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FILE NO. 333-19181
RULE 497(c)
STEIN ROE INSTITUTIONAL CLIENT HIGH YIELD FUND
Institutional Client High Yield Fund seeks total return by
investing for a high level of current income and capital growth.
Institutional Client High Yield Fund seeks to achieve its
objective by investing all of its net investable assets in SR&F
High Yield Portfolio, a portfolio of SR&F Base Trust that has the
same investment objective and substantially the same investment
policies as Institutional Client High Yield Fund. High Yield
Portfolio invests primarily in high-yield, high-risk medium- and
lower-quality debt securities. LOWER-QUALITY SECURITIES, COMMONLY
KNOWN AS "JUNK BONDS," ARE SUBJECT TO A GREATER RISK WITH REGARD
TO PAYMENT OF INTEREST AND RETURN OF PRINCIPAL THAN HIGHER-RATED
BONDS. INVESTORS SHOULD CAREFULLY CONSIDER THE RISKS ASSOCIATED
WITH JUNK BONDS BEFORE INVESTING. (SEE INVESTMENT POLICIES, RISKS
AND INVESTMENT CONSIDERATIONS, SPECIAL CONSIDERATIONS REGARDING
MASTER FUND/FEEDER FUND STRUCTURE, AND APPENDIX.)
Institutional Client High Yield Fund is a "no-load" fund. There
are no sales or redemption charges, and the Fund has no 12b-1
plan. Institutional Client High Yield Fund is a series of the
Stein Roe Trust and High Yield Portfolio is a series of SR&F Base
Trust. Each Trust is a diversified open-end management investment
company.
Shares of Institutional Client High Yield Fund are intended
primarily for investors who are (or through purchase of Fund
shares become) clients of the Institutional Asset Management
Division of Stein Roe & Farnham Incorporated.
This prospectus contains information you should know before
investing in Institutional Client High Yield Fund. Please read it
carefully and retain it for future reference.
A Statement of Additional Information dated February 14, 1997,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. The
Statement of Additional Information may be obtained without charge
by writing to Stein Roe Funds, Suite 3200, One South Wacker Drive,
Chicago, Illinois 60606, or by calling 800-322-1130.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is February 14, 1997
as supplemented and revised through March 21, 1997
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TABLE OF CONTENTS
Page
Summary...................................2
Fee Table ................................3
The Fund..................................4
Investment Policies.......................5
Portfolio Investments and Strategies......7
Investment Restrictions .................11
Risks and Investment Considerations .....12
How to Purchase Shares...................13
How to Redeem Shares ....................13
Net Asset Value .........................13
Distributions and Income Taxes...........14
Investment Return........................15
Management ..............................16
Organization and Description of Shares...17
Special Considerations Regarding the
Master Fund/Feeder Fund Structure......18
For More Information ....................20
Appendix.................................21
SUMMARY
Stein Roe Institutional Client High Yield Fund ("Institutional
Client High Yield Fund") is a series of Stein Roe Trust, an open-
end diversified management investment company organized as a
Massachusetts business trust. Institutional Client High Yield
Fund offers investors the advantage of a "no-load" fund, with
Stein Roe & Farnham Incorporated and its affiliates providing
customized services as investment adviser, administrator, transfer
agent, and distributor. (See The Fund and Organization and
Description of Shares.) This prospectus is not a solicitation in
any jurisdiction in which shares of Institutional Client High
Yield Fund are not qualified for sale.
INVESTMENT OBJECTIVES AND POLICIES. Institutional Client High
Yield Fund invests all of its net investable assets in SR&F High
Yield Portfolio ("High Yield Portfolio"). High Yield Portfolio
invests in a diversified portfolio of securities in accordance
with the identical investment objective and substantially the same
investment policies as those of Institutional Client High Yield
Fund. High Yield Portfolio seeks total return by investing for a
high level of current income and capital growth. High Yield
Portfolio invests primarily in high-yield, high-risk medium- and
lower-quality debt securities. Medium-quality debt securities,
although considered investment grade, may have some speculative
characteristics. Lower-quality debt securities are obligations of
issuers that are considered predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal
according to the terms of the obligation and, therefore, carry
greater investment risk, including the possibility of issuer
default and bankruptcy, and are commonly referred to as "junk
bonds."
For a more detailed discussion of the investment objectives and
policies, please see Investment Policies and Portfolio Investments
and Strategies. There is, of course, no assurance that
Institutional Client High Yield Fund and High Yield Portfolio will
achieve their common investment objective.
INVESTMENT RISKS. The risks inherent in Institutional Client High
Yield Fund depend primarily upon the term and quality of the
obligations in the investment portfolio of High Yield Portfolio,
as well as on market conditions. Interest rate fluctuations will
affect the Fund's net asset value and, therefore, the total return
from an investment in Institutional Client High Yield Fund.
Interest rate fluctuations will affect income on variable rate
securities and on securities purchased as other portfolio
securities mature. Since yields on debt securities available for
purchase vary over time, no specific yield on shares of
Institutional Client High Yield Fund can be assured.
Institutional Client High Yield Fund is designed for investors who
can accept the heightened level of risk and principal fluctuation
inherent in a portfolio that invests at least 65% of its assets in
medium- and lower-quality debt securities. High Yield Portfolio
may invest in foreign securities, which may entail a greater
degree of risk than investing in securities of domestic issuers.
Please see Investment Restrictions and Risks and Investment
Considerations for further information.
PURCHASES AND REDEMPTIONS. For information on purchasing (buying)
and redeeming (selling) shares, see How to Purchase Shares and How
to Redeem Shares.
DISTRIBUTIONS. Dividends are declared each business day and are
paid monthly. Dividends will be reinvested in additional shares
of Institutional Client High Yield Fund unless you elect to have
distributions paid in cash. (See Distributions and Income Taxes.)
MANAGEMENT AND FEES. Stein Roe & Farnham Incorporated (the
"Adviser") is investment adviser to High Yield Portfolio. In
addition, it provides administrative services to Institutional
Client High Yield Fund and High Yield Portfolio. For a
description of the Adviser and its fees, see Management.
FEE TABLE
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases......................None
Sales Load Imposed on Reinvested Dividend............None
Deferred Sales Load..................................None
Redemption Fees......................................None
Exchange Fees........................................None
ANNUAL FUND OPERATING EXPENSES (after fee
waiver; as a percentage of average net assets)
Management and Administrative Fees (after fee
waiver)...........................................0.50%
12b-1 Fees...........................................None
Other Expenses.(after fee waiver)....................0.00%
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Total Fund Operating Expenses (after fee waiver)....0.50%
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EXAMPLE.
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return; and (2) redemption at the end of
each time period:
1 year 3 years
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$5 $16
The purpose of the Fee Table is to assist you in understanding the
various costs and expenses that you will bear directly or
indirectly as an investor in Institutional Client High Yield Fund.
Because Institutional Client High Yield Fund has no operating
history, the information in the table is based upon an estimate of
expenses, assuming net assets of $50 million. The figures assume
that the percentage amounts listed under Annual Fund Operating
Expenses remain the same during each of the periods and that all
income dividends and capital gain distributions are reinvested in
additional Fund shares.
