<PAGE>
STEIN ROE ADVISOR FUNDS PROSPECTUS, FEB. 1, 1999
Stein Roe Advisor Growth & Income Fund, Class K
Stein Roe Advisor Special Fund, Class K
Advised by Stein Roe & Farnham Incorporated
The Securities and Exchange Commission has not approved or
disapproved these securities or determined whether this prospectus
is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
THE FUNDS
Each of these sections discusses the following topics, Investment
Goals, Primary Investment Strategies, Primary Investment Risks,
Performance History , and Expenses
Stein Roe Advisor Growth & Income Fund
Stein Roe Advisor Special Fund
YOUR ACCOUNT
How to Buy Shares
Distribution and Service Fees
How to Exchange Shares
How to Sell Shares
Other Information About Your Account
MANAGING THE FUNDS
Investment Advisor
Portfolio Managers
OTHER INVESTMENT STRATEGIES AND RISKS
FINANCIAL HIGHLIGHTS
NOT FDIC INSURED MAY LOSE VALUE
NO BANK GUARANTEE
<PAGE>
[Callout]
DEFINING CAPITALIZATION
A company's market capitalization is simply its stock price
multiplied by the number of shares of stock it has issued and
outstanding. In the financial markets, companies generally are
sorted into one of three capitalization-based categories: large
capitalization (large cap); medium capitalization (midcap); or
small capitalization (small cap).
As of Dec. 31, 1998, large-cap companies had market
capitalizations greater than $6.6 billion, midcap companies had
market capitalizations between $1.8 and $6.6 billion and small-cap
companies had market capitalizations less than $1.8 billion.
These amounts will change as the S&P Mid-Cap 400 and S&P Small-Cap
600 indices change.
[End Callout]
THE FUND STEIN ROE ADVISOR GROWTH & INCOME FUND
INVESTMENT GOAL
The Fund seeks to provide both growth of capital and current
income.
PRIMARY INVESTMENT STRATEGY
The Fund invests all of its assets in SR&F Growth & Income
Portfolio as part of a master fund/feeder fund structure. Growth
& Income Portfolio invests primarily in common stocks of well-
established companies having large-market capitalizations. The
Portfolio may also invest in companies having midsized
capitalizations. The Portfolio may invest up to 25 percent of its
assets in foreign stocks. To select investments for the
Portfolio, the portfolio manager looks for common stocks that have
the potential to appreciate in value and to pay dividends. The
portfolio manager focuses on the stocks of companies that have
experienced management; broad, highly diversified product lines;
deep financial resources; and easy access to credit.
PRIMARY RISKS
There are two basic risks for all mutual funds that invest in
stocks: management risk and market risk. These risks may cause
you to lose money when you sell the shares.
Management risk means that Stein Roe's stock selections and other
investment decisions might produce losses or cause the Fund to
underperform when compared to other funds with similar goals.
Market risk means that the security prices in a market sector or
industry may move down. Downward movements will reduce the value
of your investment. Because of management and market risk, there
is no guarantee that the Fund will achieve its investment goal or
perform favorably compared with competing funds.
Because the Portfolio invests in stocks, the price of the Fund's
shares-its net asset value per share (NAV)-fluctuates daily in
response to changes in the market value of the securities. In
addition, the risks associated with the Portfolio's investment
strategy may cause the Fund's total return or yield to decrease.
Foreign Securities. Foreign securities are subject to special
risks. Foreign stock markets, especially in countries with
developing stock markets, can be extremely volatile. The
liquidity of foreign securities may be more limited than domestic
securities, which means that the Portfolio may at times be unable
to sell them at desirable prices. Fluctuations in currency
exchange rates impact the value of foreign securities. Brokerage
commissions, custodial fees, and other fees are generally higher
for foreign investments. In addition, foreign governments may
impose withholding taxes which would reduce the amount of income
available to distribute to shareholders. Other risks include:
possible delays in settlement of transactions; less publicly
available information about companies; the impact of political,
social or diplomatic events; and possible seizure, expropriation
or nationalization of the company or its assets.
Information on other securities and risks appears under "Other
Investment Strategies and Risks."
PERFORMANCE HISTORY
The bar chart and performance table below show the historical
performance for the Portfolio restated as disclosed below and the
performance of the Fund's Class K shares. The chart and table
give some indication of the risks of investing in the Fund. The
returns include the reinvestment of dividends and distributions.
As with all mutual funds, past performance does not predict the
Fund's future performance.
<CALLOUT>
UNDERSTANDING PERFORMANCE
Calendar-year total return shown in the bar chart includes the
effects of Fund expenses. The bar chart does not take into effect
any expense reduction arrangements discussed in the footnotes to
the Annual Fund Operating Expenses table.
Average annual total return is a measure of the Fund's performance
over the past one-, five- and ten-year periods. It includes the
effects of Fund expenses. The table does not take into effect any
expense reduction arrangements discussed in the footnotes to the
Annual Fund Operating Expenses table. The Fund's return is
compared to the S&P 500 Index. Unlike the Fund, the Index does
not incur fees or charges. It is not possible to invest in the
Index.
</CALLOUT>
Calendar-Year Total Returns(1)
50%
40%
30% 30.67% 32.09%
20% 29.83% 21.50% 25.52%
10% 12.57% 19.08%
0% 9.73%
- -10% -1.97% -0.39%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
(1) Class K shares of the Fund commenced operations on February
14, 1997. The performance in the chart for calendar years 1989
through 1996 is the performance of the Portfolio restated to
reflect the Class K share expenses. The performance for calendar
year 1997 shows the restated performance of the Portfolio combined
with the performance of the Fund's Class K shares since inception.
The performance for calendar year 1998 shows the performance of
the Fund's Class K shares only.
Best quarter: Fourth quarter 1998, +17.74%
Worst quarter: Third quarter 1990, -12.11%
Average Annual Total Returns(2) - for periods ending December 31,
1998
1 Year 5 Years 10 Years
Class K (%) 19.08 18.62 17.25
S&P 500 Index (%) 28.74 24.08 19.20
(2) The 1 Year performance in the table reflects the performance
of the Fund's Class K shares. The 5 Year and 10 Year performance
in the table reflects the restated performance of the Portfolio
combined with the performance of the Fund's Class K shares since
inception. The performance of the Portfolio is restated to
reflect Class K share expenses.
YOUR EXPENSES
The tables below describe the fees and expenses you may pay when
you buy, hold and sell shares of the Fund. Your actual costs may
be higher or lower.
<CALLOUT>
UNDERSTANDING EXPENSES
Shareholder Fees are paid directly by shareholders to the Fund's
distributor.
Annual Fund Operating Expenses are deducted from the Fund. They
include management fees, 12b-1 fees, and administrative costs
including tax and compliance services.
Example Expenses helps you compare the cost of investing in the
Fund to the cost of investing in other mutual funds. The table
does not take into account any expense reduction arrangements
discussed in the footnotes to the Annual Fund Operating Expenses
table. It uses the following hypothetical conditions:
* $10,000 initial investment
* 5% total return for each year
* Fund operating expenses remain the same
* No expense reductions in effect
* Redemption at the end of each time period
</CALLOUT>
Annual Fund Operating Expenses(1)(2) (expenses are deducted
directly from Fund assets)
Class K
Management fee(3)(4) (%) 0.75
Distribution and service (12 b-1) fees (%) 0.25
Other expenses(4) (%) 9.68
Total annual fund operating expenses(4) (%) 10.68
(1) A $10 annual fee is deducted from accounts of less than $1,000
and paid to the transfer agent.
(2) There is a $7.50 charge for wiring sale proceeds to your bank.
(3) Management fee includes both the management fee and the
administrative fee charged to the Fund.
(4) The Fund's advisor voluntarily waived advisory fees and
reimbursed the Fund for certain expenses. As a result, the
actual management fee was 0.00%, other expenses were 1.15% and
total annual operating expenses were 1.40% for the fiscal year
ended Sept. 30, 1998.
Example Expenses
Class Year 1 Year 3 Year 5 Year 10
Class K $1,038 $2,940 $4,631 $8,089
<PAGE>
THE FUND STEIN ROE ADVISOR SPECIAL FUND
INVESTMENT GOAL
The Fund seeks long-term growth.
PRIMARY INVESTMENT STRATEGY
The Fund invests all of its assets in SR&F Special Portfolio as
part of a master fund/feeder fund structure. Special Portfolio
invests primarily in the common stocks of midcapitalization
companies. It may also purchase the common stocks of small- and
large-capitalization companies. The Portfolio generally purchases
stocks of companies that the portfolio manager believes are
undervalued, underfollowed or out of favor. It may invest in
stocks that have limited marketability. The Portfolio may invest
up to 25 percent of its assets in foreign stocks.
To select investments for the Portfolio, the portfolio manager
considers stocks that he believes have limited downside risk in
comparison to their potential for above-average appreciation over
the long term. The portfolio manager looks for companies that may
benefit from a change such as a change in management or demand for
its products that might cause its stock to appreciate.
PRIMARY RISKS
There are two basic risks for all mutual funds that invest in
stocks: management risk and market risk. These risks may cause
you to lose money when you sell the shares.
Management risk means that Stein Roe's stock selections and other
investment decisions might produce losses or cause the Fund to
underperform when compared to other funds with similar goals.
Market risk means that the security prices in a market sector or
industry may move down. Downward movements will reduce the value
of your investment. Because of management and market risk, there
is no guarantee that the Fund will achieve its investment goal or
perform favorably compared with competing funds.
Investments in stocks of small and midsized companies can be
riskier than investments in larger companies. Small and midsized
companies often have limited product lines, operating histories,
markets, or financial resources. They may depend heavily on a
small management group. Small companies in particular are more
likely to fail or prove unable to grow. Small and midsized
companies may trade less frequently, in smaller volumes, and
fluctuate more sharply in price than larger companies. In
addition, they may not be widely followed by the investment
community, which can lower the demand for their stock.
Because the Portfolio invests in stocks, the price of the Fund's
shares-its net asset value per share (NAV)-fluctuates daily in
response to changes in the market value of the securities. In
addition, the risks associated with the Portfolio's investment
strategy may cause the Fund's total return or yield to decrease.
Foreign Securities. Foreign securities are subject to special
risks. Foreign stock markets, especially in countries with
developing stock markets, can be extremely volatile. The
liquidity of foreign securities may be more limited than domestic
securities, which means that the Portfolio may at times be unable
to sell them at desirable prices. Fluctuations in currency
exchange rates impact the value of foreign securities. Brokerage
commissions, custodial fees, and other fees are generally higher
for foreign investments. In addition, foreign governments may
impose withholding taxes which would reduce the amount of income
available to distribute to shareholders. Other risks include:
possible delays in settlement of transactions; less publicly
available information about companies; the impact of political,
social or diplomatic events; and possible seizure, expropriation
or nationalization of the company or its assets.
Information on other securities and risks appears under "Other
Investment Strategies and Risks."
PERFORMANCE HISTORY
The bar chart and performance table below show the historical
performance for the Portfolio restated as disclosed below and the
performance of the Fund's Class K shares. The chart and table
give some indication of the risks of investing in the Fund. The
returns include the reinvestment of dividends and distributions.
As with all mutual funds, past performance does not predict the
Fund's future performance.
<CALLOUT>
UNDERSTANDING PERFORMANCE
Calendar-year total return shown in the bar chart includes the
effects of Fund expenses. The bar chart does not take into effect
any expense reduction arrangements discussed in the footnotes to
the Annual Fund Operating Expenses table.
Average annual total return is a measure of the Fund's performance
over the past one-, five- and ten-year periods. It includes the
effects of Fund expenses. The table does not take into effect any
expense reduction arrangements discussed in the footnotes to the
Annual Fund Operating Expenses table. The Fund's return is
compared to the S&P Mid-Cap 400 Index. Unlike the Fund, the Index
does not incur fees or charges. It is not possible to invest in
the Index.
</CALLOUT>
Calendar-Year Total Returns (1)
40%
30% 37.49% 33.70%
20% 20.11% 25.48%
10% 13.76% 18.44% 18.51%
0%
- -10% -6.05% -3.59% -10.28%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
(1) Class K shares of the Fund commenced operations on February
14, 1997. The performance in the chart for calendar years 1989
through 1996 is the performance of the Portfolio restated to
reflect the Class K share expenses. The performance for calendar
year 1997 shows the restated performance of the Portfolio combined
with the performance of the Fund's Class K shares since inception.
The performance for calendar year 1998 shows the performance of
the Fund's Class K shares only.
Best quarter: First quarter 1991, +18.93%
Worst quarter: Third quarter 1998, -17.31%
Average Annual Total Returns(2) - for periods ending December 31,
1998
1 Year 5 Years 10 Years
Class K (%) -10.28 8.78 13.65
S&P Mid-Cap 400 Index (%) 18.25 18.67 19.21
(2) The 1 Year performance in the table reflects the performance
of the Class K shares. The 5 Year and 10 Year performance in the
table reflects the restated performance of the Portfolio combined
with the performance of the Fund's Class K shares since inception.
The performance of the Portfolio is restated to reflect Class K
share expenses.
YOUR EXPENSES
The tables below describe the fees and expenses you may pay when
you buy, hold and sell shares of the Fund. Your actual expenses
may be higher or lower.
<CALLOUT>
UNDERSTANDING EXPENSES
Shareholder Fees are paid directly by shareholders to the Fund's
distributor.
Annual Fund Operating Expenses are deducted from the Fund. They
include management fees, 12b-1 fees, and administrative costs
including tax and compliance services.
Example Expenses helps you compare the cost of investing in the
Fund to the cost of investing in other mutual funds. The table
does not take into account any expense reduction arrangements
discussed in the footnotes to the Annual Fund Operating Expenses
table. It uses the following hypothetical conditions:
* $10,000 initial investment
* 5% total return for each year
* Fund operating expenses remain the same
* No expense reductions in effect
*Redemption at the end of each time period
</CALLOUT>
Annual Fund Operating Expenses(1)(2) (expenses are deducted
directly from Fund assets)
Class K
Management fee(3)(4) (%) 0.87
Distribution and service (12 b-1) fees (%) 0.25
Other expenses(4) (%) 11.43
Total annual fund operating expenses(4) (%) 12.56
(1) A $10 annual fee is deducted from accounts of less than $1,000
and paid to the transfer agent.
(2) There is a $7.50 charge for wiring sale proceeds to your bank.
(3) Management fee includes both the management fee and the
administrative fee charged to the Fund.
(4) The Fund's advisor voluntarily waived advisory fees and
reimbursed the Fund for certain expenses. As a result, the
actual management fee was 0.00%, other expenses were 1.20% and
total annual operating expenses were 1.45% for the fiscal year
ended Sept. 30, 1998.
Example Expenses
Class Year 1 Year 3 Year 5 Year 10
Class K $1,209 $3,358 $5,195 $8,702
<PAGE>
YOUR ACCOUNT
HOW TO BUY SHARES
Your financial advisor can help you establish an appropriate
investment portfolio, buy shares and monitor your investments.
When a Fund receives your purchase request in "good form," your
shares will be bought at the next calculated NAV. In good form
means that you placed your order with your brokerage firm or
your payment has been received and your application is complete,
including all necessary signatures.
<CALLOUT>
INVESTMENT MINIMUMS (1)
Initial Investment $1,000
Subsequent Investments $50
Automatic Purchase Plans $50
Retirement Plans $25
</CALLOUT>
Outlined below are various ways you can purchase shares:
Method Instructions
Through your
financial advisor Your financial advisor can help you establish
your account and buy Fund shares on your
behalf.
By check
(new account) For new accounts, send a completed application
and check made payable to the Fund to the
transfer agent, Liberty Funds Services, Inc.,
P.O. Box 1722, Boston, MA 02105-1722.
By check
(existing account) For existing accounts, fill out and return the
additional investment stub included in your
quarterly statement, or send a letter of
instruction including your Fund name and
account number with a check made payable to the
Fund to Liberty Funds Services, Inc., P.O. Box
1722, Boston, MA 02105-1722.
By exchange You may purchase shares by exchanging from an
existing fund into the same share class of
another fund of Stein Roe Advisor Trust at no
additional cost. To exchange by telephone,
call 1-800-422-3737.
By wire You may purchase shares by wiring money from
your bank account to your fund account. To
wire funds to your fund account, call 1-800-
422-3737 to obtain a control number and the
wiring instructions.
By electronic
funds transfer (EFT) You may purchase shares by electronically
transferring money from your bank account to
your fund account by calling 1-800-422-3737.
Your money may take up to two business days to
arrive. You must set up this feature prior to
your telephone request. Be sure to complete
the appropriate section of the application.
Automatic investment plan You can make monthly or quarterly
investments automatically from your bank
account to your fund account. You can select a
pre-authorized amount to be sent via electronic
funds transfer (EFT). Be sure to complete the
appropriate section of the application for this
feature.
By dividend diversification Dividends distributed by one fund can
be automatically invested into the same class
of shares of another fund of Stein Roe Advisor
Trust at no additional sales charge. To invest
your dividends in another fund, call 1-800-345-
6611.
(1) Each Fund reserves the right to change the investment
minimums. Each Fund also reserves the right to refuse a purchase
order for any reason, including if it believes that doing so would
be in the best interest of the Fund and its shareholders.
DISTRIBUTION AND SERVICE FEES
Each Fund has adopted a plan under Rule 12b-1 that permits it to
pay marketing and other fees to support the sale and distribution
of Class K shares and the services provided to you by your
financial advisor. Annual distribution and service fees may equal
up to 0.25% for Class K shares and are paid out of the assets of
the class. Over time, these fees will increase the cost of your
shares and may cost you more than paying other types of sales
charges.
HOW TO EXCHANGE SHARES
You may exchange your shares for shares of the same share class of
another fund of Stein Roe Advisor Trust at NAV. Unless your
account is part of a tax-deferred retirement plan, an exchange is
a taxable event. Therefore, you may realize a gain or a loss for
tax purposes. The Fund may terminate your exchange privilege if
Stein Roe determines that your exchange activity is likely to
adversely impact its ability to manage the Fund. To exchange by
telephone, call 1-800-422-3737.
HOW TO SELL SHARES
Your financial advisor can help you determine if and when you
should sell your shares. You may sell shares of the Fund on any
regular business day that the NYSE is open.
When the Fund receives your sales request in "good form," shares
will be sold at the next calculated price. In good form means
that money used to purchase your shares is fully collected. When
selling shares by letter of instruction, good form means your
letter has complete instructions, the proper signatures and
signature guarantees, you have included any certificates for
shares to be sold and any other required documents are attached.
Retirement Plan accounts have special requirements. Please call
1-800-799-7526 for more information.
The Fund will generally send proceeds from the sale to you within
seven days. However, if you purchased your shares by check, the
Fund may delay sending the proceeds for up to 15 days after your
initial purchase to protect against checks that are returned.
Outlined below are the various options for selling shares
Method Instructions
Through your financial advisor Call your financial advisor to
place your sell order. To receive the current
trading day's price, your financial advisor
firm must receive your request prior to the
close of the New York Stock Exchange (NYSE),
usually 4:00 p.m.
By exchange You may purchase shares by exchanging from an
existing fund into the same share class of
another fund of Stein Roe Advisor Trust at no
additional cost. To exchange by telephone,
call 1-800-422-3737.
By telephone You may sell shares by telephone and request
that a check be sent to your address of record
by calling 1-800-422-3737. The dollar limit
for telephone sales is $100,000 in a 30-day
period. You do not need to set up this feature
in advance of your call.
By mail Send a signed letter of instruction (LOI) or
stock power form along with any certificates to
be sold to the address below. In your LOI,
note your fund's name, share class, account
number, and the dollar value or number of
shares you wish to sell. All account owners
must sign the letter, and signatures must be
guaranteed by either a bank, a member firm of a
national stock exchange or another eligible
guarantor institution. Additional
documentation is required for sales by
corporations, agents, fiduciaries, surviving
joint owners and individual retirement account
(IRA) owners. For details, call 1-800-345-
6611.
Mail your LOI to Liberty Funds Services, Inc.,
P.O. Box 1722, Boston, MA 02105-1722
By wire You may sell shares and request that the
proceeds be wired to your bank. You must set
up this feature prior to your telephone
request. Be sure to complete the appropriate
section of the account application for this
feature.
By electronic funds transfer You may sell shares and request that
the proceeds be electronically transferred to
your bank. Proceeds may take up to two
business days to be received by your bank. You
must set up this feature prior to your request.
Be sure to complete the appropriate section of
the account application for this feature.
OTHER INFORMATION ABOUT YOUR ACCOUNT
How the Fund's Share Price is Determined The price of the Fund's
Class K shares is based on its NAV. The NAV is determined at the
close of regular session trading on the New York Stock Exchange
(NYSE), usually 4:00 p.m. Eastern time on each business day that
the NYSE is open (typically Monday through Friday).
When you request a transaction, it will be processed at the NAV
next determined after your request is received in good form by
Liberty Funds Distributor, Inc. (LFD). In most cases, in order to
receive that day's price, LFD must receive your order before that
day's transactions are processed. If you request a transaction
through your financial advisor's firm, the firm must receive your
order by the close of trading on the NYSE to receive that day's price.
To calculate NAV on a given day, we value each stock listed or
traded on a stock exchange at its latest sale price on that day.
If there are no sales that day, we value the security at the most
recently quoted bid price. We value each over-the-counter
security or National Association of Securities Dealers Automated
Quotation (Nasdaq) security as of the last sale price for that
day. We value all other over-the-counter securities that have
reliable quotes at the latest quoted bid price.
We value long-term debt obligations and securities convertible
into common stock at fair value. Pricing services provide the
Fund with the value of the securities. When the price of a
security is not available, including days when we determine that
the sale or bid price of the security does not reflect that
security's market value, we value the security at a fair value
determined in good faith under procedures established by the Board
of Trustees.
We value a security at fair value when events have occurred after
the last available market price and before the close of the NYSE
that materially affect the security's price. In the case of
foreign securities, this could include events occurring after the
close of the foreign market and before the close of the NYSE.
The Fund's foreign securities may trade on days when the NYSE is
closed. We will not price shares on days that the NYSE is closed
for trading. You will not be able to purchase or redeem shares
until the next NYSE-trading day.
Account Fees If your account value falls below $1,000 (other than
as a result of depreciation in share value), you may be subject to
an annual account fee of $10. This fee is deducted from the
account in June each year. Approximately 60 days prior to the fee
date, the Funds' transfer agent will send you written notification
of the upcoming fee. If you add money to your account and bring
the value above $1,000 prior to the fee date, the fee will not be
deducted.
Dividends, Distributions, and Taxes The Fund has the potential to
make the following distributions:
<CALLOUT>
Understanding Fund Distributions
The Fund earns income from the securities it holds. The Fund also
may experience capital gains and losses on sales of its
securities. The Fund distributes substantially all of its net
investment income and capital gains to shareholders. As a
shareholder, you are entitled to a portion of the Fund's income
and capital gains based on the number of shares you own at the
time these distributions are declared.
</CALLOUT>
Types of Distributions
Dividend income Represents interest and dividends
earned from securities held by the
portfolio; also includes short-term
capital gains, which are gains on
sales of securities the Fund buys and
then sells within a 12-month period.
Long-term capital gains Represents capital gains on sales of
securities held longer than 12 months.
Distribution Options Income dividends are declared and paid each
quarter by Advisor Growth & Income Fund and annually by Advisor
Special Fund. Any capital gains are distributed at least
annually. You can choose one of following options for these
distributions when you open your account.(1) To change your
distribution option call 1-800-345-6611.
Distribution Options
Reinvest all distributions in additional shares of your current
fund
Reinvest all distributions in shares of another fund
Receive dividends in cash and reinvest capital gains(2)
Receive all distributions in cash and(2)
- - send the check to your address of record
- - send the check to a third party address
- - transfer the money to your bank via electronic funds transfer
(EFT)
(1) If you do not indicate on your application your preference for
handling distributions, the Fund will automatically reinvest all
distributions in additional shares of the Fund.
(2) Distributions of $10 or less will automatically be reinvested
in additional Fund shares. If you elect to receive distributions
by check and the check is returned as undeliverable, or if you do
not cash a distribution check within six months of the check date,
the distribution will be reinvested in additional shares of the
Fund.
Tax Consequences Regardless of whether you receive your
distributions in cash or reinvest them in additional Fund shares,
all Fund distributions are subject to federal income tax.
Depending on the state where you live, distributions may also be
subject to state and local income taxes.
In general, any dividends and short-term capital gains
distributions are taxable as ordinary income. Distributions of
other capital gains are generally taxable as capital gains. You
will be provided each year with the amount of ordinary income and
capital gains distributed to you for the previous year and any
portion of your distribution which is exempt from state and local
taxes. Your investment in a Fund may have additional personal tax
implications. Please consult your tax advisor on state, local or
other applicable tax laws.
In addition to the dividends and capital gains distributions made
by each Fund, you may realize a capital gain or loss when selling
and exchanging shares of the Fund.
MANAGING THE FUNDS
INVESTMENT ADVISOR
Stein Roe & Farnham Incorporated, One South Wacker Drive, Chicago,
IL 60606, manages the day-to-day operations of the Fund and the
Portfolio. Stein Roe (and its predecessor) has advised and
managed mutual funds since 1949. As of Sept. 30, 1998, Stein Roe
managed more than $28 billion in assets. For the fiscal year
ended Sept. 30, 1998, aggregate fees paid by the Funds to Stein
Roe were as follows (as a percent of average net assets):
Before After
Reimbursement Reimbursement
Advisor Growth & Income Fund 0.75% 0.00%
Advisor Special Fund 0.87 0.00
Stein Roe's mutual funds and institutional investment advisory
businesses are managed together with that of its affiliate,
Colonial Management Associates, Inc. (CMA), by a combined
management team of employees from both companies. CMA also shares
personnel, facilities, and systems with Stein Roe that may be used
in providing administrative or operational services to the Funds.
CMA is a registered investment adviser investment adviser. Both
Stein Roe and CMA are subsidiaries of Liberty Financial Companies,
Inc.
Stein Roe can use the services of AlphaTrade Inc., an affiliated
broker-dealer, when buying or selling equity securities for a
Fund's portfolio, pursuant to procedures adopted by the Board of
Trustees.
PORTFOLIO MANAGERS
Daniel K. Cantor has been portfolio manager of Growth & Income
Portfolio since its inception in 1997 and had been manager of
Growth & Income Fund since 1995. He joined Stein Roe in 1985 as
an equity analyst and served as an advisor to Stein Roe Private
Capital Management from 1992 to 1995. Mr. Cantor is a senior vice
president. A chartered financial analyst, he received a B.A.
degree from the University of Rochester and an M.B.A. from the
Wharton School of the University of Pennsylvania. As of Sept. 30,
1998, Mr. Cantor was responsible for managing $338 million in
mutual fund net assets. Jeffrey C. Kinzel is associate portfolio
manager. He is a vice president of Stein Roe and has been
employed as an analyst since 1991. Mr. Kinzel holds a B.A. from
Northwestern University, a J.D. from the University of Michigan
Law School, and an M.B.A. from the Wharton School of the
University of Pennsylvania.
M. Gerard Sandel has been manager of Special Portfolio and senior
vice president of Stein Roe since July 1997. Prior to joining
Stein Roe, Mr. Sandel was portfolio manager of the Marshall Mid-
Cap Value Fund and its predecessor fund and vice president of M&I
Investment Management Corporation from 1993 until 1997. From 1991
to 1993 he was a portfolio manager at Acorn Asset Management. A
chartered financial analyst, Mr. Sandel earned a B.A. from the
University of Southern Mississippi and M.A. from the American
Graduate School. As of Sept. 30, 1998, he was responsible for
managing $917 million in mutual fund net assets.
OTHER INVESTMENT STRATEGIES AND RISKS
Each Fund's primary investment strategies and risks are described
in this prospectus. (See "The Funds.") This section and the
Statement of Additional Information (SAI) describe other
investments that the Funds may make and risks associated with
them. The Board of Trustees can change a Fund's investment
objective without shareholder approval.
The Funds' portfolio managers generally make decisions on buying
and selling portfolio investments based upon their judgment that
the decision will improve the Fund's investment return and further
its investment goal. The portfolio managers may also be required
to sell portfolio investments to fund redemptions.
Market Capitalization
In this prospectus, we refer frequently to market capitalization
as a means to distinguish among companies based on their size. A
company's market capitalization is simply its stock price
multiplied by the number of shares of stock it has issued and
outstanding. In the financial markets, companies generally are
sorted into one of three capitalization-based categories: large
capitalization (large cap); medium capitalization (midcap); or
small capitalization (small cap).
To sort companies in this manner, we compare a company's
capitalization with the capitalization of an appropriate index.
(An index is a statistical composite that measures a group of
stocks.) We utilize two indices in grouping stocks: the S&P Mid-
Cap 400 Index and the S&P Small-Cap 600 Index.
We consider a company to be large cap if its market capitalization
is at least 90 percent of the weighted market capitalization of
the S&P Mid-Cap 400 Index.
We consider a company to be midcap if its market capitalization is
less than 90 percent of the weighted market capitalization of the
S&P Mid-Cap 400 Index and at least 90 percent of the weighted
market capitalization of the S&P Small-Cap 600 Index.
We consider a company to be small cap if its market capitalization
is less than 90 percent of the weighted market capitalization of
the S&P Small-Cap 600 Index.
As of Dec. 31, 1998, large-cap companies had market
capitalizations greater than $6.6 billion, midcap companies had
market capitalizations between $1.8 and $6.6 billion and small-cap
companies had market capitalizations less than $1.8 billion.
These amounts will change as the S&P Mid-Cap 400 and S&P Small-Cap
600 indices change.
Futures
Growth & Income Portfolio uses futures to gain exposure to groups
of stocks or individual issuers. A future is an agreement to buy
or sell a specific amount of a financial instrument or physical
commodity for an agreed-upon price at a certain time in the
future. The Portfolio uses futures to invest cash pending direct
investments in stocks and to enhance its return. These
investments are efficient since they typically cost less than
direct investments in the underlying securities. However, the
Fund can lose money if the portfolio manager does not correctly
anticipate the market movements of those underlying securities.
Portfolio Turnover
There are no limits on turnover. Turnover may vary significantly
from year to year. Stein Roe does not expect it to exceed 100
percent under normal conditions. Portfolio turnover typically
produces capital gains or losses resulting in tax consequences for
Fund shareholders. It also increases transaction expenses, which
reduce a Fund's return.
Temporary Defensive Positions
When Stein Roe believes that a temporary defensive position is
necessary, a Portfolio may invest, without limit, in high-quality
debt securities or hold assets in cash and cash equivalents.
Stein Roe is not required to take a temporary defensive position,
and market conditions may prevent such an action. A Fund may not
achieve its investment objective if it takes a defensive position.
Interfund Lending Program
A Portfolio may lend money to and borrow money from other funds
advised by Stein Roe. They will do so when Stein Roe believes
such lending or borrowing is necessary and appropriate. Borrowing
costs will be the same as or lower than the costs of a bank loan.
Master/Feeder Structure
Unlike mutual funds that directly acquire and manage their own
portfolio of securities, each Fund is a "feeder" fund in a
"master/feeder" structure. This means that the Fund invests its
assets in a larger "master" portfolio of securities, which has
investment objectives and policies substantially identical to
those of the Fund. The investment performance of a Fund depends
upon the investment performance of its Portfolio. If the
investment policies of the Portfolio and the Fund became
inconsistent, the Board of Trustees of the Fund can decide what
actions to take. Actions the Board of Trustees may recommend
include withdrawal of the Fund's assets from the Portfolio. For
more information on the master/feeder fund structure, see the SAI.
Year 2000 Compliance
Like other investment companies, financial and business
organizations and individuals around the world, the Funds could be
adversely affected if the computer systems used by Stein Roe and
other service providers do not properly process and calculate
date-related information and data from and after Jan. 1, 2000.
This is commonly known as the "Year 200 Problem." The Funds'
service providers are taking steps that they believe are
reasonably designed to address the Year 2000 Problem, including
working with vendors who furnish services, software and systems to
the Funds, to provide that date-related information and data can
be properly processed after Jan. 1, 2000. Many of the Funds'
service providers and vendors are in the process of making Year
2000 modifications to their software and systems and believe that
such modifications will be completed on a timely basis prior to
Jan. 1, 2000. However, no assurances can be given that all
modifications required to ensure proper data processing and
calculation on and after Jan. 1, 2000 will be made on a timely
basis or that services to the Funds will not be adversely
affected.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand
the Funds' financial performance. Information is shown for the
Funds' fiscal years since inception. The fiscal year runs from
October 1 to September 30. Certain information in the table
reflects the financial results for a single Fund share. This
information has been audited by Arthur Andersen LLP, independent
accountants, whose report along with the Funds' financial
statements are included in its annual report. You can request a
free annual report by calling 1-800-426-3750.
Stein Roe Advisor Growth & Income Fund
Class K
Year Ended Period Ended
Sept. 30 Sept. 30
1998 1997(c)
Net asset value-Beginning of period $ 11.36 $ 10.00
Income from Investment Operations
Net investment income 0.13 0.03
Net gains on securities (both realized
and unrealized) 0.23 1.33
Total income from investment operations 0.36 1.36
Less distributions
Dividends (from net investment income) (0.14) -
Net asset value-End of period $ 11.58 $ 11.36
Total return (b) 3.18% 13.60%
Ratios/Supplemental Data
Net assets, end of period (000 omitted) $2,009 $114
Ratio of net expenses to average net
assets (a) 1.40% 1.40%(d)
Ratio of net investment income to
average net assets (b) 0.58% 0.54%(d)
(a) If the Fund had paid all of its expenses and there had been no
reimbursement of expenses by Stein Roe, this ratio would have
been 10.68% for the year ended Sept. 30, 1998, and 88.76% for
the period ended Sept. 30, 1997.
(b) Computed giving effect to Stein Roe's expense limitation
undertaking.
(c) From commencement of operations on Feb. 14, 1997.
(d) Annualized.
Stein Roe Advisor Special Fund
Class K
Year Ended Period Ended
Sept. 30 Sept. 30
1998 1997(c)
Net asset value-Beginning of period $ 12.46 $ 10.00
Income from Investment Operations
Net investment loss - (0.03)
Net gains (losses) on securities
(both realized and unrealized) (2.33) 2.49
Net asset value-End of period $ 10.13 $ 12.46
Total return (b) (18.70%) 24.60%
Ratios/Supplemental Data
Net assets, end of period (000 omitted) $143 $125
Ratio of net expenses to average net
assets (a) 1.45% 1.45%(d)
Ratio of net investment loss to
average net assets (b) - (0.46%)(d)
(a) If the Fund had paid all of its expenses and there had been no
reimbursement of expenses by Stein Roe, this ratio would have
been 12.56% for the year ended Sept. 30, 1998 and 86.39% for
the period ended Sept. 30, 1997.
(b) Computed giving effect to Stein Roe's expense limitation
undertaking.
(c) From commencement of operations on Feb. 14, 1997.
(d) Annualized.
<PAGE>
FOR MORE INFORMATION
You can get more information about the Funds' investments in the
Funds' semi-annual and annual reports to shareholders. The annual
report contains a discussion of the market conditions and
investment strategies that significantly affected the Fund's
performance over its last fiscal year.
You may wish to read the Statement of Additional Information (SAI)
for more information on the Funds and the securities in which they
invest. The SAI is incorporated into this prospectus by
reference, which means that it is considered to be part of this
prospectus.
You can get free copies of reports and the SAI, request other
information and discuss your questions about the Funds by writing
or calling the Funds' Distributor at:
Liberty Funds Distributor, Inc.
One Financial Center
Boston, MA 02111-2621
1-800-426-3750
www.libertyfunds.com
Text-only versions of all Fund documents can be viewed online or
downloaded from the SEC at www.sec.gov.
You can also obtain copies upon payment of a duplicating fee, by
writing or calling the:
Public Reference Room
Securities and Exchange Commission
Washington, DC, 20549-6009
1-800-SEC-0330
Investment Company Act file number:
Stein Roe Advisor Trust 811-07955
- -Stein Roe Advisor Growth & Income Fund
- -Stein Roe Advisor Special Fund
<PAGE>
STEIN ROE ADVISOR YOUNG INVESTOR FUND [service mark] PROSPECTUS,
FEB. 1, 1999
Advised by Stein Roe & Farnham Incorporated
The Securities and Exchange Commission has not approved or
disapproved these securities or determined whether this prospectus
is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
THE FUND
Investment Goal
Primary Investment Strategy
Primary Investment Risks
Performance History
Expenses
YOUR ACCOUNT
How to Buy Shares
Sales Charges
Distribution and Service Fees
How to Exchange Shares
How to Sell Shares
Other Information About Your Account
MANAGING THE FUND
Investment Advisor
Portfolio Managers
OTHER INVESTMENT STRATEGIES AND RISKS
FINANCIAL HIGHLIGHTS
NOT FDIC INSURED MAY LOSE VALUE
NO BANK GUARANTEE
<PAGE>
THE FUND STEIN ROE ADVISOR YOUNG INVESTOR FUND
INVESTMENT GOAL
The Fund seeks long-term growth.
PRIMARY INVESTMENT STRATEGY
The Fund invests all of its assets in SR&F Growth Investor
Portfolio as part of a master fund/feeder fund structure. The
Portfolio invests primarily in common stocks believed to have
long-term growth potential. Under normal market conditions, the
Portfolio invests at least 65 percent of its assets in common
stocks of companies that Stein Roe believes affect the lives of
children and teenagers. These companies may produce products or
services that children and teenagers use, are aware of, or could
have an interest in. The Portfolio may invest in companies of any
size including smaller emerging companies. It emphasizes
companies in the technology sector and consumer goods sectors,
including personal care products, pharmaceuticals and food
products. The Portfolio may invest up to 25 percent of its assets
in foreign stocks.
The Fund also has an educational objective. It seeks to teach
children and teenagers information about mutual funds, basic
economic principles and personal finance through a variety of
educational materials paid for by the Fund.
PRIMARY RISKS
There are two basic risks for all mutual funds that invest in
stocks: management risk and market risk. These risks may cause
you to lose money when you sell the shares.
Management risk means that Stein Roe's stock selections and other
investment decisions might produce losses or cause the Fund to
underperform when compared to other funds with similar goals.
Market risk means that the security prices in a market sector or
industry may move down. Downward movements will reduce the value
of your investment. Because of management and market risk, there
is no guarantee that the Fund will achieve its investment goal or
perform favorably compared with competing funds.
Because the Portfolio invests in stocks, the price of the Fund's
shares-its net asset value per share (NAV)-fluctuates daily in
response to changes in the market value of the securities In
addition, the risks associated with the Portfolio's investment
strategy may cause the Fund's total return or yield to decrease.
Due to its focus on companies in the technology sector and various
consumer goods sectors, including personal care products,
pharmaceuticals and food products, the Fund may perform
differently than the stock market. Shares of a small company may
pose greater risks than shares of a large company due to narrow
product lines, limited financial resources, less depth in
management or a limited trading market for its stock.
Foreign Securities. Foreign securities are subject to special
risks. Foreign stock markets, especially in countries with
developing stock markets, can be extremely volatile. The
liquidity of foreign securities may be more limited than domestic
securities, which means that the Portfolio may at times be unable
to sell them at desirable prices. Fluctuations in currency
exchange rates impact the value of foreign securities. Brokerage
commissions, custodial fees, and other fees are generally higher
for foreign investments. In addition, foreign governments may
impose withholding taxes which would reduce the amount of income
available to distribute to shareholders. Other risks include:
possible delays in settlement of transactions; less publicly
available information about companies; the impact of political,
social or diplomatic events; and possible seizure, expropriation
or nationalization of the company or its assets.
Information on other securities and risks appears under "Other
Investment Strategies and Risks."
PERFORMANCE HISTORY
The bar chart and performance table below show the historical
performance for the Portfolio restated as disclosed below and the
performance of the Fund's Class A shares. The chart and table
give some indication of the risks of investing in the Fund. The
returns include the reinvestment of dividends and distributions.
As with all mutual funds, past performance does not predict the
Fund's future performance.
<CALLOUT>
UNDERSTANDING PERFORMANCE
Calendar-year total return shown in the bar chart includes the
effects of Fund expenses, but not the effects of sales charges.
If sales charges were included, these returns would be lower. The
bar chart does not take into effect any expense reduction
arrangements discussed in the footnotes to the Annual Fund
Operating Expenses table.
Average annual total return is a measure of the Fund's performance
over the past one-year and since inception. It includes the
effects of Fund expenses. The table does not take into effect any
expense reduction arrangements discussed in the footnotes to the
Annual Fund Operating Expenses table. The Fund's return is
compared to the S&P 500 Index. Unlike the Fund, the Index does
not incur fees or charges. It is not possible to invest in the
Index.
</CALLOUT>
Calendar-Year Total Returns (1)
45%
40%
35% 39.37%
30% 34.69%
25% 25.91%
20%
15% 15.11%
10%
5%
0%
1995 1996 1997 1998
*Class A of the Fund commenced operations on January 26, 1998.
The performance in the chart for calendar years 1995 through 1997
is the performance of the Portfolio restated to reflect Class A
share expenses, but not the Class A shares sales charges. The
performance for calendar year 1998 shows the restated performance
of the Portfolio combined with the performance of the Fund's Class
A shares since inception.
Best quarter: Fourth quarter 1998, +20.53%
Worst quarter: Third quarter 1998, -16.36%
Average Annual Total Returns(2) - for periods ending December 31,
1998
1 Year Since Inception (April 29, 1994)
Class A (%) 13.11 25.75
S&P 500 Index (%) 28.74 N/A
*The one-year performance in the table reflects the restated
performance of the Portfolio combined with the performance of the
Fund's Class A shares since inception. The performance of the
Portfolio is restated to reflect Class A share expenses and sales
charges. The Since Inception performance in the table is the
performance of the restated Portfolio combined with the Fund's
Class A performance.
YOUR EXPENSES
The tables below describe the fees and expenses you may pay when
you buy, hold and sell shares of the Fund. Your actual costs may
be higher or lower.
<CALLOUT>
UNDERSTANDING EXPENSES
Shareholder Fees are paid directly by shareholders to the Fund's
distributor.
Annual Fund Operating Expenses are deducted from the Fund. They
include management fees, 12b-1 fees, and administrative costs
including tax and compliance services.
Example Expenses helps you compare the cost of investing in the
Fund to the cost of investing in other mutual funds. The table
does not take into account any expense reduction arrangements
discussed in the footnotes to the Annual Fund Operating Expenses
table. It uses the following hypothetical conditions:
* $10,000 initial investment
* 5% total return for each year
* Fund operating expenses remain the same
* No expense reductions in effect
*Redemption at the end of each time period
</CALLOUT>
Shareholder Fees(1)(2) (paid directly from your investment)
Class A
Maximum sales charge (load) on purchases (%)
(as a percentage of the offering price) None
Maximum deferred sales charge (load) on
redemptions (%) (as a percentage of the offering price) 2.00 (3)
Annual Fund Operating Expenses (expenses are deducted directly
from Fund assets)
Class A
Management fee(4)(5) (%) 0.78
Distribution and service (12 b-1) fees (%) 0.35
Other expenses (%) 0.89
Total annual fund operating expenses(5) (%) 2.02
(1) A $10 annual fee is deducted from accounts of less than $1,000
and paid to the transfer agent.
(2) There is a $7.50 charge for wiring sale proceeds to your bank.
(3) A 1.00% contingent deferred sales charge applies to purchases
of $1 million to $5 million redeemed within approximately 18
months after purchase
(4) Management fee includes both the management fee and the
administrative fee charged to the Fund.
(5) The Fund's advisor voluntarily waived advisory fees and
reimbursed the Fund for certain expenses. As a result, the
actual management fee was 0.41% and total annual operating
expenses were 1.65% for the fiscal year ended Sept. 30, 1998.
Example Expenses
Class Year 1 Year 3 Year 5 Year 10
Class A $411 $852 $1,088 $2,348
YOUR ACCOUNT
HOW TO BUY SHARES
Your financial advisor can help you establish an appropriate
investment portfolio, buy shares and monitor your investments.
When the Fund receives your purchase request in "good form," your
shares will be bought at the next calculated public offering
price. In good form means that you placed your order with your
brokerage firm or your payment has been received and your
application is complete, including all necessary signatures.
<CALLOUT>
INVESTMENT MINIMUMS (1)
Initial Investment $1,000
Subsequent Investments $50
Automatic Purchase Plans $50
Retirement Plans $25
</CALLOUT>
Outlined below are various ways you can purchase shares:
Method Instructions
Through your
financial advisor Your financial advisor can help you establish
your account and buy Fund shares on your behalf.
By check (new account) For new accounts, send a completed
application and check made payable to the Fund
to the transfer agent, Liberty Funds Services,
Inc., P.O. Box 1722, Boston, MA 02105-1722.
By check (existing account) For existing accounts, fill out and
return the additional investment stub included
in your quarterly statement, or send a letter of
instruction including your Fund name and account
number with a check made payable to the Fund to
Liberty Funds Services, Inc., P.O. Box 1722,
Boston, MA 02105-1722.
By exchange You may purchase shares by exchanging from an
existing fund into the same share class of
another fund of Stein Roe Advisor Trust at no
additional cost. To exchange by telephone, call
1-800-422-3737.
By wire You may purchase shares by wiring money from
your bank account to your fund account. To wire
funds to your fund account, call 1-800-422-3737
to obtain a control number and the wiring
instructions.
By electronic funds transfer (EFT) You may purchase shares by
electronically transferring money from your bank
account to your fund account by calling 1-800-
422-3737. Your money may take up to two
business days to arrive. You must set up this
feature prior to your telephone request. Be
sure to complete the appropriate section of the
application.
Automatic investment plan You can make monthly or quarterly
investments automatically from your bank account
to your fund account. You can select a pre-
authorized amount to be sent via electronic
funds transfer (EFT). Be sure to complete the
appropriate section of the application for this
feature.
By dividend diversification Dividends distributed by one fund can
be automatically invested into the same class of
shares of another fund of Stein Roe Advisor
Trust at no additional sales charge. To invest
your dividends in another fund, call 1-800-345-
6611.
(1) The Fund reserves the right to change the investment minimums.
The Fund also reserves the right to refuse a purchase order for
any reason, including if it believes that doing so would be in the
best interest of the Fund and its shareholders.
SALES CHARGES
You may be subject to a contingent deferred sales charge (CDSC)
when you sell shares of the Fund. The CDSCs are described below.
In certain circumstances the CDSCs are waived, as described below
and in the Statement of Additional Information (SAI).
