To secure its obligation to deliver securities sold short, the Fund
will deposit in escrow in a separate account with the Custodian an equal amount
of the securities sold short or securities convertible into or exchangeable for
such securities. The Fund can close out its short position by purchasing and
delivering an equal amount of the securities sold short, rather than by
delivering securities already held by the Fund, because the Fund might want to
continue to receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold short.
The Fund's decision to make a short sale "against the box" may be a
technique to hedge against market risks when a Manager believes that the price
of a security may decline, causing a decline in the value of a security owned by
the Fund or a security convertible into or exchangeable for such security. In
such case, any future losses in the Fund's long position would be reduced by a
gain in the short position. The extent to which such gains or losses in the long
position are reduced will depend upon the amount of securities sold short
relative to the amount of the securities the Fund owns, either directly or
indirectly, and, in the case where the Fund owns convertible securities, changes
in the investment values or conversion premiums of such securities.
The extent to which the Fund may enter into short sales transactions
may be limited by the Code requirements for qualification of the Fund as a
regulated investment company. See "Taxation."
B-19
<PAGE>
Illiquid Securities
The Fund may not invest more than 15% of the value of its net assets in
securities that at the time of purchase have legal or contractual restrictions
on resale or are otherwise illiquid. The Advisor and the Managers will monitor
the amount of illiquid securities in the Fund's portfolio, under the supervision
of the Trust's Board of Trustees, to ensure compliance with the Fund's
investment restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933 (the "Securities Act"), securities
which are otherwise not readily marketable and repurchase agreements having a
maturity of longer than seven days. Securities which have not been registered
under the Securities Act are referred to as private placement or restricted
securities and are purchased directly from the issuer or in the secondary
market. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and the Fund might be unable
to dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemption within
seven days. The Fund might also have to register such restricted securities in
order to dispose of them, resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act,
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the Commission under the Securities
Act, the Trust's Board of Trustees may determine that such securities are not
illiquid securities notwithstanding their legal or contractual restrictions on
resale. In all other cases, however, securities subject to restrictions on
resale will be deemed illiquid.
Risks of Investing in Small Companies
As stated in the prospectus, the Fund may invest in securities of small
companies. Additional risks of such investments include the markets on which
such securities are frequently traded. In many instances the securities of
smaller companies are traded only over-the-counter or on a regional securities
exchange, and the frequency and volume of their trading is substantially less
than is typical of larger companies. Therefore, the securities of smaller
companies may be subject to greater and more abrupt price fluctuations. When
making large sales, the Fund may have to sell portfolio holdings at discounts
from quoted prices or may have to make a series of small sales over an extended
period of time due to the trading volume of smaller company securities.
Investors should be aware that, based on the foregoing factors, an investment in
the Fund may be subject to greater price fluctuations than an investment in a
fund that invests exclusively in larger, more established companies. A Manager's
research efforts may also play a greater role in selecting securities for the
Fund than in a fund that invests in larger, more established companies.
Investment Restrictions
The Trust (on behalf of the Fund) has adopted the following
restrictions as fundamental policies, which may not be changed without the
favorable vote of the holders of a "majority," as defined in the 1940 Act, of
the outstanding voting securities of the Fund. Under the 1940 Act, the "vote of
the holders of a majority of the outstanding voting securities" means the vote
of the holders of the lesser of (i) 67% of the shares of the Fund represented at
a meeting at which the holders of more than 50% of its outstanding shares are
represented or (ii) more than 50% of the outstanding shares of the Fund.
As a matter of fundamental policy, the Fund is diversified; i.e., as to
75% of the value of a its total assets: (i) no more than 5% of the value of its
total assets may be invested in the securities of any one issuer (other than
U.S. Government securities); and (ii) the Fund may not purchase more than 10% of
the outstanding voting securities of an issuer. The Fund's investment objective
is also fundamental.
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<PAGE>
In addition, the Fund may not:
1. Issue senior securities, borrow money or pledge its assets, except
that (i) the Fund may borrow on an unsecured basis from banks for temporary or
emergency purposes or for the clearance of transactions in amounts not exceeding
10% of its total assets (not including the amount borrowed), provided that it
will not make investments while borrowings in excess of 5% of the value of its
total assets are outstanding; and (ii) this restriction shall not prohibit the
Fund from engaging in options, futures and foreign currency transactions or
short sales;
2. Purchase securities on margin, except such short-term credits as may
be necessary for the clearance of transactions;
3. Act as underwriter (except to the extent the Fund may be deemed to
be an underwriter in connection with the sale of securities in its investment
portfolio);
4. Invest 25% or more of its total assets, calculated at the time of
purchase and taken at market value, in any one industry (other than U.S.
Government securities);
5. Purchase or sell real estate or interests in real estate or real
estate limited partnerships (although the Fund may purchase and sell securities
which are secured by real estate and securities of companies which invest or
deal in real estate);
6. Purchase or sell commodities or commodity futures contracts, except
that the Fund may purchase and sell stock index futures contracts and currency
and financial futures contracts and related options in accordance with any rules
of the Commodity Futures Trading Commission;
7. Invest in oil and gas limited partnerships or oil, gas or mineral
leases;
8. Make loans of money (except for purchases of debt securities
consistent with the investment policies of the Fund and except for repurchase
agreements); or
9. Make investments for the purpose of exercising control or
management.
The Fund observes the following restrictions as a matter of operating
but not fundamental policy, pursuant to positions taken by federal regulatory
authorities:
The Fund may not:
1. Invest in the securities of other investment companies or purchase
any other investment company's voting securities or make any other investment in
other investment companies except to the extent permitted by federal and state
law.
2. Invest more than 15% of its assets in securities which are
restricted as to disposition or otherwise are illiquid or have no readily
available market (except for securities which are determined by the Board of
Trustees to be liquid).
MANAGEMENT
The overall management of the business and affairs of the Trust is
vested with its Board of Trustees. The Board approves all significant agreements
between the Trust and persons or companies furnishing services to it, including
the agreements with the Advisor, Managers, Administrator, Custodian and Transfer
Agent. The day to day operations of the Trust are delegated to its officers,
subject to the Fund's investment objectives and policies and to general
supervision by the Board of Trustees.
The Trustees and officers of the Trust, their ages and positions with
the Trust, their business addresses and principal occupations during the past
five years are:
<TABLE>
<CAPTION>
Name, address and age Position Principal Occupation During Past Five Years
<S> <C> <C>
A. George Battle (52) Trustee Senior Fellow, The Aspen Institute since June, 1995.
1065 Sterling Avenue Director of Peoplesoft, Inc.; Barra, Inc:, and Fair, Isaac.
Berkeley, CA 94708 Formerly (until 1995) Managing Partner, Market Development of
Andersen Consulting.
</TABLE>
B-21
<PAGE>
<TABLE>
<S> <C> <C>
Frederick August
Eigenbrod, Jr. PhD (55) Trustee Senior Vice President, Right Associates (industrial psychologists)
19925 Stevens Creek Blvd.
Cupertino, CA 95014
Kenneth E. Gregory* (39) President and President of the Advisor; President of L/G Research Inc. (publishers)
4 Orinda Way Trustee and Litman/Gregory & Co., LLC (investment advisors)
Suite 230D
Orinda, CA 94556
Craig A. Litman* (49) Trustee Treasurer and Secretary of the Advisor; Vice President and Secretary
100 Larkspur Landing Circle of L/G Research Inc.; Chairman of Litman/Gregory & Co., LLC
Suite 204
Larkspur, CA 94939
Taylor M. Welz (37) Trustee Partner, Bowman & Company, LLP (certified public accountants)
2431 W. March Lane
Suite 100
Stockton, CA 95207
</TABLE>
* denotes Trustees who are "interested persons" of the Trust under the 1940 Act.
It is estimated that each Trustee who is not an interested person of
the Trust will receive a fee at the annual rate of $5,000.
The Advisor and the Managers
Subject to the supervision of the Board of Trustees, investment
management and related services are provided by the Advisor, pursuant to an
Investment Advisory Agreement (the "Advisory Agreement"). In addition, the
assets of the Fund are divided into segments by the Advisor, and individual
selection of securities in each segment is provided by a Manager selected by the
Board of Trustees pursuant, in each case, to a form of sub-advisory agreement
("Management Agreement"). Under the Advisory Agreement, the Advisor has agreed
to (i) furnish the Fund with advice and recommendations with respect to the
selection and continued employment of Managers to manage the actual investment
of the Fund's assets; (ii) direct the allocation of the Fund's assets among such
Managers; (iii) oversee the investments made by such Managers on behalf of the
Fund, subject to the ultimate supervision and direction of the Trust's Board of
Trustees; (iv) oversee the actions of the Managers with respect to voting
proxies for the Fund, filing Section 13 ownership reports for the Fund, and
taking other actions on behalf of the Fund; (v) maintain the books and records
required to be maintained by the Fund except to the extent arrangements have
been made for such books and records to be maintained by the administrator,
another agent of the Fund or an Manager; (vi) furnish reports, statements and
other data on securities, economic conditions and other matters related to the
investment of the Fund's assets which the Fund's administrator or distributor or
the officers of the Trust may reasonably request; and (vii) render to the
Trust's Board of Trustees such periodic and special reports with respect to each
Fund's investment activities as the Board may reasonably request, including at
least one in-person appearance annually before the Board of Trustees. The
Advisor has agreed, at its own expense, to maintain such staff and employ or
retain such personnel and consult with such other persons as it shall from time
to time determine to be necessary to the performance of its obligations under
this Agreement. Personnel of the Advisor may serve as officers of the Trust
provided they do so without compensation from the Trust. Without limiting the
generality of the foregoing, the staff and personnel of the Advisor shall be
deemed to include persons employed or retained by the Advisor to furnish
statistical information, research, and other factual information, advice
regarding economic factors and trends, information with respect to technical and
scientific developments, and such other information, advice and assistance as
the Advisor or the Trust's Board of Trustees may desire and reasonably request.
With respect to the operation of the Fund, the Advisor has agreed to be
responsible for (i) providing the personnel, office space and equipment
reasonably necessary for the operation of the Trust and the Fund including the
provision of persons
B-22
<PAGE>
qualified to serve as officers of the Trust; (ii) compensating the Managers
selected to invest the assets of the Funds; (iii) the expenses of printing and
distributing extra copies of the Fund's prospectus, statement of additional
information, and sales and advertising materials (but not the legal, auditing or
accounting fees attendant thereto) to prospective investors (but not to existing
shareholders); and (iv) the costs of any special Board of Trustees meetings or
shareholder meetings convened for the primary benefit of the Advisor or any
Manager.
Under each Management Agreement, each Manager agrees to invest its
Allocated Portion of the assets of the Fund in accordance with the investment
objectives, policies and restrictions of the Fund as set forth in the Fund's and
Trust's governing documents, including, without limitation, the Trust's
Agreement and Declaration of Trust and By-Laws; the Fund's prospectus, statement
of additional information, and undertakings; and such other limitations,
policies and procedures as the Advisor or the Trustees of the Trust may impose
from time to time in writing to Manager. In providing such services, Manager
shall at all times adhere to the provisions and restrictions contained in the
federal securities laws, applicable state securities laws, the Internal Revenue
Code, and other applicable law.
Without limiting the generality of the foregoing, each Manager has
agreed to (i) furnish the Fund with advice and recommendations with respect to
the investment of the Manager's Allocated Portion of the Fund's assets, (ii)
effect the purchase and sale of portfolio securities for Manager's Allocated
Portion or determine that a portion of such Allocated Portion will remain
uninvested); (iii) manage and oversee the investments of the Manager's Allocated
Portion; subject to the ultimate supervision and direction of the Trust's Board
of Trustees; (iv) vote proxies and take other actions with respect to the
securities in Manager's Allocated Portion; (v) maintain the books and records
required to be maintained with respect to the securities in Manager's Allocated
Portion; (vi) furnish reports, statements and other data on securities, economic
conditions and other matters related to the investment of the Fund's assets
which the Advisor, Trustees or the officers of the Trust may reasonably request;
and (vii) render to the Trust's Board of Trustees such periodic and special
reports with respect to Manager's Allocated Portion as the Board may reasonably
request.
As compensation for the Advisor's services (including payment of the
Manager's fees), the Fund pays it an advisory fee at the rate specified in the
prospectus. In addition to the fees payable to the Advisor and the
Administrator, the Trust is responsible for its operating expenses, including:
fees and expenses incurred in connection with the issuance, registration and
transfer of its shares; brokerage and commission expenses; all expenses of
transfer, receipt, safekeeping, servicing and accounting for the cash,
securities and other property of the Trust for the benefit of the Fund including
all fees and expenses of its custodian, shareholder services agent and
accounting services agent; interest charges on any borrowings; costs and
expenses of pricing and calculating its daily net asset value and of maintaining
its books of account required under the Investment Company Act; taxes, if any; a
pro rata portion of expenditures in connection with meetings of the Fund's
shareholders and the Trust's Board of Trustees that are properly payable by the
Fund; salaries and expenses of officers and fees and expenses of members of the
Trust's Board of Trustees or members of any advisory board or committee who are
not members of, affiliated with or interested persons of the Advisor; insurance
premiums on property or personnel of each Fund which inure to its benefit,
including liability and fidelity bond insurance; the cost of preparing and
printing reports, proxy statements, prospectuses and statements of additional
information of the Fund or other communications for distribution to existing
shareholders; legal, auditing and accounting fees; trade association dues; fees
and expenses (including legal fees) of registering and maintaining registration
of its shares for sale under federal and applicable state and foreign securities
laws; all expenses of maintaining and servicing shareholder accounts, including
all charges for transfer, shareholder recordkeeping, dividend disbursing,
redemption, and other agents for the benefit of the Fund, if any; and all other
charges and costs of its operation plus any extraordinary and non-recurring
expenses, except as otherwise prescribed in the Advisory Agreement.
The Advisor may agree to waive certain of its fees or reimburse the
Fund for certain expenses, in order to limit the expense ratio of the Fund. In
that event, subject to approval by the Trust's Board of Trustees, the Fund may
reimburse the Advisor in subsequent years for fees waived and expenses
reimbursed, provided the expense ratio before reimbursement is less than the
expense limitation in effect at that time.
The Advisor is controlled by Craig A. Litman and Kenneth E. Gregory.
Under the Advisory Agreement and each Management Agreement, the Advisor
and the Managers will not be liable to the Trust for any error of judgment by
the Advisor or Managers or any loss sustained by the Trust except in the case of
a breach of fiduciary duty with respect to the receipt of compensation for
services (in which case any award of damages will be limited as provided in the
1940 Act) or of willful misfeasance, bad faith or gross negligence by reason
B-23
<PAGE>
of reckless disregard of its obligations and duties under the applicable
agreement.
The Advisory Agreement and the Management Agreements will remain in
effect for a period not to exceed two years. Thereafter, if not terminated, each
Advisory and Management Agreement will continue automatically for successive
annual periods, provided that such continuance is specifically approved at least
annually (i) by a majority vote of the Independent Trustees cast in person at a
meeting called for the purpose of voting on such approval, and (ii) by the Board
of Trustees or by vote of a majority of the outstanding voting securities of the
Portfolio.
The Advisory and Management Agreements are terminable by vote of the
Board of Trustees or by the holders of a majority of the outstanding voting
securities of the Trust at any time without penalty, on 60 days written notice
to the Advisor or a Manager. The Advisory and Management Agreements also may be
terminated by the Advisor or a Manager on 60 days written notice to the Trust.
The Advisory and Management Agreements terminate automatically upon their
assignment (as defined in the 1940 Act).
The Administrator. The Administrator has agreed to be responsible for
providing such services as the Trustees may reasonably request, including but
not limited to (i) maintaining the Trust's books and records (other than
financial or accounting books and records maintained by any custodian, transfer
agent or accounting services agent); (ii) overseeing the Trust's insurance
relationships; (iii) preparing for the Trust (or assisting counsel and/or
auditors in the preparation of) all required tax returns, proxy statements and
reports to the Trust's shareholders and Trustees and reports to and other
filings with the Securities and Exchange Commission and any other governmental
agency (the Trust agreeing to supply or cause to be supplied to the
Administrator all necessary financial and other information in connection with
the foregoing); (iv) preparing such applications and reports as may be necessary
to register or maintain the Trust's registration and/or the registration of the
shares of the Trust under the securities or "blue sky" laws of the various
states selected by the Trust (the Trust agreeing to pay all filing fees or other
similar fees in connection therewith); (v) responding to all inquiries or other
communications of shareholders, if any, which are directed to the Administrator,
or if any such inquiry or communication is more properly to be responded to by
the Trust's custodian, transfer agent or accounting services agent, overseeing
their response thereto; (vi) overseeing all relationships between the Trust and
any custodian(s), transfer agent(s) and accounting services agent(s), including
the negotiation of agreements and the supervision of the performance of such
agreements; (vii) together with the Advisor, monitoring compliance by the
Managers with tax, securities and other applicable requirements; and (viii)
authorizing and directing any of the Administrator's directors, officers and
employees who may be elected as Trustees or officers of the Trust to serve in
the capacities in which they are elected. All services to be furnished by the
Administrator under this Agreement may be furnished through the medium of any
such directors, officers or employees of the Administrator.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Each Management Agreement states that, with respect to the segment of
the Fund's portfolio allocated to the Manager, the Manager shall be responsible
for broker-dealer selection and for negotiation of brokerage commission rates,
provided that the Manager shall not direct orders to an affiliated person of the
Manager without general prior authorization to use such affiliated broker or
dealer by the Trust's Board of Trustees. In general, a Manager's primary
consideration in effecting a securities transaction will be execution at the
most favorable cost or proceeds under the circumstances. In selecting a
broker-dealer to execute each particular transaction, a Manager may take the
following into consideration: the best net price available; the reliability,
integrity and financial condition of the broker-dealer; the size of and
difficulty in executing the order; and the value of the expected contribution of
the broker-dealer to the investment performance of the Fund on a continuing
basis. The price to the Fund in any transaction may be less favorable than that
available from another broker-dealer if the difference is reasonably justified
by other aspects of the portfolio execution services offered.
Subject to such policies as the Advisor and the Board of
Trustees of the Trust may determine, a Manager shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Fund to pay a broker or dealer that
provides (directly or indirectly) brokerage or research services to the Advisor
an amount of commission for effecting a portfolio transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction, if the Manager determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Manager's or Advisor's overall responsibilities
with respect to the Fund. Each Manager is further authorized to allocate the
orders placed by it on behalf of the Fund to such brokers or dealers who also
provide research or statistical material, or other services, to the Trust, the
Advisor, or any affiliate of either. Such allocation shall be in such amounts
and proportions
B-24
<PAGE>
as the Manager shall determine, and each Manager shall report on such
allocations regularly to the Advisor and the Trust, indicating the
broker-dealers to whom such allocations have been made and the basis therefor.
Each Manager is also authorized to consider sales of shares of the Fund as a
factor in the selection of brokers or dealers to execute portfolio transactions,
subject to the requirements of best execution price.
On occasions when a Manager deems the purchase or sale of a security to
be in the best interest of the Fund as well as other clients of the Manager, the
Manager, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be so purchased or sold in order to obtain the most
favorable price or lower brokerage commissions and the most efficient execution.
In such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Manager in the manner
it considers to be the most equitable and consistent with its fiduciary
obligations to the Fund and to such other clients.
NET ASSET VALUE
The net asset value of the Fund's shares will fluctuate and is
determined as of the close of trading on the New York Stock Exchange (currently
4:00 p.m. Eastern time) each business day. The Exchange annually announces the
days on which it will not be open for trading. The most recent announcement
indicates that it will not be open on the following days: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. However, the Exchange may close on days not
included in that announcement.
The net asset value per share is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares in the Fund outstanding at such
time.
Generally, trading in and valuation of foreign securities is
substantially completed each day at various times prior to the close of the
NYSE. In addition, trading in and valuation of foreign securities may not take
place on every day in which the NYSE is open for trading. In that case, the
price used to determine the Fund's net asset value on the last day on which such
exchange was open will be used, unless the Trust's Board of Trustees determines
that a different price should be used. Furthermore, trading takes place in
various foreign markets on days in which the NYSE is not open for trading and on
which the Fund's net asset value is not calculated. Occasionally, events
affecting the values of such securities in U.S. dollars on a day on which the
Fund calculates its net asset value may occur between the times when such
securities are valued and the close of the NYSE that will not be reflected in
the computation of the Fund's net asset value unless the Board or its delegates
deem that such events would materially affect the net asset value, in which case
an adjustment would be made.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by the
Managers and the Trust's Pricing Committee pursuant to procedures approved by or
under the direction of the Board.
The Fund's securities, including ADRs, EDRs and GDRs, which are traded
on securities exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange are valued on the exchange determined by the Managers to be the
primary market. Securities traded in the over-the-counter market are valued at
the mean between the last available bid and asked price prior to the time of
valuation. Securities and assets for which market quotations are not readily
available (including restricted securities which are subject to limitations as
to their sale) are valued at fair value as determined in good faith by or under
the direction of the Board.
Short-term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-term
securities with 60 days or less remaining to maturity are, unless conditions
indicate otherwise, amortized to maturity based on their cost to the Fund if
acquired within 60 days of maturity or, if already held by the Fund on the 60th
day, based on the value determined on the 61st day.
Corporate debt securities, mortgage-related securities and asset-backed
securities held by the Fund are valued on the basis of valuations provided by
dealers in those instruments, by an independent pricing service, approved by the
Board, or at fair value as determined in good faith by procedures approved by
the Board. Any such pricing service, in
B-25
<PAGE>
determining value, will use information with respect to transactions in the
securities being valued, quotations from dealers, market transactions in
comparable securities, analyses and evaluations of various relationships between
securities and yield to maturity information.
An option that is written by the Fund is generally valued at the last
sale price or, in the absence of the last sale price, the last offer price. An
option that is purchased by the Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last bid price. The value of a
futures contract is the last sale or settlement price on the exchange or board
of trade on which the future is traded or, if no sales are reported, at the mean
between the last bid and asked price. When a settlement price cannot be used,
futures contracts will be valued at their fair market value as determined by or
under the direction of the Board. If an options or futures exchange closes after
the time at which the Fund's net asset value is calculated, the last sale or
last bid and asked prices as of that time will be used to calculate the net
asset value.
Any assets or liabilities initially expressed in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Board in good faith will establish a conversion rate for such currency.
All other assets of the Fund are valued in such manner as the Board in
good faith deems appropriate to reflect their fair value.
TAXATION
The Fund will be taxed, under the Internal Revenue Code (the "Code"),
as a separate entity from any other series of the Trust, and it intends to elect
to qualify for treatment as a regulated investment company ("RIC") under
Subchapter M of the Code. In each taxable year that the Fund qualifies, the Fund
(but not its shareholders) will be relieved of federal income tax on that part
of its investment company taxable income (consisting generally of interest and
dividend income, net short term capital gain and net realized gains from
currency transactions) and net capital gain that is distributed to shareholders.
In order to qualify for treatment as a RIC, the Fund must distribute
annually to shareholders at least 90% of its investment company taxable income
and must meet several additional requirements. Among these requirements are the
following: (1) 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 securities or foreign currencies, or
other income derived with respect to its business of investing in securities or
currencies; (2) less than 30% of the Fund's gross income each taxable year may
be derived from the sale or other disposition of securities held for less than
three months; (3) 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, limited in respect of any one issuer, to an amount that does not
exceed 5% of the value of the Fund and that does not represent more than 10% of
the outstanding voting securities of such issuer; and (4) 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.
Distributions of net investment income and net realized capital gains
by the Fund will be taxable to shareholders whether made in cash or reinvested
in shares. In determining amounts of net realized capital gains to be
distributed, any capital loss carryovers from prior years will be applied
against capital gains. Shareholders receiving distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share of the Fund on the
reinvestment date. Fund distributions also will be included in individual and
corporate shareholders' income on which the alternative minimum tax may be
imposed.
The Fund or any securities dealer effecting a redemption of the Fund's
shares by a shareholder will be required to file information reports with the
IRS with respect to distributions and payments made to the shareholder. In
addition, the Fund will be required to withhold federal income tax at the rate
of 31% on taxable dividends, redemptions and other payments made to accounts of
individual or other non-exempt shareholders who have not furnished their correct
taxpayer identification numbers and made certain required certifications on the
Account Application Form or with respect to which
B-26
<PAGE>
the Fund or the securities dealer has been notified by the IRS that the number
furnished is incorrect or that the account is otherwise subject to withholding.
The Fund intends to declare and pay dividends and other distributions,
as stated in the Prospectus. In order to avoid the payment of any federal excise
tax based on net income, the Fund must declare on or before December 31 of each
year, and pay on or before January 31 of the following year, distributions at
least equal to 98% of its ordinary income for that calendar year and at least
98% of the excess of any capital gains over any capital losses realized in the
one-year period ending October 31 of that year, together with any undistributed
amounts of ordinary income and capital gains (in excess of capital losses) from
the previous calendar year.
The Fund may receive dividend distributions from U.S. corporations. To
the extent that the Fund receives such dividends and distributes them to its
shareholders, and meets certain other requirements of the Code, corporate
shareholders of the Fund may be entitled to the "dividends received" deduction.
Availability of the deduction is subject to certain holding period and
debt-financing limitations.
The use of hedging strategies, such as entering into futures contracts
and forward contracts and purchasing options, involves complex rules that will
determine the character and timing of recognition of the income received in
connection therewith by the Fund. Income from foreign currencies (except certain
gains therefrom that may be excluded by future regulations) and income from
transactions in options, futures contracts and forward contracts derived by the
Fund with respect to its business of investing in securities or foreign
currencies will qualify as permissible income under Subchapter M of the Code.
For accounting purposes, when the Fund purchases an option, the premium
paid by the Fund is recorded as an asset and is subsequently adjusted to the
current market value of the option. Any gain or loss realized by the Fund upon
the expiration or sale of such options held by the Fund generally will be
capital gain or loss.
Any security, option, or other position entered into or held by the
Fund that substantially diminishes the Fund's risk of loss from any other
position held by that Fund may constitute a "straddle" for federal income tax
purposes. In general, straddles are subject to certain rules that may affect the
amount, character and timing of the Fund's gains and losses with respect to
straddle positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that the Fund's holding period in
certain straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to the
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that are
subject to Section 1256 of the Code ("Section 1256 Contracts") and that are held
by the Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by the Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency-denominated payables and receivables and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of the Fund's gain or loss on the sale or other disposition of shares of a
foreign corporation may, because of changes in foreign currency exchange rates,
be treated as ordinary income or loss under Section 988 of the Code, rather than
as capital gain or loss.
Redemptions and exchanges of shares of the Fund will result in gains or
losses for tax purposes to the extent of the difference between the proceeds and
the shareholder's adjusted tax basis for the shares. Any loss realized upon the
redemption or exchange of shares within six months from their date of purchase
will be treated as a long-term capital loss to the extent of distributions of
long-term capital gain dividends with respect to such shares during such
six-month period. All or a portion of a loss realized upon the redemption of
shares of the Fund may be disallowed to the extent
B-27
<PAGE>
shares of the same Fund are purchased (including shares acquired by means of
reinvested dividends) within 30 days before or after such redemption.
Distributions and redemptions may be subject to state and local income
taxes, and the treatment thereof may differ from the federal income tax
treatment. Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the Prospectus are
not intended to be complete discussions of all applicable federal tax
consequences of an investment in the Fund. The law firm of Heller, Ehrman, White
& McAuliffe has expressed no opinion in respect thereof. Nonresident aliens and
foreign persons are subject to different tax rules, and may be subject to
withholding of up to 30% on certain payments received from the Fund.
Shareholders are advised to consult with their own tax advisers concerning the
application of foreign, federal, state and local taxes to an investment in the
Fund.
DIVIDENDS AND DISTRIBUTIONS
Dividends from the Fund's investment company taxable income (whether
paid in cash or invested in additional shares) will be taxable to shareholders
as ordinary income to the extent of the Fund's earnings and profits.
Distributions of the Fund's net capital gain (whether paid in cash or invested
in additional shares) will be taxable to shareholders as long-term capital gain,
regardless of how long they have held their Fund shares.
Dividends declared by the Fund in October, November or December of any
year and payable to shareholders of record on a date in one of such months will
be deemed to have been paid by the Fund and received by the shareholders on the
record date if the dividends are paid by the Fund during the following January.
Accordingly, such dividends will be taxed to shareholders for the year in which
the record date falls.
The Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to any individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number. The Fund also is required to withhold 31% of all
dividends and capital gain distributions paid to such shareholders who otherwise
are subject to backup withholding.
