As filed with the Securities and Exchange
Commission on February 23, 1999
Registration No. 333-10015
File No. 811-07763
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 5 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 7 [X]
MASTERS' SELECT FUNDS TRUST
(Exact Name of Registrant as Specified in Charter)
4 ORINDA WAY, SUITE 230-D
ORINDA, CA 94563
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (925) 254-8999
KENNETH E. GREGORY
4 Orinda Way, Suite 230-D
Orinda, CA 94563
(Name and Address of Agent for Service)
Copy to:
Julie Allecta, Esq.
Paul, Hastings, Janofsky & Walker LLP
345 California Street, 29th Floor
San Francisco, CA 94104
It is proposed that this filing will become effective (check appropriate box):
[ ] Immediately upon filing pursuant to paragraph (b)
[ ] On _____________, pursuant to paragraph (b) of Rule 485
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] On _____________, pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] On _____________, pursuant to paragraph (a)(2) of Rule 485
<PAGE>
CROSS REFERENCE SHEET
(Pursuant to Rule 495 showing the location in the Prospectus and the
Statement of Additional Information of the responses to the Items of Parts A and
B of Form N-1A).
CAPTION OR SUBHEADING IN PROSPECTUS
OR STATEMENT OF ADDITIONAL
ITEM NO. ON FORM N-1A INFORMATION
1. Front and Back Cover Pages Front and Back Cover Pages
2. Risk/Return Summary: Masters' Select Equity Fund -
Investments, Risks, and Performance Objective, Strategy, Risks, Past
Performance; Masters' Select
International Fund - Objective,
Strategy, Risks, Past Performance
3. Risk/Return Summary: Fee Table Fees and Expenses
4. Investment Objectives, Principal Masters' Select Equity Fund;
Strategies, and Related Risks Masters' Select International Fund
5. Management's Discussion of Fund Not Applicable
Performance
6. Management, Organization, and Masters' Select Equity Fund in
Capital Structure Detail; Masters' Select International
Fund in Detail
7. Shareholder Information Shareholder Services
8. Distribution Arrangements Not Applicable
9. Financial Highlight Information Financial Highlights
<PAGE>
PART B-INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL INFORMATION
CAPTION OR SUBHEADING IN PROSPECTUS
OR STATEMENT OF ADDITIONAL
ITEM NO. ON FORM N-1A INFORMATION
10. Cover Page and Table of Contents Cover Page and Table of Contents
11. Fund History General Information
12. Description of the Fund and Its Investment Objectives and Policies
Investments and Risks
13. Management of the Fund Management
14. Control Persons and Principal Holders General Information
of Securities
15. Investment Advisory and Other Management; General Information
Services
16. Brokerage Allocation and Other Portfolio Transactions and
Practices Brokerage
17. Capital Stock and Other Securities General Information
18. Purchase, Redemption and Pricing of Net Asset Value
Shares
19. Taxation of the Fund Taxation
20. Underwriters Not Applicable
21. Calculation of Performance Data Performance
22. Financial Statements Financial Statements
<PAGE>
As filed with the Securities and
Exchange Commission on February 23, 1999
Registration No. 333-10015
File No. 811-07763
================================================================================
Part A
of
Form N-1A
COMBINED REGISTRATION STATEMENT
MASTERS' SELECT FUNDS TRUST
Masters' Select Equity Fund
Masters' Select International Fund
================================================================================
<PAGE>
THE MASTERS' SELECT FUNDS
PROSPECTUS
THE MASTERS' SELECT EQUITY FUND
THE MASTERS' SELECT INTERNATIONAL FUND
APRIL 30, 1999
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.
1
<PAGE>
CONTENTS
Masters' Select Equity Fund - Fund Summary __
Masters' Select International Fund - Fund Summary __
The Funds in Detail Elements Common to Both Funds __
The Masters' Select Equity Fund in Detail __
The Masters' Select International Fund in Detail __
Shareholder Services __
Financial Highlights __
2
<PAGE>
MASTERS' SELECT EQUITY FUND
OBJECTIVE: The objective of the Fund is long-term growth of capital; that is,
the increase in the value of your investment over the long term by investing in
the securities of companies that the investment managers of the Fund believe
have strong appreciation potential. The Fund will primarily invest in the
securities of U.S. companies, although the investment managers will have limited
flexibility to invest in the securities of foreign companies.
STRATEGY: The Advisor believes that it is possible to identify investment
managers who will deliver superior returns relative to their peer groups, over a
market cycle. The Advisor also believes that most stock pickers have a few
select stocks in which they have high degree of confidence. In the case of
certain, skilled stock pickers the Advisor believes a portfolio of their
"highest confidence" stocks will outperform their more diversified portfolios
over a market cycle. Based on these beliefs, the Fund's strategy is to engage
six proven investment managers as sub-advisors. Each manager runs a portion of
the overall fund portfolio by independently managing a portfolio comprised of
between 5 and 15 stocks. By executing this strategy the Fund seeks to:
+ combine the efforts of several experienced, world class managers, all with
superior track records,
+ access the favorite stock-picking ideas of each manager at any point in
time,
+ deliver a portfolio that is prudently diversified in terms of stocks
(typically 65 to 90) and industries while still allowing each manager to run
portfolio segments focused on only his or her favorite stocks, and
+ further diversify across different-sized companies and stock-picking styles
by including managers with a variety of stock-picking disciplines.
RISKS
Investment in stocks exposes shareholders of the Fund to the risk of losing
money if the value of the stocks held by the Fund declines during the period an
investor owns shares in the Fund. As with all mutual funds that invest in common
stocks, the value of an individual's investment will fluctuate daily in response
to the performance of the individual stocks held in the Fund.
Though not a small-cap fund the Fund will invest a portion of its assets in the
securities of small companies. The prices of small companies' stocks are
generally more volatile than the prices of large companies' stocks. This is
because small companies may be more reliant on a few products, services or key
personnel, which can be riskier than owning larger companies with more diverse
product lines and structured management. In addition, because small companies
have fewer shares of stock outstanding, the ability to trade their securities
quickly may be affected by a lack of buyers and sellers in these stocks. This
lack of liquidity increases the Fund's risk to adverse market movements in the
prices of these stocks.
3
<PAGE>
Though primarily a U.S. equity fund, the Fund may invest a portion of its assets
in foreign securities, the stocks and bonds of companies based outside of the
United States. The Fund is exposed to higher risk in owning these securities
because each country has its own rules regarding accounting practices,
government regulation, and government economic policies, which may differ from
the rules and policies that U.S. companies are subject to. In addition, the Fund
will, at times, be exposed to foreign currency fluctuations as the result of its
foreign holdings.
MANAGEMENT
The Advisor to the Fund is Litman/Gregory Fund Advisors, LLC. The Advisor has
ultimate responsibility for the investment performance of the Fund due to its
responsibility to oversee the investment managers and recommend their hiring,
termination and replacement. The following table provides a description of the
six investment managers. A detailed discussion of the management structure of
the Fund begins on Page __.
<TABLE>
<CAPTION>
INVESTMENT
INITIAL EXPERIENCE,
INVESTMENT ALLOCATION OF RELEVANT FUND SIZE OF STOCK-PICKING
MANAGER FUND ASSETS EXPERIENCE COMPANIES STYLE
<S> <C> <C> <C> <C>
Shelby Davis 20% Over 30 years, Mostly large Growth at a
New York Venture companies reasonable price
Fund since 1969
Foster Friess and team 10% Over 25 years, Small and mid-sized High earnings
Brandywine Fund growth
since 1986
Mason Hawkins 20% Over 20 years, All sizes, but Value and global,
Longleaf Partners mostly mid and may invest up to
Fund since 1987 large sized. 50% in foreign
securities
Robert Sanborn 20% Over 10 years, All sizes, but Value
Oakmark Fund since mostly mid and
1991 large sized.
Spiros "Sig" Segalas 20% Over 30 years; Mostly High earnings
Harbor Capital large-companies growth
Appreciation Fund
since 1990
Dick Weiss 10% Over 20 years;
Strong Common
Stock Fund since
1991
</TABLE>
4
<PAGE>
PAST PERFORMANCE
The following chart depicts the performance for the life of the Fund. The chart
illustrates the risk of investing in the Fund by showing the fluctuations in its
annual returns. Please keep in mind that past performance cannot guarantee
future returns.
MASTERS SELECT EQUITY FUND
PERFORMANCE HISTORY
Percentage Return
1997 29.1%
1998 14.9%
During the period shown above, the highest and lowest quarterly returns earned
by the Fund were:
Highest: 21.49 Quarter ended December 31, 1998
Lowest: -17.11% Quarter ended September 30, 1998
The following table compares the Fund's performance over time with the Wilshire
5000, an unmanaged broad market index of stock performance.
Average Annual Return
One Year ended since Inception
12/31/98 (12/31/96)
Masters' Select Equity Fund 14.9% 21.8%
Wilshire 5000 Index 23.5% 27.3%
FEES AND EXPENSES
Expenses are one of several factors to consider when investing in a mutual fund.
There are usually two type of expenses involved: shareholder transaction
expenses, such as sales loads and transaction fees, and annual operating
expenses, such as advisory fees. The Fund has no front-end or deferred sales
loads, and imposes no shareholder transaction fees. The following table
illustrates the fees and expenses you might pay over time as an investor in the
Fund.
Shareholder Fees (paid directly from your investment)
Sales Loads None
Redemption Fees None
Transfer Fees None
Annual Operating Expenses (deducted from Fund assets)
Management Fee 1.10%
Distribution (12b-1) Fee None
Other Operating Expenses (1) 0.28%
Total Annual Fund Operating Expenses 1.38%
Less: Fees waived .02%
Net Operating Expenses (2) 1.36%
- ---------------
(1) Significant other expenses include custody, fund accounting, transfer
agency, legal, audit, administration.
(2) The Advisor has contractually agreed to waive .02% of the Management Fee
through December 31, 1999.
5
<PAGE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. It assumes that you invest
$10,000 in the Fund for the time periods indicated and then redeem all of your
shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
$138 $437 $758 $1,657
MASTERS' SELECT INTERNATIONAL FUND
OBJECTIVE: The objective of the Fund is long-term growth of capital; that is,
the increase in the value of your investment over the long term by investing in
the securities of companies that the managers of the Fund believe have strong
appreciation potential. The Fund will primarily invest in the securities of
foreign companies, although the managers will have limited flexibility to invest
in the securities of U.S. companies.