Class A Shares. Purchases of less than $1 million are subject to
a CDSC of 2.00% on redemptions made within 3 years after purchase.
The financial advisor receives a commission of 2.00% from the
Fund's distributor, Liberty Funds Distributor, Inc. (LFD). For
purchases of $1 million or more, financial advisors receive from
LFD a commission, as follows:
Purchases Over $1 million
Amount Purchased Commission %
First $3 million 1.00
Next $2 million 0.50
Over $5 million 0.25*
*Paid over 12 months but only to the extent the shares remain
outstanding.
A 1.00% CDSC applies to purchases of $1 million redeemed within
approximately 18 months after purchase.
<CALLOUT>
Understanding Contingent Deferred Sales Charges (CDSC)
Certain investments in Class A shares are subject to a contingent
deferred sales charge (CDSC). You will pay the CDSC only on shares
you sell within a certain amount of time after purchase. The CDSC
is applied to the NAV at the time of purchase or sale, whichever
is lower. Shares you purchase with reinvested dividends or capital
gains are not subject to a CDSC. When you place an order to sell
shares, the Fund will automatically sell first those shares not
subject to a CDSC and then those you have held the longest. This
policy helps reduce the potential impact of the CDSC.
</CALLOUT>
DISTRIBUTION AND SERVICE FEES
The Fund has adopted a plan under Rule 12b-1 that permits it to
pay marketing and other fees to support the sale and distribution
of Class A shares and the services provided to you by your
financial advisor. These annual distribution and service fees may
equal up to 0.35% for Class A shares and are paid out of the
assets of the class. Over time, these fees will increase the cost
of your shares and may cost you more than paying other types of
sales charges.
HOW TO EXCHANGE SHARES
You may exchange your shares for shares of the same share class of
another fund of Stein Roe Advisor Trust at NAV. If your shares
are subject to a CDSC, you will not be charged a CDSC upon the
exchange. However, when you sell the shares acquired through the
exchange, the shares sold may be subject to a CDSC, depending upon
when you originally purchased the shares you exchanged. For
purposes of computing the CDSC, the length of time you have owned
your shares will be computed from the date of your original
purchase and the applicable CDSC will be the CDSC of the original
fund. Unless your account is part of a tax-deferred retirement
plan, an exchange is a taxable event. Therefore, you may realize
a gain or a loss for tax purposes. The Fund may terminate your
exchange privilege if Stein Roe determines that your exchange
activity is likely to adversely impact its ability to manage the
Fund. To exchange by telephone, call 1-800-422-3737.
HOW TO SELL SHARES
Your financial advisor can help you determine if and when you
should sell your shares. You may sell shares of the Fund on any
regular business day that the NYSE is open.
When the Fund receives your sales request in "good form," shares
will be sold at the next calculated price . In good form means
that money used to purchase your shares is fully collected. When
selling shares by letter of instruction, good form means your
letter has complete instructions, the proper signatures and
signature guarantees, you have included any certificates for
shares to be sold and any other required documents are attached.
Retirement Plan accounts have special requirements. Please call
1-800-799-7526 for more information.
The Fund will generally send proceeds from the sale to you within
seven days. However, if you purchased your shares by check, the
Fund may delay sending the proceeds for up to 15 days after your
initial purchase to protect against checks that are returned.
Outlined below are the various options for selling shares
Method Instructions
Through your
financial advisor Call your financial advisor to place your sell
order. To receive the current trading day's
price, your financial advisor firm must receive
your request prior to the close of the New York
Stock Exchange (NYSE), usually 4:00 p.m.
By exchange You may purchase shares by exchanging from an
existing fund into the same share class of
another fund of Stein Roe Advisor Trust at no
additional cost. To exchange by telephone,
call 1-800-422-3737.
By telephone You may sell shares by telephone and request
that a check be sent to your address of record
by calling 1-800-422-3737. The dollar limit
for telephone sales is $100,000 in a 30-day
period. You do not need to set up this feature
in advance of your call.
By mail Send a signed letter of instruction (LOI) or
stock power form along with any certificates to
be sold to the address below. In your LOI,
note your fund's name, share class, account
number, and the dollar value or number of
shares you wish to sell. All account owners
must sign the letter, and signatures must be
guaranteed by either a bank, a member firm of a
national stock exchange or another eligible
guarantor institution. Additional
documentation is required for sales by
corporations, agents, fiduciaries, surviving
joint owners and individual retirement account
(IRA) owners. For details, call 1-800-345-
6611.
Mail your LOI to Liberty Funds Services, Inc.,
P.O. Box 1722, Boston, MA 02105-1722
By wire You may sell shares and request that the
proceeds be wired to your bank. You must set
up this feature prior to your telephone
request. Be sure to complete the appropriate
section of the account application for this
feature.
By electronic
funds transfer You may sell shares and request that the
proceeds be electronically transferred to your
bank. Proceeds may take up to two business
days to be received by your bank. You must set
up this feature prior to your request. Be sure
to complete the appropriate section of the
account application for this feature.
OTHER INFORMATION ABOUT YOUR ACCOUNT
How the Fund's Share Price is Determined The price of Class A of
the Fund's shares is based on its NAV. The NAV is determined at
the close of regular session trading on the New York Stock
Exchange (NYSE), usually 4:00 p.m. Eastern time on each business
day that the NYSE is open (typically Monday through Friday).
To calculate NAV on a given day, we value each stock listed or
traded on a stock exchange at its latest sale price on that day.
If there are no sales that day, we value the security at the most
recently quoted bid price. We value each over-the-counter
security or National Association of Securities Dealers Automated
Quotation (Nasdaq) security as of the last sale price for that
day. We value all other over-the-counter securities that have
reliable quotes at the latest quoted bid price.
We value long-term debt obligations and securities convertible
into common stock at fair value. Pricing services provide the
Fund with the value of the securities. When the price of a
security is not available, including days when we determine that
the sale or bid price of the security does not reflect that
security's market value, we value the security at a fair value
determined in good faith under procedures established by the Board
of Trustees.
We value a security at fair value when events have occurred after
the last available market price and before the close of the NYSE
that materially affect the security's price. In the case of
foreign securities, this could include events occurring after the
close of the foreign market and before the close of the NYSE.
The Fund's foreign securities may trade on days when the NYSE is
closed. We will not price shares on days that the NYSE is closed
for trading. You will not be able to purchase or redeem shares
until the next NYSE-trading day.
Account Fees If your account value falls below $1,000 (other than
as a result of depreciation in share value), you may be subject to
an annual account fee of $10. This fee is deducted from the
account in June each year. Approximately 60 days prior to the fee
date, the Fund's transfer agent will send you written notification
of the upcoming fee. If you add money to your account and bring
the value above $1,000 prior to the fee date, the fee will not be
deducted.
Dividends, Distributions, and Taxes The Fund has the potential to
make the following distributions:
<CALLOUT>
Understanding Fund Distributions
The Fund earns income from the securities it holds. The Fund also
may experience capital gains and losses on sales of its
securities. The Fund distributes substantially all of its net
investment income and capital gains to shareholders. As a
shareholder, you are entitled to a portion of the Fund's income
and capital gains based on the number of shares you own at the
time these distributions are declared.
</CALLOUT>
Types of Distributions
Dividend income Represents interest and dividends
earned from securities held by the
portfolio; also includes short-term
capital gains, which are gains on
sales of securities the Fund buys and
then sells within a 12-month period.
Long-term capital gains Represents capital gains on sales of
securities held longer than 12 months.
Distribution Options Income dividends are declared and paid
annually. Any capital gains are distributed at least annually.
You can choose one of following options for these distributions
when you open your account.(1) To change your distribution option
call 1-800-345-6611.
Distribution Options
Reinvest all distributions in additional shares of your current
fund
Reinvest all distributions in shares of another fund
Receive dividends in cash and reinvest capital gains(2)
Receive all distributions in cash and(2)
- - send the check to your address of record
- - send the check to a third party address
- - transfer the money to your bank via electronic funds transfer
(EFT)
(1) If you do not indicate on your application your preference for
handling distributions, the Fund will automatically reinvest all
distributions in additional shares of the Fund.
(2) Distributions of $10 or less will automatically be reinvested
in additional Fund shares. If you elect to receive distributions
by check and the check is returned as undeliverable, or if you do
not cash a distribution check within six months of the check date,
the distribution will be reinvested in additional shares of the
Fund.
Tax Consequences Regardless of whether you receive your
distributions in cash or reinvest them in additional Fund shares,
all Fund distributions are subject to federal income tax.
Depending on the state where you live, distributions may also be
subject to state and local income taxes.
In general, any dividends and short-term capital gains
distributions are taxable as ordinary income. Distributions of
other capital gains are generally taxable as capital gains. You
will be provided each year with the amount of ordinary income and
capital gains distributed to you for the previous year and any
portion of your distribution which is exempt from state and local
taxes. Your investment in the Fund may have additional personal
tax implications. Please consult your tax advisor on state, local
or other applicable tax laws.
In addition to the dividends and capital gains distributions made
by the Fund, you may realize a capital gain or loss when selling
and exchanging shares of the Fund.
MANAGING THE FUND
INVESTMENT ADVISOR
Stein Roe & Farnham Incorporated, One South Wacker Drive, Chicago,
IL 60606, manages the day-to-day operations of the Fund and the
Portfolio. Stein Roe (and its predecessor) has advised and
managed mutual funds since 1949. As of Sept. 30, 1998, Stein Roe
managed more than $28 billion in assets. For the fiscal year
ended Sept. 30, 1998, aggregate fees paid by Class A shares of the
Fund to Stein Roe amounted to 0.78 percent of average net assets
before reimbursement and 0.41 percent after reimbursement.
Stein Roe's mutual funds and institutional investment advisory
businesses are managed together with that of its affiliate,
Colonial Management Associates, Inc. (CMA), by a combined
management team of employees from both companies. CMA also shares
personnel, facilities, and systems with Stein Roe that may be used
in providing administrative or operational services to the Funds.
CMA is a registered investment adviser investment adviser. Both
Stein Roe and CMA are subsidiaries of Liberty Financial Companies,
Inc.
Stein Roe can use the services of AlphaTrade Inc., an affiliated
broker-dealer, when buying or selling equity securities for the
Fund's portfolio, pursuant to procedures adopted by the Fund's
Board of Trustees.
PORTFOLIO MANAGERS
Erik P. Gustafson and David P. Brady, CFA, are the portfolio
managers.
Mr. Gustafson joined Stein Roe in 1992 as a portfolio manager for
privately managed accounts. Mr. Gustafson is a senior vice
president and has been portfolio manager of the Fund since
February 1995 and portfolio manager of SR&F Growth Stock Portfolio
since May 1994. He holds a B.A. from the University of Virginia
and M.B.A. and J.D. degrees from Florida State University. As of
Sept. 30, 1998, Mr. Gustafson managed $1.4 billion in mutual fund
net assets.
Mr. Brady joined Stein Roe in 1993 as an associate portfolio
manager for Stein Roe Special Fund. He currently is a senior vice
president and has been portfolio manager of the Fund since March
1995 and portfolio manager of Stein Roe Large Company Focus Fund
since June 1998. He holds a B.S. in finance, graduating Magna Cum
Laude, from the University of Arizona and an M.B.A. from the
University of Chicago. As of Sept. 30, 1998, Mr. Brady managed
$767 million in mutual fund net assets.
OTHER INVESTMENT STRATEGIES AND RISKS
The Fund's primary investment strategies and risks are described
in this prospectus. (See "The Fund.") This section and the
Statement of Additional Information (SAI) describe other
investments that the Fund may make and risks associated with them.
The Board of Trustees can change the investment objective without
shareholder approval.
The Fund's portfolio managers generally make decisions on buying
and selling portfolio investments based upon their judgment that
the decision will improve the Fund's investment return and further
its investment goal. The portfolio managers may also be required
to sell portfolio investments to fund redemptions.
To select investments for the portfolio, the portfolio managers
look for companies that are market leaders with growing market
share in their respective industries. The managers also look for
companies with strong financial balance sheets and experienced
management teams.
Portfolio Turnover
There are no limits on turnover. Turnover may vary significantly
from year to year. Stein Roe does not expect it to exceed 100
percent under normal conditions. Portfolio turnover typically
produces capital gains or losses resulting in tax consequences for
Fund shareholders. It also increases transaction expenses, which
reduce the Fund's return.
Temporary Defensive Positions
When Stein Roe believes that a temporary defensive position is
necessary, the Portfolio may invest, without limit, in high-
quality debt securities or hold assets in cash and cash
equivalents. Stein Roe is not required to take a temporary
defensive position, and market conditions may prevent such an
action. The Fund may not achieve its investment objective if it
takes a defensive position.
Interfund Lending Program
The Portfolio may lend money to and borrow money from other funds
advised by Stein Roe. The Portfolio will do so when Stein Roe
believes such lending or borrowing is necessary and appropriate.
Borrowing costs will be the same as or lower than the costs of a
bank loan.
Educational Materials
The Fund provides educational materials such as a newsletter and
activity book to all Fund shareholders. The materials are
designed to teach children and teenagers basic investing
principles. The Fund also sends investors an owner's manual. The
educational materials are paid for by the Fund.
Master/Feeder Structure
Unlike mutual funds that directly acquire and manage their own
portfolio of securities, the Fund is a "feeder" fund in a
"master/feeder" structure. This means that the Fund invests its
assets in a larger "master" portfolio of securities, the SR&F
Growth Investor Portfolio, which has investment objectives and
policies substantially identical to those of the Fund. The
investment performance of the Fund depends upon the investment
performance of the Portfolio. If the investment policies of the
Portfolio and the Fund became inconsistent, the Board of Trustees
of the Fund can decide what actions to take. Actions the Board of
Trustees may recommend include withdrawal of the Fund's assets
from the Portfolio. For more information on the master/feeder
fund structure, see the SAI.
Year 2000 Compliance
Like other investment companies, financial and business
organizations and individuals around the world, the Fund could be
adversely affected if the computer systems used by Stein Roe and
other service providers do not properly process and calculate
date-related information and data from and after Jan. 1, 2000.
This is commonly known as the "Year 200 Problem." The Fund's
service providers are taking steps that they believe are
reasonably designed to address the Year 2000 Problem, including
working with vendors who furnish services, software and systems to
the Fund, to provide that date-related information and data can be
properly processed after Jan. 1, 2000. Many of the Fund's service
providers and vendors are in the process of making Year 2000
modifications to their software and systems and believe that such
modifications will be completed on a timely basis prior to Jan. 1,
2000. However, no assurances can be given that all modifications
required to ensure proper data processing and calculation on and
after Jan. 1, 2000 will be made on a timely basis or that services
to the Fund will not be adversely affected.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand
the Fund's financial performance. Information is shown for the
Fund's fiscal years since its inception. The fiscal year runs
from October 1 to September 30. Certain information in the table
reflects the financial results for a single Fund share. This
information has been audited by Arthur Andersen LLP, independent
accountants, whose report along with the Fund's financial
statements are included in its annual report. You can request a
free annual report by calling 1-800-426-3750.
The Fund
Class A
Period Ended
Sept. 30
1998(a)
Net asset value-Beginning of period $ 11.67
Income from Investment Operations
Net investment loss (0.02)
Net losses on securities (both realized and unrealized) (0.30)
Total loss from investment operations (0.32)
Net asset value-End of period $ 11.35
Total return (c) (2.74%)
Ratios/Supplemental Data
Net assets, end of period (000 omitted) $36,843
Ratio of net expenses to average net assets (b) 1.65%(d)
Ratio of net investment loss to average net assets (c) (0.52%)(d)
(a) From commencement of mutli-class offering on Jan. 26, 1998.
(b) If the Fund had paid all of its expenses and there had been no
reimbursement by Stein Roe, this ratio would have been 2.02%
for the period ended Sept. 30, 1998.
(c) Computed giving effect to Stein Roe's expense limitation
undertaking.
(d) Annualized.
<PAGE>
FOR MORE INFORMATION
You can get more information about the Fund's investments in the
Fund's semi-annual and annual reports to shareholders. The annual
report contains a discussion of the market conditions and
investment strategies that significantly affected the Fund's
performance over its last fiscal year.
You may wish to read the Statement of Additional Information (SAI)
for more information on the Fund and the securities in which it
invests. The SAI is incorporated into this prospectus by
reference, which means that it is considered to be part of this
prospectus.
You can get free copies of reports and the SAI, request other
information and discuss your questions about the Fund by writing
or calling the Fund's Distributor at:
Liberty Funds Distributor, Inc.
One Financial Center
Boston, MA 02111-2621
1-800-426-3750
www.libertyfunds.com
Text-only versions of all Fund documents can be viewed online or
downloaded from the SEC at www.sec.gov.
You can also obtain copies upon payment of a duplicating fee, by
writing or calling the:
Public Reference Room
Securities and Exchange Commission
Washington, DC, 20549-6009
1-800-SEC-0330
Investment Company Act file number:
Stein Roe Advisor Trust 811-07955
- - Stein Roe Advisor Young Investor Fund
<PAGE>
STEIN ROE ADVISOR YOUNG INVESTOR FUND [service mark] PROSPECTUS,
FEB. 1, 1999
Class K Shares
Advised by Stein Roe & Farnham Incorporated
The Securities and Exchange Commission has not approved or
disapproved these securities or determined whether this prospectus
is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
THE FUND
Investment Goal
Primary Investment Strategy
Primary Investment Risks
Performance History
Expenses
YOUR ACCOUNT
How to Buy Shares
Distribution and Service Fees
How to Exchange Shares
How to Sell Shares
Other Information About Your Account
MANAGING THE FUND
Investment Advisor
Portfolio Managers
OTHER INVESTMENT STRATEGIES AND RISKS
FINANCIAL HIGHLIGHTS
NOT FDIC INSURED MAY LOSE VALUE
NO BANK GUARANTEE
<PAGE>
THE FUND STEIN ROE ADVISOR YOUNG INVESTOR FUND
INVESTMENT GOAL
The Fund seeks long-term growth.
PRIMARY INVESTMENT STRATEGY
The Fund invests all of its assets in SR&F Growth Investor
Portfolio as part of a master fund/feeder fund structure. The
Portfolio invests primarily in common stocks believed to have
long-term growth potential. Under normal market conditions, the
Portfolio invests at least 65 percent of its assets in common
stocks of companies that Stein Roe believes affect the lives of
children and teenagers. These companies may produce products or
services that children and teenagers use, are aware of, or could
have an interest in. The Portfolio may invest in companies of any
size including smaller emerging companies. It emphasizes
companies in the technology sector and consumer goods sectors,
including personal care products, pharmaceuticals and food
products. The Portfolio may invest up to 25 percent of its assets
in foreign stocks.
The Fund also has an educational objective. It seeks to teach
children and teenagers information about mutual funds, basic
economic principles and personal finance through a variety of
educational materials paid for by the Fund.
PRIMARY RISKS
There are two basic risks for all mutual funds that invest in
stocks: management risk and market risk. These risks may cause
you to lose money when you sell the shares.
Management risk means that Stein Roe's stock selections and other
investment decisions might produce losses or cause the Fund to
underperform when compared to other funds with similar goals.
Market risk means that the security prices in a market sector or
industry may move down. Downward movements will reduce the value
of your investment. Because of management and market risk, there
is no guarantee that the Fund will achieve its investment goal or
perform favorably compared with competing funds.
Because the Portfolio invests in stocks, the price of the Fund's
shares-its net asset value per share (NAV)-fluctuates daily in
response to changes in the market value of the securities In
addition, the risks associated with the Portfolio's investment
strategy may cause the Fund's total return or yield to decrease.
Due to its focus on companies in the technology sector and various
consumer goods sectors, including personal care products,
pharmaceuticals and food products, the Fund may perform
differently than the stock market. Shares of a small company may
pose greater risks than shares of a large company due to narrow
product lines, limited financial resources, less depth in
management or a limited trading market for its stock.
Foreign Securities. Foreign securities are subject to special
risks. Foreign stock markets, especially in countries with
developing stock markets, can be extremely volatile. The
liquidity of foreign securities may be more limited than domestic
securities, which means that the Portfolio may at times be unable
to sell them at desirable prices. Fluctuations in currency
exchange rates impact the value of foreign securities. Brokerage
commissions, custodial fees, and other fees are generally higher
for foreign investments. In addition, foreign governments may
impose withholding taxes which would reduce the amount of income
available to distribute to shareholders. Other risks include:
possible delays in settlement of transactions; less publicly
available information about companies; the impact of political,
social or diplomatic events; and possible seizure, expropriation
or nationalization of the company or its assets.
Information on other securities and risks appears under "Other
Investment Strategies and Risks."
PERFORMANCE HISTORY
The bar chart and performance table below show the historical
performance for the Portfolio restated as disclosed below and the
performance of the Fund's Class K shares. The chart and table
give some indication of the risks of investing in the Fund. The
returns include the reinvestment of dividends and distributions.
As with all mutual funds, past performance does not predict the
Fund's future performance.
<CALLOUT>
UNDERSTANDING PERFORMANCE
Calendar-year total return shown in the bar chart includes the
effects of Fund expenses. The bar chart does not take into effect
any expense reduction arrangements discussed in the footnotes to
the Annual Fund Operating Expenses table.
Average annual total return is a measure of the Fund's performance
over the past one-year and since inception. It includes the
effects of Fund expenses. The table does not take into effect any
expense reduction arrangements discussed in the footnotes to the
Annual Fund Operating Expenses table. The Fund's return is
compared to the S&P 500 Index. Unlike the Fund, the Index does
not incur fees or charges. It is not possible to invest in the
Index.
</CALLOUT>
Calendar-Year Total Returns
45%
40%
35% 39.44%
30% 34.76%
25% 26.41%
20%
15% 15.33%
10%
5%
0%
1995 1996 1997 1998
(1) Class K shares of the Fund commenced operations on February
14, 1997. The performance in the chart for calendar years 1995
and 1996 is the performance of the Portfolio restated to reflect
the Class K share expenses. The performance for calendar year
1997 shows the restated performance of the Portfolio combined with
the performance of the Fund's Class K shares since inception. The
performance for calendar year 1998 shows the performance of the
Fund's Class K shares only.
Best quarter: Fourth quarter 1998, +20.68%
Worst quarter: Third quarter 1998, -16.36%
Average Annual Total Returns(2)- for periods ending December 31,
1998
1 Year Since Inception (April 29, 1994)
Class K (%) 15.33 25.93
S&P 500 Index (%) 28.74 N/A
(2) The performance of the Portfolio is restated to reflect Class
K share expenses. The Since Inception performance in the table is
the performance of the restated Portfolio combined with the
performance of the Fund's Class K share performance. The one-year
performance in the table reflects the performance of the Fund's
Class K shares.
YOUR EXPENSES
The tables below describe the fees and expenses you may pay when
you buy, hold and sell shares of the Fund. Your actual costs may
be higher or lower.
<CALLOUT>
UNDERSTANDING EXPENSES
Shareholder Fees are paid directly by shareholders to the Fund's
distributor.
Annual Fund Operating Expenses are deducted from the Fund. They
include management fees, 12b-1 fees, and administrative costs
including tax and compliance services.
Example Expenses helps you compare the cost of investing in the
Fund to the cost of investing in other mutual funds. The table
does not take into account any expense reduction arrangements
discussed in the footnotes to the Annual Fund Operating Expenses
table. It uses the following hypothetical conditions:
* $10,000 initial investment
* 5% total return for each year
* Fund operating expenses remain the same
* No expense reductions in effect
*Redemption at the end of each time period
</CALLOUT>
Annual Fund Operating Expenses (expenses are deducted directly
from Fund assets) (1)(2)
Class K
Management fee(3)(4) (%) 0.78
Distribution and service (12 b-1) fees (%) 0.25
Other expenses(4) (%) 19.39
Total annual fund operating expenses(4) (%) 20.42
(1) A $10 annual fee is deducted from accounts of less than $1,000
and paid to the transfer agent.
(2) There is a $7.50 charge for wiring sale proceeds to your bank.
(3) Management fee includes both the management fee and the
administrative fee charged to the Fund.
(4) The Fund's advisor voluntarily waived advisory fees and
reimbursed the Fund for certain expenses. As a result, the
actual management fees were 0%, other expenses were 1.25% and
total annual operating expenses were 1.50% for the fiscal year
ended Sept. 30, 1998.
Example Expenses
Class Year 1 Year 3 Year 5 Year 10
Class K $1,885 $4,827 $6,931 $9,932
YOUR ACCOUNT
HOW TO BUY SHARES
Your financial advisor can help you establish an appropriate
investment portfolio, buy shares and monitor your investments.
When the Fund receives your purchase request in "good form," your
shares will be bought at the next calculated public offering
price. In good form means that you placed your order with your
brokerage firm or your payment has been received and your
application is complete, including all necessary signatures.
<CALLOUT>
INVESTMENT MINIMUMS (1)
Initial Investment $1,000
Subsequent Investments $50
Automatic Purchase Plans $50
Retirement Plans $25
</CALLOUT>
Outlined below are various ways you can purchase shares:
Method Instructions
Through your
financial advisor Your financial advisor can help you establish
your account and buy Fund shares on your
behalf.
By check (new account) For new accounts, send a completed
application and check made payable to the Fund
to the transfer agent, Liberty Funds Services,
Inc., P.O. Box 1722, Boston, MA 02105-1722.
By check (existing account) For existing accounts, fill out and
return the additional investment stub included
in your quarterly statement, or send a letter
of instruction including your Fund name and
account number with a check made payable to the
Fund to Liberty Funds Services, Inc., P.O. Box
1722, Boston, MA 02105-1722.
By exchange You may purchase shares by exchanging from an
existing fund into the same share class of
another fund of Stein Roe Advisor Trust at no
additional cost. To exchange by telephone,
call 1-800-422-3737.
By wire You may purchase shares by wiring money from
your bank account to your fund account. To
wire funds to your fund account, call 1-800-
422-3737 to obtain a control number and the
wiring instructions.
By electronic funds transfer (EFT) You may purchase shares by
electronically transferring money from your
bank account to your fund account by calling 1-
800-422-3737. Your money may take up to two
business days to arrive. You must set up this
feature prior to your telephone request. Be
sure to complete the appropriate section of the
application.
Automatic
investment plan You can make monthly or quarterly investments
automatically from your bank account to your
fund account. You can select a pre-authorized
amount to be sent via electronic funds transfer
(EFT). Be sure to complete the appropriate
section of the application for this feature.
By dividend diversification Dividends distributed by one fund can
be automatically invested into the same class
of shares of another fund of Stein Roe Advisor
Trust at no additional sales charge. To invest
your dividends in another fund, call 1-800-345-
6611.
(1) The Fund reserves the right to change the investment minimums.
The Fund also reserves the right to refuse a purchase order for
any reason, including if it believes that doing so would be in the
best interest of the Fund and its shareholders.
DISTRIBUTION AND SERVICE FEES
The Fund has adopted a plan under Rule 12b-1 that permits it to
pay marketing and other fees to support the sale and distribution
of Class K shares and the services provided to you by your
financial advisor. Annual distribution and service fees may equal
up to 0.25% for Class K shares and are paid out of the assets of
the class. Over time, these fees will increase the cost of your
shares and may cost you more than paying other types of sales
charges.
HOW TO EXCHANGE SHARES
You may exchange your shares for shares of the same share class of
another fund of Stein Roe Advisor Trust at NAV. Unless your
account is part of a tax-deferred retirement plan, an exchange is
a taxable event. Therefore, you may realize a gain or a loss for
tax purposes. The Fund may terminate your exchange privilege if
Stein Roe determines that your exchange activity is likely to
adversely impact its ability to manage the Fund. To exchange by
telephone, call 1-800-422-3737.
HOW TO SELL SHARES
Your financial advisor can help you determine if and when you
should sell your shares. You may sell shares of the Fund on any
regular business day that the NYSE is open.
When the Fund receives your sales request in "good form," shares
will be sold at the next calculated price. In good form means
that money used to purchase your shares is fully collected. When
selling shares by letter of instruction, good form means your
letter has complete instructions, the proper signatures and
signature guarantees, you have included any certificates for
shares to be sold and any other required documents are attached.
Retirement Plan accounts have special requirements. Please call
1-800-799-7526 for more information.
The Fund will generally send proceeds from the sale to you within
seven days. However, if you purchased your shares by check, the
Fund may delay sending the proceeds for up to 15 days after your
initial purchase to protect against checks that are returned.
Outlined below are the various options for selling shares
Method Instructions
Through your
financial advisor Call your financial advisor to place your sell
order. To receive the current trading day's
price, your financial advisor firm must receive
your request prior to the close of the New York
Stock Exchange (NYSE), usually 4:00 p.m.
By exchange You may purchase shares by exchanging from an
existing fund into the same share class of
another fund of Stein Roe Advisor Trust at no
additional cost. To exchange by telephone,
call 1-800-422-3737.
By telephone You may sell shares by telephone and request
that a check be sent to your address of record
by calling 1-800-422-3737. The dollar limit
for telephone sales is $100,000 in a 30-day
period. You do not need to set up this feature
in advance of your call.
By mail Send a signed letter of instruction (LOI) or
stock power form along with any certificates to
be sold to the address below. In your LOI,
note your fund's name, share class, account
number, and the dollar value or number of
shares you wish to sell. All account owners
must sign the letter, and signatures must be
guaranteed by either a bank, a member firm of a
national stock exchange or another eligible
guarantor institution. Additional
documentation is required for sales by
corporations, agents, fiduciaries, surviving
joint owners and individual retirement account
(IRA) owners. For details, call 1-800-345-
6611.
Mail your LOI to Liberty Funds Services, Inc.,
P.O. Box 1722, Boston, MA 02105-1722
By wire You may sell shares and request that the
proceeds be wired to your bank. You must set
up this feature prior to your telephone
request. Be sure to complete the appropriate
section of the account application for this
feature.
By electronic
funds transfer You may sell shares and request that the
proceeds be electronically transferred to your
bank. Proceeds may take up to two business
days to be received by your bank. You must set
up this feature prior to your request. Be sure
to complete the appropriate section of the
account application for this feature.
OTHER INFORMATION ABOUT YOUR ACCOUNT
How the Fund's Share Price is Determined The price of the Fund's
Class K shares is based on its NAV. The NAV is determined at the
close of regular session trading on the New York Stock Exchange
(NYSE), usually 4:00 p.m. Eastern time on each business day that
the NYSE is open (typically Monday through Friday).
When you request a transaction, it will be processed at the NAV
next determined after your request is received in good form by
Liberty Funds Distributor, Inc. (LFD). In most cases, in order
to receive that day's price, LFD must receive your order before
that day's transactions are processed. If you request a
transaction through your financial advisor's firm, the firm must
receive your order by the close of trading on the NYSE to receive
that day's price.
To calculate NAV on a given day, we value each stock listed or
traded on a stock exchange at its latest sale price on that day.
If there are no sales that day, we value the security at the most
recently quoted bid price. We value each over-the-counter
security or National Association of Securities Dealers Automated
Quotation (Nasdaq) security as of the last sale price for that
day. We value all other over-the-counter securities that have
reliable quotes at the latest quoted bid price.
We value long-term debt obligations and securities convertible
into common stock at fair value. Pricing services provide the
Fund with the value of the securities. When the price of a
security is not available, including days when we determine that
the sale or bid price of the security does not reflect that
security's market value, we value the security at a fair value
determined in good faith under procedures established by the Board
of Trustees.
We value a security at fair value when events have occurred after
the last available market price and before the close of the NYSE
that materially affect the security's price. In the case of
foreign securities, this could include events occurring after the
close of the foreign market and before the close of the NYSE.
The Fund's foreign securities may trade on days when the NYSE is
closed. We will not price shares on days that the NYSE is closed
for trading. You will not be able to purchase or redeem shares
until the next NYSE-trading day.
Account Fees If your account value falls below $1,000 (other than
as a result of depreciation in share value), you may be subject to
an annual account fee of $10. This fee is deducted from the
account in June each year. Approximately 60 days prior to the fee
date, the Fund's transfer agent will send you written notification
of the upcoming fee. If you add money to your account and bring
the value above $1,000 prior to the fee date, the fee will not be
deducted.
Dividends, Distributions, and Taxes The Fund has the potential to
make the following distributions:
<CALLOUT>
Understanding Fund Distributions
The Fund earns income from the securities it holds. The Fund also
may experience capital gains and losses on sales of its
securities. The Fund distributes substantially all of its net
investment income and capital gains to shareholders. As a
shareholder, you are entitled to a portion of the Fund's income
and capital gains based on the number of shares you own at the
time these distributions are declared.
</CALLOUT>
Types of Distributions
Dividend income Represents interest and dividends
earned from securities held by the
portfolio; also includes short-term
capital gains, which are gains on
sales of securities the Fund buys and
then sells within a 12-month period.
Long-term capital gains Represents capital gains on sales of
securities held longer than 12 months.
Distribution Options Income dividends are declared and paid
annually. Any capital gains are distributed at least annually.
You can choose one of following options for these distributions
when you open your account.(1) To change your distribution option
call 1-800-345-6611.
Distribution Options
Reinvest all distributions in additional shares of your current
fund
Reinvest all distributions in shares of another fund
Receive dividends in cash and reinvest capital gains(2)
Receive all distributions in cash and(2)
- - send the check to your address of record
- - send the check to a third party address
- - transfer the money to your bank via electronic funds transfer
(EFT)
(1) If you do not indicate on your application your preference for
handling distributions, the Fund will automatically reinvest all
distributions in additional shares of the Fund.
(2) Distributions of $10 or less will automatically be reinvested
in additional Fund shares. If you elect to receive distributions
by check and the check is returned as undeliverable, or if you do
not cash a distribution check within six months of the check date,
the distribution will be reinvested in additional shares of the
Fund.
Tax Consequences Regardless of whether you receive your
distributions in cash or reinvest them in additional Fund shares,
all Fund distributions are subject to federal income tax.
Depending on the state where you live, distributions may also be
subject to state and local income taxes.
In general, any dividends and short-term capital gains
distributions are taxable as ordinary income. Distributions of
other capital gains are generally taxable as capital gains. You
will be provided each year with the amount of ordinary income and
capital gains distributed to you for the previous year and any
portion of your distribution which is exempt from state and local
taxes. Your investment in the Fund may have additional personal
tax implications. Please consult your tax advisor on state, local
or other applicable tax laws.
<R/>
In addition to the dividends and capital gains distributions made
by the Fund, you may realize a capital gain or loss when selling
and exchanging shares of the Fund.
MANAGING THE FUND
INVESTMENT ADVISOR
Stein Roe & Farnham Incorporated, One South Wacker Drive, Chicago,
IL 60606, manages the day-to-day operations of the Fund and the
Portfolio. Stein Roe (and its predecessor) has advised and
managed mutual funds since 1949. As of Sept. 30, 1998, Stein Roe
managed more than $28 billion in assets. For the fiscal year
ended Sept. 30, 1998, aggregate fees paid by Class K shares of the
Fund to Stein Roe amounted to 0.78 percent of average net assets
before reimbursement and 0.41 percent after reimbursement.
Stein Roe's mutual funds and institutional investment advisory
businesses are managed together with that of its affiliate,
Colonial Management Associates, Inc. (CMA), by a combined
management team of employees from both companies. CMA also shares
personnel, facilities, and systems with Stein Roe that may be used
in providing administrative or operational services to the Fund.
CMA is a registered investment adviser investment adviser. Both
Stein Roe and CMA are subsidiaries of Liberty Financial Companies,
Inc.
Stein Roe can use the services of AlphaTrade Inc., an affiliated
broker-dealer, when buying or selling equity securities for the
Fund's portfolio, pursuant to procedures adopted by the Fund's
Board of Trustees.
PORTFOLIO MANAGERS
Erik P. Gustafson and David P. Brady, CFA, are the portfolio
managers.
Mr. Gustafson joined Stein Roe in 1992 as a portfolio manager for
privately managed accounts. Mr. Gustafson is a senior vice
president and has been portfolio manager of the Fund since
February 1995. Mr. Gustafson has also been portfolio manager of
SR&F Growth Stock Portfolio since May 1994. He holds a B.A. from
the University of Virginia and M.B.A. and J.D. degrees from
Florida State University. As of Sept. 30, 1998, Mr. Gustafson
managed $1.4 billion in mutual fund net assets.
Mr. Brady joined Stein Roe in 1993 as an associate portfolio
manager for Stein Roe Special Fund. He currently is a senior vice
president and has been portfolio manager of the Fund since March
1995 and portfolio manager of Stein Roe Large Company Focus Fund
since June 1998. He holds a B.S. in finance, graduating Magna Cum
Laude, from the University of Arizona and an M.B.A. from the
University of Chicago. As of Sept. 30, 1998, Mr. Brady managed
$767 million in mutual fund net assets.
OTHER INVESTMENT STRATEGIES AND RISKS
The Fund's primary investment strategies and risks are described
in this prospectus. (See "The Fund.") This section and the
Statement of Additional Information (SAI) describe other
investments that the Fund may make and risks associated with them.
The Board of Trustees can change the investment objective without
shareholder approval.
The Fund's portfolio managers generally make decisions on buying
and selling portfolio investments based upon their judgment that
the decision will improve the Fund's investment return and further
its investment goal. The portfolio managers may also be required
to sell portfolio investments to fund redemptions.
To select investments for the portfolio, the portfolio managers
look for companies that are market leaders with growing market
share in their respective industries. The managers also look for
companies with strong financial balance sheets and experienced
management teams.
Portfolio Turnover
There are no limits on turnover. Turnover may vary significantly
from year to year. Stein Roe does not expect it to exceed 100
percent under normal conditions. Portfolio turnover typically
produces capital gains or losses resulting in tax consequences for
Fund shareholders. It also increases transaction expenses, which
reduce the Fund's return.
Temporary Defensive Positions
When Stein Roe believes that a temporary defensive position is
necessary, the Portfolio may invest, without limit, in high-
quality debt securities or hold assets in cash and cash
equivalents. Stein Roe is not required to take a temporary
defensive position, and market conditions may prevent such an
action. The Fund may not achieve its investment objective if it
takes a defensive position.
Interfund Lending Program
The Portfolio may lend money to and borrow money from other funds
advised by Stein Roe. The Portfolio will do so when Stein Roe
believes such lending or borrowing is necessary and appropriate.
Borrowing costs will be the same as or lower than the costs of a
bank loan.
Educational Materials
The Fund provides educational materials such as a newsletter and
an activity book to all Fund shareholders. The materials are
designed to teach children and teenagers basic investing
principles. The Fund also sends investors an owner's manual. The
educational materials are paid for by the Fund.
Master/Feeder Structure
Unlike mutual funds that directly acquire and manage their own
portfolio of securities, the Fund is a "feeder" fund in a
"master/feeder" structure. This means that the Fund invests its
assets in a larger "master" portfolio of securities, the SR&F
Growth Investor Portfolio, which has investment objectives and
policies substantially identical to those of the Fund. The
investment performance of the Fund depends upon the investment
performance of the Portfolio. If the investment policies of the
Portfolio and the Fund became inconsistent, the Board of Trustees
of the Fund can decide what actions to take. Actions the Board of
Trustees may recommend include withdrawal of the Fund's assets
from the Portfolio. For more information on the master/feeder
fund structure, see the SAI.
Year 2000 Compliance
Like other investment companies, financial and business
organizations and individuals around the world, the Fund could be
adversely affected if the computer systems used by Stein Roe and
other service providers do not properly process and calculate
date-related information and data from and after Jan. 1, 2000.
This is commonly known as the "Year 200 Problem." The Fund's
service providers are taking steps that they believe are
reasonably designed to address the Year 2000 Problem, including
working with vendors who furnish services, software and systems to
the Fund, to provide that date-related information and data can be
properly processed after Jan. 1, 2000. Many of the Fund's service
providers and vendors are in the process of making Year 2000
modifications to their software and systems and believe that such
modifications will be completed on a timely basis prior to Jan. 1,
2000. However, no assurances can be given that all modifications
required to ensure proper data processing and calculation on and
after Jan. 1, 2000 will be made on a timely basis or that services
to the Fund will not be adversely affected.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand
the Fund's financial performance. Information is shown for the
Fund's fiscal years since its inception. The fiscal year runs
from October 1 to September 30. Certain information in the table
reflects the financial results for a single Fund share. This
information has been audited by Arthur Andersen LLP, independent
accountants, whose report along with the Fund's financial
statements are included in its annual report. You can request a
free annual report by calling 1-800-426-3750.
The Fund
Class K
Year Ended Period Ended
Sept. 30 Sept. 30
1998 1997(a)
Net asset value-Beginning of period $ 11.49 $ 10.00
Income from Investment Operations
Net investment loss (0.03) (0.02)
Net gains (losses) on securities
(both realized and unrealized) (0.04) 1.51
Total income (loss) from investment
operations (0.07) 1.49
Less distributions
Dividends (from net investment income) (0.01) -
Net asset value-End of period $ 11.41 $ 11.49
Total return (c) (0.62%) 14.90%
Ratios/Supplemental Data
Net assets, end of period (000 omitted) $331 $116
Ratio of net expenses to average net
assets (b) 1.50% 1.50%(d)
Ratio of net investment loss to average
net assets (c) (0.48%) (0.24%)(d)
(a) From commencement of operations on Feb. 14, 1997.
(b) If the Fund had paid all of its expenses and there had been no
reimbursement by Stein Roe, this ratio would have been 20.42%
for the year ended Sept. 30, 1998, and 89.45% for the period
ended Sept. 30, 1997.
(c) Computed giving effect to Stein Roe's expense limitation
undertaking.
(d) Annualized.
<PAGE>
FOR MORE INFORMATION
You can get more information about the Fund's investments in the
Fund's semi-annual and annual reports to shareholders. The annual
report contains a discussion of the market conditions and
investment strategies that significantly affected the Fund's
performance over its last fiscal year.
You may wish to read the Statement of Additional Information (SAI)
for more information on the Fund and the securities in which it
invests. The SAI is incorporated into this prospectus by
reference, which means that it is considered to be part of this
prospectus.
You can get free copies of reports and the SAI, request other
information and discuss your questions about the Fund by writing
or calling the Fund's Distributor at:
Liberty Funds Distributor, Inc.
One Financial Center
Boston, MA 02111-2621
1-800-426-3750
www.libertyfunds.com
Text-only versions of all Fund documents can be viewed online or
downloaded from the SEC at www.sec.gov.
You can also obtain copies upon payment of a duplicating fee, by
writing or calling the:
Public Reference Room
Securities and Exchange Commission
Washington, DC, 20549-6009
1-800-SEC-0330
Investment Company Act file number:
Stein Roe Advisor Trust 811-07955
- -Stein Roe Advisor Young Investor Fund
<PAGE>
STEIN ROE ADVISOR GROWTH STOCK FUND PROSPECTUS, FEB. 1, 1999
Advised by Stein Roe & Farnham Incorporated
The Securities and Exchange Commission has not approved or
disapproved these securities or determined whether this prospectus
is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
THE FUND
Investment Goal
Primary Investment Strategy
Primary Investment Risks
Performance History
Expenses
YOUR ACCOUNT
How to Buy Shares
Sales Charges
Distribution and Service Fees
How to Exchange Shares
How to Sell Shares
Other Information About Your Account
MANAGING THE FUND
Investment Advisor
Portfolio Manager
OTHER INVESTMENT STRATEGIES AND RISKS
FINANCIAL HIGHLIGHTS
NOT FDIC INSURED MAY LOSE VALUE
NO BANK GUARANTEE
<PAGE>
THE FUND STEIN ROE GROWTH STOCK FUND
[Callout]
DEFINING CAPITALIZATION
A company's market capitalization is simply its stock price
multiplied by the number of shares of stock it has issued and
outstanding. In the financial markets, companies generally are
sorted into one of three capitalization-based categories: large
capitalization (large cap); medium capitalization (midcap); or
small capitalization (small cap).
As of Dec. 31, 1998, large-cap companies had market
capitalizations greater than $6.6 billion, midcap companies had
market capitalizations between $1.8 and $6.6 billion and small-cap
companies had market capitalizations less than $1.8 billion.
These amounts will change as the S&P Mid-Cap 400 and S&P Small-Cap
600 indices change.
[End Callout]
INVESTMENT GOAL
The Fund seeks long-term growth.
PRIMARY INVESTMENT STRATEGY
The Fund invests all of its assets in SR&F Growth Stock Portfolio
as part of a master fund/feeder fund structure. The Portfolio
invests primarily in the common stocks of companies with large-
market capitalizations. The Portfolio emphasizes the technology,
financial services, health care, and global consumer franchise
sectors. The Portfolio may invest up to 25 percent of its assets
in foreign stocks. To select investments for the Portfolio, the
portfolio manager considers companies that he believes will
generate earnings growth over the long term regardless of the
economic environment.
PRIMARY RISKS
There are two basic risks for all mutual funds that invest in
stocks: management risk and market risk. These risks may cause
you to lose money when you sell the shares.
Management risk means that Stein Roe's stock selections and other
investment decisions might produce losses or cause the Fund to
underperform when compared to other funds with similar goals.
Market risk means that the security prices in a market sector or
industry may move down. Downward movements will reduce the value
of your investment. Because of management and market risk, there
is no guarantee that the Fund will achieve its investment goal or
perform favorably compared with competing funds.
Because the Portfolio invests in stocks, the price of the Fund's
shares-its net asset value per share (NAV)-fluctuates daily in
response to changes in the market value of the securities In
addition, the risks associated with the Portfolio's investment
strategy may cause the Fund's total return or yield to decrease.
The Portfolio's emphasis on certain market sectors may increase
volatility in the Fund's NAV. If sectors that the Portfolio
invests in do not perform well, the Fund's NAV could decrease.
Foreign Securities. Foreign securities are subject to special
risks. Foreign stock markets, especially in countries with
developing stock markets, can be extremely volatile. The
liquidity of foreign securities may be more limited than domestic
securities, which means that the Portfolio may at times be unable
to sell them at desirable prices. Fluctuations in currency
exchange rates impact the value of foreign securities. Brokerage
commissions, custodial fees, and other fees are generally higher
for foreign investments. In addition, foreign governments may
impose withholding taxes which would reduce the amount of income
available to distribute to shareholders. Other risks include:
possible delays in settlement of transactions; less publicly
available information about companies; the impact of political,
social or diplomatic events; and possible seizure, expropriation
or nationalization of the company or its assets.
Information on other securities and risks appears under "Other
Investment Strategies and Risks."
PERFORMANCE HISTORY
The bar chart and performance table below show the historical
performance for the Portfolio restated as disclosed below and the
performance of the Fund's Class A shares. The chart and table
give some indication of the risks of investing in the Fund. The
returns include the reinvestment of dividends and distributions.