PERFORMANCE INFORMATION
Total Return
Average annual total return quotations used in the Fund's advertising
and promotional materials are calculated according to the following formula:
n
P(1 + T) = ERV
where "P" equals a hypothetical initial payment of $1000; "T" equals average
annual total return; "n" equals the number of years; and "ERV" equals the ending
redeemable value at the end of the period of a hypothetical $1000 payment made
at the beginning of the period.
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication. Average
annual total return, or "T" in the above formula, is computed by finding the
average annual compounded rates of return over the period that would equate the
initial amount invested to the ending redeemable value. Average annual total
return assumes the reinvestment of all dividends and distributions.
Yield
Annualized yield quotations used in the Fund's advertising and
promotional materials are calculated by dividing the Fund's investment income
for a specified thirty-day period, net of expenses, by the average number of
shares outstanding during the period, and expressing the result as an annualized
percentage (assuming semi-annual compounding) of the net asset value per share
at the end of the period. Yield quotations are calculated according to the
following formula:
6
YIELD = 2 [(a-b + 1) - 1]
----
cd
B-28
<PAGE>
where "a" equals dividends and interest earned during the period; "b" equals
expenses accrued for the period, net of reimbursements; "c" equals the average
daily number of shares outstanding during the period that are entitled to
receive dividends and "d" equals the maximum offering price per share on the
last day of the period.
Except as noted below, in determining net investment income earned
during the period ("a" in the above formula), the Fund calculates interest
earned on each debt obligation held by it during the period by (1) computing the
obligation's yield to maturity, based on the market value of the obligation
(including actual accrued interest) on the last business day of the period or,
if the obligation was purchased during the period, the purchase price plus
accrued interest; (2) dividing the yield to maturity by 360 and multiplying the
resulting quotient by the market value of the obligation (including actual
accrued interest). Once interest earned is calculated in this fashion for each
debt obligation held by the Fund, net investment income is then determined by
totaling all such interest earned.
For purposes of these calculations, the maturity of an obligation with
one or more call provisions is assumed to be the next date on which the
obligation reasonably can be expected to be called or, if none, the maturity
date.
Other information
Performance data of the Fund quoted in advertising and other
promotional materials represents past performance and is not intended to predict
or indicate future results. The return and principal value of an investment in
the Fund will fluctuate, and an investor's redemption proceeds may be more or
less than the original investment amount. In advertising and promotional
materials the Fund may compare its performance with data published by Lipper
Analytical Services, Inc. ("Lipper") or CDA Investment Technologies, Inc.
("CDA"). The Fund also may refer in such materials to mutual fund performance
rankings and other data, such as comparative asset, expense and fee levels,
published by Lipper or CDA. Advertising and promotional materials also may refer
to discussions of a Fund and comparative mutual fund data and ratings reported
in independent periodicals including, but not limited to, The Wall Street
Journal, Money Magazine, Forbes, Business Week, Financial World and Barron's.
GENERAL INFORMATION
The Trust is a newly organized entity and has no prior business
history. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest and to divide or
combine the shares into a greater or lesser number of shares without thereby
changing the proportionate beneficial interest in the Fund. Each share
represents an interest in the Fund proportionately equal to the interest of each
other share. Upon the Trust's liquidation, all shareholders would share pro rata
in the net assets of the Fund available for distribution to shareholders. If
they deem it advisable and in the best interest of shareholders, the Board of
Trustees may create additional series of shares which differ from each other
only as to dividends. The Board of Trustees has created one series of shares,
and may create additional series in the future, which have separate assets and
liabilities. In the event more than one series were created, income and
operating expenses not specifically attributable to a particular Fund would be
allocated fairly among the Funds by the Trustees, generally on the basis of the
relative net assets of each Fund.
Rule 18f-2 under the 1940 Act provides that as to any investment
company which has two or more series outstanding and as to any matter required
to be submitted to shareholder vote, such matter is not deemed to have been
effectively acted upon unless approved by the holders of a "majority" (as
defined in the Rule) of the voting securities of each series affected by the
matter. Such separate voting requirements do not apply to the election of
Trustees or the ratification of the selection of accountants. The Rule contains
special provisions for cases in which an advisory contract is approved by one or
more, but not all, series. A change in investment policy may go into effect as
to one or more series whose holders so approve the change even though the
required vote is not obtained as to the holders of other affected series.
The Trust's custodian, State Street Bank and Trust Company, 225
Franklin Street, Boston, MA 02110 is responsible for holding the Funds' assets
and acts as the Trust's accounting services agent. The Trust's independent
accountants, McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, NY 10017,
assist in the preparation of certain reports to the Securities and Exchange
Commission and the Fund's tax returns.
At December 12, 1996, all of the Fund's outstanding shares were owned
by Messrs. Litman and Gregory.
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<PAGE>
APPENDIX
Description of Ratings
Moody's Investors Service, Inc.: Corporate Bond Ratings
Aaa--Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa---Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical modifiers "1", "2" and "3" to both the Aaa
and Aa rating classifications. The modifier "1" indicates that the security
ranks in the higher end of its generic rating category; the modifier "2"
indicates a mid-range ranking; and the modifier "3" indicates that the issue
ranks in the lower end of its generic rating category.
A--Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great period of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Standard & Poor's Corporation: Corporate Bond Ratings
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
Commercial Paper Ratings
Moody's commercial paper ratings are assessments of the issuer's
ability to repay punctually promissory obligations. Moody's employs the
following three designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers: Prime 1--highest quality; Prime
2--higher quality; Prime 3--high quality.
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment. Ratings are graded into four categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Issues assigned the highest rating, A, are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers "1", "2" and "3" to indicate the relative degree of safety. The
designation A-1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A "+" designation is applied to those issues
rated "A-1" which possess extremely strong safety characteristics. Capacity for
timely payment on issues with the designation "A-2" is strong. However, the
relative degree of safety is not as high as for issues designated A-1. Issues
carrying the designation "A-3" have a satisfactory capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effect of changes in
circumstances than obligations carrying the higher designations.
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<PAGE>
MASTERS' SELECT EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 12, 1996
<TABLE>
<S> <C>
Assets
Cash in bank .......................................................................... $100,000
Prepaid registration fees (Note 3) .................................................... 21,091
Deferred organization costs (Note 4) .................................................. 94,491
--------
Total Assets ...................................................................... $215,582
Liabilities
Payable for registration expenses and organization costs .............................. $115,582
Net Assets
Applicable to 10,000 shares of beneficial interest issued and outstanding; an unlimited
number of shares (par value $.01 authorized) ...................................... $100,000
========
Net Asset Value (Offering and Redemption Price) per share .................................. $ 10.00
========
</TABLE>
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
1. Masters' Select Equity Fund (the "Fund") is a diversified series of
Masters' Select Investment Trust (the "Trust"), a Delaware business trust
organized on August 1, 1996 and registered under the Investment Company Act
of 1940 as an open-end management investment company.
2. The Trust, on behalf of the Fund, has entered into an Investment Advisory
Agreement with Litman/Gregory Fund Advisors LLC (the "Advisor"), a
Distribution Agreement with First Fund Distributors, Inc. (the
"Distributor") and an Administration Agreement with Investment Company
Administration Corporation (the "Administrator"). The Trust, on behalf of
the Fund, has also entered into sub-advisory agreements with six investment
managers pursuant to which each investment manager provides portfolio
management and related services with respect to a segment of the Fund's
portfolio. (See "Management" in the Statement of Additional Information.)
Certain officers and Trustees of the Trust are officers and/or directors of
the Advisor, the Distributor and the Administrator.
The Advisor has agreed to waive its fees, and/or reimburse the Fund for
other operating expenses, to the extent necessary to limit the Fund's total
annual operating expenses to 1.75% of the Fund's average net assets. Any
such waivers or reimbursements are subject to repayment by the Fund in
subsequent years to the extent that the Fund's operating expenses are then
less than that 1.75% limit.
3. Prepaid registration fees are charged to income as the related shares are
issued.
4. Deferred organization costs will be amortized over a period of sixty months
from the date on which the Fund commences operations. In the event that the
original shares invested in the Fund are redeemed prior to the end of the
amortization period, the proceeds of the redemption payable in respect of
those shares will be reduced by the pro rata share (based on the
proportionate share of the original shares redeemed to the total number of
original shares outstanding at the time of redemption) of the unamortized
deferred organization costs as of the date of that redemption. In the event
the Fund is liquidated prior to the end of the amortization period the
holders of the original shares will bear the unamortized deferred
organization costs.
B-31
<PAGE>
[McGLADREY & PULLEN LOGO]
McGLADREY & PULLEN, LLP
--------------------------------------------
Certified Public Accountants and Consultants
INDEPENDENT AUDITOR'S REPORT
To the Trustees and Shareholders
Masters' Select Investment Trust
We have audited the accompanying statement of assets and liabilities of the
Masters' Select Equity Fund, a series of Masters' Select Investment Trust, as of
December 12, 1996. This financial statement is the responsibility of the Fund's
management. Our responsibility is to expres an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures related to the schedule. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Masters' Select Equity Fund
series of Masters' Select Investment Trust as of December 12, 1996, in
conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
New York, New York
December 13, 1996
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
The following financial statements are included in Part B of the
Registration Statement:
Statement of Assets and Liabilities as of December 12, 1996
Notes to Statement of Assets and Liabilities
EXHIBIT INDEX
(b) Exhibits:
(1) (a) Agreement and Declaration of Trust (1)
(b) Amendment to Agreement and Declaration of Trust
(2)
(2) By-Laws (1)
(3) Not applicable
(4) Specimen stock certificate
(5) (a) Form of Investment Advisory Agreement (2)
(b)(i) Investment Management Agreement with Davis
Selected Advisers LP
(b)(ii) Investment Management Agreement with Friess
Associates, Inc.
(b)(iii) Investment Management Agreement with
Jennison Associates Capital Corp.
(b)(iv) Investment Management Agreement with Societe
Generale Asset Management Corp.
(b)(v) Investment Management Agreement with
Southeastern Asset Management, Inc.
(b)(vi) Investment Management Agreement with Strong
Capital Management, Inc.
(6) Distribution Agreement
(7) Not applicable
(8) Custodian Agreement
(9) Administration Agreement with Investment Company
Administration Corporation (2)
(10) Opinion and consent of counsel
(11) Consent of Independent Auditors
(12) Not applicable
(13) Investment letter
(14) Individual Retirement Account forms (3)
(15) Not applicable
(16) Not applicable
(17) Financial Data Schedule (3)
(1) Previously filed as an exhibit to the Registration Statement on
Form N-1A of the Registrant (File No. 333-10015) on August 12, 1996, and
incorporated herein by reference.
(2) Previously filed as an exhibit to Pre-Effective Amendment No. 1 to
the Registration Statement on Form N-1A of the Registrant (File No. 333-10015)
on November 15, 1996, and incorporated herein by reference.
(3) To be filed by amendment.
Item 25. Persons Controlled by or under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities.
Two.
Item 27. Indemnification.
Article VI of Registrant's By-Laws states as follows:
Section 1. AGENTS, PROCEEDINGS AND EXPENSES. For the purpose of this
Article, "agent" means any person who is or was a Trustee, officer, employee or
other agent of this Trust or is or was serving at the request of this Trust as a
Trustee, director, officer, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise or was a
Trustee, director, officer, employee or agent of a foreign or domestic
corporation which was a predecessor of another enterprise at the request of such
predecessor entity; "proceeding" means any threatened, pending or
C-1
<PAGE>
completed action or proceeding, whether civil, criminal, administrative or
investigative; and "expenses" includes without limitation attorney's fees and
any expenses of establishing a right to indemnification under this Article.
Section 2. ACTIONS OTHER THAN BY TRUST. This Trust shall indemnify any
person who was or is a party or is threatened to be made a party to any
proceeding (other than an action by or in the right of this Trust) by reason of
the fact that such person is or was an agent of this Trust, against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with such proceeding, if it is determined that person acted in
good faith and reasonably believed:
(a) in the case of conduct in his official capacity as a Trustee
of the Trust, that his conduct was in the Trust's best
interests, and
(b) in all other cases, that his conduct was at least not opposed
to the Trust's best interests, and
(c) in the case of a criminal proceeding, that he had no
reasonable cause to believe the conduct of that person was
unlawful.
The termination of any proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent shall not of
itself create a presumption that the person did not act in good faith and in a
manner which the person reasonably believed to be in the best interests of this
Trust or that the person had reasonable cause to believe that the person's
conduct was unlawful.
Section 3. ACTIONS BY THE TRUST. This Trust shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action by or in the right of this Trust to procure a
judgment in its favor by reason of the fact that that person is or was an agent
of this Trust, against expenses actually and reasonably incurred by that person
in connection with the defense or settlement of that action if that person acted
in good faith, in a manner that person believed to be in the best interests of
this Trust and with such care, including reasonable inquiry, as an ordinarily
prudent person in a like position would use under similar circumstances.
Section 4. EXCLUSION OF INDEMNIFICATION. Notwithstanding any provision
to the contrary contained herein, there shall be no right to indemnification for
any liability arising by reason of willful misfeasance, bad faith, gross
negligence, or the reckless disregard of the duties involved in the conduct of
the agent's office with this Trust.
No indemnification shall be made under Sections 2 or 3 of this Article:
(a) In respect of any claim, issue, or matter as to which that
person shall have been adjudged to be liable on the basis that
personal benefit was improperly received by him, whether or
not the benefit resulted from an action taken in the person's
official capacity; or
(b) In respect of any claim, issue or matter as to which that
person shall have been adjudged to be liable in the
performance of that person's duty to this Trust, unless and
only to the extent that the court in which that action was
brought shall determine upon application that in view of all
the circumstances of the case, that person was not liable by
reason of the disabling conduct set
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<PAGE>
forth in the preceding paragraph and is fairly and reasonably
entitled to indemnity for the expenses which the court shall
determine; or
(c) of amounts paid in settling or otherwise disposing of a
threatened or pending action, with or without court approval,
or of expenses incurred in defending a threatened or pending
action which is settled or otherwise disposed of without court
approval, unless the required approval set forth in Section 6
of this Article is obtained.
Section 5. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of
this Trust has been successful on the merits in defense of any proceeding
referred to in Sections 2 or 3 of this Article or in defense of any claim, issue
or matter therein, before the court or other body before whom the proceeding was
brought, the agent shall be indemnified against expenses actually and reasonably
incurred by the agent in connection therewith, provided that the Board of
Trustees, including a majority who are disinterested, non-party Trustees, also
determines that based upon a review of the facts, the agent was not liable by
reason of the disabling conduct referred to in Section 4 of this Article.
Section 6. REQUIRED APPROVAL. Except as provided in Section 5 of this
Article, any indemnification under this Article shall be made by this Trust only
if authorized in the specific case on a determination that indemnification of
the agent is proper in the circumstances because the agent has met the
applicable standard of conduct set forth in Sections 2 or 3 of this Article and
is not prohibited from indemnification because of the disabling conduct set
forth in Section 4 of this Article, by:
(a) A majority vote of a quorum consisting of Trustees who are not
parties to the proceeding and are not interested persons of
the Trust (as defined in the Investment Company Act of 1940);
or
(b) A written opinion by an independent legal counsel.
Section 7. ADVANCE OF EXPENSES. Expenses incurred in defending any
proceeding may be advanced by this Trust before the final disposition of the
proceeding upon a written undertaking by or on behalf of the agent, to repay the
amount of the advance if it is ultimately determined that he or she is not
entitled to indemnification, together with at least one of the following as a
condition to the advance: (i)security for the undertaking; or (ii) the existence
of insurance protecting the Trust against losses arising by reason of any lawful
advances; or (iii) a determination by a majority of a quorum of Trustees who are
not parties to the proceeding and are not interested persons of the Trust, or by
an independent legal counsel in a written opinion, based on a review of readily
available facts that there is reason to believe that the agent ultimately will
be found entitled to indemnification. Determinations and authorizations of
payments under this Section must be made in the manner specified in Section 6 of
this Article for determining that the indemnification is permissible.
Section 8. OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article
shall affect any right to indemnification to which persons other than Trustees
and officers of this Trust or any subsidiary hereof may be entitled by contract
or otherwise.
Section 9. LIMITATIONS. No indemnification or advance shall be made
under this Article, except as provided in Sections 5 or 6 in any circumstances
where it appears:
C-3
<PAGE>
(a) that it would be inconsistent with a provision of the
Agreement and Declaration of Trust of the Trust, a resolution
of the shareholders, or an agreement in effect at the time of
accrual of the alleged cause of action asserted in the
proceeding in which the expenses were incurred or other
amounts were paid which prohibits or otherwise limits
indemnification; or
(b) that it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
Section 10. INSURANCE. Upon and in the event of a determination by the
Board of Trustees of this Trust to purchase such insurance, this Trust shall
purchase and maintain insurance on behalf of any agent of this Trust against any
liability asserted against or incurred by the agent in such capacity or arising
out of the agent's status as such, but only to the extent that this Trust would
have the power to indemnify the agent against that liability under the
provisions of this Article and the Agreement and Declaration of Trust of the
Trust.
Section 11. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This Article does not
apply to any proceeding against any Trustee, investment manger or other
fiduciary of an employee benefit plan in that person's capacity as such, even
though that person may also be an agent of this Trust as defined in Section 1 of
this Article. Nothing contained in this Article shall limit any right to
indemnification to which such a Trustee, investment manager, or other fiduciary
may be entitled by contract or otherwise which shall be enforceable to the
extent permitted by applicable law other than this Article.
Item 28. Business and Other Connections of Investment Adviser.
The information required by this item is contained in the Form ADV of
the following entities and is incorporated herein by reference:
Name of investment adviser File No.
-------------------------- --------
Litman/Gregory Fund Advisors, LLC 801-52710
Davis Selected Advisers, L.P. 801-31648
Southeastern Asset Management, Inc. 801-11123
Jennison Associates Capital Corp. 801-5608
Freiss and Associates 801-16178
Strong Capital Management, Inc. 801-10724
Societe Generale Asset Management 801-36486
Item 29. Principal Underwriters.
(a) The Registrant's principal underwriter also acts as principal
underwriter for the following investment companies:
Guiness Flight Investment Funds, Inc.
Jurika & Voyles Mutual Funds
Hotchkis and Wiley Funds
Kayne Anderson Mutual Funds
Professionally Managed Portfolios
Rainier Investment Management Mutual Funds
RNC Liquid Assets Fund, Inc.
O'Shaughnessy Funds, Inc.
(b) The following information is furnished with respect to the officers
and directors of First Fund Distributors, Inc.:
C-4
<PAGE>
Position and Offices Position and
Name and Principal with Principal Offices with
Business Address Underwriter Registrant
- ---------------- -------------------- ------------
Robert H. Wadsworth President Assistant
4455 E. Camelback Road and Treasurer Secretary
Suite 261E
Phoenix, AZ 85018
Eric M. Banhazl Vice President Assistant
2025 E. Financial Way Treasurer
Glendora, CA 91741
Steven J. Paggioli Vice President & Assistant
479 West 22nd Street Secretary Secretary
New York, New York 10011
(c) Not applicable.
Item 30. Location of Accounts and Records.
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the rules promulgated thereunder are in the possession of the following persons:
(a) the documents required to be maintained by paragraph (4) of Rule
31a-1(b) will be maintained by the Registrant;
(b) the documents required to be maintained by paragraphs (5), (6),
(10) and (11) of Rule 31a-1(b) will be maintained by the respective investment
managers:
Davis Selected Advisers, L.P., 124 East Marcy Street, Sante Fe, NM
87501 Southeastern Asset Management, Inc., 6075 Poplar Avenue, Memphis,
TN 38119
Jennison Associates Capital Corp., 466 Lexington Avenue, New York, NY
10017
Freiss and Associates, 3711 Kenett Pike, Greenville, DE 19807
Strong Capital Management, Inc., 100 Heritage Reserve, Menomonee Falls,
WI 53201
Societe Generale Asset Management, 1221 Avenue of the Americas, New
York, NY 10020
(c) all other documents will be maintained by Registrant's custodian,
State Street Bank and Trust Company, 225 Franklin Street, Boston, MA 02110.
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
Registrant hereby undertakes to:
(a) File a post-effective amendment, using financial statements
which may not be certified, within four to six months of the
effective date of this Registration Statement; and
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<PAGE>
(b) Furnish each person to whom a Prospectus is delivered a copy
of Registrant's latest annual request to shareholders, upon
request and without charge.
(c) If requested to do so by the holders of at least 10% of the
Trust's outstanding shares, call a meeting of shareholders for
the purposes of voting upon the question of removal of a
director and assist in communications with other shareholders.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
the Registration Statement on Form N-1A of Masters' Select Investment Trust to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Orinda and State of California on the 16th day of December, 1996,.
MASTERS' SELECT INVESTMENT TRUST
By /s/ Kenneth E. Gregory
----------------------
Kenneth E. Gregory
President
This Amendment to the Registration Statement on Form N-1A of Masters'
Select Investment Trust has been signed below by the following persons in the
capacities indicated on December 16, 1996.
<TABLE>
<S> <C>
/s/ Kenneth E. Gregory President and Trustee
- ---------------------------------------
Kenneth E. Gregory
/s/ Craig A. Litman Trustee
- ---------------------------------------
Craig A. Litman
Trustee
- ---------------------------------------
Albert G. Battle
Trustee
- ---------------------------------------
Frederick A. Eigenbrod, Jr.
/s/ Taylor M. Welz Trustee
- ---------------------------------------
Taylor M. Welz
/s/ John Coughlan Chief Financial and Accounting Officer
- ---------------------------------------
John Coughlan
</TABLE>
C-7
<PAGE>
EXHIBIT INDEX
EXHIBIT INDEX
Exhibits:
EX-99.B1.1 Agreement and Declaration of Trust (1)
EX-99.B1.2 Amendment to Agreement and Declaration of Trust (2)
EX-99.B2 By-Laws (1)
EX-99.B3 Not applicable
EX-99.B4 Specimen stock certificate
EX-99.B5.1 Form of Investment Advisory Agreement (2)
EX-99.B5.2(i) Investment Management Agreement with Davis Selected Advisers
LP
EX-99.B5.2(ii) Investment Management Agreement with Friess Associates, Inc.
EX-99.B5.2(iii) Investment Management Agreement with Jennison Associates
Capital Corp.
EX-99.B5.2iv) Investment Management Agreement with Societe Generale Asset
Management Corp.
EX-99.B5.2(v) Investment Management Agreement with Southeastern Asset
Management, Inc.
EX-99.B5.2(vi) Investment Management Agreement with Strong Capital
Management, Inc.
EX-99.B6 Distribution Agreement
EX-99.B7 Not applicable
EX-99.B8 Custodian Agreement
EX-99.B9 Administration Agreement with Investment Company
Administration Corporation (2)
EX-99.B10 Opinion and consent of counsel
EX-99.B11 Consent of Independent Auditors
EX-99.B12 Not applicable
EX-99.B13 Investment letter
EX-99.B14 Individual Retirement Account forms (3)
EX-99.B15 Not applicable
EX-99.B16 Not applicable
EX-99.B17 Financial Data Schedule (3)
(1) Previously filed as an exhibit to the Registration Statement on
Form N-1A of the Registrant (File No. 333-10015) on August 12, 1996, and
incorporated herein by reference.
(2) Previously filed as an exhibit to Pre-Effective Amendment No. 1 to
the Registration Statement on Form N-1A of the Registrant (File No. 333-10015)
on November 15, 1996, and incorporated herein by reference.
(3) To be filed by amendment.
MASTERS' SELECT EQUITY FUND
a series of
Masters' Select Investment Trust
(A Delaware Business Trust)
SHARES OF BENEFICIAL INTEREST
ACCOUNT NO.
THIS CERTIFIES THAT CUSIP 575923107
is the owner of _______________ shares of beneficial interest in the Masters'
Select Equity Fund (the "Fund") series of Masters' Select Investment Trust (the
"Trust"), fully paid and nonassessable, the said shares being issued and held
subject to the provisions of the Agreement and Declaration of Trust of the
Trust, and all amendments thereto, copies of which are on file with the
Secretary of State of Delaware. The said owner by accepting this certificate
agrees to and is bound by all of the said provisions. The shares represented
hereby are transferable in writing by the owner thereof in person or by attorney
upon surrender of this certificate to the Fund properly endorsed for transfer.
This certificate is executed on behalf of the Trustees of the Trust as Trustees
and not individually and the obligations hereof are not binding upon any of the
Trustees, officers or shareholders individually but are binding only upon the
assets and property of the Masters' Select Equity Fund series of the Trust.
Dated,
SEAL
TREASURER PRESIDENT
<PAGE>
For value received, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------------------
| |
| |
- -------------------------------------------
- --------------------------------------------------------------------------------
(Please print or typewrite name and address, including zip code, of assignee)
- --------------------------------------------------------------------------------
___________Shares of beneficial interest represented by the within Certificate,
and do hereby irrevocably constitute and appoint
- --------------------------------------------------------------------------------
________________________________________________________ Attorney to transfer
the said shares on the books of Professionally Managed Portfolios with full
power of substitution in the premises.
Dated, _________________
________________________________
Owner
Signature guaranteed by:
- --------------------------------------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE MASTERS' SELECT EQUITY FUND
MASTERS' SELECT INVESTMENT TRUST
INVESTMENT MANAGEMENT AGREEMENT
-------------------------------
THIS INVESTMENT MANAGEMENT AGREEMENT is made as of the ___ day
of ___________, 199__, by and between LITMAN/GREGORY FUND ADVISORS, LLC
(hereinafter called the "Advisor") and DAVIS SELECTED ADVISERS LP and its
affiliates (hereinafter called "Manager").
WITNESSETH:
WHEREAS, the Advisor has been retained as the investment
adviser to The Masters' Select Equity Fund (the "Fund"), a series of Masters'
Select Investment Trust (the "Trust"), an open-end management investment
company, registered as such under the Investment Company Act of 1940, as amended
(the "Investment Company Act"); and
WHEREAS, the Advisor has been authorized by the Trust to
retain one of more investment advisers (each an "investment manager") to serve
as portfolio managers for a specified portion of the Fund's assets (the
"Allocated Portion"); and
WHEREAS, Manager is registered as an investment adviser under
the Investment Advisers Act of 1940, as amended, and is engaged in the business
of supplying investment management services as an independent contractor; and
WHEREAS, the Fund and the Advisor desire to retain Manager as
an investment manager to render portfolio advice and services to the Fund
pursuant to the terms and provisions of this Agreement, and Manager desires to
furnish said advice and services; and
WHEREAS, the Trust and the Fund are third party beneficiaries
of such arrangements;
NOW, THEREFORE, in consideration of the covenants and the
mutual promises hereinafter set forth, the parties to this Agreement, which
shall include the Trust and the Fund for purposes of the indemnification
provisions of Section 10 hereto, intending to be legally bound hereby, mutually
agree as follows:
1. Appointment of Manager.
(a) The Advisor hereby employs Manager, and Manager
hereby accepts such employment, to render investment advice and related services
with respect to an Allocated Portion of the assets of the Fund for the period
and on the terms set
<PAGE>
forth in this Agreement, subject to the supervision and direction of the Advisor
and the Trust's Board of Trustees.
(b) Manager's employment shall be solely with respect
to an Allocated Portion of the Fund's assets, such Allocated Portion to be
specified by the Advisor and subject to periodic increases or decreases at the
Advisor's discretion.
2. Duties of Manager.
(a) General Duties. Manager shall act as one of
several investment managers to the Fund and shall invest Manager's Allocated
Portion of the assets of the Fund in accordance with the investment objectives,
policies, and restrictions of the Fund as set forth in the Fund's and Trust's
governing documents, including, without limitation, the Trust's Agreement and
Declaration of Trust and By-Laws; the Fund's prospectus, statement of additional
information, and undertakings; and such other limitations, policies, and
procedures as the Advisor or the Trustees of the Trust may impose from time to
time in writing to Manager. In providing such services, Manager shall at all
times adhere to the provisions and restrictions contained in the federal
securities laws, applicable state securities laws, the Internal Revenue Code,
and other applicable law.
Without limiting the generality of the foregoing, Manager
shall: (i) furnish the Fund with advice and recommendations with respect to the
investment of the Manager's Allocated Portion of the Fund's assets, (ii) effect
the purchase and sale of portfolio securities for Manager's Allocated Portion;
(iii) manage and oversee the investments of the Manager's Allocated Portion,
subject to the ultimate supervision and direction of the Trust's Board of
Trustees; (iv) vote proxies, file required Section 13 ownership reports with
respect to Manager's Allocated Portion, and take other actions with respect to
the securities in Manager's Allocated Portion; (v) maintain the books and
records required by the Investment Company Act, the Investment Advisers Act of
1940, or other applicable law to be maintained with respect to the securities in
Manager's Allocated Portion; (vi) furnish reports, statements and other data on
securities, economic conditions and other matters related to the investment of
the Fund's assets which the Advisor, Trustees or the officers of the Trust may
reasonably request; and (vi) render to the Trust's Board of Trustees such
periodic and special reports with respect to Manager's Allocated Portion as the
Board may reasonably request.