From time to time, the Adviser may voluntarily waive a portion of
its fees payable by Institutional Client High Yield Fund and the
Fund's pro rata share of the fees and expenses payable by High
Yield Portfolio. The Adviser has agreed to voluntarily waive such
fees to the extent the ordinary operating expenses of
Institutional Client High Yield Fund exceed 0.50% of its annual
average net assets. This commitment will be reviewed by the
Adviser on January 31, 2000, at which time the commitment could be
continued or terminated. In addition, the commitment is subject
to earlier review and possible termination by the Adviser on 30
days' notice to the Fund. Absent such expense undertaking, the
estimated Management and Administrative Fees, Other Expenses and
Total Fund Operating Expenses would be 0.65%, 0.35% and 1.00%,
respectively. Any such fee waiver will lower Institutional Client
High Yield Fund's overall expense ratio and increase its overall
return to investors. (Also see Management--Fees and Expenses.)
Institutional Client High Yield Fund pays the Adviser an
administrative fee based on its average daily net assets and High
Yield Portfolio pays the Adviser a management fee based on its
average daily net assets. The Fee Table summarizes the expenses
of both Institutional Client High Yield Fund and High Yield
Portfolio. Fees and expenses are described under Management.
Institutional Client High Yield Fund bears its proportionate share
of Portfolio expenses. The Trustees of Stein Roe Trust have
considered whether the annual operating expenses of Institutional
Client High Yield Fund, including its proportionate share of the
expenses of High Yield Portfolio, would be more or less than if
Institutional Client High Yield Fund invested directly in the
securities held by High Yield Portfolio, and concluded that
Institutional Client High Yield Fund's expenses would not be
materially greater in such case.
The figures in the Example are not necessarily indicative of past
or future expenses, and actual expenses may be greater or less
than those shown. Although information such as that shown in the
Example and Fee Table is useful in reviewing Institutional Client
High Yield Fund's expenses and in providing a basis for comparison
with other mutual funds, it should not be used for comparison with
other investments using different assumptions or time periods.
THE FUND
STEIN ROE INSTITUTIONAL CLIENT HIGH YIELD FUND ("Institutional
Client High Yield Fund") is a no-load, diversified "mutual fund."
Institutional Client High Yield Fund does not impose commissions
or charges when shares are purchased or redeemed. Institutional
Client High Yield Fund is a series of Stein Roe Trust, an open-end
management investment company, which is authorized to issue shares
of beneficial interest in separate series.
Stein Roe & Farnham Incorporated (the "Adviser") provides
portfolio management services to High Yield Portfolio and
administrative services to Institutional Client High Yield Fund
and High Yield Portfolio.
Rather than invest in securities directly, Institutional Client
High Yield Fund seeks to achieve its investment objective by using
the "master fund/feeder fund" structure. Under that structure,
Institutional Client High Yield Fund and other investment
companies with the same investment objective invest their assets
in another investment company having the same investment objective
and substantially the same investment policies as Institutional
Client High Yield Fund. The purpose of such an arrangement is to
achieve greater operational efficiencies and reduce costs.
Institutional Client High Yield Fund invests all of its net
investable assets in SR&F High Yield Portfolio ("High Yield
Portfolio"), which is a series of SR&F Base Trust ("Base Trust").
(See Special Considerations Regarding Master Fund/Feeder Fund
Structure.)
INVESTMENT POLICIES
Institutional Client High Yield Fund and High Yield Portfolio each
seek total return by investing for a high level of current income
and capital growth. Further information on portfolio investments
and strategies may be found under Portfolio Investments and
Strategies in this prospectus and in the Statement of Additional
Information. Institutional Client High Yield Fund seeks to
achieve its objective by investing all of its assets in High Yield
Portfolio. The investment policies of High Yield Portfolio are
substantially identical to those of Institutional Client High
Yield Fund.
High Yield Portfolio invests principally in high-yield, high-risk
medium- and lower-quality debt securities. The medium- and lower-
quality debt securities in which High Yield Portfolio will invest
normally offer a current yield or yield to maturity that is
significantly higher than the yield from securities rated in the
three highest categories assigned by rating services such as
Standard & Poor's Corporation ("S&P") and by Moody's Investors
Service, Inc. ("Moody's").
Under normal circumstances, at least 65% of High Yield Portfolio's
assets will be invested in high-yield, high-risk medium- and
lower-quality debt securities rated lower than Baa by Moody's or
lower than BBB by S&P, or equivalent ratings as determined by
other rating agencies, or unrated securities that the Adviser
determines to be of comparable quality. Medium-quality debt
securities, although considered investment grade, have some
speculative characteristics. Lower-quality debt securities are
obligations of issuers that are considered predominantly
speculative with respect to the issuer's capacity to pay interest
and repay principal according to the terms of the obligation and,
therefore, carry greater investment risk, including the
possibility of issuer default and bankruptcy, and are commonly
referred to as "junk bonds." Some issuers of debt securities
choose not to have their securities rated by a rating service, and
High Yield Portfolio may invest in unrated securities that the
Adviser has researched thoroughly and believes are suitable for
investment. High Yield Portfolio may invest in debt obligations
that are in default, but such obligations are not expected to
exceed 10% of High Yield Portfolio's assets.
High Yield Portfolio may invest up to 35% of its total assets in
other securities including, but not limited to, pay-in-kind bonds,
securities issued in private placements, bank loans, zero coupon
bonds, foreign securities, convertible securities, futures, and
options. High Yield Portfolio may also invest in higher-quality
debt securities. Under normal market conditions, however, High
Yield Portfolio is unlikely to emphasize higher-quality debt
securities since generally they offer lower yields than medium-
and lower-quality debt securities with similar maturities. High
Yield Portfolio may also invest in common stocks and securities
that are convertible into common stocks, such as warrants.
Investment in medium- or lower-quality debt securities involves
greater investment risk, including the possibility of issuer
default or bankruptcy. High Yield Portfolio seeks to reduce
investment risk through diversification, credit analysis, and
evaluation of developments in both the economy and financial
markets.
An economic downturn could severely disrupt the high-yield market
and adversely affect the value of outstanding bonds and the
ability of the issuers to repay principal and interest. In
addition, lower-quality bonds are less sensitive to interest rate
changes than higher-quality instruments (see Risks and Investment
Considerations) and generally are more sensitive to adverse
economic changes or individual corporate developments. During a
period of adverse economic changes, including a period of rising
interest rates, issuers of such bonds may experience difficulty in
servicing their principal and interest payment obligations.
Achievement of the investment objective will be more dependent on
the Adviser's credit analysis than would be the case if High Yield
Portfolio were investing in higher-quality debt securities. Since
the ratings of rating services (which evaluate the safety of
principal and interest payments, not market risks) are used only
as preliminary indicators of investment quality, the Adviser
employs its own credit research and analysis, from which it has
developed a proprietary credit rating system based upon
comparative credit analyses of issuers within the same industry.
