File No. 333-10015
811-7763
================================================================================
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. [ ]
Post-Effective Amendment No.3 [x]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 [ ]
Amendment No. 5 [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
It is proposed that this filing will become effective:
_______ immediately upon filing pursuant to Rule 485(b)
_______ on _______________, pursuant to Rule 485(b)
_______ 60 days after filing pursuant to Rule 485(a)(1)
__ X___ 75 days after filing pursuant to Rule 485(a)(2)
_______ on _______________, pursuant to Rule 485(a)
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant has registered an indefinite number of securities under the
Securities Act of 1933.
----------
<PAGE>
Please Send Copy of Communications to:
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.
Paul Hastings Janofsky & Walker
345 California Street 29th Floor
San Francisco, CA 94104
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<PAGE>
CROSS REFERENCE SHEET
(as required by Rule 495)
<TABLE>
<CAPTION>
NA Item No. Location
- ----------- --------
Part A
<S> <C> <C>
Item 1. Cover Page........................................... Cover Page
Item 2. Synopsis............................................. The Fund At A Glance; Expenses
Item 3. Condensed Financial Information...................... Performance
Item 4. General Description of Registrant.................... Cover Page; The Fund In Detail: Organization,
Fundamental Policies and Investment Restrictions,
Investment Philosophy
Item 5. Management of Fund .................................. The Fund in Detail: Management, Investment
Managers, Breakdown of Expenses, Organization
Item 6. Capital Stock and Other Securities................... Dividends, Capital Gains, and Taxes; General
Information
Item 7. Purchase of Securities Being Offered................. Your Account: Ways to Set Up Your Account,
How to Buy Shares
Item 8. Redemption or Repurchase............................. Your Account: How to Sell Shares
Item 9. Pending Legal Proceedings............................ Not Applicable
Part B
Item 10 Cover Page........................................... Coverage Page
Item 11 Table of Contents.................................... Table of Contents
Item 12 General Information and History...................... Not Applicable
Item 13 Investment Objectives and Policies................... Investment Objectives and Policies
Item 14 Management of the Fund............................... Management
Item 15 Control Persons and Principal
Holders of Securities.............................. General Information
Item 16 Investment Advisory and Other Services............... Management; General Information
Item 17 Brokerage Allocation and Other Practices............. Portfolio Transactions and Brokerage
Item 18 Capital Stock and Other Practices.................... General Information
Item 19 Purchase, Redemption and Pricing
of Securities Being Offered.......................... Net Asset Value
Item 20 Tax Status........................................... Taxation
Item 21 Underwriters......................................... Not Applicable
Item 22 Calculation of Performance Data...................... Performance
Item 23 Financial Statements................................. Not Applicable
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
PART A
COMBINED PROSPECTUS
MASTERS' SELECT INVESTMENT TRUST
Masters' Select Equity Fund
Masters' Select International Fund
- --------------------------------------------------------------------------------
<PAGE>
THE MASTERS' SELECT INVESTMENT TRUST
is a no-load mutual fund group consisting of two mutual funds investing in
equity funds. The Masters' Select Equity Fund is a growth fund which primarily
invests in U.S. companies. It 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. The Masters' Select
International Fund is a fund which primarily invests in foreign companies. It
seeks to increase the value of your investment over the long-term by using the
combined talents and favorite stock picking ideas of five highly regarded
international stock pickers.
Please read this prospectus before investing, and keep it on file for future
reference. It contains important information, including how the Funds invest and
the services available to shareholders.
A Statement of Additional Information (SAI) dated November 15, 1997 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 1-800-656-8864.
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 NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus
November 15, 1997
Litman/Gregory Fund Advisors, LLC
4 Orinda Way
Orinda, CA 94563
Prospectus
<PAGE>
The Funds at a Glance
Goal
- - The Masters' Select Equity Fund ("Masters' Select Equity" or the "Equity
Fund") seeks long term growth of capital primarily from investment in U.S.
equity securities.
- - The Masters' Select International Fund ("Masters' Select International" or the
"International Fund") seeks long-term growth of capital primarily from
investment in foreign stocks.
- -As with any mutual fund, there is no assurance that the Funds will achieve
their goals. Strategy
Both the Equity Fund and the International Fund (collectively, the "Funds") have
contracted with multiple sub-advisors. The Equity Fund is sub-advised by six
highly regarded investment managers. The International Fund is sub-advised by
five highly regarded international 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:
o Combine the efforts of several experienced, world class managers, all with
superior track records.
o 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.
o Deliver a portfolio that is prudently diversified in terms of stocks
(typically 70 to 90 for Masters' Select, and 50 to 75 for
Masters' Select International) and industries while still allowing each manager
to run portfolio segments focused on only their favorite stocks.
o Further diversify across different sized companies and stock picking styles by
including managers with a variety of stock picking disciplines.
The Funds' Advisor has extensive experience evaluating investment managers and
mutual funds. The Advisor has selected investment managers for the Funds 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 Funds' 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 for both funds. The individual portfolio managers are as follows:
Masters' Select Equity Masters' Select International
Shelby Davis: CEO and Chief Bruce Bee: President and Chief
Investment Officer of Davis Investment Office of Bee & Associates
Selected Advisers, LP, the advisor Inc.
to Davis New York Venture Fund.
Prospectus
<PAGE>
Jean-Marie Eveillard: President Helen Young Hayes: Vice President of
of SociJtJ GJnJrale Asset Janus Capital Corporation and portfolio
Management Corporation and lead manager of the Janus Overseas and
manager of SoGen International Janus Worldwide Funds.
and SoGen Overseas Funds.
Foster Friess (and team): David Herro: Director of International
President of Friess Associates and Equities and a Partner at Harris
also lead portfolio manager of the Associates L.P. and also lead portfolio
Brandywine Fund. manager for Oakmark International and
Oakmark International Small Cap Funds.
Mason Hawkins: Chief Dan Jaworski: Founder and Chief
Executive Officer of Southeastern Investment Officer of BPI Global Asset
Asset Management and co- Management. Formerly the portfolio
manager of Longleaf Partners manager for the STI Classic International
Fund. Equity Fund.
Spiros "Sig" Segalas: President Mark Yockey: Partner Artisan Partners
and Chief Investment Officer of L.P. and the portfolio manager of the
Jennison Associates Capital Corp. Artisan International Fund.
and portfolio manager of Harbor
Capital Appreciation Fund.
Dick Weiss: Member of the
Executive Committee at Strong
Capital Management, Inc. and co-
manager of Strong Common Stock
Fund.
Prospectus
<PAGE>
Fund Closings: Limiting each Fund's size will allow the investment managers to
maintain their focus on a small number of favorite securities. We expect to
close Masters' Select Equity to new investors at some point when fund assets are
between $500 million to $750 million. Masters' Select International is likely to
be closed when assets are between $600 million and $1 billion.
Who May Want to Invest
Each 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 Funds' investments will vary from day to day, and generally
reflect 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 themselves, the Funds do 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 Funds have no shareholder transaction expenses.
Equity Fund International Fund
----------- ------------------
Investment advisory fee 1.10% 1.10%
12b-1 fee None None
Other expenses of the Fund .0.33% .90%
----- ----
Total Fund operating expenses 1.43% 2.00%
Example: Let's say, hypothetically, that a 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:
Equity Fund International Fund
----------- ------------------
After 1 year $ 15 $28
After 3 years $ 45 $85
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 a 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 each Fund's assets. Each Fund pays an
investment advisory fee to the Advisor. Each of the investment managers receives
a fee for its services from the Advisor, not from the Fund. Each 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. Each Fund's expenses are
factored into its share price and are not charged directly to shareholder
accounts.
Prospectus
<PAGE>
For a more complete description of the various costs and expenses, see
"Breakdown of Expenses."
FINANCIAL HIGHLIGHTS
For a share outstanding throughout the period
- --------------------------------------------------------------------------------
Masters Select
For the period from
12/31/96 to 6/30/97 (1)
-----------------------
Net asset value, beginning of period $10.00
-----------------
Income from investment operations
Net investment income 0.03
Net realized and unrealized gain on investments 1.50
-----------------
Total from investment operations 1.53
-----------------
Less distributions
From net investment income ---
From net realized gains ---
-----------------
Total distributions ---
-----------------
Net asset value, end of period $11.53
=================
Total return (2) 15.30%
=================
Net assets at end of period (in 000's) $204,677
=================
Ratio of expenses to average net assets
(net of expense reimbursements) 1.47%
=================
Ratio of net investment income to
average net assets 0.73%
=================
Prospectus
<PAGE>
Portfolio turnover rate 62.73%
=================
- ----------------------------------------------------
*Annualized
The Funds in Detail - Elements Common to Both Funds
The Masters' Select Investment Philosophy
The investment objectives of the Funds' are 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 Funds' intend to be
substantially or fully invested in equity securities, including common stocks
and other securities with the characteristics of common stocks.
Both Funds' strategies are 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 comparable market indices, 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.
Investment Manager Selection Criteria
The Advisor believes that superior investment managers exhibit:
o 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.
Prospectus
<PAGE>
o A record of outperforming the S&P 500 (U.S. equity managers) or the Morgan
Stanley Europe, Australasia, Far East Index ("EAFE Index") (Foreign equity
managers) over most periods of five years or longer.
o The confidence and ability to think and act independently of "Wall Street herd
mentality."
o The passion for and obsession with stock picking that can result in working
harder and more creatively to get an edge.
o 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 Funds exhibit the qualities mentioned above.
Detailed information on the investment managers begins on page ____for Masters
Select Equity and page ____ for Masters' Select International. There are also
summary grids on pages ___ .
The Advisor
The Funds are 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.
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.
The Masters' Select Equity Fund in Detail
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 stocks of large and mid-sized companies 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 fewer securities at any point in time, it is generally
expected that the Fund will hold between 70 and 90 securities. Under unusual
market conditions, for temporary defensive purposes, up to 35% of the Fund's
total assets may be invested in short term, high quality debt securities.
Defensive positions may be initiated by the individual portfolio managers or by
the Advisor.