(b) Brokerage. With respect to Manager's Allocated
Portion, Manager shall be responsible for broker-dealer selection and for
negotiation of brokerage commission rates, provided that Manager shall not
direct orders to an affiliated person of the Manager or any other investment
manager without general prior authorization to use such affiliated broker or
dealer by the Trust's Board of Trustees. Manager's primary
-2-
<PAGE>
consideration in effecting a securities transaction will be execution at the
most favorable price. In selecting a broker-dealer to execute each particular
transaction, Manager may take the following into consideration: the best net
price available; the reliability, integrity and financial condition of the
broker-dealer; the size of and difficulty in executing the order; and the value
of the expected contribution of the broker-dealer to the investment performance
of the Fund on a continuing basis. The price to the Fund in any transaction may
be less favorable than that available from another broker-dealer if the
difference is reasonably justified by other aspects of the portfolio execution
services offered. In accordance with Section 11(a) of the 1934 Act and Rule
11a2-2(T) thereunder, and subject to any other applicable laws and regulations
including Section 17(e) of the Act and Rule 17e-1 thereunder, Manager may engage
its affiliates, the Advisor and its affiliates or any other investment manager
to the Trust and its respective affiliates, as broker-dealers or futures
commissions merchants to effect Fund transactions in securities and other
investments for the Fund.
Subject to such policies as the Advisor and the Board of
Trustees of the Trust may determine, Manager shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Fund to pay a broker or dealer that
provides (directly or indirectly) brokerage or research services to Manager an
amount of commission for effecting a portfolio transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction, if Manager determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or Manager's or Advisor's overall responsibilities with
respect to the Fund. Manager is further authorized to allocate the orders placed
by it on behalf of the Fund to such brokers or dealers who also provide research
or statistical material, or other services, to the Trust, the Advisor, or any
affiliate of either. Such allocation shall be in such amounts and proportions as
Manager shall determine, and Manager shall report on such allocations regularly
to the Advisor and the Trust, indicating the broker-dealers to whom such
allocations have been made and the basis therefor. Manager is also authorized to
consider sales of shares of the Fund as a factor in the selection of brokers or
dealers to execute portfolio transactions, subject to the requirements of best
execution, i.e., that such brokers or dealers are able to execute the order
promptly and at the best obtainable securities price.
On occasions when Manager deems the purchase or sale of a
security to be in the best interest of the Fund as well as other clients of
Manager, Manager, to the extent permitted by applicable laws and regulations,
may aggregate the securities to be so purchased or sold in order to obtain the
most favorable price or lower brokerage commissions and the most efficient
-3-
<PAGE>
execution. In such event, allocation of the securities so purchased or sold, as
well as the expenses incurred in the transaction, will be made by Manager in the
manner it considers to be the most equitable and consistent with its fiduciary
obligations to the Fund and to such other clients.
3. Representations of Manager.
(a) Manager shall maintain all licenses and
registrations necessary to perform its duties hereunder in good order.
(b) Manager shall conduct its operations at all times
in conformance with the Investment Advisers Act of 1940, the Investment Company
Act, and any other applicable state and/or self-regulatory organization
regulations.
(c) Manager shall maintain errors and omissions
insurance in a reasonable amount throughout the term of this Agreement.
4. Independent Contractor. Manager shall, for all purposes
herein, be deemed to be an independent contractor, and shall, unless otherwise
expressly provided and authorized to do so, have no authority to act for or
represent the Trust, the Fund, or the Advisor in any way, or in any way be
deemed an agent for the Trust, the Fund, or the Advisor. It is expressly
understood and agreed that the services to be rendered by Manager to the Fund
under the provisions of this Agreement are not to be deemed exclusive, and
Manager shall be free to render similar or different services to others so long
as its ability to render the services provided for in this Agreement shall not
be impaired thereby.
5. Manager's Personnel. Manager shall, at its own expense,
maintain such staff and employ or retain such personnel and consult with such
other persons as it shall from time to time determine to be necessary to the
performance of its obligations under this Agreement. Without limiting the
generality of the foregoing, the staff and personnel of Manager shall be deemed
to include persons employed or retained by Manager to furnish statistical
information, research, and other factual information, advice regarding economic
factors and trends, information with respect to technical and scientific
developments, and such other information, advice, and assistance as Manager, the
Advisor or the Trust's Board of Trustees may desire and reasonably request.
6. Expenses.
(a) Manager shall be responsible for (i) providing
the personnel, office space and equipment reasonably necessary to fulfill its
obligations under this Agreement, and (ii) the costs of any special meetings of
the Fund's shareholders or the Trust's Board of Trustees convened for the
primary benefit of Manager, or its fair share of the costs of any special
-4-
<PAGE>
meetings convened for the benefit of Manager as well as for other purposes.
(b) To the extent Manager incurs any costs by
assuming expenses which are an obligation of the Advisor or the Fund, the
Advisor or the Fund shall promptly reimburse the Manager for such costs and
expenses. To the extent Manager performs services for which the Fund or the
Advisor is obligated to pay, Manager shall be entitled to reimbursement in such
amount as shall be negotiated between Manager and the Advisor.
7. Investment Management Fee.
(a) The Advisor shall pay to Manager, and Manager
agrees to accept, as full compensation for all investment management and
advisory services furnished or provided to the Fund pursuant to this Agreement,
an annual management fee based on Manager's Allocated Portion, as such Allocated
Portion may be adjusted from time to time. Such fee shall be equal to [ ]% of
the average daily net assets of the Fund attributable to the Manager's Allocated
Portion, computed on the value of such net assets as of the close of business
each day.
(b) The management fee shall be paid by the Advisor
to Manager monthly in arrears on the first business day of each month.
(c) The initial fee under this Agreement shall be
payable on the tenth business day of the first month following the effective
date of this Agreement and shall be prorated as set forth below. If this
Agreement is terminated prior to the end of any month, the fee to Manager shall
be prorated for the portion of any month in which this Agreement is in effect
which is not a complete month according to the proportion which the number of
calendar days in the month during which the Agreement is in effect bears to the
number of calendar days in the month, and shall be payable within ten (10) days
after the date of termination.
(d) The fee payable to Manager under this Agreement
will be reduced to the extent of any amount owed by Manager to the Advisor or
the Fund.
(e) Manager voluntarily may reduce any portion of the
compensation or reimbursement of expenses due to it pursuant to this Agreement
and may agree to make payments to limit the expenses which are the
responsibility of the Advisor or the Fund under this Agreement. Any such
reduction or payment shall be applicable only to such specific reduction or
payment and shall not constitute an agreement to reduce any future compensation
or reimbursement due to Manager hereunder or to continue future payments. Any
such reduction will be agreed to prior to accrual of the related expense or fee
and will be estimated daily and reconciled and paid on a monthly basis.
-5-
<PAGE>
8. Conflicts with Trust's Governing Documents and Applicable
Laws. Nothing herein contained shall be deemed to require the Trust or the Fund
to take any action contrary to the Trust's Agreement and Declaration of Trust,
By-Laws, or any applicable statute or regulation, or to relieve or deprive the
Board of Trustees of the Trust of its responsibility for and control of the
conduct of the affairs of the Trust and the Fund. In this connection, Manager
acknowledges that the Advisor and the Trust's Board of Trustees retain ultimate
plenary authority over the Fund, including the Allocated Portion, and may take
any and all actions necessary and reasonable to protect the interests of
shareholders, with notice to and in coordination with Manager.
9. Reports and Access. Manager agrees to supply such
information to the Advisor and to permit such compliance inspections by the
Advisor or the Fund as shall be reasonably necessary to permit the administrator
to satisfy its obligations and respond to the reasonable requests of the
Trustees.
10. Standard of Care, Liability and Indemnification.
(a) Manager shall exercise reasonable care and
prudence in fulfilling its obligations under this Agreement.
(b) Manager shall have responsibility for the
accuracy and completeness (and liability for the lack thereof) of the statements
furnished by Manager for use by the Advisor in the Fund's offering materials
(including the prospectus, the statement of additional information, advertising
and sales materials) that pertain to Manager and the investment of Manager's
Allocated Portion of the Fund. Manager shall have no responsibility or liability
with respect to other disclosures.
(c) In the absence of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the obligations or duties hereunder
on the part of Manager, Manager shall not be subject to liability to the
Advisor, the Trust or the Fund or to any shareholder of the Fund for any act or
omission in the course of, or connected with, rendering services hereunder or
for any losses that may be sustained in the purchase, holding or sale of any
security by the Fund.
(d) Each party to this Agreement, including the
Trust, shall indemnify and hold harmless the other party and the shareholders,
directors, officers and employees of the other party (any such person, an
"Indemnified Party") against any loss, liability, claim, damage or expense
(including the reasonable cost of investigating and defending any alleged loss,
liability, claim, damage or expenses and reasonable counsel fees incurred in
connection therewith) arising out of the Indemnified Party's performance or
non-performance of any duties under this Agreement provided, however, that
nothing herein shall be deemed to protect any Indemnified Party against any
liability to which such Indemnified Party would otherwise be subject by reason
of willful misfeasance, bad faith or negligence in the performance of duties
-6-
<PAGE>
hereunder or by reason of reckless disregard of obligations and duties under
this Agreement.
(e) No provision of this Agreement shall be construed
to protect any Trustee or officer of the Trust, or officer of the Advisor, from
liability in violation of Sections 17(h) and (i) of the Investment Company Act.
11. Non-Exclusivity; Trading for Manager's Own Account. The
Advisor's employment of Manager is not an exclusive arrangement. The Advisor
anticipates that it will employ other individuals or entities to furnish it with
the services provided for herein. Likewise, Manager may act as investment
adviser for any other person, and shall not in any way be limited or restricted
from buying, selling or trading any securities for its or their own accounts or
the accounts of others for whom it or they may be acting, provided, however,
that Manager expressly represents that it will undertake no activities which
will adversely affect the performance of its obligations to the Fund under this
Agreement; and provided further that Manager will adhere to a code of ethics
governing employee trading and trading for proprietary accounts that conforms to
the requirements of the Investment Company Act and the Investment Advisers Act
of 1940, which has been provided to the Board of Trustees of the Trust.
12. Term.
(a) This Agreement shall become effective at the time
the Fund commences operations pursuant to an effective amendment to the Trust's
Registration Statement under the Securities Act of 1933 and shall remain in
effect for a period of two (2) years, unless sooner terminated as hereinafter
provided. This Agreement shall continue in effect thereafter for additional
periods not exceeding one (l) year so long as such continuation is approved for
the Fund at least annually by (i) the Board of Trustees of the Trust or by the
vote of a majority of the outstanding voting securities of the Fund and (ii) the
vote of a majority of the Trustees of the Trust who are not parties to this
Agreement nor interested persons thereof, cast in person at a meeting called for
the purpose of voting on such approval, and (iii) the Advisor. The terms
"majority of the outstanding voting securities" and "interested persons" shall
have the meanings as set forth in the Investment Company Act.
(b) The Fund and its distributor may use the name
"Davis Selected Advisers LP" or a derivation of such name including the words
"Davis" and/or "Davis Selected Advisers" only for Fund purposes and only so long
as this Agreement or any extension, renewal or amendment hereof remains in
effect. Within sixty (60) days from such time as this Agreement shall no longer
be in effect, the Fund shall cease to use such a name or any other name
connected with Manager.
-7-
<PAGE>
13. Termination; No Assignment.
(a) This Agreement may be terminated by the Advisor
or the Trust on behalf of the Fund at any time without payment of any penalty,
by the Board of Trustees of the Trust or by vote of a majority of the
outstanding voting securities of a Fund, upon sixty (60) days' written notice to
Manager, and by Manager upon sixty (60) days' written notice to the Advisor. In
the event of a termination, Manager shall cooperate in the orderly transfer of
the Fund's affairs and, at the request of the Board of Trustees, transfer any
and all books and records of the Fund maintained by Manager on behalf of the
Fund which are not otherwise available to the Fund.
(b) This Agreement shall terminate automatically in
the event of any transfer or assignment thereof, as defined in the Investment
Company Act.
14. Severability. If any provision of this Agreement shall be
held or made invalid by a court decision, statute or rule, or shall be otherwise
rendered invalid, the remainder of this Agreement shall not be affected thereby.
15. Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect.
16. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California without giving
effect to the conflict of laws principles thereof; provided that nothing herein
shall be construed to preempt, or to be inconsistent with, any federal law,
regulation or rule, including the Investment Company Act and the Investment
Advisors Act of 1940 and any rules and regulations promulgated thereunder.
17. Notice. Any notice that is required to be given by the
parties to each other under the terms of this Agreement shall be in writing,
delivered, or mailed postpaid to the other party, or transmitted by facsimile
with acknowledgment of receipt, to the parties at the following addresses or
facsimile numbers, which may from time to time be changed by the parties by
notice to the other party:
(a) If to Manager:
Davis Selected Advisers LP
124 East Marcy Street
Santa Fe, NM 87501
Attention: Edward A. Leskowicz, Jr.
Telephone: (505)820-3039
Facsimile: (505)820-3002
-8-
<PAGE>
(b) If to the Advisor:
Litman/Gregory Fund Advisors, LLC
4 Orinda Way, Suite 230-D
Orinda, California 94563
Attention: Kenneth L. Gregory
Telephone: (510)254-8999
Facsimile: (510)254-0335
(c) If to the Trust:
Masters' Select Investment Trust
4 Orinda Way, Suite 230-D
Orinda, California 94563
Attention: Kenneth L. Gregory
Telephone: (510)254-8999
Facsimile: (510)254-0335
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their duly authorized officers, all on the day
and year first above written.
LITMAN/GREGORY FUND DAVIS SELECTED ADVISERS LP
ADVISORS, LLC
By:______________________________ By:_________________________________
_________________________________ ____________________________________
_________________________________ ____________________________________
As a Third Party Beneficiary,
MASTERS' SELECT INVESTMENT TRUST
on behalf of
THE MASTERS' SELECT EQUITY FUND
By:______________________________
_________________________________
_________________________________
-9-
THE MASTERS SELECT EQUITY FUND
MASTERS SELECT TRUST
INVESTMENT MANAGEMENT AGREEMENT
-------------------------------
THIS INVESTMENT MANAGEMENT AGREEMENT is made as of the ___ day
of ___________, 199__, by and between LITMAN/GREGORY FUND ADVISORS, LLC
(hereinafter called the "Advisor") and FRIESS ASSOCIATES, INC. (hereinafter
called "Manager").
WITNESSETH:
WHEREAS, the Advisor has been retained as the investment
adviser to The Masters Select Equity Fund (the "Fund"), a series of Masters
Select Trust (the "Trust"), an open-end management investment company,
registered as such under the Investment Company Act of 1940, as amended (the
"Investment Company Act"); and
WHEREAS, the Advisor has been authorized by the Trust to
retain one of more investment advisers (each an "investment manager") to serve
as portfolio managers for a specified portion of the Fund's assets (the
"Allocated Portion"); and
WHEREAS, Manager is registered as an investment adviser under
the Investment Advisers Act of 1940, as amended, and is engaged in the business
of supplying investment management services as an independent contractor; and
WHEREAS, the Fund and the Advisor desire to retain Manager as
an investment manager to render portfolio advice and services to the Fund
pursuant to the terms and provisions of this Agreement, and Manager desires to
furnish said advice and services; and
WHEREAS, the Trust and the Fund are third party beneficiaries
of such arrangements;
NOW, THEREFORE, in consideration of the covenants and the
mutual promises hereinafter set forth, the parties to this Agreement, which
shall include the Trust and the Fund for purposes of the indemnification
provisions of Section 11 hereto, intending to be legally bound hereby, mutually
agree as follows:
1. Appointment of Manager.
(a) The Advisor hereby employs Manager, and Manager
hereby accepts such employment, to render investment advice and related services
with respect to an Allocated Portion of the assets of the Fund for the period
and on the terms set forth in this Agreement, subject to the supervision and
direction of the Advisor and the Trust's Board of Trustees.
<PAGE>
(b) Manager's employment shall be solely with respect
to an Allocated Portion of the Fund's assets, such Allocated Portion to be
specified by the Advisor and subject to periodic increases or decreases at the
Advisor's discretion.
2. Duties of Manager.
(a) General Duties. Manager shall act as one of
several investment managers to the Fund and shall invest Manager's Allocated
Portion of the assets of the Fund in accordance with the investment objectives,
policies and restrictions of the Fund as set forth in the Fund's and Trust's
governing documents, including, without limitation, the Trust's Agreement and
Declaration of Trust and By-Laws; the Fund's prospectus, statement of additional
information and undertakings; and such other limitations, policies and
procedures as the Advisor or the Trustees of the Trust may impose from time to
time in writing to Manager. In providing such services, Manager shall at all
times adhere to the provisions and restrictions contained in the federal
securities laws, applicable state securities laws, the Internal Revenue Code,
and other applicable law.
Without limiting the generality of the foregoing, Manager
shall: (i) furnish the Fund with advice and recommendations with respect to the
investment of the Manager's Allocated Portion of the Fund's assets, (ii) effect
the purchase and sale of portfolio securities for Manager's Portfolio
Allocation; (iii) manage and oversee the investments of the Manager's Portfolio
Allocation, subject to the ultimate supervision and direction of the Trust's
Board of Trustees; (iv) vote proxies, file required ownership reports, and take
other actions with respect to the securities in Manager's Portfolio Allocation;
(v) maintain the books and records required to be maintained with respect to the
securities in Manager's Portfolio Allocation; (vi) furnish reports, statements
and other data on securities, economic conditions and other matters related to
the investment of the Fund's assets which the Advisor, Trustees or the officers
of the Trust may reasonably request; and (vi) render to the Trust's Board of
Trustees such periodic and special reports with respect to Manager's Portfolio
Allocation as the Board may reasonably request.
(b) Brokerage. With respect to Manager's Allocated
Portion, Manager shall be responsible for broker-dealer selection and for
negotiation of brokerage commission rates, provided that Manager shall not
direct orders to an affiliated person of the Manager [or any other investment
manager] without general prior authorization to use such affiliated broker or
dealer by the Trust's Board of Trustees. Manager's primary consideration in
effecting a securities transaction will be execution at the most favorable
price. In selecting a broker-dealer to execute each particular transaction,
Manager may take the following into consideration: the best net price available;
the reliability, integrity and financial condition of the broker-dealer; the
size of and difficulty in executing the order; and
-2-
<PAGE>
the value of the expected contribution of the broker-dealer to the investment
performance of the Fund on a continuing basis. The price to the Fund in any
transaction may be less favorable than that available from another broker-dealer
if the difference is reasonably justified by other aspects of the portfolio
execution services offered.
Subject to such policies as the Advisor and the Board of
Trustees of the Trust may determine, Manager shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Fund to pay a broker or dealer that
provides (directly or indirectly) brokerage or research services to the Advisor
an amount of commission for effecting a portfolio transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction, if Manager determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or Manager's or Advisor's overall responsibilities with
respect to the Fund. Manager is further authorized to allocate the orders placed
by it on behalf of the Fund to such brokers or dealers who also provide research
or statistical material, or other services, to the Trust, the Advisor, or any
affiliate of either. Such allocation shall be in such amounts and proportions as
Manager shall determine, and Manager shall report on such allocations regularly
to the Advisor and the Trust, indicating the broker-dealers to whom such
allocations have been made and the basis therefor. Manager is also authorized to
consider sales of shares of the Fund as a factor in the selection of brokers or
dealers to execute portfolio transactions, subject to the requirements of best
execution, i.e., that such brokers or dealers are able to execute the order
promptly and at the best obtainable securities price.
On occasions when Manager deems the purchase or sale of a
security to be in the best interest of the Fund as well as other clients of
Manager, Manager, to the extent permitted by applicable laws and regulations,
may aggregate the securities to be so purchased or sold in order to obtain the
most favorable price or lower brokerage commissions and the most efficient
execution. In such event, allocation of the securities so purchased or sold, as
well as the expenses incurred in the transaction, will be made by Manager in the
manner it considers to be the most equitable and consistent with its fiduciary
obligations to the Funds and to such other clients.
3. Representations of Manager.
(a) Manager shall use its best judgment and efforts
in rendering the advice and services to the Funds as contemplated by this
Agreement.
-3-
<PAGE>
(b) Manager shall maintain all licenses and
registrations necessary to perform its duties hereunder in good order.
(c) Manager shall conduct its operations at all times
in conformance with the Investment Advisers Act of 1940, the Investment Company
Act of 1940, and any other applicable state and/or self-regulatory organization
regulations.
(d) Manager shall maintain errors and omissions
insurance in an amount at least equal to $_____________, with a deductible not
to exceed $___________, throughout the term of this Agreement.
4. Independent Contractor. Manager shall, for all purposes
herein, be deemed to be an independent contractor, and shall, unless otherwise
expressly provided and authorized to do so, have no authority to act for or
represent the Trust, the Fund, or the Advisor in any way, or in any way be
deemed an agent for the Trust, the Fund or the Advisor. It is expressly
understood and agreed that the services to be rendered by Manager to the Fund
under the provisions of this Agreement are not to be deemed exclusive, and
Manager shall be free to render similar or different services to others so long
as its ability to render the services provided for in this Agreement shall not
be impaired thereby.
5. Manager's Personnel. Manager shall, at its own expense,
maintain such staff and employ or retain such personnel and consult with such
other persons as it shall from time to time determine to be necessary to the
performance of its obligations under this Agreement. Without limiting the
generality of the foregoing, the staff and personnel of Manager shall be deemed
to include persons employed or retained by Manager to furnish statistical
information, research, and other factual information, advice regarding economic
factors and trends, information with respect to technical and scientific
developments, and such other information, advice and assistance as Manager, the
Advisor or the Trust's Board of Trustees may desire and reasonably request.
6. Expenses.
(a) Manager shall be responsible for (i) providing
the personnel, office space and equipment reasonably necessary to fulfill its
obligations under this Agreement, and (ii) the costs of any special meetings of
the Fund's shareholders or the Trust's Board of Trustees convened for the
primary benefit of Manager.
(b) Manager may voluntarily absorb certain Fund
expenses or waive some or all of Manager's own fee.
(c) To the extent Manager incurs any costs by
assuming expenses which are an obligation of the Advisor or the Fund, the
Advisor or the Fund shall promptly reimburse the
-4-
<PAGE>
Manager for such costs and expenses. To the extent Manager performs services for
which the Fund or the Advisor is obligated to pay, Manager shall be entitled to
reimbursement to the extent of Manager's actual costs for providing such
services. In determining Manager's actual costs, Manager may take into account
an allocated portion of the salaries and overhead of personnel performing such
services.
7. Investment Management Fee.
(a) The Advisor shall pay to Manager, and Manager
agrees to accept, as full compensation for all investment management and
advisory services furnished or provided to the Fund pursuant to this Agreement,
an annual management fee based on Manager's Allocated Portion, as such Allocated
Portion may be adjusted from time to time. Such fee shall be equal to [ ]% of
the average daily net assets of the Fund attributable to the Manager's Allocated
Portion, computed on the value of such net assets as of the close of business
each day.
(b) The management fee shall be paid by the Advisor
to Manager monthly in arrears on the tenth business day of each month.
(c) The initial fee under this Agreement shall be
payable on the tenth business day of the first month following the effective
date of this Agreement and shall be prorated as set forth below. If this
Agreement is terminated prior to the end of any month, the fee to Manager shall
be prorated for the portion of any month in which this Agreement is in effect
which is not a complete month according to the proportion which the number of
calendar days in the month during which the Agreement is in effect bears to the
number of calendar days in the month, and shall be payable within ten (10) days
after the date of termination.
(d) The fee payable to Manager under this Agreement
will be reduced to the extent of any receivable owed by Manager to the Advisor
or the Fund.
(e) Manager voluntarily may reduce any portion of the
compensation or reimbursement of expenses due to it pursuant to this Agreement
and may agree to make payments to limit the expenses which are the
responsibility of the Advisor of the Fund under this Agreement. Any such
reduction or payment shall be applicable only to such specific reduction or
payment and shall not constitute an agreement to reduce any future compensation
or reimbursement due to Manager hereunder or to continue future payments. Any
such reduction will be agreed to prior to accrual of the related expense or fee
and will be estimated daily and reconciled and paid on a monthly basis.
(f) Manager may agree not to require payment of any
portion of the compensation or reimbursement of expenses otherwise due to it
pursuant to this Agreement. Any such
-5-
<PAGE>
agreement shall be applicable only with respect to the specific items covered
thereby and shall not constitute an agreement not to require payment of any
future compensation or reimbursement due to Manager hereunder.
8. No Shorting; No Borrowing. Manager agrees that neither it
nor any of its officers or employees shall take any short position in the shares
of the Funds. This prohibition shall not prevent the purchase of such shares by
any of the officers or employees of Manager or any trust, pension,
profit-sharing or other benefit plan for such persons or affiliates thereof, at
a price not less than the net asset value thereof at the time of purchase, as
allowed pursuant to rules promulgated under the Investment Company Act. Manager
agrees that neither it nor any of its officers or employees shall borrow from
the Fund or pledge or use the Fund's assets in connection with any borrowing not
directly for the Fund's benefit.
9. Conflicts with Trust's Governing Documents and Applicable
Laws. Nothing herein contained shall be deemed to require the Trust or the Fund
to take any action contrary to the Trust's Agreement and Declaration of Trust,
By-Laws, or any applicable statute or regulation, or to relieve or deprive the
Board of Trustees of the Trust of its responsibility for and control of the
conduct of the affairs of the Trust and Funds. In this connection, Manager
acknowledges that the Advisor and the Trust's Board of Trustees retain ultimate
plenary authority over the Fund, including the Allocated Portion [Portfolio
Allocation?], and may take any and all actions necessary and reasonable to
protect the interests of shareholders.
10. Reports and Access. Manager agrees to supply such
information to the Advisor and to permit such compliance inspections by the
Advisor or the Fund as shall be reasonably necessary to permit the administrator
to satisfy its obligations and respond to the reasonable requests of the
Trustees.
11. Standard of Care, Liability and Indemnification.
(a) Manager shall exercise reasonable care and
prudence in fulfilling its obligations under this Agreement.
(b) The Advisor shall have responsibility for the
accuracy and completeness (and liability for the lack thereof) of the statements
in the Fund's offering materials (including the prospectus, the statement of
additional information, advertising and sales materials) that pertain to Manager
and the investment of Manager's Allocated Portion of the Fund. Manager shall
have no responsibility or liability with respect to other disclosures.
(c) Manager shall be liable to the Fund for any loss
(including brokerage charges) incurred by the Fund as a result of any investment
made by Manager in violation of Section 2 hereof.
-6-
<PAGE>
(d) In the absence of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the obligations or duties hereunder
on the part of Manager, Manager shall not be subject to liability to the
Advisor, the Trust or the Fund or to any shareholder of the Fund for any act or
omission in the course of, or connected with, rendering services hereunder or
for any losses that may be sustained in the purchase, holding or sale of any
security by the Funds.
(e) Each party to this Agreement, including the
Trust, shall indemnify and hold harmless the other party and the shareholders,
directors, officers and employees of the other party (any such person, an
"Indemnified Party") against any loss, liability, claim, damage or expense
(including the reasonable cost of investigating and defending any alleged loss,
liability, claim, damage or expenses and reasonable counsel fees incurred in
connection therewith) arising out of the Indemnified Party's performance or
non-performance of any duties under this Agreement provided, however, that
nothing herein shall be deemed to protect any Indemnified Party against any
liability to which such Indemnified Party would otherwise be subject by reason
of willful misfeasance, bad faith or negligence in the performance of duties
hereunder or by reason of reckless disregard of obligations and duties under
this Agreement.
(f) No provision of this Agreement shall be construed
to protect any Trustee or officer of the Trust, or officer of the Advisor, from
liability in violation of Sections 17(h) and (i) of the Investment Company Act.
12. Non-Exclusivity; Trading for Manager's Own Account. The
Advisor's employment of Manager is not an exclusive arrangement. The Advisor
anticipates that it will employ other individuals or entities to furnish it with
the services provided for herein. Likewise, Manager may act as investment
adviser for any other person, and shall not in any way be limited or restricted
from buying, selling or trading any securities for its or their own accounts or
the accounts of others for whom it or they may be acting, provided, however,
that Manager expressly represents that it will undertake no activities which
will adversely affect the performance of its obligations to the Fund under this
Agreement; and provided further that the Advisor will adhere to a code of ethics
governing employee trading and trading for proprietary accounts that conforms to
the requirements of the Investment Company Act and the Investment Advisers Act
of 1940 and has been approved by the Board of Trustees of the Trust.