These analyses may take into consideration such quantitative
factors as an issuer's present and potential liquidity,
profitability, internal capability to generate funds, debt/equity
ratio and debt servicing capabilities, and such qualitative
factors as an assessment of management, industry characteristics,
accounting methodology, and foreign business exposure.
Lower-quality debt securities are obligations of issuers that are
considered predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal according to the
terms of the obligation and, therefore, carry greater investment
risk, including the possibility of issuer default and bankruptcy,
and are commonly referred to as "junk bonds." The lowest rating
assigned by Moody's is for bonds that can be regarded as having
extremely poor prospects of ever attaining any real investment
standing.
Medium- and lower-quality debt securities tend to be less
marketable than higher-quality debt securities because the market
for them is less broad. The market for unrated debt securities is
even narrower. During periods of thin trading in these markets,
the spread between bid and asked prices is likely to increase
significantly, and High Yield Portfolio may have greater
difficulty selling its portfolio securities. (See Net Asset
Value.) The market value of these securities and their liquidity
may be affected by adverse publicity and investor perceptions.
PORTFOLIO INVESTMENTS AND STRATEGIES
FOREIGN SECURITIES. High Yield Portfolio may invest in foreign
securities, but will not invest in a foreign security if, as a
result of such investment, more than 25% of its total assets would
be invested in foreign securities. For purposes of this
restriction, foreign debt securities do not include securities
represented by American Depositary Receipts ("ADRs"), foreign debt
securities denominated in U.S. dollars, or securities guaranteed
by a U.S. person such as a corporation domiciled in the United
States that is a parent or affiliate of the issuer of the
securities being guaranteed. High Yield Portfolio may invest in
sponsored or unsponsored ADRs. In addition to, or in lieu of,
such direct investment, High Yield Portfolio may construct a
synthetic foreign position by (a) purchasing a debt instrument
denominated in one currency, generally U.S. dollars; and (b)
concurrently entering into a forward contract to deliver a
corresponding amount of that currency in exchange for a different
currency on a future date and at a specified rate of exchange.
Because of the availability of a variety of highly liquid U.S.
dollar debt instruments, a synthetic foreign position utilizing
such U.S. dollar instruments may offer greater liquidity than
direct investment in foreign currency debt instruments. In
connection with the purchase of foreign securities, High Yield
Portfolio may contract to purchase an amount of foreign currency
sufficient to pay the purchase price of the securities at the
settlement date. (See Risks and Investment Considerations.)
DERIVATIVES. Consistent with its objective, High Yield Portfolio
may invest in a broad array of financial instruments and
securities, including conventional exchange-traded and non-
exchange traded options, futures contracts, futures options,
securities collateralized by underlying pools of mortgages or
other receivables, and other instruments, the value of which is
"derived" from the performance of an underlying asset or a
"benchmark" such as a security index, an interest rate, or a
currency ("Derivatives"). High Yield Portfolio does not expect to
invest more than 5% of its net assets in any type of Derivative
except: options, futures contracts, and futures options.
Derivatives are most often used to manage investment risk or to
create an investment position indirectly because they are more
efficient or less costly than direct investment. They also may be
used in an effort to enhance portfolio returns.
The successful use of Derivatives depends on the Adviser's ability
to correctly predict changes in the levels and directions of
movements in security prices, interest rates and other market
factors affecting the Derivative itself or the value of the
underlying asset or benchmark. In addition, correlations in the
performance of an underlying asset to a Derivative may not be well
established. Finally, privately negotiated and over-the-counter
Derivatives may not be as well regulated and may be less
marketable than exchange-traded Derivatives. For additional
information on Derivatives, please refer to the Statement of
Additional Information.
MORTGAGE AND OTHER ASSET-BACKED DEBT SECURITIES. High Yield
Portfolio may invest in securities secured by mortgages or other
assets such as automobile or home improvement loans and credit
card receivables. These instruments may be issued or guaranteed
by the U.S. Government or by its agencies or instrumentalities or
by private entities such as commercial, mortgage and investment
banks and financial companies or financial subsidiaries of
industrial companies.
Securities issued by GNMA represent an interest in a pool of
mortgages insured by the Federal Housing Administration or the
Farmers Home Administration, or guaranteed by the Veterans
Administration. Securities issued by FNMA and FHLMC, U.S.
Government-sponsored corporations, also represent an interest in a
pool of mortgages.
The timely payment of principal and interest on GNMA securities is
guaranteed by GNMA and backed by the full faith and credit of the
U.S. Treasury. FNMA guarantees full and timely payment of
interest and principal on FNMA securities. FHLMC guarantees
timely payment of interest and ultimate collection of principal on
FHLMC securities. FNMA and FHLMC securities are not backed by the
full faith and credit of the U.S. Treasury.
Mortgage-backed debt securities, such as those issued by GNMA,
FNMA, and FHLMC, are of the "modified pass-through type," which
means the interest and principal payments on mortgages in the pool
are "passed through" to investors. During periods of declining
interest rates, there is increased likelihood that mortgages will
be prepaid, with a resulting loss of the full-term benefit of any
premium paid by High Yield Portfolio on purchase of such
securities; in addition, the proceeds of prepayment would likely
be invested at lower interest rates.
Mortgage-backed securities provide either a pro rata interest in
underlying mortgages or an interest in collateralized mortgage
obligations ("CMOs"), which represent a right to interest and/or
principal payments from an underlying mortgage pool. CMOs are not
guaranteed by either the U.S. Government or by its agencies or
instrumentalities and are usually issued in multiple classes, each
of which has different payment rights, pre-payment risks, and
yield characteristics. Mortgage-backed securities involve the
risk of pre-payment of the underlying mortgages at a faster or
slower rate than the established schedule. Pre-payments generally
increase with falling interest rates and decrease with rising
rates, but they also are influenced by economic, social, and
market factors. If mortgages are pre-paid during periods of
declining interest rates, there would be a resulting loss of the
full-term benefit of any premium paid by High Yield Portfolio on
purchase of the CMO, and the proceeds of pre-payment would likely
be invested at lower interest rates. High Yield Portfolio tends
to invest in CMOs of classes known as planned amortization classes
("PACs") which have pre-payment protection features tending to
make them less susceptible to price volatility.
Non-mortgage asset-backed securities usually have less pre-payment
risk than mortgage-backed securities, but have the risk that the
collateral will not be available to support payments on the
underlying loans which finance payments on the securities
themselves. Therefore, greater emphasis is placed on the credit
quality of the security issuer and the guarantor, if any.
Asset-backed securities tend to experience greater price
volatility than straight debt securities.
FLOATING RATE INSTRUMENTS. High Yield Portfolio may also invest
in floating rate instruments which provide for periodic
adjustments in coupon interest rates that are automatically reset
based on changes in amount and direction of specified market
interest rates. In addition, the adjusted duration of some of
these instruments may be materially shorter than their stated
maturities. To the extent such instruments are subject to
lifetime or periodic interest rate caps or floors, such
instruments may experience greater price volatility than debt
instruments without such features. Adjusted duration is an
inverse relationship between market price and interest rates and
refers to the approximate percentage change in price for a 100
basis point change in yield. For example, if interest rates
decrease by 100 basis points, a market price of a security with an
adjusted duration of 2 would increase by approximately 2%. High
Yield Portfolio does not intend to invest more than 5% of its net
assets in floating rate instruments.