Masters' Select Equity Fund Portfolio Managers
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 was a portfolio manager for
Davis New York Venture Fund from 1969 through 1996 and is still actively
involved in the stock selection process; his son, Christopher C. Davis, was
named co-portfolio manager in 1995. In total, Davis Advisers manages over $x.x
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 the Davis New York Venture Fund and the Standard & Poor's 500 Stock
Index, through September 30, 1997 is as follows:
Period Fund S&P 500
One Year
Three Years
Five Years
Ten Years
(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:
o Solid top-line (revenue) and unit growth
o Management with a stake in the business
o A business plan for the next three to five years
o Participation in an industry that is capable of earning a good return on
capital
o Respected by competitors
o 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.
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 $x billion. The average annual total return of
Brandywine Fund and the Standard & Poor's 500 Stock Index, through September 30,
1997 is as follows:
Prospectus
<PAGE>
Period Fund S&P 500
One Year
Five Years
Ten Years
(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, 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.
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
September 30, 1996, Jennison Associates managed over $xx billion in U.S. 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, 1997 is as follows:
Period Fund S&P 500
One Year
Three Years
Five Years
(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:
o High sales growth
o High unit growth
o High or improving returns on assets and equity
o Strong balance sheet.
Segalas also prefers companies with a competitive advantage such as unique
management, marketing or research and development.
Prospectus
<PAGE>
Jean-Marie Eveillard/SociJtJ GJnJrale Asset Management Corp. Jean-Marie
Eveillard is the portfolio manager for the segment of the Fund's assets run by
SociJtJ GJnJrale 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 President of SGAM, an indirect
subsidiary of SociJtJ GJnJrale, one of France's largest banks. SGAM currently
manages nearly $X billion. The average annual total return of Harbor Capital
Appreciation Fund, the Morgan Stanley EAFE Index and the Standard & Poor's 500
Stock Index, through September 30, 1997 is as follows:
Period Fund EAFE S&P 500
One Year
Three Years
Five Years
(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.
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 $x
billion. The average annual total return of Longleaf Partners Fund and the
Standard & Poor's 500 Stock Index, through September 30, 1997 is as follows:
Period Fund S&P 500
One Year
Five Years
Ten Years
(Note: Past performance is not necessarily indicative of future performance of
the Fund.)
Prospectus
<PAGE>
Approximately 20% of the Fund's assets are managed by Southeastern using a value
oriented approach to picking stocks. The Firm considers 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:
o Indications of shareholder oriented management.
o Evidence of financial strength
o Potential earnings improvement.
Richard T. Weiss/Strong Capital Management. Richard Weiss is the portfolio
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 $X
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, 1997 is as follows:
Period Fund S&P 500
One Year
Five Years
Ten Years
(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:
o Low institutional ownership and low analyst coverage
o High quality management
o Sustainable competitive advantage.
Prospectus
<PAGE>
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.
Portfolio Manager
Shelby Davis Jean-Marie Eveillard Foster Friess and team Mason Hawkins Sprios
"Sig" Segalas Richard Weiss
Initial
Allocation of Fund Portfolio
20%
20%
10%
20%
20%
10%
Investment Experience/
Relevant Fund Experience
Over 30 years/ Davis New York Venture Fund since 1969
Over 30 years/ SoGen International Fund since 1979.
Over 25 years/ Brandywine Fund since 1986
Over 25 years/ Longleaf Partners Fund since 1987.
Over 30 years/ Harbor Capital Appreciation Fund since 1990.
Over 20 years/ Strong Common Stock Fund since 1991.
Size of Companies
Mostly large cap
No market cap restrictions
Small and mid cap
Prospectus
<PAGE>
All sizes but mostly mid and large cap
Mostly large cap
Small and mid cap
Stock Picking Style
Growth at a reasonable price
Value oriented and global. At least 50% invested in the U.S.
High earnings growth
Value
High earnings growth
Growth at a reasonable price
The Masters' Select International Fund in Detail
The fund's five investment managers will pursue the Fund's objective primarily
through investments in common stocks of issuers located outside the United
States. Each manager may invest in securities traded in both developed and
emerging markets. There are no limits on the Fund's geographic asset
distribution, but, to provide adequate diversification, the Fund ordinarily
invests in the securities markets of at least five countries outside the United
States. Although the Fund intends to invest substantially all of its assets in
issuers located outside the United States, it may at times invest in U.S.
issuers and it may at times invest all of its assets in fewer than five
countries.
Each manager has a distinct stock picking approach. As a group the managers will
invest in stocks with a range of market capitalizations. While each manager has
the flexibility to invest on a worldwide basis in companies with market
capitalizations of any size, it is expected that the Fund's exposure to mid and
large-sized foreign companies will range from 50% to 90% of the Fund's total
assets, under normal market conditions. 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 relative to their respective peer
groups. The Advisor has focused exclusively on stock pickers who emphasize
bottom-up stock picking rather than macro-driven, top-down country picking. The
Advisor believes bottom-up stock pickers have an advantage in foreign markets
because:
1. It is the Advisor's opinion that the dynamics which influence individual
country's markets, including currencies, inflation, economic growth,
political factors, regulation, etc. are much more difficult to assess than
the prospects and valuation characteristics of individual companies.
2. The Advisor believes many individual stocks in foreign markets are less
closely analyzed (the markets are less "efficient") than in the U.S. If
true, the Advisor believes this will result in greater opportunities for
skilled stock pickers to add value through pure stock selection.
3. Based on the Advisor's observations, bottom-up stock pickers in foreign
markets, on average, seem to perform better than top-down oriented
managers.
The portion of the Fund assigned to each manager is fixed. 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 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 8 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 50 and
75 securities.
Under unusual market conditions for temporary defensive purposes, up to 35% of
the Fund's total assets may be invested in
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short-term, high quality debt securities. Defensive positions may be initiated
by the individual portfolio managers or by the Advisor.
Masters' Select International Portfolio Managers
Bruce Bee/Bee Associates:
Bruce B. Bee/Bee & Associates Inc. Bruce Bee is the portfolio manager for the
portion of the assets run by Bee & Associates Inc. (Bee), 370 Seventeenth
Street, Suite 3560, Denver Colorado 80202. Bee has been in the investment
business for over 25 years and founded Bee & Associates, which he controls, in
1989. In total Bee manages over $500 million. Bee has managed global small-cap
portfolios since 1989 and international small cap portfolios since January 1995.
Their investment results are as follows (composite performance for all accounts,
gross of fees):
MCSI
Global World
1 Year 18.8% 22.3%
3 Years 19.3% 17.0%
5 Years 20.7% 15.6%
Since Inception
March 1989 19.5% 9.8%
Int'l EAFE
----------------------
1 Year 15.9% 12.8%
Since Inception
January 1995 20.8% 11.5%
Bee will focus exclusively on small companies. He believes these companies
generally are under-researched and often inefficiently priced. Within this
sector Bee seeks to purchase companies with above average growth prospects at a
significant discount to his assessment of their value. Portfolio construction is
completely bottom-up oriented (no top-down country selection). In researching
candidates for purchase Bee typically reviews company financial reports
reconciling company accounting to U.S. standards, seeks information from a
variety of sources which may include international brokers, accounting firms,
banks, and other investors, and visits the company.
The ideal portfolio candidate:
has a proprietary product or service and is generally involved in international
trade o has management depth and a coherent business strategy ohas a history of
growth in revenues, earnings, cash flow and return on shareholders' equity
which, in the manager's opinion, is sustainable is available at a significant
discount to what another company might pay for it.
Bee does not expect to hedge against exchange rate risk.
Helen Young Hayes/Janus Capital Corporation. Helen Young Hayes is the portfolio
manager for the segment of the Fund's assets managed by Janus Capital
Corporation (Janus), 100 Fillmore Street, Denver, Colorado 80206. Hayes has been
in the investment business since 1984 and has been with Janus since 1987. Hayes
is the Vice President of Janus Capital Corp. and portfolio manager of the Janus
Worldwide Fund (a global fund) and the Janus Overseas Fund (an international
fund). Janus also subadvises several other international and global funds which
Hayes is the portfolio manager. She has managed both funds since their inception
in May of 1991 and May of 1994, respectively. In total, as of September 30,
1997, Janus managed over $xx billion, of which $xx billion is managed by Hayes.
The average annual total return on Hayes managed funds is represented in the
following fund composites:
Janus Janus
International Global
MSCI
Period Composite Composite EAFE
World
One Year
Three Years
Five Years
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Inception
Note: Past performance is not necessarily indicative of future performance
Approximately xx% of the Fund will be managed by Hayes. Hayes uses a bottom-up
approach to stock selection. The fund may invest in companies of all sizes
though Hayes tends to focus mostly on mid and large sized companies. She seeks
to identify individual companies with earnings growth potential that may not be
recognized by the market at large. Intensive research focuses on the fundamental
factors affecting the business prospects of companies and may include review of
earnings reports, corporate and industry developments, trading activity,
research reports and other data. In addition, for a smaller number of companies,
additional scrutiny may include (but is not limited to) direct contacts with
corporate management, analysis of and contact with competitors, customers and
suppliers, and frequent on-sight visitation of facilities. The focus of the
analytical work is to identify companies with:
o rapid sales and earnings growth
o strong cash flow generation and wise deployment of capital
o efficient operations and high productivity
o good management with the proper incentives
Hayes seeks companies that meet her selection criteria regardless of country of
organization or place of principal business activity. Securities are generally
selected on a stock-by-stock basis without regard to any defined allocation
among countries or geographic regions. However, certain factors such as expected
levels of inflation, government policies influencing business conditions, the
outlook for currency relationships, and prospects for economic growth among
countries, regions or geographic areas may influence security selection. Hayes
may use a variety of currency hedging techniques, including forward currency
contracts to manage exchange rate risk..