13. Term.
(a) This Agreement shall become effective at the time
the Fund commences operations pursuant to an effective amendment to the Trust's
Registration Statement under the Securities Act of 1933 and shall remain in
effect for a period of two (2) years, unless sooner terminated as hereinafter
provided. This Agreement shall continue in effect thereafter for additional
-7-
<PAGE>
periods not exceeding one (l) year so long as such continuation is approved for
the Fund at least annually by (i) the Board of Trustees of the Trust or by the
vote of a majority of the outstanding voting securities of each Fund and (ii)
the vote of a majority of the Trustees of the Trust who are not parties to this
Agreement nor interested persons thereof, cast in person at a meeting called for
the purpose of voting on such approval, and (iii) the Advisor. The terms
"majority of the outstanding voting securities" and "interested persons" shall
have the meanings as set forth in the Investment Company Act.
(b) The Fund and its distributor may use the
Manager's trade name or any name derived from the Manager's trade name only for
so long as this Agreement or any extension, renewal or amendment hereof remains
in effect. Within sixty (60) days from such time as this Agreement shall no
longer be in effect, the Fund shall cease to use such a name or any other name
connected with Manager.
14. Termination; No Assignment.
(a) This Agreement may be terminated by the Advisor
or the Trust on behalf of the Fund at any time without payment of any penalty,
by the Board of Trustees of the Trust or by vote of a majority of the
outstanding voting securities of a Fund, upon sixty (60) days' written notice to
the Advisor, and by the Advisor upon sixty (60) days' written notice to a Fund.
In the event of a termination, Manager shall cooperate in the orderly transfer
of the Fund's affairs and, at the request of the Board of Trustees, transfer any
and all books and records of the Fund maintained by Manager on behalf of the
Fund.
(b) This Agreement shall terminate automatically in the event
of any transfer or assignment thereof, as defined in the Investment Company Act.
15. Severability. If any provision of this Agreement shall be
held or made invalid by a court decision, statute or rule, or shall be otherwise
rendered invalid, the remainder of this Agreement shall not be affected thereby.
16. Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect.
17. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California without giving
effect to the conflict of laws principles thereof; provided that nothing herein
shall be construed to preempt, or to be inconsistent with, any federal law,
regulation or rule, including the Investment Company Act and the Investment
Advisors Act of 1940 and any rules and regulations promulgated thereunder.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their duly authorized officers, all on the day
and year first above written.
LITMAN/GREGORY FUND FRIESS ASSOCIATES, INC.
ADVISORS, LLC
By:_________________________________ By:_________________________________
____________________________________ ____________________________________
____________________________________ ____________________________________
As a Third Party Beneficiary,
MASTERS SELECT TRUST
on behalf of
THE MASTERS SELECT EQUITY FUND
By:_________________________________ By:_________________________________
____________________________________ ____________________________________
____________________________________ ____________________________________
-9-
THE MASTERS' SELECT EQUITY FUND
MASTERS' SELECT INVESTMENT TRUST
INVESTMENT MANAGEMENT AGREEMENT
-------------------------------
THIS INVESTMENT MANAGEMENT AGREEMENT is made as of the ___ day
of ___________, 199__, by and between LITMAN/GREGORY FUND ADVISORS, LLC
(hereinafter called the "Advisor") and JENNISON ASSOCIATES CAPITAL CORP.
(hereinafter called "Manager").
WITNESSETH:
WHEREAS, the Advisor has been retained as the investment
adviser to The Masters' Select Equity Fund (the "Fund"), a series of Masters'
Select Investment Trust (the "Trust"), an open-end management investment
company, registered as such under the Investment Company Act of 1940, as amended
(the "Investment Company Act"); and
WHEREAS, the Advisor has been authorized by the Trust to
retain one of more investment advisers (each an "investment manager") to serve
as portfolio managers for a specified portion of the Fund's assets (the
"Allocated Portion"); and
WHEREAS, Manager is registered as an investment adviser under
the Investment Advisers Act of 1940, as amended, and is engaged in the business
of supplying investment management services as an independent contractor; and
WHEREAS, the Fund and the Advisor desire to retain Manager as
an investment manager to render portfolio advice and services to the Fund
pursuant to the terms and provisions of this Agreement, and Manager desires to
furnish said advice and services; and
WHEREAS, the Trust and the Fund are third party beneficiaries
of such arrangements;
NOW, THEREFORE, in consideration of the covenants and the
mutual promises hereinafter set forth, the parties to this Agreement, which
shall include the Trust and the Fund for purposes of the indemnification
provisions of Section 11 hereto, intending to be legally bound hereby, mutually
agree as follows:
1. Appointment of Manager.
(a) The Advisor hereby employs Manager, and Manager
hereby accepts such employment, to render investment advice and related services
with respect to an Allocated Portion of the assets of the Fund for the period
and on the terms set forth in this Agreement, subject to the supervision and
direction of the Advisor and the Trust's Board of Trustees.
<PAGE>
(b) Manager's employment shall be solely with respect
to an Allocated Portion of the Fund's assets, such Allocated Portion to be
specified by the Advisor and subject to periodic increases or decreases at the
Advisor's discretion.
2. Duties of Manager.
(a) General Duties. Manager shall act as one of
several investment managers to the Fund and shall invest Manager's Allocated
Portion of the assets of the Fund in accordance with the investment objectives,
policies and restrictions of the Fund as set forth in the Fund's and the Trust's
governing documents, including, without limitation, the Trust's Agreement and
Declaration of Trust and By-Laws; the Fund's prospectus, statement of additional
information, and undertakings; and such other limitations, policies, and
procedures as the Advisor or the Trustees of the Trust may impose from time to
time in writing to Manager. In providing such services, Manager shall at all
times adhere to the provisions and restrictions contained in the federal
securities laws, applicable state securities laws, the Internal Revenue Code,
and other applicable law. Advisor shall provide to Manager such information with
respect to the Fund such that Manager will be able to maintain compliance with
applicable regulations, laws, policies, and restrictions with respect to
Manager's Allocated Portion.
Without limiting the generality of the foregoing, Manager
shall: (i) furnish the Fund with advice and recommendations with respect to the
investment of the Manager's Allocated Portion of the Fund's assets, (ii) effect
the purchase and sale of portfolio securities for Manager's Allocated Portion;
(iii) determine that portion of Manager's Allocated Portion that will remain
uninvested, if any; (iv) manage and oversee the investments of the Manager's
Allocated Portion, subject to the ultimate supervision and direction of the
Trust's Board of Trustees; (v) vote proxies, file required ownership reports,
and take other actions with respect to the securities in Manager's Allocated
Portion; (vi) maintain the books and records required to be maintained with
respect to the securities in Manager's Allocated Portion; (vii) furnish reports,
statements and other data on securities, economic conditions and other matters
related to the investment of the Fund's assets which the Advisor, Trustees or
the officers of the Trust may reasonably request; and (viii) render to the
Trust's Board of Trustees such periodic and special reports with respect to
Manager's Allocated Portion as the Board may reasonably request.
(b) Brokerage. With respect to Manager's Allocated
Portion, Manager shall be responsible for broker-dealer selection and for
negotiation of brokerage commission rates, provided that Manager shall not
direct orders to an affiliated person of the Manager or any other investment
manager without general prior authorization to use such affiliated broker or
dealer by the Trust's Board of Trustees. Manager's primary
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<PAGE>
consideration in effecting a securities transaction will be execution such that
the total cost or proceeds in each transaction in Manager's Allocated Portion is
the most favorable under the circumstances. In selecting a broker-dealer to
execute each particular transaction, Manager may, but is not limited to, take
the following into consideration: the best net price available; the reliability,
integrity and financial condition of the broker-dealer; the size of and
difficulty in executing the order; and the value of the expected contribution of
the broker-dealer to the investment performance of the Fund on a continuing
basis. The price to the Fund in any transaction may be less favorable than that
available from another broker-dealer if the difference is reasonably justified
by other aspects of the portfolio execution services offered.
Subject to such policies as the Advisor and the Board of
Trustees of the Trust may determine, Manager shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Fund to pay a broker or dealer that
provides (directly or indirectly) brokerage or research services to the Advisor
an amount of commission for effecting a portfolio transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction, if Manager determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or Manager's overall responsibilities with respect to
Manager's Allocated Portion and Manager's other clients. Manager is further
authorized to allocate the orders placed by it on behalf of the Fund with
respect to Manager's Allocated Portion to such brokers or dealers who also
provide research or statistical material, or other services, to the Trust, the
Advisor, or any affiliate of either. Such allocation shall be in such amounts
and proportions as Manager shall determine, and Manager shall report on such
allocations regularly to the Advisor and the Trust, indicating the
broker-dealers to whom such allocations have been made and the basis therefor.
Manager is also authorized to consider sales of shares of the Fund as a factor
in the selection of brokers or dealers to execute portfolio transactions,
subject to the requirements of best execution, i.e., that such brokers or
dealers are able to execute the order such that the total cost or proceeds in
each transaction in Manager's Allocated Portion is the most favorable under the
circumstances.
On occasions when Manager deems the purchase or sale of a
security to be in the best interest of the Fund as well as other clients of
Manager, Manager, to the extent permitted by applicable laws and regulations,
may aggregate the securities to be so purchased or sold in order to obtain the
most favorable price or lower brokerage commissions and the most efficient
execution. In such event, allocation of the securities so purchased or sold, as
well as the expenses incurred in the transaction, will be made by Manager in the
manner it considers
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<PAGE>
to be the most equitable and consistent with its fiduciary obligations to the
Funds and to such other clients.
3. Representations of Manager.
(a) Manager shall use its best judgment and efforts
in rendering the advice and services to the Funds as contemplated by this
Agreement.
(b) Manager shall maintain all licenses and
registrations necessary to perform its duties hereunder in good order.
(c) Manager shall conduct its operations at all times
in conformance with the Investment Advisers Act of 1940, the Investment Company
Act of 1940, and any other applicable state and/or self-regulatory organization
regulations.
(d) Manager shall maintain errors and omissions
insurance in an amount at least equal to $20 million, with a deductible not to
exceed $300,000, throughout the term of this Agreement.
4. Independent Contractor. Manager shall, for all purposes
herein, be deemed to be an independent contractor, and shall, unless otherwise
expressly provided and authorized to do so, have no authority to act for or
represent the Trust, the Fund, or the Advisor in any way, or in any way be
deemed an agent for the Trust, the Fund or the Advisor. It is expressly
understood and agreed that the services to be rendered by Manager to the Fund
under the provisions of this Agreement are not to be deemed exclusive, and
Manager shall be free to render similar or different services to others so long
as its ability to render the services provided for in this Agreement shall not
be impaired thereby.
5. Manager's Personnel. Manager shall, at its own expense,
maintain such staff and employ or retain such personnel and consult with such
other persons as it shall from time to time determine to be necessary to the
performance of its obligations under this Agreement. Without limiting the
generality of the foregoing, the staff and personnel of Manager shall be deemed
to include persons employed or retained by Manager to furnish statistical
information, research, and other factual information, advice regarding economic
factors and trends, information with respect to technical and scientific
developments, and such other information, advice and assistance as Manager, the
Advisor, or the Trust's Board of Trustees may desire and reasonably request.
6. Expenses.
(a) Manager shall be responsible for (i) providing
the personnel, office space, and equipment reasonably necessary to fulfill its
obligations under this Agreement, and (ii) the costs of any special meetings of
the Fund's shareholders
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<PAGE>
or the Trust's Board of Trustees convened for the primary benefit of Manager.
(b) Manager may voluntarily absorb certain Fund
expenses or waive some or all of Manager's own fee.
(c) To the extent Manager incurs any costs by
assuming expenses which are an obligation of the Advisor or the Fund, the
Advisor or the Fund shall promptly reimburse the Manager for such costs and
expenses. To the extent Manager performs services for which the Fund or the
Advisor is obligated to pay, Manager shall be entitled to reimbursement to the
extent of Manager's actual costs for providing such services. In determining
Manager's actual costs, Manager may take into account an allocated portion of
the salaries and overhead of personnel performing such services.
7. Investment Management Fee.
(a) The Advisor shall pay to Manager, and Manager
agrees to accept, as full compensation for all investment management and
advisory services furnished or provided to the Fund pursuant to this Agreement,
an annual management fee based on Manager's Allocated Portion, as such Allocated
Portion may be adjusted from time to time. Such fee shall be equal to a
percentage, as set forth on Schedule A to this Agreement, of the average daily
net assets of the Fund attributable to the Manager's Allocated Portion, computed
on the value of such net assets as of the close of business each day.
(b) The management fee shall be paid by the Advisor
to Manager monthly in arrears on the tenth business day of each month.
(c) The initial fee under this Agreement shall be
payable on the tenth business day of the first month following the effective
date of this Agreement and shall be prorated as set forth below. If this
Agreement is terminated prior to the end of any month, the fee to Manager shall
be prorated for the portion of any month in which this Agreement is in effect
which is not a complete month according to the proportion which the number of
calendar days in the month during which the Agreement is in effect bears to the
number of calendar days in the month, and shall be payable within ten (10) days
after the date of termination.
(d) The fee payable to Manager under this Agreement
will be reduced to the extent of any receivable owed by Manager to the Advisor
or the Fund.
(e) Manager voluntarily may reduce any portion of the
compensation or reimbursement of expenses due to it pursuant to this Agreement
and may agree to make payments to limit the expenses which are the
responsibility of the Advisor of the Fund under this Agreement. Any such
reduction or payment shall be
-5-
<PAGE>
applicable only to such specific reduction or payment and shall not constitute
an agreement to reduce any future compensation or reimbursement due to Manager
hereunder or to continue future payments. Any such reduction will be agreed to
prior to accrual of the related expense or fee and will be estimated daily and
reconciled and paid on a monthly basis.
(f) Manager may agree not to require payment of any
portion of the compensation or reimbursement of expenses otherwise due to it
pursuant to this Agreement. Any such agreement shall be applicable only with
respect to the specific items covered thereby and shall not constitute an
agreement not to require payment of any future compensation or reimbursement due
to Manager hereunder.
8. No Shorting; No Borrowing. Manager agrees that neither it
nor any of its officers or employees shall take any short position in the shares
of the Funds. This prohibition shall not prevent the purchase of such shares by
any of the officers or employees of Manager or any trust, pension,
profit-sharing or other benefit plan for such persons or affiliates thereof, at
a price not less than the net asset value thereof at the time of purchase, as
allowed pursuant to rules promulgated under the Investment Company Act. Manager
agrees that neither it nor any of its officers or employees shall borrow from
the Fund or pledge or use the Fund's assets in connection with any borrowing not
directly for the Fund's benefit.
9. Conflicts with Trust's Governing Documents and Applicable
Laws. Nothing herein contained shall be deemed to require the Trust or the Fund
to take any action contrary to the Trust's Agreement and Declaration of Trust,
By-Laws, or any applicable statute or regulation, or to relieve or deprive the
Board of Trustees of the Trust of its responsibility for and control of the
conduct of the affairs of the Trust and Funds. In this connection, Manager
acknowledges that the Advisor and the Trust's Board of Trustees retain ultimate
plenary authority over the Fund, including the Allocated Portion, and may take
any and all actions necessary and reasonable to protect the interests of
shareholders.
10. Reports and Access. Manager agrees to supply such
information to the Advisor and to permit such compliance inspections by the
Advisor or the Fund as shall be reasonably necessary to permit the administrator
to satisfy its obligations and respond to the reasonable requests of the
Trustees.
11. Standard of Care, Liability and Indemnification.
(a) The Manager shall have responsibility for the
accuracy and completeness (and liability for the lack thereof) of the statements
in the Fund's offering materials (including the prospectus, the statement of
additional information, advertising and sales materials) that pertain to Manager
and the investment
-6-
<PAGE>
of Manager's Allocated Portion of the Fund. Manager shall have no responsibility
or liability with respect to other disclosures.
(b) In the absence of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the obligations or duties hereunder
on the part of Manager, Manager shall not be subject to liability to the
Advisor, the Trust or the Fund or to any shareholder of the Fund for any act or
omission in the course of, or connected with, rendering services hereunder or
for any losses that may be sustained in the purchase, holding or sale of any
security by the Funds.
(c) Each party to this Agreement, including the
Trust, shall indemnify and hold harmless the other party and the shareholders,
directors, officers and employees of the other party (any such person, an
"Indemnified Party") against any loss, liability, claim, damage or expense
(including the reasonable cost of investigating and defending any alleged loss,
liability, claim, damage or expenses and reasonable counsel fees incurred in
connection therewith) arising out of the Indemnified Party's performance or
non-performance of any duties under this Agreement provided, however, that
nothing herein shall be deemed to protect any Indemnified Party against any
liability to which such Indemnified Party would otherwise be subject by reason
of willful misfeasance, bad faith or negligence in the performance of duties
hereunder or by reason of reckless disregard of obligations and duties under
this Agreement.
(d) No provision of this Agreement shall be construed
to protect any Trustee or officer of the Trust, or officer of the Advisor, from
liability in violation of Sections 17(h) and (i) of the Investment Company Act.
12. Non-Exclusivity; Trading for Manager's Own Account. The
Advisor's employment of Manager is not an exclusive arrangement. The Advisor
anticipates that it will employ other individuals or entities to furnish it with
the services provided for herein. Likewise, Manager may act as investment
adviser for any other person, and shall not in any way be limited or restricted
from buying, selling or trading any securities for its or their own accounts or
the accounts of others for whom it or they may be acting, provided, however,
that Manager expressly represents that it will undertake no activities which
will adversely affect the performance of its obligations to the Fund under this
Agreement; and provided further that Manager will adhere to a code of ethics
governing employee trading and trading for proprietary accounts that conforms to
the requirements of the Investment Company Act and the Investment Advisers Act
of 1940, a copy of which has been provided to the Board of Trustees of the
Trust.
13. Term.
(a) This Agreement shall become effective at the time
the Fund commences operations pursuant to an effective
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<PAGE>
amendment to the Trust's Registration Statement under the Securities Act of 1933
and shall remain in effect for a period of two (2) years, unless sooner
terminated as hereinafter provided. This Agreement shall continue in effect
thereafter for additional periods not exceeding one (l) year so long as such
continuation is approved for the Fund at least annually by (i) the Board of
Trustees of the Trust or by the vote of a majority of the outstanding voting
securities of each Fund and (ii) the vote of a majority of the Trustees of the
Trust who are not parties to this Agreement nor interested persons thereof, cast
in person at a meeting called for the purpose of voting on such approval, and
(iii) the Advisor. The terms "majority of the outstanding voting securities" and
"interested persons" shall have the meanings as set forth in the Investment
Company Act.
(b) Provided that Manager gives written approval in
advance, the Fund and its distributor may use the Manager's trade name or any
name derived from the Manager's trade name for Fund purposes only and only for
so long as this Agreement or any extension, renewal or amendment hereof remains
in effect. Within sixty (60) days from such time as this Agreement shall no
longer be in effect, the Fund shall cease to use such a name or any other name
connected with Manager.
14. Termination; No Assignment.
(a) This Agreement may be terminated by the Advisor
or the Trust on behalf of the Fund at any time without payment of any penalty,
by the Board of Trustees of the Trust or by vote of a majority of the
outstanding voting securities of the Fund, upon sixty (60) days' written notice
to the Manager, and by the Manager upon sixty (60) days' written notice to the
Advisor. In the event of a termination, Manager shall cooperate in the orderly
transfer of the Fund's affairs and, at the request of the Board of Trustees,
transfer any and all books and records of the Fund maintained by Manager on
behalf of the Fund.
(b) This Agreement shall terminate automatically in
the event of any transfer or assignment thereof, as defined in the Investment
Company Act.
15. Severability. If any provision of this Agreement shall be
held or made invalid by a court decision, statute or rule, or shall be otherwise
rendered invalid, the remainder of this Agreement shall not be affected thereby.
16. Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect.
17. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California without giving
effect to the conflict of laws principles thereof; provided that nothing herein
shall be
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<PAGE>
construed to preempt, or to be inconsistent with, any federal law, regulation or
rule, including the Investment Company Act and the Investment Advisors Act of
1940 and any rules and regulations promulgated thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their duly authorized officers, all on the day
and year first above written.
LITMAN/GREGORY FUND JENNISON ASSOCIATES CAPITAL
ADVISORS, LLC CORP.
By:________________________ By:_________________________________
___________________________ ____________________________________
___________________________ ____________________________________
As a Third Party Beneficiary,
MASTERS' SELECT INVESTMENT TRUST
on behalf of
THE MASTERS' SELECT EQUITY FUND
By:________________________
___________________________
___________________________
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THE MASTERS' SELECT EQUITY FUND
MASTERS' SELECT INVESTMENT TRUST
INVESTMENT MANAGEMENT AGREEMENT
-------------------------------
THIS INVESTMENT MANAGEMENT AGREEMENT is made as of the ___ day
of ___________, 199__, by and between LITMAN/GREGORY FUND ADVISORS, LLC
(hereinafter called the "Advisor") and SOCIETE GENERALE ASSET MANAGEMENT CORP.
(hereinafter called "Manager").
WITNESSETH:
WHEREAS, the Advisor has been retained as the investment
adviser to The Masters' Select Equity Fund (the "Fund"), a series of Masters'
Select Investment Trust (the "Trust"), an open-end management investment
company, registered as such under the Investment Company Act of 1940, as amended
(the "Investment Company Act"); and
WHEREAS, the Advisor has been authorized by the Trust to
retain one or more investment advisers (each an "investment manager") to serve
as portfolio managers for a specified portion of the Fund's assets (the
"Allocated Portion"); and
WHEREAS, Manager is registered as an investment adviser under
the Investment Advisers Act of 1940, as amended, and is engaged in the business
of supplying investment management services as an independent contractor; and
WHEREAS, the Fund and the Advisor desire to retain Manager as
an investment manager to render portfolio advice and services to the Fund
pursuant to the terms and provisions of this Agreement, and Manager desires to
furnish said advice and services; and
WHEREAS, the Trust and the Fund are third party beneficiaries
of such arrangements;
NOW, THEREFORE, in consideration of the covenants and the
mutual promises hereinafter set forth, the parties to this Agreement, which
shall include the Trust on behalf of the Fund for purposes of the
indemnification provisions of Section 11 hereof, intending to be legally bound
hereby, mutually agree as follows:
1. Appointment of Manager.
(a) The Advisor hereby employs Manager, and Manager
hereby accepts such employment, to render investment advice and related services
with respect to an Allocated Portion of the assets of the Fund for the period
and on the terms set
<PAGE>
forth in this Agreement, subject to the supervision and direction of the Advisor
and the Trust's Board of Trustees.
(b) Manager's employment shall be solely with respect
to an Allocated Portion of the Fund's assets, such Allocated Portion to be
specified by the Advisor and subject to periodic increases or decreases at the
Advisor's discretion.
2. Duties of Manager.
(a) General Duties. Manager shall act as one of
several investment managers to the Fund and shall invest Manager's Allocated
Portion of the assets of the Fund in accordance with the investment objectives,
policies and restrictions of the Fund as set forth in the Fund's and the Trust's
governing documents, including, without limitation, the Trust's Agreement and
Declaration of Trust and By-Laws; the Fund's prospectus, statement of additional
information and undertakings; and such other limitations, policies and
procedures as the Advisor or the Trustees of the Trust may impose from time to
time in writing to Manager. In providing such services, Manager shall at all
times adhere to the provisions and restrictions contained in the federal
securities laws, applicable state securities laws, the Internal Revenue Code,
and other applicable law.
Without limiting the generality of the foregoing, Manager
shall: (i) furnish the Fund with advice and recommendations with respect to the
investment of the Manager's Allocated Portion of the Fund's assets, (ii) effect
the purchase and sale of portfolio securities for Manager's Allocated Portion;
(iii) manage and oversee the investments of the Manager's Allocated Portion,
subject to the ultimate supervision and direction of the Trust's Board of
Trustees; (iv) vote proxies, file required ownership reports, and take other
actions with respect to the securities in Manager's Allocated Portion; (v)
maintain the books and records required to be maintained with respect to the
securities in Manager's Allocated Portion; (vi) furnish reports, statements and
other data on securities, economic conditions and other matters related to the
investment of the Fund's assets which the Advisor, the Trustees, or the officers
of the Trust may reasonably request; and (vii) render to the Trust's Board of
Trustees such periodic and special reports with respect to Manager's Allocated
Portion as the Board may reasonably request.
(b) Brokerage. With respect to Manager's Allocated
Portion, Manager shall be responsible for broker-dealer selection and for
negotiation of brokerage commission rates, provided that Manager shall not
direct orders to an affiliated person of the Manager without general prior
authorization to use such affiliated broker or dealer by the Trust's Board of
Trustees. The Trust's Board of Trustees, on behalf of the Fund, has adopted
procedures pursuant to Rule 17e-1 promulgated under the Investment Company Act
to authorize Manager to direct orders
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<PAGE>
to an affiliated person of Manager. The Advisor has furnished Manager with a
copy of the resolutions adopted by the Board of Trustees of the Trust pursuant
to Rule 17e-1 promulgated under the Investment Company Act. Manager's primary
consideration in effecting a securities transaction will be execution at the
most favorable price. In selecting a broker-dealer to execute each particular
transaction, Manager may take the following into consideration: the best net
price available; the reliability, integrity and financial condition of the
broker-dealer; the size of and difficulty in executing the order; and the value
of the expected contribution of the broker-dealer to the investment performance
of the Fund on a continuing basis. The price to the Fund in any transaction may
be less favorable than that available from another broker-dealer if the
difference is reasonably justified by other aspects of the portfolio execution
services offered.
Subject to such policies as the Advisor and the Board of
Trustees of the Trust may determine, Manager shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Fund to pay a broker or dealer that
provides (directly or indirectly) brokerage or research services to Manager an
amount of commission for effecting a portfolio transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction, if Manager determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or Manager's overall responsibilities with respect to
Manager's Allocated Portion and Manager's other clients. Manager is further
authorized to allocate the orders placed by it on behalf of the Fund to such
brokers or dealers who also provide research or statistical material, or other
services, to the Trust, the Advisor, any affiliate of either, or the Manager.
Such allocation shall be in such amounts and proportions as Manager shall
determine, and Manager shall report on such allocations regularly to the Advisor
and the Trust, indicating the broker-dealers to whom such allocations have been
made and the basis therefor. Manager is also authorized to consider sales of
shares of the Fund as a factor in the selection of brokers or dealers to execute
portfolio transactions, subject to the requirements of best execution, i.e.,
that such brokers or dealers are able to execute the order promptly and at the
best obtainable securities price.
On occasions when Manager deems the purchase or sale of a
security to be in the best interest of the Fund as well as other clients of
Manager, Manager, to the extent permitted by applicable laws and regulations,
may aggregate the securities to be so purchased or sold in order to obtain the
most favorable price or lower brokerage commissions and the most efficient
execution. In such event, allocation of the securities so purchased or sold, as
well as the expenses incurred in the transaction, will be made by Manager in the
manner it considers
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<PAGE>
to be the most equitable and consistent with its fiduciary obligations to the
Fund and to such other clients.
3. Representations of Manager.
(a) Manager shall use its best judgment and efforts
in rendering the advice and services to the Fund as contemplated by this
Agreement.
(b) Manager shall maintain all licenses and
registrations necessary to perform its duties hereunder in good order.
(c) Manager shall conduct its operations at all times
in conformance with the Investment Advisers Act of 1940, the Investment Company
Act and any other applicable state and/or self-regulatory organization
regulations.
(d) Manager shall be covered by errors and omissions
insurance. The company self-retention or deductible shall not exceed 20% of the
policy limits and the policy limits shall be as follows:
Total Fund Assets E & O Policy Limits
------------------------- -------------------
Up to $500 million $1,000,000
$500 million - $1 billion $2,000,000
$1 billion - $1.5 billion $3,000,000
$1.5 billion - $2 billion $4,000,000
Above $2 billion $5,000,000
4. Independent Contractor. Manager shall, for all purposes
herein, be deemed to be an independent contractor, and shall, unless otherwise
expressly provided and authorized to do so, have no authority to act for or
represent the Trust, the Fund, or the Advisor in any way, or in any way be
deemed an agent for the Trust, the Fund, or the Advisor. It is expressly
understood and agreed that the services to be rendered by Manager to the Fund
under the provisions of this Agreement are not to be deemed exclusive, and
Manager shall be free to render similar or different services to others so long
as its ability to render the services provided for in this Agreement shall not
be impaired thereby.