STRATEGY: The Advisor believes that it is possible to identify international
investment managers who, over a market cycle, will deliver superior returns
relative to their peers. The Advisor also believes that most stock pickers have
a few select stocks in which they have a high degree of confidence. In the case
of certain, skilled stock pickers the Advisor believes a portfolio of their
"highest confidence" stocks will outperform their more diversified portfolios
over a market cycle.
Based on these beliefs, the Fund's strategy is to engage five proven investment
managers as sub-advisors. Each manages a portion of the Fund's portfolio by
independently managing a portfolio comprised of between 8 and 15 stocks. By
executing this strategy the Fund seeks to:
+ combine the efforts of several experienced, world class international stock
pickers, all with superior track records,
+ access the favorite stock-picking ideas of each manager at any point in
time,
+ deliver a portfolio that is prudently diversified in terms of stocks
(typically 50 to 75) and industries while still allowing each manager to
run portfolio segments focused on only his or her favorite stocks, and
+ further diversify across different-sized companies, stock-picking styles by
including managers with a variety of stock-picking disciplines.
6
<PAGE>
RISKS
Investment in stocks exposes shareholders of the Fund to the risk of losing
money if the value of the stocks held by the Fund declines during the period an
investor owns shares in the Fund. As with all mutual funds that invest in common
stocks, the value of an individual's investment will fluctuate daily in response
to the performance of the individual stocks held in the Fund.
Though not a small-cap fund, the Fund will invest a portion of its assets in the
securities of small companies. The prices of small companies' stocks are
generally more volatile than the prices of large companies' stocks. This is
because small companies may be more reliant on a few products, services or key
personnel, which can be riskier than owning larger, more diversified companies
with more structured management. In addition, because small companies have fewer
shares of stock outstanding, the ability to trade their securities quickly may
be affected by a lack of buyers and sellers in these stocks. This lack of
liquidity increases the Fund's risk to adverse market movements in the prices of
these stocks.
The Fund will normally be invested in foreign securities, the stocks and bonds
of companies based outside of the United States. The Fund is exposed to higher
risk in owning these securities because foreign countries have there own rules
regarding accounting practices, government regulation, and government economic
policies, which differ from the rules and policies that U.S. companies are
subject to. Owning foreign securities also exposes shareholders to the political
risks of other countries and the risk of fluctuations of the exchange rate of
the local currency relative to the U.S. dollar.
The Fund may invest a portion of its assets in emerging market countries.
Emerging market countries are those with immature economic and political
structures, and entail greater investment risk than in developed markets. Such
risks include government dependence on a few industries or resources, government
imposed taxes on foreign investment or limits on the removal of capital from a
country, unstable government, and volatile markets.
MANAGEMENT
The Advisor to the Fund is Litman/Gregory Fund Advisors, LLC. The following
table provides a description of the five investment managers. The Advisor has
ultimate responsibility for the investment performance of the Fund due to its
responsibility to oversee the investment managers and to recommend their hiring,
termination and replacement. A detailed discussion of the management structure
of the Fund begins on Page __.
7
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
INITIAL EXPERIENCE,
INVESTMENT ALLOCATION OF RELEVANT FUND SIZE OF STOCK-PICKING
MANAGER FUND ASSETS EXPERIENCE COMPANIES STYLE
<S> <C> <C> <C> <C>
Bruce Bee 10% Over 25 years Mostly small Growth at a
companies reasonable price
Helen Young Hayes 22.5% Since 1984; Janus Overseas All sizes, but Growth at a
Fund and Janus Worldwide mostly large reasonable price
Fund companies
Since 1986; Oakmark All sizes, but Value
David Herro 22.5% International Fund and mostly mid and
Oakmark Small Cap large sized
International Fund companies
Dan Jaworski 22.5% Since 1988; STI Classic Mostly large Value
International Equity Fund companies
(2/95-4/97) and Princor
World Fund (12/88-4/93)
Mark Yockey 22.5% Since 1981; Artisan All sizes but Growth at a
International Fund and mostly reasonable price
United International large-companies
Growth Fund (1990-11/96)
</TABLE>
PAST PERFORMANCE
The following chart depicts the performance for the life of the Fund. Please
keep in mind that past performance cannot guarantee future returns.
MASTERS' SELECT INTERNATIONAL FUND
PERFORMANCE HISTORY
Percentage Return
1998 11.7%
8
<PAGE>
During the period shown above, the highest and lowest quarterly returns earned
by the Fund were:
Highest: 20.77 Quarter ended December 31, 1998
Lowest: -19.54% Quarter ended September 30, 1998
FEES AND EXPENSES
Expenses are one of several factors to consider when investing in a mutual fund.
There are usually two type of expenses involved: shareholder transaction
expenses, such as sales loads and transaction fees, and annual operating
expenses, such as advisory fees. The Fund has no front-end or deferred sales
loads, and imposes no shareholder transaction fees. The following table
illustrates the fees and expenses you might pay over time as an investor in the
Fund.
Shareholder Fees (paid directly from your investment)
Sales Loads None
Redemption Fees None
Transfer Fees None
Annual Operating Expenses (deducted from Fund assets)
Management Fee 1.10%
Distribution (12b-1) Fees None
Other Operating Expenses (1) 0.54%
Total Annual Fund Operating Expenses 1.64%
Less: Fees waived 0.10%
Net Operating Expenses (2) 1.54%
- -----------------
(1) Significant other expenses include custody, fund accounting, transfer
agency, legal, audit, administration.
(2) The Advisor has contractually agreed to waive 0.10% of the Management Fee
through December 31, 1999.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. It assumes that you invest
$10,000 in the Fund for the time periods indicated and then redeem all of your
shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
$157 $517 $892 $1,944
9
<PAGE>
THE FUNDS IN DETAIL--ELEMENTS COMMON TO BOTH FUNDS
THE MASTERS' SELECT INVESTMENT PHILOSOPHY
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. But 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 a market cycle, the performance of most skilled
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 indexes, while others
will lag. By including a variety of stock-picking styles in a single mutual
fund, the Advisor believes that the variability and volatility of returns can be
lessened.
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 of Masters'
Select Funds (Trust), evaluates performance of the investment managers, monitors
changes at the investment managers' organizations that may impact their ability
to deliver superior future performance, determines when to rebalance the
investment managers' assets, determines the amount of cash equivalents (if any)
that may be held in addition to cash in each of the investment managers'
sub-portfolios and coordinates with the managers with respect to diversification
and tax issues.
Kenneth E. Gregory is a Trustee of the Trust and is responsible for monitoring
the day-to-day activities of the investment managers. Gregory is also President
of L/G Research, an affiliated firm that 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.
10
<PAGE>
INVESTMENT MANAGER SELECTION CRITERIA
The Advisor believes that superior investment managers exhibit:
* Consistently above-average intermediate and long-term performance relative
to an appropriate peer group. The Advisor measures investment manager
performance against performance composites made up of other advisory firms
using a similar stock-picking style and market capitalization. The Advisor
maintains its own database and has developed proprietary software to
measure performance over various time periods.
* A record of outperforming the S&P 500 (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.
* The confidence and ability to think and act independently of the "Wall
Street herd mentality."
* The passion for, and obsession, with stock-picking that can result in
working harder and more creatively to get an edge.
* A focus on the job of stock-picking and portfolio management. Thus the
Advisor seeks investment managers who have attempted to mitigate
non-investment distractions by delegating most business management and
marketing duties.
The Advisor has extensive experience evaluating investment advisory firms, using
the above criteria, and believes that each of the investment managers selected
to participate in the Funds exhibits the qualities mentioned above.
MULTI-MANAGER ISSUES
The investment methods used by these managers in selecting securities for the
Funds vary. The segment of each Fund portfolio managed by an investment manager
will, under normal circumstances, differ from the segments managed by the other
investment managers with respect to portfolio composition, turnover, issuer
capitalization and issuer financial condition. Because 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 monitors the overall portfolio on an ongoing 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. Each investment manager selects the brokers and
dealers to execute transactions for the segment of the Fund being managed by
that manager.
11
<PAGE>
The Advisor has obtained an exemptive order from the Securities and Exchange
Commission which permits it, subject to certain conditions, to select new
investment 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 to continue the employment of a manager
after an event that would otherwise cause the automatic termination of services.
Shareholders must 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
managers' fees only in the aggregate in its registration statement.
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. The Advisor (not
the Funds) is responsible for payment of advisory fees to the investment
managers, each of who is compensated monthly on the basis of the assets
committed to his or her individual discretion. The Advisor pays fees to the
investment managers of the Equity Fund at the aggregate annual rate of 0.68%.
The Advisor pays fees to the investment managers of the International Fund at
the aggregate annual rate of 0.6175%. The Advisor is waiving a portion of the
management fees equal to 0.02% of total net assets of the Equity Fund and 0.10%
of the total net assets of the International Fund through December 31, 1999.
In the event an investment manager ceases to manage a segment of a Fund's
portfolio, the Advisor will select a replacement investment manager with an
investment style comparable to that of the investment manager being replaced.
The Advisor will use the same criteria as those used in the original selection
of investment managers.
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 capitalization. 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 mid and large-sized companies at
50% to 85% of the Fund's total assets in normal market conditions. These fixed
allocations are 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 whom, 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 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 65 and 90 securities. Under unusual market conditions or
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.
12
<PAGE>
MASTERS' SELECT EQUITY FUND PORTFOLIO MANAGERS
SHELBY M. C. DAVIS
CHRISTOPHER DAVIS
Davis Selected Advisers, L.P.
124 E. Marcy Street
Santa Fe, NM 87501
Shelby Davis is the lead portfolio manager for the segment of the Fund's assets
managed by Davis Selected Advisers, L.P. ("Davis Advisers"), 124 E. Marcy
Street, Santa Fe, NM 87501. Davis has been in the investment business for more
than 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, joined Davis Selected Advisors in 1991 and was
named co-portfolio manager of the New York Venture Fund in 1995 and sole manager
in 1996. Before joining Davis Selected Advisers, Chris Davis was an associate at
Tanaka Capital Management. Shelby Davis retains ultimate responsibility for
researching and selecting each company included in their portion of the Masters'
portfolio, while Chris handles the daily portfolio management duties. In total,
as of December 31, 1998, Davis Advisers managed more than $20 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.). Approximately 20% of the Fund's assets are
managed by the Davises. They invest 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." The Davises prefers high-quality
companies as evidenced by some or all of the following:
* Solid top-line (revenue) and unit growth
* Management with a stake in the business
* A business plan for the next three to five years
* Participation in an industry that is capable of earning a good return on
capital
* Respected by competitors
* Low-cost operations
The Davises 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, they believe that there is often a catalyst
that will eventually push the stock price higher.
