<PAGE> 1
File No. 333-13331
Rule 497(c)
STEIN ROE
INSTITUTIONAL MUTUAL FUNDS
Prospectus
January 2, 1997
Institutional High Yield Fund
[STEIN ROE MUTUAL FUNDS LOGO]
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PROSPECTUS
STEIN ROE INSTITUTIONAL HIGH YIELD FUND
Institutional High Yield Fund seeks total return by investing
for a high level of current income and capital growth.
Institutional High Yield Fund seeks to achieve its objective by
investing all of its net investable assets in shares of SR&F
High Yield Portfolio, a portfolio of SR&F Base Trust that has
the same investment objective and substantially the same
investment policies as Institutional High Yield Fund. High
Yield Portfolio invests primarily in high-yield, high-risk
medium- and lower-quality debt securities. LOWER-QUALITY
SECURITIES, COMMONLY KNOWN AS "JUNK BONDS," ARE SUBJECT TO A
GREATER RISK WITH REGARD TO PAYMENT OF INTEREST AND RETURN OF
PRINCIPAL THAN HIGHER-RATED BONDS. INVESTORS SHOULD CAREFULLY
CONSIDER THE RISKS ASSOCIATED WITH JUNK BONDS BEFORE INVESTING.
(SEE INVESTMENT POLICIES, RISKS AND INVESTMENT CONSIDERATIONS,
SPECIAL CONSIDERATIONS REGARDING MASTER FUND/FEEDER FUND
STRUCTURE, AND APPENDIX.)
Institutional High Yield Fund is a "no-load" fund. There are no
sales or redemption charges, and the Fund has no 12b-1 plan.
Institutional High Yield Fund is a series of the Stein Roe
Institutional Trust and High Yield Portfolio is a series of SR&F
Base Trust. Each Trust is a diversified open-end management
investment company.
Shares of Institutional High Yield Fund are available primarily
through Intermediaries who provide accounting, recordkeeping,
and other services to investors and who hold Fund shares in
omnibus accounts for their clients. (See How to Purchase
Shares.)
This prospectus contains information you should know before
investing in Institutional High Yield Fund. Please read it
carefully and retain it for future reference.
A Statement of Additional Information dated January 2, 1997,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. The
Statement of Additional Information may be obtained without
charge by writing to Stein Roe Funds, Suite 3200, One South
Wacker Drive, Chicago, Illinois 60606, or by calling Stein Roe
Advisor and Dealer Services at 800-322-0593.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this prospectus is January 2, 1997.
TABLE OF CONTENTS
Page
Summary.................................2
Fee Table ..............................4
The Fund................................5
Investment Policies.....................6
Portfolio Investments and Strategies....8
Investment Restrictions ...............14
Risks and Investment Considerations ...15
How to Purchase Shares.................16
How to Redeem Shares ..................17
Net Asset Value .......................17
Distributions and Income Taxes.........18
Investment Return......................19
Management ............................20
Organization and Description of Shares.22
Special Considerations Regarding the
Master Fund/Feeder Fund Structure....23
For More Information ..................26
Appendix...............................27
SUMMARY
Stein Roe Institutional High Yield Fund ("Institutional High
Yield Fund") is a series of the Stein Roe Institutional Trust,
an open-end diversified management investment company organized
as a Massachusetts business trust. Institutional High Yield
Fund offers institutional investors the advantage of a "no-load"
fund, with Stein Roe & Farnham Incorporated and its affiliates
providing customized services as investment adviser,
administrator, transfer agent, and distributor. (See The Fund
and Organization and Description of Shares.) This prospectus is
not a solicitation in any jurisdiction in which shares of
Institutional High Yield Fund are not qualified for sale.
INVESTMENT OBJECTIVES AND POLICIES. Institutional High Yield
Fund invests all of its net investable assets in SR&F High Yield
Portfolio ("High Yield Portfolio"). High Yield Portfolio
invests in a diversified portfolio of securities in accordance
with the identical investment objective and substantially the
same investment policies as those of Institutional High Yield
Fund. High Yield Portfolio seeks total return by investing for
a high level of current income and capital growth. High Yield
Portfolio invests primarily in high-yield, high-risk medium- and
lower-quality debt securities. Medium-quality debt securities,
although considered investment grade, may have some speculative
characteristics. Lower-quality debt securities are obligations
of issuers that are considered predominantly speculative with
respect to the issuer's capacity to pay interest and repay
principal according to the terms of the obligation and,
therefore, carry greater investment risk, including the
possibility of issuer default and bankruptcy, and are commonly
referred to as "junk bonds."