FUTURES AND OPTIONS. High Yield Portfolio may purchase and write
both call options and put options on securities, indexes and
foreign currencies, and enter into interest rate, index and
foreign currency futures contracts. High Yield Portfolio may also
write options on such futures contracts and purchase other types
of forward or investment contracts linked to individual
securities, indexes or other benchmarks, consistent with its
investment objective, in order to provide additional revenue, or
to hedge against changes in security prices, interest rates, or
currency fluctuations. High Yield Portfolio may write a call or
put option only if the option is covered. As the writer of a
covered call option, High Yield Portfolio foregoes, during the
option's life, the opportunity to profit from increases in market
value of the security covering the call option above the sum of
the premium and the exercise price of the call. There can be no
assurance that a liquid market will exist when High Yield
Portfolio seeks to close out a position. Because of low margin
deposits required, the use of futures contracts involves a high
degree of leverage, and may result in losses in excess of the
amount of the margin deposit.
LENDING OF PORTFOLIO SECURITIES. Subject to certain restrictions,
High Yield Portfolio may lend portfolio securities to broker-
dealers and banks. Any such loan must be continuously secured by
collateral in cash or cash equivalents maintained on a current
basis in an amount at least equal to the market value of the
securities loaned by High Yield Portfolio. High Yield Portfolio
would continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned, and would
also receive an additional return that may be in the form of a
fixed fee or a percentage of the collateral. High Yield Portfolio
would have the right to call the loan and obtain the securities
loaned at any time on notice of not more than five business days.
In the event of bankruptcy or other default of the borrower, High
Yield Portfolio could experience both delays in liquidating the
loan collateral or recovering the loaned securities and losses
including (a) possible decline in the value of the collateral or
in the value of the securities loaned during the period while the
Portfolio seeks to enforce its rights thereto; (b) possible
subnormal levels of income and lack of access to income during
this period; and (c) expenses of enforcing its rights.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES; STANDBY COMMITMENTS.
High Yield Portfolio's assets may include securities purchased on
a when-issued or delayed-delivery basis. Although the payment and
interest terms of these securities are established at the time the
purchaser enters into the commitment, the securities may be
delivered and paid for a month or more after the date of purchase,
when their value may have changed. High Yield Portfolio makes
such commitments only with the intention of actually acquiring the
securities, but may sell the securities before settlement date if
the Adviser deems it advisable for investment reasons. Securities
purchased in this manner involve a risk of loss if the value of
the security purchased declines before the settlement date.
When-issued or delayed-delivery securities may sometimes be
purchased on a "dollar roll" basis, meaning that High Yield
Portfolio will sell securities with a commitment to purchase
similar, but not identical, securities at a future date.
Generally, the securities are repurchased at a price lower than
the sales price. Dollar roll transactions involve the risk of
restrictions on the Portfolio's ability to repurchase the security
if the counterparty becomes insolvent; an adverse change in the
price of the security during the period of the roll or that the
value of the security repurchased will be less than the security
sold; and transaction costs exceeding the return earned by High
Yield Portfolio on the sales proceeds of the dollar roll.
High Yield Portfolio may also invest in securities purchased on a
standby commitment basis, which is a delayed-delivery agreement in
which High Yield Portfolio binds itself to accept delivery of a
security at the option of the other party to the agreement.
PIK AND ZERO COUPON BONDS. High Yield Portfolio may invest up to
20% of its total assets in zero coupon bonds and bonds the
interest on which is payable in kind ("PIK bonds"). A zero coupon
bond is a bond that does not pay interest for its entire life. A
PIK bond pays interest in the form of additional securities. The
market prices of both zero coupon and PIK bonds are affected to a
greater extent by changes in prevailing levels of interest rates
and thereby tend to be more volatile in price than securities that
pay interest periodically and in cash. In addition, because High
Yield Portfolio accrues income with respect to these securities
prior to the receipt of such interest in cash, it may have to
dispose of portfolio securities under disadvantageous
circumstances in order to obtain cash needed to pay income
dividends in amounts necessary to avoid unfavorable tax
consequences.
SHORT SALES AGAINST THE BOX. The Fund may sell short securities
it owns or has the right to acquire without further consideration,
a technique called selling short "against the box." Short sales
against the box may protect the Fund against the risk of losses in
the value of its portfolio securities because any unrealized
losses with respect to such securities should be wholly or partly
offset by a corresponding gain in the short position. However,
any potential gains in such securities should be wholly or
partially offset by a corresponding loss in the short position.
Short sales against the box may be used to lock in a profit on a
security when, for tax reasons or otherwise, the Adviser does not
want to sell the security. For a more complete explanation,
please refer to the Statement of Additional Information.
PORTFOLIO TURNOVER. In attempting to attain its objective, High
Yield Portfolio may sell portfolio securities without regard to
the period of time they have been held. Further, the Adviser may
purchase and sell securities for the investment portfolio with a
view to maximizing current return, even if portfolio changes would
cause the realization of capital gains. Although the average
stated maturity of High Yield Portfolio will be from five to ten
years, the Adviser may adjust the average effective maturity of
High Yield Portfolio's portfolio from time to time, depending on
its assessment of the relative yields available on securities of
different maturities and its expectations of future changes in
interest rates. As a result, the turnover rate of High Yield
Portfolio may vary from year to year. The turnover rate for High
Yield Portfolio may exceed 100%, but is not expected to exceed
200% under normal market conditions. A high rate of portfolio
turnover may result in increased transaction expenses and the
realization of capital gains (which may be taxable) or losses.
(See Distributions and Income Taxes.)
INVESTMENT RESTRICTIONS
Neither Institutional Client High Yield Fund nor High Yield
Portfolio may invest in a security if, as a result of such
investment: (1) with respect to 75% of its assets, more than 5% of
its total assets would be invested in the securities of any one
issuer, except for U.S. Government Securities or repurchase
agreements /1/ for such securities; or (2) 25% or more of its
total assets would be invested in the securities of a group of
issuers in the same industry, except that this restriction does
not apply to U.S. Government Securities. Notwithstanding these
limitations, Institutional Client High Yield Fund, but not High
Yield Portfolio, may invest all of its assets in another
registered investment company having the same investment objective
and substantially similar investment policies as the Fund.
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/1/ A repurchase agreement involves a sale of securities to High
Yield Portfolio with the concurrent agreement of the seller (bank
or securities dealer) to repurchase the securities at the same
price plus an amount equal to an agreed-upon interest rate within
a specified time. In the event of a bankruptcy or other default
of a seller of a repurchase agreement, the Portfolio could
experience both delays in liquidating the underlying securities
and losses. The Portfolio may not invest more than 10% of its net
assets in repurchase agreements maturing in more than seven days
and other illiquid securities.