As with all mutual funds, past performance does not predict the
Fund's future performance.
<CALLOUT>
UNDERSTANDING PERFORMANCE
Calendar-year total return shown in the bar chart includes the
effects of Fund expenses, but not the effects of sales charges.
If sales charges were included, these returns would be lower. The
bar chart does not take into effect any expense reduction
arrangements discussed in the footnotes to the Annual Fund
Operating Expenses table.
Average annual total return is a measure of the Fund's performance
over the past one-, five- and ten-year periods. It includes the
effects of Fund expenses. The table does not take into effect any
expense reduction arrangements discussed in the footnotes to the
Annual Fund Operating Expenses table. The Fund's return is
compared to the S&P 500 Index. Unlike the Fund, the Index does
not incur fees or charges. It is not possible to invest in the
Index.
</CALLOUT>
Calendar-Year Total Returns (1)
50%
40% 45.57%
30% 35.09% 35.23% 33.25%
20% 20.58% 24.47%
10%
0% 0.63% 7.92% 2.53%
- -10% -4.06%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
*Class A of the Fund commenced operations on October 15, 1997.
The performance in the chart for calendar years 1989 through 1997
is the performance of the Portfolio restated to reflect the Class
A shares expenses, but not the Class A share sales charge. The
performance for calendar year 1997 shows the restated performance
of the Portfolio combined with the performance of the Fund's Class
A shares since inception. The performance for calendar year 1998
shows the performance of the Fund's Class A shares only.
Best quarter: Fourth quarter 1998, +24.37%
Worst quarter: Third quarter 1990, -16.67%
Average Annual Total Returns(2) - for periods ending December 31,
1998
1 Year 5 Years 10 Years
Class A (%) 17.31 20.08 18.44
Class B (%) 18.56 19.97 18.30
Class C (%) 22.72 20.12 18.12
S&P 500 Index (%) 28.74 24.08 19.20
(2) The one-year performance in the table reflects the performance
of each Class since inception. Class A, B and C each have an
inception date of October 15, 1997. The 5 Year and 10 Year
performance in the table is the performance of the restated
Portfolio combined with each Class's performance. The performance
of the Portfolio is restated to reflect each Class's expenses and
sales charges.
YOUR EXPENSES
The tables below describe the fees and expenses you may pay when
you buy, hold and sell shares of the Fund. Your actual costs may
be higher or lower.
<CALLOUT>
UNDERSTANDING EXPENSES
Shareholder Fees are paid directly by shareholders to the Fund's
distributor.
Annual Fund Operating Expenses are deducted from the Fund. They
include management fees, 12b-1 fees, and administrative costs
including tax and compliance services.
Example Expenses helps you compare the cost of investing in the
Fund to the cost of investing in other mutual funds. The table
does not take into account any expense reduction arrangements
discussed in the footnotes to the Annual Fund Operating Expenses
table. It uses the following hypothetical conditions:
* $10,000 initial investment
* 5% total return for each year
* Fund operating expenses remain the same
* No expense reductions in effect
*Redemption at the end of each time period
</CALLOUT>
Shareholder Fees(1)(2) (paid directly from your investment)
Class A Class B Class C
Maximum sales charge (load) on
purchases (%) (as a percentage of
the offering price) 5.75 0.00(4) 0.00(4)
Maximum deferred sales charge
(load) on redemptions (%) (as a
percentage of the offering price) 1.00(3) 5.00 1.00
Annual Fund Operating Expenses (expenses are deducted directly
from Fund assets)
Class A Class B Class C
Management fee(5)(6) (%) 0.73 0.73 0.73
Distribution and service (12 b-1)
fees (%) 0.30 1.00 1.00
Other expenses (%) 0.61 0.58 0.57
Total annual fund operating
expenses(6) (%) 1.63 2.31 2.30
(1) A $10 annual fee is deducted from accounts of less than $1,000
and paid to the transfer agent.
(2) There is a $7.50 charge for wiring sale proceeds to your bank.
(3) This charge applies only to purchases of $1 million to $5
million if shares are redeemed within 18 months after
purchase.
(4) Because of the 0.75% distribution fee applicable to Class B
and Class C shares, long-term Class B and Class C shareholders
may pay more in aggregate sales charges than the maximum
initial sales charge permitted by the National Association of
Securities Dealers, Inc. However, because Class B shares
automatically convert to Class A shares after approximately
eight years, this is less likely for Class B shares than for a
class without a conversion feature.
(5) Management fee includes both the management fee and the
administrative fee charged to the Fund.
(6) The Fund's advisor voluntarily waived advisory fees and
reimbursed the Fund for certain expenses. As a result, the
actual management fee was 0.49%, 0.52% and 0.53% and total
annual operating expenses were 1.40%, 2.10% and 2.10%,
respectively, for Class A, Class B and Class C for the fiscal
year ended Sept. 30, 1998.
Example Expenses
Class Year 1 Year 3 Year 5 Year 10
Class A $166 $514 $ 887 $1,933
Class B: did not sell your shares 234 721 1,235 2,476
sold all your shares at
the end of the period 747 1,046 1,463 2,476
Class C: did not sell your shares 233 718 1,230 2,636
sold all your shares
at the end of the period 233 718 1,230 2,636
<PAGE>
YOUR ACCOUNT
HOW TO BUY SHARES
Your financial advisor can help you establish an appropriate
investment portfolio, buy shares and monitor your investments.
When the Fund receives your purchase request in "good form," your
shares will be bought at the next calculated NAV. In good form
means that you placed your order with your brokerage firm or
your payment has been received and your application is complete,
including all necessary signatures.
<CALLOUT>
INVESTMENT MINIMUMS (1)
Initial Investment $1,000
Subsequent Investments $50
Automatic Purchase Plans $50
Retirement Plans $25
</CALLOUT>
Outlined below are various ways you can purchase shares:
Method Instructions
Through your
financial advisor Your financial advisor can help you establish
your account and buy Fund shares on your
behalf.
By check (new account) For new accounts, fill out and return a
completed application and check made payable to
the Fund to the transfer agent, Liberty Funds
Services, Inc., P.O. Box 1722, Boston, MA
02105-1722.
By check (existing account) For existing accounts, fill out and
return the additional investment stub included
in your quarterly statement, or send a letter
of instruction including your Fund name and
account number with a check made payable to the
Fund to Liberty Funds Services, Inc., P.O. Box
1722, Boston, MA 02105-1722.
By exchange You may purchase shares by exchanging from an
existing fund into the same share class of
another fund of Stein Roe Advisor Trust at no
additional cost. To exchange by telephone,
call 1-800-422-3737.
By wire You may purchase shares by wiring money from
your bank account to your fund account. To
wire funds to your fund account, call 1-800-
422-3737 to obtain a control number and the
wiring instructions.
By electronic funds transfer (EFT) You may purchase shares by
electronically transferring money from your
bank account to your fund account by calling 1-
800-422-3737. Your money may take up to two
business days to arrive. You must set up this
feature prior to your telephone request. Be
sure to complete the appropriate section of the
application.
Automatic
investment plan You can make monthly or quarterly investments
automatically from your bank account to your
fund account. You can select a pre-authorized
amount to be sent via electronic funds transfer
(EFT). Be sure to complete the appropriate
section of the application for this feature.
By dividend diversification Dividends distributed by one fund can
be automatically invested into the same class
of shares of another fund of Stein Roe Advisor
Trust at no additional sales charge. To invest
your dividends in another fund, call 1-800-345-
6611.
(1) The Fund reserves the right to change the investment minimums.
The Fund also reserves the right to refuse a purchase order for
any reason, including if it believes that doing so would be in the
best interest of the Fund and its shareholders.
SALES CHARGES
You may be subject to an initial sales charge when you purchase,
or a contingent deferred sales charge (CDSC) when you sell, shares
of the Fund. These sales charges are described below. In certain
circumstances these sales charges are waived, as described below
and in the Statement of Additional Information (SAI).
<CALLOUT>
CHOOSING A SHARE CLASS
The Fund offers three classes of shares in this prospectus - Class
A, B and C. Each share class has its own sales charge and expense
structure. Determining which share class is best for you depends
on the dollar amount you are investing and the number of years for
which you are willing to invest. Purchases of more than $250,000
but less than $1 million can only be made in Class A or Class C
shares. Purchases of $1 million or more are automatically
invested in Class A shares. Based on your personal situation,
your investment advisor can help you decide which class of shares
makes the most sense for you.
</CALLOUT>
Class A shares Your purchases of Class A shares generally are at
the Public Offering Price (POP). This price includes a sales
charge that is based on the amount of your initial investment when
you open your account. The sales charge you pay on additional
investments is based on the total amount of your purchase and the
current value of your account. The amount of the sales charge
differs depending on the amount you invest as shown in the tables
below. The tables below also show the commission paid to the
financial advisor firm on sales of Class A shares.
The Fund
Initial Sales Charge
As a % of As a % % of
the Public of your offering
Offering invest- price
Price (POP) ment retained by
financial
advisor
Amount of Purchase firm
Less than $50,000 5.75 6.10 5.00
$ 50,000 to less than $100,000 4.50 4.71 3.75
$100,000 to less than $250,000 3.50 3.63 2.75
$250,000 to less than $500,000 2.50 2.56 2.00
$500,000 to less than $1,000,000 2.00 2.04 1.75
$1,000,000 or more(1) 0.00 0.00 0.00
(1) Redemptions from Class A share accounts with shares valued
between $1 million and $5 million may be subject to a CDSC. Class
A share purchases that bring your account value above $1 million
are subject to a 1% CDSC if redeemed within 18 months of their
purchase date. The 18-month period begins on the first day of the
month following each purchase.
Class A Shares For Class A share purchases of $1 million or more,
financial advisors receive a commission from the Fund's
distributor, Liberty Funds Distributor, Inc. (LFD), as follows:
Purchases Over $1 Million
Amount Purchased Commission %
First $3 million 1.00
Next $2 million 0.50
Over $5 million 0.25
<CALLOUT>
UNDERSTANDING CONTINGENT DEFERRED SALES CHARGES (CDSC)
Certain investments in Class A, B and C shares are subject to a
contingent deferred sales charge (CDSC). You will pay the CDSC
only on shares you sell within a certain amount of time after
purchase. The CDSC generally declines each year until there is no
charge for selling shares. The CDSC is applied to the NAV at the
time of purchase or sale, whichever is lower. Shares you purchase
with reinvested dividends or capital gains are not subject to a
CDSC. When you place an order to sell shares, the Fund will
automatically sell those shares not subject to a CDSC and then
those you have held the longest. This policy helps reduce and
possibly eliminate the potential impact of the CDSC.
</CALLOUT>
Reduced Sales Charges for Larger Investments There are two ways
for you to pay a lower sales charge when purchasing Class A
shares. The first is through Rights of Accumulation. If the
combined value of the Fund accounts maintained by you, your spouse
or your minor children reaches a discount level (according to the
chart on the previous page), your next purchase will receive the
lower sales charge. The second is by signing a Statement of
Intent within 90 days of opening your account. By doing so, you
would be able to pay the lower sales charge on all purchases by
agreeing to invest a total of at least $50,000 within 13 months.
If your Statement of Intent purchases are not completed within 13
months, you will be charged the applicable sales charge. In
addition, certain investors may purchase shares at a reduced sales
charge or net asset value (NAV). See the Statement of Additional
Information for a description of these situations.
Class B shares Your purchases of Class B shares are at the Fund's
NAV. Class B shares have no front-end sales charge, but carry a
CDSC, or back-end charge, that is only imposed on shares sold
prior to the completion of the periods shown in the chart below.
The CDSC generally declines each year and eventually disappears
over time. Class B shares automatically convert to Class A shares
after eight years. LFD pays the financial advisor firm an upfront
commission of 5.00% on sales of Class B shares.
The Fund
Holding period after purchase % deducted when shares are sold
Through first year 5.00
Through second year 4.00
Through third year 3.00
Through fourth year 3.00
Through fifth year 2.00
Through sixth year 1.00
Longer than six years 0.00
Class C shares Similar to Class B shares, your purchases of Class
C shares are at the Fund's NAV. Although Class C shares have no
front-end sales charge, they carry a CDSC of 1% that is applied to
shares sold within the first year after they are purchased. After
holding shares for one year, you may sell them at any time without
paying a CDSC. LFD pays the financial advisor firm an upfront
commission of 1.00% on sales of Class C shares.
The Fund
Years after purchase % deducted when shares are sold
Through first year 1.00
Longer than one year 0.00
DISTRIBUTION AND SERVICE FEES
The Fund has adopted a plan under Rule 12b-1 that permits it to
pay marketing and other fees to support the sale and distribution
of Class A, B and C shares and the services provided to you by
your financial advisor. These annual distribution and service
fees may equal up to 0.25% for Class A shares and 1.00% for each
of Class B and Class C shares and are paid out of the assets of
these classes. Over time, these fees will increase the cost of
your shares and may cost you more than paying other types of sales
charges.(1)
(1) Class B shares automatically convert to Class A after eight
years, eliminating the distribution fee.
HOW TO EXCHANGE SHARES
You may exchange your shares for shares of the same share class of
another fund of Stein Roe Advisor Trust at NAV. If your shares
are subject to a CDSC, you will not be charged a CDSC upon the
exchange. However, when you sell the shares acquired through the
exchange, the shares sold may be subject to a CDSC, depending upon
when you originally purchased the shares you exchanged. For
purposes of computing the CDSC, the length of time you have owned
your shares will be computed from the date of your original
purchase and the applicable CDSC will be the CDSC of the original
fund. Unless your account is part of a tax-deferred retirement
plan, an exchange is a taxable event. Therefore, you may realize
a gain or a loss for tax purposes. The Fund may terminate your
exchange privilege if Stein Roe determines that your exchange
activity is likely to adversely impact its ability to manage the
Fund. To exchange by telephone, call 1-800-422-3737.
HOW TO SELL SHARES
Your financial advisor can help you determine if and when you
should sell your shares. You may sell shares of the Fund on any
regular business day that the NYSE is open.
When the Fund receives your sales request in "good form," shares
will be sold at the next calculated price. In good form means
that money used to purchase your shares is fully collected. When
selling shares by letter of instruction, good form means your
letter has complete instructions, the proper signatures and
signature guarantees, you have included any certificates for
shares to be sold and any other required documents are attached.
Retirement Plan accounts have special requirements. Please call
1-800-799-7526 for more information.
The Fund will generally send proceeds from the sale to you within
seven days. However, if you purchased your shares by check, the
Fund may delay sending the proceeds for up to 15 days after your
initial purchase to protect against checks that are returned.
Outlined below are the various options for selling shares:
Method Instructions
Through your
financial advisor Call your financial advisor to place your sell
order. To receive the current trading day's
price, your financial advisor firm must receive
your request prior to the close of the New York
Stock Exchange (NYSE), usually 4:00 p.m.
By exchange You may purchase shares by exchanging from an
existing fund into the same share class of
another fund of Stein Roe Advisor Trust at no
additional cost. To exchange by telephone,
call 1-800-422-3737.
By telephone You may sell shares by telephone and request
that a check be sent to your address of record
by calling 1-800-422-3737. The dollar limit
for telephone sales is $100,000 in a 30-day
period. You do not need to set up this feature
in advance of your call.
By mail Send a signed letter of instruction (LOI) or
stock power form along with any certificates to
be sold to the address below. In your LOI,
note your fund's name, share class, account
number, and the dollar value or number of
shares you wish to sell. All account owners
must sign the letter, and signatures must be
guaranteed by either a bank, a member firm of a
national stock exchange or another eligible
guarantor institution. Additional
documentation is required for sales by
corporations, agents, fiduciaries, surviving
joint owners and individual retirement account
(IRA) owners. For details, call 1-800-345-
6611.
Mail your LOI to Liberty Funds Services, Inc.,
P.O. Box 1722, Boston, MA 02105-1722
By wire You may sell shares and request that the
proceeds be wired to your bank. You must set
up this feature prior to your telephone
request. Be sure to complete the appropriate
section of the account application for this
feature.
By electronic
funds transfer You may sell shares and request that the
proceeds be electronically transferred to your
bank. Proceeds may take up to two business
days to be received by your bank. You must set
up this feature prior to your request. Be sure
to complete the appropriate section of the
account application for this feature.
OTHER INFORMATION ABOUT YOUR ACCOUNT
How the Fund's Share Price is Determined The price of each class
of the Fund's shares is based on its NAV. The NAV is determined
at the close of regular session trading on the New York Stock
Exchange (NYSE), usually 4:00 p.m. Eastern time on each business
day that the NYSE is open (typically Monday through Friday).
When you request a transaction, it will be processed at the NAV
(after any applicable sales charges) next determined after your
request is received in good form by LFD. In most cases, in order
to receive that day's price, LFD must receive your order before
that day's transactions are processed. If you request a
transaction through your financial advisor's firm, the firm must
receive your order by the close of trading on the NYSE to receive
that day's price.
To calculate NAV on a given day, we value each stock listed or
traded on a stock exchange at its latest sale price on that day.
If there are no sales that day, we value the security at the most
recently quoted bid price. We value each over-the-counter
security or National Association of Securities Dealers Automated
Quotation (Nasdaq) security as of the last sale price for that
day. We value all other over-the-counter securities that have
reliable quotes at the latest quoted bid price.
We value long-term debt obligations and securities convertible
into common stock at fair value. Pricing services provide the
Fund with the value of the securities. When the price of a
security is not available, including days when we determine that
the sale or bid price of the security does not reflect that
security's market value, we value the security at a fair value
determined in good faith under procedures established by the Board
of Trustees.
We value a security at fair value when events have occurred after
the last available market price and before the close of the NYSE
that materially affect the security's price. In the case of
foreign securities, this could include events occurring after the
close of the foreign market and before the close of the NYSE.
The Fund's foreign securities may trade on days when the NYSE is
closed. We will not price shares on days that the NYSE is closed
for trading. You will not be able to purchase or redeem shares
until the next NYSE-trading day.
Account Fees If your account value falls below $1,000 (other than
as a result of depreciation in share value), you may be subject to
an annual account fee of $10. This fee is deducted from the
account in June each year. Approximately 60 days prior to the fee
date, the Fund's transfer agent will send you written notification
of the upcoming fee. If you add money to your account and bring
the value above $1,000 prior to the fee date, the fee will not be
deducted.
Dividends, Distributions, and Taxes The Fund has the potential to
make the following distributions:
<CALLOUT>
UNDERSTANDING FUND DISTRIBUTIONS
The Fund earns income from the securities it holds. The Fund also
may experience capital gains and losses on sales of its
securities. The Fund distributes substantially all of its net
investment income and capital gains to shareholders. As a
shareholder, you are entitled to a portion of the Fund's income
and capital gains based on the number of shares you own at the
time these distributions are declared.
</CALLOUT>
Types of Distributions
Dividend income Represents interest and dividends
earned from securities held by the
portfolio; also includes short-term
capital gains, which are gains on
sales of securities the Fund buys and
then sells within a 12-month period.
Long-term capital gains Represents capital gains on sales of
securities held longer than 12 months.
Distribution Options Income dividends are declared and paid
annually. Any capital gains are distributed at least annually.
You can choose one of following options for these distributions
when you open your account.(1) To change your distribution option
call 1-800-345-6611.
Distribution Options
Reinvest all distributions in additional shares of your current
fund
Reinvest all distributions in shares of another fund
Receive dividends in cash and reinvest capital gains(2)
Receive all distributions in cash and(2)
- - send the check to your address of record
- - send the check to a third party address
- - transfer the money to your bank via electronic funds transfer
(EFT)
(1) If you do not indicate on your application your preference for
handling distributions, the Fund will automatically reinvest all
distributions in additional shares of the Fund.
(2) Distributions of $10 or less will automatically be reinvested
in additional Fund shares. If you elect to receive distributions
by check and the check is returned as undeliverable, or if you do
not cash a distribution check within six months of the check date,
the distribution will be reinvested in additional shares of the
Fund.
Tax Consequences Regardless of whether you receive your
distributions in cash or reinvest them in additional Fund shares,
all Fund distributions are subject to federal income tax.
Depending on the state where you live, distributions may also be
subject to state and local income taxes.
In general, any dividends and short-term capital gains
distributions are taxable as ordinary income. Distributions of
other capital gains are generally taxable as capital gains. You
will be provided each year with the amount of ordinary income and
capital gains distributed to you for the previous year and any
portion of your distribution which is exempt from state and local
taxes. Your investment in the Fund may have additional personal
tax implications. Please consult your tax advisor on state, local
or other applicable tax laws.
In addition to the dividends and capital gains distributions made
by the Fund, you may realize a capital gain or loss when selling
and exchanging shares of the Fund.
MANAGING THE FUND
INVESTMENT ADVISOR
Stein Roe & Farnham Incorporated, One South Wacker Drive, Chicago,
IL 60606, manages the day-to-day operations of the Fund and the
Portfolio. Stein Roe (and its predecessor) has advised and
managed mutual funds since 1949. As of Sept. 30, 1998, Stein Roe
managed more than $28 billion in assets. For the fiscal year
ended Sept. 30, 1998, aggregate fees paid by Classes A, B, and C
of the Fund to Stein Roe amounted to the following, as a percent
of average net assets:
Before Reimbursement After Reimbursement
Class A 0.73% 0.49%
Class B 0.73 0.52
Class C 0.73 0.53
Stein Roe's mutual funds and institutional investment advisory
businesses are managed together with that of its affiliate,
Colonial Management Associates, Inc. (CMA), by a combined
management team of employees from both companies. CMA also shares
personnel, facilities, and systems with Stein Roe that may be used
in providing administrative or operational services to the Funds.
CMA is a registered investment adviser investment adviser. Both
Stein Roe and CMA are subsidiaries of Liberty Financial Companies,
Inc.
Stein Roe can use the services of AlphaTrade Inc., an affiliated
broker-dealer, when buying or selling equity securities for the
Fund's portfolio, pursuant to procedures adopted by the Fund's
Board of Trustees.
Portfolio Managers
Erik P. Gustafson has been portfolio manager of Growth Stock
Portfolio since its inception in 1997 and had managed Growth Stock
Fund since 1994. Mr. Gustafson joined Stein Roe in 1992 as a
portfolio manager for privately managed accounts and is a senior
vice president. He holds a B.A. from the University of Virginia
and M.B.A. and J.D. degrees from Florida State University. Mr.
Gustafson was responsible for managing $1.4 billion in mutual fund
net assets at Sept. 30, 1998.
OTHER INVESTMENT STRATEGIES AND RISKS
The Fund's primary investment strategies and risks are described
in this prospectus. (See "The Fund.") This section and the
Statement of Additional Information (SAI) describe other
investments that the Fund may make and risks associated with them.
The Board of Trustees can change the Fund's investment objective
without shareholder approval.
The Fund's portfolio manager generally makes decisions on buying
and selling portfolio investments based upon his judgment that the
decision will improve the Fund's investment return and further its
investment goal. The portfolio manager may also be required to
sell portfolio investments to fund redemptions.
Market Capitalization
In this prospectus, we refer frequently to market capitalization
as a means to distinguish among companies based on their size. A
company's market capitalization is simply its stock price
multiplied by the number of shares of stock it has issued and
outstanding. In the financial markets, companies generally are
sorted into one of three capitalization-based categories: large
capitalization (large cap); medium capitalization (midcap); or
small capitalization (small cap).
To sort companies in this manner, we compare a company's
capitalization with the capitalization of an appropriate index.
(An index is a statistical composite that measures a group of
stocks.) We utilize two indices in grouping stocks: the S&P Mid-
Cap 400 Index and the S&P Small-Cap 600 Index.
We consider a company to be large cap if its market capitalization
is at least 90 percent of the weighted market capitalization of
the S&P Mid-Cap 400 Index.
We consider a company to be midcap if its market capitalization is
less than 90 percent of the weighted market capitalization of the
S&P Mid-Cap 400 Index and at least 90 percent of the weighted
market capitalization of the S&P Small-Cap 600 Index.
We consider a company to be small cap if its market capitalization
is less than 90 percent of the weighted market capitalization of
the S&P Small-Cap 600 Index.
As of Dec. 31, 1998, large-cap companies had market
capitalizations greater than $6.6 billion, midcap companies had
market capitalizations between $1.8 and $6.6 billion and small-cap
companies had market capitalizations less than $1.8 billion.
These amounts will change as the S&P Mid-Cap 400 and S&P Small-Cap
600 indices change.
PORTFOLIO TURNOVER
There are no limits on turnover. Turnover may vary significantly
from year to year. Stein Roe does not expect it to exceed 100
percent under normal conditions. Portfolio turnover typically
produces capital gains or losses resulting in tax consequences for
Fund shareholders. It also increases transaction expenses, which
reduce the Fund's return.
TEMPORARY DEFENSIVE POSITIONS
When Stein Roe believes that a temporary defensive position is
necessary, the Portfolio may invest, without limit, in high-
quality debt securities or hold assets in cash and cash
equivalents. Stein Roe is not required to take a temporary
defensive position, and market conditions may prevent such an
action. The Fund may not achieve its investment objective if it
takes a defensive position.
INTERFUND LENDING PROGRAM
The Portfolio may lend money to and borrow money from other funds
advised by Stein Roe. The Portfolio will do so when Stein Roe
believes such lending or borrowing is necessary and appropriate.
Borrowing costs will be the same as or lower than the costs of a
bank loan.
MASTER/FEEDER STRUCTURE
Unlike mutual funds that directly acquire and manage their own
portfolio of securities, the Fund is a "feeder" fund in a
"master/feeder" structure. This means that the Fund invests its
assets in a larger "master" portfolio of securities, the SR&F
Growth Stock Portfolio, which has investment objectives and
policies substantially identical to those of the Fund. The
investment performance of the Fund depends upon the investment
performance of the Portfolio. If the investment policies of the
Portfolio and the Fund became inconsistent, the Board of Trustees
of the Fund can decide what actions to take. Actions the Board of
Trustees may recommend include withdrawal of the Fund's assets
from the Portfolio. For more information on the master/feeder
fund structure, see the SAI.
YEAR 2000 COMPLIANCE
Like other investment companies, financial and business
organizations and individuals around the world, the Fund could be
adversely affected if the computer systems used by Stein Roe and
other service providers do not properly process and calculate
date-related information and data from and after Jan. 1, 2000.
This is commonly known as the "Year 200 Problem." The Fund's
service providers are taking steps that they believe are
reasonably designed to address the Year 2000 Problem, including
working with vendors who furnish services, software and systems to
the Fund, to provide that date-related information and data can be
properly processed after Jan. 1, 2000. Many of the Fund's service
providers and vendors are in the process of making Year 2000
modifications to their software and systems and believe that such
modifications will be completed on a timely basis prior to Jan. 1,
2000. However, no assurances can be given that all modifications
required to ensure proper data processing and calculation on and
after Jan. 1, 2000 will be made on a timely basis or that services
to the Fund will not be adversely affected.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand
the Fund's financial performance. Information is shown for the
Fund's fiscal years since its inception. The fiscal year runs
from October 1 to September 30. Certain information in the table
reflects the financial results for a single Fund share. This
information has been audited by Arthur Andersen LLP, independent
accountants, whose report along with the Fund's financial
statements are included in its annual report. You can request a
free annual report by calling 1-800-426-3750.
The Fund
Period ended
Sept. 30, 1998(a)
Class A Class B Class C
Net asset value-Beginning of period $ 11.59 $ 11.59 $ 11.59
Income from Investment Operations
Net investment loss (0.04) (0.08) (0.08)
Net gains on securities (both
realized and unrealized) 0.27 0.23 0.21
Net asset value-end of period $ 11.82 $ 11.74 $ 11.72
Total return (c) 1.98% 1.29% 1.12%
Ratios/Supplemental Data
Net assets, end of period
(000 omitted) $39,521 $64,148 $10,472
Ratio of net expenses to average
net assets (b) 1.40%(d) 2.10%(d) 2.10%(d)
Ratio of net investment loss to
average net assets (c) (0.50%)(d) (1.20%)(d) (1.21%)(d)
(a) From commencement of mutli-class offering on Oct. 15, 1997.
(b) If the Fund had paid all of its expenses and there had been no
reimbursement by Stein Roe, this ratio would have been 1.63%
for Class A shares, 2.31% for Class B shares, and 2.30% for
Class C shares for the period ended Sept. 30, 1998.
(c) Computed giving effect to Stein Roe's expense limitation
undertaking.
(d) Annualized.
<PAGE>
FOR MORE INFORMATION
You can get more information about the Fund's investments in the
Fund's semi-annual and annual reports to shareholders. The annual
report contains a discussion of the market conditions and
investment strategies that significantly affected the Fund's
performance over its last fiscal year.
You may wish to read the Statement of Additional Information (SAI)
for more information on the Fund and the securities in which it
invests. The SAI is incorporated into this prospectus by
reference, which means that it is considered to be part of this
prospectus.
You can get free copies of reports and the SAI, request other
information and discuss your questions about the Fund by writing
or calling the Fund's Distributor at:
Liberty Funds Distributor, Inc.
One Financial Center
Boston, MA 02111-2621
1-800-426-3750
www.libertyfunds.com
Text-only versions of all Fund documents can be viewed online or
downloaded from the SEC at www.sec.gov.
You can also obtain copies upon payment of a duplicating fee, by
writing or calling the:
Public Reference Room
Securities and Exchange Commission
Washington, DC, 20549-6009
1-800-SEC-0330
Investment Company Act file number:
Stein Roe Advisor Trust 811-07955
- -Stein Roe Advisor Growth Stock Fund
<PAGE>
STEIN ROE ADVISOR GROWTH STOCK FUND PROSPECTUS, FEB. 1, 1999
Class K Shares
Advised by Stein Roe & Farnham Incorporated
The Securities and Exchange Commission has not approved or
disapproved these securities or determined whether this prospectus
is accurate or complete. Anyone who tells you otherwise is
committing a crime.
TABLE OF CONTENTS
THE FUND
Investment Goal
Primary Investment Strategy
Primary Investment Risks
Performance History
Expenses
YOUR ACCOUNT
How to Buy Shares
Distribution and Service Fees
How to Exchange Shares
How to Sell Shares
Other Information About Your Account
MANAGING THE FUND
Investment Advisor
Portfolio Manager
OTHER INVESTMENT STRATEGIES AND RISKS
FINANCIAL HIGHLIGHTS
NOT FDIC INSURED MAY LOSE VALUE
NO BANK GUARANTEE
<PAGE>
THE FUND STEIN ROE ADVISOR GROWTH STOCK FUND
[Callout]
DEFINING CAPITALIZATION
A company's market capitalization is simply its stock price
multiplied by the number of shares of stock it has issued and
outstanding. In the financial markets, companies generally are
sorted into one of three capitalization-based categories: large
capitalization (large cap); medium capitalization (midcap); or
small capitalization (small cap).
As of Dec. 31, 1998, large-cap companies had market
capitalizations greater than $6.6 billion, midcap companies had
market capitalizations between $1.8 and $6.6 billion and small-cap
companies had market capitalizations less than $1.8 billion.
These amounts will change as the S&P Mid-Cap 400 and S&P Small-Cap
600 indices change.
[End Callout]
INVESTMENT GOAL
The Fund seeks long-term growth.
PRIMARY INVESTMENT STRATEGY
The Fund invests all of its assets in SR&F Growth Stock Portfolio
as part of a master fund/feeder fund structure. The Portfolio
invests primarily in the common stocks of companies with large-
market capitalizations. The Portfolio emphasizes the technology,
financial services, health care, and global consumer franchise
sectors. The Portfolio may invest up to 25 percent of its assets
in foreign stocks. To select investments for the Portfolio, the
portfolio manager considers companies that he believes will
generate earnings growth over the long term regardless of the
economic environment.
PRIMARY RISKS
There are two basic risks for all mutual funds that invest in
stocks: management risk and market risk. These risks may cause
you to lose money when you sell the shares.
Management risk means that Stein Roe's stock selections and other
investment decisions might produce losses or cause the Fund to
underperform when compared to other funds with similar goals.
Market risk means that the security prices in a market sector or
industry may move down. Downward movements will reduce the value
of your investment. Because of management and market risk, there
is no guarantee that the Fund will achieve its investment goal or
perform favorably compared with competing funds.
Because the Portfolio invests in stocks, the price of the Fund's
shares-its net asset value per share (NAV)-fluctuates daily in
response to changes in the market value of the securities In
addition, the risks associated with the Portfolio's investment
strategy may cause the Fund's total return or yield to decrease.
The Portfolio's emphasis on certain market sectors may increase
volatility in the Fund's NAV. If sectors that the Portfolio
invests in do not perform well, the Fund's NAV could decrease.
Foreign Securities. Foreign securities are subject to special
risks. Foreign stock markets, especially in countries with
developing stock markets, can be extremely volatile. The
liquidity of foreign securities may be more limited than domestic
securities, which means that the Portfolio may at times be unable
to sell them at desirable prices. Fluctuations in currency
exchange rates impact the value of foreign securities. Brokerage
commissions, custodial fees, and other fees are generally higher
for foreign investments. In addition, foreign governments may
impose withholding taxes which would reduce the amount of income
available to distribute to shareholders. Other risks include:
possible delays in settlement of transactions; less publicly
available information about companies; the impact of political,
social or diplomatic events; and possible seizure, expropriation
or nationalization of the company or its assets.
Information on other securities and risks appears under "Other
Investment Strategies and Risks."
PERFORMANCE HISTORY
The bar chart and performance table below show the historical
performance for the Portfolio restated as disclosed below and the
performance of the Fund's Class K shares. The chart and table
give some indication of the risks of investing in the Fund. The
returns include the reinvestment of dividends and distributions.
As with all mutual funds, past performance does not predict the
Fund's future performance.
<CALLOUT>
UNDERSTANDING PERFORMANCE
Calendar-year total return shown in the bar chart includes the
effects of Fund expenses. The bar chart does not take into effect
any expense reduction arrangements discussed in the footnotes to
the Annual Fund Operating Expenses table.
Average annual total return is a measure of the Fund's performance
over the past one-, five- and ten-year periods. It includes the
effects of Fund expenses. The table does not take into effect any
expense reduction arrangements discussed in the footnotes to the
Annual Fund Operating Expenses table. The Fund's return is
compared to the S&P 500 Index. Unlike the Fund, the Index does
not incur fees or charges. It is not possible to invest in the
Index.
</CALLOUT>
Calendar-Year Total Returns(1)
50%
40% 45.64%
30% 35.16% 35.30% 32.86%
20% 20.64% 24.39%
10%
0% 0.68% 7.97% 2.58%
- -10% -4.02%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
(1) Class K shares of the Fund commenced operations on February
14, 1997. The performance in the chart for calendar years 1989
through 1996 is the performance of the Portfolio restated to
reflect the Class K share expenses. The performance for calendar
year 1997 shows the restated performance of the Portfolio combined
with the performance of the Fund's Class K shares since inception.
The performance for calendar year 1998 shows the performance of
the Fund's Class K shares only.
Best quarter: Fourth quarter 1998, +24.28%
Worst quarter: Third quarter 1990, -16.66%
Average Annual Total Returns(2)- for periods ending December 31,
1998
1 Year 5 Years 10 Years
Class K (%) 24.39 20.96 18.98
S&P 500 Index (%) 28.74 24.08 19.20
(2) The 1 Year performance in the table reflects the performance
of the Fund's Class K shares. The 5 Year and 10 Year performance
in the table reflects the restated performance of the Portfolio
combined with the performance of the Fund's Class K shares since
inception. The performance of the Portfolio is restated to
reflect Class K share expenses.
YOUR EXPENSES
The tables below describe the fees and expenses you may pay when
you buy, hold and sell shares of the Fund. Your actual costs may
be higher or lower.
<CALLOUT>
UNDERSTANDING EXPENSES
Shareholder Fees are paid directly by shareholders to the Fund's
distributor.
Annual Fund Operating Expenses are deducted from the Fund. They
include management fees, 12b-1 fees, and administrative costs
including tax and compliance services.
Example Expenses helps you compare the cost of investing in the
Fund to the cost of investing in other mutual funds. The table
does not take into account any expense reduction arrangements
discussed in the footnotes to the Annual Fund Operating Expenses
table. It uses the following hypothetical conditions:
* $10,000 initial investment
* 5% total return for each year
* Fund operating expenses remain the same
* No expense reductions in effect
*Redemption at the end of each time period
</CALLOUT>
Annual Fund Operating Expenses (1)(2) (expenses are deducted
directly from Fund assets)
Class K
Management fee(3)(4) (%) 0.73
Distribution and service (12 b-1) fees (%) 0.25
Other expenses(4) (%) 1.09
Total annual fund operating expenses(4) (%) 2.07
(1) A $10 annual fee is deducted from accounts of less than $1,000
and paid to the transfer agent.
(2) There is a $7.50 charge for wiring sale proceeds to your bank.
(3) Management fee includes both the management fee and the
administrative fee charged to the Fund.
(4) The Fund's advisor voluntarily waived advisory fees and
reimbursed the Fund for certain expenses. As a result, the
actual management fee was 0.01% and total annual operating
expenses were 1.35% for the fiscal year ended Sept. 30, 1998.
Example Expenses
Class Year 1 Year 3 Year 5 Year 10
Class K $210 $653 $1,126 $2,455
<PAGE>
YOUR ACCOUNT
HOW TO BUY SHARES
Your financial advisor can help you establish an appropriate
investment portfolio, buy shares and monitor your investments.
When the Fund receives your purchase request in "good form," your
shares will be bought at the next calculated NAV. In good form
means that you placed your order with your brokerage firm or
your payment has been received and your application is complete,
including all necessary signatures.
<CALLOUT>
INVESTMENT MINIMUMS (1)
Initial Investment $1,000
Subsequent Investments $50
Automatic Purchase Plans $50
Retirement Plans $25
</CALLOUT>
(1) The Fund reserves the right to change the investment minimums.
The Fund also reserves the right to refuse a purchase order for
any reason, including if it believes that doing so would be in the
best interest of the Fund and its shareholders.
Outlined below are various ways you can purchase shares:
Method Instructions
Through your
financial advisor Your financial advisor can help you establish
your account and buy Fund shares on your
behalf.
By check (new
account) For new accounts, send a completed application
and check made payable to the Fund to the
transfer agent, Liberty Funds Services, Inc.,
P.O. Box 1722, Boston, MA 02105-1722.
By check
(existing account) For existing accounts, fill out and return the
additional investment stub included in your
quarterly statement, or send a letter of
instruction including your Fund name and
account number with a check made payable to the
Fund to Liberty Funds Services, Inc., P.O. Box
1722, Boston, MA 02105-1722.
By exchange You may purchase shares by exchanging from an
existing fund into the same share class of
another fund of Stein Roe Advisor Trust at no
additional cost. To exchange by telephone,
call 1-800-422-3737.
By wire You may purchase shares by wiring money from
your bank account to your fund account. To
wire funds to your fund account, call 1-800-
422-3737 to obtain a control number and the
wiring instructions.
By electronic funds
transfer (EFT) You may purchase shares by electronically
transferring money from your bank account to
your fund account by calling 1-800-422-3737.
Your money may take up to two business days to
arrive. You must set up this feature prior to
your telephone request. Be sure to complete
the appropriate section of the application.
Automatic investment
plan You can make monthly or quarterly investments
automatically from your bank account to your
fund account. You can select a pre-authorized
amount to be sent via electronic funds transfer
(EFT). Be sure to complete the appropriate
section of the application for this feature.
By dividend
diversification Dividends distributed by one fund can be
automatically invested into the same class of
shares of another fund of Stein Roe Advisor
Trust at no additional sales charge. To invest
your dividends in another fund, call 1-800-345-
6611.
DISTRIBUTION AND SERVICE FEES
The Fund has adopted a plan under Rule 12b-1 that permits it to
pay marketing and other fees to support the sale and distribution
of Class K shares and the services provided to you by your
financial advisor. Annual distribution and service fees may equal
up to 0.25% for Class K shares and are paid out of the assets of
the class. Over time, these fees will increase the cost of your
shares and may cost you more than paying other types of sales
charges.
HOW TO EXCHANGE SHARES
You may exchange your shares for shares of the same share class of
another fund of Stein Roe Advisor Trust at NAV. Unless your
account is part of a tax-deferred retirement plan, an exchange is
a taxable event. Therefore, you may realize a gain or a loss for
tax purposes. The Fund may terminate your exchange privilege if
Stein Roe determines that your exchange activity is likely to
adversely impact its ability to manage the Fund. To exchange by
telephone, call 1-800-422-3737.
HOW TO SELL SHARES
Your financial advisor can help you determine if and when you
should sell your shares. You may sell shares of the Fund on any
regular business day that the NYSE is open.
When the Fund receives your sales request in "good form," shares
will be sold at the next calculated price. In good form means
that money used to purchase your shares is fully collected. When
selling shares by letter of instruction, good form means your
letter has complete instructions, the proper signatures and
signature guarantees, you have included any certificates for
shares to be sold and any other required documents are attached.
Retirement Plan accounts have special requirements. Please call
1-800-799-7526 for more information.
The Fund will generally send proceeds from the sale to you within
seven days. However, if you purchased your shares by check, the
Fund may delay sending the proceeds for up to 15 days after your
initial purchase to protect against checks that are returned.
Outlined below are the various options for selling shares
Method Instructions
Through your
financial advisor Call your financial advisor to place your sell
order. To receive the current trading day's
price, your financial advisor firm must receive
your request prior to the close of the New York
Stock Exchange (NYSE), usually 4:00 p.m.
By exchange You may purchase shares by exchanging from an
existing fund into the same share class of
another fund of Stein Roe Advisor Trust at no
additional cost. To exchange by telephone,
call 1-800-422-3737.
By telephone You may sell shares by telephone and request
that a check be sent to your address of record
by calling 1-800-422-3737. The dollar limit
for telephone sales is $100,000 in a 30-day
period. You do not need to set up this feature
in advance of your call.
By mail Send a signed letter of instruction (LOI) or
stock power form along with any certificates to
be sold to the address below. In your LOI,
note your fund's name, share class, account
number, and the dollar value or number of
shares you wish to sell. All account owners
must sign the letter, and signatures must be
guaranteed by either a bank, a member firm of a
national stock exchange or another eligible
guarantor institution. Additional
documentation is required for sales by
corporations, agents, fiduciaries, surviving
joint owners and individual retirement account
(IRA) owners. For details, call 1-800-345-
6611.
Mail your LOI to Liberty Funds Services, Inc.,
P.O. Box 1722, Boston, MA 02105-1722
By wire You may sell shares and request that the
proceeds be wired to your bank. You must set
up this feature prior to your telephone
request. Be sure to complete the appropriate
section of the account application for this
feature.
By electronic
funds transfer You may sell shares and request that the
proceeds be electronically transferred to your
bank. Proceeds may take up to two business
days to be received by your bank. You must set
up this feature prior to your request. Be sure
to complete the appropriate section of the
account application for this feature.
OTHER INFORMATION ABOUT YOUR ACCOUNT
How the Fund's Share Price is Determined The price of the Fund's
Class K shares is based on its NAV. The NAV is determined at the
close of regular session trading on the New York Stock Exchange
(NYSE), usually 4:00 p.m. Eastern time on each business day that
the NYSE is open (typically Monday through Friday).
When you request a transaction, it will be processed at the NAV
next determined after your request is received in good form by
Liberty Funds Distributor, Inc. (LFD). In most cases, in order
to receive that day's price, LFD must receive your order before
that day's transactions are processed. If you request a
transaction through your financial advisor's firm, the firm
must receive your order by the close of trading on the NYSE
to receive that day's price.
To calculate NAV on a given day, we value each stock listed or
traded on a stock exchange at its latest sale price on that day.
If there are no sales that day, we value the security at the most
recently quoted bid price. We value each over-the-counter
security or National Association of Securities Dealers Automated
Quotation (Nasdaq) security as of the last sale price for that
day. We value all other over-the-counter securities that have
reliable quotes at the latest quoted bid price.
We value long-term debt obligations and securities convertible
into common stock at fair value. Pricing services provide the
Fund with the value of the securities. When the price of a
security is not available, including days when we determine that
the sale or bid price of the security does not reflect that
security's market value, we value the security at a fair value
determined in good faith under procedures established by the Board
of Trustees.
We value a security at fair value when events have occurred after
the last available market price and before the close of the NYSE
that materially affect the security's price. In the case of
foreign securities, this could include events occurring after the
close of the foreign market and before the close of the NYSE.
The Fund's foreign securities may trade on days when the NYSE is
closed. We will not price shares on days that the NYSE is closed
for trading. You will not be able to purchase or redeem shares
until the next NYSE-trading day.
Account Fees If your account value falls below $1,000 (other than
as a result of depreciation in share value), you may be subject to
an annual account fee of $10. This fee is deducted from the
account in June each year. Approximately 60 days prior to the fee
date, the Fund's transfer agent will send you written notification
of the upcoming fee. If you add money to your account and bring
the value above $1,000 prior to the fee date, the fee will not be
deducted.
Dividends, Distributions, and Taxes The Fund has the potential to
make the following distributions:
<CALLOUT>
Understanding Fund Distributions
The Fund earns income from the securities it holds. The Fund also
may experience capital gains and losses on sales of its
securities. The Fund distributes substantially all of its net
investment income and capital gains to shareholders. As a
shareholder, you are entitled to a portion of the Fund's income
and capital gains based on the number of shares you own at the
time these distributions are declared.
</CALLOUT>
Types of Distributions
Dividend income Represents interest and dividends
earned from securities held by the
portfolio; also includes short-term
capital gains, which are gains on
sales of securities the Fund buys and
then sells within a 12-month period.
Long-term capital gains Represents capital gains on sales of
securities held longer than 12 months.
Distribution Options Income dividends are declared and paid
annually. Any capital gains are distributed at least annually.
You can choose one of following options for these distributions
when you open your account.(1) To change your distribution option
call 1-800-345-6611.
Distribution Options
Reinvest all distributions in additional shares of your current
fund
Reinvest all distributions in shares of another fund
Receive dividends in cash and reinvest capital gains(2)
Receive all distributions in cash and(2)
- - send the check to your address of record
- - send the check to a third party address
- - transfer the money to your bank via electronic funds transfer
(EFT)
(1) If you do not indicate on your application your preference for
handling distributions, the Fund will automatically reinvest all
distributions in additional shares of the Fund.
(2) Distributions of $10 or less will automatically be reinvested
in additional Fund shares. If you elect to receive distributions
by check and the check is returned as undeliverable, or if you do
not cash a distribution check within six months of the check date,
the distribution will be reinvested in additional shares of the
Fund.
Tax Consequences Regardless of whether you receive your
distributions in cash or reinvest them in additional Fund shares,
all Fund distributions are subject to federal income tax.