13
<PAGE>
FOSTER FRIESS AND TEAM
Friess Associates, Inc.
350 Broadway
Jackson, WY 83001
Foster Friess is the lead portfolio manager for the segment of the Fund's assets
managed by Friess Associates, Inc. Friess has been in the investment business
for more than 25 years and has been lead manager of the Brandywine Fund since
1986. He is also President and, with his wife, Lynette Friess, sole owner of
Friess Associates. In total, as of December 31, 1998, Friess managed
approximately $7.9 billion.
Approximately 10% of the Fund's assets are managed by Freiss and his team.
Friess invests in stocks of well-financed issuers that have proven records of
profitability and strong earnings momentum. Emphasis is placed on companies with
market capitalization of less than $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 that those common
stocks offer particular opportunity for long-term capital growth. In selecting
investments, Friess considers 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 is 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.
MASON HAWKINS
Southeastern Asset Management, Inc.
6410 Poplar Avenue
Memphis, TN 38119
Mason Hawkins is the lead portfolio manager for the portion of the Fund's assets
run by Southeastern Asset Management, Inc. (Southeastern). Hawkins has been in
the investment business for more than 20 years and founded Southeastern, which
he controls, in 1975. He has managed the Longleaf Partners Fund since its
inception in 1987. In total, as of December 31, 1998, Southeastern managed more
than $13 billion.
Approximately 20% of the Fund's assets are managed by Southeastern which uses 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 has the flexibility,
but not the requirement, to invest up to 50% of its portfolio segment in the
securities of foreign companies. Southeastern focuses on securities of companies
believed to have unrecognized intrinsic value and the potential to grow their
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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 that 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 he believes to
be the real economic value of the issuer's net assets; 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
arm's length would accept for the whole company. In a concluding analysis, the
asset value determination and/or the discounted free cash flow value are
compared to business transactions of comparable corporations. Other
considerations used in selecting potential investments include the following:
* Indications of shareholder-oriented management
* Evidence of financial strength
* Potential earnings improvement
ROBERT SANBORN
Harris Associates, L.P.
2 North LaSalle Street
Chicago, IL 60602
Robert Sanborn is the portfolio manager for the segment of the Fund's assets
managed by Harris Associates, L.P. (Harris Associates). Sanborn has been in the
investment business since 1983 and has been employed by Harris Associates since
1988, where he is an Executive Vice President and Portfolio Manager. Sanborn has
been the portfolio manager of the Oakmark Fund since its inception in 1991.
Overall, Sanborn is responsible for management of more than $7 billion at
Harris, which managed approximately $17 billion as a firm as of December 31,
1998.
Approximately 20% of the Fund's assets are managed by Robert Sanborn. He employs
a disciplined, value-oriented approach to investing that he combines with a
long-term outlook and a bias for concentration in his portfolios. Sanborn seeks
to identify and buy the stocks of companies that are out of favor or have been
overlooked by the marketplace, generally seeking a price that is 60% or less of
his estimate of private market value of the company. Under normal circumstances,
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he holds those stocks until the stock price converges with at least 90% of his
estimate of the private market value of the company. To determine private market
value, Sanborn and the Harris team of analysts study a company's ability to
generate free cash flow. Sanborn ignores short-term market movements, and
employs a three to five-year time horizon when evaluating the prospects of a
business. He believes it is critical to own companies in which the interests of
management are aligned with those of the shareholders, and also considers
franchise value and barriers to market entry when evaluating the long-term
outlook of a company. The majority of the companies Sanborn will hold in the
Fund are mid- and large-sized, although he will have the flexibility to hold
smaller companies and foreign securities if he finds them to be of compelling
value.
SPIROS SEGALAS
Jennison Associates Capital Corporation
466 Lexington Avenue
New York, NY 10017
Spiros "Sig" Segalas is the portfolio manager for the segment of the Fund's
assets managed by Jennison Associates Capital Corp. Segalas has been in the
investment business for more than 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
December 31, 1998, Jennison Associates managed more than $48 billion in U.S.
equity securities.
Approximately 20% of the Fund's assets are managed by Segalas. He seeks to
invest in large and mid-sized companies experiencing superior absolute and
relative earnings growth. Earnings predictability and confidence in earnings
forecasts are an important part of the selection process. In considering a stock
for ownership, Segalas considers price/earnings ratios relative to the market as
well as the companies' histories. In addition, he seeks out companies
experiencing some or all of the following:
* High sales growth
* High unit growth
* High or improving returns on assets and equity
* Strong balance sheet
Segalas also prefers companies with a competitive advantage, such as unique
management, marketing or research and development.
RICHARD T. WEISS
Strong Capital Management, Inc.
100 Heritage Reserve
Menomonee Falls, WI 53051
Dick Weiss is the portfolio manager for the segment of the Fund's assets managed
by Strong Capital Management, Inc. Weiss has been in the investment business for
more than 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, as of December 31, 1998, Weiss
co-managed approximately $6 billion. Strong Capital Management was founded in
1974 and is controlled by Richard Strong.
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Approximately 10% of the Fund's assets are run by Weiss. He invests in stocks of
small and mid-sized companies that are undervalued either because they are not
broadly recognized, are in transition, or are out of favor based on short-term
factors. In seeking attractively valued companies, Weiss focuses on companies
with above-average growth potential that also exhibit some or all of the
following:
* Low institutional ownership and low analyst coverage
* High-quality management
* Sustainable competitive advantage
Weiss evaluates the degree of under-valuation 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 at
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.
THE MASTERS' SELECT INTERNATIONAL FUND IN DETAIL
The Fund's five investment managers pursue the Fund's objective primarily
through investments in common stocks of issuers located outside of the United
States.
Each manager may invest in securities traded in both developed and emerging
markets. Though there is no limit on emerging market exposure, it is not
expected to be a primary focus, and the majority of the Fund's assets are
expected to be invested in stocks of companies listed and domiciled in developed
countries. 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 of the United States. In
most periods it is expected that the Fund will hold securities in more than five
countries. Although the Fund intends to invest substantially all of its assets
in issuers located outside of the United States, it may at times of abnormal
market conditions invest in U.S. issuers and it may at times invest all of its
assets in fewer than five countries.
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Each manager has a distinct stock-picking approach. As a group, the managers
invest in stocks with a range of market capitalization. Although each manager
has the flexibility to invest on a worldwide basis (excluding the U.S.) in
companies with market capitalization of any size, it is expected that the Fund's
exposure to mid and large-sized foreign companies will range from 60% 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 whom, 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 that bottom-up stock pickers have an advantage in foreign
markets because:
* It is the Advisor's opinion that the dynamics that influence individual
countries' markets, including currencies, inflation, economic growth,
political factors, regulation and the like, are much more difficult to
assess than the prospects and valuation characteristics of individual
companies.
* The Advisor believes that many individual stocks in foreign markets are
less closely analyzed (the markets are less "efficient") than in the United
States. If true, the Advisor believes that this will result in greater
opportunities for skilled stock pickers to add value through pure stock
selection.
* Based on the Advisor's observations, bottom-up stock pickers in foreign
markets, on average, seem to perform better than top-down-oriented
managers.
Though bottom-up stock picking is emphasized, each manager also monitors
specific macro-factors that he or she believes are relevant in specific
countries.
The portion of the Fund assigned to each manager is fixed. These fixed
allocations are allowed to drift slightly. The Advisor is responsible for
periodically rebalancing 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 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 50 and
75 securities.
Under unusual market conditions or 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.
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MASTERS' SELECT INTERNATIONAL FUND PORTFOLIO MANAGERS
BRUCE BEE
Bee & Associates, Inc.
370 Seventeenth Street, Suite 3560
Denver, CO 80202
Bruce Bee is the portfolio manager for the portion of the assets managed by Bee
& Associates, Inc. (Bee). Bee has been in the investment business for more than
25 years and founded Bee & Associates, which he controls, in 1989. In total, as
of December 31, 1998, Bee managed approximately $500 million. Bee has managed
global small-cap portfolios since 1989 and international small-cap portfolios
since January 1995.
Approximately 10% of the Fund is managed by Bee. Bee focuses exclusively on
small companies primarily in developed markets, though he may also invest in
emerging markets. He believes that 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; he 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;
has management depth and a coherent business strategy; and has a history of
growth in revenues, earnings, cash flow and return on shareholders' equity
which, in the manager's opinion, is sustainable and 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
100 Filmore Street
Denver, CO 80206
Helen Young Hayes is the portfolio manager for the segment of the Fund's assets
managed by Janus Capital Corporation (Janus). Hayes has been in the investment
business since 1984 and has been with Janus since 1987. Hayes is the Vice
President of Janus Capital Corporation and the 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 of
which Hayes is the portfolio manager. She has managed both funds since their
inceptions in May 1991 and May 1994, respectively. In total, as of December 31,
1998, Janus managed more than $108 billion, of which $24 billion is managed by
Hayes.
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Approximately 22.5% of the Fund is managed by Hayes, who uses a bottom-up
approach to stock selection. Hayes may invest in companies of all sizes, though
she tends to focus mostly on large and mid-sized companies. She invests in
developed markets, and, to a lesser extent, emerging markets. Hayes 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-site visits to facilities. The focus of the
analytical work is to identify companies with:
* Rapid sales and earnings growth
* Strong cash flow generation and wise deployment of capital
* Efficient operations and high productivity
* 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. Certain factors, however, 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 Associates L.P.
2 North LaSalle Street
Chicago, IL 60602
David Herro is the portfolio manager for the portion of the Fund's assets
managed by Harris Associates L.P. (Harris Associates). Herro has been in the
investment business since 1986 and is a partner, portfolio manager and director
of international equities at Harris Associates. He has managed the Oakmark
International Fund and the Oakmark International Small Cap Fund since their
inceptions in 1992 and 1995, respectively. Overall, Herro is responsible for
$864 million in international equity assets. As a firm, Harris Associates
managed $17.3 billion in equity and fixed-income assets as of December 31, 1998.
Approximately 22.5% 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.