- - ------------
Neither Institutional Client High Yield Fund nor High Yield
Portfolio may make loans except that it may (1) purchase money
market instruments and enter into repurchase agreements; (2)
acquire publicly-distributed or privately-placed debt securities;
(3) lend its portfolio securities under certain conditions; and
(4) participate in an interfund lending program with other Stein
Roe Funds and Portfolios. Neither may borrow money, except for
non-leveraging, temporary, or emergency purposes or in connection
with participation in the interfund lending program. Neither the
aggregate borrowings (including reverse repurchase agreements) nor
the aggregate loans at any one time may exceed 33 1/3% of the
value of total assets. Additional securities may not be purchased
when borrowings, less proceeds receivable from sales of portfolio
securities, exceed 5% of total assets.
The policies set forth in the first two paragraphs under
Investment Restrictions (but not the footnote) are fundamental
policies of Institutional Client High Yield Fund and High Yield
Portfolio./2/ The Statement of Additional Information contains
all of the investment restrictions.
- - ----------------
/2/ A fundamental policy may be changed only with the approval of
a "majority of the outstanding voting securities" as defined in
the Investment Company Act.
- - ---------------
RISKS AND INVESTMENT CONSIDERATIONS
The risks inherent in Institutional Client High Yield Fund depend
primarily upon the term and quality of the obligations in High
Yield Portfolio's investment portfolio, as well as on market
conditions. Although High Yield Portfolio seeks to reduce risk by
investing in a diversified portfolio, this does not eliminate all
risk. Institutional Client High Yield Fund is designed for
investors who can accept the heightened level of risk and
principal fluctuation which might result from a portfolio that
invests at least 65% of its assets in medium- and lower-quality
debt securities.
The market value of securities in the investment portfolio tends
to vary inversely with the level of interest rates. As a result,
interest rate fluctuations may affect net asset value. (Because
yields on debt securities available for purchase by High Yield
Portfolio vary over time, no specific yield on shares of
Institutional Client High Yield Fund can be assured.) In
addition, if the bonds in the investment portfolio contain call,
prepayment or redemption provisions, during a period of declining
interest rates, these securities are likely to be redeemed, and
High Yield Portfolio may have to replace the security with a lower
yielding security, resulting in a decreased return for investors.
Investments in foreign securities, including ADRs, represent both
risks and opportunities not typically associated with investments
in domestic issuers. Risks of foreign investing include currency
risk, less complete financial information on issuers, different
accounting, auditing and financial reporting standards, different
settlement practices, less market liquidity, more market
volatility, less well-developed and regulated markets, and greater
political instability. In addition, various restrictions by
foreign governments on investments by non-residents may apply,
including imposition of exchange controls and withholding taxes on
dividends, and seizure or nationalization of investments owned by
non-residents. Foreign investments also tend to involve higher
transaction and custody costs.
High Yield Portfolio may enter into foreign currency forward
contracts and use options and futures contracts, as described
elsewhere in this prospectus, to limit or reduce foreign currency
risk.
There can be no assurance that Institutional Client High Yield
Fund or High Yield Portfolio will achieve its objective, nor can
High Yield Portfolio assure that payments of interest and
principal on portfolio securities will be made when due. If,
after purchase by High Yield Portfolio, the rating of a portfolio
security is lost or reduced, High Yield Portfolio would not be
required to sell the security, but the Adviser would consider such
a change in deciding whether High Yield Portfolio should retain
the security in its investment portfolio.
The investment objective of Institutional Client High Yield Fund
and High Yield Portfolio is not fundamental and may be changed by
the respective Board of Trustees without a vote of shareholders.
HOW TO PURCHASE SHARES
Shares of Institutional Client High Yield Fund are intended
primarily for investors who are (or through purchase of Fund
shares become) clients of Stein Roe's Institutional Asset
Management Division. Shares may also be available to other
investors if, in the judgment of the Adviser, the sale of shares
to such investors would not adversely affect the Fund or its
shareholders. The initial purchase minimum is $1,000,000 and the
minimum subsequent investment is $100,000. For more information
on how to purchase Fund shares, please call Stein Roe Retirement
Services at 800-322-1130. Stein Roe Trust reserves the right to
waive or lower its investment minimums for any reason.
CONDITIONS OF PURCHASE. Each purchase order for Institutional
Client High Yield Fund must be accepted by an authorized officer
of Stein Roe Trust or its authorized agent and is not binding
until accepted and entered on the books of Institutional Client
High Yield Fund. Once your purchase order has been accepted, you
may not cancel or revoke it; you may, however, redeem the shares.
Stein Roe Trust reserves the right not to accept any purchase
order that it determines not to be in the best interests of Stein
Roe Trust or of Institutional Client High Yield Fund's
shareholders.
PURCHASE PRICE AND EFFECTIVE DATE. Each purchase of Institutional
Client High Yield Fund's shares is made at its net asset value
(see Net Asset Value) next determined after receipt of an order in
good form, including receipt of payment by Institutional Client
High Yield Fund.
HOW TO REDEEM SHARES
Shares of Institutional Client High Yield Fund may be redeemed any
day the New York Stock Exchange ("NYSE") is open at the net asset
value next calculated after a redemption order is received and
accepted by Stein Roe Trust.
Redemption instructions may not be cancelled or revoked once they
have been received and accepted by Stein Roe Trust. Stein Roe
Trust cannot accept a redemption request that specifies a
particular date or price for redemption or any special conditions.
Because the redemption price you receive depends upon
Institutional Client High Yield Fund's net asset value per share
at the time of redemption, it may be more or less than the price
you originally paid for the shares and may result in a realized
capital gain or loss. Stein Roe Trust will generally mail payment
for shares redeemed within seven days after proper instructions
are received.
Stein Roe Trust reserves the right to redeem shares in any account
and send the proceeds to the owner if the shares in the account do
not have a value of at least $1,000,000. A shareholder would be
notified that his account is below the minimum and would be
allowed 30 days to increase the account before the redemption is
processed.
NET ASSET VALUE
The purchase and redemption price of Institutional Client High
Yield Fund's shares is its net asset value per share.
Institutional Client High Yield Fund determines the net asset
value of its shares as of the close of trading on the NYSE
(currently 3:00 p.m., central time) by dividing the difference
between the values of its assets and liabilities by the number of
shares outstanding. High Yield Portfolio allocates net asset
value, income, and expenses to Institutional Client High Yield
Fund and any other of its feeder funds in proportion to their
respective interests in High Yield Portfolio.
Net asset value will not be determined on days when the NYSE is
closed unless, in the judgment of the Board of Trustees, the net
asset value of Institutional Client High Yield Fund should be
determined on any such day, in which case the determination will
be made at 3:00 p.m., central time.