5. Manager's Personnel. Manager shall, at its own expense,
maintain such staff and employ or retain such personnel and consult with such
other persons as it shall from time to time determine to be necessary to the
performance of its obligations under this Agreement. Without limiting the
generality of the foregoing, the staff and personnel of Manager shall be deemed
to include persons employed or retained by Manager to furnish
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<PAGE>
statistical information, research, and other factual information, advice
regarding economic factors and trends, information with respect to technical and
scientific developments, and such other information, advice, and assistance as
Manager, the Advisor or the Trust's Board of Trustees may desire and reasonably
request.
6. Expenses.
(a) Manager shall be responsible for (i) providing
the personnel, office space, and equipment reasonably necessary to fulfill its
obligations under this Agreement, and (ii) the costs of any special meetings of
the Fund's shareholders or the Trust's Board of Trustees convened for the
primary benefit of Manager. Manager shall not be responsible for any costs
associated with the initial approval of this Agreement by the Fund's
shareholders.
(b) Manager may voluntarily absorb certain Fund
expenses or waive some or all of Manager's own fee.
(c) To the extent Manager incurs any costs by
assuming expenses which are an obligation of the Advisor or the Fund, the
Advisor or the Fund shall promptly reimburse the Manager for such costs and
expenses. To the extent Manager performs services for which the Fund or the
Advisor is obligated to pay, Manager shall be entitled to prompt reimbursement
to the extent of Manager's actual costs for providing such services. In
determining Manager's actual costs, Manager may take into account an allocated
portion of the salaries and overhead of personnel performing such services.
7. Investment Management Fee.
(a) The Advisor shall pay to Manager, and Manager
agrees to accept, as full compensation for all investment management and
advisory services furnished or provided to the Fund pursuant to this Agreement,
an annual management fee based on Manager's Allocated Portion, as such Allocated
Portion may be adjusted from time to time. Such fee shall be equal to [ ]% of
the average daily net assets of the Fund attributable to the Manager's Allocated
Portion, computed on the value of such net assets as of the close of business
each day.
(b) The management fee shall be paid by the Advisor
to Manager monthly in arrears on the tenth business day of each month.
(c) The initial fee under this Agreement shall be
payable on the tenth business day of the first month following the effective
date of this Agreement and shall be prorated as set forth below. If this
Agreement is terminated prior to the end of any month, the fee to Manager shall
be prorated for the portion of any month in which this Agreement is in effect
which is not a complete month according to the proportion which the number of
calendar days in the month during which the Agreement is in
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<PAGE>
effect bears to the number of calendar days in the month, and shall be payable
within ten (10) days after the date of termination.
(d) The fee payable to Manager under this Agreement
will be reduced to the extent of any receivable owed by Manager to the Advisor
or the Fund.
(e) Manager voluntarily may reduce any portion of the
compensation or reimbursement of expenses due to it pursuant to this Agreement
and may agree to make payments to limit the expenses which are the
responsibility of the Advisor of the Fund under this Agreement. Any such
reduction or payment shall be applicable only to such specific reduction or
payment and shall not constitute an agreement to reduce any future compensation
or reimbursement due to Manager hereunder or to continue future payments. Any
such reduction will be agreed to prior to accrual of the related expense or fee
and will be estimated daily and reconciled and paid on a monthly basis.
(f) Manager may agree not to require payment of any
portion of the compensation or reimbursement of expenses otherwise due to it
pursuant to this Agreement. Any such agreement shall be applicable only with
respect to the specific items covered thereby and shall not constitute an
agreement not to require payment of any future compensation or reimbursement due
to Manager hereunder.
8. No Shorting; No Borrowing. Manager agrees that neither it
nor any of its officers or employees shall take any short position in the shares
of the Fund. This prohibition shall not prevent the purchase of such shares by
any of the officers or employees of Manager or any trust, pension,
profit-sharing or other benefit plan for such persons or affiliates thereof, at
a price not less than the net asset value thereof at the time of purchase, as
allowed pursuant to rules promulgated under the Investment Company Act. Manager
agrees that neither it nor any of its officers or employees shall borrow from
the Fund or pledge or use the Fund's assets in connection with any borrowing not
directly for the Fund's benefit.
9. Conflicts with Trust's Governing Documents and Applicable
Laws. Nothing herein contained shall be deemed to require the Trust or the Fund
to take any action contrary to the Trust's Agreement and Declaration of Trust,
By-Laws, or any applicable statute or regulation, or to relieve or deprive the
Board of Trustees of the Trust of its responsibility for and control of the
conduct of the affairs of the Trust and the Fund. In this connection, Manager
acknowledges that the Advisor and the Trust's Board of Trustees retain ultimate
plenary authority over the Fund, including the Allocated Portion, and may take
any and all actions necessary and reasonable to protect the interests of
shareholders.
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<PAGE>
10. Reports and Access. Manager agrees to supply such
information to the Advisor and to permit such compliance inspections by the
Advisor or the Fund as shall be reasonably necessary to permit the administrator
to satisfy its obligations and respond to the reasonable requests of the
Trustees.
11. Standard of Care, Liability and Indemnification.
(a) Manager shall exercise reasonable care and
prudence in fulfilling its obligations under this Agreement.
(b) Manager shall have responsibility for the
accuracy and completeness (and liability for the lack thereof) of the statements
furnished by Manager to the Advisor for use in the Fund's offering materials
(including the prospectus, the statement of additional information, advertising
and sales materials) that pertain to Manager and the investment of Manager's
Allocated Portion of the Fund. Manager shall have no responsibility or liability
with respect to other disclosures.
(c) Manager shall be liable to the Fund for any loss
(including brokerage charges) incurred by the Fund as a result of any investment
made by Manager in violation of Section 2 hereof.
(d) In the absence of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the obligations or duties hereunder
on the part of Manager, Manager shall not be subject to liability to the
Advisor, the Trust, or the Fund or to any shareholder of the Fund for any act or
omission in the course of, or connected with, rendering services hereunder or
for any losses that may be sustained in the purchase, holding or sale of any
security by the Fund.
(e) Each party to this Agreement, including the Trust
on behalf of the Fund, shall indemnify and hold harmless the other party and the
shareholders, directors, officers, and employees of the other party (any such
person, an "Indemnified Party") against any loss, liability, claim, damage, or
expense (including the reasonable cost of investigating and defending any
alleged loss, liability, claim, damage, or expense and reasonable counsel fees
incurred in connection therewith) arising out of the Indemnified Party's
performance or non-performance of any duties under this Agreement provided,
however, that nothing herein shall be deemed to protect any Indemnified Party
against any liability to which such Indemnified Party would otherwise be subject
by reason of willful misfeasance, bad faith, or negligence in the performance of
duties hereunder or by reason of reckless disregard of obligations and duties
under this Agreement.
If indemnification is to be sought hereunder, then the
Indemnified Party shall promptly notify the other party of the assertion of any
claim or the commencement of any action or proceeding in respect thereof;
provided, however, that the failure so to notify the other party shall not
relieve the other
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<PAGE>
party from any liability that it may otherwise have to the Indemnified Party
provided such failure shall not affect in a material adverse manner the position
of the other party or the Indemnified Party with respect to such claim.
Following such notification, the other party may elect in writing to assume the
defense of such action or proceeding and, upon such election, it shall not be
liable for any legal costs incurred by the Indemnified Party (other than
reasonable costs of investigation previously incurred) in connection therewith,
unless (i) the other party has failed to provide counsel reasonably satisfactory
to the Indemnified Party in a timely manner or (ii) counsel which has been
provided by the other party reasonably determines that its representation of the
Indemnified Party would present it with a conflict of interest.
The provisions of this paragraph 11(e) shall not apply in any
action where the Indemnified Party is the party adverse, or one of the parties
adverse, to the other party.
(f) No provision of this Agreement shall be construed
to protect any Trustee or officer of the Trust, or officer of the Advisor, from
liability in violation of Sections 17(h) and (i) of the Investment Company Act.
12. Non-Exclusivity; Trading for Manager's Own Account. The
Advisor's employment of Manager is not an exclusive arrangement. The Advisor
anticipates that it will employ other individuals or entities to furnish it with
the services provided for herein. Likewise, Manager may act as investment
adviser for any other person, and shall not in any way be limited or restricted
from buying, selling, or trading any securities for its or their own accounts or
the accounts of others for whom it or they may be acting, provided, however,
that Manager expressly represents that it will undertake no activities which
will adversely affect the performance of its obligations to the Fund under this
Agreement; and provided further that Manager will adhere to a code of ethics
governing employee trading and trading for proprietary accounts that conforms to
the requirements of the Investment Company Act and the Investment Advisers Act
of 1940, a copy of which has been provided to the Board of Trustees of the
Trust.
13. Term.
(a) This Agreement shall become effective at the time
the Fund commences operations pursuant to an effective amendment to the Trust's
Registration Statement under the Securities Act of 1933 and upon shareholder
approval and shall remain in effect for a period of two (2) years, unless sooner
terminated as hereinafter provided. This Agreement shall continue in effect
thereafter for additional periods not exceeding one (l) year so long as such
continuation is approved for the Fund at least annually by (i) the Board of
Trustees of the Trust or by the vote of a majority of the outstanding voting
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<PAGE>
securities of the Fund and (ii) the vote of a majority of the Trustees of the
Trust who are not parties to this Agreement nor interested persons thereof, cast
in person at a meeting called for the purpose of voting on such approval, and
(iii) the Advisor. The terms "majority of the outstanding voting securities" and
"interested persons" shall have the meanings as set forth in the Investment
Company Act.
(b) The Fund and its distributor may use the
Manager's trade name or any name derived from the Manager's trade name only in a
manner consistent with the nature of this Agreement for so long as this
Agreement or any extension, renewal, or amendment hereof remains in effect.
Within sixty (60) days from such time as this Agreement shall no longer be in
effect, the Fund shall cease to use such a name or any other name connected with
Manager.
14. Termination; No Assignment.
(a) This Agreement may be terminated by the Advisor
or the Trust on behalf of the Fund at any time without payment of any penalty,
by the Board of Trustees of the Trust or by vote of a majority of the
outstanding voting securities of the Fund, upon sixty (60) days' written notice
to the Manager, and by the Manager upon sixty (60) days' written notice to the
Fund. In the event of a termination, Manager shall cooperate in the orderly
transfer of the Fund's affairs and, at the request of the Board of Trustees,
transfer any and all books and records of the Fund maintained by Manager on
behalf of the Fund.
(b) This Agreement shall terminate automatically in
the event of any transfer or assignment thereof, as defined in the Investment
Company Act.
15. Severability. If any provision of this Agreement shall be
held or made invalid by a court decision, statute or rule, or shall be otherwise
rendered invalid, the remainder of this Agreement shall not be affected thereby.
16. Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect.
17. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to the conflict of laws principles thereof; provided that nothing herein
shall be construed to preempt, or to be inconsistent with, any federal law,
regulation or rule, including the Investment Company Act and the Investment
Advisers Act of 1940 and any rules and regulations promulgated thereunder.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their duly authorized officers, all on the day
and year first above written.
LITMAN/GREGORY FUND SOCIETE GENERALE ASSET
ADVISORS, LLC MANAGEMENT CORP.
By:_________________________ By:_________________________________
____________________________ ____________________________________
____________________________ ____________________________________
As a Third Party Beneficiary,
MASTERS' SELECT INVESTMENT TRUST
on behalf of
THE MASTERS' SELECT EQUITY FUND
By:_________________________
____________________________
____________________________
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THE MASTERS' SELECT EQUITY FUND
MASTERS' SELECT INVESTMENT TRUST
INVESTMENT SUB-ADVISORY AGREEMENT
---------------------------------
THIS INVESTMENT SUB-ADVISORY AGREEMENT is made as of the ___
day of ___________, 199__, by and between LITMAN/GREGORY FUND ADVISORS, LLC
(hereinafter called the "Advisor"); SOUTHEASTERN ASSET MANAGEMENT, INC.
(hereinafter called the "Sub-Advisor"); Masters' Select Investment Trust
(hereinafter called the "Trust"), on behalf of The Masters' Select Equity Fund
(hereinafter called the "Fund"), a separate series of the Trust, solely for
purposes of the indemnification provisions of Section 13 hereof; and
Litman/Gregory & Company, LLC, solely for purposes of the indemnification
provisions of Section 13 hereof.
WHEREAS, the Advisor is registered as an Investment Adviser
under the Investment Adviser's Act of 1940, as amended (the "Investment
Adviser's Act"); and
WHEREAS, the Advisor is the sole sponsor and organizer of and
has been retained as the investment advisor to the Fund, a series of the Trust,
an open-end management investment company registered as such under the
Investment Company Act of 1940, as amended (the "Investment Company Act"); and
WHEREAS, Sub-Advisor is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended, and is engaged in the
business of supplying investment advisory services as an independent contractor;
and
WHEREAS, the Fund and the Advisor desire to retain Sub-Advisor
as an investment advisor to render portfolio advice and services to the Fund
pursuant to the terms and provisions of this Agreement, and Sub-Advisor desires
to furnish said advice and services;
NOW, THEREFORE, in consideration of the covenants and the
mutual promises hereinafter set forth, the parties to this Agreement, which
shall include the Trust on behalf of the Fund and Litman Gregory & Company, LLC
solely for purposes of the indemnification provisions of Section 13 hereof,
intending to be legally bound hereby, mutually agree as follows:
1. Description of Duties of Advisor.
Advisor is the sponsor of the Fund and has the overall
responsibility for its organization, administration, operation, and compliance
with all applicable federal and state laws and regulations, all rules or
requirements of self-regulatory organizations, as well as all policies
established by the Trust's Board of Trustees. Such duties include but are not
limited to the overall responsibility for the investment
<PAGE>
management of the Fund's portfolio of securities, the functions of fund
accounting, preparation and filing of tax returns, transfer agent and
shareholder servicing, daily pricing of the Fund's portfolio, registrations with
the Securities and Exchange Commission and the various states, preparation,
filing, and distribution of all investment company financial reports, compliance
with any contractual expense limitation requirements and mutual fund fidelity
bonding requirements, and the performance of or supervision of all other mutual
fund administrative and operational functions. Advisor may retain other parties
or entities to perform some or all of such functions as the Advisor deems
appropriate, and Advisor has the responsibility for screening, selection, and
supervision of all outside or non-affiliated service providers to the Fund.
Except as specifically delegated to Sub-Advisor under the provisions of this
Agreement, Sub-Advisor shall have no responsibility for any administrative or
operational functions, or for the compliance with any applicable laws,
regulations, rules or internal policies.
2. Appointment and General Duties of Sub-Advisor.
(a) Appointment. Advisor hereby employs Sub- Advisor,
and Sub-Advisor hereby accepts such employment, to render investment advice and
related services with respect to a specified portion of the assets of the Fund
(the "Allocated Portion") for the period and on the terms set forth in this
Agreement, subject to the supervision and direction of the Advisor and the
Trust's Board of Trustees.
(b) General Duties. Sub-Advisor shall act as one of
the several sub-investment advisers on behalf of the Fund and shall make
recommendations to the Advisor with respect to investment transactions for the
Sub-Advisor's Allocated Portion of the assets of the Fund in accordance with the
investment objectives, policies, and restrictions of the Fund as set forth in
the Fund's prospectus and statement of additional information, and with any
other limitations or requirements established by the Trust's Board of Trustees
from time to time as communicated in writing to the Sub-Advisor.
3. Responsibilities of Advisor and Sub-Advisor With Respect to
Portfolio Investments.
(a) Sub-Advisor shall furnish the Advisor with
recommendations with respect to the purchase or sale of investments for the
Sub-Advisor's Allocated Portion of the Fund's assets, in accordance with the
requirements of Section 2(b), above. Advisor shall have responsibility for
determining that the recommended transaction does not conflict with transactions
being proposed or implemented by other sub-advisors and that, if implemented,
the recommended transaction would satisfy all applicable diversification
requirements under the Investment Company Act, the Internal Revenue Code of
1986, as amended, or otherwise. After the Advisor grants approval for the
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<PAGE>
transaction, Sub-Advisor shall effect the approved transaction for the
Sub-Advisor's Portfolio Allocation through its traders and shall provide Advisor
with confirmations of the execution of the transaction. Sub-Advisor shall
maintain records with respect to all transactions for its Allocated Portion, and
shall furnish such other reports, statements, and other data on the securities
recommended and acquired for its Allocated Portion as the Advisor or the Fund's
Board of Trustees may reasonably request.
(b) Advisor shall have the responsibility for
maintaining consolidated books and records with respect to the Fund's overall
portfolio of securities in the manner required by the Investment Company Act and
the Investment Adviser's Act, for voting all proxies for the securities held in
the Fund's portfolio of securities, and for filing all required ownership
reports for such securities, including the filing with the Securities and
Exchange Commission of Schedules 13F, 13G, and 13D, under its name or in the
name of the Fund as may be appropriate.
(c) Brokerage. With respect to Sub-Advisor's
Allocated Portion, Sub-Advisor shall be responsible for broker-dealer selection
and for negotiation of brokerage commission rates, provided that Sub-Advisor
shall not direct orders to an affiliated person of the Sub-Advisor without
general prior authorization to use such affiliated broker or dealer by the
Trust's Board of Trustees. Sub-Advisor's primary consideration in effecting a
securities transaction will be execution at the most favorable price. In
selecting a broker-dealer to execute each particular transaction, Sub-Advisor
may take the following into consideration: the best net price available; the
reliability, integrity, and financial condition of the broker-dealer; the size
of and difficulty in executing the order; and the value of the expected
contribution of the broker-dealer to the investment performance of the Fund on a
continuing basis. The price to the Fund in any transaction may be less favorable
than that available from another broker-dealer if the difference is reasonably
justified by other aspects of the portfolio execution services offered.
Subject to such policies as the Advisor and the Board of
Trustees of the Trust may determine, Sub-Advisor shall not be deemed to have
acted unlawfully or to have breached any duty created by this Agreement or
otherwise solely by reason of its having caused the Fund to pay a broker or
dealer that provides (directly or indirectly) brokerage or research services to
the Advisor an amount of commission for effecting a portfolio transaction in
excess of the amount of commission another broker or dealer would have charged
for effecting that transaction, if Sub-Advisor determines in good faith that
such amount of commission was reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or Sub-Advisor's or Advisor's
overall responsibilities with respect to the Fund. Sub-Advisor is further
authorized to allocate the
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<PAGE>
orders placed by it on behalf of the Fund to such brokers or dealers who also
provide research or statistical material, or other services, to the Trust, the
Advisor, or any affiliate of either. Such allocation shall be in such amounts
and proportions as Sub-Advisor shall determine, and Sub-Advisor shall report on
such allocations regularly to the Advisor and the Trust, indicating the
broker-dealers to whom such allocations have been made and the basis therefor.
Sub-Advisor is also authorized to consider sales of shares of the Fund as a
factor in the selection of brokers or dealers to execute portfolio transactions,
subject to the requirements of best execution, i.e., that such brokers or
dealers are able to execute the order promptly and at the best obtainable
securities price.
On occasions when Sub-Advisor deems the purchase or sale of a
security to be in the best interest of the Fund as well as other clients of
Sub-Advisor, Sub-Advisor, to the extent permitted by applicable laws and
regulations, may aggregate the securities to be so purchased or sold in order to
obtain the most favorable price or lower brokerage commissions and the most
efficient execution. In such event, allocation of the securities so purchased or
sold, as well as the expenses incurred in the transaction, will be made by
Sub-Advisor in the manner it considers to be the most equitable and consistent
with its fiduciary obligations to the Fund and to such other clients.
4. Representations of Sub-Advisor.
(a) Sub-Advisor shall use its best judgment and
efforts in rendering the advice and services to the Fund as contemplated by this
Agreement.
(b) Sub-Advisor shall maintain all licenses and
registrations necessary to perform its duties hereunder in good order.
(c) Sub-Advisor shall conduct its responsibilities
under this Agreement at all times in conformance with the Investment Advisers
Act, the Investment Company Act, and any other applicable state and/or
self-regulatory organization regulations.
5. Independent Contractor Status. Advisor and Sub-Advisor
shall for all purposes herein be deemed to be independent contractors and,
unless expressly authorized to do so, shall have no authority to act for or
represent the Trust, the Fund, or each other in any way, or in any way be deemed
an agent for the Trust, the Fund, or each other. It is expressly understood and
agreed that Sub-Advisor is engaged in rendering investment advisory services to
a large number of other clients and that the services to be rendered pursuant to
the terms of this Agreement are not to be deemed exclusive. In the event that
Sub-Advisor determines that its ability to render the services hereunder would
be impaired by the performance of similar services for other
-4-
<PAGE>
clients, Sub-Advisor agrees to so notify Advisor and to terminate its services
hereunder when so requested by Advisor.
6. Sub-Advisor's Personnel. Sub-Advisor shall, at its own
expense, maintain such staff and employ or retain such personnel and consult
with such other persons as it shall from time to time determine to be necessary
to the performance of its obligations under this Agreement.
7. Expenses.
(a) Sub-Advisor shall be responsible for (i)
providing the personnel, office space and equipment reasonably necessary to
fulfill its obligations under this Agreement, and (ii) the costs of any special
meetings of the Fund's shareholders or the Trust's Board of Trustees convened
for the primary benefit of Sub-Advisor.
(b) Advisor may voluntarily or as the result of an
expense limitation agreement absorb certain Fund expenses or waive some or all
of the Advisor's own fee, but such actions shall not reduce the sub-investment
advisory fee otherwise due and payable by Advisor to Sub-Advisor.
8. Sub-Advisory Fee.
(a) The Advisor shall pay to Sub-Advisor, and
Sub-Advisor agrees to accept, as full compensation for all investment advisory
services furnished or provided to the Fund pursuant to this Agreement, an annual
sub-advisory fee based on Sub-Advisor's Allocated Portion, as such Allocated
Portion may be adjusted from time to time. Such fee shall be equal to [ ]% of
the average daily net assets of the Fund attributable to the Sub-Advisor's
Allocated Portion, computed on the value of such net assets as of the close of
business each day.
(b) The sub-advisory fee shall be paid by the Advisor
to Sub-Advisor monthly in arrears on the tenth business day of each month.
(c) The initial fee under this Agreement shall be
payable on the tenth business day of the first month following the effective
date of this Agreement and shall be prorated as set forth below. If this
Agreement is terminated prior to the end of any month, the fee to Sub-Advisor
shall be prorated for the portion of any month in which this Agreement is in
effect which is not a complete month according to the proportion which the
number of calendar days in the month during which the Agreement is in effect
bears to the number of calendar days in the month, and shall be payable within
ten (10) days after the date of termination.
9. No Shorting; No Borrowing. Sub-Advisor agrees that neither
it nor any of its officers or employees shall take any short position in the
shares of the Fund. This prohibition
-5-
<PAGE>
shall not prevent the purchase of such shares by any of the officers or
employees of Sub-Advisor or any trust, pension, profit-sharing or other benefit
plan for such persons or affiliates thereof, at a price not less than the net
asset value thereof at the time of purchase, as allowed pursuant to rules
promulgated under the Investment Company Act. Sub-Advisor agrees that neither it
nor any of its officers or employees shall borrow from the Fund or pledge or use
the Fund's assets in connection with any borrowing not directly for the Fund's
benefit.
10. Conflicts with Trust's Governing Documents and Applicable
Laws. Nothing herein contained shall be deemed to require the Trust or the Fund
to take any action contrary to the Trust's Agreement and Declaration of Trust,
By-Laws, or any applicable statute or regulation, or to relieve or deprive the
Board of Trustees of the Trust of its responsibility for and control of the
conduct of the affairs of the Trust and the Fund. In this connection,
Sub-Advisor acknowledges that the Advisor and the Trust's Board of Trustees
retain ultimate plenary authority over the Fund, including the Allocated
Portion, and may take any and all actions necessary and reasonable to protect
the interests of shareholders.
11. Reports and Access. Sub-Advisor agrees to supply such
information to the Advisor and to permit such compliance inspections by the
Advisor or the Fund with respect to the Allocated Portion as shall be reasonably
necessary to permit the administrator to satisfy its obligations and respond to
the reasonable requests of the Trustees.
12. Standard of Care.
(a) Sub-Advisor shall exercise reasonable care and
prudence in fulfilling its obligations under this Agreement.
(b) Subject to submission by Advisor to Sub-Advisor
for approval prior to publication or other usage, Sub-Advisor shall have
responsibility for the accuracy and completeness (and liability for the lack
thereof) of the statements in the Fund's offering materials (including the
prospectus, the statement of additional information, advertising and sales
materials) that pertain to Sub-Advisor and the investment of Sub-Advisor's
Allocated Portion of the Fund. Sub-Advisor shall have no responsibility or
liability with respect to other disclosures.
13. Insurance and Indemnification.
(a) For the protection and benefit of the Trust and
the Sub-Advisor, Advisor shall maintain in full force and effect an errors and
omissions liability insurance policy providing errors and omissions liability
insurance coverage for all mutual fund operations for which Advisor and
Sub-Advisor have responsibility, as set forth in Sections 1, 2, and 3 herein.
The Sub-Advisor will be specifically named as an insured party on
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<PAGE>
such policy. The company self-retention or deductible shall not exceed 20% of
the policy limits and the policy limits shall be as follows:
Total Fund Assets E & O Policy Limits
-------------------------------------------------------
Up to $500 million $1,000,000
$500 million - $1 billion $2,000,000
$1 billion - $1.5 billion $3,000,000
$1.5 billion - $2 billion $4,000,000
Above $2 billion - $5,000,000
(b) With respect to the policy required by this
Agreement, the Advisor shall provide the other parties with an initial insurance
certificate and a certified copy of the insurance policy, and annually
thereafter with insurance certificates and certified copies of the policy, if
requested.
(c) Indemnification. Each party to this Agreement,
including the Trust and Litman/Gregory & Company, LLC (each such party an
"Indemnifying Party"), shall indemnify each other Party and the shareholders,
directors, officers, and employees of each other party (any such person an
"Indemnified Party") against any loss, liability, claim, damage, or expense
(including the reasonable cost of investigating and defending any alleged loss,
liability, claim, damage, or expense and reasonable counsel fees incurred in
connection therewith) sustained by the Indemnified Party and arising out of any
errors or omissions of the Indemnifying Party in its performance or
non-performance of any of its duties or responsibilities under this Agreement;
provided however, that nothing contained herein shall be deemed to protect the
Indemnified Party against any liability to which such Indemnified Party would
otherwise be subject by reason of the Indemnified Party's willful misfeasance,
bad faith, negligence, or reckless disregard of its obligations or duties under
this Agreement.
(d) No provision of this Agreement shall be construed
to protect any Trustee or officer of the Trust, or officer of the Advisor or
Sub-Advisor, from liability in violation of Sections 17(h) and (i) of the
Investment Company Act. Advisor and Sub-Advisor will adhere to a code of ethics
governing employee trading and trading for proprietary accounts that conforms to
the requirements of the Investment Company Act and the Investment Advisers Act
and has been provided the Board of Trustees of the Trust.
14. Term.
(a) This Agreement shall become effective at the time
the Fund commences operations pursuant to an effective amendment to the Trust's
Registration Statement under the Securities Act of 1933 and shall remain in
effect for a period of two (2) years, unless sooner terminated as hereinafter
provided. This Agreement shall continue in effect thereafter for additional
-7-
<PAGE>
periods not exceeding one (l) year so long as such continuation is approved for
the Fund at least annually by (i) the Board of Trustees of the Trust or by the
vote of a majority of the outstanding voting securities of the Fund and (ii) the
vote of a majority of the Trustees of the Trust who are not parties to this
Agreement nor interested persons thereof, cast in person at a meeting called for
the purpose of voting on such approval, and (iii) the Advisor. The terms
"majority of the outstanding voting securities" and "interested persons" shall
have the meanings as set forth in the Investment Company Act.
(b) The Fund and its distributor may use the Sub-
Advisor's trade name or any name derived from the Sub-Advisor's trade name only
for so long as this Agreement or any extension, renewal or amendment hereof
remains in effect. Within sixty (60) days from such time as this Agreement shall
no longer be in effect, the Fund shall cease to use such a name or any other
name connected with Sub-Advisor.
15. Termination; No Assignment.
(a) This Agreement may be terminated by the Advisor,
the Sub-Advisor, or the Trust on behalf of the Fund at any time without payment
of any penalty, by the Board of Trustees of the Trust or by vote of a majority
of the outstanding voting securities of a Fund, upon sixty (60) days' written
notice to the Advisor, and by the Advisor upon sixty (60) days' written notice
to the Fund. In the event of a termination, Sub-Advisor shall cooperate in the
orderly transfer of the Fund's affairs and, at the request of the Board of
Trustees, transfer any and all books and records of the Fund maintained by
Sub-Advisor on behalf of the Fund.