Depending on the state where you live, distributions may also be
subject to state and local income taxes.
In general, any dividends and short-term capital gains
distributions are taxable as ordinary income. Distributions of
other capital gains are generally taxable as capital gains. You
will be provided each year with the amount of ordinary income and
capital gains distributed to you for the previous year and any
portion of your distribution which is exempt from state and local
taxes. Your investment in the Fund may have additional personal
tax implications. Please consult your tax advisor on state, local
or other applicable tax laws.
In addition to the dividends and capital gains distributions made
by the Fund, you may realize a capital gain or loss when selling
and exchanging shares of the Fund.
MANAGING THE FUND
INVESTMENT ADVISOR
Stein Roe & Farnham Incorporated, One South Wacker Drive, Chicago,
IL 60606, manages the day-to-day operations of the Fund and the
Portfolio. Stein Roe (and its predecessor) has advised and
managed mutual funds since 1949. As of Sept. 30, 1998, Stein Roe
managed more than $28 billion in assets. For the fiscal year
ended Sept. 30, 1998, aggregate fees paid by Class K shares of the
Fund to Stein Roe amounted to 0.73 percent of average net assets
before reimbursement and 0.01 percent after reimbursement.
Stein Roe's mutual funds and institutional investment advisory
businesses are managed together with that of its affiliate,
Colonial Management Associates, Inc. (CMA), by a combined
management team of employees from both companies. CMA also shares
personnel, facilities, and systems with Stein Roe that may be used
in providing administrative or operational services to the Funds.
CMA is a registered investment adviser investment adviser. Both
Stein Roe and CMA are subsidiaries of Liberty Financial Companies,
Inc.
Stein Roe can use the services of AlphaTrade Inc., an affiliated
broker-dealer, when buying or selling equity securities for the
Fund's portfolio, pursuant to procedures adopted by the Fund's
Board of Trustees.
PORTFOLIO MANAGER
Erik P. Gustafson has been portfolio manager of Growth Stock
Portfolio since its inception in 1997 and had managed Growth Stock
Fund since 1994. Mr. Gustafson joined Stein Roe in 1992 as a
portfolio manager for privately managed accounts and is a senior
vice president. He holds a B.A. from the University of Virginia
and M.B.A. and J.D. degrees from Florida State University. Mr.
Gustafson was responsible for managing $1.4 billion in mutual fund
net assets at Sept. 30, 1998.
OTHER INVESTMENT STRATEGIES AND RISKS
The Fund's primary investment strategies and risks are described
in this prospectus. (See "The Fund.") This section and the
Statement of Additional Information (SAI) describe other
investments that the Fund may make and risks associated with them.
The Board of Trustees can change the Fund's investment objective
without shareholder approval.
The Fund's portfolio manager generally makes decisions on buying
and selling portfolio investments based upon his judgment that the
decision will improve the Fund's investment return and further its
investment goal. The portfolio manager may also be required to
sell portfolio investments to fund redemptions.
Market Capitalization
In this prospectus, we refer frequently to market capitalization
as a means to distinguish among companies based on their size. A
company's market capitalization is simply its stock price
multiplied by the number of shares of stock it has issued and
outstanding. In the financial markets, companies generally are
sorted into one of three capitalization-based categories: large
capitalization (large cap); medium capitalization (midcap); or
small capitalization (small cap).
To sort companies in this manner, we compare a company's
capitalization with the capitalization of an appropriate index.
(An index is a statistical composite that measures a group of
stocks.) We utilize two indices in grouping stocks: the S&P Mid-
Cap 400 Index and the S&P Small-Cap 600 Index.
We consider a company to be large cap if its market capitalization
is at least 90 percent of the weighted market capitalization of
the S&P Mid-Cap 400 Index.
We consider a company to be midcap if its market capitalization is
less than 90 percent of the weighted market capitalization of the
S&P Mid-Cap 400 Index and at least 90 percent of the weighted
market capitalization of the S&P Small-Cap 600 Index.
We consider a company to be small cap if its market capitalization
is less than 90 percent of the weighted market capitalization of
the S&P Small-Cap 600 Index.
As of Dec. 31, 1998, large-cap companies had market
capitalizations greater than $6.6 billion, midcap companies had
market capitalizations between $1.8 and $6.6 billion and small-cap
companies had market capitalizations less than $1.8 billion.
These amounts will change as the S&P Mid-Cap 400 and S&P Small-Cap
600 indices change.
Portfolio Turnover
There are no limits on turnover. Turnover may vary significantly
from year to year. Stein Roe does not expect it to exceed 100
percent under normal conditions. Portfolio turnover typically
produces capital gains or losses resulting in tax consequences for
Fund shareholders. It also increases transaction expenses, which
reduce the Fund's return.
Temporary Defensive Positions
When Stein Roe believes that a temporary defensive position is
necessary, the Portfolio may invest, without limit, in high-
quality debt securities or hold assets in cash and cash
equivalents. Stein Roe is not required to take a temporary
defensive position, and market conditions may prevent such an
action. The Fund may not achieve its investment objective if it
takes a defensive position.
Interfund Lending Program
The Portfolio may lend money to and borrow money from other funds
advised by Stein Roe. The Portfolio will do so when Stein Roe
believes such lending or borrowing is necessary and appropriate.
Borrowing costs will be the same as or lower than the costs of a
bank loan.
Master/Feeder Structure
Unlike mutual funds that directly acquire and manage their own
portfolio of securities, the Fund is a "feeder" fund in a
"master/feeder" structure. This means that the Fund invests its
assets in a larger "master" portfolio of securities, the SR&F
Growth Stock Portfolio, which has investment objectives and
policies substantially identical to those of the Fund. The
investment performance of the Fund depends upon the investment
performance of the Portfolio. If the investment policies of the
Portfolio and the Fund became inconsistent, the Board of Trustees
of the Fund can decide what actions to take. Actions the Board of
Trustees may recommend include withdrawal of the Fund's assets
from the Portfolio. For more information on the master/feeder
fund structure, see the SAI.
Year 2000 Compliance
Like other investment companies, financial and business
organizations and individuals around the world, the Fund could be
adversely affected if the computer systems used by Stein Roe and
other service providers do not properly process and calculate
date-related information and data from and after Jan. 1, 2000.
This is commonly known as the "Year 200 Problem." The Fund's
service providers are taking steps that they believe are
reasonably designed to address the Year 2000 Problem, including
working with vendors who furnish services, software and systems to
the Fund to provide that date-related information and data can be
properly processed after Jan. 1, 2000. Many of the Fund's service
providers and vendors are in the process of making Year 2000
modifications to their software and systems and believe that such
modifications will be completed on a timely basis prior to Jan. 1,
2000. However, no assurances can be given that all modifications
required to ensure proper data processing and calculation on and
after Jan. 1, 2000 will be made on a timely basis or that services
to the Fund will not be adversely affected.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand
the Fund's financial performance. Information is shown for the
Fund's fiscal years since its inception. The fiscal year runs
from October 1 to September 30. Certain information in the table
reflects the financial results for a single Fund share. This
information has been audited by Arthur Andersen LLP, independent
accountants, whose report along with the Fund's financial
statements are included in its annual report. You can request a
free annual report by calling 1-800-426-3750.
Fund
Class K
Year Ended Period Ended
Sept. 30 Sept. 30
1998 1997(a)
Net asset value-Beginning of period $11.26 $10.00
Income from Investment Operations
Net investment loss (0.03) (0.01)
Net gains on securities (both
realized and unrealized) 0.63 1.27
Net asset value-End of period $11.86 $11.26
Total return (c) 5.33% 12.60%
Ratios/Supplemental Data
Net assets, end of period (000 omitted) $2,768 $251
Ratio of net expenses to average net
assets (b) 1.35% 1.35%(d)
Ratio of net investment loss to
average net assets (c) (0.47%) (0.22%)(d)
(a) From commencement of operations on Feb. 14, 1997.
(b) If the Fund had paid all of its expenses and there had been no
reimbursement by Stein Roe, this ratio would have been 2.07%
for the year ended Sept. 30, 1998, and 56.10% for the period
ended Sept. 30, 1997.
(c) Computed giving effect to Stein Roe's expense limitation
undertaking.
(d) Annualized.
<PAGE>
FOR MORE INFORMATION
You can get more information about the Fund's investments in the
Fund's semi-annual and annual reports to shareholders. The annual
report contains a discussion of the market conditions and
investment strategies that significantly affected the Fund's
performance over its last fiscal year.
You may wish to read the Statement of Additional Information (SAI)
for more information on the Fund and the securities in which it
invests. The SAI is incorporated into this prospectus by
reference, which means that it is considered to be part of this
prospectus.
You can get free copies of reports and the SAI, request other
information and discuss your questions about the Fund by writing
or calling the Fund's Distributor at:
Liberty Funds Distributor, Inc.
One Financial Center
Boston, MA 02111-2621
1-800-426-3750
www.libertyfunds.com
Text-only versions of all Fund documents can be viewed online or
downloaded from the SEC at www.sec.gov.
You can also obtain copies upon payment of a duplicating fee, by
writing or calling the:
Public Reference Room
Securities and Exchange Commission
Washington, DC, 20549-6009
1-800-SEC-0330
Investment Company Act file number:
Stein Roe Advisor Trust 811-07955
- -Stein Roe Advisor Growth Stock Fund
<PAGE>
Statement of Additional Information Dated Feb. 1, 1999
STEIN ROE ADVISOR TRUST
Suite 3200, One South Wacker Drive, Chicago, IL 60606
Stein Roe Advisor Growth & Income Fund
Stein Roe Advisor Special Fund
This Statement of Additional Information ("SAI") is not a
prospectus, but provides additional information that should be
read in conjunction with the prospectus dated Feb. 1, 1999, and
any supplements thereto ("Prospectus"). Financial statements,
which are contained in the Funds' Annual Report, are incorporated
by reference into this SAI. The Prospectus and Annual Report may
be obtained at no charge by calling Stein Roe & Farnham
Incorporated. For additional information, call Retirement
Services at 800-322-1130 or Advisor/Broker Services at 800-322-
0593.
TABLE OF CONTENTS
Page
General Information and History............................2
Investment Policies........................................3
Advisor Growth & Income Fund............................4
Advisor Special Fund....................................4
Portfolio Investments and Strategies.......................5
Investment Restrictions...................................20
Additional Investment Considerations......................23
Management................................................24
Financial Statements......................................27
Principal Shareholders....................................27
Investment Advisory and Other Services....................28
Custodian.................................................31
Independent Public Accountants............................32
Distributor...............................................32
Transfer Agent and Shareholder Servicing..................33
Purchases and Redemptions.................................33
Portfolio Transactions....................................34
Additional Income Tax Considerations......................37
Investment Performance....................................37
Master Fund/Feeder Fund: Structure and Risk Factors.......42
Appendix-Ratings..........................................44
GENERAL INFORMATION AND HISTORY
The mutual funds described in this SAI are the following
separate series of Stein Roe Advisor Trust (the "Trust"):
Stein Roe Advisor Growth & Income Fund ("Advisor Growth & Income
Fund")
Stein Roe Advisor Special Fund ("Advisor Special Fund")
The above series are referred to collectively as "the Funds."
Each Fund offers one class of shares, Class K. On Sept. 13, 1996,
the spelling of the name of the Trust was changed from Stein Roe
Adviser Trust to Stein Roe Advisor Trust.
The 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 the
Trust's shareholders or its trustees. The Trust may issue an
unlimited number of shares, in one or more series as the Board may
authorize. Currently, six series are authorized and outstanding.
Each series invests in a separate portfolio of securities and
other assets, with its own objectives and policies.
Under Massachusetts law, shareholders of a Massachusetts
business trust such as the Trust could, in some circumstances, be
held personally liable for unsatisfied obligations of the trust.
The Declaration of Trust provides that persons extending credit
to, contracting with, or having any claim against the Trust or any
particular series shall look only to the assets of the Trust or of
the respective series for payment under such credit, contract or
claim, and that the shareholders, trustees and officers 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
the 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 the 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 the
Trust also is 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 series was unable to meet its
obligations.
Each share of a series, without par value, is entitled to
participate pro rata in any dividends and other distributions
declared by the Board on shares of that series, and all shares of
a series have equal rights in the event of liquidation of that
series. Each whole share (or fractional share) outstanding on the
record date established in accordance with the By-Laws shall be
entitled to a number of votes on any matter on which it is
entitled to vote equal to the net asset value of the share (or
fractional share) in United States dollars determined at the close
of business on the record date (for example, a share having a net
asset value of $10.50 would be entitled to 10.5 votes). As a
business trust, the Trust is not required to hold annual
shareholder meetings. However, special meetings may be called for
purposes such as electing or removing trustees, changing
fundamental policies, or approving an investment advisory
contract. If requested to do so by the holders of at least 10% of
its outstanding shares, the Trust will call a special meeting for
the purpose of voting upon the question of removal of a trustee or
trustees and will assist in the communications with other
shareholders as if the Trust were subject to Section 16(c) of the
Investment Company Act of 1940. All shares of all series of the
Trust are voted together in the election of trustees. On any
other matter submitted to a vote of shareholders, shares are voted
in the aggregate and not by individual series, except that shares
are voted by individual series when required by the Investment
Company Act of 1940 or other applicable law, or when the Board of
Trustees determines that the matter affects only the interests of
one or more series, in which case shareholders of the unaffected
series are not entitled to vote on such matters.
Special Considerations Regarding Master Fund/Feeder Fund Structure
Rather than invest in securities directly, the Funds seek to
achieve their objectives by pooling their assets with those of
other investment companies for investment in a master fund having
the identical investment objective and substantially the same
investment policies as its feeder funds. The purpose of such an
arrangement is to achieve greater operational efficiencies and
reduce costs. Each Fund invests all of its net investable assets
in a separate master fund that is a series of SR&F Base Trust, as
follows:
Feeder Fund Master Fund
Advisor Growth & Income Fund SR&F Growth & Income Portfolio
("Growth & Income Portfolio")
Advisor Special Fund SR&F Special Portfolio ("Special
Portfolio")
The master funds are referred to collectively as the
"Portfolios." For more information, please refer to Master
Fund/Feeder Fund: Structure and Risk Factors.
Stein Roe & Farnham Incorporated ("Stein Roe") provides
administrative and accounting and recordkeeping services to the
Funds and Portfolios and provides investment advisory services to
the Portfolios.
INVESTMENT POLICIES
The Trust and SR&F Base Trust are open-end management
investment companies. The Funds and the Portfolios are
diversified, as that term is defined in the Investment Company Act
of 1940.
In pursuing its respective objective, each Portfolio will
invest as described below and may employ the investment techniques
described under Portfolio Investments and Strategies. The
investment objective is a non-fundamental policy and may be
changed by the Board of Trustees without the approval of a
"majority of the outstanding voting securities."/1/
- --------------
/1/ A "majority of the outstanding voting securities" means the
approval of the lesser of (i) 67% or more of the shares at a
meeting if the holders of more than 50% of the outstanding shares
are present or represented by proxy or (ii) more than 50% of the
outstanding shares.
- --------------
Advisor Growth & Income Fund
Advisor Growth & Income Fund seeks to achieve its objective
by investing in Growth & Income Portfolio. Their common
investment objective is to provide both growth of capital and
current income. Advisor Growth & Income Fund is designed for
investors seeking a diversified portfolio of securities that
offers the opportunity for long-term growth of capital while also
providing a steady stream of income. Growth & Income Portfolio
invests primarily in well-established companies whose common
stocks are believed to have both the potential to appreciate in
value and to pay dividends to shareholders.
Although it may invest in a broad range of securities
(including common stocks, preferred stocks, securities convertible
into or exchangeable for common stocks, and warrants or rights to
purchase common stocks), normally Growth & Income Portfolio
emphasizes investments in equity securities of companies having
large market capitalizations. The Portfolio may also invest in
companies having midsized market capitalizations. Securities of
these well-established companies are believed to be generally less
volatile than those of companies with smaller capitalizations
because companies with larger capitalizations tend to have
experienced management; broad, highly diversified product lines;
deep resources; and easy access to credit.
Advisor Special Fund
Advisor Special Fund seeks to achieve its objective by
investing in Special Portfolio. Their common investment objective
is to invest in securities selected for long-term growth.
Particular emphasis is placed on securities that are considered to
have limited downside risk relative to their potential for above-
average growth, including securities of undervalued, underfollowed
or out-of-favor companies, and companies that are low-cost
producers of goods or services, financially strong or run by well-
respected managers. Special Portfolio may invest more than 5% of
its net assets in securities of seasoned, established companies
that appear to have appreciation potential, as well as securities
of relatively small, new companies. In addition, it may invest in
securities with limited marketability, new issues of securities,
securities of companies that, in Stein Roe's opinion, will benefit
from management change, new technology, new product or service
development or change in demand, and other securities that Stein
Roe believes have capital appreciation possibilities; however,
Special Portfolio does not currently intend to invest more than 5%
of its net assets in any of these types of securities. Securities
of smaller, newer companies may be subject to greater price
volatility than securities of larger, more well-established
companies. In addition, many smaller companies are less well
known to the investing public and may not be as widely followed by
the investment community. Although Special Portfolio invests
primarily in common stocks, it may also invest in other equity-
type securities, including preferred stocks and securities
convertible into equity securities.
PORTFOLIO INVESTMENTS AND STRATEGIES
Debt Securities
In pursuing its investment objective, each Portfolio may
invest in debt securities of corporate and governmental issuers.
The risks inherent in debt securities depend primarily on the term
and quality of the obligations in the investment portfolio as well
as on market conditions. A decline in the prevailing levels of
interest rates generally increases the value of debt securities,
while an increase in rates usually reduces the value of those
securities.
Investments in debt securities by Growth & Income Portfolio
are limited to those that are within the four highest grades
(generally referred to as "investment grade") assigned by a
nationally recognized statistical rating organization or, if
unrated, deemed to be of comparable quality by Stein Roe. Special
Portfolio may invest up to 35% of its net assets in debt
securities, but does not expect to invest more than 5% of its net
assets in debt securities that are rated below investment grade.
Securities in the fourth highest grade may possess
speculative characteristics, and changes in economic conditions
are more likely to affect the issuer's capacity to pay interest
and repay principal. If the rating of a security held by a
Portfolio is lost or reduced below investment grade, the Portfolio
is not required to dispose of the security, but Stein Roe will
consider that fact in determining whether that Portfolio should
continue to hold the security.
Securities that are rated below investment grade 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."
When Stein Roe determines that adverse market or economic
conditions exist and considers a temporary defensive position
advisable, the Portfolios may invest without limitation in high-
quality fixed income securities or hold assets in cash or cash
equivalents.
Derivatives
Consistent with its objective, a 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, floating rate
instruments, and other instruments that securitize assets of
various types ("Derivatives"). In each case, the value of the
instrument or security is "derived" from the performance of an
underlying asset or a "benchmark" such as a security index, an
interest rate, or a currency.
Derivatives are most often used to manage investment risk or
to create an investment position indirectly because using them is
more efficient or less costly than direct investment that cannot
be readily established directly due to portfolio size, cash
availability, or other factors. They also may be used in an
effort to enhance portfolio returns.
The successful use of Derivatives depends on Stein Roe'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.
No Portfolio currently intends to invest more than 5% of its
net assets in any type of Derivative except for options, futures
contracts, and futures options. (See Options and Futures below.)
Some mortgage-backed debt securities 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 a
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") that 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, prepayment risks, and yield
characteristics. Mortgage-backed securities involve the risk of
prepayment on the underlying mortgages at a faster or slower rate
than the established schedule. Prepayments 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 the Portfolio on purchase of the CMO, and the
proceeds of prepayment would likely be invested at lower interest
rates.
Non-mortgage asset-backed securities usually have less
prepayment risk than mortgage-backed securities, but have the risk
that the collateral will not be available to support payments on
the underlying loans that finance payments on the securities
themselves.
Floating rate instruments 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%.
Convertible Securities
By investing in convertible securities, a Portfolio obtains
the right to benefit from the capital appreciation potential in
the underlying stock upon exercise of the conversion right, while
earning higher current income than would be available if the stock
were purchased directly. In determining whether to purchase a
convertible, Stein Roe will consider substantially the same
criteria that would be considered in purchasing the underlying
stock. While convertible securities purchased by a Portfolio are
frequently rated investment grade, a Portfolio may purchase
unrated securities or securities rated below investment grade if
the securities meet Stein Roe's other investment criteria.
Convertible securities rated below investment grade (a) tend to be
more sensitive to interest rate and economic changes, (b) may be
obligations of issuers who are less creditworthy than issuers of
higher quality convertible securities, and (c) may be more thinly
traded due to such securities being less well known to investors
than either common stock or conventional debt securities. As a
result, Stein Roe's own investment research and analysis tend to
be more important in the purchase of such securities than other
factors.
Foreign Securities
Each Portfolio may invest up to 25% of its total assets in
foreign securities, which may entail a greater degree of risk
(including risks relating to exchange rate fluctuations, tax
provisions, or expropriation of assets) than investment in
securities of domestic issuers. For this purpose, foreign
securities do not include American Depositary Receipts (ADRs) or
securities guaranteed by a United States person. ADRs are
receipts typically issued by an American bank or trust company
evidencing ownership of the underlying securities. A Portfolio
may invest in sponsored or unsponsored ADRs. In the case of an
unsponsored ADR, a Portfolio is likely to bear its proportionate
share of the expenses of the depositary and it may have greater
difficulty in receiving shareholder communications than it would
have with a sponsored ADR. No Portfolio intends to invest more
than 5% of its net assets in unsponsored ADRs.
As of Sept. 30, 1998, holdings of foreign companies, as a
percentage of net assets, were as follows: Growth & Income
Portfolio, 3.0% (0.6% in foreign securities and 2.4% in ADRs); and
Special Portfolio, 5.9% (3.3% in foreign securities and 2.6% in
ADRs and ADSs).
With respect to portfolio securities that are issued by
foreign issuers or denominated in foreign currencies, a
Portfolio's investment performance is affected by the strength or
weakness of the U.S. dollar against these currencies. For
example, if the dollar falls in value relative to the Japanese
yen, the dollar value of a yen-denominated stock held in the
portfolio will rise even though the price of the stock remains
unchanged. Conversely, if the dollar rises in value relative to
the yen, the dollar value of the yen-denominated stock will fall.
(See discussion of transaction hedging and portfolio hedging under
Currency Exchange Transactions.)
Investors should understand and consider carefully the risks
involved in foreign investing. Investing in foreign securities,
positions which are generally denominated in foreign currencies,
and utilization of forward foreign currency exchange contracts
involve certain considerations comprising both risks and
opportunities not typically associated with investing in U.S.
securities. These considerations include: fluctuations in
exchange rates of foreign currencies; possible imposition of
exchange control regulation or currency restrictions that would
prevent cash from being brought back to the United States; less
public information with respect to issuers of securities; less
governmental supervision of stock exchanges, securities brokers,
and issuers of securities; lack of uniform accounting, auditing,
and financial reporting standards; lack of uniform settlement
periods and trading practices; less liquidity and frequently
greater price volatility in foreign markets than in the United
States; possible imposition of foreign taxes; possible investment
in securities of companies in developing as well as developed
countries; and sometimes less advantageous legal, operational, and
financial protections applicable to foreign sub-custodial
arrangements.
Although the Portfolios will try to invest in companies and
governments of countries having stable political environments,
there is the possibility of expropriation or confiscatory
taxation, seizure or nationalization of foreign bank deposits or
other assets, establishment of exchange controls, the adoption of
foreign government restrictions, or other adverse political,
social or diplomatic developments that could affect investment in
these nations.
Currency Exchange Transactions. Currency exchange
transactions may be conducted either on a spot (i.e., cash) basis
at the spot rate for purchasing or selling currency prevailing in
the foreign exchange market or through forward currency exchange
contracts ("forward contracts"). Forward contracts are
contractual agreements to purchase or sell a specified currency at
a specified future date (or within a specified time period) and
price set at the time of the contract. Forward contracts are
usually entered into with banks and broker-dealers, are not
exchange traded, and are usually for less than one year, but may
be renewed.
A Portfolio's foreign currency exchange transactions are
limited to transaction and portfolio hedging involving either
specific transactions or portfolio positions. Transaction hedging
is the purchase or sale of forward contracts with respect to
specific receivables or payables of a Portfolio arising in
connection with the purchase and sale of its portfolio securities.
Portfolio hedging is the use of forward contracts with respect to
portfolio security positions denominated or quoted in a particular
foreign currency. Portfolio hedging allows the Portfolio to limit
or reduce its exposure in a foreign currency by entering into a
forward contract to sell such foreign currency (or another foreign
currency that acts as a proxy for that currency) at a future date
for a price payable in U.S. dollars so that the value of the
foreign-denominated portfolio securities can be approximately
matched by a foreign-denominated liability. A Portfolio may not
engage in portfolio hedging with respect to the currency of a
particular country to an extent greater than the aggregate market
value (at the time of making such sale) of the securities held in
its portfolio denominated or quoted in that particular currency,
except that a Portfolio may hedge all or part of its foreign
currency exposure through the use of a basket of currencies or a
proxy currency where such currencies or currency act as an
effective proxy for other currencies. In such a case, a Portfolio
may enter into a forward contract where the amount of the foreign
currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into
separate forward contracts for each currency held in a Portfolio.
No Portfolio may engage in "speculative" currency exchange
transactions.
At the maturity of a forward contract to deliver a particular
currency, a Portfolio may either sell the portfolio security
related to such contract and make delivery of the currency, or it
may retain the security and either acquire the currency on the
spot market or terminate its contractual obligation to deliver the
currency by purchasing an offsetting contract with the same
currency trader obligating it to purchase on the same maturity
date the same amount of the currency.
It is impossible to forecast with absolute precision the
market value of portfolio securities at the expiration of a
forward contract. Accordingly, it may be necessary for a
Portfolio to purchase additional currency on the spot market (and
bear the expense of such purchase) if the market value of the
security is less than the amount of currency the Portfolio is
obligated to deliver and if a decision is made to sell the
security and make delivery of the currency. Conversely, it may be
necessary to sell on the spot market some of the currency received
upon the sale of the portfolio security if its market value
exceeds the amount of currency a Portfolio is obligated to
deliver.
If a Portfolio retains the portfolio security and engages in
an offsetting transaction, the Portfolio will incur a gain or a
loss to the extent that there has been movement in forward
contract prices. If a Portfolio engages in an offsetting
transaction, it may subsequently enter into a new forward contract
to sell the currency. Should forward prices decline during the
period between a Portfolio's entering into a forward contract for
the sale of a currency and the date it enters into an offsetting
contract for the purchase of the currency, the Portfolio will
realize a gain to the extent the price of the currency it has
agreed to sell exceeds the price of the currency it has agreed to
purchase. Should forward prices increase, a Portfolio will suffer
a loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
A default on the contract would deprive the Portfolio of
unrealized profits or force the Portfolio to cover its commitments
for purchase or sale of currency, if any, at the current market
price.
Hedging against a decline in the value of a currency does not
eliminate fluctuations in the prices of portfolio securities or
prevent losses if the prices of such securities decline. Such
transactions also preclude the opportunity for gain if the value
of the hedged currency should rise. Moreover, it may not be
possible for a Portfolio to hedge against a devaluation that is so
generally anticipated that the Portfolio is not able to contract
to sell the currency at a price above the devaluation level it
anticipates. The cost to a Portfolio of engaging in currency
exchange transactions varies with such factors as the currency
involved, the length of the contract period, and prevailing market
conditions. Since currency exchange transactions are usually
conducted on a principal basis, no fees or commissions are
involved.
Lending of Portfolio Securities
Subject to restriction (5) under Investment Restrictions in
this SAI, a Portfolio may lend its 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 the Portfolio. The 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. The 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. The Portfolio would
not have the right to vote the securities during the existence of
the loan but would call the loan to permit voting of the
securities if, in Stein Roe's judgment, a material event requiring
a shareholder vote would otherwise occur before the loan was
repaid. In the event of bankruptcy or other default of the
borrower, the 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.
Repurchase Agreements
A Portfolio may invest in repurchase agreements, provided
that it will not invest more than 15% of net assets in repurchase
agreements maturing in more than seven days and any other illiquid
securities. A repurchase agreement is a sale of securities to a
Portfolio in which the seller agrees to repurchase the securities
at a higher price, which includes an amount representing interest
on the purchase price, within a specified time. In the event of
bankruptcy of the seller, a Portfolio could experience both losses
and delays in liquidating its collateral.
When-Issued and Delayed-Delivery Securities; Reverse Repurchase
Agreements
A Portfolio may purchase securities on a when-issued or
delayed-delivery basis. Although the payment and interest terms
of these securities are established at the time a Portfolio 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. A Portfolio makes such commitments only with the
intention of actually acquiring the securities, but may sell the
securities before settlement date if Stein Roe deems it advisable
for investment reasons. No Portfolio currently intends to make
commitments to purchase when-issued securities in excess of 5% of
its net assets.
A Portfolio may enter into reverse repurchase agreements with
banks and securities dealers. A reverse repurchase agreement is a
repurchase agreement in which a Portfolio is the seller of, rather
than the investor in, securities and agrees to repurchase them at
an agreed-upon time and price. Use of a reverse repurchase
agreement may be preferable to a regular sale and later repurchase
of securities because it avoids certain market risks and
transaction costs.
At the time a Portfolio enters into a binding obligation to
purchase securities on a when-issued basis or enters into a
reverse repurchase agreement, liquid assets (cash, U.S. Government
securities or other "high-grade" debt obligations) of the
Portfolio having a value at least as great as the purchase price
of the securities to be purchased will be segregated on the books
of the Portfolio and held by the custodian throughout the period
of the obligation. The use of these investment strategies, as
well as borrowing under a line of credit as described below, may
increase net asset value fluctuation.
Short Sales "Against the Box"
A Portfolio may sell securities short against the box; that
is, enter into short sales of securities that it currently owns or
has the right to acquire through the conversion or exchange of
other securities that it owns at no additional cost. A Portfolio
may make short sales of securities only if at all times when a
short position is open it owns at least an equal amount of such
securities or securities convertible into or exchangeable for
securities of the same issue as, and equal in amount to, the
securities sold short, at no additional cost.
In a short sale against the box, a Portfolio does not deliver
from its portfolio the securities sold. Instead, the Portfolio
borrows the securities sold short from a broker-dealer through
which the short sale is executed, and the broker-dealer delivers
such securities, on behalf of the Portfolio, to the purchaser of
such securities. The Portfolio is required to pay to the broker-
dealer the amount of any dividends paid on shares sold short.
Finally, to secure its obligation to deliver to such broker-dealer
the securities sold short, the Portfolio must deposit and
continuously maintain in a separate account with its custodian an
equivalent amount of the securities sold short or securities
convertible into or exchangeable for such securities at no
additional cost. A Portfolio is said to have a short position in
the securities sold until it delivers to the broker-dealer the
securities sold. A Portfolio may close out a short position by
purchasing on the open market and delivering to the broker-dealer
an equal amount of the securities sold short, rather than by
delivering portfolio securities.
Short sales may protect a Portfolio against the risk of
losses in the value of its portfolio securities because any
unrealized losses with respect to such portfolio securities should
be wholly or partially offset by a corresponding gain in the short
position. However, any potential gains in such portfolio
securities should be wholly or partially offset by a corresponding
loss in the short position. The extent to which such gains or
losses are offset will depend upon the amount of securities sold
short relative to the amount the Portfolio owns, either directly
or indirectly, and, in the case where the Portfolio owns
convertible securities, changes in the conversion premium.
Short sale transactions involve certain risks. If the price
of the security sold short increases between the time of the short
sale and the time a Portfolio replaces the borrowed security, the
Portfolio will incur a loss and if the price declines during this
period, the Portfolio will realize a short-term capital gain. Any
realized short-term capital gain will be decreased, and any
incurred loss increased, by the amount of transaction costs and
any premium, dividend or interest which the Portfolio may have to
pay in connection with such short sale. Certain provisions of the
Internal Revenue Code may limit the degree to which a Portfolio is
able to enter into short sales. There is no limitation on the
amount of a Portfolio's assets that, in the aggregate, may be
deposited as collateral for the obligation to replace securities
borrowed to effect short sales and allocated to segregated
accounts in connection with short sales. No Portfolio will invest
more than 5% of its total assets in short sales against the box.
Rule 144A Securities
A Portfolio may purchase securities that have been privately
placed but that are eligible for purchase and sale under Rule 144A
under the Securities Act of 1933. That Rule permits certain
qualified institutional buyers, such as the Portfolio, to trade in
privately placed securities that have not been registered for sale
under the 1933 Act. Stein Roe, under the supervision of the Board
of Trustees, will consider whether securities purchased under Rule
144A are illiquid and thus subject to the restriction on investing
no more than 15% of its net assets in illiquid securities. A
determination of whether a Rule 144A security is liquid or not is
a question of fact. In making this determination, Stein Roe will
consider the trading markets for the specific security, taking
into account the unregistered nature of a Rule 144A security. In
addition, Stein Roe could consider the (1) frequency of trades and
quotes, (2) number of dealers and potential purchasers, (3) dealer
undertakings to make a market, and (4) nature of the security and
of marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of
transfer). The liquidity of Rule 144A securities would be
monitored and if, as a result of changed conditions, it is
determined that a Rule 144A security is no longer liquid, the
Portfolio's holdings of illiquid securities would be reviewed to
determine what, if any, steps are required to assure that the
Portfolio does not invest more than 15% of its assets in illiquid
securities. Investing in Rule 144A securities could have the
effect of increasing the amount of a Portfolio's assets invested
in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities. No Portfolio expects to
invest as much as 5% of its total assets in Rule 144A securities
that have not been deemed to be liquid by Stein Roe.
Swaps, Caps, Floors and Collars
A Portfolio may enter into swaps and may purchase or sell
related caps, floors and collars. A Portfolio would enter into
these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio, to protect
against currency fluctuations, as a duration management technique
or to protect against any increase in the price of securities it
anticipates purchasing at a later date. The Portfolios intend to
use these techniques as hedges and not as speculative investments
and will not sell interest rate income stream they may be
obligated to pay.
A swap agreement is generally individually negotiated and
structured to include exposure to a variety of different types of
investments or market factors. Depending on its structure, a swap
agreement may increase or decrease a Portfolio's exposure to
changes in the value of an index of securities in which a
Portfolio might invest, the value of a particular security or
group of securities, or foreign currency values. Swap agreements
can take many different forms and are known by a variety of names.
A Portfolio may enter into any form of swap agreement if Stein Roe
determines it is consistent with its investment objective and
policies.
A swap agreement tends to shift investment exposure from one
type of investment to another. For example, if a Portfolio agrees
to exchange payments in dollars at a fixed rate for payments in a
foreign currency the amount of which is determined by movements of
a foreign securities index, the swap agreement would tend to
increase its exposure to foreign stock market movements and
foreign currencies. Depending on how it is used, a swap agreement
may increase or decrease the overall volatility of a Portfolio's
investments and its net asset value.
The performance of a swap agreement is determined by the
change in the specific currency, market index, security, or other
factors that determine the amounts of payments due to and from a
Portfolio. If a swap agreement calls for payments by a Portfolio,
it must be prepared to make such payments when due. If the
counterparty's creditworthiness declines, the value of a swap
agreement would be likely to decline, potentially resulting in a
loss. No Portfolio will enter into any swap, cap, floor or collar
transaction unless, at the time of entering into such transaction,
the unsecured long-term debt of the counterparty, combined with
any credit enhancements, is rated at least A by Standard & Poor's
Corporation or Moody's Investors Service, Inc. or has an
equivalent rating from a nationally recognized statistical rating
organization or is determined to be of equivalent credit quality
by Stein Roe.
The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling the
cap to the extent that a specified index exceeds a predetermined
interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is
a combination of a cap and floor that preserves a certain return
within a predetermined range of interest rates or values.
At the time a Portfolio enters into swap arrangements or
purchases or sells caps, floors or collars, liquid assets of the
Portfolio having a value at least as great as the commitment
underlying the obligations will be segregated on its books and
held by the custodian throughout the period of the obligation.
Line of Credit
Subject to restriction (6) under Investment Restrictions in
this SAI, each Fund and Portfolio may establish and maintain a
line of credit with a major bank in order to permit borrowing on a
temporary basis to meet share redemption requests in circumstances
in which temporary borrowing may be preferable to liquidation of
portfolio securities.
Interfund Borrowing and Lending Program
Pursuant to an exemptive order issued by the Securities and
Exchange Commission, each Fund and Portfolio may lend money to and
borrow money from other mutual funds advised by Stein Roe. They
will borrow through the program when borrowing is necessary and
appropriate and the costs are equal to or lower than the costs of
bank loans.
Portfolio Turnover
Although the Portfolios do not purchase securities with a
view to rapid turnover, there are no limitations on the length of
time that portfolio securities must be held. At times, Special
Portfolio may invest for short-term capital appreciation.
Portfolio turnover can occur for a number of reasons such as
general conditions in the securities markets, more favorable
investment opportunities in other securities, or other factors
relating to the desirability of holding or changing a portfolio
investment. Because of the Portfolios' flexibility of investment
and emphasis on growth of capital, they may have greater portfolio
turnover than that of mutual funds that have primary objectives of
income or maintenance of a balanced investment position. The
future turnover rate may vary greatly from year to year. A high
rate of portfolio turnover in a Portfolio, if it should occur,
would result in increased transaction expenses, which must be
borne by that Portfolio. High portfolio turnover may also result
in the realization of capital gains or losses and, to the extent
net short-term capital gains are realized, any distributions
resulting from such gains will be considered ordinary income for
federal income tax purposes.
Options on Securities and Indexes
A Portfolio may purchase and sell put options and call
options on securities, indexes or foreign currencies in
standardized contracts traded on recognized securities exchanges,
boards of trade, or similar entities, or quoted on Nasdaq. A
Portfolio may purchase agreements, sometimes called cash puts,
that may accompany the purchase of a new issue of bonds from a
dealer.
An option on a security (or index) is a contract that gives
the purchaser (holder) of the option, in return for a premium, the
right to buy from (call) or sell to (put) the seller (writer) of
the option the security underlying the option (or the cash value
of the index) at a specified exercise price at any time during the
term of the option (normally not exceeding nine months). The
writer of an option on an individual security or on a foreign
currency has the obligation upon exercise of the option to deliver
the underlying security or foreign currency upon payment of the
exercise price or to pay the exercise price upon delivery of the
underlying security or foreign currency. Upon exercise, the
writer of an option on an index is obligated to pay the difference
between the cash value of the index and the exercise price
multiplied by the specified multiplier for the index option. (An
index is designed to reflect specified facets of a particular
financial or securities market, a specific group of financial
instruments or securities, or certain economic indicators.)
A Portfolio will write call options and put options only if
they are "covered." For example, in the case of a call option on
a security, the option is "covered" if the Portfolio owns the
security underlying the call or has an absolute and immediate
right to acquire that security without additional cash
consideration (or, if additional cash consideration is required,
cash or cash equivalents in such amount are held in a segregated
account by its custodian) upon conversion or exchange of other
securities held in its portfolio.
If an option written by a Portfolio expires, the Portfolio
realizes a capital gain equal to the premium received at the time
the option was written. If an option purchased by a Portfolio
expires, the Portfolio realizes a capital loss equal to the
premium paid.
Prior to the earlier of exercise or expiration, an option may
be closed out by an offsetting purchase or sale of an option of
the same series (type, exchange, underlying security or index,
exercise price, and expiration). There can be no assurance,
however, that a closing purchase or sale transaction can be
effected when a Portfolio desires.
A Portfolio will realize a capital gain from a closing
purchase transaction if the cost of the closing option is less
than the premium received from writing the option, or, if it is
more, the Portfolio will realize a capital loss. If the premium
received from a closing sale transaction is more than the premium
paid to purchase the option, the Portfolio will realize a capital
gain or, if it is less, the Portfolio will realize a capital loss.
The principal factors affecting the market value of a put or a
call option include supply and demand, interest rates, the current
market price of the underlying security or index in relation to
the exercise price of the option, the volatility of the underlying
security or index, and the time remaining until the expiration
date.
A put or call option purchased by a Portfolio is an asset of
the Portfolio, valued initially at the premium paid for the
option. The premium received for an option written by a Portfolio
is recorded as a deferred credit. The value of an option
purchased or written is marked-to-market daily and is valued at
the closing price on the exchange on which it is traded or, if not
traded on an exchange or no closing price is available, at the
mean between the last bid and asked prices.
Risks Associated with Options on Securities and Indexes.
There are several risks associated with transactions in options.
For example, there are significant differences between the
securities markets, the currency markets, and the options markets
that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its
objectives. 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.
There can be no assurance that a liquid market will exist
when a Portfolio seeks to close out an option position. If a
Portfolio were unable to close out an option that it had purchased
on a security, it would have to exercise the option in order to
realize any profit or the option would expire and become
worthless. If a Portfolio were unable to close out a covered call
option that it had written on a security, it would not be able to
sell the underlying security until the option expired. As the
writer of a covered call option on a security, a Portfolio
foregoes, during the option's life, the opportunity to profit from
increases in the market value of the security covering the call
option above the sum of the premium and the exercise price of the
call.
If trading were suspended in an option purchased or written
by a Portfolio, the Portfolio would not be able to close out the
option. If restrictions on exercise were imposed, the Portfolio
might be unable to exercise an option it has purchased.
Futures Contracts and Options on Futures Contracts
A Portfolio may use interest rate futures contracts, index
futures contracts, and foreign currency futures contracts. An
interest rate, index or foreign currency futures contract provides
for the future sale by one party and purchase by another party of
a specified quantity of a financial instrument or the cash value
of an index/2/ at a specified price and time. A public market
exists in futures contracts covering a number of indexes
(including, but not limited to: the Standard & Poor's 500 Index,
the Value Line Composite Index, and the New York Stock Exchange
Composite Index) as well as financial instruments (including, but
not limited to: U.S. Treasury bonds, U.S. Treasury notes,
Eurodollar certificates of deposit, and foreign currencies).
Other index and financial instrument futures contracts are
available and it is expected that additional futures contracts
will be developed and traded.
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/2/ A futures contract on an index is an agreement pursuant to
which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at
which the index contract was originally written. Although the
value of a securities index is a function of the value of certain
specified securities, no physical delivery of those securities is
made.
- ------------
A Portfolio may purchase and write call and put futures
options. Futures options possess many of the same characteristics
as options on securities, indexes and foreign currencies
(discussed above). A futures option gives the holder the right,
in return for the premium paid, to assume a long position (call)
or short position (put) in a futures contract at a specified
exercise price at any time during the period of the option. Upon
exercise of a call option, the holder acquires a long position in
the futures contract and the writer is assigned the opposite short
position. In the case of a put option, the opposite is true. A
Portfolio might, for example, use futures contracts to hedge
against or gain exposure to fluctuations in the general level of
stock prices, anticipated changes in interest rates or currency
fluctuations that might adversely affect either the value of the
Portfolio's securities or the price of the securities that the
Portfolio intends to purchase. Although other techniques could be
used to reduce or increase that Portfolio's exposure to stock
price, interest rate and currency fluctuations, the Portfolio may
be able to achieve its exposure more effectively and perhaps at a
lower cost by using futures contracts and futures options.
A Portfolio will only enter into futures contracts and
futures options that are standardized and traded on an exchange,
board of trade, or similar entity, or quoted on an automated
quotation system.
The success of any futures transaction depends on accurate
predictions of changes in the level and direction of stock prices,
interest rates, currency exchange rates and other factors. Should
those predictions be incorrect, the return might have been better
had the transaction not been attempted; however, in the absence of
the ability to use futures contracts, Stein Roe might have taken
portfolio actions in anticipation of the same market movements
with similar investment results but, presumably, at greater
transaction costs.
When a purchase or sale of a futures contract is made by a
Portfolio, the Portfolio is required to deposit with its custodian
(or broker, if legally permitted) a specified amount of cash or
U.S. Government securities or other securities acceptable to the
broker ("initial margin"). The margin required for a futures
contract is set by the exchange on which the contract is traded
and may be modified during the term of the contract. The initial
margin is in the nature of a performance bond or good faith
deposit on the futures contract, which is returned to the
Portfolio upon termination of the contract, assuming all
contractual obligations have been satisfied. A Portfolio expects
to earn interest income on its initial margin deposits. A futures
contract held by a Portfolio is valued daily at the official
settlement price of the exchange on which it is traded. Each day
the Portfolio pays or receives cash, called "variation margin,"
equal to the daily change in value of the futures contract. This
process is known as "marking-to-market." Variation margin paid or
received by a Portfolio does not represent a borrowing or loan by
the Portfolio but is instead settlement between the Portfolio and
the broker of the amount one would owe the other if the futures
contract had expired at the close of the previous day. In
computing daily net asset value, a Portfolio will mark-to-market
its open futures positions.
A Portfolio is also required to deposit and maintain margin
with respect to put and call options on futures contracts written
by it. Such margin deposits will vary depending on the nature of
the underlying futures contract (and the related initial margin
requirements), the current market value of the option, and other
futures positions held by the Portfolio.
Although some futures contracts call for making or taking
delivery of the underlying securities, usually these obligations
are closed out prior to delivery by offsetting purchases or sales
of matching futures contracts (same exchange, underlying security
or index, and delivery month). If an offsetting purchase price is
less than the original sale price, the Portfolio engaging in the
transaction realizes a capital gain, or if it is more, the
Portfolio realizes a capital loss. Conversely, if an offsetting
sale price is more than the original purchase price, the Portfolio
engaging in the transaction realizes a capital gain, or if it is
less, the Portfolio realizes a capital loss. The transaction
costs must also be included in these calculations.
Risks Associated with Futures
There are several risks associated with the use of futures
contracts and futures options. A purchase or sale of a futures
contract may result in losses in excess of the amount invested in
the futures contract. In trying to increase or reduce market
exposure, there can be no guarantee that there will be a
correlation between price movements in the futures contract and in
the portfolio exposure sought. In addition, there are significant
differences between the securities and futures markets that could
result in an imperfect correlation between the markets, causing a
given transaction not to achieve its objectives. The degree of
imperfection of correlation depends on circumstances such as:
variations in speculative market demand for futures, futures
options and the related securities, including technical influences
in futures and futures options trading and differences between the
securities market and the securities underlying the standard
contracts available for trading. For example, in the case of
index futures contracts, the composition of the index, including
the issuers and the weighting of each issue, may differ from the
composition of the investment portfolio, and, in the case of
interest rate futures contracts, the interest rate levels,
maturities, and creditworthiness of the issues underlying the
futures contract may differ from the financial instruments held in
the Portfolio's portfolio. A decision as to whether, when and how
to use futures contracts 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 stock price or interest rate trends.