David Herro/Harris AssociatesL.P. David Herro is the portfolio manager for the
portion of the Fund's assets run by Harris Associates L.P. (Harris Associates),
2 North LaSalle Street, Chicago, Illinois 60602. Herro has been in the
investment business since 1986 and is a partner, portfolio manager and director
of international equities at Harris Associates. He
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has managed The Oakmark International Fund and (also The Oakmark International
Small Cap Fund) since their inceptions in 1992 and 1995, respectively. Overall,
Herro is responsible for over $x billion in international equity assets. As a
firm, Harris Associates manages $xx billion in equity and fixed income assets.
The average annual total return of The Oakmark International Fund, The Oakmark
Small Cap Fund, and the MSCI EAFE Index, through September 30, 1997, is as
follows:
International Small Cap
Period Fund Fund MSCI EAFE
One year % %
%
Three years % %
%
Five years % %
%
Since Inception
(Note: Past performance is not necessarily indicative of future performance of
the Fund.)
Approximately ___% of the Fund's assets are managed by David Herro. Herro
believes that long-term results are achieved by investing as owners in
successful companies that may be purchased at a significant discount to their
true economic value. He selects stocks using a disciplined value investment
approach that emphasizes a bottom-up stock selection process. Herro searches for
international stocks in both established and emerging markets. When looking for
new investment ideas, Herro attempts to do two things:
Seek out companies that are selling at a substantial discount to their true
value Try to determine the management's capability of enhancing the value of the
company
His focus is to buy securities at large discounts to their underlying value
(usually based on
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its current and potential cash generation). He also looks for bargains based on
companies' normalized earnings (the level of earnings after backing out cyclical
influences) and asset values. A company must be selling at a 30% or greater
discount to its value to be a candidate for purchase. Stocks are also analyzed
in terms of financial strength, the position of the company in its industry, and
the attractiveness of the industry. Another key feature of Herro's investment
approach is the thorough assessment of a company's management team. Herro
believes that investing in companies with proven, capable managers enhances the
likelihood of positive returns. When interviewing management, Herro looks for
two specific qualities in a management team:
Management's ability to generate cash from the company's asset base; and
Management's ability to allocate capital efficiently.
Because of his bottom-up approach, Herro focuses on stock selection rather than
industry or country selection. Currency hedging is done defensively only if the
dollar appears excessively undervalued. Hedging is based on real interest rate
spreads, purchasing power parity differentials and differences in growth and
productivity.
Daniel R. Jaworski/BPI Global Asset Management LLP: Dan Jaworski is the
portfolio manager for the segment of the Fund's assets run by BPI Global Asset
Management, 1900 Summit Tower Boulevard, Orlando, Florida 32810. Jaworski has
been in the investment management business since 198? and in 1997 founded and
became Chief Investment Officer of BPI Global Asset Management. BPI is currently
managing over $700 million in assets. Prior to founding BPI, he was the
portfolio manager of the STI Classic International Equity Fund and its
predecessor commingled fund from February 1, 1995 to April 30, 1997. Prior to
joining STI, Jaworski was an international portfolio manager with Lazard Freres
Asset Management. Jaworski began his portfolio management career as the manager
of the Princor World Fund (an international fund) for The Principle Financial
Group in December 1988.
The average annual return of the STI Classic International Equity Fund during
Mr. Jaworski's tenure was as follows:
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Fund EAFE
Period: 33.64% 9.13%
2/01/95 to
4/30/97
The average annual return of the Princor World Fund during Mr. Jaworski's tenure
was as follows:
Fund EAFE
Period:
x/x/89 to
ended
3/31/93
Note: Past performance is not necessarily indicative of future performance.
Approximately __% of the Fund's assets will be run by Jaworski. He seeks to
invest in high quality, low leveraged companies with sustainable, globally
competitive products or services. Jaworski purchases these companies when they
are selling at a discount to their global industrial peer group. Valuation
criteria used is specific to the industry but typical factors include:
* Price to free cash flow
* Price to earnings
* Price to book
* Yield
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Appreciation potential is determined assuming the security sells at the mean of
the industrial group. Potential returns are then adjusted to reflect the
estimated impact of local market, local currency or general risk profile of the
security.
Securities ultimately selected by Jaworski will primarily be well established,
large companies that have, historically, generated higher returns and better
profit margins than their peers in their industry. Jaworski may use various
hedging techniques to reduce exchange rate risk.
Mark Yockey/Artisan Partners Limited Partnership. Mark Yockey is the portfolio
manager for the segment of the Fund's assets run by Artisan Partners Limited
Partnership, 1000 North Water Street, Suite 1770, Milwaukee, WI 53202. Artisan
Partners was founded by Carlene Murphy Ziegler and Andrew Ziegler in 1995 and is
controlled by the Zieglers. Yockey has been in the investment management
business for over 15 years and has been the portfolio manager of the Artisan
International Fund since its inception in January, 1996. He is a partner in
Artisan Partners and is the senior member of the firm's international investment
management group. Prior to joining Artisan Partners, he was the portfolio
manager of the United International Growth Fund commencing in 1990. In total,
Yockey manages over $600 million. The average annual total return of the Artisan
International Fund and the [EAFE Index] through [September 30, 1997], is as
follows:
Fund EAFE
One Year
Since Inception (12/31/95)
The average annual return for the United International Fund (and the EAFE index)
during for the period in which Yockey was the portfolio manager was as follows:
Period (dates) Fund EAFE
Approximately [20%] of the Fund's assets will be run by Yockey. He invests
primarily in international growth stocks, concentrating on companies located in
countries that have accelerating growth prospects. He will also invest in
companies located in emerging markets.
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Though not a country picker, Yockey prefers to invest in regions and countries
of the world which are enjoying improving or rapid economic growth. Yockey is
less likely to invest in countries that, while showing favorable economic
growth, appear to have overvalued markets. Economic growth is determined
principally from the standpoint of gross domestic product growth, corporate
profitability, current account and currency issues, interest rates and social
changes. Having identified favorable areas of the world for growth, Yockey seeks
stocks of companies best positioned to capitalize on that growth. In this
process, he emphasizes well-managed companies with dominant or increasing market
share in strong industries. He typically focuses on companies with above-average
financial fundamentals and accelerating earnings per share. Yockey also analyzes
relative valuations using a variety of criteria such as price-to-earnings ratios
and avoids stocks that are trading at unsustainable or unusually high
valuations. His research process is flexible and varies depending on the country
and company with an emphasis on determining whether the company has a sound
business plan and is able to execute it. In making this assessment Yockey will
typically rely on analysis of company reports, analyst reports, visits to the
company and other contact with senior management and competitors. Yockey may
engage in hedging activities to reduce exchange rate risk.
The average annual return of the Artisan International Fund through September
30, 1997 is as follows:
Period Fund EAFE
One Year
Inception (12/31/95)
Note: Past performance is not necessarily indicative of future performance
The average annual return of the United International Growth Fund during Mr.
Yockey's tenure was as follows:
Fund EAFE
Period (dates)
Note: Past performance is not necessarily indicative of future performance
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Masters' International Investment Manager Summary
Portfolio Initial Investment Size of Stock
Manager Allocation Experience Companies Picking
of /Relevant Style
Fund Fund
Portfolio Experience
Bruce 10.0% Over 25 Mostly Growth
Bee years small at a
cap reasonable
price
Helen 22.5% Since All cap Growth
Young 1984/Janus but at a
Hayes Overseas mostly reasonable
and Janus mid and price
Worldwide large cap
David 22.5% Since All cap Value
Herro 1986/Oakmark but mostly
Internation mid and
al and large
Oakmark cap
International
Small Cap
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Dan 22.5% Since Mostly Value
Jaworski 198?/STI large
Classic cap
Internation
al Fund
(2/95
through
4/97 and
the Princor
World
Fund
(dates)
Mark 22.5% Since All cap Growth
Yockey 1981/Artisan at a
International reasonable
and price
United
International
Growth
(1990
through
November
1996)
MULTI-MANAGER ISSUES
The investment methods used by these managers in selecting securities for the
Funds varies. The segment of each Fund portfolio managed by an investment
manager will, under normal circumstances, differ from the segments managed by
the other investment
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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 Funds 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 a Fund portfolio, the Advisor would select a replacement investment
manager with an investment style comparable to that of the investment manager
being replaced. The Advisor would use the same criteria as those used in the
original selection of investment managers.
The Advisor has obtained an exemptive order from the Securities and Exchange
Commission which permits, subject to certain conditions, to select new Managers
with the approval of the Board of Trustees, but without obtaining shareholder
approval. The order also permits 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 a
Fund. The order also permits a 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 Funds
intend 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. 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. The Masters' Select Equity Fund will typically invest 20%
to 30% of its assets in small companies. The Masters' Select International Fund
will typically invest 10% to 50% of its assets in small companies.
Convertible Securities. Each Fund may invest in convertible securities. A
convertible security is a fixed income equity
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security that may be converted into a prescribed amount of common stock at a
specified formula. A convertible security entitles the owner to receive interest
until the security matures or is converted. Convertibles have several unique
investment characteristics such as: (a) higher yields than common stocks but
lower yields than straight debt securities; (b) lesser degree of fluctuation in
value than the underlying stock since they have fixed income characteristics;
and 8 potential for capital appreciation if the market price of the underlying
security increases.
Foreign Investment Considerations. The Masters' Select Equity 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 by the Masters' Select Equity Fund will be less than 15% of
total assets.
The Masters' Select International Fund may invest up to 100% of its total assets
in foreign securities, including depositary receipts.
Securities of some foreign companies and governments may be traded in the United
States, but many foreign securities are traded primarily in foreign markets. The
risks of foreign investing include:
o Currency Risk. A Fund may buy the local currency when it buys a foreign
currency denominated security and sell the local currency when it sells the
security. As long as a Fund holds a foreign security, its value will be affected
by the value of the local currency relative to the U.S. dollar. When a Fund
sells a foreign denominated security, its value may be worth less in U.S.
dollars even though the security increases in value in its home country. U.S.
dollar denominated securities of foreign issuers may also be affected by
currency risk.
o Political and Economic Risk. Foreign investments may be subject to heightened
political and economic risks, particularly in underdeveloped or developing
countries which may have relatively unstable governments and economies based on
only a few industries. In some countries, there is the risk that the government
may take over the assets or operations of a company or that the government may
impose taxes or limits on the removal of a Fund's assets from that country.