(b) This Agreement shall terminate automatically in
the event of any transfer or assignment thereof, as defined in the Investment
Company Act.
16. Severability. If any provision of this Agreement shall be
held or made invalid by a court decision, statute or rule, or shall be otherwise
rendered invalid, the remainder of this Agreement shall not be affected thereby.
17. Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect.
18. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California without giving
effect to the conflict of laws principles thereof; provided that nothing herein
shall be construed to preempt, or to be inconsistent with, any federal law,
regulation or rule, including the Investment Company Act and the Investment
Advisors Act of 1940 and any rules and regulations promulgated thereunder.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their duly authorized officers, all on the day
and year first above written.
LITMAN/GREGORY FUND SOUTHEASTERN ASSET MANAGEMENT,
ADVISORS, LLC INC.
By:______________________________ By:_________________________________
______________________________ _________________________________
______________________________ _________________________________
With respect to the indemnification provisions of Section 13 hereof:
MASTERS' SELECT INVESTMENT TRUST
on behalf of LITMAN/GREGORY & COMPANY,
THE MASTERS' SELECT EQUITY FUND LLC
By:______________________________ By:_________________________________
______________________________ _________________________________
______________________________ _________________________________
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THE MASTERS' SELECT EQUITY FUND
MASTERS' SELECT INVESTMENT TRUST
INVESTMENT MANAGEMENT AGREEMENT
-------------------------------
THIS INVESTMENT MANAGEMENT AGREEMENT is made as of the ___ day
of ___________, 199__, by and between LITMAN/GREGORY FUND ADVISORS, LLC
(hereinafter called the "Advisor") and STRONG CAPITAL MANAGEMENT, INC.
(hereinafter called "Manager").
WITNESSETH:
WHEREAS, the Advisor has been retained as the investment
adviser to The Masters' Select Equity Fund (the "Fund"), a series of Masters'
Select Investment Trust (the "Trust"), an open-end management investment
company, registered as such under the Investment Company Act of 1940, as amended
(the "Investment Company Act"); and
WHEREAS, the Advisor has been authorized by the Trust to
retain one of more investment advisers (each an "investment manager") to serve
as portfolio managers for a specified portion of the Fund's assets (the
"Allocated Portion"); and
WHEREAS, Manager is registered as an investment adviser under
the Investment Advisers Act of 1940, as amended, and is engaged in the business
of supplying investment management services as an independent contractor; and
WHEREAS, the Fund and the Advisor desire to retain Manager as
an investment manager to render portfolio advice and services to the Fund
pursuant to the terms and provisions of this Agreement, and Manager desires to
furnish said advice and services; and
WHEREAS, the Trust and the Fund are third party
beneficiaries of such arrangements;
NOW, THEREFORE, in consideration of the covenants and the
mutual promises hereinafter set forth, the parties to this Agreement, which
shall include the Trust and the Fund for purposes of the indemnification
provisions of Section 11 hereto, intending to be legally bound hereby, mutually
agree as follows:
1. Appointment of Manager.
(a) The Advisor hereby employs Manager, and Manager
hereby accepts such employment, to render investment advice and related services
with respect to an Allocated Portion of the assets of the Fund for the period
and on the terms set forth in this Agreement, subject to the supervision and
direction of the Advisor and the Trust's Board of Trustees.
<PAGE>
(b) Manager's employment shall be solely with respect
to an Allocated Portion of the Fund's assets, such Allocated Portion to be
specified by the Advisor and subject to periodic increases or decreases at the
Advisor's discretion.
2. Duties of Manager.
(a) General Duties. Manager shall act as one of
several investment managers to the Fund and shall invest Manager's Allocated
Portion of the assets of the Fund in accordance with the investment objectives,
policies and restrictions of the Fund as set forth in the Fund's and Trust's
governing documents (collectively, "Governing Instruments and Regulatory
Filings"), including, without limitation, the Trust's Agreement and Declaration
of Trust and By-Laws; the Fund's prospectus, statement of additional
information, and undertakings; and such other limitations, policies, and
procedures as the Advisor or the Trustees of the Trust may impose from time to
time in writing to Manager. In providing such services, Manager shall at all
times adhere to the provisions and restrictions contained in the federal
securities laws, applicable state securities laws, the Internal Revenue Code,
and other applicable law. The Advisor hereby agrees to provide to Manager any
amendments, supplements, or other changes to the Governing Instruments and
Regulatory Filings as soon as practicable after such materials become available
and, upon receipt by Manager, Manager will act in accordance with such
amendments, supplements, or other changes.
Without limiting the generality of the foregoing, Manager
shall: (i) furnish the Fund with advice and recommendations with respect to the
investment of Manager's Allocated Portion of the Fund's assets, (ii) effect the
purchase and sale of portfolio securities for Manager's Allocated Portion; (iii)
manage and oversee the investments of Manager's Allocated Portion, subject to
the ultimate supervision and direction of the Trust's Board of Trustees; (iv)
vote proxies, file required ownership reports, and take other actions with
respect to the securities in Manager's Allocated Portion; (v) maintain the books
and records required to be maintained with respect to the securities in
Manager's Allocated Portion; (vi) furnish reports, statements and other data on
securities, economic conditions and other matters related to the investment of
the Fund's assets which the Advisor, Trustees or the officers of the Trust may
reasonably request; and (vi) render to the Trust's Board of Trustees such
periodic and special reports with respect to Manager's Allocated Portion as the
Board may reasonably request.
(b) Brokerage. With respect to Manager's Allocated
Portion, Manager shall be responsible for broker-dealer selection, for
establishing and maintaining accounts on behalf of the Fund, and for negotiation
of brokerage commission rates, provided that Manager shall not direct orders to
an affiliated person of the Manager or any other investment manager without
general prior authorization to use such affiliated broker or
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<PAGE>
dealer by the Trust's Board of Trustees. Manager's primary consideration in
effecting a securities transaction will be execution at the most favorable
price. In selecting a broker-dealer to execute each particular transaction,
Manager may take the following into consideration: the best net price available;
the reliability, integrity and financial condition of the broker-dealer; the
size of and difficulty in executing the order; and the value of the expected
contribution of the broker-dealer to the investment performance of the Fund on a
continuing basis. The price to the Fund in any transaction may be less favorable
than that available from another broker-dealer if the difference is reasonably
justified by other aspects of the portfolio execution services offered.
Subject to such policies as the Advisor and the Board of
Trustees of the Trust may determine, Manager shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Fund to pay a broker or dealer that
provides (directly or indirectly) brokerage or research services to Manager an
amount of commission for effecting a portfolio transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction, if Manager determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or Manager's or Advisor's overall responsibilities with
respect to the Fund. It is recognized that the services provided by such brokers
may be useful to Manager in connection with Manager's services to other clients.
Manager is further authorized to allocate the orders placed by it on behalf of
the Fund to such brokers or dealers who also provide research or statistical
material, or other services, to the Trust, the Advisor, or any affiliate of
either. Such allocation shall be in such amounts and proportions as Manager
shall determine, and Manager shall report on such allocations regularly to the
Advisor and the Trust, indicating the broker-dealers to whom such allocations
have been made and the basis therefor. Manager is also authorized to consider
sales of shares of the Fund as a factor in the selection of brokers or dealers
to execute portfolio transactions, subject to the requirements of best
execution, i.e., that such brokers or dealers are able to execute the order
promptly and at the best obtainable securities price.
On occasions when Manager deems the purchase or sale of a
security to be in the best interest of the Fund as well as other clients of
Manager, Manager, to the extent permitted by applicable laws and regulations,
may aggregate the securities to be so purchased or sold in order to obtain the
most favorable price or lower brokerage commissions and the most efficient
execution. In such event, allocation of the securities so purchased or sold, as
well as the expenses incurred in the transaction, will be made by Manager in the
manner it considers
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<PAGE>
to be the most equitable and consistent with its fiduciary obligations to the
Fund and to such other clients.
3. Representations.
(a) Representations of Manager.
(1) Manager shall use its best judgment and
efforts in rendering the advice and services to the Fund as contemplated by this
Agreement.
(2) Manager shall maintain all licenses and
registrations necessary to perform its duties hereunder in good order.
(3) Manager shall conduct its operations at
all times in conformance with the Investment Advisers Act of 1940, the
Investment Company Act, and any other applicable state and/or self-regulatory
organization regulations.
(4) Manager shall maintain errors and
omissions insurance in an amount reasonable to cover its obligations hereunder.
(5) Manager has filed a notice of exemption
pursuant to Rule 4.14 under the Commodity Exchange Act, as amended (the "CEA"),
with the Commodity Futures Trading Commission (the "CFTC") and the National
Futures Association.
(6) The execution, delivery and performance
by Manager of this Agreement are within Manager's powers and have been duly
authorized by all necessary action on the part of its shareholders, and no
action by or in respect of, or filing with, any governmental body, agency or
official is required on the part of Manager for the execution, delivery and
performance by Manager of this Agreement, and the execution, delivery and
performance by Manager of this Agreement do not contravene or constitute a
default under (i) any provision of applicable law, rule, or regulation, (ii)
Manager's governing instruments, or (iii) any agreement, judgment, injunction,
order, decree, or other instrument binding upon Manager.
(7) The Form ADV of Manager previously
provided to the Advisor is a true and complete copy of the form filed with the
Securities and Exchange Commission and the information contained therein is
accurate and complete in all material respects and does not omit to state any
material fact necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading.
(b) Representations of Advisor. The Advisor
represents and warrants to the Manager as follows:
(1) The Advisor is registered as an
investment adviser under the Investment Advisers Act.
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<PAGE>
(2) The Advisor has filed a notice of
exemption pursuant to Rule 4.14 under the CEA with the CFTC and the National
Futures Association.
(3) The execution, delivery and performance
by the Advisor of this Agreement are within the Advisor's powers and have been
duly authorized by all necessary action on the part of its shareholders, and no
action by or in respect of, or filing with, any governmental body, agency, or
official is required on the part of the Advisor for the execution, delivery and
performance by the Advisor of this Agreement, and the execution, delivery, and
performance by the Advisor of this Agreement do not contravene or constitute a
default under (i) any provision of applicable law, rule, or regulation, (ii) the
Advisor's governing instruments, or (iii) any agreement, judgment, injunction,
order, decree, or other instrument binding upon the Adviser.
(4) The Form ADV of the Advisor previously
provided to Manager is a true and complete copy of the form filed with the
Securities and Exchange Commission and the information contained therein is
accurate and complete in all material respects and does not omit to state any
material fact necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading.
(5) The Advisor acknowledges that it
received a copy of Manager's Form ADV at least 48 hours prior to the execution
of this Agreement.
(c) Survival of Representations and Warranties; Duty
to Update Information. All representations and warranties made by Manager and
the Advisor pursuant to this Section 3 hereof shall survive for the duration of
this Agreement and the parties hereto shall promptly notify each other in
writing upon becoming aware that any of the foregoing representations and
warranties are no longer true.
4. Independent Contractor. Manager shall, for all purposes
herein, be deemed to be an independent contractor, and shall, unless otherwise
expressly provided and authorized to do so, have no authority to act for or
represent the Trust, the Fund, or the Advisor in any way, or in any way be
deemed an agent for the Trust, the Fund, or the Advisor. It is expressly
understood and agreed that the services to be rendered by Manager to the Fund
under the provisions of this Agreement are not to be deemed exclusive, and
Manager shall be free to render similar or different services to others so long
as its ability to render the services provided for in this Agreement shall not
be impaired thereby.
5. Manager's Personnel. Manager shall, at its own expense,
maintain such staff and employ or retain such personnel and consult with such
other persons as it shall from time to time determine to be necessary to the
performance of its obligations under this Agreement.
-5-
<PAGE>
6. Expenses.
(a) Manager shall be responsible for (i) providing
the personnel, office space and equipment reasonably necessary to fulfill its
obligations under this Agreement, and (ii) the costs of any special meetings of
the Fund's shareholders or the Trust's Board of Trustees convened for the
primary benefit of Manager.
(b) Manager may voluntarily absorb certain Fund
expenses or waive some or all of Manager's own fee.
(c) To the extent Manager incurs any costs by
assuming expenses which are an obligation of the Advisor or the Fund, the
Advisor or the Fund shall promptly reimburse the Manager for such costs and
expenses. To the extent Manager performs services for which the Fund or the
Advisor is obligated to pay, Manager shall be entitled to reimbursement to the
extent of Manager's actual costs for providing such services. In determining
Manager's actual costs, Manager may take into account an allocated portion of
the salaries and overhead of personnel performing such services.
7. Investment Management Fee.
(a) The Advisor shall pay to Manager, and Manager
agrees to accept, as full compensation for all investment management and
advisory services furnished or provided to the Fund pursuant to this Agreement,
an annual management fee based on Manager's Allocated Portion, as such Allocated
Portion may be adjusted from time to time. Such fee shall be equal to [ ]% of
the average daily net assets of the Fund attributable to the Manager's Allocated
Portion, computed on the value of such net assets as of the close of business
each day.
(b) The management fee shall be paid by the Advisor
to Manager monthly in arrears on the tenth business day of the following month.
(c) The initial fee under this Agreement shall be
payable on the tenth business day of the first month following the effective
date of this Agreement and shall be prorated as set forth below. If this
Agreement is terminated prior to the end of any month, the fee to Manager shall
be prorated for the portion of any month in which this Agreement is in effect
which is not a complete month according to the proportion which the number of
calendar days in the month during which the Agreement is in effect bears to the
number of calendar days in the month, and shall be payable within ten (10) days
after the date of termination.
(d) The fee payable to Manager under this Agreement
will be reduced to the extent of any receivable owed by Manager to the Advisor
or the Fund.
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<PAGE>
(e) Manager voluntarily may reduce any portion of the
compensation or reimbursement of expenses due to it pursuant to this Agreement
and may agree to make payments to limit the expenses which are the
responsibility of the Advisor or the Fund under this Agreement. Any such
reduction or payment shall be applicable only to such specific reduction or
payment and shall not constitute an agreement to reduce any future compensation
or reimbursement due to Manager hereunder or to continue future payments. Any
such reduction will be agreed to prior to accrual of the related expense or fee
and will be estimated daily and reconciled and paid on a monthly basis.
(f) Manager may agree not to require payment of any
portion of the compensation or reimbursement of expenses otherwise due to it
pursuant to this Agreement. Any such agreement shall be applicable only with
respect to the specific items covered thereby and shall not constitute an
agreement not to require payment of any future compensation or reimbursement due
to Manager hereunder.
8. No Shorting; No Borrowing. Manager agrees that neither it
nor any of its officers or employees shall take any short position in the shares
of the Fund. This prohibition shall not prevent the purchase of such shares by
any of the officers or employees of Manager or any trust, pension,
profit-sharing or other benefit plan for such persons or affiliates thereof, at
a price not less than the net asset value thereof at the time of purchase, as
allowed pursuant to rules promulgated under the Investment Company Act. Manager
agrees that neither it nor any of its officers or employees shall borrow from
the Fund or pledge or use the Fund's assets in connection with any borrowing not
directly for the Fund's benefit.
9. Conflicts with Trust's Governing Documents and Applicable
Laws. Nothing herein contained shall be deemed to require the Trust or the Fund
to take any action contrary to the Trust's Agreement and Declaration of Trust,
By-Laws, or any applicable statute or regulation, or to relieve or deprive the
Board of Trustees of the Trust of its responsibility for and control of the
conduct of the affairs of the Trust and Fund. In this connection, Manager
acknowledges that the Advisor and the Trust's Board of Trustees retain ultimate
plenary authority over the Fund, including the Allocated Portion, and may take
any and all actions necessary and reasonable to protect the interests of
shareholders.
10. Reports and Access. Manager agrees to supply such
information to the Advisor and to permit such compliance inspections by the
Advisor or the Fund as shall be reasonably necessary to permit the administrator
to satisfy its obligations and respond to the reasonable requests of the
Trustees.
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<PAGE>
11. Standard of Care, Liability and Indemnification.
(a) Manager shall exercise reasonable care and
prudence in fulfilling its obligations under this Agreement.
(b) Manager shall have responsibility for the
accuracy and completeness (and liability for the lack thereof) of the statements
provided by Manager to the Advisor for use in the Fund's offering materials
(including the prospectus, the statement of additional information, advertising,
and sales materials) that pertain to Manager and the investment of Manager's
Allocated Portion of the Fund. Manager shall have no responsibility or liability
with respect to other disclosures.
(c) Manager shall be liable to the Fund for any loss
(including brokerage charges) incurred by the Fund as a result of any investment
made by Manager in violation of Section 2 hereof.
(d) In the absence of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the obligations or duties hereunder
on the part of Manager, Manager shall not be subject to liability to the
Advisor, the Trust or the Fund or to any shareholder of the Fund for any act or
omission in the course of, or connected with, rendering services hereunder or
for any losses that may be sustained in the purchase, holding or sale of any
security by the Fund.
(e) Each party to this Agreement, including the Trust
on behalf of the Fund, shall indemnify and hold harmless the other party and the
shareholders, directors, officers and employees of the other party (any such
person, an "Indemnified Party") against any loss, liability, claim, damage, or
expense (including the reasonable cost of investigating and defending any
alleged loss, liability, claim, damage, or expense and reasonable counsel fees
incurred in connection therewith) arising out of the Indemnified Party's
performance or non-performance of any duties under this Agreement provided,
however, that nothing herein shall be deemed to protect any Indemnified Party
against any liability to which such Indemnified Party would otherwise be subject
by reason of willful misfeasance, bad faith or negligence in the performance of
duties hereunder or by reason of reckless disregard of obligations and duties
under this Agreement.
(f) No provision of this Agreement shall be construed
to protect any Trustee or officer of the Trust, or officer of the Advisor, from
liability in violation of Sections 17(h) and (i) of the Investment Company Act.
12. Non-Exclusivity; Trading for Manager's Own Account. The
Advisor's employment of Manager is not an exclusive arrangement. The Advisor
anticipates that it will employ other individuals or entities to furnish it with
the services provided for herein. Likewise, Manager may act as investment
adviser for any other person, and shall not in any way be limited or
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<PAGE>
restricted from buying, selling or trading any securities for its or their own
accounts or the accounts of others for whom it or they may be acting, provided,
however, that Manager expressly represents that it will undertake no activities
which will adversely affect the performance of its obligations to the Fund under
this Agreement; and provided further that Manager will adhere to a code of
ethics governing employee trading and trading for proprietary accounts that
conforms to the requirements of the Investment Company Act and the Investment
Advisers Act of 1940, a copy of which has been provided to the Board of Trustees
of the Trust.
13. Term.
(a) This Agreement shall become effective at the time
the Fund commences operations pursuant to an effective amendment to the Trust's
Registration Statement under the Securities Act of 1933 and shall remain in
effect for a period of two (2) years, unless sooner terminated as hereinafter
provided. This Agreement shall continue in effect thereafter for additional
periods not exceeding one (l) year so long as such continuation is approved for
the Fund at least annually by (i) the Board of Trustees of the Trust or by the
vote of a majority of the outstanding voting securities of the Fund and (ii) the
vote of a majority of the Trustees of the Trust who are not parties to this
Agreement nor interested persons thereof, cast in person at a meeting called for
the purpose of voting on such approval, and (iii) the Advisor. The terms
"majority of the outstanding voting securities" and "interested persons" shall
have the meanings as set forth in the Investment Company Act.
(b) The Fund and its distributor may use the
Manager's trade name or any name derived from the Manager's trade name solely in
connection with Manager's services provided pursuant to this Agreement only for
so long as this Agreement or any extension, renewal or amendment hereof remains
in effect. Within sixty (60) days from such time as this Agreement shall no
longer be in effect, the Fund shall cease to use such a name or any other name
connected with Manager.
14. Termination; No Assignment.
(a) This Agreement may be terminated by the Advisor
or the Trust on behalf of the Fund at any time without payment of any penalty,
by the Board of Trustees of the Trust or by vote of a majority of the
outstanding voting securities of a Fund, upon sixty (60) days' written notice to
Manager, and by Manager upon sixty (60) days' written notice to the Advisor. In
the event of a termination, Manager shall cooperate in the orderly transfer of
the Fund's affairs and, at the request of the Board of Trustees, transfer any
and all books and records of the Fund maintained by Manager on behalf of the
Fund.
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<PAGE>
(b) This Agreement shall terminate automatically in
the event of any transfer or assignment thereof, as defined in the Investment
Company Act.
(c) This Agreement may be terminated by the Advisor
upon a material breach of this Agreement by Manager by giving 20 days written
notice to Manager if said breach is not cured during said 20 day period; and may
be terminated by Manager upon a material breach of this Agreement by the Advisor
by giving 20 days written notice to the Advisor if said breach is not cured
during said 20 day period.
15. Severability. If any provision of this Agreement shall be
held or made invalid by a court decision, statute or rule, or shall be otherwise
rendered invalid, the remainder of this Agreement shall not be affected thereby.
16. Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect.
17. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California without giving
effect to the conflict of laws principles thereof; provided that nothing herein
shall be construed to preempt, or to be inconsistent with, any federal law,
regulation or rule, including the Investment Company Act and the Investment
Advisors Act of 1940 and any rules and regulations promulgated thereunder.
18. Amendment. This Agreement may be amended by mutual consent
of the parties, provided that the terms of each such amendment shall be approved
by the Board of Trustees of the Trust or by a vote of a majority of the
outstanding voting securities of the Fund.
19. Notice. Any notice that is required to be given by the
parties to each other under the terms of this Agreement shall be in writing,
delivered, or mailed postpaid to the other party, or transmitted by facsimile
with acknowledgment of receipt, to the parties at the following addresses or
facsimile numbers, which may from time to time be changed by the parties by
notice to the other party:
(a) If to Manager:
Strong Capital Management, Inc.
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
Attention: General Counsel
Facsimile: (414)359-3948
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<PAGE>
(b) If to the Advisor:
Litman/Gregory Fund Advisors, LLC
4 Orinda Way, Suite 230-D
Orinda, California 94563
Attention: Kenneth L. Gregory
Facsimile: (510)254-0335
(c) If to the Fund:
The Masters' Select Equity Fund
4 Orinda Way, Suite 230-D
Orinda, California 94563
Attention: Kenneth L. Gregory
Facsimile: (510)254-0335
20. Counterparts. This Agreement may be executed in one or
more counterparts, all of which shall together constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their duly authorized officers, all on the day
and year first above written.
LITMAN/GREGORY FUND STRONG CAPITAL MANAGEMENT,
ADVISORS, LLC INC.
By:______________________________ By:_________________________________
_________________________________ ____________________________________
_________________________________ ____________________________________
As a Third Party Beneficiary,
MASTERS' SELECT INVESTMENT TRUST
on behalf of
THE MASTERS' SELECT EQUITY FUND
By:______________________________
_________________________________
_________________________________
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DISTRIBUTION AGREEMENT
This Agreement made this day of , 1996 by and between MASTERS'
SELECT INVESTMENT TRUST, a Delaware business trust (the "Trust"), and FIRST FUND
DISTRIBUTORS, INC., a Delaware corporation (the "Distributor").
W I T N E S S E T H:
--------------------
WHEREAS, the Trust is registered as an open-end management
investment company under the Investment Company Act of 1940 (the "1940 Act"),
with shares of beneficial interest ("Shares") currently designated as shares of
the Masters' Select Equity Fund series of the Trust; and
WHEREAS, the Trust's Agreement and Declaration of Trust
permits the Board of Trustees to divide the Trust's Shares into separate series
("series") and it is in the interest of the Trust to offer the Shares of each
series for sale continuously; and
WHEREAS, the Distributor is registered as a broker-dealer
under the Securities Exchange Act of 1934 (the "1934 Act") and is a member in
good standing of the National Association of Securities Dealers, Inc. (the
"NASD"); and
WHEREAS, the Trust and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering of the Shares
of each series of the Trust;
NOW, THEREFORE, the parties agree as follows:
1. Appointment of Distributor. The Trust hereby appoints the
Distributor as exclusive agent to sell and to arrange for the sale of the
Shares, on the terms and for the period set forth in this Agreement, and the
Distributor hereby accepts such appointment and agrees to act hereunder directly
and/or through the Trust's transfer agent in the manner set forth in the
Prospectuses (as defined below). It is understood and agreed that the services
of the Distributor hereunder are not exclusive, and the Distributor may act as
principal underwriter for the shares of any other registered investment company.
2. Services and Duties of the Distributor.
(a) The Distributor agrees to sell the Shares, as
agent for the Trust, from time to time during the term of this Agreement upon
the terms described in a Prospectus. As used in this Agreement, the term
"Prospectus" shall mean a prospectus and statement of additional information
included as part of the Trust's Registration Statement, as such prospectus and
statement of additional information may be amended or supplemented from time to
time, and the term "Registration Statement" shall mean the Registration
Statement most recently filed from time to time by the Trust with the Securities
and Exchange Commission ("SEC") and effective under the Securities Act of 1933
(the "1933 Act") and the 1940 Act, as such Registration Statement is amended by
any amendments thereto at the time in effect. The Distributor shall not be
obligated to sell any certain number of Shares.
<PAGE>
(b) Upon commencement of operations of any of the
series, the Distributor will hold itself available to receive orders,
satisfactory to the Distributor, for the purchase of the Shares and will accept
such orders and will transmit such orders and funds received by it in payment
for such Shares as are so accepted to the Trust's transfer agent or custodian,
as appropriate, as promptly as practicable. Purchase orders shall be deemed
accepted and shall be effective at the time and in the manner set forth in the
series' Prospectuses. The Distributor shall not make any short sales of Shares.
(c) The offering price of the Shares shall be the net
asset value per share of the Shares, plus the sales charge, if any, (determined
as set forth in the Prospectuses). The Trust shall furnish the Distributor, with
all possible promptness, an advice of each computation of net asset value and
offering price.
(d) The Distributor shall have the right to enter
into selected dealer agreements with securities dealers of its choice ("selected
dealers") for the sale of Shares. Shares sold to selected dealers shall be for
resale by such dealers only at the offering price of the Shares as set forth in
the Prospectuses. The Distributor shall offer and sell Shares only to such
selected dealers as are members in good standing of the NASD.
3. Duties of the Trust.
(a) Maintenance of Federal Registration. The Trust
shall, at its expense, take, from time to time, all necessary action and such
steps, including payment of the related filing fees, as may be necessary to
register and maintain registration of a sufficient number of Shares under the
1933 Act. The Trust agrees to file from time to time such amendments, reports
and other documents as may be necessary in order that there may be no untrue
statement of a material fact in a Registration Statement or Prospectus, or
necessary in order that there may be no omission to state a material fact in the
Registration Statement or Prospectus which omission would make the statements
therein misleading.
(b) Maintenance of "Blue Sky" Qualifications. The
Trust shall, at its expense, use its best efforts to qualify and maintain the
qualification of an appropriate number of Shares for sale under the securities
laws of such states as the Distributor and the Trust may approve, and, if
necessary or appropriate in connection therewith, to qualify and maintain the
qualification of the Trust or the series as a broker or dealer in such states;
provided that the Trust shall not be required to amend its Agreement and
Declaration of Trust or By-Laws to comply with the laws of any state, to
maintain an office in any state, to change the terms of the offering of the
Shares in any state, to change the terms of the offering of the Shares in any
state from the terms set forth in Prospectuses, to qualify as a foreign
corporation in any state or to consent to service of process in any state other
than with respect to claims arising out of the offering and sale of the Shares.
The Distributor shall furnish such information and other material relating to
its affairs and activities as may be required by the Trust or its series in
connection with such qualifications.
(c) Copies of Reports and Prospectuses. The Trust
shall, at its expense, keep the Distributor fully informed with regard to its
affairs and in connection therewith shall furnish to the
2
<PAGE>
Distributor copies of all information, financial statements and other papers
which the Distributor may reasonably request for use in connection with the
distribution of Shares, including such reasonable number of copies of
Prospectuses and annual and interim reports as the Distributor may request and
shall cooperate fully in the efforts of the Distributor to sell and arrange for
the sale of the Shares and in the performance of the Distributor under this
Agreement.
4. Conformity with Applicable Law and Rules. The Distributor
agrees that in selling Shares hereunder it shall conform in all respects with
the laws of the United States and of any state in which Shares may be offered,
and with applicable rules and regulations of the NASD.