Futures exchanges may limit the amount of fluctuation
permitted in certain 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 the current
trading session. Once the daily limit has been reached in a
futures contract subject to the limit, no more trades may be made
on that day at a price beyond that limit. The daily limit governs
only price movements during a particular trading day and therefore
does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for
several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of positions and subjecting
some holders of futures contracts to substantial losses. Stock
index futures contracts are not normally subject to such daily
price change limitations.
There can be no assurance that a liquid market will exist at
a time when a Portfolio seeks to close out a futures or futures
option position. The Portfolio would be exposed to possible loss
on the position during the interval of inability to close, and
would continue to be required to meet margin requirements until
the position is closed. In addition, many of the contracts
discussed above are relatively new instruments without a
significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue
to exist.
Limitations on Options and Futures
If other options, futures contracts, or futures options of
types other than those described herein are traded in the future,
a Portfolio may also use those investment vehicles, provided the
Board of Trustees determines that their use is consistent with the
Portfolio's investment objective.
A Portfolio will not enter into a futures contract or
purchase an option thereon if, immediately thereafter, the initial
margin deposits for futures contracts held by that Portfolio plus
premiums paid by it for open futures option positions, less the
amount by which any such positions are "in-the-money,"/3/ would
exceed 5% of the Portfolio's total assets.
- --------------
/3/ A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise
price. A put option is "in-the-money" if the exercise price
exceeds the value of the futures contract that is the subject of
the option.
- --------------
When purchasing a futures contract or writing a put option on
a futures contract, a Portfolio must maintain with its custodian
(or broker, if legally permitted) cash or cash equivalents
(including any margin) equal to the market value of such contract.
When writing a call option on a futures contract, the Portfolio
similarly will maintain with its custodian cash or cash
equivalents (including any margin) equal to the amount by which
such option is in-the-money until the option expires or is closed
out by the Portfolio.
A Portfolio may not maintain open short positions in futures
contracts, call options written on futures contracts or call
options written on indexes if, in the aggregate, the market value
of all such open positions exceeds the current value of the
securities in its portfolio, plus or minus unrealized gains and
losses on the open positions, adjusted for the historical relative
volatility of the relationship between the portfolio and the
positions. For this purpose, to the extent the Portfolio has
written call options on specific securities in its portfolio, the
value of those securities will be deducted from the current market
value of the securities portfolio.
In order to comply with Commodity Futures Trading Commission
Regulation 4.5 and thereby avoid being deemed a "commodity pool
operator," a Portfolio will use commodity futures or commodity
options contracts solely for bona fide hedging purposes within the
meaning and intent of Regulation 1.3(z), or, with respect to
positions in commodity futures and commodity options contracts
that do not come within the meaning and intent of 1.3(z), the
aggregate initial margin and premiums required to establish such
positions will not exceed 5% of the fair market value of the
assets of a Portfolio, after taking into account unrealized
profits and unrealized losses on any such contracts it has entered
into [in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount (as defined in Section 190.01(x)
of the Commission Regulations) may be excluded in computing such
5%].
Taxation of Options and Futures
If a Portfolio exercises a call or put option that it holds,
the premium paid for the option is added to the cost basis of the
security purchased (call) or deducted from the proceeds of the
security sold (put). For cash settlement options and futures
options exercised by a Portfolio, the difference between the cash
received at exercise and the premium paid is a capital gain or
loss.
If a call or put option written by a Portfolio is exercised,
the premium is included in the proceeds of the sale of the
underlying security (call) or reduces the cost basis of the
security purchased (put). For cash settlement options and futures
options written by a Portfolio, the difference between the cash
paid at exercise and the premium received is a capital gain or
loss.
Entry into a closing purchase transaction will result in
capital gain or loss. If an option written by a Portfolio was in-
the-money at the time it was written and the security covering the
option was held for more than the long-term holding period prior
to the writing of the option, any loss realized as a result of a
closing purchase transaction will be long-term. The holding
period of the securities covering an in-the-money option will not
include the period of time the option is outstanding.
If a Portfolio writes an equity call option/4/ other than a
"qualified covered call option," as defined in the Internal
Revenue Code, any loss on such option transaction, to the extent
it does not exceed the unrealized gains on the securities covering
the option, may be subject to deferral until the securities
covering the option have been sold.
- -------------
/4/ An equity option is defined to mean any option to buy or sell
stock, and any other option the value of which is determined by
reference to an index of stocks of the type that is ineligible to
be traded on a commodity futures exchange (e.g., an option
contract on a sub-index based on the price of nine hotel-casino
stocks). The definition of equity option excludes options on
broad-based stock indexes (such as the Standard & Poor's 500
index).
- -------------
A futures contract held until delivery results in capital
gain or loss equal to the difference between the price at which
the futures contract was entered into and the settlement price on
the earlier of delivery notice date or expiration date. If a
Portfolio delivers securities under a futures contract, the
Portfolio also realizes a capital gain or loss on those
securities.
For federal income tax purposes, a Portfolio generally is
required to recognize as income for each taxable year its net
unrealized gains and losses as of the end of the year on futures,
futures options and non-equity options positions ("year-end mark-
to-market"). Generally, any gain or loss recognized with respect
to such positions (either by year-end mark-to-market or by actual
closing of the positions) is considered to be 60% long-term and
40% short-term, without regard to the holding periods of the
contracts. However, in the case of positions classified as part
of a "mixed straddle," the recognition of losses on certain
positions (including options, futures and futures options
positions, the related securities and certain successor positions
thereto) may be deferred to a later taxable year. Sale of futures
contracts or writing of call options (or futures call options) or
buying put options (or futures put options) that are intended to
hedge against a change in the value of securities held by a
Portfolio: (1) will affect the holding period of the hedged
securities; and (2) may cause unrealized gain or loss on such
securities to be recognized upon entry into the hedge.
If a Portfolio were to enter into a short index future, short
index futures option or short index option position and the
Portfolio's portfolio were deemed to "mimic" the performance of
the index underlying such contract, the option or futures contract
position and the Portfolio's stock positions would be deemed to be
positions in a mixed straddle, subject to the above-mentioned loss
deferral rules.
In order for a Portfolio to continue to qualify for federal
income tax treatment as a regulated investment company, at least
90% of its gross income for a taxable year must be derived from
qualifying income; i.e., dividends, interest, income derived from
loans of securities, and gains from the sale of securities or
foreign currencies, or other income (including but not limited to
gains from options, futures, or forward contracts). Any net gain
realized from futures (or futures options) contracts will be
considered gain from the sale of securities and therefore be
qualifying income for purposes of the 90% requirement.
Each Fund distributes to shareholders annually any net
capital gains that have been recognized for federal income tax
purposes (including year-end mark-to-market gains) on options and
futures transactions. Such distributions are combined with
distributions of capital gains realized on the other investments,
and shareholders are advised of the nature of the payments.
The Taxpayer Relief Act of 1997 (the "Act") imposed
constructive sale treatment for federal income tax purposes on
certain hedging strategies with respect to appreciated securities.
Under these rules, taxpayers will recognize gain, but not loss,
with respect to securities if they enter into short sales of
"offsetting notional principal contracts" (as defined by the Act)
or futures or "forward contracts" (as defined by the Act) with
respect to the same or substantially identical property, or if
they enter into such transactions and then acquire the same or
substantially identical property. These changes generally apply
to constructive sales after June 8, 1997. Furthermore, the
Secretary of the Treasury is authorized to promulgate regulations
that will treat as constructive sales certain transactions that
have substantially the same effect as short sales, offsetting
notional principal contracts, and futures or forward contracts to
deliver the same or substantially similar property.
INVESTMENT RESTRICTIONS
The Funds and the Portfolios operate under the following
investment restrictions. No Fund or Portfolio may:
(1) with respect to 75% of its total assets, invest more than
5% of its total assets, taken at market value at the time of a
particular purchase, in the securities of a single issuer, except
for securities issued or guaranteed by the U.S. Government or any
of its agencies or instrumentalities or repurchase agreements for
such securities, and [Funds only] except that all or substantially
all of the assets of the Fund may be invested in another
registered investment company having the same investment objective
and substantially similar investment policies as the Fund;
(2) acquire more than 10%, taken at the time of a particular
purchase, of the outstanding voting securities of any one issuer,
[Funds only] except that all or substantially all of the assets of
the Fund may be invested in another registered investment company
having the same investment objective and substantially similar
investment policies as the Fund;
(3) act as an underwriter of securities, except insofar as it
may be deemed an underwriter for purposes of the Securities Act of
1933 on disposition of securities acquired subject to legal or
contractual restrictions on resale, [Funds only] except that all
or substantially all of the assets of the Fund may be invested in
another registered investment company having the same investment
objective and substantially similar investment policies as the
Fund;
(4) purchase or sell real estate (although it may purchase
securities secured by real estate or interests therein, or
securities issued by companies which invest in real estate or
interests therein), commodities, or commodity contracts, except
that it may enter into (a) futures and options on futures and (b)
forward contracts;
(5) make loans, although it may (a) lend portfolio securities
and participate in an interfund lending program with other Stein
Roe Funds and Portfolios provided that no such loan may be made
if, as a result, the aggregate of such loans would exceed 33 1/3%
of the value of its total assets (taken at market value at the
time of such loans); (b) purchase money market instruments and
enter into repurchase agreements; and (c) acquire publicly
distributed or privately placed debt securities;
(6) borrow except that it may (a) borrow for nonleveraging,
temporary or emergency purposes, (b) engage in reverse repurchase
agreements and make other borrowings, provided that the
combination of (a) and (b) shall not exceed 33 1/3% of the value
of its total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage
permitted by law, and (c) enter into futures and options
transactions; it may borrow from banks, other Stein Roe Funds and
Portfolios, and other persons to the extent permitted by
applicable law;
(7) invest in a security if more than 25% of its total assets
(taken at market value at the time of a particular purchase) would
be invested in the securities of issuers in any particular
industry, except that this restriction does not apply to
securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, and [Funds only] except that all or
substantially all of the assets of the Fund may be invested in
another registered investment company having the same investment
objective and substantially similar investment policies as the
Fund; or
(8) issue any senior security except to the extent permitted
under the Investment Company Act of 1940.
The above restrictions (other than bracketed portions thereof
and, in the case of Advisor Special Fund and Special Portfolio,
other than restrictions 1 and 2) are fundamental policies and may
not be changed without the approval of a "majority of the
outstanding voting securities" as defined above. The Funds and
the Portfolios (and, in the case of Advisor Special Fund and
Special Portfolio, together with restrictions 1 and 2 above) are
also subject to the following non-fundamental restrictions and
policies, which may be changed by the Board of Trustees. None of
the following restrictions shall prevent a Fund from investing all
or substantially all of its assets in another investment company
having the same investment objective and substantially the same
investment policies as the Fund. No Fund or Portfolio may:
(a) invest in any of the following: (i) interests in oil,
gas, or other mineral leases or exploration or development
programs (except readily marketable securities, including but not
limited to master limited partnership interests, that may
represent indirect interests in oil, gas, or other mineral
exploration or development programs); (ii) puts, calls, straddles,
spreads, or any combination thereof (except that it may enter into
transactions in options, futures, and options on futures); (iii)
shares of other open-end investment companies, except in
connection with a merger, consolidation, acquisition, or
reorganization; and (iv) limited partnerships in real estate
unless they are readily marketable;
(b) invest in companies for the purpose of exercising control
or management;
(c) purchase more than 3% of the stock of another investment
company or purchase stock of other investment companies equal to
more than 5% of its total assets (valued at time of purchase) in
the case of any one other investment company and 10% of such
assets (valued at time of purchase) in the case of all other
investment companies in the aggregate; any such purchases are to
be made in the open market where no profit to a sponsor or dealer
results from the purchase, other than the customary broker's
commission, except for securities acquired as part of a merger,
consolidation or acquisition of assets;
(d) invest more than 5% of its net assets (valued at time of
purchase) in warrants, nor more than 2% of its net assets in
warrants that are not listed on the New York or American Stock
Exchange;
(e) write an option on a security unless the option is issued
by the Options Clearing Corporation, an exchange, or similar
entity;
(f) invest more than 25% of its total assets (valued at time
of purchase) in securities of foreign issuers (other than
securities represented by American Depositary Receipts (ADRs) or
securities guaranteed by a U.S. person);
(g) purchase a put or call option if the aggregate premiums
paid for all put and call options exceed 20% of its net assets
(less the amount by which any such positions are in-the-money),
excluding put and call options purchased as closing transactions;
(h) purchase securities on margin (except for use of short-
term credits as are necessary for the clearance of transactions),
or sell securities short unless (i) it owns or has the right to
obtain securities equivalent in kind and amount to those sold
short at no added cost or (ii) the securities sold are "when
issued" or "when distributed" securities which it expects to
receive in a recapitalization, reorganization, or other exchange
for securities it contemporaneously owns or has the right to
obtain and provided that transactions in options, futures, and
options on futures are not treated as short sales;
(i) invest more than 5% of its total assets (taken at market
value at the time of a particular investment) in restricted
securities, other than securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933;
(j) invest more than 15% of its net assets (taken at market
value at the time of a particular investment) in illiquid
securities, including repurchase agreements maturing in more than
seven days.
ADDITIONAL INVESTMENT CONSIDERATIONS
Stein Roe seeks to provide superior long-term investment
results through a disciplined, research-intensive approach to
investment selection and prudent risk management. In working to
take sensible risks and make intelligent investments, it has been
guided by three primary objectives which it believes are the
foundation of a successful investment program. These objectives
are preservation of capital, limited volatility through managed
risk, and consistent above-average returns, as appropriate for the
particular client or managed account. Because every investor's
needs are different, Stein Roe mutual funds are designed to
accommodate different investment objectives, risk tolerance
levels, and time horizons. In selecting a mutual fund, investors
should ask the following questions:
What are my investment goals?
It is important to a choose a fund that has investment objectives
compatible with your investment goals.
What is my investment time frame?
If you have a short investment time frame (e.g., less than three
years), a mutual fund that seeks to provide a stable share price,
such as a money market fund, or one that seeks capital
preservation as one of its objectives may be appropriate. If you
have a longer investment time frame, you may seek to maximize your
investment returns by investing in a mutual fund that offers
greater yield or appreciation potential in exchange for greater
investment risk.
What is my tolerance for risk?
All investments, including those in mutual funds, have risks which
will vary depending on investment objective and security type.
However, mutual funds seek to reduce risk through professional
investment management and portfolio diversification.
In general, equity mutual funds emphasize long-term capital
appreciation and tend to have more volatile net asset values than
bond or money market mutual funds. Although there is no guarantee
that they will be able to maintain a stable net asset value of
$1.00 per share, money market funds emphasize safety of principal
and liquidity, but tend to offer lower income potential than bond
funds. Bond funds tend to offer higher income potential than
money market funds but tend to have greater risk of principal and
yield volatility.
MANAGEMENT
The Board of Trustees of the Trust has overall management
responsibility for the Trust and the Fund. The following table
sets forth certain information with respect to the trustees and
officers of the Trust:
<TABLE>
<CAPTION>
Position(s) held Principal occupation(s)
Name with the Trust during past five years
- ------------------ ------------------------ ----------------------------------------
<S> <C> <C>
William D. Andrews, 51 Executive Vice-President Executive vice president of Stein Roe
Gary A. Anetsberger, 43(4) Senior Vice-President; Chief financial officer and chief administrative
Controller officer of the Mutual Funds division of Stein Roe;
senior vice president of Stein Roe since April 1996;
vice president of Stein Roe prior thereto
John A. Bacon Jr., 70 Trustee Private investor
(3) (4)
William W. Boyd, 72 Trustee Chairman and director of Sterling Plumbing
(2) (3) (4) (manufacturer of plumbing products)
David P. Brady, 34 Vice-President Senior vice president of Stein Roe since March 1998;
vice president of Stein Roe from Nov. 1995 to March
1998; portfolio manager for Stein Roe since 1993
Thomas W. Butch, 42 (4) President President of the Mutual Funds division of Stein Roe
since March 1998; senior vice president of Stein Roe
from Sept. 1994 to March 1998; first vice president,
corporate communications, of Mellon Bank Corporation
prior thereto
Daniel K. Cantor, 39 Vice-President Senior vice president of Stein Roe
Kevin M. Carome, 42 (4) Vice-President; Senior vice president, legal, COGRA LLC (an affiliate
Assistant Secretary of Stein Roe) since Jan. 1999; general counsel and
secretary of Stein Roe since Jan. 1998; associate
general counsel and vice president of Liberty
Financial Companies, Inc. (the indirect parent of
Stein Roe) through Jan. 1999
J. Kevin Connaughton, 34 Vice-President Vice president of Colonial Management Associates,
(4) Inc. ("CMA") , since February, 1998; senior tax
manager, Coopers & Lybrand, LLP from April, 1996 to
January, 1998; vice president, 440 Financial
Group/First Data Investor Services Group from
March,1994 to April, 1996
Lindsay Cook, 46 Trustee Executive vice president of Liberty Financial
(1)(2)(4) Companies, Inc. (the indirect parent of Stein Roe)
since March 1997; senior vice president prior thereto
Erik P. Gustafson, 35 Vice-President Senior portfolio manager of Stein Roe; senior vice
president of Stein Roe since April 1996; vice
president of Stein Roe from May 1994 to April 1996;
associate of Stein Roe prior thereto
Douglas A. Hacker, 43 Trustee Senior vice president and chief financial officer of
(3) (4) UAL, Inc. (airline) since July 1994; senior vice
president, finance of UAL, Inc. prior thereto
Loren A. Hansen, 50 (4) Executive Vice-President Chief investment officer of CMA ("CMA") since 1997;
executive vice president of Stein Roe since Dec. 1995;
vice president of The Northern Trust (bank) prior
thereto
James P. Haynie, 36 Vice-President Vice President of Stein Roe since Oct. 1998; Vice
President of CMA since 1993
Harvey B. Hirschhorn, 49 Vice-President Executive vice president, senior portfolio manager,
and chief economist and investment strategist of Stein
Roe; director of research of Stein Roe, 1991 to 1995
Timothy J. Jacoby, 46 (4) Vice-President Fund treasurer for The Colonial Group since Sept. 1996
and chief financial officer since Aug. 1997; senior
vice president of Fidelity Investments from Sept. 1993
to Sept. 1996
Janet Langford Kelly, 41 Trustee Senior vice president, secretary and general counsel
(3) (4) of Sara Lee Corporation (branded, packaged, consumer-
products manufacturer) since 1995; partner of Sidley &
Austin (law firm) prior thereto
Michael T. Kennedy, 36 Vice-President Senior vice president of Stein Roe since Oct. 1994;
vice president of Stein Roe prior thereto
Gail D. Knudsen, 36 (4) Vice-President Vice president and assistant controller of CMA
Stephen F. Lockman, 37 Vice-President Senior vice president, portfolio manager, and credit
analyst of the Adviser since 1994; portfolio manager
for Illinois State Board of Investment prior thereto
Eric S. Maddix, 35 Vice-President Senior vice president of Stein Roe since March 1998;
vice president of Stein Roe from Nov. 1995 to March
1998; portfolio manager or research assistant for
Stein Roe since 1987
Lynn C. Maddox, 58 Vice-President Senior vice president of Stein Roe
Arthur J. McQueen, 40 Vice-President Senior vice president of Stein Roe
Charles R. Nelson, 56 Trustee Van Voorhis Professor of Political Economy, Department
(3) (4) of Economics of the University of Washington
Maureen G. Newman, 39 Vice-President Vice President of Stein Roe since Nov. 1998; portfolio
manager and vice president of CMA since May 1996;
portfolio manager and bond analyst at Fidelity
Investments from May 1985 to May 1996
Nicolette D. Parrish, 49 Vice-President; Senior legal assistant and assistant secretary of
(4) Assistant Secretary Stein Roe
Gita R. Rao, 39 Vice-President Vice President of Stein Roe since Oct. 1998; vice
president and portfolio manager for CMA since 1995;
global equity research analyst at Fidelity Management
& Research Company prior thereto
Michael E. Rega, 39 Vice-President Vice President of Stein Roe since Oct. 1998; Vice
President of CMA since 1996
Janet B. Rysz, 43 (4) Assistant Secretary Senior legal assistant and assistant secretary of
Stein Roe
M. Gerard Sandel, 44 Vice-President Senior vice president of Stein Roe since July 1997;
vice president of M&I Investment Management
Corporation prior thereto
Gloria J. Santella, 41 Vice-President Senior vice president of Stein Roe since Nov. 1995;
vice president of Stein Roe prior thereto
Thomas C. Theobald, 61 Trustee Managing director, William Blair Capital Partners
(3) (4) (private equity fund) since 1994; chief executive
officer and chairman of the Board of Directors of
Continental Bank Corporation, 1987-1994
Scott E. Volk, 27 (4) Treasurer Financial reporting manager for Stein Roe's Mutual
Funds division since Oct. 1997; senior auditor with
Ernst & Young LLP from Sept. 1993 to April 1996 and
from Oct. 1996 to Sept. 1997; financial analyst with
John Nuveen & Company Inc. from May 1996 to Sept. 1996
Heidi J. Walter, 31 (4) Vice-President; Secretary Vice president of Stein Roe since March 1998; senior
legal counsel for Stein Roe since Feb. 1998; legal
counsel for Stein Roe from March 1995 to Jan. 1998;
associate with Beeler Schad & Diamond, PC (law firm)
prior thereto
Hans P. Ziegler (4), 57 Executive Vice-President Director and Executive Vice-President of Stein Roe
since May 1994; President of the Investment Counsel
division of Stein Roe prior thereto
<FN>
_________________________
(1) Trustee who is an "interested person" of the Trust and of
Stein Roe, as defined in the Investment Company Act of 1940.
(2) Member of the Executive Committee of the Board of Trustees,
which is authorized to exercise all powers of the Board with
certain statutory exceptions.
(3) Member of the Audit Committee of the Board, which makes
recommendations to the Board regarding the selection of
auditors and confers with the auditors regarding the scope and
results of the audit.
(4) This person holds the corresponding officer or trustee
position with SR&F Base Trust.
</TABLE>
Certain of the trustees and officers of the Trust are
trustees or officers of other investment companies managed by
Stein Roe. Mr. Anetsberger, Mr. Butch, and Ms. Walter are also
officers of Liberty Funds Distributor, Inc., the Fund's
distributor. The address of Mr. Bacon is 4N640 Honey Hill Road,
Box 296, Wayne, IL 60184; that of Mr. Boyd is 2900 Golf Road,
Rolling Meadows, IL 60008; that of Mr. Cook is 600 Atlantic
Avenue, Boston, MA 02210; that of Mr. Hacker is P.O. Box 66100,
Chicago, IL 60666; that of Ms. Kelly is Three First National
Plaza, Chicago, IL 60602; that of Mr. Nelson is Department of
Economics, University of Washington, Seattle, WA 98195; that of
Mr. Theobald is Suite 3300, 222 West Adams Street, Chicago, IL
60606; that of Mr. Cantor is 1330 Avenue of the Americas, New
York, NY 10019; that of Ms. Knudsen, Ms. Newman, Ms. Rao, and
Messrs. Connaughton, Haynie, Jacoby, and Rega is One Financial
Center, Boston, MA 02111; and that of the other officers is One
South Wacker Drive, Chicago, IL 60606.
Officers and trustees affiliated with Stein Roe serve without
any compensation from the Trust. In compensation for their
services to the Trust, trustees who are not "interested persons"
of the Trust or Stein Roe are paid an annual retainer plus an
attendance fee for each meeting of the Board or standing committee
thereof attended. The Trust has no retirement or pension plan.
The following table sets forth compensation paid during the fiscal
year ended Sept. 30, 1998 to each of the trustees:
Compensation from the
Stein Roe Fund Complex*
-----------------------
Aggregate Compensation Total Average
Name of Trustee from the Trust Compensation Per Series
- ------------------- -------------------- ------------ ----------
Timothy K. Armour** -0- -0- -0-
Thomas W. Butch** -0- -0- -0-
Lindsay Cook -0- -0- -0-
John A. Bacon Jr.** -0- -0- -0-
Kenneth L. Block** $ 2,000 $ 23,100 $ 525
William W. Boyd 13,400 109,902 2,498
Douglas A. Hacker 13,100 101,148 2,299
Janet Langford Kelly 12,500 97,950 2,226
Francis W. Morley** 2,000 23,100 525
Charles R. Nelson 13,400 109,552 2,490
Thomas C. Theobald 13,100 101,148 2,299
_______________
* At Sept. 30, 1998, the Stein Roe Fund Complex consisted of 10
series of the Trust, 11 series of Stein Roe Investment Trust, four
series of Stein Roe Income Trust, four series of Stein Roe
Municipal Trust, one series of Stein Roe Institutional Trust, one
series of Stein Roe Trust, and 13 series of SR&F Base Trust.
**Messrs. Block and Morley retired as trustees on Dec. 31, 1997.
Mr. Armour resigned as a trustee on April 14, 1998. Mr. Butch
served as a trustee from April 14, 1998 to Nov. 3, 1998. Mr.
Bacon was elected a trustee effective Nov. 3, 1998.
FINANCIAL STATEMENTS
Please refer to the Funds' Sept. 30, 1998 Financial
Statements (statements of assets and liabilities and schedules of
investments as of Sept. 30, 1998 and the statements of operations,
changes in net assets, and notes thereto) and the report of
independent public accountants contained in the Sept. 30, 1998
Annual Report of the Funds. The Financial Statements and the
report of independent public accountants (but no other material
from the Annual Report) are incorporated herein by reference. The
Annual Report may be obtained at no charge by telephoning 800-338-
2550.
PRINCIPAL SHAREHOLDERS
As of Oct. 31, 1998, the only person known by the Trust to
own of record or "beneficially" 5% or more of the outstanding
shares of a Fund within the definition of that term as contained
in Rule 13d-3 under the Securities Exchange Act of 1934 was as
follows:
Approximate
Percentage of
Outstanding
Name and Address Fund Shares Held
- ------------------- ---------------------------- -------------
Mae H. Colby
25 Oakville Avenue
Waterbury CT 06708 Advisor Growth & Income Fund 6.39%
Liberty Financial Advisor Growth & Income Fund 5.21%
Companies, Inc. Advisor Special Fund 71.14%
600 Atlantic Avenue
Federal Reserve Plaza
Boston, MA 02210
INVESTMENT ADVISORY AND OTHER SERVICES
Stein Roe & Farnham Incorporated provides investment
management services to the Portfolios and administrative services
to the Funds and the Portfolios. Stein Roe is a wholly owned
subsidiary of SteinRoe Services Inc. ("SSI"), the Fund's transfer
agent, which is a wholly owned subsidiary of Liberty Financial
Companies, Inc. ("Liberty Financial"), which is a majority owned
subsidiary of Liberty Corporate Holdings, Inc., which is a wholly
owned subsidiary of LFC Holdings, Inc., which is a wholly owned
subsidiary of Liberty Mutual Equity Corporation, which is a wholly
owned subsidiary of Liberty Mutual Insurance Company. Liberty
Mutual Insurance Company is a mutual insurance company,
principally in the property/casualty insurance field, organized
under the laws of Massachusetts in 1912.
The directors of Stein Roe are Kenneth R. Leibler, C. Allen
Merritt, Jr., Thomas W. Butch, and Hans P. Ziegler. Mr. Leibler
is President and Chief Executive Officer of Liberty Financial; Mr.
Merritt is Chief Operating Officer of Liberty Financial; Mr. Butch
is President of Stein Roe's Mutual Funds division; and Mr. Ziegler
is Chief Executive Officer of Stein Roe. The business address of
Messrs. Leibler and Merritt is 600 Atlantic Avenue, Boston, MA
02210; and that of Messrs. Butch and Ziegler is One South Wacker
Drive, Chicago, IL 60606.
Stein Roe and its predecessor have been providing investment
advisory services since 1932. Stein Roe acts as investment
adviser to wealthy individuals, trustees, pension and profit
sharing plans, charitable organizations, and other institutional
investors. As of Sept. 30, 1998, Stein Roe managed over $28.3
billion in assets: over $9.4 billion in equities and over $18.9
billion in fixed income securities (including $1.1 billion in
municipal securities). The $28.3 billion in managed assets
included over $8.3 billion held by open-end mutual funds managed
by Stein Roe (approximately 14% of the mutual fund assets were
held by clients of Stein Roe). These mutual funds were owned by
over 295,000 shareholders. The $8.3 billion in mutual fund assets
included over $637 million in over 43,000 IRA accounts. In
managing those assets, Stein Roe utilizes a proprietary computer-
based information system that maintains and regularly updates
information for approximately 7,500 companies. Stein Roe also
monitors over 1,400 issues via a proprietary credit analysis
system. At Sept. 30, 1998, Stein Roe employed 18 research
analysts and 55 account managers. The average investment-related
experience of these individuals was 17 years.
In return for its services, Stein Roe is entitled to receive
a monthly administrative fee from each Fund and a monthly
management fee from each Portfolio. The table below shows the
annual rates of such fees as a percentage of average net assets
(shown in millions), gross fees paid since commencement of
operations, and any expense reimbursements by Stein Roe:
<TABLE>
<CAPTION>
Year Ended Year Ended
Fund/Portfolio Type Current Rates 9/30/98 9/30/97
<S> <C> <C> <C> <C>
Advisor Growth &
Income Fund Administrative .15% up to $500,
.125% next $500,
.10% thereafter $ 1,347 $ 98
Reimbursement Expenses exceeding
1.40% 83,622 56,890
Growth & Income
Portfolio Management .60% up to $500,
.55% next $500,
.50% thereafter 2,187,961 1,191,731
Advisor Special
Fund Administrative .15% up to $500,
.125% next $500,
.10% next $500,
.075% thereafter 1,124 100
Reimbursement Expenses exceeding
1.45% 83,321 56,403
Special Portfolio Management .75% up to $500,
.70% next $500,
.65% next $500,
.60% thereafter 8,771,718 5,249,468
</TABLE>
Stein Roe provides office space and executive and other
personnel to the Funds, and bears any sales or promotional
expenses. Each Fund pays all expenses other than those paid by
Stein Roe, including but not limited to printing and postage
charges, securities registration and custodian fees, and expenses
incidental to its organization.
The administrative agreement provides that Stein Roe shall
reimburse each Fund to the extent that total annual expenses of
the Fund (including fees paid to Stein Roe, but excluding taxes,
interest, commissions and other normal charges incident to the
purchase and sale of portfolio securities, and expenses of
litigation to the extent permitted under applicable state law)
exceed the applicable limits prescribed by any state in which Fund
shares are being offered for sale to the public; provided,
however, Stein Roe is not required to reimburse a Fund an amount
in excess of fees paid by the Fund under that agreement for such
year. In addition, in the interest of further limiting expenses
of a Fund, Stein Roe may voluntarily waive its fees and/or absorb
certain expenses, as described under The Funds-Your Expenses in
the Prospectus. Any such reimbursement will enhance the yield of
such Fund.
The management agreement provides that neither Stein Roe, nor
any of its directors, officers, stockholders (or partners of
stockholders), agents, or employees shall have any liability to
the Trust or any shareholder of the Trust for any error of
judgment, mistake of law or any loss arising out of any
investment, or for any other act or omission in the performance by
Stein Roe of its duties under the agreement, except for liability
resulting from willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under the agreement.
Any expenses that are attributable solely to the
organization, operation, or business of a series of the Trust are
paid solely out of the assets of that series. Any expenses
incurred by the Trust that are not solely attributable to a
particular series are apportioned in such manner as Stein Roe
determines is fair and appropriate, unless otherwise specified by
the Board of Trustees.
Bookkeeping and Accounting Agreement
Pursuant to a separate agreement with the Trust, Stein Roe
receives a fee for performing certain bookkeeping and accounting
services. For services provided to the Trust, Stein Roe receives
an annual fee of $25,000 per series plus .0025 of 1% of average
net assets over $50 million. During the fiscal years ended Sept.
30, 1997 and 1998, Stein Roe received $109,375 and $224,068,
respectively, from the Trust for services provided under this
agreement.
CUSTODIAN
State Street Bank and Trust Company (the "Bank"), 225
Franklin Street, Boston, MA 02101, is the custodian for the Trust
and SR&F Base Trust. It is responsible for holding all securities
and cash, receiving and paying for securities purchased,
delivering against payment securities sold, receiving and
collecting income from investments, making all payments covering
expenses, and performing other administrative duties, all as
directed by authorized persons. The Bank does not exercise any
supervisory function in such matters as purchase and sale of
portfolio securities, payment of dividends, or payment of
expenses.
Portfolio securities purchased in the U.S. are maintained in
the custody of the Bank or of other domestic banks or
depositories. Portfolio securities purchased outside of the U.S.
are maintained in the custody of foreign banks and trust companies
that are members of the Bank's Global Custody Network and foreign
depositories ("foreign sub-custodians"). Each of the domestic and
foreign custodial institutions holding portfolio securities has
been approved by the Board of Trustees in accordance with
regulations under the Investment Company Act of 1940.
The Board of Trustees of each Trust reviews, at least
annually, whether it is in the best interests of each Portfolio,
each Fund, and its shareholders to maintain assets in each of the
countries in which it invests with particular foreign sub-
custodians in such countries, pursuant to contracts between such
respective foreign sub-custodians and the Bank. The review
includes an assessment of the risks of holding assets in any such
country (including risks of expropriation or imposition of
exchange controls), the operational capability and reliability of
each such foreign sub-custodian, and the impact of local laws on
each such custody arrangement. Each Board of Trustees is aided in
its review by the Bank, which has assembled the network of foreign
sub-custodians, as well as by Stein Roe and counsel. However,
with respect to foreign sub-custodians, there can be no assurance
that a Fund and the value of its shares will not be adversely
affected by acts of foreign governments, financial or operational
difficulties of the foreign sub-custodians, difficulties and costs
of obtaining jurisdiction over or enforcing judgments against the
foreign sub-custodians, or application of foreign law to foreign
sub-custodial arrangements. Accordingly, an investor should
recognize that the non-investment risks involved in holding assets
abroad are greater than those associated with investing in the
United States.
The Funds and the Portfolios may invest in obligations of the
Bank and may purchase or sell securities from or to the Bank.
INDEPENDENT PUBLIC ACCOUNTANTS
The independent public accountants for the Funds and the
Portfolios are Arthur Andersen LLP, 33 West Monroe Street,
Chicago, IL 60603. The accountants audit and report on the annual
financial statements, review certain regulatory reports and the
federal income tax returns, and perform other professional
accounting, auditing, tax and advisory services when engaged to do
so by a Trust.
DISTRIBUTOR
Shares of Funds are distributed by Liberty Funds Distributor,
Inc. (the "Distributor"), One Financial Center, Boston, MA 02111,
under a Distribution Agreement. The Distributor is a subsidiary
of Colonial Management Associates, Inc., which is an indirect
subsidiary of Liberty Financial. The Distribution Agreement
continues in effect from year to year, provided such continuance
is approved annually (i) by a majority of the trustees or by a
majority of the outstanding voting securities of the Trust, and
(ii) by a majority of the trustees who are not parties to the
Agreement or interested persons of any such party ("independent
trustees"). The Distributor has no obligation, as underwriter, to
buy Fund shares, and purchases shares only upon receipt of orders
from authorized Intermediaries. The Trust has agreed to pay all
expenses in connection with registration of its shares with the
Securities and Exchange Commission and auditing and filing fees in
connection with registration of its shares under the various state
blue sky laws and assumes the cost of preparation of prospectuses
and other expenses.
Each Fund offers one class of shares (Class K) and may in the
future offer other classes of shares. Class K shares are offered
at net asset value, subject to a Rule 12b-1 fee.
The trustees of the Trust have adopted a plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Plan").
The Plan provides that, as compensation for personal service
and/or the maintenance of shareholder accounts, the Distributor
receives a service fee at an annual rate not to exceed 0.25% of
net assets attributed to each class of shares other than Class K
shares. The Plan also provides that as compensation for the
promotion and distribution of shares of the Funds including its
expenses related to sale and promotion of Fund shares, the
Distributor receives from each Fund a fee at an annual rate not
exceeding 0.10% of the average net assets attributed to Class A
shares, and 0.75% of the average net assets attributed to each of
its Class B and Class C shares. The Plan further provides that,
as compensation for services and/or distribution, the Distributor
receives a fee at an annual rate not to exceed 0.25% of the
average net assets attributable to Class K shares. At this time,
the Distributor has voluntarily agreed to limit the Class A
distribution fee to 0.05% annually. The Distributor may terminate
this voluntary limitation without shareholder approval. Class B
shares automatically convert to Class A shares approximately eight
years after the Class B shares are purchased. Class C and Class K
shares do not convert. The Distributor generally pays this amount
to institutions that distribute Fund shares and provide services
to the Funds and their shareholders. Those institutions may use
the payments for, among other purposes, compensating employees
engaged in sales and/or shareholder servicing. The amount of fees
paid by the Funds during any year may be more or less than the
cost of distribution or other services provided to the Fund. NASD
rules limit the amount of annual distribution fees that may be
paid by a mutual fund and impose a ceiling on the cumulative sales
charges paid. The Trust's Plan complies with those rules.
The trustees believe that the Plan could be a significant
factor in the growth and retention of Fund assets resulting in a
more advantageous expense ratio and increased investment
flexibility which could benefit each class of shareholders. The
Plan will continue in effect from year to year so long as
continuance is specifically approved at least annually by a vote
of the trustees, including the independent trustees. The Plan may
not be amended to increase the fee materially without approval by
a vote of a majority of the outstanding voting securities of the
relevant class of shares and all material amendments of the Plan
must be approved by the trustees in the manner provided in the
foregoing sentence. The Plan may be terminated at any time by a
vote of a majority of the independent trustees or by a vote of a
majority of the outstanding voting securities of the relevant
Class of shares.
For the fiscal year ended Sept. 30, 1998, the Funds paid the
following 12b-1 service and distribution fees:
Advisor Growth & Income Fund $2,245
Advisor Special Fund $1,873
TRANSFER AGENT AND SHAREHOLDER SERVICING
Liberty Funds Services, Inc. (the "Transfer Agent"), P.O. Box
1722, Boston, MA 02105, an indirect subsidiary of Liberty
Financial, is the agent of the Trust for the transfer of shares,
disbursement of dividends, and maintenance of shareholder
accounting records. For performing these services, the Transfer
Agent receives from each Fund a fee based on the following annual
rates:
Class K Shares
Account maintenance and trade processing 0.05%
Client services 0.25%
Total 0.30%
The Trust believes the charges by the Transfer Agent to the Funds
are comparable to those of other companies performing similar
services.
Some intermediaries having special selling arrangements with
the Distributor, including certain broker-dealers, bank trust
departments, asset allocation programs sponsored by Stein Roe,
wrap fee programs, and retirement plan service providers
("Intermediaries") that maintain nominee accounts with the Funds
for their clients who are Fund shareholders, may be paid a fee
from the Transfer Agent for shareholder servicing and accounting
services they provide with respect to the underlying Fund shares.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the Prospectus
under the heading Your Account, and that information is
incorporated herein by reference. It is the responsibility of any
investment dealers, banks, or other institutions, including
retirement plan service providers, through whom you purchase or
redeem shares to establish procedures insuring the prompt
transmission to the Trust of any such purchase order.
The net asset value per share for each Fund is determined on
days on which the New York Stock Exchange (the "NYSE") is open for
trading. The NYSE is regularly closed on Saturdays and Sundays
and on New Year's Day, the third Monday in January, the third
Monday in February, Good Friday, the last Monday in May,
Independence Day, Labor Day, Thanksgiving, and Christmas. If one
of these holidays falls on a Saturday or Sunday, the NYSE will be
closed on the preceding Friday or the following Monday,
respectively. Net asset value will not be determined on days when
the NYSE is closed unless, in the judgment of the Board of
Trustees, net asset value of a Fund should be determined on any
such day, in which case the determination will be made at 3 p.m.,
Central time.
The Trust intends to pay all redemptions in cash and is
obligated to redeem shares solely in cash up to the lesser of
$250,000 or one percent of the net assets of the Trust during any
90-day period for any one shareholder. However, redemptions in
excess of such limit may be paid wholly or partly by a
distribution in kind of securities. If redemptions were made in
kind, the redeeming shareholders might incur transaction costs in
selling the securities received in the redemptions.
Due to the relatively high cost of maintaining smaller
accounts, the Trust reserves the right to redeem shares in any
account for their then-current value (which will be promptly paid
to the investor) if at any time the shares in the account do not
have a value of at least $1,000. An investor will be notified
that the value of his account is less than that minimum and
allowed at least 30 days to bring the value of the account up to
at least $1,000 before the redemption is processed. The Agreement
and Declaration of Trust also authorizes the Trust to redeem
shares under certain other circumstances as may be specified by
the Board of Trustees.
The Trust reserves the right to suspend or postpone
redemptions of shares of the Funds during any period when: (a)
trading on the NYSE is restricted, as determined by the Securities
and Exchange Commission, or the NYSE is closed for other than
customary weekend and holiday closings; (b) the Securities and
Exchange Commission has by order permitted such suspension; or (c)
an emergency, as determined by the Securities and Exchange
Commission, exists, making disposal of portfolio securities or
valuation of net assets of a Fund not reasonably practicable.
PORTFOLIO TRANSACTIONS
Stein Roe places the orders for the purchase and sale of
portfolio securities and options and futures contracts. Stein
Roe's overriding objective in selecting brokers and dealers to
effect portfolio transactions is to seek the best combination of
net price and execution. The best net price, giving effect to
brokerage commissions, if any, is an important factor in this
decision; however, a number of other judgmental factors may also
enter into the decision. These factors include Stein Roe's
knowledge of negotiated commission rates currently available and
other current transaction costs; the nature of the security being
purchased or sold; the size of the transaction; the desired timing
of the transaction; the activity existing and expected in the
market for the particular security; confidentiality; the
execution, clearance and settlement capabilities of the broker or
dealer selected and others considered; Stein Roe's knowledge of
the financial condition of the broker or dealer selected and such
other brokers and dealers; and Stein Roe's knowledge of actual or
apparent operation problems of any broker or dealer. Recognizing
the value of these factors, Stein Roe may cause a client to pay a
brokerage commission in excess of that which another broker may
have charged for effecting the same transaction.
Stein Roe has established internal policies for the guidance
of its trading personnel, specifying minimum and maximum
commissions to be paid for various types and sizes of transactions
and effected for clients in those cases where Stein Roe has
discretion to select the broker or dealer by which the transaction
is to be executed. Transactions which vary from the guidelines
are subject to periodic supervisory review. These guidelines are
reviewed and periodically adjusted, and the general level of
brokerage commissions paid is periodically reviewed by Stein Roe.
Evaluations of the reasonableness of brokerage commissions, based
on the factors described in the preceding paragraph, are made by
Stein Roe's trading personnel while effecting portfolio
transactions. The general level of brokerage commissions paid is
reviewed by Stein Roe, and reports are made annually to the Board
of Trustees.
Where more than one broker or dealer is believed to be
capable of providing a combination of best net price and execution
with respect to a particular portfolio transaction, Stein Roe
often selects a broker or dealer that has furnished it with
investment research products or services such as: economic,
industry or company research reports or investment
recommendations; subscriptions to financial publications or
research data compilations; compilations of securities prices,
earnings, dividends, and similar data; computerized data bases;
quotation equipment and services; research or analytical computer
software and services; or services of economic and other
consultants. Such selections are not made pursuant to any
agreement or understanding with any of the brokers or dealers.
However, Stein Roe does in some instances request a broker to
provide a specific research or brokerage product or service which
may be proprietary to the broker or produced by a third party and
made available by the broker and, in such instances, the broker in
agreeing to provide the research or brokerage product or service
frequently will indicate to Stein Roe a specific or minimum amount
of commissions which it expects to receive by reason of its
provision of the product or service. Stein Roe does not agree
with any broker to direct such specific or minimum amounts of
commissions; however, Stein Roe does maintain an internal
procedure to identify those brokers who provide it with research
products or services and the value of such products or services,
and Stein Roe endeavors to direct sufficient commissions on client
transactions (including commissions on transactions in fixed
income securities effected on an agency basis and, in the case of
transactions for certain types of clients, dealer selling
concessions on new issues of securities) to ensure the continued
receipt of research products or services Stein Roe believes are
useful.
In a few instances, Stein Roe receives from a broker a
product or service which is used by Stein Roe both for investment
research and for administrative, marketing, or other non-research
or brokerage purposes. In such an instance, Stein Roe makes a
good faith effort to determine the relative proportion of its use
of such product or service which is for investment research or
brokerage, and that portion of the cost of obtaining such product
or service may be defrayed through brokerage commissions generated
by client transactions, while the remaining portion of the costs
of obtaining the product or service is paid by Stein Roe in cash.
Stein Roe may also receive research in connection with selling
concessions and designations in fixed income offerings.
The Funds and the Portfolios do not believe they pay
brokerage commissions higher than those obtainable from other
brokers in return for research or brokerage products or services
provided by brokers. Research or brokerage products or services
provided by brokers may be used by Stein Roe in servicing any or
all of its clients and such research products or services may not
necessarily be used by Stein Roe in connection with client
accounts which paid commissions to the brokers providing such
products or services.
The table below shows information on brokerage commissions
paid by the Portfolios:
Growth
& Income Special
Portfolio Portfolio
--------- ---------
Total amount of brokerage commissions paid
during the year ended 9/30/98 $100,196 $2,301,286
Amount of commissions paid to brokers or
dealers who supplied research services to
Stein Roe 93,226 2,048,250
Total dollar amount involved in such
transactions (000 omitted) 113,429 1,006,542
Amount of commissions paid to brokers or
dealers that were allocated to such brokers
or dealers by the portfolio manager because
of research services provided to the
Portfolio 23,300 324,839
Total dollar amount involved in such
transactions (000 omitted) 17,996 181,286
Total amount of brokerage commissions paid
from inception to 9/30/97 76,712 458,431
The Trusts have arranged for the custodian to act as a
soliciting dealer to accept any fees available to the custodian as
a soliciting dealer in connection with any tender offer for
portfolio securities. The custodian will credit any such fees
received against its custodial fees. In addition, the Board of
Trustees has reviewed the legal developments pertaining to and the
practicability of attempting to recapture underwriting discounts
or selling concessions when portfolio securities are purchased in
underwritten offerings. However, the Board has been advised by
counsel that recapture by a mutual fund currently is not permitted
under the Rules of the Association of the National Association of
Securities Dealers.