The Funds may invest in emerging market countries. Emerging market countries
involve greater risks such as immature economic structures, national policies
restricting investments by foreigners, and different legal systems.
o Regulatory and Market Risk. The securities markets of certain foreign
countries, particularly those with emerging marketing securities markets, are
substantially smaller, less developed, less liquid and more volatile than the
securities markets of the United States and other more developed countries.
Disclosure and regulatory standards in many respects are less stringent than in
the U.S. and other major markets. There also may be a lower level of monitoring
and regulation of emerging markets and the activities of investors in such
markets, and enforcement of existing regulations has been extremely limited.
o Transaction Costs. Transaction costs of buying and selling foreign securities,
including brokerage, tax and custody costs, are generally higher than those
involved in domestic transactions.
o Depository Receipts. 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.
Each 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.
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o Privatizations. Some foreign governments have been engaged in programs of
selling part or all of their stakes in government owned or controlled
enterprises ("privatizations"). The Adviser believes that privatizations may
offer opportunities for significant capital appreciation, and the Funds may
invest assets in privatizations in appropriate circumstances. In certain of
those markets, the ability of foreign entities such as the Funds to participate
in privatizations may be limited by local law and/or the terms on which each
Fund may be permitted to participate may be less advantageous than those
afforded local investors. There can be no assurance that governments will
continue to sell companies currently owned or controlled by them or that
privatization programs will be successful.
The following paragraphs describe briefly some of the other securities a Fund
may buy and some of the strategies that may be used by a Fund, as well as some
of the risks associated with investing in a Fund. More information on this
subject is contained in the SAI.
Futures, Options and Other Derivative Instruments. Each Fund may enter into
futures contracts on securities, financial indices and foreign currencies and
options on such contracts ("futures contracts") and may invest in options on
securities, financial indices and foreign currencies ("options"), forward
contracts and interest rate swaps and swap-related products (collectively
"derivative instruments"). The Funds intend to use most derivative instruments
primarily to hedge the value of their portfolios against potential adverse
movements in securities prices,in foreign currency markets or interest rates.
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. The use of
derivative instruments exposes the Funds to additional investment risks and
transaction costs. Risks inherent in the use of derivative instruments include:
o the risk that interest rates, securities prices and currency markets will not
move in the direction that a portfolio manager anticipates;
o imperfect correlation between the price of derivative instruments and
movements in the prices of the securities, interest rates or currencies being
hedged;
o inability to close out certain hedged positions to avoid adverse tax
consequences;
o the possible absence of a liquid secondary market for any particular
instrument and possible exchange-imposed price fluctuation limits, either of
which may make it difficult or impossible to close out a position when desired;
o leverage risk, that is, the risk that adverse price movements in an instrument
can result in a loss substantially greater than a Fund's initial investment in
that instrument (in some cases, the potential loss is unlimited); and
o particularly in the case of privately-negotiated instruments, the risk that
the counterparty will fail to perform its obligations, which could leave a Fund
worse off than if it had not entered into the position.
Although the Funds believe the use of derivative instruments will benefit the
Funds, a Fund's performance could be worse than if the Fund had not used such
instruments if a portfolio manager's judgement proves incorrect. When a Fund
invests in a derivative instrument, it may be required to segregate liquid
assets with its custodian to "cover" the Fund's position. Assets segregated or
set aside generally may not be disposed of so long as the Fund maintains the
positions requiring segregation or cover. Segregating assets could diminish the
Fund's return due to the opportunity losses of foregoing other potential
investments with the segregated assets.
U.S. Government Securities. The Funds 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
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backed by the full faith and credit of the United States, the Funds 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
Funds may also invest in mortgage-backed securities. Repurchase Agreements. The
Funds may enter into repurchase agreements, in which the Funds buy securities
and the seller agrees to repurchase them from the Funds 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 Funds' rate of
return. Each repurchase agreement is fully collateralized, but if the seller
defaults, the Funds may incur a loss. The Funds only enter into repurchase
agreements with institutions which meet certain creditworthiness and other
criteria.
Illiquid Securities. The Funds may invest up to 15% of their net assets in
illiquid securities, including restricted securities, that are not deemed to be
liquid by the sub-advisor.
Securities Lending. The Funds may lend up to 10% of their portfolio securities
to financial institutions in order to increase the Funds' income.
Borrowing. The Funds may borrow from banks in an amount up to 20% of their total
assets, but only for temporary, extraordinary or emergency purposes. The Funds
may also engage in reverse repurchase agreements.
Junk Bonds. The Masters' Select Equity 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 Funds may invest up to 5% of their total assets in
securities on a when-issued or delayed-delivery basis. The Advisor does not
expect each 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 each Fund's outstanding shares, as defined in the Investment Company
Act of 1940 (the "1940 Act"). Each 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 each Fund's
fundamental policies and investment restrictions is contained in the SAI.
Breakdown of Expenses
Like all mutual funds, the Funds pay expenses related to their daily operations.
Expenses paid out of each Fund's assets are reflected in its share price; they
are neither billed directly to shareholders nor deducted from shareholder
accounts. Each 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 Funds) 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 each Fund's annual operating
expenses, the Funds also pay other expenses. The Funds pay 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 Funds, at the annual rate of 0.10%
on the first $100 million of its average net assets, 0.05% on the next $150
million of such net assets, 0.025% of the next $250 million of such net assets,
and 0.0125% of such net assets over $500 million subject to an annual minimum of
$40,000 per Fund. The Funds also pay 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.
The Advisor has agreed to reimburse the Masters' Select Equity Fund and Masters'
Select International Fund for any ordinary operating expenses above 1.75% and
___%, respectively, of each Funds' average net assets. The Advisor reserves the
right to be repaid by a Fund if expenses subsequently fall below the specified
limit in future years. But the Masters' Select Equity Fund and Masters' Select
International Fund's operating expenses including any repayments will never be
allowed to exceed 1.75% and ___%, respectively, of average annual net assets.
This expense limitation arrangement is guaranteed by the Advisor for at
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least the first year of a 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 Funds' expenses and
boost its performance. Organization The Masters' Select Equity Fund and Masters'
Select International Fund are series of the 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 Funds, review the compensation arrangements between the Advisor and the
investment managers, review contractual arrangements with companies that provide
services to the Funds 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. Each 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. Each 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 you
own.
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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
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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 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.
o Rollover IRAs retain special tax advantages for certain distributions from
employer-sponsored retirement plans.
o 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.
o Other retirement plans, such as Keogh or corporate profit sharing plans,
403(b) plans and 401(k) plans, may invest in the Funds. All of these accounts
need to be established by the plan's trustee. The Funds do not offer prototypes
of these plans.
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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).
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Trust. For money being invested by a trust The trust must be established before
an account can be opened.
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Business or Organization. For investment needs of corporations, associations,
partnerships or other groups Does not require a special application.
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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:
o mailing a check or money order along with the form at the bottom of your
account statement, or a letter;
o wiring money from your bank; or
o making automatic investments.
Each Fund is a no-load fund, which means you pay no sales commissions of any
kind. Once each business day, each 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 1-800-960-0188 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 Funds' 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 Funds' principal underwriter.
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: 1- 800-960-0188
To Invest
By Mail:
By Wire: Call:
1-800-960-0188 to set up an account and arrange a wire
transfer
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J
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To open an account:
o Complete and sign the new account application. Make your check or money order
payable to "Masters' Select Equity Fund" or "Masters' Select International
Fund."
Mail to the address on the new account application or, for overnight
delivery, send to:
National Financial Data Services
1004 Baltimore, 5th Floor
Kansas City, MO 64105
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To add to an account:
o Make your check or money order payable to "Masters' Select Equity Fund" or
"Masters' Select International 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:
National Financial Data Services
1004 Baltimore, 5th Floor
Kansas City, MO 64105
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G
Wire
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To open an account:
o Call 1-800-960-0188 for instructions on opening an account by wire.
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To add to an account:
o Call 1-800-960-0188 for instructions on adding to an account by wire.
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L
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To open an account:
o If you sign up for the Automatic Investment Plan when you open your account,
the minimum initial investment is $2,500.
o Complete and sign the Automatic Investment Plan section of the new account
application.
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To add to an account:
o Sign up for the Automatic Investment Plan or call 1-800-960-0188 for
instructions on how to establish this Plan.
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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 each Fund from fraud. Your request must be made in writing and include a
signature guarantee if any of the following situations apply:
o You wish to redeem more than $25,000 worth of shares,
o Your account registration has changed within the last 30 days,
o The check is being mailed to a different address from the one on your account
(record address), or
o 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.
Each 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 each Fund if, due to redemptions you have made, the total value of
your account is reduced to less than $2,500. If a 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 a Fund takes any action.
Selling Shares by Letter
Write a "letter of instruction" with:
o Your name,
o Your Fund account number,
o The dollar amount or number of shares to be redeemed, and
o Any other applicable requirements listed in the table at right.
o Unless otherwise instructed, the Fund will send a check to the record address.
Mail your letter to:
National Financial Data Services
P.O. Box 419922
Kansas City, MO 64141-6922
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 1-800-960-0188. The
amount you wish redeemed (up to $25,000) will be wired to your bank account.
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By Phone
1-800-960-0188
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Mail or in Person
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Wire
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All account types except retirement
Individual, Joint Tenant,
Sole Proprietorship,
UGMA, UTMA
Retirement Account
Trust
Business or Organization
Executor, Administrator,
Conservator, Guardian
All account types except retirement
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o Maximum check request: $ 25,000
o The letter of instructions must be signed be all persons required to sign for
transactions, exactly as their names appear on the account.
o The account owner should complete a retirement distribution form. Call
1-800-960-0188 to request one.
o 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.
o At least one person authorized by corporate resolutions to act on the account
must sign the letter.
o Include a corporate resolution with corporate seal or a signature guarantee.
o Call 1-800-960-0188 for instructions.
o You must sign up for the wire feature before using it. To verify that it is in
place, call 1-800-960-0188. Minimum wire: $5,000.
o 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.