For a more detailed discussion of the investment objectives and
policies, please see Investment Policies and Portfolio
Investments and Strategies. There is, of course, no assurance
that Institutional High Yield Fund will achieve its investment
objective.
INVESTMENT RISKS. The risks inherent in Institutional High
Yield Fund depend primarily upon the term and quality of the
obligations in the investment portfolio of High Yield Portfolio,
as well as on market conditions. Interest rate fluctuations
will affect the Fund's net asset value and, therefore, the total
return from an investment in Institutional High Yield Fund.
Interest rate fluctuations will affect income on variable rate
securities and on securities purchased as other portfolio
securities mature. Since yields on debt securities available
for purchase vary over time, no specific yield on shares of
Institutional High Yield Fund can be assured. Institutional
High Yield Fund is designed for investors who can accept the
heightened level of risk and principal fluctuation inherent in a
portfolio that invests at least 65% of its assets in medium- and
lower-quality debt securities. High Yield Portfolio may invest
in foreign securities, which may entail a greater degree of risk
than investing in securities of domestic issuers. Please see
Investment Restrictions and Risks and Investment Considerations
for further information.
PURCHASES AND REDEMPTIONS. Fund shares are available primarily
through pension plan administrators, broker-dealers, or other
intermediaries (each an "Intermediary"), who provide accounting,
recordkeeping, and other services to investors and who hold Fund
shares in omnibus accounts for their clients. For additional
information on purchasing (buying) and redeeming (selling)
shares, see How to Purchase Shares and How to Redeem Shares.
DISTRIBUTIONS. Dividends are declared each business day and are
paid monthly. Dividends will be reinvested in additional shares
of Institutional High Yield Fund unless the Intermediary holding
the omnibus account elects to receive them in cash. (See
Distributions and Income Taxes.)
MANAGEMENT AND FEES. Stein Roe & Farnham Incorporated (the
"Adviser") is investment adviser to High Yield Portfolio. In
addition, it provides administrative services to Institutional
High Yield Fund and High Yield Portfolio. For a description of
the Adviser and its fees, see Management.
FEE TABLE
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases.....................None
Sales Load Imposed on Reinvested Dividends..........None
Deferred Sales Load.................................None
Redemption Fees.....................................None
Exchange Fees.......................................None
ANNUAL FUND OPERATING EXPENSES (after fee
waiver; as a percentage of average net assets)
Management and Administrative Fees
(after fee waiver)...............................0.50%
12b-1 Fees..........................................None
Other Expenses......................................0.25%
-----
Total Fund Operating Expenses (after fee waiver)....0.75%
=====
EXAMPLE.
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return; and (2) redemption at the end of
each time period:
1 year 3 years
------ --------
$8 $24
The purpose of the Fee Table is to assist you in understanding
the various costs and expenses that you will bear directly or
indirectly as an investor in Institutional High Yield Fund.
Because Institutional High Yield Fund has no operating history,
the information in the table is based upon an estimate of
expenses, assuming net assets of $50 million. The figures
assume that the percentage amounts listed under Annual Fund
Operating Expenses remain the same during each of the periods
and that all income dividends and capital gain distributions are
reinvested in additional Fund shares.
From time to time, the Adviser may voluntarily waive a portion
of its fees payable by Institutional High Yield Fund and the
Fund's pro rata share of the fees payable by High Yield
Portfolio. The Adviser has agreed to voluntarily waive such
fees to the extent the ordinary operating expenses of
Institutional High Yield Fund exceed 0.75% of its annual average
net assets. This commitment expires on October 31, 1999,
subject to earlier review and possible termination by the
Adviser on 30 days' notice to the Fund. Absent such expense
undertaking, the estimated Management and Administrative Fees
and Total Fund Operating Expenses would be 0.65% and 1.03%,
respectively. Any such reimbursement will lower Institutional
High Yield Fund's overall expense ratio and increase its
overall return to investors. (Also see Management--Fees and
Expenses.)
Institutional High Yield Fund pays the Adviser an administrative
fee based on its average daily net assets and High Yield
Portfolio pays the Adviser a management fee based on its average
daily net assets. The Fee Table summarizes the expenses of both
Institutional High Yield Fund and High Yield Portfolio. Fees
and expenses are described under Management. Institutional High
Yield Fund bears its proportionate share of Portfolio expenses.
The Trustees of Institutional Trust have considered whether the
annual operating expenses of Institutional High Yield Fund,
including its proportionate share of the expenses of High Yield
Portfolio, would be more or less than if Institutional High
Yield Fund invested directly in the securities held by High
Yield Portfolio, and concluded that Institutional High Yield
Fund's expenses would not be materially greater in such case.