During the last fiscal year, certain Portfolios held
securities issued by one or more of their regular broker-dealers
or the parent of such broker-dealers that derive more than 15% of
gross revenue from securities-related activities. Such holdings
were as follows at Sept. 30, 1998:
Value of
Securities Held
Portfolio Security (in thousands)
- ------------------ ----------------------------- --------------
Growth & Income
Portfolio Associates Corp. of North America $17,330
Special Portfolio Associates Corp. of North America 39,850
ADDITIONAL INCOME TAX CONSIDERATIONS
Each Fund and each Portfolio intend to qualify under
Subchapter M of the Internal Revenue Code and to comply with the
special provisions of the Internal Revenue Code that relieve it of
federal income tax to the extent of its net investment income and
capital gains currently distributed to shareholders.
Because dividend and capital gains distributions reduce net
asset value, a shareholder who purchases shares shortly before a
record date will, in effect, receive a return of a portion of his
investment in such distribution. The distribution would
nonetheless be taxable to him, even if the net asset value of
shares were reduced below his cost. However, for federal income
tax purposes the shareholder's original cost would continue as his
tax basis.
Each Fund expects that less than 100% of its dividends will
qualify for the deduction for dividends received by corporate
shareholders.
To the extent a Portfolio invests in foreign securities, it
may be subject to withholding and other taxes imposed by foreign
countries. Tax treaties between certain countries and the United
States may reduce or eliminate such taxes. Investors may be
entitled to claim U.S. foreign tax credits with respect to such
taxes, subject to certain provisions and limitations contained in
the Code. Specifically, if more than 50% its total assets at the
close of any fiscal year consist of stock or securities of foreign
corporations, the Portfolio may file an election with the Internal
Revenue Service pursuant to which shareholders of the Fund will be
required to (i) include in ordinary gross income (in addition to
taxable dividends actually received) their pro rata shares of
foreign income taxes paid even though not actually received, (ii)
treat such respective pro rata shares as foreign income taxes paid
by them, and (iii) deduct such pro rata shares in computing their
taxable incomes, or, alternatively, use them as foreign tax
credits, subject to applicable limitations, against their United
States income taxes. Shareholders who do not itemize deductions
for federal income tax purposes will not, however, be able to
deduct their pro rata portion of foreign taxes paid by a Fund,
although such shareholders will be required to include their share
of such taxes in gross income. Shareholders who claim a foreign
tax credit may be required to treat a portion of dividends
received from a Fund as separate category income for purposes of
computing the limitations on the foreign tax credit available to
such shareholders. Tax-exempt shareholders will not ordinarily
benefit from this election relating to foreign taxes. Each year,
the Funds will notify shareholders of the amount of (i) each
shareholder's pro rata share of foreign income taxes paid and (ii)
the portion of dividends which represents income from each foreign
country, if the Fund qualifies to pass along such credit.
INVESTMENT PERFORMANCE
A Fund may quote certain total return figures from time to
time. A "Total Return" on a per share basis is the amount of
dividends distributed per share plus or minus the change in the
net asset value per share for a period. A "Total Return
Percentage" may be calculated by dividing the value of a share at
the end of a period 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 computed by finding the average annual
compounded rate that would equate a hypothetical initial amount
invested of $1,000 to the ending redeemable value.
n
Average Annual Total Return is computed as follows: ERV = P(1+T)
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period at the
end of the period (or fractional portion).
Each Fund invests all of its net investable assets in a
separate series of SR&F Base Trust, which series has the same
investment objective and substantially the same investment
policies as the respective Fund (each such series hereinafter
referred to as a "Portfolio"). Each Fund commenced operations on
Feb. 14, 1997 and as of Oct. 15, 1997 designated its shares as
Class K shares. The historical performance of each Fund's Class K
shares for the period prior to Feb. 14, 1997 is based on the
performance of its respective Portfolio restated to reflect the
12b-1 fees and other expenses as set forth in the prospectus,
without giving effect to any fee reimbursement described therein
and assuming reinvestment of dividends and capital gains.
Historical performance as restated should not be interpreted as
indicative of a Fund's future performance. The average annual
returns for the Class K shares of each Fund as of Sept. 30, 1998,
were as follows:
TOTAL RETURN AVERAGE ANNUAL
TOTAL RETURN PERCENTAGE TOTAL RETURN
------------ ------------- --------------
Advisor Growth &
Income Fund
1 year $1,032 3.18% 3.18%
5 years 2,067 106.65 15.62
10 years 4,217 321.68 15.48
Advisor Special Fund
1 year 813 (18.70) (18.70)
5 years 1,483 48.26 8.19
10 years 3,430 242.97 13.12
Investment performance figures assume reinvestment of all
dividends and distributions and do not take into account any
federal, state, or local income taxes which shareholders must pay
on a current basis. The performance of a Fund is a result of
conditions in the securities markets, portfolio management, and
operating expenses. Although investment performance information
is useful in reviewing a Fund's performance and in providing some
basis for comparison with other investment alternatives, it should
not be used for comparison with other investments using different
reinvestment assumptions or time periods.
A Fund may note its mention or recognition in newspapers,
magazines, or other media from time to time. However, the Funds
assume no responsibility for the accuracy of such data.
Newspapers and magazines which might mention the Funds include,
but are not limited to, the following:
Architectural Digest
Arizona Republic
Atlanta Constitution
Atlantic Monthly
Associated Press
Barron's
Bloomberg
Boston Globe
Boston Herald
Business Week
Chicago Tribune
Chicago Sun-Times
Cleveland Plain Dealer
CNBC
CNN
Crain's Chicago Business
Consumer Reports
Consumer Digest
Dow Jones Investment Advisor
Dow Jones Newswire
Fee Advisor
Financial Planning
Financial World
Forbes
Fortune
Fund Action
Fund Marketing Alert
Gourmet
Individual Investor
Investment Dealers' Digest
Investment News
Investor's Business Daily
Kiplinger's Personal Finance Magazine
Knight-Ridder
Lipper Analytical Services
Los Angeles Times
Louis Rukeyser's Wall Street
Money
Money on Line
Morningstar
Mutual Fund Market News
Mutual Fund News Service
Mutual Funds Magazine
Newsday
Newsweek
New York Daily News
The New York Times
No-Load Fund Investor
Pension World
Pensions and Investment
Personal Investor
Physicians Financial News
Jane Bryant Quinn (syndicated column)
Reuters
The San Francisco Chronicle
Securities Industry Daily
Smart Money
Smithsonian
Strategic Insight
Street.com
Time
Travel & Leisure
USA Today
U.S. News & World Report
Value Line
The Wall Street Journal
The Washington Post
Working Women
Worth
Your Money
In advertising and sales literature, a Fund may compare its
performance with that of other mutual funds, indexes or averages
of other mutual funds, indexes of related financial assets or
data, and other competing investment and deposit products
available from or through other financial institutions. The
composition of these indexes or averages differs from that of the
Funds. Comparison of a Fund to an alternative investment should
be made with consideration of differences in features and expected
performance. All of the indexes and averages noted below will be
obtained from the indicated sources or reporting services, which
the Funds believe to be generally accurate. All of the Funds may
compare their performance to the Consumer Price Index (All Urban),
a widely recognized measure of inflation. Each Fund's performance
may be compared to the following indexes or averages:
Dow-Jones Industrial Average New York Stock Exchange
Composite Index
Standard & Poor's 500 Stock Index American Stock Exchange
Composite Index
Standard & Poor's 400 Industrials NASDAQ Composite
Wilshire 5000 NASDAQ Industrials
(These indexes are widely (These indexes generally reflect
recognized indicators of the performance of stocks
general U.S. stock market traded in the indicated
results.) markets.)
In addition, the Funds may compare performance to the
indicated benchmarks:
Benchmark Fund(s)
Lipper Equity Fund Average Both Funds
Lipper General Equity Fund Average Both Funds
Lipper Growth & Income Fund Average Advisor Growth & Income Fund
Lipper Growth & Income Fund Index Advisor Growth & Income Fund
Lipper Growth Fund Average Advisor Special Fund
Lipper Growth Fund Index Advisor Special Fund
Morningstar Domestic Stock Average Both Funds
Morningstar Growth & Income Fund
Average Advisor Growth & Income Fund
Morningstar Growth Fund Average Advisor Special Fund
Morningstar Total Fund Average Both Funds
Value Line Index (Widely recognized
indicator of the performance of
small- and medium-sized company
stocks) Advisor Special Fund
Lipper Growth Fund Index reflects the net asset value
weighted total return of the largest thirty growth funds and
thirty growth and income funds, respectively, as calculated and
published by Lipper. The Lipper and Morningstar averages are
unweighted averages of total return performance of mutual funds as
classified, calculated, and published by these independent
services that monitor the performance of mutual funds. The Funds
may also use comparative performance as computed in a ranking by
Lipper or category averages and rankings provided by another
independent service. Should Lipper or another service reclassify
a Fund to a different category or develop (and place a Fund into)
a new category, that Fund may compare its performance or ranking
with those of other funds in the newly assigned category, as
published by the service.
A Fund may also cite its rating, recognition, or other
mention by Morningstar or any other entity. Morningstar's rating
system is based on risk-adjusted total return performance and is
expressed in a star-rating format. The risk-adjusted number is
computed by subtracting a fund's risk score (which is a function
of the fund's monthly returns less the 3-month T-bill return) from
its load-adjusted total return score. This numerical score is
then translated into rating categories, with the top 10% labeled
five star, the next 22.5% labeled four star, the next 35% labeled
three star, the next 22.5% labeled two star, and the bottom 10%
one star. A high rating reflects either above-average returns or
below-average risk, or both.
Of course, past performance is not indicative of future
results.
________________
To illustrate the historical returns on various types of
financial assets, the Funds may use historical data provided by
Ibbotson Associates, Inc. ("Ibbotson"), a Chicago-based investment
firm. Ibbotson constructs (or obtains) very long-term (since
1926) total return data (including, for example, total return
indexes, total return percentages, average annual total returns
and standard deviations of such returns) for the following asset
types:
Common stocks
Small company stocks
Long-term corporate bonds
Long-term government bonds
Intermediate-term government bonds
U.S. Treasury bills
Consumer Price Index
_____________________
A Fund may also use hypothetical returns to be used as an
example in a mix of asset allocation strategies. One such example
is reflected in the chart below, which shows the effect of tax
deferral on a hypothetical investment. This chart assumes that an
investor invested $2,000 a year on January 1, for any specified
period, in both a Tax-Deferred Investment and a Taxable
Investment, that both investments earn either 6%, 8% or 10%
compounded annually, and that the investor withdrew the entire
amount at the end of the period. (A tax rate of 39.6% is applied
annually to the Taxable Investment and on the withdrawal of
earnings on the Tax-Deferred Investment.)
<TABLE>
<CAPTION>
TAX-DEFERRED INVESTMENT VS. TAXABLE INVESTMENT
Interest
Rate 3% 5% 7% 9% 3% 5% 7% 9%
- --------------------------------------------------------------------------------
Com-
pound-
ing
Years Tax-Deferred Investment Taxable Investment
- ---- ------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30 $82,955 $108,031 $145,856 $203,239 $80,217 $98,343 $121,466 $151,057
25 65,164 80,337 101,553 131,327 63,678 75,318 89,528 106,909
20 49,273 57,781 68,829 83,204 48,560 55,476 63,563 73,028
15 35,022 39,250 44,361 50,540 34,739 38,377 42,455 47,025
10 22,184 23,874 25,779 27,925 22,106 23,642 25,294 27,069
5 10,565 10,969 11,393 11,840 10,557 10,943 11,342 11,754
1 2,036 2,060 2,085 2,109 2,036 2,060 2,085 2,109
</TABLE>
Dollar Cost Averaging. Dollar cost averaging is an
investment strategy that requires investing a fixed amount of
money in Fund shares at set intervals. This allows you to
purchase more shares when prices are low and fewer shares when
prices are high. Over time, this tends to lower your average cost
per share. Like any investment strategy, dollar cost averaging
can't guarantee a profit or protect against losses in a steadily
declining market. Dollar cost averaging involves uninterrupted
investing regardless of share price and therefore may not be
appropriate for every investor.
MASTER FUND/FEEDER FUND: STRUCTURE AND RISK FACTORS
Each Fund (each a series of the Trust, an open-end management
investment company) seeks to achieve its objective by investing
all of its assets in another mutual fund having an investment
objective identical to that of the Fund. The shareholders of each
Fund approved this policy of permitting a Fund to act as a feeder
fund by investing in a Portfolio. Please refer to Investment
Policies, Portfolio Investments and Strategies, and Investment
Restrictions for a description of the investment objectives,
policies, and restrictions of the Funds and the Portfolios. The
management fees and expenses of the Funds and the Portfolios are
described under Investment Advisory and Other Services. Each
feeder Fund bears its proportionate share of the expenses of its
master Portfolio.
Stein Roe has provided investment management services in
connection with other mutual funds employing the master
fund/feeder fund structure since 1991.
Each 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
Aug. 23, 1993. The Declaration of Trust of Base Trust provides
that a Fund and other investors in a Portfolio will be liable for
all obligations of that Portfolio that are not satisfied by the
Portfolio. However, the risk of a Fund incurring financial loss
on account of such liability is limited to circumstances in which
liability was inadequately insured and a Portfolio was unable to
meet its obligations. Accordingly, the trustees of the Trust
believe that neither the Funds nor their shareholders will be
adversely affected by reason of a Fund's investing in a Portfolio.
The Declaration of Trust of Base Trust provides that a
Portfolio will terminate 120 days after the withdrawal of a Fund
or any other investor in the Portfolio, unless the remaining
investors vote to agree to continue the business of the Portfolio.
The trustees of the Trust may vote a Fund's interests in a
Portfolio for such continuation without approval of the Fund's
shareholders.
The common investment objectives of the Funds and the
Portfolios are nonfundamental and may be changed without
shareholder approval, subject, however, to at least 30 days'
advance written notice to a Fund's shareholders.
The fundamental policies of each Fund and the corresponding
fundamental policies of its master Portfolio can be changed only
with shareholder approval. If a Fund, as a Portfolio investor, is
requested to vote on a change in a fundamental policy of a
Portfolio or any other matter pertaining to the Portfolio (other
than continuation of the business of the Portfolio after
withdrawal of another investor), the Fund will solicit proxies
from its shareholders and vote its interest in the Portfolio for
and against such matters proportionately to the instructions to
vote for and against such matters received from Fund shareholders.
A Fund will vote shares for which it receives no voting
instructions in the same proportion as the shares for which it
receives voting instructions. 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 investors in a
Portfolio. If other investors hold a majority interest in a
Portfolio, they could have voting control over that Portfolio.
In the event that a Portfolio's fundamental policies were
changed so as to be inconsistent with those of the corresponding
Fund, the Board of Trustees of the Trust would consider what
action might be taken, including changes to the Fund's fundamental
policies, withdrawal of the Fund's assets from the Portfolio and
investment of such assets in another pooled investment entity, or
the retention of an investment adviser to invest those assets
directly in a portfolio of securities. Any of these actions would
require the approval of a Fund's shareholders. A 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 a Fund's assets could result in a
distribution in kind of portfolio securities (as opposed to a cash
distribution) to the Fund. Should such a distribution occur, the
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 the Fund and could affect the liquidity of the
Fund.
Each investor in a Portfolio, including a Fund, may add to or
reduce its investment in the Portfolio on each day the NYSE is
open for business. The investor's percentage of the aggregate
interests in the 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 the 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 the
Portfolio effected on such day; and (ii) the denominator of which
is the aggregate beginning of the day net asset value of the
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 the Portfolio by all investors in the Portfolio.
The percentage so determined will then be applied to determine the
value of the investor's interest in the Portfolio as of the close
of business.
Base Trust may permit other investment companies and/or other
institutional investors to invest in a Portfolio, but members of
the general public may not invest directly in the Portfolio.
Other investors in a Portfolio are not required to sell their
shares at the same public offering price as a Fund, might incur
different administrative fees and expenses than the Fund, and
might charge a sales commission. Therefore, Fund shareholders
might have different investment returns than shareholders in
another investment company that invests exclusively in a
Portfolio. Investment by such other investors in a Portfolio
would provide funds for the purchase of additional portfolio
securities and would tend to reduce the operating expenses as a
percentage of the Portfolio's net assets. Conversely, large-scale
redemptions by any such other investors in a Portfolio could
result in untimely liquidations of the Portfolio's security
holdings, loss of investment flexibility, and increases in the
operating expenses of the Portfolio as a percentage of its net
assets. As a result, a Portfolio's security holdings may become
less diverse, resulting in increased risk.
Information regarding other investors in a Portfolio may be
obtained by writing to SR&F Base Trust at Suite 3200, One South
Wacker Drive, Chicago, IL 60606, or by calling 800-338-2550.
Stein Roe may provide administrative or other services to one or
more of such investors.
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, Stein Roe believes that the quality of debt
securities 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 which 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 of corporate debt securities used by Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's Corporation
("S&P").
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.
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.
_____________
<PAGE>
Statement of Additional Information Dated Feb. 1, 1999
STEIN ROE ADVISOR TRUST
Suite 3200, One South Wacker Drive, Chicago, IL 60606
Stein Roe Advisor Growth Stock Fund
Stein Roe Advisor Young Investor Fund
This Statement of Additional Information ("SAI") is not a
prospectus, but provides additional information that should be
read in conjunction with each Fund's prospectus dated Feb. 1,
1999, and any supplements thereto ("Prospectus"). Financial
statements, which are contained in the Funds' Annual Reports, are
incorporated by reference into this SAI. A Prospectus and Annual
Report may be obtained at no charge by calling (800) 426-3720.
TABLE OF CONTENTS
Page
General Information and History.........................2
Investment Policies.....................................3
Portfolio Investments and Strategies....................4
Investment Restrictions................................20
Additional Investment Considerations...................22
Management.............................................23
Financial Statements...................................26
Principal Shareholders.................................27
Investment Advisory and Other Services.................27
Custodian..............................................29
Independent Public Accountants.........................30
Distributor............................................30
Transfer Agent and Shareholder Servicing...............33
Purchases and Redemptions..............................33
Portfolio Transactions.................................42
Additional Income Tax Considerations...................45
Investment Performance.................................45
Master Fund/Feeder Fund: Structure and Risk Factors....49
Appendix-Ratings.......................................51
GENERAL INFORMATION AND HISTORY
The mutual funds described in this SAI are the following
separate series of Stein Roe Advisor Trust (the "Trust"):
Stein Roe Advisor Growth Stock Fund ("Advisor Growth Stock Fund")
Stein Roe Advisor Young Investor Fund ("Advisor Young Investor
Fund")
The above series are referred to collectively as "the Funds."
Advisor Growth Stock Fund offers four classes of shares (Classes
A, B, C and K) and Advisor Young Investor Fund offers two classes
of shares (Classes A and K). On Sept. 13, 1996, the spelling of
the name of the Trust was changed from Stein Roe Adviser Trust to
Stein Roe Advisor Trust.
The 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 the
Trust's shareholders or its trustees. The Trust may issue an
unlimited number of shares, in one or more series as the Board may
authorize. Currently, six series are authorized and outstanding.
Each series invests in a separate portfolio of securities and
other assets, with its own objectives and policies.
Under Massachusetts law, shareholders of a Massachusetts
business trust such as the Trust could, in some circumstances, be
held personally liable for unsatisfied obligations of the trust.
The Declaration of Trust provides that persons extending credit
to, contracting with, or having any claim against the Trust or any
particular series shall look only to the assets of the Trust or of
the respective series for payment under such credit, contract or
claim, and that the shareholders, trustees and officers 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
the 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 the 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 the
Trust also is 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 series was unable to meet its
obligations.
Each share of a series, without par value, is entitled to
participate pro rata in any dividends and other distributions
declared by the Board on shares of that series, and all shares of
a series have equal rights in the event of liquidation of that
series. Each whole share (or fractional share) outstanding on the
record date established in accordance with the By-Laws shall be
entitled to a number of votes on any matter on which it is
entitled to vote equal to the net asset value of the share (or
fractional share) in United States dollars determined at the close
of business on the record date (for example, a share having a net
asset value of $10.50 would be entitled to 10.5 votes). As a
business trust, the Trust is not required to hold annual
shareholder meetings. However, special meetings may be called for
purposes such as electing or removing trustees, changing
fundamental policies, or approving an investment advisory
contract. If requested to do so by the holders of at least 10% of
its outstanding shares, the Trust will call a special meeting for
the purpose of voting upon the question of removal of a trustee or
trustees and will assist in the communications with other
shareholders as if the Trust were subject to Section 16(c) of the
Investment Company Act of 1940. All shares of all series of the
Trust are voted together in the election of trustees. On any
other matter submitted to a vote of shareholders, shares are voted
in the aggregate and not by individual series, except that shares
are voted by individual series when required by the Investment
Company Act of 1940 or other applicable law, or when the Board of
Trustees determines that the matter affects only the interests of
one or more series, in which case shareholders of the unaffected
series are not entitled to vote on such matters.
Special Considerations Regarding Master Fund/Feeder Fund Structure
Rather than invest in securities directly, the Funds seek to
achieve their objectives by pooling their assets with those of
other investment companies for investment in a master fund having
the identical investment objective and substantially the same
investment policies as its feeder funds. The purpose of such an
arrangement is to achieve greater operational efficiencies and
reduce costs. Each Fund invests all of its net investable assets
in a separate master fund that is a series of SR&F Base Trust, as
follows:
Feeder Fund Master Fund
- -------------------------- -------------------------------------
Advisor Growth Stock Fund SR&F Growth Stock Portfolio ("Growth
Stock Portfolio")
Advisor Young Investor Fund SR&F Growth Investor Portfolio
("Growth Investor Portfolio")
The master funds are referred to collectively as the
"Portfolios." For more information, please refer to Master
Fund/Feeder Fund: Structure and Risk Factors.
Stein Roe & Farnham Incorporated ("Stein Roe") provides
administrative and accounting and recordkeeping services to the
Funds and Portfolios and provides investment advisory services to
each Portfolio.
INVESTMENT POLICIES
The Trust and SR&F Base Trust are open-end management
investment companies. The Funds and the Portfolios are
diversified, as that term is defined in the Investment Company Act
of 1940.
In pursuing its objective, each Portfolio will invest as
described below and may employ the investment techniques described
under Portfolio Investments and Strategies. The investment
objective is a non-fundamental policy and may be changed by the
Board of Trustees without the approval of a "majority of the
outstanding voting securities."/1/
- ------------
/1/ A "majority of the outstanding voting securities" means the
approval of the lesser of (i) 67% or more of the shares at a
meeting if the holders of more than 50% of the outstanding shares
are present or represented by proxy or (ii) more than 50% of the
outstanding shares.
- ------------
Advisor Growth Stock Fund
Advisor Growth Stock Fund seeks to achieve its objective by
investing in Growth Stock Portfolio. Their common investment
objective is long-term capital appreciation. Growth Stock
Portfolio attempts to achieve this objective by investing
primarily in common stocks and other equity-type securities (such
as preferred stocks, securities convertible into or exchangeable
for common stocks, and warrants or rights to purchase common
stocks) that, in the opinion of Stein Roe, have long-term
appreciation possibilities.
Advisor Young Investor Fund
Advisor Young Investor Fund seeks to achieve its objective by
investing in Growth Investor Portfolio. Their common investment
objective is long-term capital appreciation. Growth Investor
Portfolio invests primarily in common stocks and other equity-type
securities that, in the opinion of Stein Roe, have long-term
appreciation potential.
Under normal circumstances, at least 65% of the total assets
of Growth Investor Portfolio will be invested in securities of
companies that, in the opinion of Stein Roe, directly or through
one or more subsidiaries, affect the lives of young people. Such
companies may include companies that produce products or services
that young people use, are aware of, or could potentially have an
interest in. Although Growth Investor Portfolio invests primarily
in common stocks and other equity-type securities (such as
preferred stocks, securities convertible into or exchangeable for
common stocks, and warrants or rights to purchase common stocks),
it may invest up to 35% of its total assets in debt securities.
PORTFOLIO INVESTMENTS AND STRATEGIES
Debt Securities
In pursuing its investment objective, a Portfolio may invest
in debt securities of corporate and governmental issuers. The
risks inherent in debt securities depend primarily on the term and
quality of the obligations in the investment portfolio as well as
on market conditions. A decline in the prevailing levels of
interest rates generally increases the value of debt securities,
while an increase in rates usually reduces the value of those
securities.
Investments in debt securities by Growth Stock Portfolio are
limited to those that are investment grade. Growth Investor
Portfolio may invest up to 35% of its net assets in debt
securities, but does not expect to invest more than 5% of its net
assets in debt securities that are rated below investment grade.
"Investment grade" refers to debt securities that are within the
four highest grades assigned by a nationally recognized
statistical rating organization or, if unrated, deemed to be of
comparable quality by Stein Roe.
Securities in the fourth highest grade may possess
speculative characteristics, and changes in economic conditions
are more likely to affect the issuer's capacity to pay interest
and repay principal. If the rating of a security held by a
Portfolio is lost or reduced below investment grade, it is not
required to dispose of the security, but Stein Roe will consider
that fact in determining whether to continue to hold the security.
Securities that are rated below investment grade 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."
When Stein Roe determines that adverse market or economic
conditions exist and considers a temporary defensive position
advisable, a Portfolio may invest without limitation in high-
quality fixed income securities or hold assets in cash or cash
equivalents.
Derivatives
Consistent with its objective, a 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, floating rate
instruments, and other instruments that securitize assets of
various types ("Derivatives"). In each case, the value of the
instrument or security is "derived" from the performance of an
underlying asset or a "benchmark" such as a security index, an
interest rate, or a currency.
Derivatives are most often used to manage investment risk or
to create an investment position indirectly because using them is
more efficient or less costly than direct investment that cannot
be readily established directly due to portfolio size, cash
availability, or other factors. They also may be used in an
effort to enhance portfolio returns.
The successful use of Derivatives depends on Stein Roe'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.
No Portfolio currently intends to invest more than 5% of its
net assets in any type of Derivative except for options, futures
contracts, and futures options. (See Options and Futures below.)
Some mortgage-backed debt securities 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 a
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") that 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, prepayment risks, and yield
characteristics. Mortgage-backed securities involve the risk of
prepayment on the underlying mortgages at a faster or slower rate
than the established schedule. Prepayments 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 the Portfolio on purchase of the CMO, and the
proceeds of prepayment would likely be invested at lower interest
rates.
Non-mortgage asset-backed securities usually have less
prepayment risk than mortgage-backed securities, but have the risk
that the collateral will not be available to support payments on
the underlying loans that finance payments on the securities
themselves.
Floating rate instruments 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%.
Convertible Securities
By investing in convertible securities, a Portfolio obtains
the right to benefit from the capital appreciation potential in
the underlying stock upon exercise of the conversion right, while
earning higher current income than would be available if the stock
were purchased directly. In determining whether to purchase a
convertible, Stein Roe will consider substantially the same
criteria that would be considered in purchasing the underlying
stock. While convertible securities purchased by the Portfolios
are frequently rated investment grade, they may purchase unrated
securities or securities rated below investment grade if the
securities meet Stein Roe's other investment criteria.
Convertible securities rated below investment grade (a) tend to be
more sensitive to interest rate and economic changes, (b) may be
obligations of issuers who are less creditworthy than issuers of
higher quality convertible securities, and (c) may be more thinly
traded due to such securities being less well known to investors
than either common stock or conventional debt securities. As a
result, Stein Roe's own investment research and analysis tend to
be more important in the purchase of such securities than other
factors.
Foreign Securities
A Portfolio may invest up to 25% of its total assets in
foreign securities, which may entail a greater degree of risk
(including risks relating to exchange rate fluctuations, tax
provisions, or expropriation of assets) than investment in
securities of domestic issuers. For this purpose, foreign
securities do not include American Depositary Receipts (ADRs) or
securities guaranteed by a United States person. ADRs are
receipts typically issued by an American bank or trust company
evidencing ownership of the underlying securities. A Portfolio
may invest in sponsored or unsponsored ADRs. In the case of an
unsponsored ADR, it is likely to bear its proportionate share of
the expenses of the depositary and it may have greater difficulty
in receiving shareholder communications than it would have with a
sponsored ADR. No Portfolio currently intends to invest more than
5% of its net assets in unsponsored ADRs.
As of Sept. 30, 1998, holdings of foreign companies, as a
percentage of net assets, were 2.0% (none in foreign securities
and 2.0% in ADRs) for Growth Stock Portfolio and 3.9% (none in
foreign securities and 3.9% in ADRs) for Growth Investor
Portfolio.
With respect to portfolio securities that are issued by
foreign issuers or denominated in foreign currencies, investment
performance is affected by the strength or weakness of the U.S.
dollar against these currencies. For example, if the dollar falls
in value relative to the Japanese yen, the dollar value of a yen-
denominated stock held in a Portfolio will rise even though the
price of the stock remains unchanged. Conversely, if the dollar
rises in value relative to the yen, the dollar value of the yen-
denominated stock will fall. (See discussion of transaction
hedging and portfolio hedging under Currency Exchange
Transactions.)
Investors should understand and consider carefully the risks
involved in foreign investing. Investing in foreign securities,
positions which are generally denominated in foreign currencies,
and utilization of forward foreign currency exchange contracts
involve certain considerations comprising both risks and
opportunities not typically associated with investing in U.S.
securities. These considerations include: fluctuations in
exchange rates of foreign currencies; possible imposition of
exchange control regulation or currency restrictions that would
prevent cash from being brought back to the United States; less
public information with respect to issuers of securities; less
governmental supervision of stock exchanges, securities brokers,
and issuers of securities; lack of uniform accounting, auditing,
and financial reporting standards; lack of uniform settlement
periods and trading practices; less liquidity and frequently
greater price volatility in foreign markets than in the United
States; possible imposition of foreign taxes; possible investment
in securities of companies in developing as well as developed
countries; and sometimes less advantageous legal, operational, and
financial protections applicable to foreign sub-custodial
arrangements.
Although the Portfolios will try to invest in companies and
governments of countries having stable political environments,
there is the possibility of expropriation or confiscatory
taxation, seizure or nationalization of foreign bank deposits or
other assets, establishment of exchange controls, the adoption of
foreign government restrictions, or other adverse political,
social or diplomatic developments that could affect investment in
these nations.
Currency Exchange Transactions. Currency exchange
transactions may be conducted either on a spot (i.e., cash) basis
at the spot rate for purchasing or selling currency prevailing in
the foreign exchange market or through forward currency exchange
contracts ("forward contracts"). Forward contracts are
contractual agreements to purchase or sell a specified currency at
a specified future date (or within a specified time period) and
price set at the time of the contract. Forward contracts are
usually entered into with banks and broker-dealers, are not
exchange traded, and are usually for less than one year, but may
be renewed.
The Portfolios' foreign currency exchange transactions are
limited to transaction and portfolio hedging involving either
specific transactions or portfolio positions. Transaction hedging
is the purchase or sale of forward contracts with respect to
specific receivables or payables of a Portfolio arising in
connection with the purchase and sale of its portfolio securities.
Portfolio hedging is the use of forward contracts with respect to
portfolio security positions denominated or quoted in a particular
foreign currency. Portfolio hedging allows a Portfolio to limit
or reduce its exposure in a foreign currency by entering into a
forward contract to sell such foreign currency (or another foreign
currency that acts as a proxy for that currency) at a future date
for a price payable in U.S. dollars so that the value of the
foreign-denominated portfolio securities can be approximately
matched by a foreign-denominated liability. A Portfolio may not
engage in portfolio hedging with respect to the currency of a
particular country to an extent greater than the aggregate market
value (at the time of making such sale) of the securities held in
its portfolio denominated or quoted in that particular currency,
except that it may hedge all or part of its foreign currency
exposure through the use of a basket of currencies or a proxy
currency where such currencies or currency act as an effective
proxy for other currencies. In such a case, the Portfolio may
enter into a forward contract where the amount of the foreign
currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into
separate forward contracts for each currency held. No Portfolio
may engage in "speculative" currency exchange transactions.
At the maturity of a forward contract to deliver a particular
currency, a Portfolio may either sell the portfolio security
related to such contract and make delivery of the currency, or it
may retain the security and either acquire the currency on the
spot market or terminate its contractual obligation to deliver the
currency by purchasing an offsetting contract with the same
currency trader obligating it to purchase on the same maturity
date the same amount of the currency.
It is impossible to forecast with absolute precision the
market value of portfolio securities at the expiration of a
forward contract. Accordingly, it may be necessary for a
Portfolio to purchase additional currency on the spot market (and
bear the expense of such purchase) if the market value of the
security is less than the amount of currency it is obligated to
deliver and if a decision is made to sell the security and make
delivery of the currency. Conversely, it may be necessary to sell
on the spot market some of the currency received upon the sale of
the portfolio security if its market value exceeds the amount of
currency it is obligated to deliver.
If a Portfolio retains the portfolio security and engages in
an offsetting transaction, it will incur a gain or a loss to the
extent that there has been movement in forward contract prices.
If a Portfolio engages in an offsetting transaction, it may
subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period between
the Portfolio's entering into a forward contract for the sale of a
currency and the date it enters into an offsetting contract for
the purchase of the currency, it will realize a gain to the extent
the price of the currency it has agreed to sell exceeds the price
of the currency it has agreed to purchase. Should forward prices
increase, the Portfolio will suffer a loss to the extent the price
of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell. A default on the contract would
deprive the Portfolio of unrealized profits or force it to cover
its commitments for purchase or sale of currency, if any, at the
current market price.
Hedging against a decline in the value of a currency does not
eliminate fluctuations in the prices of portfolio securities or
prevent losses if the prices of such securities decline. Such
transactions also preclude the opportunity for gain if the value
of the hedged currency should rise. Moreover, it may not be
possible for a Portfolio to hedge against a devaluation that is so
generally anticipated that it is not able to contract to sell the
currency at a price above the devaluation level it anticipates.
The cost to a Portfolio of engaging in currency exchange
transactions varies with such factors as the currency involved,
the length of the contract period, and prevailing market
conditions. Since currency exchange transactions are usually
conducted on a principal basis, no fees or commissions are
involved.
Lending of Portfolio Securities
Subject to restriction (5) under Investment Restrictions in
this SAI, a Portfolio may lend its 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 the Portfolio. The 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. The 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. The Portfolio would
not have the right to vote the securities during the existence of
the loan but would call the loan to permit voting of the
securities if, in Stein Roe's judgment, a material event requiring
a shareholder vote would otherwise occur before the loan was
repaid. In the event of bankruptcy or other default of the
borrower, it 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 it
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.
Repurchase Agreements
A Portfolio may invest in repurchase agreements, provided
that it will not invest more than 15% of net assets in repurchase
agreements maturing in more than seven days and any other illiquid
securities. A repurchase agreement is a sale of securities to a
Portfolio in which the seller agrees to repurchase the securities
at a higher price, which includes an amount representing interest
on the purchase price, within a specified time. In the event of
bankruptcy of the seller, a Portfolio could experience both losses
and delays in liquidating its collateral.
When-Issued and Delayed-Delivery Securities; Reverse Repurchase
Agreements
A Portfolio may purchase securities on a when-issued or
delayed-delivery basis. Although the payment and interest terms
of these securities are established at the time it 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. A Portfolio makes such commitments only with the
intention of actually acquiring the securities, but may sell the
securities before settlement date if Stein Roe deems it advisable
for investment reasons. No Portfolio currently intends to make
commitments to purchase when-issued securities in excess of 5% of
its net assets.
A Portfolio may enter into reverse repurchase agreements with
banks and securities dealers. A reverse repurchase agreement is a
repurchase agreement in which it is the seller of, rather than the
investor in, securities and agrees to repurchase them at an
agreed-upon time and price. Use of a reverse repurchase agreement
may be preferable to a regular sale and later repurchase of
securities because it avoids certain market risks and transaction
costs.
At the time a Portfolio enters into a binding obligation to
purchase securities on a when-issued basis or enters into a
reverse repurchase agreement, liquid assets (cash, U.S. Government
securities or other "high-grade" debt obligations) having a value
at least as great as the purchase price of the securities to be
purchased will be segregated on its books and held by the
custodian throughout the period of the obligation. The use of
these investment strategies, as well as borrowing under a line of
credit as described below, may increase net asset value
fluctuation.
Short Sales "Against the Box"
A Portfolio may sell securities short against the box; that
is, enter into short sales of securities that it currently owns or
has the right to acquire through the conversion or exchange of
other securities that it owns at no additional cost. A Portfolio
may make short sales of securities only if at all times when a
short position is open it owns at least an equal amount of such
securities or securities convertible into or exchangeable for
securities of the same issue as, and equal in amount to, the
securities sold short, at no additional cost.
In a short sale against the box, a Portfolio does not deliver
from its portfolio the securities sold. Instead, the Portfolio
borrows the securities sold short from a broker-dealer through
which the short sale is executed, and the broker-dealer delivers
such securities, on behalf of the Portfolio, to the purchaser of
such securities. The Portfolio is required to pay to the broker-
dealer the amount of any dividends paid on shares sold short.
Finally, to secure its obligation to deliver to such broker-dealer
the securities sold short, the Portfolio must deposit and
continuously maintain in a separate account with its custodian an
equivalent amount of the securities sold short or securities
convertible into or exchangeable for such securities at no
additional cost. The Portfolio is said to have a short position
in the securities sold until it delivers to the broker-dealer the
securities sold. The Portfolio may close out a short position by
purchasing on the open market and delivering to the broker-dealer
an equal amount of the securities sold short, rather than by
delivering portfolio securities.
Short sales may protect a Portfolio against the risk of
losses in the value of its portfolio securities because any
unrealized losses with respect to such portfolio securities should
be wholly or partially offset by a corresponding gain in the short
position. However, any potential gains in such portfolio
securities should be wholly or partially offset by a corresponding
loss in the short position. The extent to which such gains or
losses are offset will depend upon the amount of securities sold
short relative to the amount the Portfolio owns, either directly
or indirectly, and, in the case where it owns convertible
securities, changes in the conversion premium.
Short sale transactions involve certain risks. If the price
of the security sold short increases between the time of the short
sale and the time the Portfolio replaces the borrowed security, it
will incur a loss and if the price declines during this period, it
will realize a short-term capital gain. Any realized short-term
capital gain will be decreased, and any incurred loss increased,
by the amount of transaction costs and any premium, dividend or
interest which the Portfolio may have to pay in connection with
such short sale. Certain provisions of the Internal Revenue Code
may limit the degree to which a Portfolio is able to enter into
short sales. There is no limitation on the amount of assets that,
in the aggregate, may be deposited as collateral for the
obligation to replace securities borrowed to effect short sales
and allocated to segregated accounts in connection with short
sales. No Portfolio will invest more than 5% of its total assets
in short sales against the box.
Rule 144A Securities
A Portfolio may purchase securities that have been privately
placed but that are eligible for purchase and sale under Rule 144A
under the Securities Act of 1933. That Rule permits certain
qualified institutional buyers, such as a Portfolio, to trade in
privately placed securities that have not been registered for sale
under the 1933 Act. Stein Roe, under the supervision of the Board
of Trustees, will consider whether securities purchased under Rule
144A are illiquid and thus subject to the restriction on investing
no more than 15% of its net assets in illiquid securities. A
determination of whether a Rule 144A security is liquid or not is
a question of fact. In making this determination, Stein Roe will
consider the trading markets for the specific security, taking
into account the unregistered nature of a Rule 144A security. In
addition, Stein Roe could consider the (1) frequency of trades and
quotes, (2) number of dealers and potential purchasers, (3) dealer
undertakings to make a market, and (4) nature of the security and
of marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of
transfer). The liquidity of Rule 144A securities would be
monitored and if, as a result of changed conditions, it is
determined that a Rule 144A security is no longer liquid, the
Portfolio's holdings of illiquid securities would be reviewed to
determine what, if any, steps are required to assure that it does
not invest more than 15% of its assets in illiquid securities.
Investing in Rule 144A securities could have the effect of
increasing the amount of its assets invested in illiquid
securities if qualified institutional buyers are unwilling to
purchase such securities. No Portfolio expects to invest as much
as 5% of its total assets in Rule 144A securities that have not
been deemed to be liquid by Stein Roe.
Swaps, Caps, Floors and Collars
A Portfolio may enter into swaps and may purchase or sell
related caps, floors and collars. A Portfolio would enter into
these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio, to protect
against currency fluctuations, as a duration management technique
or to protect against any increase in the price of securities it
anticipates purchasing at a later date. The Portfolios intend to
use these techniques as hedges and not as speculative investments
and will not sell interest rate income stream they may be
obligated to pay.
A swap agreement is generally individually negotiated and
structured to include exposure to a variety of different types of
investments or market factors. Depending on its structure, a swap
agreement may increase or decrease a Portfolio's exposure to
changes in the value of an index of securities in which it might
invest, the value of a particular security or group of securities,
or foreign currency values. Swap agreements can take many
different forms and are known by a variety of names. A Portfolio
may enter into any form of swap agreement if Stein Roe determines
it is consistent with its investment objective and policies.
A swap agreement tends to shift investment exposure from one
type of investment to another. For example, if a Portfolio agrees
to exchange payments in dollars at a fixed rate for payments in a
foreign currency the amount of which is determined by movements of
a foreign securities index, the swap agreement would tend to
increase its exposure to foreign stock market movements and
foreign currencies. Depending on how it is used, a swap agreement
may increase or decrease the overall volatility of a Portfolio's
investments and its net asset value.
The performance of a swap agreement is determined by the
change in the specific currency, market index, security, or other
factors that determine the amounts of payments due to and from a
Portfolio. If a swap agreement calls for payments by a Portfolio,
it must be prepared to make such payments when due. If the
counterparty's creditworthiness declines, the value of a swap
agreement would be likely to decline, potentially resulting in a
loss. No Portfolio will enter into any swap, cap, floor or collar
transaction unless, at the time of entering into such transaction,
the unsecured long-term debt of the counterparty, combined with
any credit enhancements, is rated at least A by Standard & Poor's
Corporation or Moody's Investors Service, Inc. or has an
equivalent rating from a nationally recognized statistical rating
organization or is determined to be of equivalent credit quality
by Stein Roe.
The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling the
cap to the extent that a specified index exceeds a predetermined
interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is
a combination of a cap and floor that preserves a certain return
within a predetermined range of interest rates or values.
At the time a Portfolio enters into swap arrangements or
purchases or sells caps, floors or collars, liquid assets of the
Portfolio having a value at least as great as the commitment
underlying the obligations will be segregated on its books and
held by the custodian throughout the period of the obligation.
Line of Credit
Subject to restriction (6) under Investment Restrictions in
this SAI, each Fund and Portfolio may establish and maintain a
line of credit with a major bank in order to permit borrowing on a
temporary basis to meet share redemption requests in circumstances
in which temporary borrowing may be preferable to liquidation of
portfolio securities.
Interfund Borrowing and Lending Program
Pursuant to an exemptive order issued by the Securities and
Exchange Commission, each Fund and Portfolio may lend money to and
borrow money from other mutual funds advised by Stein Roe. They
will borrow through the program when borrowing is necessary and
appropriate and the costs are equal to or lower than the costs of
bank loans.
Portfolio Turnover
Although the Portfolios do not purchase securities with a
view to rapid turnover, there are no limitations on the length of
time that portfolio securities must be held. Portfolio turnover
can occur for a number of reasons such as general conditions in
the securities markets, more favorable investment opportunities in
other securities, or other factors relating to the desirability of
holding or changing a portfolio investment. Because of the
Portfolios' flexibility of investment and emphasis on growth of
capital, they may have greater portfolio turnover than that of
mutual funds that have primary objectives of income or maintenance
of a balanced investment position. The future turnover rate may
vary greatly from year to year. A high rate of portfolio turnover
if it should occur, would result in increased transaction
expenses, which must be borne by the Portfolio. High portfolio
turnover may also result in the realization of capital gains or
losses and, to the extent net short-term capital gains are
realized, any distributions resulting from such gains will be
considered ordinary income for federal income tax purposes.
Options on Securities and Indexes
A Portfolio may purchase and sell put options and call
options on securities, indexes or foreign currencies in
standardized contracts traded on recognized securities exchanges,
boards of trade, or similar entities, or quoted on Nasdaq. A
Portfolio may purchase agreements, sometimes called cash puts,
that may accompany the purchase of a new issue of bonds from a
dealer.
An option on a security (or index) is a contract that gives
the purchaser (holder) of the option, in return for a premium, the
right to buy from (call) or sell to (put) the seller (writer) of
the option the security underlying the option (or the cash value
of the index) at a specified exercise price at any time during the
term of the option (normally not exceeding nine months). The
writer of an option on an individual security or on a foreign
currency has the obligation upon exercise of the option to deliver
the underlying security or foreign currency upon payment of the
exercise price or to pay the exercise price upon delivery of the
underlying security or foreign currency. Upon exercise, the
writer of an option on an index is obligated to pay the difference
between the cash value of the index and the exercise price
multiplied by the specified multiplier for the index option. (An
index is designed to reflect specified facets of a particular
financial or securities market, a specific group of financial
instruments or securities, or certain economic indicators.)
A Portfolio will write call options and put options only if
they are "covered." For example, in the case of a call option on
a security, the option is "covered" if a Portfolio owns the
security underlying the call or has an absolute and immediate
right to acquire that security without additional cash
consideration (or, if additional cash consideration is required,
cash or cash equivalents in such amount are held in a segregated
account by its custodian) upon conversion or exchange of other
securities held in its portfolio.
If an option written by a Portfolio expires, it realizes a
capital gain equal to the premium received at the time the option
was written. If an option purchased by a Portfolio expires, it
realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may
be closed out by an offsetting purchase or sale of an option of
the same series (type, exchange, underlying security or index,
exercise price, and expiration). There can be no assurance,
however, that a closing purchase or sale transaction can be
effected when the Portfolio desires.
The Portfolio will realize a capital gain from a closing
purchase transaction if the cost of the closing option is less
than the premium received from writing the option, or, if it is
more, it will realize a capital loss. If the premium received
from a closing sale transaction is more than the premium paid to
purchase the option, the Portfolio will realize a capital gain or,
if it is less, it will realize a capital loss. The principal
factors affecting the market value of a put or a call option
include supply and demand, interest rates, the current market
price of the underlying security or index in relation to the
exercise price of the option, the volatility of the underlying
security or index, and the time remaining until the expiration
date.
A put or call option purchased by a Portfolio is an asset,
valued initially at the premium paid for the option. The premium
received for an option written by a Portfolio is recorded as a
deferred credit. The value of an option purchased or written is
marked-to-market daily and is valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange or
no closing price is available, at the mean between the last bid
and asked prices.