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Shareholder and Account Policies
Statements, Reports and Inquiries
Statements and reports that each Fund sends you include the following:
o Confirmation statements (after every transaction that affects your account
balance or your account registration)
o Financial reports (every six months)
If you have questions about your account, you may call the Transfer Agent at
1-800-960-0188.
Exchange Privilege. Shareholders may exchange shares between the Masters' Select
Equity Fund and Masters' Select International Fund by mailing or delivering
written instructions to the Transfer Agent. Please specify the name of the
applicable Fund, the number of shares or dollar amount to be exchanged, and your
name and account number. You may also exchange shares by telephoning the
Transfer Agent at (800) 960-0188 between the hours of 9:00 AM and 4:00 PM
(Eastern time) on a day when the NYSE is open for normal trading. Telephone
exchanges are subject to the identification procedures noted with respect to
telephone redemptions above.
Investor Services
The Funds offer 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 Funds offer 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 1-800-960- 0188 for more information.
Share Price
Each Fund is open for business each day the New York Stock Exchange (NYSE) is
open. Each Fund calculates its NAV as of the close of business of the NYSE,
normally 4 p.m. Eastern time.
Each Fund's NAV is the value of a single share. The NAV is computed by adding
the value of each 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).
Each 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
o All of your purchases must be made in U.S. dollars, and checks must be drawn
on U.S. banks.
o The Funds do not accept cash, credit cards or third-party checks.
o If your check does not clear, your purchase will be canceled and you will be
liable for any losses or fees the Funds or its transfer agent incurs.
o Your ability to make automatic investments may be immediately terminated if
any item is unpaid by your financial institution.
o Each 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 Funds. Order may also be rejected from
persons believed by the Advisor to be "market timers."
Certain financial institutions that have entered into sales agreements with the
Funds 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
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Redemptions
o Normally, redemption proceeds will be mailed to you on the next business day,
but if making immediate payment could adversely affect the Funds, it may take up
to seven days to pay you.
o 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 Funds distribute substantially all of their 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 1-800-960-0188 for instructions. The Funds offer three options:
1. Reinvestment Option. Your dividend and capital gain distributions will be
automatically reinvested in additional shares of the Funds. 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 2 years old, you can receive distributions in cash.
When a 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 Funds pass their earnings along to
investors as distributions.
Each Fund earns dividends from stocks and interest from short term
investments. These are passed along as dividend distributions. Each 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.
Taxes
As with any investment, you should consider how your investment in each 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, each 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, each 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 a Fund, the
Fund will send you a confirmation statement showing how many shares you sold and
at
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<PAGE>
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 a 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 Funds 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 a 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 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 Funds may sometimes show their performance
compared to certain performance rankings, averages or stock indices (described
more fully in the SAI).
General Information
The Masters' Select Equity Fund and Masters' Select International Fund are 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 Paul, Hastings, Janofsky &
Walker.
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<PAGE>
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PART B
COMBINED STATEMENT OF ADDITIONAL INFORMATION
MASTERS' SELECT INVESTMENT TRUST
Masters' Select Equity Fund
Masters' Select International Fund
- --------------------------------------------------------------------------------
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<PAGE>
THE MASTERS' SELECT EQUITY FUND
Statement of Additional Information
Dated November 15, 1997
This Statement of Additional Information is not a prospectus, and it should be
read in conjunction with the prospectus dated November 15, 1997, as may be
amended from time to time, of The Masters' Select Equity Fund (the "Masters'
Select Equity" or "Equity Fund") and The Masters' Select International Fund (the
"Masters' Select International" or "International Fund"), a series of Masters'
Select Investment Trust (the "Trust"). Litman/Gregory Fund Advisors, LLC (the
"Advisor") is the Advisor of the Funds. The Advisor has retained investment
managers as sub-advisers ("Managers"), each responsible for portfolio management
of a segment of each Fund's total assets. A copy of the combined prospectus may
be obtained from the Trust at 4 Orinda Way, Suite 230- D, Orinda, California
94563, Telephone (510) 254-8999.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Cross-reference to sections
Page in the prospectus
---- -----------------
<S> <C> <C>
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-29 Performance
General Information................................... B-30 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>
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INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Fund is to provide long-term growth
of capital. There is no assurance that each Fund will achieve its objective. The
discussion below supplements information contained in the prospectus as to
investment policies of each Fund.
Convertible Securities and Warrants
Each Fund may invest in convertible securities and warrants. A
convertible security is a fixed income security (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 a Fund's
entire investment therein).
Other Corporate Debt Securities
Each Fund may invest in non-convertible debt securities of foreign
and domestic companies over a cross-section of industries. The debt securities
in which each 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 each Fund to achieve its
investment objective also depends on the continuing ability of the issuers of
the debt securities in which each 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, each 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
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<PAGE>
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, each 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 a 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, a Fund would have to replace the security with a lower
yielding security, resulting in a decreased return for investors. Conversely, a
high yield bond's value will decrease in a rising interest rate market, as will
the value of a Fund's assets. If a 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 a Fund's expenses can be
spread and possibly reducing a 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 a Fund's
assets and hinder a 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 a
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 a Fund can meet redemption requests. A Fund will not
necessarily dispose of a portfolio security when its rating has been changed.
Short-Term Investments
Each Fund may invest in any of the following securities and
instruments:
Bank Certificates or Deposit, Bankers' Acceptances and Time
Deposits. Each 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 a 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 a 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
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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 a 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, a 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. Each 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 $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.
Each 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, a 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
Each 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 a 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
a Fund invested in a money market mutual fund. However, an investment in a money
market mutual fund will involve payment by a Fund of its pro rata share of
advisory and administrative fees charged by such fund.
Government Obligations
Each 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.
Each Fund may invest in sovereign debt obligations of foreign
countries. A sovereign debtor's willingness or ability to repay
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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.
Zero Coupon Securities
Each 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
Each 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 a 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 a 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 a Fund. The absence of such an active secondary market
could make it difficult for a 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 a Fund is not entitled to
exercise its demand rights, and a 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
Each 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. Each 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.
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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 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 a 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
Each Fund may invest in securities of foreign issuers that are not
publicly traded in the United States (the International Fund will invest
substantially all of its assets in securities of foreign issuers). Each 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. Each 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 a Fund's assets denominated in that currency. Such
changes will also affect a Fund's income. The value of a Fund's assets may also
be affected significantly by currency restrictions and exchange control
regulations enacted from time to time.
Market Characteristics. The Managers expect that many foreign
securities in which a Fund invests 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 a 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 a 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 a
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 a Fund's foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to a Fund's shareholders.
Costs. To the extent that each 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 each 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 a
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 a
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. Each Fund may purchase covered
"put" and "call" options with respect to securities
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which are otherwise eligible for purchase by a Fund and with respect to various
stock indices subject to certain restrictions. Each Fund will engage in trading
of such derivative securities primarily for hedging purposes.
If a Fund purchases a put option, a 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 a Fund is
holding a stock which it feels has strong fundamentals, but for some reason may
be weak in the near term, a 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, a 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 a Fund exercises the put, less transaction costs, will be
the amount by which a 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 a Fund paid for the put, plus
transaction costs. If the price of the underlying security increases, the profit
a 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 a 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 a Fund has a short position in the underlying
security and the security thereafter increases in price. Each 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 a Fund in the underlying security and the price of the
underlying security thereafter falls, the profit a 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. Each 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. Each Fund may write covered call options. A
call option is "covered" if a 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 a 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 a Fund.
If a 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.
Each 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. Each 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
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security, any loss to a 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 a Fund.
Stock Index Options. Each 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 a 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 a 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 a 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 a 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 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, a Fund would not be able to
close out options which it had purchased, and if restrictions on exercise were
imposed, a Fund might be unable to exercise an option it holds, which could
result in substantial losses to a Fund. It is the policy of each 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 a Fund may enter into options transactions may be limited by the
Internal Revenue Code (the "Code") requirements for qualification of a 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, a 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. Each Fund will engage in transactions involving
dealer options as well as exchange-traded options. Certain risks are specific to
dealer options. While a Fund might look to a clearing corporation to exercise
exchange-traded options, if a 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 a Fund as well as loss of the expected benefit
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of the transaction.
Exchange-traded options generally have a continuous liquid market
while dealer options may not. Consequently, a 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 a Fund writes
a dealer option, a 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 a Fund originally wrote the option. While a 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 a Fund, there
can be no assurance that a Fund will at any time be able to liquidate a dealer
option at a favorable price at any time prior to expiration. Unless a 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, a Fund may be unable to liquidate a dealer option. With respect
to options written by a Fund, the inability to enter into a closing transaction
may result in material losses to a Fund. For example, because a Fund must
maintain a secured position with respect to any call option on a security it
writes, a Fund may not sell the assets which it has segregated to secure the
position while it is obligated under the option. This requirement may impair a
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. A Fund may treat the cover used for written dealer options as liquid
if the dealer agrees that a 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, each Fund will treat dealer options as subject to a Fund's
limitation on illiquid securities. If the Commission changes its position on the
liquidity of dealer options, each Fund will change its treatment of such
instruments accordingly.
Foreign Currency Options. Each 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. Each 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 a
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. Each 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 a Fund's position, a Fund may forfeit the entire amount of
the premium plus related transaction costs.
Spread Transactions. Each 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 a 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 a Fund does not own, but
which is used as a benchmark. The risk to a 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 a 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
Each 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, a Fund might
purchase a
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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
Each Fund may invest in futures contracts and options on futures
contracts as a hedge against changes in market conditions or interest rates. A
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"). A 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 a Fund upon the purchase or sale of
a futures contract. When it enters into a domestic futures contract, a 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. The margin requirements for foreign
futures contracts may be different.
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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 a 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 a
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
a Fund will receive from the broker a variation margin payment equal to that
increase in value. Conversely, when a 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 a Fund will be required to make a variation margin
payment to the broker.
At any time prior to expiration of a futures contract, a Fund may
elect to close the position by taking an opposite position, which will operate
to terminate a 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 a Fund, which realizes a loss or a gain.