Securities for which market quotations are readily available at
the time of valuation are valued on that basis. Long-term
straight-debt securities for which market quotations are not
readily available are valued at a fair value based on valuations
provided by pricing services approved by the Board, which may
employ electronic data processing techniques, including a matrix
system, to determine valuations. Short-term debt securities with
remaining maturities of 60 days or less are valued at their
amortized cost, which does not take into account unrealized gains
or losses. The Board believes that the amortized cost represents
a fair value for such securities. Short-term debt securities with
remaining maturities of more than 60 days for which market
quotations are not readily available are valued by use of a matrix
prepared by the Adviser based on quotations for comparable
securities. Other assets and securities held by High Yield
Portfolio for which these valuation methods do not produce a fair
value are valued by a method that the Board believes will
determine a fair value.
DISTRIBUTIONS AND INCOME TAXES
DISTRIBUTIONS. Income dividends are declared each business day,
paid monthly, and confirmed at least quarterly. Institutional
Client High Yield Fund intends to distribute by the end of each
calendar year at least 98% of any net capital gains realized from
the sale of securities during the twelve-month period ended
October 31 in that year. Institutional Client High Yield Fund
intends to distribute any undistributed net investment income and
net realized capital gains in the following year.
All income dividends and capital gain distributions will be
reinvested in additional shares unless you elect to have
distributions paid in cash. Reinvestment normally occurs on the
payable date. Stein Roe Trust reserves the right to reinvest the
proceeds and future distributions in additional shares of
Institutional Client High Yield Fund if checks mailed to you for
distributions are returned as undeliverable or are not presented
for payment within six months.
INCOME TAXES. Your distributions will be taxable to you, under
income tax law, whether received in cash or reinvested in
additional shares. For federal income tax purposes, any
distribution that is paid in January but was declared in the prior
calendar year is deemed paid in the prior calendar year.
You will be subject to federal income tax at ordinary rates on
income dividends and distributions of net short-term capital gain.
Distributions of net long-term capital gain will be taxable to you
as long-term capital gain regardless of the length of time you
have held your shares.
You will be advised annually as to the source of distributions.
If you are not subject to tax on your income, you will not be
required to pay tax on these amounts.
If you realize a loss on the sale or exchange of Fund shares held
for six months or less, your short-term loss is recharacterized as
long-term to the extent of any long-term capital gain
distributions you have received with respect to those shares.
For federal income tax purposes, Institutional Client High Yield
Fund is treated as a separate taxable entity distinct from any
other series of the Stein Roe Trust. High Yield Portfolio intends
to qualify for the special tax treatment afforded regulated
investment companies under Subchapter M of the Internal Revenue
Code, so that it will be relieved of federal income tax on that
part of its net investment income and net capital gain that is
distributed to shareholders.
This section is not intended to be a full discussion of income tax
laws and their effect on shareholders. You may wish to consult
your own tax advisor.
INVESTMENT RETURN
The total return from an investment in Institutional Client High
Yield Fund is measured by the distributions received (assuming
reinvestment) plus or minus the change in the net asset value per
share for a given period. A total return percentage may be
calculated by dividing the value of a share at the end of the
period (including reinvestment of distributions) by the value of
the share at the beginning of the period and subtracting one. For
a given period, an average annual total return may be calculated
by finding the average annual compounded rate that would equate a
hypothetical $1,000 investment to the ending redeemable value.
The yield of Institutional Client High Yield Fund is calculated by
dividing its net investment income per share (a hypothetical
figure as defined in the SEC rules) during a 30-day period by the
net asset value per share on the last day of the period. The
yield formula provides for semiannual compounding, which assumes
that net investment income is earned and reinvested at a constant
rate and annualized at the end of a six-month period.
Comparison of Institutional Client High Yield Fund's yield or
total return with those of alternative investments should consider
differences between Institutional Client High Yield Fund and the
alternative investments, the periods and methods used in
calculation of the return being compared, and the impact of taxes
on alternative investments. Yield figures are not based on actual
dividends paid. Past performance is not necessarily indicative of
future results. To obtain current yield or total return
information, you may call 800-322-1130.
MANAGEMENT
TRUSTEES AND INVESTMENT ADVISER. The Board of Trustees of the
Stein Roe Trust has overall management responsibility for Stein
Roe Trust and Institutional Client High Yield Fund; the Board of
Base Trust has overall management responsibility for High Yield
Portfolio. See Management in the Statement of Additional
Information for the names of and other information about the
trustees and officers. Since Stein Roe Trust and Base Trust have
the same trustees, the trustees have adopted conflict of interest
procedures to monitor and address potential conflicts between the
interests of Institutional Client High Yield Fund and High Yield
Portfolio.
The Adviser, Stein Roe & Farnham Incorporated, One South Wacker
Drive, Chicago, Illinois 60606, is responsible for managing the
investment portfolio of High Yield Portfolio and the business
affairs of Institutional Client High Yield Fund, High Yield
Portfolio, Stein Roe Trust, and Base Trust, subject to the
direction of the respective Board. The Adviser is registered as
an investment adviser under the Investment Advisers Act of 1940.
The Adviser was organized in 1986 to succeed to the business of
Stein Roe & Farnham, a partnership that had advised and managed
mutual funds since 1949. The Adviser is a wholly owned subsidiary
of Liberty Financial Companies, Inc. ("Liberty Financial"), which
in turn is a majority owned indirect subsidiary of Liberty Mutual
Insurance Company.
PORTFOLIO MANAGERS. Stephen F. Lockman became portfolio
manager of High Yield Portfolio on March 3, 1997. He had
been associate portfolio manager of High Yield Portfolio
since its inception in November 1996 and of Stein Roe Income
Fund since October 1995. Mr. Lockman joined the Adviser in
January 1994. As a senior research analyst for the Adviser's
fixed income department from 1994 to 1997, Mr. Lockman has
broad expertise in the fixed income markets, with specialties
in the high yield sector and the aerospace, broadcasting,
entertainment, insurance, mining/metals, paper/forest
products, printing, publishing and real estate industries.
In addition, he served as the fixed income department's
sovereign debt analyst from 1994 to 1997, evaluating
securities for its more than $1 billion portfolio of dollar-
denominated foreign investments. Mr. Lockman previously
served as portfolio manager for the Illinois State Board of
Investment from 1987 to 1994, and as a trust investment
officer for LaSalle National Bank from 1983 to 1987. A
chartered financial analyst, Mr. Lockman earned a bachelor's
degree in 1983 from the University of Illinois and a master's
degree in 1986 from DePaul University.
FEES AND EXPENSES. The Adviser is entitled to receive a monthly
administrative fee from Institutional Client High Yield Fund,
computed and accrued daily, at an annual rate of .150% of the
first $500 million of average net assets and .125% thereafter; and
a monthly management fee from High Yield Portfolio, computed and
accrued daily, at an annual rate of .500% of the first $500
million of average net assets and .475% thereafter. However, as
noted above under Fee Table, the Adviser may voluntarily waive a
portion of its fees.
The Adviser provides office space and executive and other
personnel to Stein Roe Trust and Base Trust and bears any sales or
promotional expenses. All expenses of Institutional Client High
Yield Fund (other than those paid by the Adviser), including, but
not limited to, printing and postage charges, securities
registration fees, custodian and transfer agency fees, legal and
auditing fees, compensation of trustees not affiliated with the
Adviser and expenses incidental to its organization, are paid out
of the assets of Institutional Client High Yield Fund.