Risks Associated with Options on Securities and Indexes.
There are several risks associated with transactions in options.
For example, there are significant differences between the
securities markets, the currency markets, and the options markets
that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its
objectives. 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.
There can be no assurance that a liquid market will exist
when a Portfolio seeks to close out an option position. If a
Portfolio were unable to close out an option that it had purchased
on a security, it would have to exercise the option in order to
realize any profit or the option would expire and become
worthless. If a Portfolio were unable to close out a covered call
option that it had written on a security, it would not be able to
sell the underlying security until the option expired. As the
writer of a covered call option on a security, the Portfolio
foregoes, during the option's life, the opportunity to profit from
increases in the market value of the security covering the call
option above the sum of the premium and the exercise price of the
call.
If trading were suspended in an option purchased or written
by a Portfolio, it would not be able to close out the option. If
restrictions on exercise were imposed, It might be unable to
exercise an option it has purchased.
Futures Contracts and Options on Futures Contracts
A Portfolio may use interest rate futures contracts, index
futures contracts, and foreign currency futures contracts. An
interest rate, index or foreign currency futures contract provides
for the future sale by one party and purchase by another party of
a specified quantity of a financial instrument or the cash value
of an index/2/ at a specified price and time. A public market
exists in futures contracts covering a number of indexes
(including, but not limited to: the Standard & Poor's 500 Index,
the Value Line Composite Index, and the New York Stock Exchange
Composite Index) as well as financial instruments (including, but
not limited to: U.S. Treasury bonds, U.S. Treasury notes,
Eurodollar certificates of deposit, and foreign currencies).
Other index and financial instrument futures contracts are
available and it is expected that additional futures contracts
will be developed and traded.
- ------------
/2/ A futures contract on an index is an agreement pursuant to
which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at
which the index contract was originally written. Although the
value of a securities index is a function of the value of certain
specified securities, no physical delivery of those securities is
made.
- ------------
A Portfolio may purchase and write call and put futures
options. Futures options possess many of the same characteristics
as options on securities, indexes and foreign currencies
(discussed above). A futures option gives the holder the right,
in return for the premium paid, to assume a long position (call)
or short position (put) in a futures contract at a specified
exercise price at any time during the period of the option. Upon
exercise of a call option, the holder acquires a long position in
the futures contract and the writer is assigned the opposite short
position. In the case of a put option, the opposite is true. A
Portfolio might, for example, use futures contracts to hedge
against or gain exposure to fluctuations in the general level of
stock prices, anticipated changes in interest rates or currency
fluctuations that might adversely affect either the value of the
portfolio securities or the price of the securities that the
Portfolio intends to purchase. Although other techniques could be
used to reduce or increase portfolio exposure to stock price,
interest rate and currency fluctuations, it may be able to achieve
its exposure more effectively and perhaps at a lower cost by using
futures contracts and futures options.
A Portfolio will only enter into futures contracts and
futures options that are standardized and traded on an exchange,
board of trade, or similar entity, or quoted on an automated
quotation system.
The success of any futures transaction depends on accurate
predictions of changes in the level and direction of stock prices,
interest rates, currency exchange rates and other factors. Should
those predictions be incorrect, the return might have been better
had the transaction not been attempted; however, in the absence of
the ability to use futures contracts, Stein Roe might have taken
portfolio actions in anticipation of the same market movements
with similar investment results but, presumably, at greater
transaction costs.
When a purchase or sale of a futures contract is made by a
Portfolio, it is required to deposit with its custodian (or
broker, if legally permitted) a specified amount of cash or U.S.
Government securities or other securities acceptable to the broker
("initial margin"). The margin required for a futures contract is
set by the exchange on which the contract is traded and may be
modified during the term of the contract. The initial margin is
in the nature of a performance bond or good faith deposit on the
futures contract, which is returned to the Portfolio upon
termination of the contract, assuming all contractual obligations
have been satisfied. A Portfolio expects to earn interest income
on its initial margin deposits. A futures contract held by a
Portfolio is valued daily at the official settlement price of the
exchange on which it is traded. Each day the Portfolio pays or
receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as
"marking-to-market." Variation margin paid or received by a
Portfolio does not represent a borrowing or loan by it but is
instead settlement between the Portfolio and the broker of the
amount one would owe the other if the futures contract had expired
at the close of the previous day. In computing daily net asset
value, a Portfolio will mark-to-market its open futures positions.
A Portfolio is also required to deposit and maintain margin
with respect to put and call options on futures contracts written
by it. Such margin deposits will vary depending on the nature of
the underlying futures contract (and the related initial margin
requirements), the current market value of the option, and other
futures positions held by the Portfolio.
Although some futures contracts call for making or taking
delivery of the underlying securities, usually these obligations
are closed out prior to delivery by offsetting purchases or sales
of matching futures contracts (same exchange, underlying security
or index, and delivery month). If an offsetting purchase price is
less than the original sale price, the Portfolio realizes a
capital gain, or if it is more, it realizes a capital loss.
Conversely, if an offsetting sale price is more than the original
purchase price, it realizes a capital gain, or if it is less, it
realizes a capital loss. The transaction costs must also be
included in these calculations.
Risks Associated with Futures
There are several risks associated with the use of futures
contracts and futures options. A purchase or sale of a futures
contract may result in losses in excess of the amount invested in
the futures contract. In trying to increase or reduce market
exposure, there can be no guarantee that there will be a
correlation between price movements in the futures contract and in
the portfolio exposure sought. In addition, there are significant
differences between the securities and futures markets that could
result in an imperfect correlation between the markets, causing a
given transaction not to achieve its objectives. The degree of
imperfection of correlation depends on circumstances such as:
variations in speculative market demand for futures, futures
options and the related securities, including technical influences
in futures and futures options trading and differences between the
securities market and the securities underlying the standard
contracts available for trading. For example, in the case of
index futures contracts, the composition of the index, including
the issuers and the weighting of each issue, may differ from the
composition of the investment portfolio, and, in the case of
interest rate futures contracts, the interest rate levels,
maturities, and creditworthiness of the issues underlying the
futures contract may differ from the financial instruments held in
the investment portfolio. A decision as to whether, when and how
to use futures contracts 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 stock price or interest rate trends.
Futures exchanges may limit the amount of fluctuation
permitted in certain 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 the current
trading session. Once the daily limit has been reached in a
futures contract subject to the limit, no more trades may be made
on that day at a price beyond that limit. The daily limit governs
only price movements during a particular trading day and therefore
does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for
several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of positions and subjecting
some holders of futures contracts to substantial losses. Stock
index futures contracts are not normally subject to such daily
price change limitations.
There can be no assurance that a liquid market will exist at
a time when a Portfolio seeks to close out a futures or futures
option position. The Portfolio would be exposed to possible loss
on the position during the interval of inability to close, and
would continue to be required to meet margin requirements until
the position is closed. In addition, many of the contracts
discussed above are relatively new instruments without a
significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue
to exist.
Limitations on Options and Futures
If other options, futures contracts, or futures options of
types other than those described herein are traded in the future,
a Portfolio may also use those investment vehicles, provided the
Board of Trustees determines that their use is consistent with the
investment objective.
A Portfolio will not enter into a futures contract or
purchase an option thereon if, immediately thereafter, the initial
margin deposits for futures contracts held by it plus premiums
paid by it for open futures option positions, less the amount by
which any such positions are "in-the-money,"/3/ would exceed 5% of
total assets.
- ------------
/3/ A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise
price. A put option is "in-the-money" if the exercise price
exceeds the value of the futures contract that is the subject of
the option.
- ------------
When purchasing a futures contract or writing a put option on
a futures contract, the Portfolio must maintain with its custodian
(or broker, if legally permitted) cash or cash equivalents
(including any margin) equal to the market value of such contract.
When writing a call option on a futures contract, the Portfolio
similarly will maintain with its custodian cash or cash
equivalents (including any margin) equal to the amount by which
such option is in-the-money until the option expires or is closed
out.
A Portfolio may not maintain open short positions in futures
contracts, call options written on futures contracts or call
options written on indexes if, in the aggregate, the market value
of all such open positions exceeds the current value of the
securities in its portfolio, plus or minus unrealized gains and
losses on the open positions, adjusted for the historical relative
volatility of the relationship between the Portfolio and the
positions. For this purpose, to the extent a Portfolio has
written call options on specific securities in its portfolio, the
value of those securities will be deducted from the current market
value of the securities portfolio.
In order to comply with Commodity Futures Trading Commission
Regulation 4.5 and thereby avoid being deemed a "commodity pool
operator," a Portfolio will use commodity futures or commodity
options contracts solely for bona fide hedging purposes within the
meaning and intent of Regulation 1.3(z), or, with respect to
positions in commodity futures and commodity options contracts
that do not come within the meaning and intent of 1.3(z), the
aggregate initial margin and premiums required to establish such
positions will not exceed 5% of the fair market value of the
assets, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into [in
the case of an option that is in-the-money at the time of
purchase, the in-the-money amount (as defined in Section 190.01(x)
of the Commission Regulations) may be excluded in computing such
5%].
Taxation of Options and Futures
If a Portfolio exercises a call or put option that it holds,
the premium paid for the option is added to the cost basis of the
security purchased (call) or deducted from the proceeds of the
security sold (put). For cash settlement options and futures
options exercised by it, the difference between the cash received
at exercise and the premium paid is a capital gain or loss.
If a call or put option written by a Portfolio is exercised,
the premium is included in the proceeds of the sale of the
underlying security (call) or reduces the cost basis of the
security purchased (put). For cash settlement options and futures
options written by the Portfolio, the difference between the cash
paid at exercise and the premium received is a capital gain or
loss.
Entry into a closing purchase transaction will result in
capital gain or loss. If an option written by a Portfolio was in-
the-money at the time it was written and the security covering the
option was held for more than the long-term holding period prior
to the writing of the option, any loss realized as a result of a
closing purchase transaction will be long-term. The holding
period of the securities covering an in-the-money option will not
include the period of time the option is outstanding.
If a Portfolio writes an equity call option/4/ other than a
"qualified covered call option," as defined in the Internal
Revenue Code, any loss on such option transaction, to the extent
it does not exceed the unrealized gains on the securities covering
the option, may be subject to deferral until the securities
covering the option have been sold.
- -----------------
/4/ An equity option is defined to mean any option to buy or sell
stock, and any other option the value of which is determined by
reference to an index of stocks of the type that is ineligible to
be traded on a commodity futures exchange (e.g., an option
contract on a sub-index based on the price of nine hotel-casino
stocks). The definition of equity option excludes options on
broad-based stock indexes (such as the Standard & Poor's 500
index).
- -----------------
A futures contract held until delivery results in capital
gain or loss equal to the difference between the price at which
the futures contract was entered into and the settlement price on
the earlier of delivery notice date or expiration date. If a
Portfolio delivers securities under a futures contract, it also
realizes a capital gain or loss on those securities.
For federal income tax purposes, a Portfolio generally is
required to recognize as income for each taxable year its net
unrealized gains and losses as of the end of the year on futures,
futures options and non-equity options positions ("year-end mark-
to-market"). Generally, any gain or loss recognized with respect
to such positions (either by year-end mark-to-market or by actual
closing of the positions) is considered to be 60% long-term and
40% short-term, without regard to the holding periods of the
contracts. However, in the case of positions classified as part
of a "mixed straddle," the recognition of losses on certain
positions (including options, futures and futures options
positions, the related securities and certain successor positions
thereto) may be deferred to a later taxable year. Sale of futures
contracts or writing of call options (or futures call options) or
buying put options (or futures put options) that are intended to
hedge against a change in the value of securities held by a
Portfolio: (1) will affect the holding period of the hedged
securities; and (2) may cause unrealized gain or loss on such
securities to be recognized upon entry into the hedge.
If a Portfolio were to enter into a short index future, short
index futures option or short index option position and its
portfolio were deemed to "mimic" the performance of the index
underlying such contract, the option or futures contract position
and its stock positions would be deemed to be positions in a mixed
straddle, subject to the above-mentioned loss deferral rules.
In order for a Portfolio to continue to qualify for federal
income tax treatment as a regulated investment company, at least
90% of its gross income for a taxable year must be derived from
qualifying income; i.e., dividends, interest, income derived from
loans of securities, and gains from the sale of securities or
foreign currencies, or other income (including but not limited to
gains from options, futures, or forward contracts). Any net gain
realized from futures (or futures options) contracts will be
considered gain from the sale of securities and therefore be
qualifying income for purposes of the 90% requirement.
Each Fund distributes to shareholders annually any net
capital gains that have been recognized for federal income tax
purposes (including year-end mark-to-market gains) on options and
futures transactions. Such distributions are combined with
distributions of capital gains realized on the other investments,
and shareholders are advised of the nature of the payments.
The Taxpayer Relief Act of 1997 (the "Act") imposed
constructive sale treatment for federal income tax purposes on
certain hedging strategies with respect to appreciated securities.
Under these rules, taxpayers will recognize gain, but not loss,
with respect to securities if they enter into short sales of
"offsetting notional principal contracts" (as defined by the Act)
or futures or "forward contracts" (as defined by the Act) with
respect to the same or substantially identical property, or if
they enter into such transactions and then acquire the same or
substantially identical property. These changes generally apply
to constructive sales after June 8, 1997. Furthermore, the
Secretary of the Treasury is authorized to promulgate regulations
that will treat as constructive sales certain transactions that
have substantially the same effect as short sales, offsetting
notional principal contracts, and futures or forward contracts to
deliver the same or substantially similar property.
INVESTMENT RESTRICTIONS
Each Fund and Portfolio operates under the following
investment restrictions. No Fund or Portfolio may:
(1) with respect to 75% of its total assets, invest more than
5% of its total assets, taken at market value at the time of a
particular purchase, in the securities of a single issuer, except
for securities issued or guaranteed by the U.S. Government or any
of its agencies or instrumentalities or repurchase agreements for
such securities, and [Funds only] except that all or substantially
all of the assets of the Fund may be invested in another
registered investment company having the same investment objective
and substantially similar investment policies as the Fund;
(2) acquire more than 10%, taken at the time of a particular
purchase, of the outstanding voting securities of any one issuer,
[Funds only] except that all or substantially all of the assets of
the Fund may be invested in another registered investment company
having the same investment objective and substantially similar
investment policies as the Fund;
(3) act as an underwriter of securities, except insofar as it
may be deemed an underwriter for purposes of the Securities Act of
1933 on disposition of securities acquired subject to legal or
contractual restrictions on resale, [Funds only] except that all
or substantially all of the assets of the Fund may be invested in
another registered investment company having the same investment
objective and substantially similar investment policies as the
Fund;
(4) purchase or sell real estate (although it may purchase
securities secured by real estate or interests therein, or
securities issued by companies which invest in real estate or
interests therein), commodities, or commodity contracts, except
that it may enter into (a) futures and options on futures and (b)
forward contracts;
(5) make loans, although it may (a) lend portfolio securities
and participate in an interfund lending program with other Stein
Roe Funds and Portfolios provided that no such loan may be made
if, as a result, the aggregate of such loans would exceed 33 1/3%
of the value of its total assets (taken at market value at the
time of such loans); (b) purchase money market instruments and
enter into repurchase agreements; and (c) acquire publicly
distributed or privately placed debt securities;
(6) borrow except that it may (a) borrow for nonleveraging,
temporary or emergency purposes, (b) engage in reverse repurchase
agreements and make other borrowings, provided that the
combination of (a) and (b) shall not exceed 33 1/3% of the value
of its total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage
permitted by law, and (c) enter into futures and options
transactions; it may borrow from banks, other Stein Roe Funds and
Portfolios, and other persons to the extent permitted by
applicable law;
(7) invest in a security if more than 25% of its total assets
(taken at market value at the time of a particular purchase) would
be invested in the securities of issuers in any particular
industry, except that this restriction does not apply to
securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, and [Funds only] except that all or
substantially all of the assets of the Fund may be invested in
another registered investment company having the same investment
objective and substantially similar investment policies as the
Fund; or
(8) issue any senior security except to the extent permitted
under the Investment Company Act of 1940.
The above restrictions (other than bracketed portions
thereof) are fundamental policies and may not be changed without
the approval of a "majority of the outstanding voting securities"
as defined above. The Funds and Portfolios are also subject to
the following non-fundamental restrictions and policies, which may
be changed by the Board of Trustees. None of the following
restrictions shall prevent a Fund from investing all or
substantially all of its assets in another investment company
having the same investment objective and substantially the same
investment policies. A Fund or Portfolio may not:
(a) invest in any of the following: (i) interests in oil,
gas, or other mineral leases or exploration or development
programs (except readily marketable securities, including but not
limited to master limited partnership interests, that may
represent indirect interests in oil, gas, or other mineral
exploration or development programs); (ii) puts, calls, straddles,
spreads, or any combination thereof (except that it may enter into
transactions in options, futures, and options on futures); (iii)
shares of other open-end investment companies, except in
connection with a merger, consolidation, acquisition, or
reorganization; and (iv) limited partnerships in real estate
unless they are readily marketable;
(b) invest in companies for the purpose of exercising control
or management;
(c) purchase more than 3% of the stock of another investment
company or purchase stock of other investment companies equal to
more than 5% of the its total assets (valued at time of purchase)
in the case of any one other investment company and 10% of such
assets (valued at time of purchase) in the case of all other
investment companies in the aggregate; any such purchases are to
be made in the open market where no profit to a sponsor or dealer
results from the purchase, other than the customary broker's
commission, except for securities acquired as part of a merger,
consolidation or acquisition of assets;
(d) invest more than 5% of its net assets (valued at time of
purchase) in warrants, nor more than 2% of its net assets in
warrants that are not listed on the New York or American Stock
Exchange;
(e) write an option on a security unless the option is issued
by the Options Clearing Corporation, an exchange, or similar
entity;
(f) invest more than 25% of its total assets (valued at time
of purchase) in securities of foreign issuers (other than
securities represented by American Depositary Receipts (ADRs) or
securities guaranteed by a U.S. person);
(g) purchase a put or call option if the aggregate premiums
paid for all put and call options exceed 20% of its net assets
(less the amount by which any such positions are in-the-money),
excluding put and call options purchased as closing transactions;
(h) purchase securities on margin (except for use of short-
term credits as are necessary for the clearance of transactions),
or sell securities short unless (i) it owns or has the right to
obtain securities equivalent in kind and amount to those sold
short at no added cost or (ii) the securities sold are "when
issued" or "when distributed" securities which it expects to
receive in a recapitalization, reorganization, or other exchange
for securities it contemporaneously owns or has the right to
obtain and provided that transactions in options, futures, and
options on futures are not treated as short sales;
(i) invest more than 5% of its total assets (taken at market
value at the time of a particular investment) in restricted
securities, other than securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933;
(j) invest more than 15% of its net assets (taken at market
value at the time of a particular investment) in illiquid
securities, including repurchase agreements maturing in more than
seven days.
ADDITIONAL INVESTMENT CONSIDERATIONS
Stein Roe seeks to provide superior long-term investment
results through a disciplined, research-intensive approach to
investment selection and prudent risk management. In working to
take sensible risks and make intelligent investments, it has been
guided by three primary objectives which it believes are the
foundation of a successful investment program. These objectives
are preservation of capital, limited volatility through managed
risk, and consistent above-average returns, as appropriate for the
particular client or managed account. Stein Roe's focus on a
long-term investment style can result in lower turnover rates,
often leading to increased tax efficiencies for shareholders
subject to income tax. Because every investor's needs are
different, Stein Roe mutual funds are designed to accommodate
different investment objectives, risk tolerance levels, and time
horizons. In selecting a mutual fund, investors should ask the
following questions:
What are my investment goals?
It is important to a choose a fund that has investment objectives
compatible with your investment goals.
What is my investment time frame?
If you have a short investment time frame (e.g., less than three
years), a mutual fund that seeks to provide a stable share price,
such as a money market fund, or one that seeks capital
preservation as one of its objectives may be appropriate. If you
have a longer investment time frame, you may seek to maximize your
investment returns by investing in a mutual fund that offers
greater yield or appreciation potential in exchange for greater
investment risk.
What is my tolerance for risk?
All investments, including those in mutual funds, have risks which
will vary depending on investment objective and security type.
However, mutual funds seek to reduce risk through professional
investment management and portfolio diversification.
In general, equity mutual funds emphasize long-term capital
appreciation and tend to have more volatile net asset values than
bond or money market mutual funds. Although there is no guarantee
that they will be able to maintain a stable net asset value of
$1.00 per share, money market funds emphasize safety of principal
and liquidity, but tend to offer lower income potential than bond
funds. Bond funds tend to offer higher income potential than
money market funds but tend to have greater risk of principal and
yield volatility.
MANAGEMENT
The Board of Trustees of the Trust has overall management
responsibility for the Trust and the Fund. The following table
sets forth certain information with respect to the trustees and
officers of the Trust:
<TABLE>
<CAPTION>
Position(s) held Principal occupation(s)
Name with the Trust during past five years
- ------------------ ------------------------ -----------------------------------
<S> <C> <C>
William D. Andrews, 51 Executive Vice-President Executive vice president of Stein Roe
Gary A. Anetsberger, 43(4) Senior Vice-President; Chief financial officer and chief administrative
Controller officer of the Mutual Funds division of Stein Roe;
senior vice president of Stein Roe since April 1996;
vice president of Stein Roe prior thereto
John A. Bacon Jr., 70 Trustee Private investor
(3) (4)
William W. Boyd, 72 Trustee Chairman and director of Sterling Plumbing
(2) (3) (4) (manufacturer of plumbing products)
David P. Brady, 34 Vice-President Senior vice president of Stein Roe since March 1998;
vice president of Stein Roe from Nov. 1995 to March
1998; portfolio manager for Stein Roe since 1993
Thomas W. Butch, 42 (4) President President of the Mutual Funds division of Stein Roe
since March 1998; senior vice president of Stein Roe
from Sept. 1994 to March 1998; first vice president,
corporate communications, of Mellon Bank Corporation
prior thereto
Daniel K. Cantor, 39 Vice-President Senior vice president of Stein Roe
Kevin M. Carome, 42 (4) Vice-President; Senior vice president, legal, COGRA LLC (an affiliate
Assistant Secretary of Stein Roe) since Jan. 1999; general counsel and
secretary of Stein Roe since Jan. 1998; associate
general counsel and vice president of Liberty
Financial Companies, Inc. (the indirect parent of
Stein Roe) through Jan. 1999
J. Kevin Connaughton, 34 Vice-President Vice president of Colonial Management Associates,
(4) Inc. ("CMA") , since February, 1998; senior tax
manager, Coopers & Lybrand, LLP from April, 1996 to
January, 1998; vice president, 440 Financial
Group/First Data Investor Services Group from
March,1994 to April, 1996
Lindsay Cook, 46 Trustee Executive vice president of Liberty Financial
(1)(2)(4) Companies, Inc. (the indirect parent of Stein Roe)
since March 1997; senior vice president prior thereto
Erik P. Gustafson, 35 Vice-President Senior portfolio manager of Stein Roe; senior vice
president of Stein Roe since April 1996; vice
president of Stein Roe from May 1994 to April 1996;
associate of Stein Roe prior thereto
Douglas A. Hacker, 43 Trustee Senior vice president and chief financial officer of
(3) (4) UAL, Inc. (airline) since July 1994; senior vice
president, finance of UAL, Inc. prior thereto
Loren A. Hansen, 50 (4) Executive Vice-President Chief investment officer of CMA ("CMA") since 1997;
executive vice president of Stein Roe since Dec. 1995;
vice president of The Northern Trust (bank) prior
thereto
James P. Haynie, 36 Vice-President Vice President of Stein Roe since Oct. 1998; Vice
President of CMA since 1993
Harvey B. Hirschhorn, 49 Vice-President Executive vice president, senior portfolio manager,
and chief economist and investment strategist of Stein
Roe; director of research of Stein Roe, 1991 to 1995
Timothy J. Jacoby, 46 (4) Vice-President Fund treasurer for The Colonial Group since Sept. 1996
and chief financial officer since Aug. 1997; senior
vice president of Fidelity Investments from Sept. 1993
to Sept. 1996
Janet Langford Kelly, 41 Trustee Senior vice president, secretary and general counsel
(3) (4) of Sara Lee Corporation (branded, packaged, consumer-
products manufacturer) since 1995; partner of Sidley &
Austin (law firm) prior thereto
Michael T. Kennedy, 36 Vice-President Senior vice president of Stein Roe since Oct. 1994;
vice president of Stein Roe prior thereto
Gail D. Knudsen, 36 (4) Vice-President Vice president and assistant controller of CMA
Stephen F. Lockman, 37 Vice-President Senior vice president, portfolio manager, and credit
analyst of the Adviser since 1994; portfolio manager
for Illinois State Board of Investment prior thereto
Eric S. Maddix, 35 Vice-President Senior vice president of Stein Roe since March 1998;
vice president of Stein Roe from Nov. 1995 to March
1998; portfolio manager or research assistant for
Stein Roe since 1987
Lynn C. Maddox, 58 Vice-President Senior vice president of Stein Roe
Arthur J. McQueen, 40 Vice-President Senior vice president of Stein Roe
Charles R. Nelson, 56 Trustee Van Voorhis Professor of Political Economy, Department
(3) (4) of Economics of the University of Washington
Maureen G. Newman, 39 Vice-President Vice President of Stein Roe since Nov. 1998; portfolio
manager and vice president of CMA since May 1996;
portfolio manager and bond analyst at Fidelity
Investments from May 1985 to May 1996
Nicolette D. Parrish, 49 Vice-President; Senior legal assistant and assistant secretary of
(4) Assistant Secretary Stein Roe
Gita R. Rao, 39 Vice-President Vice President of Stein Roe since Oct. 1998; vice
president and portfolio manager for CMA since 1995;
global equity research analyst at Fidelity Management
& Research Company prior thereto
Michael E. Rega, 39 Vice-President Vice President of Stein Roe since Oct. 1998; Vice
President of CMA since 1996
Janet B. Rysz, 43 (4) Assistant Secretary Senior legal assistant and assistant secretary of
Stein Roe
M. Gerard Sandel, 44 Vice-President Senior vice president of Stein Roe since July 1997;
vice president of M&I Investment Management
Corporation prior thereto
Gloria J. Santella, 41 Vice-President Senior vice president of Stein Roe since Nov. 1995;
vice president of Stein Roe prior thereto
Thomas C. Theobald, 61 Trustee Managing director, William Blair Capital Partners
(3) (4) (private equity fund) since 1994; chief executive
officer and chairman of the Board of Directors of
Continental Bank Corporation, 1987-1994
Scott E. Volk, 27 (4) Treasurer Financial reporting manager for Stein Roe's Mutual
Funds division since Oct. 1997; senior auditor with
Ernst & Young LLP from Sept. 1993 to April 1996 and
from Oct. 1996 to Sept. 1997; financial analyst with
John Nuveen & Company Inc. from May 1996 to Sept. 1996
Heidi J. Walter, 31 (4) Vice-President; Secretary Vice president of Stein Roe since March 1998; senior
legal counsel for Stein Roe since Feb. 1998; legal
counsel for Stein Roe from March 1995 to Jan. 1998;
associate with Beeler Schad & Diamond, PC (law firm)
prior thereto
Hans P. Ziegler (4), 57 Executive Vice-President Director and Executive Vice-President of Stein Roe
since May 1994; President of the Investment Counsel
division of Stein Roe prior thereto
<FN>
_________________________
(1) Trustee who is an "interested person" of the Trust and of
Stein Roe, as defined in the Investment Company Act of 1940.
(2) Member of the Executive Committee of the Board of Trustees,
which is authorized to exercise all powers of the Board with
certain statutory exceptions.
(3) Member of the Audit Committee of the Board, which makes
recommendations to the Board regarding the selection of
auditors and confers with the auditors regarding the scope and
results of the audit.
(4) This person holds the corresponding officer or trustee
position with SR&F Base Trust.
</TABLE>
Certain of the trustees and officers of the Trust are
trustees or officers of other investment companies managed by
Stein Roe. Mr. Anetsberger, Mr. Butch, and Ms. Walter are also
officers of Liberty Funds Distributor, Inc., the Fund's
distributor. The address of Mr. Bacon is 4N640 Honey Hill Road,
Box 296, Wayne, IL 60184; that of Mr. Boyd is 2900 Golf Road,
Rolling Meadows, IL 60008; that of Mr. Cook is 600 Atlantic
Avenue, Boston, MA 02210; that of Mr. Hacker is P.O. Box 66100,
Chicago, IL 60666; that of Ms. Kelly is Three First National
Plaza, Chicago, IL 60602; that of Mr. Nelson is Department of
Economics, University of Washington, Seattle, WA 98195; that of
Mr. Theobald is Suite 3300, 222 West Adams Street, Chicago, IL
60606; that of Mr. Cantor is 1330 Avenue of the Americas, New
York, NY 10019; that of Ms. Knudsen, Ms. Newman, Ms. Rao, and
Messrs. Connaughton, Haynie, Jacoby, and Rega is One Financial
Center, Boston, MA 02111; and that of the other officers is One
South Wacker Drive, Chicago, IL 60606.
Officers and trustees affiliated with Stein Roe serve without
any compensation from the Trust. In compensation for their
services to the Trust, trustees who are not "interested persons"
of the Trust or Stein Roe are paid an annual retainer plus an
attendance fee for each meeting of the Board or standing committee
thereof attended. The Trust has no retirement or pension plan.
The following table sets forth compensation paid during the fiscal
year ended Sept. 30, 1998 to each of the trustees:
Compensation from the
Stein Roe Fund Complex*
-----------------------
Aggregate Compensation Total Average
Name of Trustee from the Trust Compensation Per Series
- ------------------- -------------------- ------------ ----------
Timothy K. Armour** -0- -0- -0-
Thomas W. Butch** -0- -0- -0-
Lindsay Cook -0- -0- -0-
John A. Bacon Jr.** -0- -0- -0-
Kenneth L. Block** $ 2,000 $ 23,100 $ 525
William W. Boyd 13,400 109,902 2,498
Douglas A. Hacker 13,100 101,148 2,299
Janet Langford Kelly 12,500 97,950 2,226
Francis W. Morley** 2,000 23,100 525
Charles R. Nelson 13,400 109,552 2,490
Thomas C. Theobald 13,100 101,148 2,299
_______________
* At Sept. 30, 1998, the Stein Roe Fund Complex consisted of 10
series of the Trust, 11 series of Stein Roe Investment Trust, four
series of Stein Roe Income Trust, four series of Stein Roe
Municipal Trust, one series of Stein Roe Institutional Trust, one
series of Stein Roe Trust, and 13 series of SR&F Base Trust.
**Messrs. Block and Morley retired as trustees on Dec. 31, 1997.
Mr. Armour resigned as a trustee on April 14, 1998. Mr. Butch
served as a trustee from April 14, 1998 to Nov. 3, 1998. Mr.
Bacon was elected a trustee effective Nov. 3, 1998.
FINANCIAL STATEMENTS
Please refer to the Sept. 30, 1998 Financial Statements
(statements of assets and liabilities and schedules of investments
as of Sept. 30, 1998 and the statements of operations, changes in
net assets, and notes thereto) and the report of independent
public accountants contained in the Sept. 30, 1998 Annual Reports.
The Financial Statements and the report of independent public
accountants (but no other material from the Annual Reports) are
incorporated herein by reference. An Annual Report may be
obtained at no charge by telephoning 800-322-1130.
PRINCIPAL SHAREHOLDERS
As of October 31, 1998, the only persons known by the Trust
to own of record or "beneficially" 5% or more of outstanding
shares of any class of a Fund within the definition of that term
as contained in Rule 13d-3 under the Securities Exchange Act of
1934 were as follows:
Approximate % of
Outstanding
Name and Address Fund/Class Shares Held
- --------------------- -------------------------- ----------------
Bob Weik Advisor Growth Stock Fund, 9.01%
P. O. Box 5020 Class K
San Antonio TX 78201
Liberty Financial Advisor Young Investor Fund, 32.63
Companies, Inc. Class K
600 Atlantic Avenue
Federal Reserve Plaza
Boston, MA 02210
A. G. Edwards* Advisor Young Investor Fund, 22.54
For the Sole Benefit Class K
of Its Customers
One N. Jefferson
St. Louis, MO 63103
Merrill Lynch Pierce Advisor Growth Stock Fund:
Fenner & Smith* Class A 19.82
For the Sole Benefit Class B 36.55
of Its Customers Class C 15.77
Attn: Fund Adminis-
tration
4800 Deer Lake Drive
Jacksonville, FL 32246
_____________
*Shares held of record, but not beneficially.
INVESTMENT ADVISORY AND OTHER SERVICES
Stein Roe & Farnham Incorporated provides investment
management services to the Portfolios and administrative services
to the Funds and the Portfolios. Stein Roe is a wholly owned
subsidiary of SteinRoe Services Inc. ("SSI"), the Fund's transfer
agent, which is a wholly owned subsidiary of Liberty Financial
Companies, Inc. ("Liberty Financial"), which is a majority owned
subsidiary of Liberty Corporate Holdings, Inc., which is a wholly
owned subsidiary of LFC Holdings, Inc., which is a wholly owned
subsidiary of Liberty Mutual Equity Corporation, which is a wholly
owned subsidiary of Liberty Mutual Insurance Company. Liberty
Mutual Insurance Company is a mutual insurance company,
principally in the property/casualty insurance field, organized
under the laws of Massachusetts in 1912.
The directors of Stein Roe are Kenneth R. Leibler, C. Allen
Merritt, Jr., Thomas W. Butch, and Hans P. Ziegler. Mr. Leibler
is President and Chief Executive Officer of Liberty Financial; Mr.
Merritt is Chief Operating Officer of Liberty Financial; Mr. Butch
is President of Stein Roe's Mutual Funds division; and Mr. Ziegler
is Chief Executive Officer of Stein Roe. The business address of
Messrs. Leibler and Merritt is 600 Atlantic Avenue, Boston, MA
02210; and that of Messrs. Butch and Ziegler is One South Wacker
Drive, Chicago, IL 60606.
Stein Roe and its predecessor have been providing investment
advisory services since 1932. Stein Roe acts as investment
adviser to wealthy individuals, trustees, pension and profit
sharing plans, charitable organizations, and other institutional
investors. As of Sept. 30, 1998, Stein Roe managed over $28.3
billion in assets: over $9.4 billion in equities and over $18.9
billion in fixed income securities (including $1.1 billion in
municipal securities). The $28.3 billion in managed assets
included over $8.3 billion held by open-end mutual funds managed
by Stein Roe (approximately 14% of the mutual fund assets were
held by clients of Stein Roe). These mutual funds were owned by
over 295,000 shareholders. The $8.3 billion in mutual fund assets
included over $637 million in over 43,000 IRA accounts. In
managing those assets, Stein Roe utilizes a proprietary computer-
based information system that maintains and regularly updates
information for approximately 7,500 companies. Stein Roe also
monitors over 1,400 issues via a proprietary credit analysis
system. At Sept. 30, 1998, Stein Roe employed 18 research
analysts and 55 account managers. The average investment-related
experience of these individuals was 17 years.
In return for its services, Stein Roe is entitled to receive
a monthly administrative fee from each Fund and a monthly
management fee from each Portfolio. The table below shows the
annual rates of such fees as a percentage of average net assets
(shown in millions), gross fees paid since commencement of
operations, and any expense reimbursements by Stein Roe:
<TABLE>
<CAPTION>
Year Ended Year Ended
Fund/Portfolio Type Current Rates 9/30/98 9/30/97
<S> <C> <C> <C> <C>
Advisor Growth
Stock Fund Administrative .15% up to $500,
.125% next $500,
.10% thereafter $ 106,730 $ 166
Class A Reimbursement Expenses exceeding 1.40% 66,480 -
Class B Reimbursement Expenses exceeding 2.10% 74,172 -
Class C Reimbursement Expenses exceeding 2.10% 12,265 -
Class K Reimbursement Expenses exceeding 1.35% 9,039 60,346
Growth Stock
Portfolio Management .60% up to $500,
.55% next $500,
.50% thereafter 4,251,833 2,119,803
Advisor Young
Investor Fund Administrative .20% up to $500,
.150% next $500,
.125% thereafter 26,438 129
Class A Reimbursement Expenses exceeding 1.65% 41,170 -
Class K Reimbursement Expenses exceeding 1.50% 42,387 56,653
Growth Investor
Portfolio Management .60% up to $500,
.55% next $500, .50%
thereafter 3,758,114 1,191,731
</TABLE>
Stein Roe provides office space and executive and other
personnel to the Funds and bears any sales or promotional
expenses. Each Fund pays all expenses other than those paid by
Stein Roe, including but not limited to printing and postage
charges, securities registration and custodian fees, and expenses
incidental to its organization.
The administrative agreement provides that Stein Roe shall
reimburse each Fund to the extent that its total annual expenses
(including fees paid to Stein Roe, but excluding taxes, interest,
commissions and other normal charges incident to the purchase and
sale of portfolio securities, and expenses of litigation to the
extent permitted under applicable state law) exceed the applicable
limits prescribed by any state in which its shares are being
offered for sale to the public; provided, however, Stein Roe is
not required to reimburse a Fund an amount in excess of fees paid
under that agreement for such year. In addition, in the interest
of further limiting expenses of a Fund, Stein Roe may voluntarily
waive its fees and/or absorb certain expenses, as described under
The Fund-Your Expenses in the Prospectus. Any such reimbursement
will enhance the yield of such Fund.
The management agreement provides that neither Stein Roe, nor
any of its directors, officers, stockholders (or partners of
stockholders), agents, or employees shall have any liability to
the Trust or any shareholder of the Trust for any error of
judgment, mistake of law or any loss arising out of any
investment, or for any other act or omission in the performance by
Stein Roe of its duties under the agreement, except for liability
resulting from willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under the agreement.
Any expenses that are attributable solely to the
organization, operation, or business of a series of the Trust are
paid solely out of the assets of that series. Any expenses
incurred by the Trust that are not solely attributable to a
particular series are apportioned in such manner as Stein Roe
determines is fair and appropriate, unless otherwise specified by
the Board of Trustees.
Bookkeeping and Accounting Agreement
Pursuant to a separate agreement with the Trust, Stein Roe
receives a fee for performing certain bookkeeping and accounting
services. For services provided to the Trust, Stein Roe receives
an annual fee of $25,000 per Fund plus .0025 of 1% of average net
assets over $50 million. During the fiscal years ended Sept. 30,
1997 and 1998, Stein Roe received $109,375 and $224,068,
respectively, from the Trust for services provided under this
agreement.
CUSTODIAN
State Street Bank and Trust Company (the "Bank"), 225
Franklin Street, Boston, MA 02101, is the custodian for the Trust
and SR&F Base Trust. It is responsible for holding all securities
and cash, receiving and paying for securities purchased,
delivering against payment securities sold, receiving and
collecting income from investments, making all payments covering
expenses, and performing other administrative duties, all as
directed by authorized persons. The Bank does not exercise any
supervisory function in such matters as purchase and sale of
portfolio securities, payment of dividends, or payment of
expenses.
Portfolio securities purchased in the U.S. are maintained in
the custody of the Bank or of other domestic banks or
depositories. Portfolio securities purchased outside of the U.S.
are maintained in the custody of foreign banks and trust companies
that are members of the Bank's Global Custody Network and foreign
depositories ("foreign sub-custodians"). Each of the domestic and
foreign custodial institutions holding portfolio securities has
been approved by the Board of Trustees in accordance with
regulations under the Investment Company Act of 1940.
The Board of Trustees of each Trust reviews, at least
annually, whether it is in the best interests of the Portfolios,
the Funds, and their shareholders to maintain assets in each of
the countries in which it invests with particular foreign sub-
custodians in such countries, pursuant to contracts between such
respective foreign sub-custodians and the Bank. The review
includes an assessment of the risks of holding assets in any such
country (including risks of expropriation or imposition of
exchange controls), the operational capability and reliability of
each such foreign sub-custodian, and the impact of local laws on
each such custody arrangement. Each Board of Trustees is aided in
its review by the Bank, which has assembled the network of foreign
sub-custodians, as well as by Stein Roe and counsel. However,
with respect to foreign sub-custodians, there can be no assurance
that a Fund and the value of its shares will not be adversely
affected by acts of foreign governments, financial or operational
difficulties of the foreign sub-custodians, difficulties and costs
of obtaining jurisdiction over or enforcing judgments against the
foreign sub-custodians, or application of foreign law to foreign
sub-custodial arrangements. Accordingly, an investor should
recognize that the non-investment risks involved in holding assets
abroad are greater than those associated with investing in the
United States.
The Funds and Portfolios may invest in obligations of the
Bank and may purchase or sell securities from or to the Bank.
INDEPENDENT PUBLIC ACCOUNTANTS
The independent public accountants for the Funds and
Portfolios are Arthur Andersen LLP, 33 West Monroe Street,
Chicago, IL 60603. The accountants audit and report on the annual
financial statements, review certain regulatory reports and the
federal income tax returns, and perform other professional
accounting, auditing, tax and advisory services when engaged to do
so by a Trust.
DISTRIBUTOR
Shares of the Funds are distributed by Liberty Funds
Distributor, Inc. (the "Distributor"), One Financial Center,
Boston, MA 02111, an indirect subsidiary of Liberty Financial,
under a Distribution Agreement. The Distribution Agreement
continues in effect from year to year, provided such continuance
is approved annually (i) by a majority of the trustees or by a
majority of the outstanding voting securities of the Trust, and
(ii) by a majority of the trustees who are not parties to the
Agreement or interested persons of any such party ("independent
trustees"). The Distributor has no obligation, as underwriter, to
buy Fund shares, and purchases shares only upon receipt of orders
from authorized financial service firms or investors. The Trust
has agreed to pay all expenses in connection with registration of
its shares with the Securities and Exchange Commission and
auditing and filing fees in connection with registration of its
shares under the various state blue sky laws and assumes the cost
of preparation of prospectuses and other expenses.
12b-1 Plans, Contingent Deferred Sales Charges, and Conversion of
Shares
The trustees of the Trust have adopted a plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Plan").
The Plan provides that, as compensation for personal service
and/or the maintenance of shareholder accounts, the Distributor
receives a service fee at an annual rate not to exceed 0.25% of
net assets attributed to each class of shares other than Class K
shares. The Plan also provides that as compensation for the
promotion and distribution of shares of a Fund including its
expenses related to sale and promotion of Fund shares, the
Distributor receives from the Fund a fee at an annual rate not
exceeding 0.10% of the average net assets attributed to Class A
shares, and 0.75% of the average net assets attributed to each of
its Class B and Class C shares. The Plan further provides that,
as compensation for services and/or distribution, the Distributor
receives a fee at an annual rate not to exceed 0.25% of the
average net assets attributable to Class K shares. At this time,
the Distributor has voluntarily agreed to limit the Class A
distribution fee to 0.05% annually. The Distributor may terminate
this voluntary limitation without shareholder approval. Class B
shares automatically convert to Class A shares approximately eight
years after the Class B shares are purchased. Class C and Class K
shares do not convert. The Distributor generally pays this amount
to institutions that distribute Fund shares and provide services
to the Funds and their shareholders. Those institutions may use
the payments for, among other purposes, compensating employees
engaged in sales and/or shareholder servicing. The amount of fees
paid by a Fund during any year may be more or less than the cost
of distribution or other services provided to the Fund. NASD
rules limit the amount of annual distribution fees that may be
paid by a mutual fund and impose a ceiling on the cumulative sales
charges paid. The Trust's Plan complies with those rules.
The trustees believe that the Plan could be a significant
factor in the growth and retention of Fund assets resulting in a
more advantageous expense ratio and increased investment
flexibility which could benefit each class of shareholders. The
Plan will continue in effect from year to year so long as
continuance is specifically approved at least annually by a vote
of the trustees, including the independent trustees. The Plan may
not be amended to increase the fee materially without approval by
a vote of a majority of the outstanding voting securities of the
relevant class of shares and all material amendments of the Plan
must be approved by the trustees in the manner provided in the
foregoing sentence. The Plan may be terminated at any time by a
vote of a majority of the independent trustees or by a vote of a
majority of the outstanding voting securities of the relevant
Class of shares.
Advisor Young Investor Fund offers two classes of shares
(Class A and Class K) and Advisor Growth Stock Fund offers four
classes of shares (Class A, Class B, Class C, and Class K). The
Funds may in the future offer other classes of shares. Class K
shares are offered at net asset value, subject to a Rule 12b-1
fee. Class A shares of Advisor Young Investor Fund are offered at
net asset value and a subject to a Rule 12b-1 fee and a contingent
deferred sales charge on redemptions made within three years of
purchase. Class A shares of Advisor Growth Stock Fund are offered
at net asset value plus a front-end sales charge to be imposed at
the time of purchase and are subject to a Rule 12b-1 fee. Class B
shares are offered at net asset value subject to a Rule 12b-1 fee
and a declining contingent deferred sales charge on redemptions
made within six years of purchase. Class C shares are offered at
net asset value, subject to a Rule 12b-1 fee and a contingent
deferred sales charge on redemptions made within one year of
purchase. The contingent deferred sales charges are described in
the Prospectus.
No contingent deferred sales charge will be imposed on shares
derived from reinvestment of distributions or amounts representing
capital appreciation. In determining the applicability and rate
of any contingent deferred sales charge, it will be assumed that a
redemption is made first of shares representing capital
appreciation, next of shares representing reinvestment of
distributions, and finally of other shares held by the shareholder
for the longest time.
Eight years after the end of the month in which a Class B
share is purchased, such shares and a pro-rated portion of any
shares issued on the reinvestment of distributions will be
automatically invested into Class A shares of that Fund having an
equal value, which are not subject to the distribution or service
fee.
12b-1 fees paid for the fiscal year ended Sept. 30, 1998:
<TABLE>
<CAPTION>
Advisor Growth Stock Fund Advisor Young Investor Fund
- ----------------------------------- -----------------------------------
<S> <C>
Distribution and Service Distribution and Service
Fees-Class A $ 85,338 Fees-Class A $38,986
Distribution and Service Distribution and Service
Fees-Class B 353,004 Fees-Class K 561
Distribution and Service
Fees-Class C 61,520
Distribution and Service
Fees-Class K 3,138
</TABLE?