5. Independent Contractor. In performing its duties hereunder,
the Distributor shall be an independent contractor and neither the Distributor,
nor any of its officers, directors, employees, or representatives is or shall be
an employee of the Trust in the performance of the Distributor's duties
hereunder. The Distributor shall be responsible for its own conduct and the
employment, control, and conduct of its agents and employees and for injury to
such agents or employees or to others through its agents or employees. The
Distributor assumes full responsibility for its agents and employees under
applicable statutes and agrees to pay all employee taxes thereunder.
6. Indemnification.
(a) Indemnification of Trust. The Distributor agrees
to indemnify and hold harmless the Trust and each of its present or former
Trustees, officers, employees, representatives and each person, if any, who
controls or previously controlled the Trust within the meaning of Section 15 of
the 1933 Act against any and all losses, liabilities, damages, claims or
expenses (including the reasonable costs of investigating or defending any
alleged loss, liability, damage, claims or expense and reasonable legal counsel
fees incurred in connection therewith) to which the Trust or any such person may
become subject under the 1933 Act, under any other statute, at common law, or
otherwise, arising out of the acquisition of any Shares by any person which (i)
may be based upon any wrongful act by the Distributor or any of the
Distributor's directors, officers, employees or representatives, or (ii) may be
based upon any untrue statement or alleged untrue statement of a material fact
contained in a Registration Statement, Prospectus, shareholder report or other
information covering Shares filed or made public by the Trust or any amendment
thereof or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was made in
reliance upon and in conformity with information furnished to the Trust by the
Distributor. In no case (i) is the Distributor's indemnity in favor of the
Trust, or any person indemnified to be deemed to protect the Trust or such
indemnified person against any liability to which the Trust or such person would
otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance of the Trust's or such person's duties or by
reason of reckless disregard of the Trust's or such person's obligations and
duties under this Agreement or (ii) is the Distributor to be liable under its
indemnity agreement contained in this Paragraph with respect to any claim made
against the Trust or any person indemnified unless the Trust or such person, as
the case may be, shall have notified the Distributor in writing of the claim
within a reasonable time after the
3
<PAGE>
summons or other first written notification giving information of the nature of
the claim shall have been served upon the Trust or upon such person (or after
the Trust or such person shall have received notice of such service on any
designated agent). However, failure to notify the Distributor of any such claim
shall not relieve the Distributor from any liability which the Distributor may
have to the Trust or any person against whom such action is brought otherwise
than on account of the Distributor's indemnity agreement contained in this
Paragraph.
The Distributor shall be entitled to participate, at its own
expense, in the defense, or, if the Distributor so elects, to assume the defense
of any suit brought to enforce any such claim, but, if the Distributor elects to
assume the defense, such defense shall be conducted by legal counsel chosen by
the Distributor and satisfactory to the Trust, and to the persons indemnified as
defendant or defendants, in the suit. In the event that the Distributor elects
to assume the defense of any such suit and retain such legal counsel, the Trust,
and the persons indemnified as defendant or defendants in the suit, shall bear
the fees and expenses of any additional legal counsel retained by them. If the
Distributor does not elect to assume the defense of any such suit, the
Distributor will reimburse the Trust and the persons indemnified defendant or
defendants in such suit for the reasonable fees and expenses of any legal
counsel retained by them. The Distributor agrees to promptly notify the Trust of
the commencement of any litigation of proceedings against it or any of its
officers, employees or representatives in connection with the issue or sale of
any Shares.
(b) Indemnification of the Distributor. The Trust
agrees to indemnify and hold harmless the Distributor and each of its present or
former directors, officers, employees, representatives and each person, if any,
who controls or previously controlled the Distributor within the meaning of
Section 15 of the 1933 Act against any and all losses, liabilities, damages,
claims or expenses (including the reasonable costs of investigating or defending
any alleged loss, liability, damage, claim or expense and reasonable legal
counsel fees incurred in connection therewith) to which the Distributor or any
such person may become subject under the 1933 Act, under any other statute, at
common law, or otherwise, arising out of the acquisition of any Shares by any
person which (i) may be based upon any wrongful act by the Trust or any of the
Trust's Trustees, officers, employees or representatives, or (ii) may be based
upon any untrue statement or alleged untrue statement of a material fact
contained in a Registration Statement, Prospectus, shareholder report or other
information covering Shares filed or made public by the Trust or any amendment
thereof or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading unless such statement or omission was made in
reliance upon and in conformity with information furnished to the Trust by the
Distributor. In no case (i) is the Trust's indemnity in favor of the
Distributor, or any person indemnified to be deemed to protect the Distributor
or such indemnified person against any liability to which the Distributor or
such person would otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence in the performance of such person's duties or by
reason of reckless disregard of such person's obligations and duties under this
Agreement or (ii) is the Trust to be liable under their indemnity agreement
contained in this Paragraph with respect to any claim made against Distributor,
or person indemnified unless the Distributor, or such person, as the case may
be, shall have notified the Trust in writing of the claim within a reasonable
time after the summons or other
4
<PAGE>
first written notification giving information of the nature of the claim shall
have been served upon the Distributor or upon such person (or after the
Distributor or such person shall have received notice of such service on any
designated agent). However, failure to notify the Trust of any such claim shall
not relieve the Trust from any liability which the Trust may have to the
Distributor or any person against whom such action is brought otherwise than on
account of the Trust's indemnity agreement contained in this Paragraph.
The Trust shall be entitled to participate, at its own
expense, in the defense, or, if the Trust so elects, to assume the defense of
any suit brought to enforce any such claim, but if the Trust elects to assume
the defense, such defense shall be conducted by legal counsel chosen by the
Trust and satisfactory to the Distributor and to the persons indemnified as
defendant or defendants, in the suit. In the event that the Trust elects to
assume the defense of any such suit and retain such legal counsel, the
Distributor, the persons indemnified as defendant or defendants in the suit,
shall bear the fees and expenses of any additional legal counsel retained by
them. If the Trust does not elect to assume the defense of any such suit, the
Trust will reimburse the Distributor and the persons indemnified as defendant or
defendants in such suit for the reasonable fees and expenses of any legal
counsel retained by them. The Trust agrees to promptly notify the Distributor of
the commencement of any litigation or proceedings against it or any of its
Trustees, officers, employees or representatives in connection with the issue or
sale of any Shares.
7. Authorized Representations. The Distributor is not
authorized by the Trust to give on behalf of the Trust any information or to
make any representations in connection with the sale of Shares other than the
information and representations contained in a Registration Statement or
Prospectus filed with the SEC under the 1933 Act and/or the 1940 Act, covering
Shares, as such Registration Statement and Prospectus may be amended or
supplemented from time to time, or contained in shareholder reports or other
material that may be prepared by or on behalf of the Trust for the Distributor's
use. This shall not be construed to prevent the Distributor from preparing and
distributing tombstone ads and sales literature or other material as it may deem
appropriate. No person other than the Distributor is authorized to act as
principal underwriter (as such term is defined in the 1940 Act) for the Trust.
8. Term of Agreement. The term of this Agreement shall begin
on the date first above written, and unless sooner terminated as hereinafter
provided, this Agreement shall remain in effect for a period of two years from
the date first above written. Thereafter, this Agreement shall continue in
effect from year to year, subject to the termination provisions and all other
terms and conditions thereof, so long as such continuation shall be specifically
approved at least annually by (i) the Board of Trustees or by vote of a majority
of the outstanding voting securities of each series of the Trust and, (ii) by
the vote, cast in person at a meeting called for the purpose of voting on such
approval, of a majority of the Trustees of the Trust who are not parties to this
Agreement or interested persons of any such party. The Distributor shall furnish
to the Trust, promptly upon its request, such information as may reasonably be
necessary to evaluate the terms of this Agreement or any extension, renewal or
amendment hereof.
5
<PAGE>
9. Amendment or Assignment of Agreement. This Agreement may
not be amended or assigned except as permitted by the 1940 Act, and this
Agreement shall automatically and immediately terminate in the event of its
assignment.
10. Termination of Agreement. This Agreement may be terminated
by either party hereto, without the payment of any penalty, on not more than
upon 60 days' nor less than 30 days' prior notice in writing to the other party;
provided, that in the case of termination by the Trust such action shall have
been authorized by resolution of a majority of the Trustees of the Trust who are
not parties to this Agreement or interested persons of any such party, or by
vote of a majority of the outstanding voting securities of each series of the
Trust.
11. Miscellaneous. The captions in this Agreement are included
for convenience of reference only and in no way define or delineate any of the
provisions hereof or otherwise affect their construction or effect.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Nothing herein contained shall be deemed to require the Trust
to take any action contrary to its Agreement and Declaration of Trust or
By-Laws, or any applicable statutory or regulatory requirement to which it is
subject or by which it is bound, or to relieve or deprive the Board of Trustees
of the Trust of responsibility for and control of the conduct of the affairs of
the Trust.
12. Definition of Terms. Any question of interpretation of any
term or provision of this Agreement having a counterpart in or otherwise derived
from a term or provision of the 1940 Act shall be resolved by reference to such
term or provision of the 1940 Act and to interpretation thereof, if any, by the
United States courts or, in the absence of any controlling decision of any such
court, by rules, regulations or orders of the SEC validly issued pursuant to the
1940 Act. Specifically, the terms "vote of a majority of the outstanding voting
securities", "interested persons," "assignment," and "affiliated person," as
used in Paragraphs 8, 9 and 10 hereof, shall have the meanings assigned to them
by Section 2(a) of the 1940 Act. In addition, where the effect of a requirement
of the 1940 Act reflected in any provision of this Agreement is relaxed by a
rule, regulation or order of the SEC, whether of special or of general
application, such provision shall be deemed to incorporate the effect of such
rule, regulation or order.
13. Compliance with Securities Laws. The Trust represents that
it is registered as an open-end management investment company under the 1940
Act, and agrees that it will comply with all the provisions of the 1940 Act and
of the rules and regulations thereunder. The Trust and the Distributor each
agree to comply with all of the applicable terms and provisions of the 1940 Act,
the 1933 Act and, subject to the provisions of Section 4(d), all applicable
"Blue Sky" laws. The Distributor agrees to comply with all of the applicable
terms and provisions of the 1934 Act.
6
<PAGE>
14. Notices. Any notice required to be given pursuant to this
Agreement shall be deemed duly given if delivered or mailed by registered mail,
postage prepaid, to the Distributor at 4455 E. Camelback Road., Suite 261E,
Phoenix, AZ 85018 or to the Trust at 4 Orinda Way, Suite 230-D, Orinda, CA
94563.
15. Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be executed by their officers designated below on the date
first written above.
MASTERS' SELECT INVESTMENT TRUST
By:________________________________________
Name:
Title:
FIRST FUND DISTRIBUTORS, INC.
By:________________________________________
Name:
Title:
7
CUSTODIAN CONTRACT
Between
MASTERS' SELECT INVESTMENT TRUST
and
STATE STREET BANK AND TRUST COMPANY
Global/Series/Trust
21E593
<PAGE>
TABLE OF CONTENTS
Page
1. Employment of Custodian and Property to be Held By It.................. 1
2. Duties of the Custodian with Respect to Property of the Fund Held by
the Custodian in the United States..................................... 2
2.1 Holding Securities............................................ 2
2.2 Delivery of Securities........................................ 2
2.3 Registration of Securities.................................... 5
2.4 Bank Accounts................................................. 5
2.5 Availability of Federal Funds................................. 5
2.6 Collection of Income.......................................... 6
2.7 Payment of Fund Monies........................................ 6
2.8 Liability for Payment in Advance of Receipt of Securities
Purchased..................................................... 8
2.9 Appointment of Agents......................................... 8
2.10 Deposit of Fund Assets in U.S. Securities System.............. 8
2.11 Fund Assets Held in the Custodian's Direct
Paper System.................................................. 9
2.12 Segregated Account............................................ 10
2.13 Ownership Certificates for Tax Purposes....................... 11
2.14 Proxies....................................................... 11
2.15 Communications Relating to Portfolio Securities............... 11
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States........................................... 12
3.1 Appointment of Foreign Sub-Custodians......................... 12
3.2 Assets to be Held............................................. 12
3.3 Foreign Securities Systems.................................... 12
3.4 Holding Securities............................................ 13
3.5 Agreements with Foreign Banking Institutions.................. 13
3.6 Access of Independent Accountants of the Fund................. 13
3.7 Reports by Custodian.......................................... 13
3.8 Transactions in Foreign Custody Account....................... 14
3.9 Liability of Foreign Sub-Custodians........................... 14
3.10 Liability of Custodian........................................ 14
3.11 Reimbursement for Advances.................................... 15
3.12 Monitoring Responsibilities................................... 15
3.13 Branches of U.S. Banks........................................ 16
3.14 Tax Law....................................................... 16
<PAGE>
4. Payments for Sales or Repurchase or Redemptions of Shares of the Fund.. 16
5. Proper Instructions.................................................... 17
6. Actions Permitted Without Express Authority............................ 17
7. Evidence of Authority.................................................. 18
8. Duties of Custodian With Respect to the Books of Account and
Calculation of Net Asset Value and Net Income.......................... 18
9. Records................................................................ 19
10. Opinion of Fund's Independent Accountants.............................. 19
11. Reports to Fund by Independent Public Accountants...................... 19
12. Compensation of Custodian.............................................. 19
13. Responsibility of Custodian............................................ 20
14. Effective Period, Termination and Amendment............................ 21
15. Successor Custodian.................................................... 22
16. Interpretive and Additional Provisions................................. 23
17. Additional Funds....................................................... 23
18. Massachusetts Law to Apply............................................. 23
19. Prior Contracts........................................................ 24
20. Reproduction of Documents.............................................. 24
20. Shareholder Communications............................................. 24
<PAGE>
CUSTODIAN CONTRACT
This Contract between Masters' Select Investment Trust, a business
trust organized and existing under the laws of the State of Delaware, having its
principal place of business at 4 Orinda Way, Orinda, California 94563
hereinafter called the "Fund", and State Street Bank and Trust Company, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian",
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer shares in one series, The
Masters' Select Equity Fund, (such series together with all other series
subsequently established by the Fund and made subject to this Contract in
accordance with paragraph 17, being herein referred to as the "Portfolio(s)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of the assets of
the Portfolios of the Fund, including securities which the Fund, on behalf of
the applicable Portfolio desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Declaration of
Trust. The Fund on behalf of the Portfolio(s) agrees to deliver to the Custodian
all securities and cash of the Portfolios, and all payments of income, payments
of principal or capital distributions received by it with respect to all
securities owned by the Portfolio(s) from time to time, and the cash
consideration received by it for such new or treasury shares of capital stock of
the Fund representing interests in the Portfolios, ("Shares") as may be issued
or sold from time to time. The Custodian shall not be responsible for any
property of a Portfolio held or received by the Portfolio and not delivered to
the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article
5), the Custodian shall on behalf of the applicable Portfolio(s) from time to
time employ one or more sub-custodians, located in the United States but only in
accordance with an applicable vote by the Board of Trustees of the Fund on
behalf of the applicable Portfolio(s), and provided that the Custodian shall
have no more or less responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed than any such
sub-custodian has to the Custodian. The Custodian may employ as sub-custodian
for the Fund's foreign securities on behalf of the applicable Portfolio(s) the
foreign banking institutions and foreign securities
<PAGE>
depositories designated in Schedule A hereto but only in accordance with the
provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By the
Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate for
the account of each Portfolio all non-cash property, to be held by it in the
United States including all domestic securities owned by such Portfolio, other
than (a) securities which are maintained pursuant to Section 2.10 in a clearing
agency which acts as a securities depository or in a book-entry system
authorized by the U.S. Department of the Treasury and certain federal agencies
(each, a "U.S. Securities System") and (b) commercial paper of an issuer for
which State Street Bank and Trust Company acts as issuing and paying agent
("Direct Paper") which is deposited and/or maintained in the Direct Paper System
of the Custodian (the "Direct Paper System") pursuant to Section 2.11.
2.2 Delivery of Securities. The Custodian shall release and deliver domestic
securities owned by a Portfolio held by the Custodian or in a U.S. Securities
System account of the Custodian or in the Custodian's Direct Paper book entry
system account ("Direct Paper System Account") only upon receipt of Proper
Instructions from the Fund on behalf of the applicable Portfolio, which may be
continuing instructions when deemed appropriate by the parties, and only in the
following cases:
1) Upon sale of such securities for the account of the Portfolio and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Portfolio;
3) In the case of a sale effected through a U.S. Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any such case,
the cash or other consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of
the Portfolio or into the name of any nominee or nominees of the Custodian or
into the name or nominee name of any agent appointed pursuant to Section 2.9 or
into the name or nominee name of any sub-custodian appointed pursuant to Article
1; or for exchange for a
<PAGE>
different number of bonds, certificates or other evidence representing the same
aggregate face amount or number of units; provided that, in any such case, the
new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Portfolio,
to the broker or its clearing agent, against a receipt, for examination in
accordance with "street delivery" custom; provided that in any such case, the
Custodian shall have no responsibility or liability for any loss arising from
the delivery of such securities prior to receiving payment for such securities
except as may arise from the Custodian's own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions for
conversion contained in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities or the
surrender of interim receipts or temporary securities for definitive securities;
provided that, in any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the
Portfolio, but only against receipt of adequate collateral as agreed upon from
time to time by the Custodian and the Fund on behalf of the Portfolio, which may
be in the form of cash or obligations issued by the United States government,
its agencies or instrumentalities, except that in connection with any loans for
which collateral is to be credited to the Custodian's account in the book-entry
system authorized by the U.S. Department of the Treasury, the Custodian will not
be held liable or responsible for the delivery of securities owned by the
Portfolio prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by the
Fund on behalf of the Portfolio requiring a pledge of assets by the Fund on
behalf of the Portfolio, but only against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any agreement
among the Fund on behalf of the Portfolio, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the "Exchange Act") and a
member of The National Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options Clearing Corporation and of
any registered national securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements in connection with
transactions by the Portfolio of the Fund;
13) For delivery in accordance with the provisions of any agreement
among the Fund on behalf of the Portfolio, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange Act, relating to
compliance with the rules of the Commodity Futures
<PAGE>
Trading Commission and/or any Contract Market, or any similar organization or
organizations, regarding account deposits in connection with transactions by the
Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such Transfer Agent or to the holders of
shares in connection with distributions in kind, as may be described from time
to time in the currently effective prospectus and statement of additional
information of the Fund, related to the Portfolio ("Prospectus"), in
satisfaction of requests by holders of Shares for repurchase or redemption; and
15) For any other proper corporate purpose, but only upon receipt of,
in addition to Proper Instructions from the Fund on behalf of the applicable
Portfolio, a certified copy of a resolution of the Board of Trustees or of the
Executive Committee signed by an officer of the Fund and certified by the
Secretary or an Assistant Secretary, specifying the securities of the Portfolio
to be delivered, setting forth the purpose for which such delivery is to be
made, declaring such purpose to be a proper corporate purpose, and naming the
person or persons to whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian (other
than bearer securities) shall be registered in the name of the Portfolio or in
the name of any nominee of the Fund on behalf of the Portfolio or of any nominee
of the Custodian which nominee shall be assigned exclusively to the Portfolio,
unless the Fund has authorized in writing the appointment of a nominee to be
used in common with other registered investment companies having the same
investment adviser as the Portfolio, or in the name or nominee name of any agent
appointed pursuant to Section 2.9 or in the name or nominee name of any
sub-custodian appointed pursuant to Article 1. All securities accepted by the
Custodian on behalf of the Portfolio under the terms of this Contract shall be
in "street name" or other good delivery form. If, however, the Fund directs the
Custodian to maintain securities in "street name", the Custodian shall utilize
its best efforts only to timely collect income due the Fund on such securities
and to notify the Fund on a best efforts basis only of relevant corporate
actions including, without limitation, pendency of calls, maturities, tender or
exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank account
or accounts in the United States in the name of each Portfolio of the Fund,
subject only to draft or order by the Custodian acting pursuant to the terms of
this Contract, and shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for the account of the
Portfolio, other than cash maintained by the Portfolio in a bank account
established and used in accordance with Rule 17f-3 under the Investment Company
Act of 1940. Funds held by the Custodian for a Portfolio may be deposited by it
to its credit as Custodian in the Banking Department of the Custodian or in such
other banks or trust companies as it may in its discretion deem necessary or
desirable; provided, however, that every such bank or trust company shall be
qualified to act as a custodian under the Investment Company Act of 1940 and
that each such bank or trust company and the funds to be deposited with each
such bank or trust company shall on behalf of each applicable Portfolio be
approved by vote of a majority of the Board of Trustees
<PAGE>
of the Fund. Such funds shall be deposited by the Custodian in its capacity as
Custodian and shall be withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund on
behalf of each applicable Portfolio and the Custodian, the Custodian shall, upon
the receipt of Proper Instructions from the Fund on behalf of a Portfolio, make
federal funds available to such Portfolio as of specified times agreed upon from
time to time by the Fund and the Custodian in the amount of checks received in
payment for Shares of such Portfolio which are deposited into the Portfolio's
account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments with
respect to registered domestic securities held hereunder to which each Portfolio
shall be entitled either by law or pursuant to custom in the securities
business, and shall collect on a timely basis all income and other payments with
respect to bearer domestic securities if, on the date of payment by the issuer,
such securities are held by the Custodian or its agent thereof and shall credit
such income, as collected, to such Portfolio's custodian account. Without
limiting the generality of the foregoing, the Custodian shall detach and present
for payment all coupons and other income items requiring presentation as and
when they become due and shall collect interest when due on securities held
hereunder. Income due each Portfolio on securities loaned pursuant to the
provisions of Section 2.2 (10) shall be the responsibility of the Fund. The
Custodian will have no duty or responsibility in connection therewith, other
than to provide the Fund with such information or data as may be necessary to
assist the Fund in arranging for the timely delivery to the Custodian of the
income to which the Portfolio is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the Fund on
behalf of the applicable Portfolio, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay out monies of a
Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options, futures contracts
or options on futures contracts for the account of the Portfolio but only (a)
against the delivery of such securities or evidence of title to such options,
futures contracts or options on futures contracts to the Custodian (or any bank,
banking firm or trust company doing business in the United States or abroad
which is qualified under the Investment Company Act of 1940, as amended, to act
as a custodian and has been designated by the Custodian as its agent for this
purpose) registered in the name of the Portfolio or in the name of a nominee of
the Custodian referred to in Section 2.3 hereof or in proper form for transfer;
(b) in the case of a purchase effected through a U.S. Securities System, in
accordance with the conditions set forth in Section 2.10 hereof; (c) in the case
of a purchase involving the Direct Paper System, in accordance with the
conditions set forth in Section 2.11; (d) in the case of repurchase agreements
entered into between the Fund on behalf of the Portfolio and the Custodian, or
another bank, or a broker-dealer which is a member of NASD, (i) against delivery
of the securities either in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such securities or (ii)
against delivery of the receipt evidencing purchase by the Portfolio of
securities owned by the Custodian along with written evidence of the agreement
by the Custodian to repurchase such securities from the
<PAGE>
Portfolio or (e) for transfer to a time deposit account of the Fund in any bank,
whether domestic or foreign; such transfer may be effected prior to receipt of a
confirmation from a broker and/or the applicable bank pursuant to Proper
Instructions from the Fund as defined in Article 5;
2) In connection with conversion, exchange or surrender of securities
owned by the Portfolio as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by the Portfolio
as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Portfolio, including but not limited to the following payments for the account
of the Portfolio: interest, taxes, management, accounting, transfer agent and
legal fees, and operating expenses of the Fund whether or not such expenses are
to be in whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends on Shares of the Portfolio declared
pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in addition
to Proper Instructions from the Fund on behalf of the Portfolio, a certified
copy of a resolution of the Board of Trustees or of the Executive Committee of
the Fund signed by an officer of the Fund and certified by its Secretary or an
Assistant Secretary, specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such purpose to be a
proper purpose, and naming the person or persons to whom such payment is to be
made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased. Except
as specifically stated otherwise in this Contract, in any and every case where
payment for purchase of domestic securities for the account of a Portfolio is
made by the Custodian in advance of receipt of the securities purchased in the
absence of specific written instructions from the Fund on behalf of such
Portfolio to so pay in advance, the Custodian shall be absolutely liable to the
Fund for such securities to the same extent as if the securities had been
received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust company
which is itself qualified under the Investment Company Act of 1940, as amended,
to act as a custodian, as its agent to carry out such of the provisions of this
Article 2 as the Custodian may from time to time direct; provided, however, that
the appointment of any agent shall not relieve the Custodian of its
responsibilities or liabilities hereunder.
<PAGE>
2.10 Deposit of Fund Assets in U.S. Securities Systems. The Custodian may
deposit and/or maintain securities owned by a Portfolio in a clearing agency
registered with the Securities and Exchange Commission under Section 17A of the
Securities Exchange Act of 1934, which acts as a securities depository, or in
the book-entry system authorized by the U.S. Department of the Treasury and
certain federal agencies, collectively referred to herein as "U.S. Securities
System" in accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the following
provisions:
1) The Custodian may keep securities of the Portfolio in a U.S.
Securities System provided that such securities are represented in an account
("Account") of the Custodian in the U.S. Securities System which shall not
include any assets of the Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a U.S. Securities System shall identify by
book-entry those securities belonging to the Portfolio;
3) The Custodian shall pay for securities purchased for the account of
the Portfolio upon (i) receipt of advice from the U.S. Securities System that
such securities have been transferred to the Account, and (ii) the making of an
entry on the records of the Custodian to reflect such payment and transfer for
the account of the Portfolio. The Custodian shall transfer securities sold for
the account of the Portfolio upon (i) receipt of advice from the U.S. Securities
System that payment for such securities has been transferred to the Account, and
(ii) the making of an entry on the records of the Custodian to reflect such
transfer and payment for the account of the Portfolio. Copies of all advices
from the U.S. Securities System of transfers of securities for the account of
the Portfolio shall identify the Portfolio, be maintained for the Portfolio by
the Custodian and be provided to the Fund at its request. Upon request, the
Custodian shall furnish the Fund on behalf of the Portfolio confirmation of each
transfer to or from the account of the Portfolio in the form of a written advice
or notice and shall furnish to the Fund on behalf of the Portfolio copies of
daily transaction sheets reflecting each day's transactions in the U.S.
Securities System for the account of the Portfolio.
4) The Custodian shall provide the Fund for the Portfolio with any
report obtained by the Custodian on the U.S. Securities System's accounting
system, internal accounting control and procedures for safeguarding securities
deposited in the U.S. Securities System;
5) The Custodian shall have received from the Fund on behalf of the
Portfolio the initial or annual certificate, as the case may be, required by
Article 14 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the Portfolio for any
loss or damage to the Portfolio resulting from use of the U.S. Securities System
by reason of any negligence, misfeasance or misconduct of the Custodian or any
of its agents or of any of its or their employees or from failure of the
Custodian or any such agent to enforce effectively such rights as it may have
against the U.S. Securities System; at the election of the Fund, it shall be
entitled to be subrogated to the rights of
<PAGE>
the Custodian with respect to any claim against the U.S. Securities System or
any other person which the Custodian may have as a consequence of any such loss
or damage if and to the extent that the Portfolio has not been made whole for
any such loss or damage.
2.11 Fund Assets Held in the Custodian's Direct Paper System. The Custodian may
deposit and/or maintain securities owned by a Portfolio in the Direct Paper
System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System
will be effected in the absence of Proper Instructions from the Fund on behalf
of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the Direct
Paper System only if such securities are represented in an account ("Account")
of the Custodian in the Direct Paper System which shall not include any assets
of the Custodian other than assets held as a fiduciary, custodian or otherwise
for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System shall identify by
book-entry those securities belonging to the Portfolio;
4) The Custodian shall pay for securities purchased for the account of
the Portfolio upon the making of an entry on the records of the Custodian to
reflect such payment and transfer of securities to the account of the Portfolio.
The Custodian shall transfer securities sold for the account of the Portfolio
upon the making of an entry on the records of the Custodian to reflect such
transfer and receipt of payment for the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the Portfolio
confirmation of each transfer to or from the account of the Portfolio, in the
form of a written advice or notice, of Direct Paper on the next business day
following such transfer and shall furnish to the Fund on behalf of the Portfolio
copies of daily transaction sheets reflecting each day's transaction in the U.S.
Securities System for the account of the Portfolio;
6) The Custodian shall provide the Fund on behalf of the Portfolio with
any report on its system of internal accounting control as the Fund may
reasonably request from time to time.