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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
* 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 their 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 his estimate of 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
* Management's ability to efficiently allocate capital
Because of his bottom-up approach, Herro focuses on stock selection rather than
industry or country selection. Currency hedging is done defensively and 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
1900 Summit Tower Boulevard
Orlando, FL 32810
Dan Jaworski is the portfolio manager for the segment of the Fund's assets
managed by BPI Global Asset Management, LLP. Jaworski has been in the investment
management business since 1988 and in 1997 founded and became Chief Investment
Officer of BPI Global Asset Management. As of December 31, 1998, BPI managed
approximately $1.2 billion in assets. Prior to founding BPI, Jaworski 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.
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Approximately 22.5% of the Fund's assets are 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 are
specific to the industry, but typical factors include:
* Price to free cash flow
* Price to earnings
* Price to book
* Yield
Appreciation potential is determined assuming the security sells at the mean of
the industrial peer group. Potential returns are then adjusted to reflect the
estimated impact of the local market, the local currency or the general risk
profile of the security.
Securities ultimately selected by Jaworski are primarily large, well-established
companies that have, historically, generated higher returns and better profit
margins than their industry peers. Jaworski invests in developed and emerging
markets, and may use various hedging techniques to reduce exchange rate risk.
MARK YOCKEY
Artisan Partners LP
1000 North Water Street, Suite 1770
Milwaukee, WI 53202
Mark Yockey is the portfolio manager for the segment of the Fund's assets
managed by Artisan Partners LP. Artisan Partners was founded by Carlene Murphy
Ziegler and Andrew Ziegler in 1995 and is controlled by them. Yockey has been in
the investment management business for more than 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, as of December 31, 1998, Yockey managed
approximately $741 million.
Approximately 22.5% of the Fund's assets are run by Yockey. He invests primarily
in international growth stocks, concentrating on companies located in countries
that have accelerating growth prospects. He also invests in companies located in
emerging markets.
Though not a country picker, Yockey prefers to invest in regions and countries
that are enjoying improving or rapid economic growth. This investment universe
includes developed and emerging markets. 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
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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.
SHAREHOLDER SERVICES
EACH FUND IS A NO-LOAD FUND, which means you pay no sales commissions of any
kind. Once each business day that the New York Stock Exchange (NYSE) is open,
each Fund calculates its share price, which is also called 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 calculated as of the close
of the NYSE, normally 4:00 p.m. Eastern Time.
HOW TO BUY SHARES
STEP ONE:
The first step is to determine the type of account you wish to open. The
following types of accounts are available to investors:
INDIVIDUAL OR JOINT ACCOUNTS
For your general investment needs:
Individual accounts are owned by one person. Joint accounts can have
two or more owners (tenants).
RETIREMENT ACCOUNTS
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 specific
applications and typically have lower minimums.
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS) allow anyone of legal age and
under 70 1/2 with earned income to invest up to $2,000 per 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.
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ROLLOVER IRAS retain tax advantages for certain distributions from
employer-sponsored retirement plans.
SIMPLIFIED EMPLOYEE PENSION PLANS (SEP-IRAS) provide small business
owners or those with self-employed income (and their eligible
employees) with many of the same advantages as a Keogh retirement plan,
but with fewer administrative requirements.
ROTH IRAS allow anyone of legal age who meets certain income limits to
invest up to $2,000 per year.
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 versions of these plans.
IF YOU ARE INVESTING THROUGH A TAX-SHELTERED RETIREMENT PLAN, such as
an IRA, for the first time, you will need an IRA Application and
Adoption Agreement. Retirement investing also involves its own
investment procedures.
GIFTS OR TRANSFERS TO MINORS (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 per year per
child without paying a federal gift tax. Depending on state laws, you
can set up a custodial account under the Uniform Gifts to Minors Act
(UGMA) or the Uniform Transfers to Minors Act (UTMA).
TRUST
For money being invested by a trust:
The trust must be established before an account can be opened. The Fund
may require additional documentation regarding the formation of the
Trust prior to establishing an account.
BUSINESS OR ORGANIZATION
For investment needs of corporations, associations, partnerships or other
groups:
Does not require a special application, however the Fund may require
additional information prior to establishing an account.
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STEP TWO:
The second step involves determining the amount of your investment. The Masters'
Select Funds has established the following minimum investment levels for your
initial investment, additional investments and ongoing account balances:
Type of Account Minimum Initial Minimum Additional Minimum Account
Investment Investment Balance
Regular Account $5,000 $250 $2,500
Retirement Account $1,000 $250 $ 250
Automatic Investment
Account $2,500 $100 $2,500
The Distributor may waive the minimum investment from time to time.
STEP THREE:
The third step involves completing your application to open your account. All
shareholders must complete and sign an application in order to establish their
account. The type of application depends on the type of account you chose to
open. Regular investment accounts, including individual, joint tenant, UGMA,
UTMA, business, or trust accounts must complete the Fund's standard New Account
Application. Shareholders who wish to establish retirement accounts must
complete the IRA Application and Adoption Agreement. Shareholders who wish to
transfer retirement holdings from another custodian must also complete the IRA
Transfer of Assets Form.
STEP FOUR:
The final step in opening your account is to mail the completed application,
along with your check or money order payable to the Masters' Select Equity Fund
or the Masters' Select International Fund. THE FUNDS DO NOT ACCEPT THIRD-PARTY
CHECKS.
The mailing addresses for the Funds are:
For Regular Delivery: For Overnight Delivery:
Masters' Select Funds Masters' Select Funds
c/o National Financial Data Services c/o National Financial Data Services
P.O. Box 419922 330 W. Ninth Street
Kansas City, MO 64141-6922 Kansas City, MO 64105
If you wish to open or add to your account by wire, please call 1-800-960-0188
for instructions.
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After your account is open, you may add to it by:
+ Mailing a check or money order to the above addresses along with a letter
or the form at the bottom of your account statement. Be sure to put your
account number on your check and in your letter.
+ Wiring money from your bank. Call 1-800-960-0188 for instructions
+ Making automatic investments if you signed up for the Automatic Investment
Plan when you opened your account.
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.
TO SELL SHARES IN A NON-RETIREMENT ACCOUNT, you may use any of the methods
described in this section. 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:
* You wish to redeem more than $25,000 worth of shares
* Your account registration information has changed within the last 30 days
* The redemption check is being mailed to a different address from the one on
your account (address of record)
* 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.
SELLING SHARES BY LETTER
Write and sign a "letter of instruction" with:
* Your name
* Your Fund's account number
* The dollar amount or number of shares to be redeemed
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+ Please note the following special requirements for redeeming shares by mail
or in person for different types of accounts Individual, Joint Tenant, Sole
Proprietorship, UGMA or UTMA Accounts: The letter of instruction must be
signed by all persons required to sign for transactions, exactly as their
names appear on the account.
+ Retirement Account: The account owner should complete a Retirement
Distribution Form. Call 1-800-960-0188 to request one.
+ Trust Account: The trustee must sign the letter indicating capacity as
trustee. If a trustee's name is not in the account registration, provide a
copy of the trust document certified within the past 60 days.
+ Business or Organization: At least one person authorized by corporate
resolutions to act on the account must sign the letter. Include a corporate
resolution with corporate seal or signature guarantee.
+ Executor, Administrator, Conservator or Guardian: Call 1-800-960-0188 for
instructions.
Unless otherwise instructed, the Fund will send a check to the address of
record.
Mail your letter to:
REGULAR DELIVERY: OVERNIGHT DELIVERY:
Masters' Select Funds Masters' Select Funds
c/o National Financial Data Services c/o National Financial Data Services
P.O. Box 419922 330 W. Ninth Street
Kansas City, MO 64141-6922 Kansas City, MO 64105
SELLING SHARES BY TELEPHONE
YOU MUST SELECT THIS OPTION ON YOUR NEW ACCOUNT APPLICATION IF YOU WISH TO USE
TELEPHONE REDEMPTION; IT IS NOT AUTOMATICALLY AVAILABLE. If you selected the
telephone redemption option on your New Account Application, you can sell shares
simply by calling 1-800-960-0188. The amount you wish to redeem (up to $25,000)
will be wired to your bank account. This option is not available for Retirement
Accounts.
SELLING SHARES BY WIRE:
You must sign up for the wire feature before using it. To verify that it is in
place, please call 1-800-960-0188. The minimum wire amount is $5,000. Your wire
redemption request must be received by the Funds before 4:00 p.m. eastern time
for money to be wired the next business day. This option is not available for
Retirement Accounts.
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SHAREHOLDER AND ACCOUNT POLICIES
STATEMENTS, REPORTS AND INQUIRIES
Statements and reports that each Fund sends you include the following:
* Confirmation statements (after every transaction that affects your account
balance or your account registration)
* Financial reports (every six months)
The Transfer Agent for the Funds is National Financial Data Services. Its
address is 330 W. Ninth Street, Kansas City, MO 64105. You may call the Transfer
Agent at 1-800-960-0188 if you have questions about your account.
First Fund Distributors, Inc., an affiliate of the Administrator, is the
principal underwriter of the Funds. Its address is 4455 E. Camelback Road,
Phoenix AZ 85018.
EXCHANGE PRIVILEGE
Shareholders may exchange shares between the Masters' Select Equity Fund and the
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 calling the Transfer Agent at 1-800-960-0188
between 9:00 a.m. and 4:00 p.m. eastern time on a day when the New York Stock
Exchange (NYSE) is open for normal trading. Telephone exchanges are subject to
the identification procedures noted with respect to telephone redemptions above.
AUTOMATIC INVESTMENT/WITHDRAWAL PLANS
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. Although Automatic 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.
A systematic withdrawal plan lets you set up periodic redemptions from your
account. Certain restrictions apply for retirement accounts. Call 1-800-960-0188
for more information.
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SHARE PRICE
Each Fund is open for business each day the New York Stock Exchange is open.
Each Fund calculates its net asset value (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
* All of your purchases must be made in U.S. dollars, and checks must be
drawn on U.S. banks.
* The Funds do not accept cash, credit cards or third-party checks.
* If your check does not clear, your purchase will be canceled and you will
be liable for any losses or fees the Funds or the Transfer Agent incurs.
* Your ability to make automatic investments may be immediately terminated if
any item is unpaid by your financial institution.
* 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. Orders 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.
REDEMPTIONS
* 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.