In addition to amounts segregated or paid as initial and variation
margin, a 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 a 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. Each 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. Each 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 a Fund
would create an obligation by a 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 a Fund would create an
obligation by a 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 a 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, a Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, a Fund pays the difference and realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by a Fund's entering into
a futures contract sale. If the offsetting sale price exceeds the purchase
price, a Fund realizes a gain, and if the purchase price exceeds the offsetting
sale price, a Fund realizes a loss.
Each 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
membership. Domestic interest
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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. Each 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. Each 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. Each 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, a 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, a 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, a 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, a 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 a 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 a Fund's portfolio may decline. If this occurs, a
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 a 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 a 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 frame.
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Positions in futures may be closed out only on an exchange or board
of trade which provides a secondary market for such futures. Although a 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, a 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 a Fund is also subject to a Manager's
ability to predict correctly movements in the direction of the market. For
example, if a Fund has hedged against the possibility of a decline in the market
adversely affecting stocks held in its portfolio and stock prices increase
instead, a 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 a 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. Each 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 a Fund
engages in transactions in futures contracts or options, a 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, each 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 a 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.
Each Fund will engage in transactions in futures contracts or related options
primarily as a hedge against changes resulting from market conditions in the
values of securities held in a 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 each Fund. A Fund may not purchase
or sell futures or purchase related options if, immediately thereafter, more
than 25% of its net assets would be hedged. A Fund also may not purchase or sell
futures or purchase
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related options if, immediately thereafter, the sum of the amount of margin
deposits on a Fund's existing futures positions and premiums paid for such
options would exceed 5% of the market value of a 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 each Fund.
The extent to which a Fund may enter into futures and options
transactions may be limited by the Code requirements for qualification of a Fund
as a regulated investment company. See "Taxation." Repurchase Agreements
Each Fund may enter into repurchase agreements with respect to its
portfolio securities. Pursuant to such agreements, a 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 a Fund's agreement to resell such securities at a mutually agreed
upon date and price. The repurchase price generally equals the price paid by a
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, a 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 a 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.
Each Fund may enter into reverse repurchase agreements. A 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. A Fund may use the proceeds of
reverse repurchase agreements to provide liquidity to meet redemption requests
when sale of a Fund's securities is disadvantageous.
Each 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
Each Fund may enter into dollar roll transactions. A dollar roll
transaction involves a sale by a Fund of a security to a financial institution
concurrently with an agreement by a 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, a
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 a Fund, and the income from these investments, together with any
additional fee income received on the sale, may or may not generate income for a
Fund exceeding the yield on the securities sold.
At the time a 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
Each 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 account. Normally, the Custodian will set aside portfolio
securities to satisfy a purchase commitment. In such a case, a Fund may be
required
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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 a Fund's
commitment. It may be expected that a 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.
Each Fund does not intend to engage in these transactions for
speculative purposes but only in furtherance of its investment objectives.
Because a Fund will set aside cash or liquid portfolio securities to satisfy its
purchase commitments in the manner described, a Fund's liquidity and the ability
of a Manager to manage it may be affected in the event a Fund's forward
commitments, commitments to purchase when-issued securities and delayed
settlements ever exceeded 15% of the value of its net assets.
Each 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, a
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 a Fund on the settlement date. In these cases a Fund may realize a
taxable capital gain or loss. When a 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 a 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 a Fund starting on the day a Fund agrees to
purchase the securities. A 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
Each 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. A 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
Each 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
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Each 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 a Fund if the demand meets the
terms of the letter. Such terms and the issuing bank would have to be
satisfactory to a Fund. Any loan might be secured by any one or more
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of the three types of collateral. The terms of a Fund's loans must permit a 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
Each Fund is authorized to make short sales of securities which it
does not own or have the right to acquire. In a short sale, a 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, a Fund must borrow the security
(generally from the broker through which the short sale is made) in order to
make delivery to the buyer. Each Fund is then obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement. Each
Fund is said to have a "short position" in the securities sold until it delivers
them to the broker. The period during which a 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 a 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, a 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 a Fund create opportunities to increase a Fund's
return but, at the same time, involve specific risk considerations and may be
considered a speculative technique. Since each 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, a 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 a Fund may be required to pay in connection with the short sale.
Furthermore, under adverse market conditions a 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.
Illiquid Securities
Each Fund may not invest more than 15% of the value of its net
assets in illiquid securities, including restricted securities, that are not
deemed to liquid by the sub-advisor. The Advisor and the Managers will monitor
the amount of illiquid securities in a Fund's portfolio, under the supervision
of the Trust's Board of Trustees, to ensure compliance with a 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 a 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. A 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 sub- advisor, pursuant to procedures adopted by 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
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will be deemed illiquid.
Risks of Investing in Small Companies
As stated in the prospectus, a 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, a 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
a 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 a Fund
than in a fund that invests in larger, more established companies.
Investment Restrictions
The Trust (on behalf of a 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 a 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 a 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 a Fund.
As a matter of fundamental policy, a 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) a Fund may not purchase more than 10% of
the outstanding voting securities of an issuer. Each Fund's investment objective
is also fundamental.
In addition, a Fund may not:
1. Issue senior securities, borrow money or pledge its assets,
except that (I) a 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 a 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 a 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 a 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 a 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 a Fund and except for repurchase
agreements); or
9. Make investments for the purpose of exercising control or
management.
Each Fund observes the following restrictions as a matter of
operating but not fundamental policy, pursuant to positions
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taken by federal regulatory authorities:
Each 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 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 the
sub-advisor, pursuant to procedures adopted 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 a 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. Director of
1065 Sterling Avenue Peoplesoft, Inc.; Barra, Inc.; and Fair, Isaac. Formerly (until 1995)
Berkeley, CA 94708 Managing Partner, Market Development of Andersen Consulting.
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) Secretary and Treasurer and Secretary of the Advisor; Vice President and Secretary
100 Larkspur Landing Circle Trustee 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
John Coughlan (40) Treasurer Chief Operating Officer, Litman/Gregory & Co., LLC since 1996;
4 Orinda Way Controller, Centex Homes of Northern CA, 1995 - 1996;
Suite 230D Senior Vice President, Countrywide Capital Markets, Inc., 1994;
Orinda, CA 94556, Executive Vice President, TMAC, 1992 - 1994 ; Vice President and
Treasurer, Barnett Range Corporation, prior to 1992
</TABLE>
* denotes Trustees who are "interested persons" of the Trust under the 1940 Act.
Prospectus
<PAGE>
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 each 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 each Fund with advice and recommendations with respect to the
selection and continued employment of Managers to manage the actual investment
of each Fund's assets; (ii) direct the allocation of each Fund's assets among
such Managers; (iii) oversee the investments made by such Managers on behalf of
each 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 each Fund, filing Section 13 ownership reports for each Fund,
and taking other actions on behalf of each Fund; (v) maintain the books and
records required to be maintained by each Fund except to the extent arrangements
have been made for such books and records to be maintained by the administrator,
another agent of each Fund or a Manager; (vi) furnish reports, statements and
other data on securities, economic conditions and other matters related to the
investment of each Fund's assets which each 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 each 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 each Fund including the
provision of persons qualified to serve as officers of the Trust; (ii)
compensating the Managers selected to invest the assets of each Fund; (iii) the
expenses of printing and distributing extra copies of each 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 each Fund in accordance with the investment
objectives, policies and restrictions of each Fund as set forth in each Fund's
and Trust's governing documents, including, without limitation, the Trust's
Agreement and Declaration of Trust and By-Laws; each 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 each Fund with advice and recommendations with respect to
the investment of the Manager's Allocated Portion of each 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 each 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
Managers' fees), each Fund pays it an advisory fee
Prospectus
<PAGE>
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 each 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 each Fund's
shareholders and the Trust's Board of Trustees that are properly payable by each
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 each 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 each 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 each
Fund for certain expenses, in order to limit the expense ratio of each Fund. In
that event, subject to approval by the Trust's Board of Trustees, each 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 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
Prospectus
<PAGE>
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 each 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 each Fund on
a continuing basis. The price to each 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 each Fund to pay a broker or dealer that provides
(directly or indirectly) brokerage or research services to the 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 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 each Fund or other advisory clients. Each Manager is further
authorized to allocate the orders placed by it on behalf of each 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 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
Prospectus
<PAGE>
authorized to consider sales of shares of each Fund as a factor in the selection
of brokers or dealers to execute portfolio transactions, subject to the
requirements of best execution.
On occasions when a Manager deems the purchase or sale of a security
to be in the best interest of each 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 each Fund and to such other clients.
NET ASSET VALUE
The net asset value of a 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 a 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 a 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 a 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 a 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 a 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 a 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, a 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.
Each 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 a Fund if
acquired within 60 days of maturity or, if already held by a 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 a 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 determining
value, will use information with respect to transactions in the securities being
valued, quotations from dealers, market transactions in comparable
Prospectus
<PAGE>
securities, analyses and evaluations of various relationships between securities
and yield to maturity information.
An option that is written by a 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 a 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 a 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 a Fund are valued in such manner as the Board in
good faith deems appropriate to reflect their fair value.
TAXATION
Each 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 a Fund qualifies, a
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, a 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 a 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) at the close of each quarter of a 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 a Fund and that does not represent more than 10% of the outstanding
voting securities of such issuer; and (3) at the close of each quarter of a
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 a 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 a 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.
Each Fund or any securities dealer effecting a redemption of a
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, a 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 a 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.
Prospectus
<PAGE>
Each 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, a 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.
Each Fund may receive dividend distributions from U.S. corporations.
To the extent that a Fund receives such dividends and distributes them to its
shareholders, and meets certain other requirements of the Code, corporate
shareholders of a 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 a 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 a 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 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 shares of the
same Fund are purchased (including shares acquired by means of reinvested
dividends) within 30 days before or after such redemption.
Prospectus
<PAGE>
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 Paul Hastings Janofsky &
Walker 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
Prospectus
<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 Delaware Business Trust organized on August 1, 1996.