2.12 Segregated Account. The Custodian shall upon receipt of Proper Instructions
from the Fund on behalf of each applicable Portfolio establish and maintain a
segregated account or accounts for and on behalf of each such Portfolio, into
which account or accounts may be transferred cash and/or securities, including
securities maintained in an account by the Custodian pursuant to Section 2.10
hereof, (i) in accordance with the provisions of any agreement among the Fund on
behalf of the Portfolio, the Custodian and a broker-dealer registered under the
Exchange Act and a member of the NASD (or any futures commission merchant
registered under the Commodity Exchange Act), relating to compliance with the
rules of The Options Clearing Corporation and of any registered national
securities exchange (or the Commodity Futures
<PAGE>
Trading Commission or any registered contract market), or of any similar
organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Portfolio, (ii) for purposes of segregating
cash or government securities in connection with options purchased, sold or
written by the Portfolio or commodity futures contracts or options thereon
purchased or sold by the Portfolio, (iii) for the purposes of compliance by the
Portfolio with the procedures required by Investment Company Act Release No.
10666, or any subsequent release or releases of the Securities and Exchange
Commission relating to the maintenance of segregated accounts by registered
investment companies and (iv) for other proper corporate purposes, but only, in
the case of clause (iv), upon receipt of, in addition to Proper Instructions
from the Fund on behalf of the applicable Portfolio, a certified copy of a
resolution of the Board of Trustees or of the Executive Committee signed by an
officer of the Fund and certified by the Secretary or an Assistant Secretary,
setting forth the purpose or purposes of such segregated account and declaring
such purposes to be proper corporate purposes.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state tax
purposes in connection with receipt of income or other payments with respect to
domestic securities of each Portfolio held by it and in connection with
transfers of securities.
2.14 Proxies. The Custodian shall, with respect to the domestic securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of the
Portfolio or a nominee of the Portfolio, all proxies, without indication of the
manner in which such proxies are to be voted, and shall promptly deliver to the
Portfolio such proxies, all proxy soliciting materials and all notices relating
to such securities.
2.15 Communications Relating to Portfolio Securities. Subject to the provisions
of Section 2.3, the Custodian shall transmit promptly to the Fund for each
Portfolio all written information (including, without limitation, pendency of
calls and maturities of domestic securities and expirations of rights in
connection therewith and notices of exercise of call and put options written by
the Fund on behalf of the Portfolio and the maturity of futures contracts
purchased or sold by the Portfolio) received by the Custodian from issuers of
the securities being held for the Portfolio. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Portfolio all written
information received by the Custodian from issuers of the securities whose
tender or exchange is sought and from the party (or his agents) making the
tender or exchange offer. If the Portfolio desires to take action with respect
to any tender offer, exchange offer or any other similar transaction, the
Portfolio shall notify the Custodian at least three business days prior to the
date on which the Custodian is to take such action.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside of
the United States
<PAGE>
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Portfolio's
securities and other assets maintained outside the United States the foreign
banking institutions and foreign securities depositories designated on Schedule
A hereto ("foreign sub-custodians"). Upon receipt of "Proper Instructions", as
defined in Section 5 of this Contract, together with a certified resolution of
the Fund's Board of Trustees, the Custodian and the Fund may agree to amend
Schedule A hereto from time to time to designate additional foreign banking
institutions and foreign securities depositories to act as sub-custodian. Upon
receipt of Proper Instructions, the Fund may instruct the Custodian to cease the
employment of any one or more such sub-custodians for maintaining custody of the
Portfolio's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other assets
maintained in the custody of the foreign sub-custodians to: (a) "foreign
securities", as defined in paragraph (c)(1) of Rule 17f-5 under the Investment
Company Act of 1940, and (b) cash and cash equivalents in such amounts as the
Custodian or the Fund may determine to be reasonably necessary to effect the
Portfolio's foreign securities transactions. The Custodian shall identify on its
books as belonging to the Fund, the foreign securities of the Fund held by each
foreign sub-custodian.
3.3 Foreign Securities Systems. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Portfolios shall be
maintained in a clearing agency which acts as a securities depository or in a
book-entry system for the central handling of securities located outside of the
United States (each a "Foreign Securities System") only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof (Foreign Securities Systems and U.S. Securities
Systems are collectively referred to herein as the "Securities Systems"). Where
possible, such arrangements shall include entry into agreements containing the
provisions set forth in Section 3.5 hereof.
3.4 Holding Securities. The Custodian may hold securities and other non-cash
property for all of its customers, including the Fund, with a foreign
sub-custodian in a single account that is identified as belonging to the
Custodian for the benefit of its customers, provided however, that (i) the
records of the Custodian with respect to securities and other non-cash property
of the Fund which are maintained in such account shall identify by book-entry
those securities and other non-cash property belonging to the Fund and (ii) the
Custodian shall require that securities and other non-cash property so held by
the foreign sub-custodian be held separately from any assets of the foreign
sub-custodian or of others.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a foreign
banking institution shall provide that: (a) the assets of each Portfolio will
not be subject to any right, charge, security interest, lien or claim of any
kind in favor of the foreign banking institution or its creditors or agent,
except a claim of payment for their safe custody or administration; (b)
beneficial ownership for the assets of each Portfolio will be freely
transferable without the payment of money or value other than for custody or
administration; (c) adequate records will be maintained identifying the assets
as belonging to each applicable Portfolio; (d) officers of or
<PAGE>
auditors employed by, or other representatives of the Custodian, including to
the extent permitted under applicable law the independent public accountants for
the Fund, will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the Custodian; and
(e) assets of the Portfolios held by the foreign sub-custodian will be subject
only to the instructions of the Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of the Fund, the
Custodian will use its best efforts to arrange for the independent accountants
of the Fund to be afforded access to the books and records of any foreign
banking institution employed as a foreign sub-custodian insofar as such books
and records relate to the performance of such foreign banking institution under
its agreement with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from time to
time, as mutually agreed upon, statements in respect of the securities and other
assets of the Portfolio(s) held by foreign sub-custodians, including but not
limited to an identification of entities having possession of the Portfolio(s)
securities and other assets and advices or notifications of any transfers of
securities to or from each custodial account maintained by a foreign banking
institution for the Custodian on behalf of each applicable Portfolio indicating,
as to securities acquired for a Portfolio, the identity of the entity having
physical possession of such securities.
3.8 Transactions in Foreign Custody Account. (a) Except as otherwise provided in
paragraph (b) of this Section 3.8, the provision of Sections 2.2 and 2.7 of this
Contract shall apply, mutatis mutandis to the foreign securities of the Fund
held outside the United States by foreign sub-custodians. (b) Notwithstanding
any provision of this Contract to the contrary, settlement and payment for
securities received for the account of each applicable Portfolio and delivery of
securities maintained for the account of each applicable Portfolio may be
effected in accordance with the customary established securities trading or
securities processing practices and procedures in the jurisdiction or market in
which the transaction occurs, including, without limitation, delivering
securities to the purchaser thereof or to a dealer therefor (or an agent for
such purchaser or dealer) against a receipt with the expectation of receiving
later payment for such securities from such purchaser or dealer. (c) Securities
maintained in the custody of a foreign sub-custodian may be maintained in the
name of such entity's nominee to the same extent as set forth in Section 2.3 of
this Contract, and the Fund agrees to hold any such nominee harmless from any
liability as a holder of record of such securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the
Custodian employs a foreign banking institution as a foreign sub-custodian shall
require the institution to exercise reasonable care in the performance of its
duties and to indemnify, and hold harmless, the Custodian and each Fund from and
against any loss, damage, cost, expense, liability or claim arising out of or in
connection with the institution's performance of such obligations. At the
election of the Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a foreign banking institution as a
consequence of any such loss, damage, cost, expense, liability or claim if and
to the extent that the Fund has not been made whole for any such loss, damage,
cost, expense, liability or claim.
<PAGE>
3.10 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set forth with
respect to sub-custodians generally in this Contract and, regardless of whether
assets are maintained in the custody of a foreign banking institution, a foreign
securities depository or a branch of a U.S. bank as contemplated by paragraph
3.13 hereof, the Custodian shall not be liable for any loss, damage, cost,
expense, liability or claim resulting from nationalization, expropriation,
currency restrictions, or acts of war or terrorism or any loss where the
sub-custodian has otherwise exercised reasonable care. Notwithstanding the
foregoing provisions of this paragraph 3.10, in delegating custody duties to
State Street London Ltd., the Custodian shall not be relieved of any
responsibility to the Fund for any loss due to such delegation, except such loss
as may result from (a) political risk (including, but not limited to, exchange
control restrictions, confiscation, expropriation, nationalization,
insurrection, civil strife or armed hostilities) or (b) other losses (excluding
a bankruptcy or insolvency of State Street London Ltd. not caused by political
risk) due to Acts of God, nuclear incident or other losses under circumstances
where the Custodian and State Street London Ltd. have exercised reasonable care.
3.11 Reimbursement for Advances. If the Fund requires the Custodian to advance
cash or securities for any purpose for the benefit of a Portfolio including the
purchase or sale of foreign exchange or of contracts for foreign exchange, or in
the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the applicable Portfolio shall
be security therefor and should the Fund fail to repay the Custodian promptly,
the Custodian shall be entitled to utilize available cash and to dispose of such
Portfolios assets to the extent necessary to obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually to the
Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be similar in
kind and scope to that furnished to the Fund in connection with the initial
approval of this Contract. In addition, the Custodian will promptly inform the
Fund in the event that the Custodian learns of a material adverse change in the
financial condition of a foreign sub-custodian or any material loss of the
assets of the Fund or in the case of any foreign sub-custodian not the subject
of an exemptive order from the Securities and Exchange Commission is notified by
such foreign sub-custodian that there appears to be a substantial likelihood
that its shareholders' equity will decline below $200 million (U.S. dollars or
the equivalent thereof) or that its shareholders' equity has declined below $200
million (in each case computed in accordance with generally accepted U.S.
accounting principles).
3.13 Branches of U.S. Banks. (a) Except as otherwise set forth in this Contract,
the provisions hereof shall not apply where the custody of the Portfolios assets
are maintained in a foreign branch of a banking institution which is a "bank" as
defined by Section 2(a)(5) of the Investment Company Act of 1940 meeting the
qualification set forth in Section 26(a) of said Act. The appointment of any
such branch as a sub-custodian shall be governed by paragraph 1 of this
Contract. (b) Cash held for each Portfolio of the Fund in the United Kingdom
shall be maintained
<PAGE>
in an interest bearing account established for the Fund with the Custodian's
London branch, which account shall be subject to the direction of the Custodian,
State Street London Ltd. or both.
3.14 Tax Law. The Custodian shall have no responsibility or liability for any
obligations now or hereafter imposed on the Fund or the Custodian as custodian
of the Fund by the tax law of the United States of America or any state or
political subdivision thereof. It shall be the responsibility of the Fund to
notify the Custodian of the obligations imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of jurisdictions other than those mentioned
in the above sentence, including responsibility for withholding and other taxes,
assessments or other governmental charges, certifications and governmental
reporting. The sole responsibility of the Custodian with regard to such tax law
shall be to use reasonable efforts to assist the Fund with respect to any claim
for exemption or refund under the tax law of jurisdictions for which the Fund
has provided such information.
4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund
The Custodian shall receive from the distributor for the Shares or from
the Transfer Agent of the Fund and deposit into the account of the appropriate
Portfolio such payments as are received for Shares of that Portfolio issued or
sold from time to time by the Fund. The Custodian will provide timely
notification to the Fund on behalf of each such Portfolio and the Transfer Agent
of any receipt by it of payments for Shares of such Portfolio.
From such funds as may be available for the purpose but subject to the
limitations of theDeclaration of Trust and any applicable votes of the Board of
Trustees of the Fund pursuant thereto, the Custodian shall, upon receipt of
instructions from the Transfer Agent, make funds available for payment to
holders of Shares who have delivered to the Transfer Agent a request for
redemption or repurchase of their Shares. In connection with the redemption or
repurchase of Shares of a Portfolio, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian shall honor checks drawn on
the Custodian by a holder of Shares, which checks have been furnished by the
Fund to the holder of Shares, when presented to the Custodian in accordance with
such procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
5. Proper Instructions
Proper Instructions as used throughout this Contract means a writing
signed or initialled by one or more person or persons as the Board of Trustees
shall have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes them
to have been given by a person authorized to give such instructions with respect
to the transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. Upon receipt of a certificate of the Secretary or an
Assistant Secretary as to the authorization by the Board of
<PAGE>
Trustees of the Fund accompanied by a detailed description of procedures
approved by the Board of Trustees, Proper Instructions may include
communications effected directly between electro-mechanical or electronic
devices provided that the Board of Trustees and the Custodian are satisfied that
such procedures afford adequate safeguards for the Portfolios' assets. For
purposes of this Section, Proper Instructions shall include instructions
received by the Custodian pursuant to any three-party agreement which requires a
segregated asset account in accordance with Section 2.12.
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this Contract,
provided that all such payments shall be accounted for to the Fund on behalf of
the Portfolio;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Portfolio, checks, drafts
and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and other dealings
with the securities and property of the Portfolio except as otherwise directed
by the Board of Trustees of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the Fund.
The Custodian may receive and accept a certified copy of a vote of the Board of
Trustees of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of any action
by the Board of Trustees pursuant to the Declaration of Trust as described in
such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and Calculation of
Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Trustees of the Fund to keep
the books of account of each Portfolio and/or compute the net asset value per
share of the outstanding shares of each Portfolio
<PAGE>
or, if directed in writing to do so by the Fund on behalf of the Portfolio,
shall itself keep such books of account and/or compute such net asset value per
share. If so directed, the Custodian shall also calculate daily the net income
of the Portfolio as described in the Fund's currently effective prospectus
related to such Portfolio and shall advise the Fund and the Transfer Agent daily
of the total amounts of such net income and, if instructed in writing by an
officer of the Fund to do so, shall advise the Transfer Agent periodically of
the division of such net income among its various components. The calculations
of the net asset value per share and the daily income of each Portfolio shall be
made at the time or times described from time to time in the Fund's currently
effective prospectus related to such Portfolio.
9. Records
The Custodian shall with respect to each Portfolio create and maintain
all records relating to its activities and obligations under this Contract in
such manner as will meet the obligations of the Fund under the Investment
Company Act of 1940, with particular attention to Section 31 thereof and Rules
31a-1 and 31a-2 thereunder. All such records shall be the property of the Fund
and shall at all times during the regular business hours of the Custodian be
open for inspection by duly authorized officers, employees or agents of the Fund
and employees and agents of the Securities and Exchange Commission. The
Custodian shall, at the Fund's request, supply the Fund with a tabulation of
securities owned by each Portfolio and held by the Custodian and shall, when
requested to do so by the Fund and for such compensation as shall be agreed upon
between the Fund and the Custodian, include certificate numbers in such
tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund on behalf
of each applicable Portfolio may from time to time request, to obtain from year
to year favorable opinions from the Fund's independent accountants with respect
to its activities hereunder in connection with the preparation of the Fund's
Form N-1A, and Form N-SAR or other annual reports to the Securities and Exchange
Commission and with respect to any other requirements of such Commission.
11. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, on behalf of each of the
Portfolios at such times as the Fund may reasonably require, with reports by
independent public accountants on the accounting system, internal accounting
control and procedures for safeguarding securities, futures contracts and
options on futures contracts, including securities deposited and/or maintained
in a Securities System, relating to the services provided by the Custodian under
this Contract; such reports, shall be of sufficient scope and in sufficient
detail, as may reasonably be required by the Fund to provide reasonable
assurance that any material inadequacies would be disclosed by such examination,
and, if there are no such inadequacies, the reports shall so state.
12. Compensation of Custodian
<PAGE>
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund on behalf of each applicable Portfolio and the Custodian.
13. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Fund for any
action taken or omitted by it in good faith without negligence. It shall be
entitled to rely on and may act upon advice of counsel (who may be counsel for
the Fund) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice.
Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a sub-custodian or agent,
the Custodian shall be without liability to the Fund for any loss, liability,
claim or expense resulting from or caused by; (i) events or circumstances beyond
the reasonable control of the Custodian or any sub-custodian or Securities
System or any agent or nominee of any of the foregoing, including, without
limitation, nationalization or expropriation, imposition of currency controls or
restrictions, the interruption, suspension or restriction of trading on or the
closure of any securities market, power or other mechanical or technological
failures or interruptions, computer viruses or communications disruptions, acts
of war or terrorism, riots, revolutions, work stoppages, natural disasters or
other similar events or acts; (ii) errors by the Fund or the Investment Advisor
in their instructions to the Custodian provided such instructions have been in
accordance with this Contract; (iii) the insolvency of or acts or omissions by a
Securities System; (iv) any delay or failure of any broker, agent or
intermediary, central bank or other commercially prevalent payment or clearing
system to deliver to the Custodian's sub-custodian or agent securities purchased
or in the remittance or payment made in connection with securities sold; (v) any
delay or failure of any company, corporation, or other body in charge of
registering or transferring securities in the name of the Custodian, the Fund,
the Custodian's sub-custodians, nominees or agents or any consequential losses
arising out of such delay or failure to transfer such securities including
non-receipt of bonus, dividends and rights and other accretions or benefits;
(vi) delays or inability to perform its duties due to any disorder in market
infrastructure with respect to any particular security or Securities System; and
(vii) any provision of any present or future law or regulation or order of the
United States of America, or any state thereof, or any other country, or
political subdivision thereof or of any court of competent jurisdiction.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution to the same extent as set forth with respect to
sub-custodians generally in this Contract.
<PAGE>
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Fund or the Portfolio being liable for the payment
of money or incurring liability of some other form, the Fund on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements, foreign exchange contracts and assumed settlement) or
in the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the applicable Portfolio shall
be security therefor and should the Fund fail to repay the Custodian promptly,
the Custodian shall be entitled to utilize available cash and to dispose of such
Portfolio's assets to the extent necessary to obtain reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
14. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however that the Custodian shall not with respect to a Portfolio act under
Section 2.10 hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board of Trustees of the Fund has
approved the initial use of a particular Securities System by such Portfolio, as
required by Rule 17f-4 under the Investment Company Act of 1940, as amended and
that the Custodian shall not with respect to a Portfolio act under Section 2.11
hereof in the absence of receipt of an initial certificate of the Secretary or
an Assistant Secretary that the Board of Trustees has approved the initial use
of the Direct Paper System by such Portfolio; provided further, however, that
the Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Declaration of
Trust, and further provided, that the Fund on behalf of one or more of the
Portfolios may at any time by action of its Board of Trustees (i) substitute
another bank or trust company for the Custodian by giving notice as described
above to the Custodian, or (ii) immediately terminate this Contract in the event
of the appointment of a conservator or receiver for the Custodian by the
Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
<PAGE>
15. Successor Custodian
If a successor custodian for the Fund, of one or more of the Portfolios
shall be appointed by the Board of Trustees of the Fund, the Custodian shall,
upon termination, deliver to such successor custodian at the office of the
Custodian, duly endorsed and in the form for transfer, all securities of each
applicable Portfolio then held by it hereunder and shall transfer to an account
of the successor custodian all of the securities of each such Portfolio held in
a Securities System.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Board of
Trustees of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Trustees shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian on behalf of each applicable Portfolio and all
instruments held by the Custodian relative thereto and all other property held
by it under this Contract on behalf of each applicable Portfolio and to transfer
to an account of such successor custodian all of the securities of each such
Portfolio held in any Securities System. Thereafter, such bank or trust company
shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
16. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Fund on behalf of each of the Portfolios, may from time to time agree on
such provisions interpretive of or in addition to the provisions of this
Contract as may in their joint opinion be consistent with the general tenor of
this Contract. Any such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto, provided that no
such interpretive or additional provisions shall contravene any applicable
federal or state regulations or any provision of the Declaration of Trust of the
Fund. No interpretive or additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this Contract.
<PAGE>
17. Additional Funds
In the event that the Fund establishes one or more series of Shares in
addition to the Masters' Select Equity Fund with respect to which it desires to
have the Custodian render services as custodian under the terms hereof, it shall
so notify the Custodian in writing, and if the Custodian agrees in writing to
provide such services, such series of Shares shall become a Portfolio hereunder.
18. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
19. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund on behalf of each of the Portfolios and the
Custodian relating to the custody of the Fund's assets.
20. Reproduction of Documents
This Contract and all schedules, exhibits, attachments and amendments hereto may
be reproduced by any photographic, photostatic, microfilm, micro-card, miniature
photographic or other similar process. The parties hereto all/each agree that
any such reproduction shall be admissible in evidence as the original itself in
any judicial or administrative proceeding, whether or not the original is in
existence and whether or not such reproduction was made by a party in the
regular course of business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
21. Shareholder Communications Election
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether the Fund authorizes
the Custodian to provide the Fund's name, address, and share position to
requesting companies whose stock the Fund owns. If the Fund tells the Custodian
"no", the Custodian will not provide this information to requesting companies.
If the Fund tells the Custodian "yes" or do not check either "yes" or "no"
below, the Custodian is required by the rule to treat the Fund as consenting to
disclosure of this information for all securities owned by the Fund or any funds
or accounts established by the Fund. For the Fund's protection, the Rule
prohibits the requesting company from using the Fund's name and address for any
purpose other than corporate communications. Please indicate below whether the
Fund consent or object by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions.
NO [ ] The Custodian is not authorized to release the Fund's name,
address, and share positions.
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the th day of December, 1996.
ATTEST MASTERS' SELECT INVESTMENT TRUST
ATTEST STATE STREET BANK AND TRUST COMPANY
<PAGE>
Schedule A
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Trustees of Masters' Select
Investment Trust for use as sub-custodians for the Fund's securities and other
assets:
(Insert banks and securities depositories)
Certified:
Fund's Authorized Officer
Date:
December 16, 1996
22910-0001
Masters' Select Investment Trust
4 Orinda Way, Suite 230-D
Orinda, CA 94563
Registration Statement on Form N-1A
Ladies and Gentlemen:
We have acted as counsel to Masters' Select Investment Trust, a
Delaware business trust (the "Trust"), in connection with the Trust's
Registration Statement on Form N-1A filed with the Securities and Exchange
Commission on August 12, 1996 (the "Registration Statement") and relating to the
issuance by the Trust of an indefinite number of $0.01 par value shares of
beneficial interest of one series of the Trust, The Masters' Select Equity Fund
(the "Shares") pursuant to Rule 24f-2 under the Investment Company Act of 1940,
as amended (the "Act").
In connection with this opinion, we have assumed the authenticity of
all records, documents and instruments submitted to us as originals, the
genuineness of all signatures, the legal capacity of all natural persons, and
the conformity to the originals of all records, documents, and instruments
submitted to us as copies. We have based our opinion on the following:
(a) the Trust's Agreement and Declaration of Trust dated as of August
1, 1996, as amended by unanimous consent of the initial Trustees of the Trust on
November 11, 1996 (the "Declaration of Trust"), and the Trust's Certificate of
Trust as filed with the Secretary of State of Delaware on August 2, 1996;
(b) the By-Laws of the Trust;
<PAGE>
Masters' Select Investment Trust
December 16, 1996
Page 2
(c) resolutions of the initial Trustees of the Trust adopted by written
consent dated November 11, 1996 authorizing the issuance of the Shares;
(d) the Registration Statement; and
(e) a certificate of an officer of the Trust as to certain factual
matters relevant to this opinion.
Our opinion below is limited to the federal law of the United States of
America and the business trust law of the State of Delaware. We are not licensed
to practice law in the State of Delaware, and we have based our opinion below
solely on our review of Chapter 38 of Title 12 of the Delaware Code and the case
law interpreting such Chapter as reported in Delaware Code Annotated (Michie Co.
1995). We have not undertaken a review of other Delaware law or of any
administrative or court decisions in connection with rendering this opinion. We
disclaim any opinion as to any law other than that of the United States of
America and the business trust law of the State of Delaware as described above,
and we disclaim any opinion as to any statute, rule, regulation, ordinance,
order or other promulgation of any regional or local governmental authority.
Based upon the foregoing and our examination of such questions of law
as we have deemed necessary and appropriate for the purpose of this opinion, and
assuming that (i) all of the Shares will be issued and sold for cash at the
per-share public offering price on the date of their issuance in accordance with
statements in the Trust's Prospectus included in the Registration Statement and
in accordance with the Declaration of Trust, (ii) all consideration for the
Shares will be actually received by the Trust (iii) such consideration will be
at least equal in value to the par value of the Shares, and (iv) all applicable
securities laws will be complied with, it is our opinion that, when issued and
sold by the Trust, the Shares will be legally issued, fully paid and
nonassessable.
This opinion is rendered to you in connection with the Registration
Statement and is solely for your benefit. This opinion may not be relied upon by
you for any other purpose or relied upon by any other person, firm, corporation
or other entity for any purpose, without our prior written consent. We disclaim
any obligation to advise you of any developments in areas covered by this
opinion that occur after the date of this opinion.
<PAGE>
Masters' Select Investment Trust
December 16, 1996
Page 3
We hereby consent to (i) the reference to our firm under the caption
"Legal Counsel" in the Prospectus of the Trust included in the Registration
Statement, and (ii) the filing of this opinion with as an exhibit to the
Registration Statement.
Very truly yours,
/s/ HELLER EHRMAN WHITE AND MCAULIFFE
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of our report dated December 13, 1996 on the
financial statement of Masters' Select Equity Fund, a series of Masters' Select
Investment Trust referred to therein, in Pre-Effective Amendment No. 2 to the
Registration Statement on Form N-1A, file No. 333- 10015, as filed with the
Securities and Exchange Commission.
We also consent to the reference to our Firm in the Statement of Additional
Information under the caption "Auditors."
/s/ McGladrey & Pullen, LLP
MCGLADREY & PULLEN, LLP
New York, New York
December 13, 1996
SUBSCRIPTION AGREEMENT
MASTERS' SELECT INVESTMENT TRUST (the"Trust"), an open-end management
investment trust, and CRAIG A. LITMAN (the "Investor"), intending to be legally
bound, hereby agree as follows:
1. In order to provide the Trust with its initial capital, the Trust
hereby sells to the Investor, and the Investor hereby purchases, 5,000 shares of
beneficial interest of the Trust (the "Shares"), at a price of $10.00 per share.
The Trust hereby acknowledges receipt from the Investor of funds in the amount
of $50,000 in full payment for the Shares.
2. The Investor represents and warrants to the Trust that the Shares
are being acquired for investment and not with a view to distribution thereof
and that the Investor has no present intention to redeem or dispose of any of
the Shares.
3. The Investor agrees that:
(i) in the event that any of the Shares are redeemed prior to
the end of the period of amortization of the Trust's organization
costs, the proceeds of the redemption payable in respect of those
shares will be reduced by the pro rata share (based on the
proportionate share of the original shares redeemed to the total number
of original shares outstanding at the time of redemption) of the
unamortized deferred organization costs as of the date of that
redemption; and
(ii) in the event the Fund is liquidated prior to the end of
the amortization period the Investor will bear 50% of the unamortized
organization costs.
IN WITNESS WHEREOF, the parties have executed this Agreement this 12th
day of December, 1996.
MASTERS' SELECT INVESTMENT TRUST
By: /s/ Robert H. Wadsworth
Assistant Secretary
/s/ Craig A. Litman
Craig A. Litman
<PAGE>
SUBSCRIPTION AGREEMENT
MASTERS' SELECT INVESTMENT TRUST (the"Trust"), an open-end management
investment trust, and KENNETH E. GREGORY (the "Investor"), intending to be
legally bound, hereby agree as follows:
1. In order to provide the Trust with its initial capital, the Trust
hereby sells to the Investor, and the Investor hereby purchases, 5,000 shares of
beneficial interest of the Trust (the "Shares"), at a price of $10.00 per share.
The Trust hereby acknowledges receipt from the Investor of funds in the amount
of $50,000 in full payment for the Shares.
2. The Investor represents and warrants to the Trust that the Shares
are being acquired for investment and not with a view to distribution thereof
and that the Investor has no present intention to redeem or dispose of any of
the Shares.
3. The Investor agrees that:
(i) in the event that any of the Shares are redeemed prior to
the end of the period of amortization of the Trust's organization
costs, the proceeds of the redemption payable in respect of those
shares will be reduced by the pro rata share (based on the
proportionate share of the original shares redeemed to the total number
of original shares outstanding at the time of redemption) of the
unamortized deferred organization costs as of the date of that
redemption; and
(ii) in the event the Fund is liquidated prior to the end of
the amortization period the Investor will bear 50% of the unamortized
organization costs.
IN WITNESS WHEREOF, the parties have executed this Agreement this 12th
day of December, 1996.
MASTERS' SELECT INVESTMENT TRUST
By: /s/ Robert H. Wadsworth
Assistant Secretary
/s/ Kenneth E. Gregory
Kenneth E. Gregory