Sales charges paid for the fiscal year ended Sept. 30, 1998:
</TABLE>
<TABLE>
<CAPTION>
Advisor Growth Advisor Young
Stock Fund Investor Fund
-------------- -------------
<S> <C> <C>
Aggregate initial sales charges on Fund
shares sales $1,235,171 -
Initial sales charges retained by the
Distributor 109,835 -
Aggregate CDSCs on Fund redemptions
retained by the Distributor 32,441 -
</TABLE>
Sales-related expenses (dollars in thousands) of the Distributor
relating to the Funds for the year ended Sept. 30, 1998:
<TABLE>
<CAPTION>
Advisor Young
Advisor Growth Stock Fund Investor Fund
Class A Class B Class C Class A
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Fees to FSFs $ 91 $2,968 $127 $ 29
Cost of sales material relating
to the Fund (including
printing and mailing expenses) 477 524 84 495
Allocated travel, entertainment,
and other promotional expenses
(including advertising) 183 260 45 150
</TABLE>
TRANSFER AGENT AND SHAREHOLDER SERVICING
Liberty Funds Services, Inc. (the "Transfer Agent"), P.O. Box
1722, Boston, MA 02105, an indirect subsidiary of Liberty
Financial, is the agent of the Trust for the transfer of shares,
disbursement of dividends, and maintenance of shareholder
accounting records. For performing these services, the Transfer
Agent receives from each Fund a fee based on the following annual
rates:
Class K Class A Class B Class C
Account maintenance
and trade
processing 0.05% Bundled Fee Bundled Fee Bundled Fee
Client services 0.25%
Total 0.30% 0.236% 0.236% 0.236%
The Trust believes the charges by the Transfer Agent to the Funds
are comparable to those of other companies performing similar
services.
Some financial services firms ("FSF") or other intermediaries
having special selling arrangements with the Distributor,
including certain bank trust departments, wrap fee programs and
retirement plan service providers ("Intermediaries") that maintain
nominee accounts with the Funds for their clients who are Fund
shareholders, may be paid a fee from the Transfer Agent for
shareholder servicing and accounting services they provide with
respect to the underlying Fund shares.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the Prospectus
under the heading Your Account, and that information is
incorporated herein by reference. It is the responsibility of any
investment dealers, banks, or other institutions, including
retirement plan service providers, through whom you purchase or
redeem shares to establish procedures insuring the prompt
transmission to the Trust of any order.
The Funds will accept unconditional orders for shares to be
executed at the public offering price based on the net asset value
per share next determined after the order is received in good
order. The public offering price is the net asset value plus the
applicable sales charge, if any. In the case of orders for
purchase of shares placed through FSFs or Intermediaries, the
public offering price will be determined on the day the order is
placed in good order, but only if the FSF or Intermediary receives
the order prior to the time at which shares are valued and
transmits it to the Fund before that day's transactions are
processed. If the FSF or Intermediary fails to transmit before
the Fund processes that day's transactions, the customer's
entitlement to that day's closing price must be settled between
the customer and the FSF or Intermediary. If the FSF or
Intermediary receives the order after the time at which the Fund
values its shares, the price will be based on the net asset value
determined as of the close of the NYSE on the next day it is open.
If funds for the purchase of shares are sent directly to the
Transfer Agent, they will be invested at the public offering price
next determined after receipt in good order. Payment for shares
of the Fund must be in U.S. dollars; if made by check, the check
must be drawn on a U.S. bank.
Each Fund receives the entire net asset value of shares sold.
For Class A shares of Advisor Growth Stock Fund, which are subject
to an initial sales charge, the Distributor's commission is the
sales charge shown in the Prospectus less any applicable FSF or
Intermediary discount. The FSF or Intermediary discount is the
same for all FSFs or Intermediaries, except that the Distributor
retains the entire sales charge on any sales made to a shareholder
who does not specify an FSF or Intermediary on the application,
and except that the Distributor may from time to time reallow
additional amounts to all or certain FSFs or Intermediaries. The
Distributor generally retains 100% of any asset-based sales charge
(distribution fee) or contingent deferred sales charge. Such
charges generally reimburse the Distributor for any up-front
and/or ongoing commissions paid to FSFs or Intermediaries.
Checks presented for the purchase of Fund shares which are
returned by the purchaser's bank will subject the purchaser to a
$15 service fee for each check returned.
The Transfer Agent acts as the shareholder's agent whenever
it receives instructions to carry out a transaction on the
shareholder's account. Upon receipt of instructions that shares
are to be purchased for a shareholder's account, the designated
FSF or Intermediary will receive the applicable sales commission.
Shareholders may change FSFs or Intermediaries at any time by
written notice to the Transfer Agent, provided the new FSF or
Intermediary has a sales agreement with the Distributor.
Determination of Net Asset Value
The net asset value per share for each Class is determined as
of the close of business (normally 3 p.m., Central time, or 4
p.m., Eastern time) on days on which the New York Stock Exchange
(the "NYSE") is open for trading. The NYSE is regularly closed on
Saturdays and Sundays and on New Year's Day, the third Monday in
January, the third Monday in February, Good Friday, the last
Monday in May, Independence Day, Labor Day, Thanksgiving, and
Christmas. If one of these holidays falls on a Saturday or
Sunday, the NYSE will be closed on the preceding Friday or the
following Monday, respectively. Net asset value will not be
determined on days when the NYSE is closed unless, in the judgment
of the Board of Trustees, net asset value of a Fund should be
determined on any such day, in which case the determination will
be made at 3 p.m., Central time.
A Portfolio may invest in securities that are listed
primarily on foreign exchanges that are open and allow trading on
days on which the Funds do not determine net asset value. This
may significantly affect the net asset value of a Fund's
redeemable securities on days when an investor cannot redeem such
securities. Debt securities generally are valued by a pricing
service which determines valuations based upon market transactions
for normal, institutional-size trading units of similar
securities. However, in circumstances where such prices are not
available or where Stein Roe deems it appropriate to do so, an
over-the-counter or exchange bid quotation is used. Securities
listed on an exchange or on Nasdaq are valued at the last sale
price. Listed securities for which there were no sales during the
day and unlisted securities are valued at the last quoted bid
price. Options are valued at the last sale price or in the
absence of a sale, the mean between the last quoted bid and
offering prices. Short-term obligations with a maturity of 60
days or less are valued at amortized cost pursuant to procedures
adopted by the Board of Trustees. The values of foreign
securities quoted in foreign currencies are translated into U.S.
dollars at the exchange rate for that day. Positions for which
there are no such valuations and other assets are valued at fair
value as determined in good faith under the direction of the Board
of Trustees.
Generally, trading in certain securities (such as foreign
securities) is substantially completed each day at various times
prior to the close of the NYSE. Trading on certain foreign
securities markets may not take place on all NYSE business days,
and trading on some foreign securities markets takes place on days
that are not NYSE business days and on which net asset value is
not calculated. The values of these securities used in
determining net asset value are computed as of such times. Also,
because of the amount of time required to collect and process
trading information as to large numbers of securities issues, the
values of certain securities (such as convertible bonds, U.S.
government securities, and tax-exempt securities) are determined
based on market quotations collected earlier in the day at the
latest practicable time prior to the close of the NYSE.
Occasionally, events affecting the value of such securities may
occur between such time and the close of the NYSE which will not
be reflected in the computation of the net asset value. If events
materially affecting the value of such securities occur during
such period, then these securities will be valued at their fair
value following procedures approved by the Board of Trustees.
The Trust intends to pay all redemptions in cash and is
obligated to redeem shares solely in cash up to the lesser of
$250,000 or one percent of the net assets of the Trust during any
90-day period for any one shareholder. However, redemptions in
excess of such limit may be paid wholly or partly by a
distribution in kind of securities. If redemptions were made in
kind, the redeeming shareholders might incur transaction costs in
selling the securities received in the redemptions.
Due to the relatively high cost of maintaining smaller
accounts, the Trust may deduct $10 (payable to the Transfer Agent)
from accounts valued at less than $1,000 unless the account value
has dropped below $1,000 solely as a result of share depreciation.
An investor will be notified that the value of his account is less
than that minimum and allowed at least 60 days to bring the value
of the account up to at least $1,000 before the fee is deducted.
The Agreement and Declaration of Trust also authorizes the Trust
to redeem shares under certain other circumstances as may be
specified by the Board of Trustees.
The Trust reserves the right to suspend or postpone
redemptions of Fund shares during any period when: (a) trading on
the NYSE is restricted, as determined by the Securities and
Exchange Commission, or the NYSE is closed for other than
customary weekend and holiday closings; (b) the Securities and
Exchange Commission has by order permitted such suspension; or (c)
an emergency, as determined by the Securities and Exchange
Commission, exists, making disposal of portfolio securities or
valuation of net assets of a Fund not reasonably practicable.
Special Purchase Programs/Investor Services
The following special purchase programs/investor services may
be changed or eliminated at any time.
Fundamatic Program (Classes A, B and C only). As a
convenience to investors, Class A, B and C shares of the Funds may
be purchased through the Colonial Fundamatic Program.
Preauthorized monthly bank drafts or electronic funds transfer for
a fixed amount of at least $50 are used to purchase Fund shares at
the public offering price next determined after the Transfer Agent
receives the proceeds from the draft (normally the 5th or 20th of
each month, or the next business day thereafter). If your
Fundamatic purchase is by electronic funds transfer, you may
request the Fundamatic purchase for any day. Further information
and application forms are available from FSFs or Intermediaries or
from the Distributor.
Tax-Sheltered Retirement Plans (Classes A, B and C only).
The Distributor offers prototype tax-qualified plans, including
IRAs and pension and profit-sharing plans for individuals,
corporations, employees and the self-employed. The minimum
initial investment for a retirement account sponsored by the
Distributor is $25. The First National Bank of Boston is the
trustee of the Distributor's prototype plans and charges a $10
annual fee. Detailed information concerning these retirement
plans and copies of the retirement plans are available from the
Distributor.
Participants in other prototype retirement plans (other than
IRAs) also are charged a $10 annual fee unless the plan maintains
an omnibus account with the Transfer Agent. Participants in
prototype plans offered by the Distributor (other than IRAs) who
liquidate the total value of their account will also be charged a
$15 close-out processing fee payable to the Transfer Agent. The
fee is in addition to any applicable contingent deferred sales
charge. The fee will not apply if the participant uses the
proceeds to open an IRA Rollover account in any fund, or if the
plan maintains an omnibus account.
Consultation with a competent financial and tax advisor
regarding these plans and consideration of the suitability of Fund
shares as an investment under the Employee Retirement Income
Security Act of 1974 or otherwise is recommended.
Telephone Address Change Services. By calling the Transfer
Agent, shareholders, beneficiaries or their FSF or Intermediary of
record may change an address on a recorded telephone line.
Confirmations of address change will be sent to both the old and
the new addresses. Telephone redemption privileges are suspended
for 30 days after an address change is effected.
Colonial Cash Connection. Dividends and any other
distributions, including Systematic Withdrawal Plan (SWP)
payments, on Class A, Class B or Class C shares may be
automatically deposited to a shareholder's bank account via
electronic funds transfer. Shareholders wishing to avail
themselves of this electronic transfer procedure should complete
the appropriate sections of the Application.
Programs for Reducing or Eliminating Sales Charges
Right of Accumulation and Statement of Intent (Class A of
Advisor Growth Stock Fund only). Reduced sales charges on Class A
shares can be effected by combining a current purchase with prior
purchases of Class A, B, C, T, and Z shares of other funds managed
by Colonial Management Associates, Inc. or distributed by the
Distributor (such funds hereinafter referred to as "Colonial
Funds"). The applicable sales charged is based on the combined
total of: (1) the current purchase and (2) the value at the public
offering price at the close of business on the previous day of all
Colonial Funds' Class A shares held by the shareholder (except
shares of any Colonial money market fund, unless such shares were
acquired by exchange from Class A shares of another Colonial Fund
other than a money market fund and Class B, C, T and Z shares).
The Distributor must be promptly notified of each purchase
which entitles a shareholder to a reduced sales charge. Such
reduced sales charge will be applied upon confirmation of the
shareholder's holdings by the Transfer Agent. A Colonial Fund may
terminate or amend this right of Accumulation.
Any person may qualify for reduced sales charges on purchase
of Class A shares made within a 13-month period pursuant to a
Statement of Intent ("Statement"). A shareholder may include, as
an accumulation credit toward the completion of such Statement,
the value of all Class A, B, C, T and Z shares held by the
shareholder on the date of the Statement in the Trust's Funds and
Colonial Funds (except shares of any Colonial money market fund,
unless such shares were acquired by exchange from Class A shares
of another non-money market Colonial Fund). The value is
determined at the public offering price on the date of the
Statement. Purchases made through reinvestment of distributions
do not count toward satisfaction of the Statement.
During the term of a Statement, the Transfer Agent will hold
shares in escrow to secure payment of the higher sales charge
applicable to Class A shares actually purchased. Dividends and
capital gains will be paid on all escrowed shares and these shares
will be released when the amount indicated has been purchased. A
Statement does not obligate the investor to buy or the Fund to
sell the amount of the Statement.
If a shareholder exceeds the amount of the Statement and
reaches an amount which would qualify for a further quantity
discount, a retroactive price adjustment will be made at the time
of expiration of the Statement. The resulting difference in
offering price will purchase additional shares for the
shareholder's account at the then-current applicable offering
price. As a part of this adjustment, the FSF or Intermediary
shall return to the Distributor the excess commission previously
paid during the 13-month period.
If the amount of the Statement is not purchased, the
shareholder shall remit to the Distributor an amount equal to the
difference between the sales charge paid and the sales charge that
should have been paid. If the shareholder fails within 20 days
after a written request to pay such difference in sales charge,
the Transfer Agent will redeem that number of escrowed Class A
shares equal to such difference. The additional amount of FSF or
Intermediary discount from the applicable offering price shall be
remitted to the shareholder's FSF or Intermediary of record.
Additional information about and the terms of Statements of
Intent are available from your FSF or Intermediary or from the
Transfer Agent at 1-800-345-6611.
Reinstatement Privilege. An investor who has redeemed Fund
shares may, upon request, reinstate within one year a portion or
all of the proceeds of such sale in shares of the same class of
that Fund at the net asset value next determined after the
Transfer Agent receives a written reinstatement request and
payment. Any contingent deferred sales charge paid at the time of
the redemption will be credited to the shareholder upon
reinstatement. The period between the redemption and the
reinstatement will not be counted in aging the reinstated shares
for purposes of calculating any contingent deferred sales charge
or conversion date. Investors who desire to exercise this
privilege should contact their FSF or Intermediary or the
Distributor. Shareholders may exercise this privilege an
unlimited number of times. Exercise of this privilege does not
alter the federal income tax treatment of any capital gains
realized on the prior sale of Fund shares, but to the extent any
such shares were sold at a loss, some or all of the loss may be
disallowed for tax purposes. Consult your tax advisor.
Shareholders may reinvest all or a portion of a recent cash
distribution without a sales charge. A shareholder request must
be received within 30 calendar days of the distribution. A
shareholder may exercise this privilege only once. No charge is
currently made for reinvestment.
Privileges of Adviser Employees, FSFs or Intermediaries
(Class A of Advisor Growth Stock Fund only). Class A shares may
be sold at net asset value to the following individuals whether
currently employed or retired: Trustees of funds advised or
administered by Stein Roe or an affiliate of Stein Roe; directors,
officers and employees of Stein Roe or an affiliate of Stein Roe,
including the Transfer Agent and the Distributor; registered
representatives and employees of FSFs or Intermediaries (including
their affiliates) that are parties to dealer agreements or other
sales arrangements with the Distributor; and such persons'
families and their beneficial accounts.
Sponsored Arrangements (Class A of Advisor Growth Stock Fund
only). Class A shares may be purchased at reduced or no sales
charge pursuant to sponsored arrangements, which include programs
under which an organization makes recommendations to, or permits
group solicitation of, its employees, members or participants in
connection with the purchase of Fund shares on an individual
basis. The amount of the sales charge reduction will reflect the
anticipated reduction in sales expense associated with sponsored
arrangements. The reduction in sales expense, and therefore the
reduction in sales charge, will vary depending on factors such as
the size and stability of the organization's group, the term of
the organization's existence and certain characteristics of the
members of its group. The Fund reserves the right to revise the
terms of or to suspend or discontinue sales pursuant to sponsored
plans at any time.
Class A shares of Advisor Growth Stock Fund may also be
purchased at reduced or no sales charge by clients of dealers,
brokers or registered investment advisers that have entered into
agreements with the Distributor pursuant to which the Fund is
included as an investment option in programs involving fee-based
compensation arrangements.
Waiver of Contingent Deferred Sales Charges (Class A of
Advisor Young Investor Fund, Class A of Advisor Growth Stock Fund
with accounts in excess of $1,000,000, and Classes B and C).
Contingent deferred sales charges may be waived on redemptions in
the following situations with the proper documentation:
1. Death. Contingent deferred sales charges may be waived on
redemptions within one year following the death of (i) the sole
shareholder on an individual account, (ii) a joint tenant where
the surviving joint tenant is the deceased's spouse, or (iii) the
beneficiary of a Uniform Gifts to Minors Act ("UGMA"), Uniform
Transfers to Minors Act ("UTMA") or other custodial account. If,
upon the occurrence of one of the foregoing, the account is
transferred to an account registered in the name of the deceased's
estate, the contingent deferred sales charge will be waived on any
redemption from the estate account occurring within one year after
the death. If the shares are not redeemed within one year of the
death, they will remain subject to the applicable contingent
deferred sales charge, when redeemed from the transferee's
account. If the account is transferred to a new registration and
then a redemption is requested, the applicable contingent deferred
sales charge will be charged.
2. Systematic Withdrawal Plan (SWP). Contingent deferred sales
charges may be waived on redemptions occurring pursuant to a
monthly, quarterly or semiannual SWP established with the Transfer
Agent, to the extent the redemptions do not exceed, on an annual
basis, 12% of the account's value, so long as at the time of the
first SWP redemption the account had distributions reinvested for
a period at least equal to the period of the SWP (e.g., if it is a
quarterly SWP, distributions must have been reinvested at least
for the three month period prior to the first SWP redemption);
otherwise contingent deferred sales charges will be charged on SWP
redemptions until this requirement is met; this requirement does
not apply to Class B or C accounts if the SWP is set up at the
time the account is established, and distributions are being
reinvested. See below under How to Sell Shares-Systematic
Withdrawal Plan.
3. Disability. Contingent deferred sales charges may be waived
on redemptions occurring within one year after the sole
shareholder on an individual account or a joint tenant on a
spousal joint tenant account becomes disabled (as defined in
Section 72(m)(7) of the Internal Revenue Code). To be eligible
for such waiver, (i) the disability must arise after the purchase
of shares and (ii) the disabled shareholder must have been under
age 65 at the time of the initial determination of disability. If
the account is transferred to a new registration and then a
redemption is requested, the applicable contingent deferred sales
charge will be charged.
4. Death of a trustee. Contingent deferred sales charges may be
waived on redemptions occurring upon dissolution of a revocable
living or grantor trust following the death of the sole trustee
where (i) the grantor of the trust is the sole trustee and the
sole life beneficiary, (ii) death occurs following the purchase
and (iii) the trust document provides for dissolution of the trust
upon the trustee's death. If the account is transferred to a new
registration (including that of a successor trustee), the
applicable contingent deferred sales charge will be charged upon
any subsequent redemption.
5. Returns on excess contributions. Contingent deferred sales
charges may be waived on redemptions required to return excess
contributions made to retirement plans or IRAs, so long as the FSF
or Intermediary agrees to return the applicable portion of any
commission paid by the Distributor.
6. Qualified Retirement Plans. Contingent deferred sales charges
may be waived on redemptions required to make distributions from
qualified retirement plans following (i) normal retirement (as
stated in the plan document) or (ii) separation from service. For
shares purchased in a prototype 401K plan after Sept. 1, 1997,
contingent deferred sales charges will not be waived upon
separation from service except if such plan is held in an omnibus
account. Contingent deferred sales charges also will be waived on
SWP redemptions made to make required minimum distributions from
qualified retirement plans that have invested in a Fund for at
least two years.
The contingent deferred sales charge also may be waived where
the FSF or Intermediary agrees to return all or an agreed upon
portion of the commission earned on the sale of the shares being
redeemed.
How to Sell ("Redeem") Shares
Shares may be sold on any day the NYSE is open, either
directly to a Fund or through an FSF or Intermediary. Sale
proceeds generally are sent within seven days (usually on the next
business day after your request is received in good form).
However, for shares recently purchased by check, the Fund will
delay sending proceeds for 15 days in order to protect the Fund
against financial losses and dilution in net asset value caused by
dishonored purchase payment checks. To avoid delays in payment,
investors are advised to purchase shares unconditionally, such as
by certified check or other immediately available funds.
To sell shares directly to a Fund, send a signed letter of
instruction to the Transfer Agent. The sale price is the net
asset value next determined (less any applicable contingent
deferred sales charge) after the Fund or an FSF or Intermediary
receives the request in proper form. Signatures must be
guaranteed by a bank, a member firm of a national stock exchange
or another eligible guarantor institution. Additional
documentation is required for sales by corporations, agents,
fiduciaries, surviving joint owners and IRA holders. Call the
Transfer Agent for more information at (800) 345-6611.
FSFs and Intermediaries must receive requests before the time
at which Fund shares are valued to receive that day's price, are
responsible for furnishing all necessary documentation to the
Transfer Agent and may charge for this service.
Systematic Withdrawal Plan (Class A, B and C shares). If a
shareholder's account balance is at least $5,000, the shareholder
may establish a SWP. A specified dollar amount or percentage of
the then-current net asset value of the shareholder's investment
in the Fund designated by the shareholder will be paid monthly,
quarterly or semiannually to a designated payee. The amount or
percentage the shareholder specifies generally may not, on an
annualized basis, exceed 12% of the value, as of the time the
shareholder makes the election of the shareholder's investment.
Withdrawals from Class B and C shares under a SWP will be treated
as redemptions of shares purchased through the reinvestment of
Fund distributions, or, to the extent such shares in the
shareholder's account are insufficient to cover plan payments, as
redemptions from the earliest purchased Fund shares in the
shareholder's account. No contingent deferred sales charges apply
to a redemption pursuant to a SWP of 12% or less, even if, after
giving effect to the redemption, the shareholder's account balance
is less than the shareholder's base amount. Qualified plan
participants who are required by Internal Revenue Code regulation
to withdraw more than 12%, on an annual basis, of the value of
their Class B or C share account may do so but will be subject to
a contingent deferred sales charge ranging from 1% to 5% of the
excess over 12%. If a shareholder wishes to participate in a SWP,
the shareholder must elect to have all income dividends and other
distributions payable in Fund shares rather than in cash.
A shareholder or its FSF or Intermediary of record may
establish a SWP account by telephone on a recorded line. However,
SWP checks will be payable only to the shareholder and sent to the
address of record. SWPs from retirement accounts cannot be
established by telephone.
Purchasing additional shares (other than through dividend and
distribution reinvestment) while receiving SWP payments is
ordinarily disadvantageous because of duplicative sales charges.
For this reason, a shareholder may not maintain a plan for the
accumulation of shares of a Fund (other than through the
reinvestment of dividends) and a SWP at the same time.
SWP payments are made through share redemptions, which may
result in a gain or loss for tax purposes, may involve the use of
principal and may eventually use up all of the shares in a
shareholder's account.
A Fund may terminate a shareholder's SWP if the shareholder's
account balance falls below $5,000 due to any transfer or
liquidation of shares other than pursuant to the SWP. SWP
payments will be terminated on receiving satisfactory evidence of
the death or incapacity of a shareholder. Until this evidence is
received, the Transfer Agent will not be liable for any payment
made in accordance with the provisions of a SWP.
The cost of administering SWPs for the benefit of
shareholders who participate in them is borne by the Funds as an
expense of all shareholders.
Shareholders whose positions are held in "street name" by
certain FSFs or Intermediaries may not be able to participate in a
SWP. If a shareholder's Fund shares are held in "street name,"
the shareholder should consult his or her FSF or Intermediary to
determine whether he or she may participate in a SWP.
Telephone Redemptions. Telephone redemption privileges are
described in the Prospectus.
Non-Cash Redemptions. For redemptions of any single
shareholder within any 90-day period exceeding the lesser of
$250,000 or 1% of a Fund's net asset value, the Fund may make the
payment or a portion of the payment with portfolio securities held
by the Fund instead of cash, in which case the redeeming
shareholder may incur brokerage and other costs in selling the
securities received.
How to Exchange Shares
With respect to Class A, Class B and Class C shares of
Advisor Growth Stock Fund, exchanges at net asset value may be
made among shares of the same class of any other fund that is a
series of the Trust or of most Colonial Funds. With respect to
Class A shares of Advisor Young Investor Fund, for a period of 90
days following the purchase of shares, exchanges at net asset
value may be made among Class A shares of Colonial Municipal Money
Market Fund or Colonial Government Money Market Fund (or its
successor). Thereafter, exchanges at net asset value may be made
among Class A shares of any other fund that is a series of the
Trust or of most Colonial Funds. For more information on the
Colonial Funds, see your FSF or Intermediary or call (800) 345-
6611.
With respect to Class K shares, exchanges at net asset value
may be made among shares of Class K of any other fund that is a
series of the Trust. Shares may be exchanged on the basis of the
net asset value per share at the time of exchange and only one
"round-trip" exchange of Class C shares may be made per three-
month period, measured from the date of the initial purchase.
Before exchanging into another fund, you should obtain the
prospectus for the fund in which you wish to invest and read it
carefully. Prospectuses of Colonial Funds are available by
calling (800) 426-3750. Consult the Transfer Agent before
requesting an exchange.
By calling the Transfer Agent, shareholders or their FSF or
Intermediary of record may exchange among accounts with identical
registrations, provided that the shares are held on deposit.
During periods of unusual market changes and/or shareholder
activity, shareholders may experience delays in contacting the
Transfer Agent by telephone to exercise the telephone exchange
privilege. Because an exchange involves a redemption and
reinvestment in another fund, completion of an exchange may be
delayed under unusual circumstances, such as if a Fund suspends
repurchases or postpones payment for Fund shares being exchanged
in accordance with federal securities law. The Transfer Agent
will also make exchanges upon receipt of a written exchange
request. If the shareholder is a corporation, partnership, agent,
or surviving joint owner, the Transfer Agent will require
customary additional documentation.
A loss to a shareholder may result from an unauthorized
transaction reasonably believed to have been authorized. No
shareholder is obligated to use the telephone to execute
transactions.
In all cases, the shares to be exchanged must be registered
on the records of the Fund in the name of the shareholder desiring
to exchange.
An exchange is a capital sale transaction for federal income
tax purposes. The exchange privilege may be revised, suspended or
terminated at any time.
PORTFOLIO TRANSACTIONS
Stein Roe places the orders for the purchase and sale of
portfolio securities and options and futures contracts. Stein
Roe's overriding objective in selecting brokers and dealers to
effect portfolio transactions is to seek the best combination of
net price and execution. The best net price, giving effect to
brokerage commissions, if any, is an important factor in this
decision; however, a number of other judgmental factors may also
enter into the decision. These factors include Stein Roe's
knowledge of negotiated commission rates currently available and
other current transaction costs; the nature of the security being
purchased or sold; the size of the transaction; the desired timing
of the transaction; the activity existing and expected in the
market for the particular security; confidentiality; the
execution, clearance and settlement capabilities of the broker or
dealer selected and others considered; Stein Roe's knowledge of
the financial condition of the broker or dealer selected and such
other brokers and dealers; and Stein Roe's knowledge of actual or
apparent operation problems of any broker or dealer. Recognizing
the value of these factors, Stein Roe may cause a client to pay a
brokerage commission in excess of that which another broker may
have charged for effecting the same transaction.
Stein Roe has established internal policies for the guidance
of its trading personnel, specifying minimum and maximum
commissions to be paid for various types and sizes of transactions
and effected for clients in those cases where Stein Roe has
discretion to select the broker or dealer by which the transaction
is to be executed. Transactions which vary from the guidelines
are subject to periodic supervisory review. These guidelines are
reviewed and periodically adjusted, and the general level of
brokerage commissions paid is periodically reviewed by Stein Roe.
Evaluations of the reasonableness of brokerage commissions, based
on the factors described in the preceding paragraph, are made by
Stein Roe's trading personnel while effecting portfolio
transactions. The general level of brokerage commissions paid is
reviewed by Stein Roe, and reports are made annually to the Board
of Trustees.
Where more than one broker or dealer is believed to be
capable of providing a combination of best net price and execution
with respect to a particular portfolio transaction, Stein Roe
often selects a broker or dealer that has furnished it with
investment research products or services such as: economic,
industry or company research reports or investment
recommendations; subscriptions to financial publications or
research data compilations; compilations of securities prices,
earnings, dividends, and similar data; computerized data bases;
quotation equipment and services; research or analytical computer
software and services; or services of economic and other
consultants. Such selections are not made pursuant to any
agreement or understanding with any of the brokers or dealers.
However, Stein Roe does in some instances request a broker to
provide a specific research or brokerage product or service which
may be proprietary to the broker or produced by a third party and
made available by the broker and, in such instances, the broker in
agreeing to provide the research or brokerage product or service
frequently will indicate to Stein Roe a specific or minimum amount
of commissions which it expects to receive by reason of its
provision of the product or service. Stein Roe does not agree
with any broker to direct such specific or minimum amounts of
commissions; however, Stein Roe does maintain an internal
procedure to identify those brokers who provide it with research
products or services and the value of such products or services,
and Stein Roe endeavors to direct sufficient commissions on client
transactions (including commissions on transactions in fixed
income securities effected on an agency basis and, in the case of
transactions for certain types of clients, dealer selling
concessions on new issues of securities) to ensure the continued
receipt of research products or services Stein Roe believes are
useful.
In a few instances, Stein Roe receives from a broker a
product or service which is used by Stein Roe both for investment
research and for administrative, marketing, or other non-research
or brokerage purposes. In such an instance, Stein Roe makes a
good faith effort to determine the relative proportion of its use
of such product or service which is for investment research or
brokerage, and that portion of the cost of obtaining such product
or service may be defrayed through brokerage commissions generated
by client transactions, while the remaining portion of the costs
of obtaining the product or service is paid by Stein Roe in cash.
Stein Roe may also receive research in connection with selling
concessions and designations in fixed income offerings.
The Funds and the Portfolios do not believe they pay
brokerage commissions higher than those obtainable from other
brokers in return for research or brokerage products or services
provided by brokers. Research or brokerage products or services
provided by brokers may be used by Stein Roe in servicing any or
all of its clients and such research products or services may not
necessarily be used by Stein Roe in connection with client
accounts which paid commissions to the brokers providing such
products or services.
The table below shows information on brokerage commissions
paid by the Portfolios:
Growth Growth
Stock Investor
Portfolio Portfolio
--------- ---------
Total amount of brokerage commissions paid
during the fiscal year ended 9/30/98 $562,354 $807,008
Amount of commissions paid to brokers or
dealers who supplied research services
to Stein Roe 479,454 731,886
Total dollar amount involved in such
transactions (000 omitted) 450,572 476,833
Amount of commissions paid to brokers or
dealers that were allocated to such
brokers or dealers by the portfolio
manager because of research services
provided to the Portfolio 19,000 131,103
Total dollar amount involved in such
transactions (000 omitted) 18,693 88,249
Total amount of brokerage commissions paid
from inception to 9/30/97 178,057 298,009
The Trust and SR&F Base Trust have arranged for the custodian
to act as a soliciting dealer to accept any fees available to the
custodian as a soliciting dealer in connection with any tender
offer for portfolio securities. The custodian will credit any
such fees received against its custodial fees. In addition, the
Board of Trustees has reviewed the legal developments pertaining
to and the practicability of attempting to recapture underwriting
discounts or selling concessions when portfolio securities are
purchased in underwritten offerings. However, the Board has been
advised by counsel that recapture by a mutual fund currently is
not permitted under the Rules of the Association of the National
Association of Securities Dealers.
During the last fiscal year, the Portfolios held securities
issued by one or more of their regular broker-dealers or the
parent of such broker-dealers that derive more than 15% of gross
revenue from securities-related activities. Such holdings were as
follows at Sept. 30, 1998:
Value of
Securities Held
Portfolio Security (in thousands)
- ---------------- ----------------------------- --------------
Growth Stock
Portfolio Associates Corp. of North America $38,635
Travelers Group 18,750
Growth Investor
Portfolio Associates Corp. of North America 35,775
Travelers Group 9,375
ADDITIONAL INCOME TAX CONSIDERATIONS
The Funds and Portfolios intend to qualify under Subchapter M
of the Internal Revenue Code and to comply with the special
provisions of the Internal Revenue Code that relieve it of federal
income tax to the extent of its net investment income and capital
gains currently distributed to shareholders.
Because dividend and capital gains distributions reduce net
asset value, a shareholder who purchases shares shortly before a
record date will, in effect, receive a return of a portion of his
investment in such distribution. The distribution would
nonetheless be taxable to him, even if the net asset value of
shares were reduced below his cost. However, for federal income
tax purposes the shareholder's original cost would continue as his
tax basis.
The Funds expect that less than 100% of their dividends will
qualify for the deduction for dividends received by corporate
shareholders.
A Portfolio may purchase the securities of certain foreign
investment funds or trusts called passive foreign investment
companies ("PFICs"). In addition to bearing their proportionate
share of the Fund's expenses (management fees and operating
expenses), shareholders will also indirectly bear similar expenses
of PFICs. Capital gains on the sale of PFIC holdings will be
deemed to be ordinary income regardless of how long the Portfolio
holds its investment. In addition, the Portfolio may be subject
to corporate income tax and an interest charge on certain
dividends and capital gains earned from PFICs, regardless of
whether such income and gains are distributed to shareholders.
In accordance with tax regulations, the Portfolios intend to
treat securities of PFICs as sold on the last day of its fiscal
year and recognize any gains for tax purposes at that time; losses
will not be recognized. Such gains will be considered ordinary
income which it will be required to distribute even though it has
not sold the security and received cash to pay such distributions.
INVESTMENT PERFORMANCE
The Funds may quote certain total return figures from time to
time. A "Total Return" on a per class share basis is the amount
of dividends distributed per class share plus or minus the change
in the net asset value per class share for a period. A "Total
Return Percentage" may be calculated by dividing the value of a
share of a particular class of shares at the end of a period 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 computed by finding the average annual compounded
rate that would equate a hypothetical initial amount invested of
$1,000 to the ending redeemable value.
n
Average Annual Total Return is computed as follows: ERV = P(1+T)
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period at the
end of the period (or fractional portion).
Each Fund commenced operations on February 14, 1997. Classes
A, B and C of Advisor Growth Stock Fund commenced operations on
Oct. 15, 1997, and Class A of Advisor Young Investor Fund
commenced operations on January 26, 1998. The historical
performance of Class A shares of the Fund prior to commencement of
operations is based on the performance of the Portfolio, restated
to reflect the sales charges, 12b-1 fees and other expenses set
forth in the fee table, without giving effect to any Class A share
fee reimbursements, and assuming reinvestment of dividends and
capital gains. The Fund's performance results since commencement
of operations include any expense reduction arrangements. If
these arrangements were not in place, then the performance results
would have been lower. Any reduction arrangements may be
discontinued at any time. As with all mutual funds, past
performance does not predict the Fund's future performance.
Average annual returns as of Sept. 30, 1998, were as follows:
Advisor Growth Stock Fund 1 year 5 years 10 years
Class A with sales charge of 5.75% -0.40% 15.72% 15.77%
Class A without sales charge 5.67 17.10 16.46
Class B with applicable CDSC -0.07 16.05 15.19
Class B without applicable CDSC 4.93 16.27 15.19
Class C with applicable CDSC 3.75 16.23 15.62
Class C without CDSC 4.75 16.23 15.62
Class K 5.33 17.06 16.47
Advisor Young Investor Fund 1 year Since Inception
Class A with applicable CDSC -2.88% 22.12%
Class A without applicable CDSC -0.88 22.12
Class K -0.62 22.28
Investment performance figures assume reinvestment of all
dividends and distributions and do not take into account any
federal, state, or local income taxes which shareholders must pay
on a current basis. The performance of a Fund is a result of
conditions in the securities markets, portfolio management, and
operating expenses. Although investment performance information
is useful in reviewing a Fund's performance and in providing some
basis for comparison with other investment alternatives, it should
not be used for comparison with other investments using different
reinvestment assumptions or time periods.
A Fund may note its mention or recognition in newspapers,
magazines, or other media from time to time. However, the Trust
assumes no responsibility for the accuracy of such data.
Newspapers and magazines which might mention the Funds include,
but are not limited to, the following:
Architectural Digest
Arizona Republic
Atlanta Constitution
Atlantic Monthly
Associated Press
Barron's
Bloomberg
Boston Globe
Boston Herald
Business Week
Chicago Tribune
Chicago Sun-Times
Cleveland Plain Dealer
CNBC
CNN
Crain's Chicago Business
Consumer Reports
Consumer Digest
Dow Jones Investment Advisor
Dow Jones Newswire
Fee Advisor
Financial Planning
Financial World
Forbes
Fortune
Fund Action
Fund Marketing Alert
Gourmet
Individual Investor
Investment Dealers' Digest
Investment News
Investor's Business Daily
Kiplinger's Personal Finance Magazine
Knight-Ridder
Lipper Analytical Services
Los Angeles Times
Louis Rukeyser's Wall Street
Money
Money on Line
Morningstar
Mutual Fund Market News
Mutual Fund News Service
Mutual Funds Magazine
Newsday
Newsweek
New York Daily News
The New York Times
No-Load Fund Investor
Pension World
Pensions and Investment
Personal Investor
Physicians Financial News
Jane Bryant Quinn (syndicated column)
Reuters
The San Francisco Chronicle
Securities Industry Daily
Smart Money
Smithsonian
Strategic Insight
Street.com
Time
Travel & Leisure
USA Today
U.S. News & World Report
Value Line
The Wall Street Journal
The Washington Post
Working Women
Worth
Your Money
In advertising and sales literature, a Fund may compare its
performance with that of other mutual funds, indexes or averages
of other mutual funds, indexes of related financial assets or
data, and other competing investment and deposit products
available from or through other financial institutions. The
composition of these indexes or averages differs from that of the
Funds. Comparison of a Fund to an alternative investment should
be made with consideration of differences in features and expected
performance. All of the indexes and averages noted below will be
obtained from the indicated sources or reporting services, which
the Trust believes to be generally accurate. A Fund may compare
its performance to the Consumer Price Index (All Urban), a widely
recognized measure of inflation. The performance of the Funds may
be compared to the following indexes or averages:
Dow-Jones Industrial Average New York Stock Exchange
Composite Index
Standard & Poor's 500 Stock Index American Stock Exchange
Composite Index
Standard & Poor's 400 Industrials NASDAQ Composite
Wilshire 5000 NASDAQ Industrials
(These indexes are widely (These indexes generally reflect
recognized indicators of the performance of stocks
general U.S. stock market traded in the indicated
results.) markets.)
In addition, a Fund may compare its performance to the
indicated benchmarks:
In addition, a Fund may compare its performance to the
indicated benchmarks:
Benchmark Fund(s)
Lipper Equity Fund Average Both Funds
Lipper General Equity Fund Average Both Funds
Lipper Growth Fund Average Both Funds
Lipper Growth Fund Index Both Funds
Morningstar All Equity Funds Average Advisor Young Investor Fund
Morningstar Domestic Stock Average Both Funds
Morningstar Equity Fund Average Advisor Young Investor Fund
Morningstar General Equity Average Advisor Young Investor Fund
Morningstar Growth Fund Average Both Funds
Morningstar Hybrid Fund Average Advisor Young Investor Fund
Morningstar Total Fund Average Both Funds
Morningstar U.S. Diversified Average Advisor Young Investor Fund
Lipper Growth Fund Index reflects the net asset value
weighted total return of the largest thirty growth funds and
thirty growth and income funds, respectively, as calculated and
published by Lipper. The Lipper and Morningstar averages are
unweighted averages of total return performance of mutual funds as
classified, calculated, and published by these independent
services that monitor the performance of mutual funds. A Fund may
also use comparative performance as computed in a ranking by
Lipper or category averages and rankings provided by another
independent service. Should Lipper or another service reclassify
a Fund to a different category or develop (and place it into) a
new category, the Fund may compare its performance or ranking with
those of other funds in the newly assigned category, as published
by the service.
A Fund may also cite its rating, recognition, or other
mention by Morningstar or any other entity. Morningstar's rating
system is based on risk-adjusted total return performance and is
expressed in a star-rating format. The risk-adjusted number is
computed by subtracting a fund's risk score (which is a function
of the fund's monthly returns less the 3-month T-bill return) from
its load-adjusted total return score. This numerical score is
then translated into rating categories, with the top 10% labeled
five star, the next 22.5% labeled four star, the next 35% labeled
three star, the next 22.5% labeled two star, and the bottom 10%
one star. A high rating reflects either above-average returns or
below-average risk, or both.
Of course, past performance is not indicative of future
results.
____________________
To illustrate the historical returns on various types of
financial assets, a Fund may use historical data provided by
Ibbotson Associates, Inc. ("Ibbotson"), a Chicago-based investment
firm. Ibbotson constructs (or obtains) very long-term (since
1926) total return data (including, for example, total return
indexes, total return percentages, average annual total returns
and standard deviations of such returns) for the following asset
types:
Common stocks
Small company stocks
Long-term corporate bonds
Long-term government bonds
Intermediate-term government bonds
U.S. Treasury bills
Consumer Price Index
_____________________
Dollar Cost Averaging. Dollar cost averaging is an
investment strategy that requires investing a fixed amount of
money in Fund shares at set intervals. This allows you to
purchase more shares when prices are low and fewer shares when
prices are high. Over time, this tends to lower your average cost
per share. Like any investment strategy, dollar cost averaging
can't guarantee a profit or protect against losses in a steadily
declining market. Dollar cost averaging involves uninterrupted
investing regardless of share price and therefore may not be
appropriate for every investor.
MASTER FUND/FEEDER FUND: STRUCTURE AND RISK FACTORS
Each Fund (each a series of the Trust, an open-end management
investment company) seeks to achieve its objective by investing
all of its assets in another mutual fund having an investment
objective identical to that of the Fund. The shareholders of each
Fund approved this policy of permitting a Fund to act as a feeder
fund by investing in a Portfolio. Please refer to Investment
Policies, Portfolio Investments and Strategies, and Investment
Restrictions for a description of the investment objectives,
policies, and restrictions of the Funds and the Portfolios. The
management fees and expenses of the Funds and the Portfolios are
described under Investment Advisory and Other Services. Each
feeder Fund bears its proportionate share of the expenses of its
master Portfolio.
Stein Roe has provided investment management services in
connection with other mutual funds employing the master
fund/feeder fund structure since 1991.
Each 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
Aug. 23, 1993. The Declaration of Trust of Base Trust provides
that a Fund and other investors in a Portfolio will be liable for
all obligations of that Portfolio that are not satisfied by the
Portfolio. However, the risk of a Fund incurring financial loss
on account of such liability is limited to circumstances in which
liability was inadequately insured and a Portfolio was unable to
meet its obligations. Accordingly, the trustees of the Trust
believe that neither the Funds nor their shareholders will be
adversely affected by reason of a Fund's investing in a Portfolio.
The Declaration of Trust of Base Trust provides that a
Portfolio will terminate 120 days after the withdrawal of a Fund
or any other investor in the Portfolio, unless the remaining
investors vote to agree to continue the business of the Portfolio.
The trustees of the Trust may vote a Fund's interests in a
Portfolio for such continuation without approval of the Fund's
shareholders.
The common investment objectives of the Funds and the
Portfolios are nonfundamental and may be changed without
shareholder approval, subject, however, to at least 30 days'
advance written notice to a Fund's shareholders.
The fundamental policies of each Fund and the corresponding
fundamental policies of its master Portfolio can be changed only
with shareholder approval. If a Fund, as a Portfolio investor, is
requested to vote on a change in a fundamental policy of a
Portfolio or any other matter pertaining to the Portfolio (other
than continuation of the business of the Portfolio after
withdrawal of another investor), the Fund will solicit proxies
from its shareholders and vote its interest in the Portfolio for
and against such matters proportionately to the instructions to
vote for and against such matters received from Fund shareholders.
A Fund will vote shares for which it receives no voting
instructions in the same proportion as the shares for which it
receives voting instructions. 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 investors in a
Portfolio. If other investors hold a majority interest in a
Portfolio, they could have voting control over that Portfolio.
In the event that a Portfolio's fundamental policies were
changed so as to be inconsistent with those of the corresponding
Fund, the Board of Trustees of the Trust would consider what
action might be taken, including changes to the Fund's fundamental
policies, withdrawal of the Fund's assets from the Portfolio and
investment of such assets in another pooled investment entity, or
the retention of an investment adviser to invest those assets
directly in a portfolio of securities. Any of these actions would
require the approval of a Fund's shareholders. A 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 a Fund's assets could result in a
distribution in kind of portfolio securities (as opposed to a cash
distribution) to the Fund. Should such a distribution occur, the
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 the Fund and could affect the liquidity of the
Fund.
Each investor in a Portfolio, including a Fund, may add to or
reduce its investment in the Portfolio on each day the NYSE is
open for business. The investor's percentage of the aggregate
interests in the 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 the 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 the
Portfolio effected on such day; and (ii) the denominator of which
is the aggregate beginning of the day net asset value of the
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 the Portfolio by all investors in the Portfolio.
The percentage so determined will then be applied to determine the
value of the investor's interest in the Portfolio as of the close
of business.
Base Trust may permit other investment companies and/or other
institutional investors to invest in a Portfolio, but members of
the general public may not invest directly in the Portfolio.
Other investors in a Portfolio are not required to sell their
shares at the same public offering price as a Fund, might incur
different administrative fees and expenses than the Fund, and
might charge a sales commission. Therefore, Fund shareholders
might have different investment returns than shareholders in
another investment company that invests exclusively in a
Portfolio. Investment by such other investors in a Portfolio
would provide funds for the purchase of additional portfolio
securities and would tend to reduce the operating expenses as a
percentage of the Portfolio's net assets. Conversely, large-scale
redemptions by any such other investors in a Portfolio could
result in untimely liquidations of the Portfolio's security
holdings, loss of investment flexibility, and increases in the
operating expenses of the Portfolio as a percentage of its net
assets. As a result, a Portfolio's security holdings may become
less diverse, resulting in increased risk.
Information regarding other investors in a Portfolio may be
obtained by writing to SR&F Base Trust at Suite 3200, One South
Wacker Drive, Chicago, IL 60606, or by calling 800-338-2550.
Stein Roe may provide administrative or other services to one or
more of such investors.
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, Stein Roe believes that the quality of debt
securities 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 which 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 of corporate debt securities used by Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's Corporation
("S&P").
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.
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.
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