29
<PAGE>
* Redemptions may be suspended or payment dates postponed when the New York
Stock Exchange is closed (other than weekends or holidays), when trading on
the NYSE is restricted or as permitted by the SEC.
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 custodial account) 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.
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 gains 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 gains 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 gains
distributions.
For retirement accounts all distributions are automatically reinvested. When you
are over 59 1/2 years old, you can receive distributions in cash.
When 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
30
<PAGE>
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 gains 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 and local taxes. If you live outside of 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. Distributions declared in December and paid in
January, however, are taxable as if they were paid on December 31.
For federal tax purposes, each Fund's income and short-term capital gains
distributions are taxed as dividends; long-term capital gains 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 what price. You will also receive a consolidated transaction statement every
January. It is up to you or your tax preparer, however, 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 their efforts to adhere to these requirements, the Funds may have
to limit their investment activity in some types of instruments.
When you sign your New 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.
31
<PAGE>
THE MASTERS' SELECT FUNDS TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
EQUITY FUND INTERNATIONAL FUND
FOR THE PERIOD FROM FOR THE PERIOD FROM
JANUARY 1, JANUARY 1, JANUARY 1, DECEMBER 1,
1998 1997 1998 1997+
TO DECEMBER 31, TO DECEMBER 31, TO DECEMBER 31, TO DECEMBER 31,
1998 1997 1998 1997
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ............................. $ 11.84 $ 10.00 $ 9.88 $ 10.00
-------- -------- -------- --------
Income from investment operations
Net investment income ......................................... 0.03 0.03 0.08 --
Net realized and unrealized gain .............................. 1.73 2.90 1.08 (0.12)
-------- -------- -------- --------
Total from investment operations ........................... 1.76 2.93 1.16 (0.12)
-------- -------- -------- --------
Less distributions
From net investment income .................................... (0.02) (0.03) (0.09) --
From capital gains ............................................ (0.01) (1.06) -- --
-------- -------- -------- --------
Total distributions ........................................... (0.03) (1.09) (0.09) --
-------- -------- -------- --------
Net asset value, end of period ................................... $ 13.57 $ 11.84 $ 10.95 $ 9.88
======== ======== ======== ========
Total return ..................................................... 14.90% 29.11% 11.74% (1.20%)
======== ======== ======== ========
Net assets at end of period (in 000's) ........................... $405,458 $296,876 $ 95,222 $ 45,934
======== ======== ======== ========
Ratio of expenses to average net assets .......................... 1.38%# 1.47%# 1.55%^ 1.77%*^
======== ======== ======== ========
Ratio of net investment income to average net assets
(net of waiver and expenses paid indirectly) ................... 0.30% 0.12% 0.87% 0.42%*
======== ======== ======== ========
Portfolio turnover rate .......................................... 135.41% 145.11% 71.55% 0.00%
======== ======== ======== ========
</TABLE>
* ANNUALIZED.
+ THE MASTERS' SELECT INTERNATIONAL FUND COMMENCED OPERATIONS ON DECEMBER 1,
1997.
# INCLUDES CUSTODY FEES PAID INDIRECTLY WHICH AMOUNT TO 0.00% AND 0.03%,
RESPECTIVELY, OF AVERAGE NET ASSETS FOR THE FISCAL YEAR ENDED DECEMBER 31,
1998 AND 1997, RESPECTIVELY.
^ INCLUDES CUSTODY FEES PAID INDIRECTLY WHICH AMOUNT TO 0.02% AND 0.06%,
RESPECTIVELY, OF AVERAGE NET ASSETS FOR THE FISCAL YEAR ENDED DECEMBER 31,
1998 AND 1997, RESPECTIVELY.
See Notes to Financial Statements
32
<PAGE>
FOR MORE INFORMATION
The Statement of Additional Information (SAI) contains additional information
about the Funds. Further additional information about the Funds' investments is
available in the Funds' annual and Semi-Annual Reports to shareholders.
ANNUAL AND SEMI-ANNUAL REPORTS:
In the Funds' annual report, you will find a discussion of the market conditions
and investment strategies that significantly affected the Funds' performance
during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION:
The SAI, Annual Report to Shareholders and Semi-Annual Report to Shareholders
are available, without charge, upon request. To request a SAI, Annual Report to
Shareholders or Semi-Annual Report to Shareholders, or to ask questions about
your account or obtain other information about the Funds, please call
1-800-960-0188.
SEC CONTACT INFORMATION:
If you have access to the Internet, you can view the SAI at the Securities and
Exchange Commission (SEC) Web site at www.sec.gov. You may also visit the SEC
public reference room by calling 1-800-SEC-0330 or request a copy by writing to
the Public Reference Section of the SEC, Washington, D.C. 20549-6009. The SEC
charges a duplicating fee for this service. SEC File No: 333-10015
33
<PAGE>
As filed with the Securities and
Exchange Commission on February 23, 1999
Registration No. 333-10015
File No. 811-07763
================================================================================
Part B
of
Form N-1A
COMBINED REGISTRATION STATEMENT
MASTERS' SELECT FUNDS TRUST
Masters' Select Equity Fund
Masters' Select International Fund
================================================================================
<PAGE>
MASTERS' SELECT FUNDS TRUST
Statement of Additional Information
Dated April 30, 1999
This Statement of Additional Information is not a prospectus, and it should be
read in conjunction with the prospectus dated April 30, 1999, as it 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 Funds Trust (the "Trust"), formerly known as the Masters' Select
Investment Trust until December 1997. The Trust, a diversified open-end
management investment company, is a Delaware business trust formed on August 1,
1996. 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 (800)
960-0188.
TABLE OF CONTENTS
Cross-reference to sections
Page in the prospectus
---- ---------------------------
Investment Objective and Policies ........B-2 The Fund at a Glance; The Fund
in Detail
Management ..............................B-18 The Fund in Detail: Management,
Investment Managers, Breakdown
of Expenses, Organization
Portfolio Transactions and Brokerage ....B-22 The Fund in Detail: Investment
Managers
Net Asset Value .........................B-23 Your Account: How to Buy Shares
Taxation ................................B-24 Taxes
Dividends and Distributions .............B-26 Dividends, Capital Gains, and
Taxes
Performance Information .................B-26 Performance
General Information .....................B-27 General Information
Financial Statements ....................B-28 Not applicable
Appendix ................................B-29 Not applicable
B-1
<PAGE>
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.
Under unusual market conditions, for temporary defensive purposes, up
to 35% of each 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.
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:
B-2
<PAGE>
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and
interest rates affect high yield securities differently from other securities.
For example, the prices of high yield bonds have been found to be less sensitive
to interest rate changes than higher-rated investments, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which would adversely affect
their ability to service their principal and interest obligations, to meet
projected business goals, and to obtain additional financing. If the issuer of a
bond defaults, 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.
B-3
<PAGE>
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry depends largely upon the availability and cost of funds for the
purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks
are, among other things, required to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower, and subject to
other regulations designed to promote financial soundness. However, such laws
and regulations do not necessarily apply to foreign bank obligations that 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.
B-4
<PAGE>
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 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.
B-5
<PAGE>
U.S. MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments of principal resulting from the
sale of the underlying residential property, refinancing or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities (such as
securities issued by GNMA) are described as "modified pass-throughs." These
securities entitle the holder to receive all interest and principal payments
owed on the mortgage pool, net of certain fees, at the scheduled payment dates
regardless of whether or not the mortgagor actually makes the payment.
The principal governmental guarantor of U.S. mortgage-related
securities is GNMA, a wholly owned United States Government corporation within
the Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the United States Government, the
timely payment of principal and interest on securities issued by institutions
approved by GNMA (such as savings and loan institutions, commercial banks and
mortgage bankers) and backed by pools of mortgages insured by the Federal
Housing Agency or guaranteed by the Veterans Administration.
Government-related guarantors include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders and subject to general regulation by the Secretary of Housing and
Urban Development. FNMA purchases conventional residential mortgages not insured
or guaranteed by any government agency from a list of approved seller/services
which include state and federally chartered savings and loan associations,
mutual savings banks, commercial banks and credit unions and mortgage bankers.
FHLMC is a government-sponsored corporation created to 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.
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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.
B-7
<PAGE>
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 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.
B-8
<PAGE>
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 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.
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<PAGE>
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 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.
B-10
<PAGE>
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
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.
B-11
<PAGE>
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.
B-12
<PAGE>
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 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.
B-13
<PAGE>
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).
B-14
<PAGE>
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 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.
B-15
<PAGE>
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 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.
B-16
<PAGE>
LENDING PORTFOLIO SECURITIES
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 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.
B-17
<PAGE>
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 will be deemed
illiquid.
RISKS OF INVESTING IN SMALL COMPANIES
As stated in the prospectus, each 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
the Funds 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;
B-18
<PAGE>
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 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 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, who are 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, including the Advisor, Managers, Administrator, Custodian and Transfer
Agent, and review performance. 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 majority of
Trustees are not otherwise affiliated with the Advisor or any of the investment
managers.
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 (55) 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 Trustee Senior Vice President, Right Associates (industrial psychologists)
Eigenbrod, Jr. PhD (58)
19925 Stevens Creek Blvd.
Cupertino, CA 95014
</TABLE>
B-19
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
<S> <C> <C>
Kenneth E. Gregory* (41) 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* (52) 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 (39) Trustee Partner, Bowman & Company, LLP (certified public accountants)
2431 W. March Lane
Suite 100
Stockton, CA 95207
John Coughlan (42) 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.
The table below illustrates the annual compensation paid to each Trustee of the
Masters' Select Funds Trust:
<TABLE>
<CAPTION>
AGGREGATE TOTAL
COMPENSATION PENSION OR COMPENSATION
FROM MASTERS' RETIREMENT BENEFITS ESTIMATED ANNUAL FROM MASTERS'
SELECT FUNDS ACCRUED AS PART OF BENEFITS UPON SELECT FUNDS
NAME OF TRUSTEE TRUST FUND EXPENSES RETIREMENT TRUST
<S> <C> <C> <C> <C>
A. George Battle $10,000 $0 $0 $10,000
Frederick A. Eigenbrod, Jr. $10,000 $0 $0 $10,000
Taylor M. Welz $10,000 $0 $0 $10,000
Kenneth E. Gregory $0 $0 $0 $0
Craig A. Litman $0 $0 $0 $0
</TABLE>
Each Trustee who is not an "interested person" of the Funds receives an
annual fee of $10,000 allocated equally between the Funds, plus expenses
incurred by the Trustees in connection with attendance at meetings of the Board
of Trustees and their Committees. As of December 31, 1998, to the best of the
knowledge of the Masters' Select Funds Trust, the Board of Trustees and officers
of the Funds, as a group, owned of record less than 1% of each Fund's
outstanding shares.