The Masters' Select Equity Fund series of shares commenced operations on January
2, 1997. The Masters' Select International Fund has not commenced operations as
of the date of this Statement of Additional Information. 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 two series of shares, and may create additional series in
the future, which have separate assets and liabilities. Income and operating
expenses not specifically attributable to a particular Fund will 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.
Prospectus
<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
Prospectus
<PAGE>
"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.
Prospectus
<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.
Prospectus
<PAGE>
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 express 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
McGladrey & Pullen, LLP
New York, New York
December 13, 1996
Prospectus
<PAGE>
- --------------------------------------------------------------------------------
PART C
OTHER INFORMATION
- --------------------------------------------------------------------------------
C-1
<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
(b) Exhibits:
(1) (a) Agreement and Declaration of Trust1
(b) Amendment to Agreement and Declaration of Trust2
(2) By-Laws1
(3) Not applicable
(4) Specimen stock certificate
(5) (a) Form of Investment Advisory Agreement2
(b)(i) Investment Management Agreement with Davis Selected
Advisers LP3
(ii) Investment Management Agreement with Friess
Associates, Inc.3+
(iii) Investment Management Agreement with Jennison
Associates Capital Corp.3+
(iv) Investment Management Agreement with Societe
Generale Asset Management Corp.3
(v) Investment Management Agreement with Southeastern
Asset Management, Inc.3
(vi) Investment Management Agreement with Strong Capital
Management, Inc.3
(vii) Form of Investment Management Agreement with
Masters' Select International Sub-Advisors
(viii) Form of Investment Management Agreement with
Janus Capital Corp.
(6) Distribution Agreement3
(7) Not applicable
(8) Custodian Agreement3
(9) Administration Agreement with Investment Company
Administration Corporation2
(10) Opinion and consent of counsel3
(11) Consent of Independent Auditors3
(12) Not applicable
(13) Investment letter3
(14) Individual Retirement Account forms4
(15) Not applicable
(16) Not applicable
(17) Financial Data Schedule4
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 Previously filed as an exhibit to Pre-Effective Amendment No. 2 to
the Registration Statement on Form N-1A of the Registrant (File No. 333-10015)
on December 16, 1996, and incorporated herein by reference.
C-2
<PAGE>
4 To be filed by amendment.
+ Filed with amendment.
Item 25. Persons Controlled by or under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities.
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 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
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<PAGE>
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 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
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<PAGE>
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:
(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
C-5
<PAGE>
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
Janus Capital Corp.
Bee & Associates
Harris Associates
Artisan Partners
BPI Global Asset Management
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.:
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:
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<PAGE>
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
Janus Capital Corp.
Bee & Associates
Harris Associates
Artisan Partners
BPI Global Asset Management
(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 for the Masters' Select International Fund;
and
(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-7
<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
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Orinda, and
State of California on the 29th day of August, 1997.
MASTERS' SELECT INVESTMENT TRUST
By: /s/ Kenneth E. Gregory
------------------------
Kenneth E. Gregory
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
Kenneth E. Gregory President and August 29, 1997
- ------------------- Trustee
Kenneth E. Gregory
Craig A. Litman* Trustee August 29, 1997
- -------------------
Craig A. Litman
A. George Battle* Trustee August 29, 1997
- -------------------
A. George Battle
Frederick A. Eigenbrod, Jr. Trustee August 29, 1997
- ---------------------------
Frederick A. Eigenbrod, Jr.
Taylor M. Welz Trustee August 29, 1997
- -------------------
Taylor M. Welz
John Coughlan Chief Financial August 29, 1997
- ------------------- and Accounting Officer
John Coughlan
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<PAGE>
EXHIBITS
C-9
FORM OF INVESTMENT MANAGEMENT AGREEMENT WITH BPI, ARTISAN FUNDS, BEE &
ASSOCIATES AND HARRIS ASSOCIATES
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"); (hereinafter called the "Sub-Advisor");
Masters' Select Investment Trust (hereinafter called the "Trust"), on behalf of
The Masters' Select International 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 management of the
Fund's portfolio of securities, the functions of fund
<PAGE>
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
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
<PAGE>
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 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.
<PAGE>
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 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
<PAGE>
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 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.
<PAGE>
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 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,
<PAGE>
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
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
<PAGE>
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.
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 ADVISORS, LLC
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:_________________________________
------------------------------ ---------------------------------
------------------------------ ---------------------------------
FORM OF INVESTMENT ADVISORY AGREEMENT WITH JANUS CAPITAL CORP.
SUB-INVESTMENT ADVISORY AGREEMENT
This Sub-Investment Advisory Agreement (this "Agreement") is entered
into as of __________________, 1996 by and between , a _________________
corporation ("Investment Manager") and Janus Capital Corporation, a Colorado
corporation ("JCC").
RECITALS
--------
a. Investment Manager has entered into an Investment Management
Agreement dated , 199_ (the "Investment Management Agreement") with (the
"Fund"), to act as investment manager to , which are series of the Fund
(collectively the "Portfolio").
b. The Investment Management Agreement provides that Investment
Manager may engage a sub-investment adviser to furnish investment information
and advice to assist Investment Manager in carrying out its responsibilities
under the Investment Management Agreement.
c. Investment Manager and the Trustees of the Fund desire to retain
JCC to render investment management services to Investment Manager in the manner
and on the terms set forth in this Agreement.
AGREEMENT
---------
In consideration of the mutual covenants and agreements set forth in
this Agreement, Investment Manager and JCC agree as follows:
1. Sub-Investment Adviser Services.
(a) JCC shall, subject to the control of the Trustees of
the Fund and to the supervision of Investment Manager, have exclusive authority
to manage the investment and reinvestment of the assets of the Portfolio,
including cash, provided that such management is in accordance with the Fund's
declaration of trust and in its registration statements under the Investment
Company Act of 1940 (the "1940 Act"), Investment Manager acknowledges that JCC
has authority to trade every day the market is open. JCC makes no representation
or warranty, express or implied, that any level of performance or investment
results will be achieved by the Portfolio or that the Portfolio will perform
comparably with any standard or index, including other clients of JCC, whether
public or private.
(b) JCC shall furnish Investment Manager with monthly,
quarterly, and
<PAGE>
annual reports concerning transactions and performance of the Portfolio in such
form as may be mutually agreed upon. Upon prior notice, JCC shall permit the
financial statements, books and records with respect to the Portfolio to be
inspected and audited by Investment Manager (and/or the independent accountants
for Investment Manager or the Fund) at all reasonable times during normal
business hours. JCC shall also provide Investment Manager with such other
information and reports as may reasonably be requested by Investment Manager
from time to time, other than proprietary information and provided JCC shall not
be responsible for Portfolio accounting, nor shall it be required to generate
information derived from Portfolio accounting data.
(c) JCC has provided to Investment Manager a copy of
JCC's Form ADV as filed with the Securities and Exchange Commission. JCC shall
provide to Investment Manager a list of persons who JCC wishes to have
authorized to give written and/or oral instructions to Custodians of Fund assets
for the Portfolio.
(d) JCC shall be responsible for the preparation and
filing of Schedule 13G and Form 13F on behalf of the Portfolio. JCC shall not be
responsible for the preparation or filing of any reports required of the
Portfolio by any governmental or regulatory agency, except as expressly agreed
to in writing. JCC shall vote proxies received in connection with securities
held by the Portfolio.
(e) JCC shall have no responsibility to monitor certain
limitations or restrictions, including without limitation, the 1/2 of 1%
limitation on personal trading, the "short-short" test, and the 90%-source test,
for which JCC determines it has not been provided sufficient information in
accordance with Section 2 of this Agreement or otherwise. All such monitoring
shall be the responsibility of Investment Manager.
2. Obligations of Investment Manager and the Portfolio.
(a) Investment Manager has provided to JCC the
information and documents listed on the attached Exhibit A. Throughout the term
of this Agreement, Investment Manager shall continue to provide such information
and documents to JCC, including any amendments, updates or supplements to such
information or documents, before or at the time the amendments, updates or
supplements become effective. Investment Manager shall timely furnish JCC with
such additional information as may be reasonably necessary for or requested by
JCC to perform its responsibilities pursuant to this Agreement. (b) Investment
Manager shall be responsible for setting up and maintaining brokerage accounts
and other accounts JCC deems advisable to allow for the purchase or sale of
various forms of securities pursuant to this Agreement.
3. Custodian. The Portfolio assets shall be maintained in the
custody of the custodian identified pursuant to Exhibit A. Any assets added to
the Portfolio shall be delivered directly to such custodian. JCC shall have no
liability for the acts or omissions of any
<PAGE>
custodian of the Portfolio's assets. JCC shall have no responsibility for the
segregation requirement of the 1940 Act or other applicable law.
4. Broker Dealers. Absent written instructions from Investment
Manager to the contrary, JCC shall place all orders for the purchase and sale of
investment instruments for the Portfolio with brokers or dealers selected by
JCC, which may include brokers or dealers affiliated with JCC. Purchase or sell
orders for the Portfolio may be aggregated with contemporaneous purchase or sell
orders of other clients of JCC. JCC shall use its best efforts to obtain
execution of Portfolio transaction at prices that are advantageous to the
Portfolio and at commission rates that are reasonable in relation to the
benefits received. However, JCC may select brokers or dealers on the basis that
they provide brokerage, research, or other services or products to the Portfolio
and/or other accounts serviced by JCC. JCC may place portfolio transactions with
a broker or dealer with whom it has negotiated a commission in excess of the
commission another broker or dealer would have charged for effecting that
transaction if JCC determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research provided by
such broker or dealer, viewed in terms of either that particular transaction or
the overall responsibilities that JCC and its affiliates have with respect to
the Portfolio and to accounts over which they exercise investment discretion,
and not all such services or products will necessarily be used by JCC in
managing the Portfolio. In addition, consistent with best execution, JCC may
execute Portfolio transactions through brokers and dealers that sell shares of
mutual funds advised by JCC or recommend to their customers that they purchase
shares of such funds. If JCC determines that any product or service furnished by
a broker has a mixed use, such that it also serves functions that do not assist
in the investment decision-making process, JCC may allocate the costs of such
service or product accordingly. The portion of the product or service that JCC
determines will assist it in the investment decision-making process may be paid
for in brokerage commission dollars. This allocation may create a conflict of
interest for JCC.