Under a separate agreement with each Trust, the Adviser provides
certain accounting and bookkeeping services to Institutional
Client High Yield Fund and High Yield Portfolio including
computation of net asset value and calculation of net income and
capital gains and losses on disposition of assets.
PORTFOLIO TRANSACTIONS. The Adviser places the orders for the
purchase and sale of portfolio securities and options and futures
contracts. In doing so, the Adviser seeks to obtain the best
combination of price and execution, which involves a number of
judgmental factors.
TRANSFER AGENT. SteinRoe Services Inc. ("SSI"), One South Wacker
Drive, Chicago, Illinois 60606, a wholly owned subsidiary of
Liberty Financial, is the agent of Stein Roe Trust for the
transfer of shares, disbursement of dividends, and maintenance of
shareholder accounting records.
DISTRIBUTOR. The shares of Institutional Client High Yield Fund
are offered for sale through Liberty Securities Corporation
("Distributor") without any sales commissions or charges to
Institutional Client High Yield Fund or to its shareholders. The
Distributor is a wholly owned indirect subsidiary of Liberty
Financial. The business address of the Distributor is 600
Atlantic Avenue, Boston, Massachusetts 02210; however, all Fund
correspondence (including purchase and redemption orders) should
be mailed to SteinRoe Services Inc. at P.O. Box 8900, Boston,
Massachusetts 02205. All distribution and promotional expenses
are paid by the Adviser, including payments to the Distributor for
sales of Fund shares.
CUSTODIAN. State Street Bank and Trust Company (the "Bank"), 225
Franklin Street, Boston, Massachusetts 02101, is the custodian for
Institutional Client High Yield Fund. Foreign securities are
maintained in the custody of foreign banks and trust companies
that are members of the Bank's Global Custody Network or foreign
depositories used by such members. (See Custodian in the
Statement of Additional Information.)
ORGANIZATION AND DESCRIPTION OF SHARES
Stein Roe Trust is a Massachusetts business trust organized under
an Agreement and Declaration of Trust ("Declaration of Trust")
dated July 31, 1996, which provides that each shareholder shall be
deemed to have agreed to be bound by the terms thereof. The
Declaration of Trust may be amended by a vote of either Stein Roe
Trust's shareholders or its trustees. Stein Roe Trust may issue
an unlimited number of shares, in one or more series as the Board
may authorize. Currently, Institutional Client High Yield Fund is
the only series authorized and outstanding.
Under Massachusetts law, shareholders of a Massachusetts business
trust such as Stein Roe Trust could, in some circumstances, be
held personally liable for unsatisfied obligations of Stein Roe
Trust. The Declaration of Trust provides that persons extending
credit to, contracting with, or having any claim against, Stein
Roe Trust or any particular series shall look only to the assets
of Stein Roe Trust or of the respective series for payment under
such credit, contract or claim, and that the shareholders,
trustees and officers of Stein Roe Trust shall have no personal
liability therefor. The Declaration of Trust requires that notice
of such disclaimer of liability be given in each contract,
instrument or undertaking executed or made on behalf of Stein Roe
Trust. The Declaration of Trust provides for indemnification of
any shareholder against any loss and expense arising from personal
liability solely by reason of being or having been a shareholder.
Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is believed to be remote, because
it would be limited to circumstances in which the disclaimer was
inoperative and Stein Roe Trust was unable to meet its
obligations.
The risk of a particular series incurring financial loss on
account of unsatisfied liability of another series of Stein Roe
Trust is also believed to be remote, because it would be limited
to claims to which the disclaimer did not apply and to
circumstances in which the other Fund was unable to meet its
obligations.
SPECIAL CONSIDERATIONS REGARDING THE
MASTER FUND/FEEDER FUND STRUCTURE
Institutional Client High Yield Fund, an open-end management
investment company, seeks to achieve its objective by investing
all of its assets in shares of another mutual fund having an
investment objective identical to that of Institutional Client
High Yield Fund. The initial shareholder of Institutional Client
High Yield Fund approved this policy of permitting Institutional
Client High Yield Fund to act as a feeder fund by investing in
High Yield Portfolio. Please refer to the Investment Policies,
Portfolio Investments and Strategies, and Investment Restrictions
for a description of the investment objectives, policies, and
restrictions of Institutional Client High Yield Fund and High
Yield Portfolio. The management and expenses of both
Institutional Client High Yield Fund and High Yield Portfolio are
described under Fee Table and Management. Institutional Client
High Yield Fund bears its proportionate share of Portfolio
expenses.
The Adviser has provided investment management services in
connection with other mutual funds employing the master
fund/feeder fund structure since 1991.
SR&F High Yield Portfolio is a separate series of SR&F Base Trust
("Base Trust"), a Massachusetts common law trust organized under
an Agreement and Declaration of Trust ("Declaration of Trust")
dated August 23, 1993. The Declaration of Trust of Base Trust
provides that Institutional Client High Yield Fund and other
investors in High Yield Portfolio will each be liable for all
obligations of High Yield Portfolio that are not satisfied by High
Yield Portfolio. However, the risk of Institutional Client High
Yield Fund incurring financial loss on account of such liability
is limited to circumstances in which both inadequate insurance
existed and High Yield Portfolio itself were unable to meet its
obligations. Accordingly, the Trustees of Stein Roe Trust believe
that neither Institutional Client High Yield Fund nor its
shareholders will be adversely affected by reason of Institutional
Client High Yield Fund's investing in High Yield Portfolio.
The Declaration of Trust of Base Trust provides that High Yield
Portfolio will terminate 120 days after the withdrawal of
Institutional Client High Yield Fund or any other investor in High
Yield Portfolio, unless the remaining investors vote to agree to
continue the business of High Yield Portfolio. The Trustees of
Stein Roe Trust may vote Institutional Client High Yield Fund's
interests in High Yield Portfolio for such continuation without
approval of Institutional Client High Yield Fund's shareholders.
The common investment objective of Institutional Client High Yield
Fund and High Yield Portfolio is non-fundamental and may be
changed without shareholder approval, subject, however, to at
least 30 days' advance written notice to Institutional Client High
Yield Fund's shareholders.
The fundamental policies of Institutional Client High Yield Fund
and the corresponding fundamental policies of the Portfolio can be
changed only with shareholder approval.
If Institutional Client High Yield Fund, as a Portfolio investor,
is requested to vote on a proposed change in fundamental policy of
High Yield Portfolio or any other matter pertaining to High Yield
Portfolio (other than continuation of the business of High Yield
Portfolio after withdrawal of another investor), Institutional
Client High Yield Fund will solicit proxies from its shareholders
and vote its interest in High Yield Portfolio for and against such
matters proportionately to the instructions to vote for and
against such matters received from Fund shareholders.
Institutional Client High Yield Fund will vote shares for which it
receives no voting instructions in the same proportion as the
shares for which it receives voting instructions. If there are
other investors in High Yield Portfolio, there can be no assurance
that any matter receiving a majority of votes cast by Fund
shareholders will receive a majority of votes cast by all High
Yield Portfolio investors. If other investors hold a majority
interest in High Yield Portfolio, they could have voting control
over High Yield Portfolio.