The following persons, to the best knowledge of the Trust, owned of
record more than 5% of the outstanding shares of the Masters' Select Equity Fund
as of December 31, 1998:
CHARLES SCHWAB & CO INC
SPL CSTDY A/C FOR EXCL BNFT CUST
MUTUAL FUND DEPT - REINVEST A/C
101 MONTGOMERY ST
SAN FRANCISCO CA 94104-4122 - 50%
B-20
<PAGE>
NATIONAL FINANCIAL SERVICES CORP
FOR THE EXCLUSIVE BENEFIT OF
OUR CUSTOMERS
ATTN TERRI LOUIE
200 LIBERTY ST FL 5
NEW YORK NY 10281-5500 - 6%
The following persons, to the best knowledge of the Trust, owned of
record more than 5% of the outstanding shares of the Masters' Select
International Fund as of December 31, 1998:
CHARLES SCHWAB & CO INC
SPL CSTDY A/C FOR EXCL BNFT CUST
MUTUAL FUND DEPT - REINVEST A/C
101 MONTGOMERY ST
SAN FRANCISCO CA 94104-4122 - 65%
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.
B-21
<PAGE>
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 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.
B-22
<PAGE>
The Advisory Agreement and the Management Agreements will remain in
effect for a period not to exceed two years. Thereafter, if not terminated, each
Advisory and Management Agreement will continue automatically for successive
annual periods, provided that such continuance is specifically approved at least
annually (I) by a majority vote of the Independent Trustees cast in person at a
meeting called for the purpose of voting on such approval, and (ii) by the Board
of Trustees or by vote of a majority of the outstanding voting securities of the
Portfolio.
The Advisory and Management Agreements are terminable by vote of the
Board of Trustees or by the holders of a majority of the outstanding voting
securities of the Trust at any time without penalty, on 60 days written notice
to the Advisor or a Manager. The Advisory and Management Agreements also may be
terminated by the Advisor or a Manager on 60 days written notice to the Trust.
The Advisory and Management Agreements terminate automatically upon their
assignment (as defined in the 1940 Act).
As compensation for its investment management services, each of the
Funds paid the Advisor investment advisory fees in the amount specified below.
Additional investment advisory fees payable under the investment advisory
agreement may have, instead, been waived by the Advisor, but may be subject to
reimbursement by the respective Fund, as discussed previously.
ADVISORY FEES PAID TO ADVISOR
YEAR EQUITY FUND INTERNATIONAL FUND
1997 $2,247,185 $35,638
1998 $4,056,899 $891,022
THE ADMINISTRATOR. The Administrator, Investment Company
Administration, L.L.C.. 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.
ADMINISTRATION FEES PAID TO ADMINISTRATOR
YEAR EQUITY FUND INTERNATIONAL FUND
1997 $149,572 $1,644
1998 $184,423 $43,313
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.
Brokerage commissions paid for the year ended December 31, 1998, by the
Masters' Select Equity Fund and the Masters' Select International Fund,
respectively, were $1,438,016 and $432,232. Of these amounts, the percentages
attributable to affiliated broker transactions were 1% and 0%, respectively.
Brokerage commissions paid for the year ended December 31, 1997 were
$1,537,490(1) and $117,416(2), respectively. Of these amounts, the percentages
attributable to affiliated broker transactions were 3% and 0%, respectively.
- --------
(1) For the period 12/31/96 (commencement of operations) to 12/31/97.
(2) For the period 12/1/97 (commencement of operations) to 12/31/97.
B-23
<PAGE>
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 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, Martin Luther
King's Birthday, 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.
B-24
<PAGE>
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 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.
B-25
<PAGE>
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.
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.
B-26
<PAGE>
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.
Distributions and redemptions may be subject to state and local income
taxes, and the treatment thereof may differ from the federal income tax
treatment. Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the Prospectus are
not intended to be complete discussions of all applicable federal tax
consequences of an investment in the Funds. Paul, Hastings, Janofsky & Walker
L.L.P. 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:
P(1 + T)n = ERV
B-27
<PAGE>
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
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.
B-28
<PAGE>
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 December
31, 1996. The Masters' Select International Fund commenced operations on
December 1, 1997. 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.
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 each shareholder is entitled to is
based on the number of shares he or she owns. 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 Masters' Select Equity Fund and the Masters' Select International
Fund are the only existing series of shares of 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.
The Declaration of Trust provides that the shareholders have the right
to remove a Trustee. Upon the written request of the record holders of 10% of
the Trust's shares, the Trustees will call a meeting of shareholders to vote on
the removal of a Trustee. In addition, 10 shareholders holding the lesser of
$25,000 worth or 1% 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 preemptive or conversion rights. Shares when issued are
fully paid and non-assessable, except as set forth above.
B-29
<PAGE>
The Advisor has obtained an exemptive order from the Securities and
Exchange Commission which permits it, subject to certain conditions, selection
of new investment 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 to continue the employment
of a manager after an event that would otherwise cause the automatic termination
of services. Shareholders must 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
managers' fees only in the aggregate in its registration statement.
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.
The Masters' Select Funds reserve the right, if conditions exist which
make cash payments undesirable, to honor any request for redemption or
repurchase order by making payment in whole or in part in readily marketable
securities chosen by the Fund and valued as they are for purposes of computing
the Fund's net asset value (a redemption in kind). If payment is made in
securities, a shareholder may incur transaction expenses in converting these
securities into cash.
FINANCIAL STATEMENTS
The audited statement of assets and liabilities and report thereon for
the Funds for the year ended December 31, 1998 are incorporated by reference.
The opinion of XXXXXXXXXXXXXXXXXXXXXXX, independent accountants, with respect to
the audited financial statements, is incorporated herein in its entirety in
reliance upon such report of XXXXXXXXXXXXXXXXXXXXXXXX and on the authority of
such firm as experts in auditing and accounting. Shareholders will receive a
copy of the audited and unaudited financial statements at no additional charge
when requesting a copy of the Statement of Additional Information.
B-30
<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.
B-31
<PAGE>
Issues assigned the highest rating, A, are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers "1", "2" and "3" to indicate the relative degree of safety. The
designation A-1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A "+" designation is applied to those issues
rated "A-1" which possess extremely strong safety characteristics. Capacity for
timely payment on issues with the designation "A-2" is strong. However, the
relative degree of safety is not as high as for issues designated A-1. Issues
carrying the designation "A-3" have a satisfactory capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effect of changes in
circumstances than obligations carrying the higher designations.
B-32
<PAGE>
As filed with the Securities and
Exchange Commission on February 23, 1999
Registration No. 333-10015
File No. 811-07763
================================================================================
Part C
of
Form N-1A
COMBINED REGISTRATION STATEMENT
MASTERS' SELECT FUNDS TRUST
Masters' Select Equity Fund
Masters' Select International Fund
================================================================================
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(1) Financial Statements:
The following financial statements are included in Part B of the
Registration Statement:
Statement of Assets and Liabilities as of December 31, 1998
Notes to Statement of Assets and Liabilities
(2) Exhibits:
(1) (a) Agreement and Declaration of Trust(1)
(b) Amendment to Agreement and Declaration of
Trust(2)
(2) By-Laws(1)
(3) Not applicable
(4) Specimen stock certificate
(5) (a) Form of Investment Advisory Agreement(2)
(b) (i) Investment Management Agreement with
Davis Selected Advisers LP(3)
(ii) Investment Management Agreement with
Friess Associates, Inc.(3)
(iii) Investment Management Agreement with
Jennison Associates(3)
(iv) Investment Management Agreement with
Southeastern Asset Management, Inc.(3)
(v) Investment Management Agreement with
Strong Capital Management, Inc.(3)
(vi) Form of Investment Management Agreement
with Masters' Select International
Sub-Advisors(4)
(vii) Form of Investment Management Agreement
with Janus Capital Corp.(4)
(viii) Form of Investment Management Agreement
with Harris Associates - included
herewith
(6) Distribution Agreement(3)
(7) Not applicable
(8) Custodian Agreement(3)
(9) Administration Agreement with Investment Company
Administration Corporation(2)
(10) Opinion and consent of counsel
(11) Consent of Independent Auditors
- --------
(1) Previously filed as an exhibit to the Registration Statement on
Form N-1A of the Registration (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.
(4) Previously filed as an exhibit to Post-Effective Amendment No. 3 to
the Registration Statement on Form N-1A of the Registrant (File No. 333-10015)
on August 29, 1997, and incorporated herein by reference.
(5) To be filed by amendment.
<PAGE>
(12) Not applicable (13) Investment letter(3)
(14) Individual Retirement Account forms(5)
(15) Not applicable
(16) Not applicable
(17) Financial Data Schedule
Item 25. Persons Controlled by or under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities.
The number of record holders for each fund as of February 22,
1999:
NAME OF FUND NUMBER OF RECORD HOLDERS
Masters' Select Equity Fund 8,211
Masters' Select International Fund 1,582
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 proceedings, if it is determined that persons acted in
good faith and reasonably believed:
(1) 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
(2) in all other cases, that his conduct was at least not opposed
to the Trust's best interests, and
(3) 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.
<PAGE>
Section 3. ACTIONS BY THE TRUST. This Trust shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action by or in the right of this Trust to procure a
judgment in its favor by reason of the fact that that person is or was an agent
of this Trust, against expenses actually and reasonably incurred by that person
in connection with the defense or settlement of that action if that person acted
in good faith, in a manner that person believed to be in the best interests of
this Trust and with such care, including reasonable inquiry, as an ordinarily
prudent person in a like position would use under similar circumstances.
Section 4. EXCLUSION OF INDEMNIFICATION. Notwithstanding any provision
to the contrary contained herein, there shall be no right to indemnification for
any liability arising by reason of willful misfeasance, bad faith, gross
negligence, or the reckless disregard of the duties involved in the conduct of
the agent's office with this Trust.
No indemnification shall be made under Sections 2 or 3 of this Article:
(1) 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
(2) 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
(3) 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 nay 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:
<PAGE>
(1) 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
(2) A written opinion by an independent legal counsel.