5. Fees. Investment Manager shall pay to JCC a monthly fee in
accordance with the attached Exhibit B. Investment Manager shall calculate the
fee for each month during which JCC provides investment management services
based upon the average daily net assets of the Portfolio (including cash or cash
equivalents) for each such month. The fee shall be payable to JCC by the
fifteenth day of each month. The fee for the first month during which JCC
provides investment management services and shall be based upon the number of
days the account was open in that month. Similarly, if this Agreement is
terminated, the fee shall be based upon the number of days the account was open
during the month in which the Agreement is terminated.
6. Expenses. Investment Manager, the Fund and the Portfolio shall
assume and pay their respective organizational, operational, and business
expenses not specifically assumed or agreed to be paid by JCC pursuant to this
Agreement. JCC shall pay its own organizational, operational, and business
expenses but shall not be obligated to pay any expenses of Investment Manager,
the Fund, or the Portfolio, including without limitation:
<PAGE>
(a) interest and taxes; (b) brokerage commissions and other costs in connection
with the purchase or sale of securities or other investment instruments for the
Portfolio; and (c) custodian fees and expenses. Any reimbursement of management
fees required by any expense limitation provision and any liability arising out
of a violation of Section 36(b) of the 1940 Act shall be the sole responsibility
of Investment Manager.
7. Representations and Warranties.
(a) Investment Manager represents and warrants the
following:
(i) Investment Manager has been duly
incorporated and is validly
existing and in good standing as
a corporation under the laws of
the state of ____________.
(ii) Investment Manager has all
requisite corporate power and
authority under the laws of
_____________ and federal
securities laws to execute,
deliver and to perform this
Agreement.
(iii) All necessary corporate
proceedings of Investment
Manager have been duly taken to
authorize the execution,
delivery and performance of this
Agreement by Investment Manager.
(iv) Investment Manager is a
registered investment adviser
under the Investment Advisers
Act of 1940 and is in compliance
with all other registrations
required.
(v) Investment Manager has complied,
in all material respects, with
all registrations required by,
and will comply, in all material
respects, with all applicable
rules and regulations of, the
Securities and Exchange
Commission.
(vi) Investment Manager has authority
under the Investment Management
Agreement to execute, deliver
and perform this Agreement.
(vii) Investment Manager has received
a copy of Part II of JCC's Form
ADV.
(b) JCC represents and warrants the following:
(i) JCC has been duly incorporated
and is validly existing and in
good standing as a corporation
under the laws of the state of
Colorado.
<PAGE>
(ii) JCC has all requisite corporate
power and authority under the
laws of Colorado and federal
securities laws to execute,
deliver and to perform this
Agreement.
(iii) All necessary corporate
proceedings of JCC have been
duly taken to authorize the
execution, delivery and
performance of this Agreement by
JCC.
(iv) JCC is a registered investment
adviser under the Investment
Advisers Act of 1940 and is in
compliance with all other
registrations required.
(v) JCC has complied, in all
material respects, with all
registrations required by, and
will comply, in all material
respects, with all applicable
rules and regulations, of the
Securities and Exchange
Commission.
8. Confidentiality and Proprietary Rights. Investment Manager will
not, directly or indirectly, and will not permit its affiliates employees,
officers, directors, agents, contractors, or the Portfolio to, in any form or by
any means, use, disclose, or furnish, to any person or entity, records or
information concerning the business of JCC, except as necessary for the
performance of its duties under this Agreement or the Investment Management
Agreement, or as required by law upon prior written notice to JCC. JCC is the
sole owner of the name and mark "Janus." Investment Manager shall not, and shall
not permit the Portfolio to, without prior written consent of JCC, use the name
or mark "Janus" or make representations regarding JCC or its affiliates. Upon
termination of this Agreement for any reason, Investment Manager shall
immediately cease, and Investment Manager shall cause the Portfolio to
immediately cease, all use of the Janus name or any Janus mark.
9. Non-Exclusivity.
(a) JCC, its affiliates, or any of their directors,
officers, employees, or agents may buy, sell, or trade any securities or other
investment instruments for their own account or for the account of others for
whom it or they may be acting, provided that such activities will not adversely
affect or otherwise impair the performance by JCC of its responsibilities under
this Agreement. JCC and its affiliates may act as investment manager to or
provide other services with respect to various investment companies and other
managed accounts, which advice or services, including the nature of such
services, may differ from or be identical to advice given or action taken with
respect to the Portfolio. In the event of such activities, the transactions and
associated costs will be allocated among such clients (including the Portfolio)
in a manner that JCC believes to be equitable to the accounts involved and
consistent with such accounts' objectives, policies, and limitations.
<PAGE>
(b) JCC shall be subject to a written code of ethics
adopted by it pursuant to Rule 17j-1(b) of the 1940 Act, and shall not be
subject to any other code of ethics, including Investment Manager's code of
ethics, unless specifically adopted by JCC.
(c) JCC may provide advice to or take action with
respect to other clients, which advice or action, including the timing and
nature of such action, may differ from or be identical to advice given or action
taken with respect to the Portfolio. Except as necessary to perform this
Agreement, JCC shall be deemed to be an independent contractor and shall have no
authority, unless otherwise provided or authorized, to act for or represent the
Portfolio or Investment Manager in any way or otherwise be deemed an agent of
the Portfolio or Investment Manager. Investment Manager and JCC shall not be
considered as partners or participants in a joint venture.
10. Liability. Except as may otherwise be provided by the 1940 Act,
or other federal securities laws, neither JCC nor any of its affiliates,
officers, directors, officers, shareholders, employees, or agents shall be
liable for any loss, liability, cost, damage, or expense (including reasonable
attorneys' fees and costs) (collectively referred to in this Agreement as
"Losses"), including without limitation, Losses in connection with pricing
information or other information provided by JCC, except for Losses directly
resulting from JCC's gross negligence, bad faith, or willful misconduct.
Investment Manager and the Fund shall, jointly and severally, hold harmless and
indemnify JCC, its affiliates, directors, officers, shareholders, employees or
agents for any Loss not directly resulting from JCC's gross negligence, bad
faith, or willful misconduct. The obligations contained in this Section 10 shall
survive termination of this Agreement.
11. Duration.
(a) This Agreement shall remain in full force and effect
for two years from the date it is entered into, and is then renewable annually
upon approval by (i) the majority of those members of the Fund's Trustees who
are not interested persons of the Fund, the Investment Manager, or JCC, cast in
person at a meeting called for the purpose of voting on such approval, and (ii)
the Fund's Trustees or vote of a majority of outstanding voting securities of
the applicable Portfolio; provided, however, that if this Agreement or the
continuation of this Agreement is not approved, JCC may continue to render
services under this Agreement in the manner and to the extent permitted by the
1940 Act and applicable regulations.
(b) This Agreement may be terminated as to a Portfolio
at any time, without penalty, by JCC, by the Fund's Trustees or by a majority of
the outstanding voting securities of the applicable Portfolio, on sixty days'
written notice to the other party. This Agreement will immediately terminate in
the event of its assignment. Investment Manager shall provide advance written
notice of any anticipated assignment. (As used in this Agreement, the terms
"majority of the outstanding voting securities," "interested persons," and
"assignment" have
<PAGE>
the same meaning as such terms have in the 1940 Act.)
12. Amendment. This Agreement may be amended only in accordance with
applicable law, and only by a written instrument signed by all the parties to
this Agreement.
13. General.
(a) This Agreement constitutes the entire understanding
of the parties with respect to its subject matter, shall supersede all prior
understandings agreements, contracts or other documents, and shall continue in
full force and effect until terminated.
(b) If any provision of this Agreement is held to be
invalid or unenforceable to any extent, the remainder of this Agreement shall be
enforced to the greatest extent permitted by law.
(c) This Agreement shall be governed by applicable
federal law and the laws of the State of Colorado without regard to choice of
laws principals. Investment Manager and the Fund consent to the venue of the
Denver District Court of the County of Denver, State of Colorado, or the United
States District Court for the District of Colorado and agree that all lawsuits
arising from this Agreement shall be conducted only in such courts, unless such
courts refuse to accept jurisdiction.
(d) This Agreement may be executed in two or more
counterparts which together shall constitute one document.
By:
Name:
Title:
JANUS CAPITAL CORPORATION
By:
Name:
Title:
<PAGE>
Exhibit A
Information and documentation provided by Investment Manager:
o A copy of the Portfolio's registration statement.
o Copies of the Portfolio's prospectus and statement of additional information.
o Copies of the Fund's organizational documents, Bylaws, and as applicable to
the Portfolio, minutes of meetings of the Trustees of the Fund.
o Notice of the Portfolio's custodian designated to hold assets in the
Portfolio.
o A list of the countries approved by the Trustees in accordance with Rule 17f-5
in which Portfolio assets may be maintained and a list of those countries
available immediately.
o Certified copies of financial statements or reports prepared for the Fund,
including the Portfolio, by certified or independent public accountants.
o Copies of any financial statement or reports made by the Portfolio to its
shareholders or to any governmental body or securities exchange.
o Reports as to the composition of assets in the Fund, cash requirements and
cash available for investment in the Portfolio.
o Copies of Investment Manager's liquidity procedures, cross-trade procedures,
repurchase agreement procedures, 10f-3, 17a-7 and 17e-1 procedures and other
procedures that may affect the duties of JCC.
o A Free-riding and Withholding Questionnaire completed by the Fund.
o An Internal Revenue Service Form W-9 completed by the Fund.
o A Qualified Institutional Investor Certification completed by the Fund.
o A list of persons authorized to act on behalf of the Portfolio.
o A list of "affiliates" of the Fund, as such term is used in the 1940 Act,
including all broker- dealers affiliated with the Fund.
o Applicable Commodities Futures Trading Commission exemptions, notifications
and/or related documentation.
o A list of established futures accounts.