In the event that High Yield Portfolio's fundamental policies were
changed so as to be inconsistent with those of Institutional
Client High Yield Fund, the Board of Trustees of Stein Roe Trust
would consider what action might be taken, including changes to
Institutional Client High Yield Fund's fundamental policies,
withdrawal of Institutional Client High Yield Fund's assets from
High Yield Portfolio and investment of such assets in another
pooled investment entity, or the retention of another investment
adviser. Any of these actions would require the approval of
Institutional Client High Yield Fund's shareholders.
Institutional Client High Yield Fund's inability to find a
substitute master fund or comparable investment management could
have a significant impact upon its shareholders' investments. Any
withdrawal of Institutional Client High Yield Fund's assets could
result in a distribution in kind of portfolio securities (as
opposed to a cash distribution) to Institutional Client High Yield
Fund. Should such a distribution occur, Institutional Client High
Yield Fund would incur brokerage fees or other transaction costs
in converting such securities to cash. In addition, a
distribution in kind could result in a less diversified portfolio
of investments for Institutional Client High Yield Fund and could
affect the liquidity of Institutional Client High Yield Fund.
Each investor in High Yield Portfolio, including Institutional
Client High Yield Fund, may add to or reduce its investment in
High Yield Portfolio on each day the NYSE is open for business.
The investor's percentage of the aggregate interests in High Yield
Portfolio will be computed as the percentage equal to the fraction
(i) the numerator of which is the beginning of the day value of
such investor's investment in High Yield Portfolio on such day
plus or minus, as the case may be, the amount of any additions to
or withdrawals from the investor's investment in High Yield
Portfolio effected on such day; and (ii) the denominator of which
is the aggregate beginning of the day net asset value of High
Yield Portfolio on such day plus or minus, as the case may be, the
amount of the net additions to or withdrawals from the aggregate
investments in High Yield Portfolio by all investors in High Yield
Portfolio. The percentage so determined will then be applied to
determine the value of the investor's interest in High Yield
Portfolio as of the close of business.
Base Trust may permit other investment companies and/or other
institutional investors to invest in High Yield Portfolio, but
members of the general public may not invest directly in High
Yield Portfolio. Other investors in High Yield Portfolio are not
required to sell their shares at the same public offering price as
Institutional Client High Yield Fund, could incur different
administrative fees and expenses than Institutional Client High
Yield Fund, and their shares might be sold with a sales
commission. Therefore, Fund shareholders might have different
investment returns than shareholders in another investment company
that invests exclusively in High Yield Portfolio. Investment by
such other investors in High Yield Portfolio would provide funds
for the purchase of additional portfolio securities and would tend
to reduce the Portfolio's operating expenses as a percentage of
its net assets. Conversely, large-scale redemptions by any such
other investors in High Yield Portfolio could result in untimely
liquidations of High Yield Portfolio's security holdings, loss of
investment flexibility, and increases in the operating expenses of
High Yield Portfolio as a percentage of its net assets. As a
result, High Yield Portfolio's security holdings may become less
diverse, resulting in increased risk.
Currently two other investment companies invest in High Yield
Portfolio: Stein Roe High Yield Fund, a series of Stein Roe
Income Trust; and Stein Roe Institutional High Yield Fund, a
series of Stein Roe Institutional Trust. Information regarding
any investment company that may invest in High Yield Portfolio in
the future may be obtained by writing to SR&F Base Trust, Suite
3200, One South Wacker Drive, Chicago, Illinois 60606 or by
calling 800-338-2550. The Adviser may provide administrative or
other services to one or more of such investors.
FOR MORE INFORMATION
Contact Stein Roe Retirement Services at 800-322-1130 for more
information about this Fund.
APPENDIX--RATINGS
RATINGS IN GENERAL
A rating of a rating service represents the service's opinion as
to the credit quality of the security being rated. However, the
ratings are general and are not absolute standards of quality or
guarantees as to the creditworthiness of an issuer. Consequently,
the Adviser believes that the quality of debt securities in which
High Yield Portfolio invests should be continuously reviewed and
that individual analysts give different weightings to the various
factors involved in credit analysis. A rating is not a
recommendation to purchase, sell or hold a security because it
does not take into account market value or suitability for a
particular investor. When a security has received a rating from
more than one service, each rating should be evaluated
independently. Ratings are based on current information furnished
by the issuer or obtained by the rating services from other
sources that they consider reliable. Ratings may be changed,
suspended or withdrawn as a result of changes in or unavailability
of such information, or for other reasons.
The following is a description of the characteristics of ratings
used by Moody's Investors Service, Inc. ("Moody's") and Standard &
Poor's Corporation ("S&P").
CORPORATE BOND RATINGS
RATINGS BY MOODY'S
Aaa. Bonds rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or an exceptionally stable margin and principal is secure.
Although the various protective elements are likely to change,
such changes as can be visualized are more unlikely to impair the
fundamentally strong position of such bonds.
Aa. Bonds 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 bonds 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 bonds.
A. Bonds 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 rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any
long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with
respect to principal or interest.
Ca. Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each
generic rating classification from Aa through B in its corporate
bond rating system. 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.
RATINGS BY S&P
AAA. Debt rated AAA has the highest rating. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in
small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than for debt in higher rated categories.
BB, B, CCC, CC, and C. Debt rated BB, B, CCC, CC, or C is
regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with
the terms of the obligation. BB indicates the lowest degree of
speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C1. This rating is reserved for income bonds on which no interest
is being paid.
D. Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears. The D rating is also used
upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
NOTES: The ratings from AA to CCC may be modified by the addition
of a plus (+) or minus (-) sign to show relative standing within
the major rating categories. Foreign debt is rated on the same
basis as domestic debt measuring the creditworthiness of the
issuer; ratings of foreign debt do not take into account currency
exchange and related uncertainties.
The "r" is attached to highlight derivative, hybrid, and certain
other obligations that S&P believes may experience high volatility
or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or
interest return is indexed to equities, commodities, or
currencies; certain swaps and options; and interest only and
principal only mortgage securities. The absence of an "r" symbol
should not be taken as an indication that an obligation will
exhibit no volatility or variability in total return.
COMMERCIAL PAPER RATINGS
RATINGS BY MOODY'S
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
If an issuer represents to Moody's that its commercial paper
obligations are supported by the credit of another entity or
entities, Moody's, in assigning ratings to such issuers, evaluates
the financial strength of the indicated affiliated corporations,
commercial banks, insurance companies, foreign governments or
other entities, but only as one factor in the total rating
assessment.
RATINGS BY S&P
A brief description of the applicable rating symbols and their
meaning follows:
A. Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
further refined with the designations 1, 2, and 3 to indicate the
relative degree of safety.
A-1. This designation indicates that the degree of safety
regarding timely payment is very strong. Those issues determined
to possess overwhelming safety characteristics will be denoted
with a plus (+) sign designation.
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