Section 7. ADVANCE OF EXPENSES. Expenses incurred in defending any
proceeding may be advanced by this Trust before the final disposition of the
proceeding upon a written undertaking by or on behalf of the agent, to repay the
amount of the advance if it is ultimately determined that he or she is not
entitled to indemnification, together with at least one of the following as a
condition to the advance: (i) security for the undertaking; or (ii) the
existence of insurance protecting the Trust against losses arising by reason of
any lawful advances; or (iii) a determination by a majority of a quorum of
Trustees who are not parties to the proceeding and are not interested persons of
the Trust, or by an independent legal counsel in a written opinion, based on a
review of readily available facts that there is reason to believe that the agent
ultimately will be found entitled to indemnification. Determinations and
authorizations of payments under this Section must be made in the manner
specified in Section 6 of this Article for determining that the indemnification
is permissible.
Section 8. OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article
shall affect any right to indemnification to which persons other than Trustees
and officers of this Trust or any subsidiary hereof may be entitled by contract
or otherwise.
Section 9. LIMITATIONS. No indemnification or advance shall be made
under this Article, except as provided in Sections 5 or 6 in any circumstances
where it appears:
(1) 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
(2) 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 nay proceeding against any Trustee, investment manager 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 imit 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.
<PAGE>
Item 28. Business and Other Connections of Investment Adviser.
The information required by this item is contained in the Form
ADV of the following entities and is incorporated herein by reference:
NAME OF INVESTMENT ADVISER FILE NO.
Litman/Gregory Fund Advisors, LLC 801-52710
Davis Selected Advisers, L.P. 801-31648
Southeastern Asset Management, Inc. 801-11123
Jennison Associates Capital Corp. 801-5608
Freiss and Associates 801-16178
Strong Capital Management, Inc. 801-10724
Janus Capital Corp. 801-13991
Bee & Associates 801-34538
Harris Associates 801-50333
Artisan Partners 801-48435
BPI Global Asset Management 801-53972
Item 29. Principal Underwriters.
(a) First Fund Distributors, Inc. currently serves as distributor of
the shares of:
Advisors Series Trust
Brandes Investment Funds
Guinness Flight Investment Funds, Inc.
Fleming Capital Mutual Fund Group
Fremont Mutual Funds
Jurika & Voyles Mutual Funds
Kayne Anderson Mutual Funds
Masters' Select Funds Trust
O'Shaughnessy Funds, Inc.
RNC Mutual Fund Group, Inc.
PIC Investment Trust
Professionally Managed Portfolios
Purisima Total Return Fund
Rainier Investment Management Mutual Funds
Trent Equity Fund
(b) The officers of First Fund Distributors, Inc. are:
Robert H. Wadsworth President and Treasurer
Eric Banhazl Vice President
Steven J. Paggioli Vice President and Secretary
Each officer's business address with the Distributor is 4455 E. Camelback Rd.,
Ste. 261-E, Phoenix, AZ 85018.
(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;
<PAGE>
(b) the documents required to be maintained by paragraphs (5), (6),
(10) and (11) of Rule 31a-1(b) will be maintained by the respective investment
managers:
Davis Selected Advisers, L.P., 124 East Marcy Street, Santa Fe, NM
87501
Southeastern Asset Management, Inc., 6075 Poplar Avenue, Memphis, TN
38119
Jennison Associates Capital Corp., 466 Lexington Avenue, New York, NY
10017
Friess and Associates, 3711 Kenett Pike, Greenville, DE 19807
Strong Capital Management, Inc., 100 Heritage Reserve, Menomonee Falls,
WI 53201
Janus Capital Corp., 100 Fillmore St., Denver, Colorado 80206-4928
Bee & Associates, 370 Seventeenth Street, Suite 3560, Denver, Colorado
80202
Harris Associates, Two North LaSalle, Suite 500, Chicago, Illinois
60602-3790
Artisan Partners, 1000 North Water Street, Suite 1770, Milwaukee,
Wisconsin 53202
BPI Global Asset Management, Tower Place at the Summit, 1900 Summit
Tower Blvd., Ste. 450, Orlando, FL 32810
(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:
(1) Furnish each person to whom a Prospectus is delivered a copy
of Registrant's latest annual request to shareholders, upon
request and without charge.
(2) 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
trustee and assist in communications with other shareholders.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement (File No. 333-10015) to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Orinda, State of
California on the 23rd day of February, 1999.
MASTERS' SELECT FUNDS 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.
/s/ Kenneth E. Gregory President and February 23, 1999
- ---------------------- Trustee
Kenneth E. Gregory
/s/ Craig A. Litman Trustee February 23, 1999
- -------------------
Craig A. Litman
/s/ A. George Battle Trustee February 23, 1999
- --------------------
A. George Battle
/s/ Frederick A. Eigenbrod, Jr. Trustee February 23, 1999
- -------------------------------
Frederick A. Eigenbrod, Jr.
/s/ Taylor M. Welz Trustee February 23, 1999
- ------------------
Taylor M. Welz
/s/ John Coughlan Chief Financial February 23, 1999
- ----------------- and Accounting Officer
John Coughlan
As filed with the Securities and Exchange
Commission on February 23, 1999
Registration No. 333-10015
File No. 811-07763
- --------------------------------------------------------------------------------
EXHIBIT TO FORM N-1A
Exhibit 2(5)(viii)
- --------------------------------------------------------------------------------
<PAGE>
THE MASTERS' SELECT EQUITY FUND
MASTERS' SELECT FUNDS TRUST
FORM OF INVESTMENT SUB-ADVISORY AGREEMENT
THIS INVESTMENT SUB-ADVISORY AGREEMENT is made as of the ___ day of October,
1998, by and between LITMAN/GREGORY FUND ADVISORS, LLC (hereinafter called the
"Advisor") and Harris Associates L.P. (hereinafter called "Sub-Advisor").
WITNESSETH:
WHEREAS, the Advisor has been retained as the investment adviser to The Masters'
Select Equity Fund (the "Fund"), a series of Masters' Select Funds Trust (the
"Trust"), an open-end management investment company, registered as such under
the Investment Company Act of 1940, as amended (the "Investment Company Act");
and
WHEREAS, the Advisor has been authorized by the Trust to retain one or more
investment advisers (each an "investment manager") to serve as portfolio
managers for a specified portion of the Fund's assets (the "Allocated Portion");
and
WHEREAS, Sub-Advisor has registered as an investment adviser under the
Investment Advisers Act of 1940, as amended (the "Investment Advisers Act"), 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
manager 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; and
WHEREAS, the Trust and the Fund are third party beneficiaries of such
arrangements; NOW, THEREFORE, in consideration of the covenants and the mutual
promises hereinafter set forth, the parties to this Agreement, which shall
include the Trust on behalf of the Fund for purposes of the indemnification
provisions of section 11 hereof, intending to be legally bound hereby, mutually
agree as follows:
1. Appointment of Sub-Advisor.
(a) The Advisor hereby employs Sub-Advisor, and Sub-Advisor hereby
accepts such employment, to render investment advice and
related services with respect to the Allocated Portion of the
assets of the Fund for the period and on the terms set forth
in this Agreement, subject to the supervision and direction of
the Advisor and the Trust's Board of Trustees.
(b) Sub-Advisor's employment shall be solely with respect to an
Allocated Portion of the Fund's assets, such Allocated Portion
to be specified by the Advisor and subject to periodic
increases or decreases at the Advisor's sole discretion.
<PAGE>
2. Duties of Sub-Advisor.
(a) General Duties. Sub-Advisor shall act as one of several
investment managers to the Fund and shall invest Sub-Advisors
Allocated Portion of the assets of the Fund in accordance with
the investment objectives, policies and restrictions of the
Fund as set forth in the Fund's and the Trust's governing
documents, including, without limitation, the Trust's
Agreement and Declaration of Trust and By-law; the Fund's
prospectus, statement of additional information and
undertakings; and such other limitations, policies and
procedures as the Advisor or the Trustees of the Trust may
impose from time to time in writing to Sub-Advisor. In
providing such services, Sub-Advisor shall at all times adhere
to the provisions and restrictions contained in the federal
securities laws, applicable state securities laws, the
Internal Revenue Code, and other applicable law. Advisor shall
provide to Sub-Advisor such information with respect to the
Fund such that Sub-Advisor will be able to maintain compliance
with applicable regulations, laws, policies, and restrictions
with respect to Sub-Advisor's Allocated Portion.
Without limiting the generality of the foregoing, Sub-Advisor
shall: (I) furnish the Fund with advice and recommendations
with respect to the investment of the Sub-Advisor's Allocated
Portion of the Fund's assets, (ii) effect the purchase and
sale of portfolio securities for Sub-Advisor's Allocated
Portion; (iii) determine that portion of Manager's Allocated
Portion that will remain uninvested, if any; (iv) manage and
oversee the investments of the Sub-Advisor's Allocated
Portion, subject to the ultimate supervision and direction of
the Trust's Board of Trustees; (v) vote proxies, file required
ownership reports, and take other actions with respect ot the
securities in Sub-Advisor's allocated Portion; (vi) maintain
the books and records required to be maintained with respect
to the securities in Sub-Advisor's allocated Portion; (vii)
furnish reports, statements and other data on securities,
economic conditions and other matters related to the
investment of the Fund's assets which the Advisor, the
Trustees or the officers of the Trust may reasonably request;
and (viii) render to the Trust's Board of Trustees such
periodic and special reports with respect to Sub-Advisor's
Allocated Portion as the Board may reasonably request.
<PAGE>
(b) 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 or to any other broker-dealer who
has been identified to the Sub-Advisor as an affiliate of nay
other investment manager 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 broker0dealer 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 tot he 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 Sub-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, fi 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, any affiliate of either, or the Sub-Advisor. Such allocation shall be
in such amounts and proportions as Sub-Advisor shall determine, and Sub-Advisor
shall report on such allocations regularly to the Advisor and the Trust,
indicating the broker-dealers to whom such allocations have been made and the
basis therefor. Sub-Advisor is also authorized to consider sales of shares of
the Fund as a factor in the selection of brokers or dealers to execute portfolio
transactions, subject to the requirements of best execution, i.e., that such
brokers or dealers are able to execute the order promptly and at the best
obtainable securities price.
On occasions when Sub-Advisor deems the purchase or sale of a security to be in
the best interest of the Fund as well as other clients of Sub-Advisor,
Sub-Advisor, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be so purchased or sold in order to obtain the most
favorable price or lower brokerage commissions and the most efficient execution.
In such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by Sub-Advisor in the manner
it considers to be the most equitable and consistent with its fiduciary
obligations to the Fund and to such other clients.
<PAGE>
3. 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 operations 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.
(d) Sub-Advisor shall be covered by errors and omissions
insurance. The company self-retention or deductible shall not
exceed 10% of the policy limits and the limits shall be as
follows;
Total Fund Assets E&O Policy Limits
Up to $500 million $1,000,000
$500 million - $1 billion $2,000,000
$1 billion - $1.5 billion $3,000,000
$1.5 billion - $2 billion $4,000,000
Above $2 billion $5,000,000
4. Independent Contractor. Sub-Advisor shall, for all purposes herein, be
deemed to be an independent contractor, and shall, unless otherwise
expressly provided and authorized to do so, have no authority to act
for or represent the Trust, the Fund, or the Advisor in any way, or in
any way be deemed an agent for the Trust, the Fund, or the Advisor. It
is expressly understood and agreed that the services to be rendered by
Sub-Advisor to the Fund under the provisions of this Agreement are not
to be deemed exclusive, and Sub-Advisor shall be free to render similar
or different services to others so long as its ability to render the
services provided for in this agreement shall not be impaired thereby.
5. Sub-Advisor's Personnel. Sub-Advisor shall, at its own expenses,
maintain such staff and employ or retain such personnel and consult
with such other persons as it shall from time to time determine to be
necessary to the performance of its obligations under this Agreement.
Without limiting the generality of the foregoing, the staff and
personnel of Sub-Advisor shall be deemed to include persons employed or
retained by Sub-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
Sub-Advisor, the Advisor or the Trust's Board of Trustees may desire
and reasonably request.
<PAGE>
6. 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) Sub-Advisor may voluntarily absorb certain Fund Expenses or
waive some or all of Sub-Advisor's own fee.
(c) To the extent Sub-Advisor incurs any costs by assuming
expenses which are an obligation of the Advisor or the Fund
the Advisor or the Fund shall promptly reimburse the
Sub-Advisor for such costs and expenses. To the extent
Sub-Advisor performs services for which the Fund or the
Advisor is obligated to pay, Sub-Advisor shall be entitled to
prompt reimbursement in such amount as shall be negotiated
between Sub-Advisor and the Advisor but shall, under no
circumstances, exceed Sub-Advisor's actual costs for providing
such services.
7. Investment 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 b e adjusted
from time to time. Such fee shall be equal to 0.65% of the
first $50 million of average daily net assets of the Fund
attributable to the Sub-Advisor's Allocated Portion, 0.60% of
the next $50 million of average daily net assets of the Fund
attributable to the Sub-Advisor's Allocated Portion, and 0.55%
of any additional average daily net assets of the Fund
attributable to the Sub-Advisor's Allocated Portion, all
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 nay 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 or calendar
days in the month, and shall be payable within ten (10) days
after the date of termination.
<PAGE>
(d) The fee payable to Sub-Advisor under this Agreement will be
reduced to the extent of any receivable owed by Sub-Advisor to
the Advisor or the Fund.
(e) Sub-Advisor voluntarily may reduce any portion of the
compensation or reimbursement of expenses due to it pursuant
to this Agreement and may agree to make payments to limit the
expenses which are the responsibility of the Advisor of the
Fund under this Agreement. Any such reduction or payment shall
be applicable only to such specific reduction or payment and
shall not constitute an agreement or reduce any future
compensation or reimbursement due to Sub-Advisor hereunder or
to continue future payments. Any such reduction will be agreed
to prior to accrual of the related expense or fee and will be
estimated daily and reconciled and paid on a monthly basis.
(f) Sub-Advisor may agree not to require payment of any portion of
the compensation or reimbursement of expenses otherwise due to
it pursuant to this Agreement. Any such agreement shall be
applicable only with respect to the specific items covered
thereby and shall not constitute an agreement not to require
payment of nay future compensation or reimbursement due to
Sub-Advisor hereunder.
8. No Shorting, No Borrowing. Sub-Advisor agrees that neither it nor nay
of its officers or employees shall take nay 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 nay of its officers or employees shall borrow from the
Fund or pledge or use the funds assets in connection with any borrowing
not directly for the Fund's benefit.
9. Conflicts with Trust's Governing Documents and Applicable Laws. Nothing
herein contained shall be deemed to require the Trust or the Fund to
take any action contrary to the Trust's Agreement and Declaration of
Trust, By-Laws, or any applicable statue 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 nay and all actions
necessary and reasonable to protect the interests of shareholders.
10. 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 as shall be reasonably necessary to permit the administrator
to satisfy its obligations and respond to the reasonable requests of
the Trustees.
<PAGE>
11. Standard of Care, Liability and Indemnification.
(a) Sub-Advisor shall exercise reasonable care and prudence in
fulfilling its obligations under this Agreement.
(b) Sub-advisor shall have responsibility for the accuracy and
completeness (and liability for the lack thereof) of the
statements furnished by Sub-Advisor for use by the Advisor in
the Fund's offering materials (including the prospectus, the
statement of additional information, advertising and sales
materials) that pertain to 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.
(c) Sub-Advisor shall be liable to the Fund for nay loss
(including brokerage charges) incurred by the Fund as a result
of nay investment made by Sub-Advisor in violation of Section
2 hereof.
(d) in the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the obligations or duties
hereunder on the part of Sub-Advisor, Sub-Advisor shall not be
subject to liability to the Advisor, the Trust, or the Fund or
to any shareholder of the Fund for any act or omission in the
course of, or connected with, rendering services hereunder or
for any losses that may be sustained in the purchase, holding
or sale of nay security by the Fund.
(e) Each party to this Agreement, including the Trust on behalf of
the Fund, shall indemnify and hold harmless the other party
and the shareholders, directors, officers, and employees of
the other party (any such person, an "Indemnified Party")
against any loss, liability, claim, damage, or expense
(including the reasonable cost of investigating and defending
any alleged loss, liability, claim, damage, or expense and
reasonable counsel fees incurred in connection therewith)
arising out of the Indemnified Party's performance or
non-performance of nay duties under this Agreement provided,
however, that nothing herein shall be deemed to protect nay
Indemnified party against any liability to which such
Indemnified Party would otherwise be subject by reason of
willful misfeasance, bad faith, or negligence in the
performance of duties hereunder or by reason of reckless
disregard of obligations and duties under this Agreement.
If indemnification is to be sought hereunder, then the Indemnified Party shall
promptly notify the other part of the assertion of any claim or the commencement
of nay action or proceeding in respect thereof; provided, however, that the
failure so to notify the other party shall not relieve the other party from any
liability that it may otherwise have to the Indemnified Party provided such
failure shall not affect in a material adverse manner the position of the other
party or the Indemnified Party with respect to such claim. Following such
notification, the other party may elect in writing to assume the defense of such
action or proceeding and, upon such election, it shall not be liable for any
legal costs incurred by the Indemnified Party (other than reasonable costs of
investigation previously incurred) in connection therewith, unless (I) the other
party ahs failed to provide counsel reasonably satisfactory to the Indemnified
Party in a timely manner or (ii) counsel which has been provided by the other
party reasonably determines that its representation of the Indemnified Party
would present it with a conflict of interest.
<PAGE>
The provisions of this paragraph 11 (e) shall not apply in any action where the
Indemnified Party is the party adverse, or one of the parties adverse, to the
other party.
(f) No provision of this Agreement shall be construed to protect
any Trustee or officers of the Trust, or officers of the
Advisor or Sub-Advisor, from liability in violation of
Sections 17(h) and (i) of the Investment Company Act.
12. Non-Exclusivity, Trading for Sub-Advisor's Own Account. The Advisor's
employment of Sub-Advisor is not an exclusive arrangement. The Advisor
anticipates that it will employ other individuals or entities to
furnish it with the services provided for herein. Likewise, Sub-advisor
may act as investment adviser for nay other person, and shall not in
any way be limited or restricted form buying, selling, or trading any
securities for its or their own accounts or the accounts of others for
whom it or they may be acting, provided, however, that Sub-Advisor
expressly represents that it will undertake no activities which will
adversely affect the performance of its obligations to the Fund under
this Agreement; and provided further that 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, a copy of which has been provided
to the Board of Trustees of the Trust.
13. Term.
(a) This Agreement shall become effective at the time Advisor
allocates a portion of Fund's assets to Sub-Advisor as
approved by a majority of the Trustees of the Trust who are
not parties tot his Agreement nor interested persons thereof,
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 (1) 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.
<PAGE>
(b) The Fund and its distributor may use the Sub-advisor's trade
name or nay name derived from the Sub-Advisor's trade name
only in a manner consistent with the nature of this Agreement
for so long as this Agreement or any extension, renewal, or
amendment hereof remains in effect. Within sixty (6) 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.
14. 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 the Fund, upon sixty (60) days' written notice
to the Sub-Advisor, and by the Sub-Advisor upon sixty (60)
days' written notice to the Fund. In the event of a
termination, Sub-Advisor shall cooperate in the orderly
transfer of the Fund's affairs and, at the request of the
Board of Trustees, transfer any and all books and records of
the Fund maintained by Sub-Advisor on behalf of the Fund.
(b) This Agreement shall terminate automatically in the event of
any transfer or assignment thereof, as defined in the
Investment Company Act.
15. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute or rule, or shall be otherwise
rendered invalid, the remainder of this Agreement shall not be affected
thereby.
16. Captions. The captions in this Agreement are included for convenience
of reference only and in no way define or limit any of the provisions
hereof or otherwise affect their construction or effect.
17. Governing law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California without giving
effect to the conflict of laws principles thereof; provided that
nothing herein shall be construed to preempt, or to be inconsistent
with, any federal law, regulation or rule, including the Investment
Company Act and the Investment Advisers Act and any rules and
regulations promulgated thereunder.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their duly authorized officers, all on the day and year first above
written.
LITMNA/GREGORY FUND HARRIS ASSOCIATES L.P.
ADVISORS, LLC
By: ______________________ By: ______________________
Name: ______________________ Name: ______________________
Title: ______________________ Title: ______________________
As a Third Party Beneficiary,
MASTERS' SELECT FUNDS TRUST
On behalf of
THE MASTERS' SELECT EQUITY FUND
By: ________________________
Name: ________________________
Title: ________________________