The figures in the Example are not necessarily indicative of
past or future expenses, and actual expenses may be greater or
less than those shown. Although information such as that shown
in the Example and Fee Table is useful in reviewing
Institutional High Yield Fund's expenses and in providing a
basis for comparison with other mutual funds, it should not be
used for comparison with other investments using different
assumptions or time periods.
THE FUND
STEIN ROE INSTITUTIONAL HIGH YIELD FUND ("Institutional High
Yield Fund") is a no-load, diversified "mutual fund."
Institutional High Yield Fund does not impose commissions or
charges when shares are purchased or redeemed. Institutional
High Yield Fund is a series of the Stein Roe Institutional Trust
("Institutional Trust"), an open-end management investment
company, which is authorized to issue shares of beneficial
interest in separate series.
Stein Roe & Farnham Incorporated (the "Adviser") provides
portfolio management services to High Yield Portfolio and
administrative services to Institutional High Yield Fund and
High Yield Portfolio.
Rather than invest in securities directly, Institutional High
Yield Fund seeks to achieve its investment objective by using
the "master fund/feeder fund" structure. Under that structure,
Institutional High Yield Fund and other investment companies
and/or institutional investors with the same investment
objective invest their assets in another investment company
having the same investment objective and substantially the same
investment policies and restrictions as Institutional High Yield
Fund. The purpose of such an arrangement is to achieve greater
operational efficiencies and reduce costs. Institutional High
Yield Fund invests all of its net investable assets in shares of
SR&F High Yield Portfolio ("High Yield Portfolio"), which is a
series of SR&F Base Trust ("Base Trust"). (See Special
Considerations Regarding Master Fund/Feeder Fund Structure.)
INVESTMENT POLICIES
Institutional High Yield Fund and High Yield Portfolio each seek
total return by investing for a high level of current income and
capital growth. Further information on portfolio investments
and strategies may be found under Portfolio Investments and
Strategies in this prospectus and in the Statement of Additional
Information. Institutional High Yield Fund seeks to achieve its
objective by investing all of its assets in High Yield
Portfolio. The investment policies of High Yield Portfolio are
substantially identical to those of Institutional High Yield
Fund.
High Yield Portfolio invests principally in high-yield, high-
risk medium- and lower-quality debt securities. The medium- and
lower-quality debt securities in which High Yield Portfolio will
invest normally offer a current yield or yield to maturity that
is significantly higher than the yield from securities rated in
the three highest categories assigned by rating services such as
Standard & Poor's Corporation ("S&P") and by Moody's Investors
Service, Inc. ("Moody's").
Under normal circumstances, at least 65% of High Yield
Portfolio's assets will be invested in high-yield, high-risk
medium- and lower-quality debt securities rated lower than Baa
by Moody's or lower than BBB by S&P, or equivalent ratings as
determined by other rating agencies, or unrated securities that
the Adviser determines to be of comparable quality. Medium-
quality debt securities, although considered investment grade,
have some speculative characteristics. Lower-quality debt
securities are obligations of issuers that are considered
predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal according to the terms of
the obligation and, therefore, carry greater investment risk,
including the possibility of issuer default and bankruptcy, and
are commonly referred to as "junk bonds." Some issuers of debt
securities choose not to have their securities rated by a rating
service, and High Yield Portfolio may invest in unrated
securities that the Adviser has researched thoroughly and
believes are suitable for investment. High Yield Portfolio may
invest in debt obligations that are in default, but such
obligations are not expected to exceed 10% of High Yield
Portfolio's assets.
High Yield Portfolio may invest up to 35% of its total assets in
other securities including, but not limited to, pay-in-kind
bonds, securities issued in private placements, bank loans, zero
coupon bonds, foreign securities, convertible securities,
futures, and options. High Yield Portfolio may also invest in
higher-quality debt securities. Under normal market conditions,
however, High Yield Portfolio is unlikely to emphasize higher-
quality debt securities since generally they offer lower yields
than medium- and lower-quality debt securities with similar
maturities. High Yield Portfolio may also invest in common
stocks and securities that are convertible into common stocks,
such as warrants.
Investment in medium- or lower-quality debt securities involves
greater investment risk, including the possibility of issuer
default or bankruptcy. High Yield Portfolio seeks to reduce
investment risk through diversification, credit analysis, and
evaluation of developments in both the economy and financial
markets.
An economic downturn could severely disrupt the high-yield
market and adversely affect the value of outstanding bonds and
the ability of the issuers to repay principal and interest. In
addition, lower-quality bonds are less sensitive to interest
rate changes than higher-quality instruments (see Risks and
Investment Considerations) and generally are more sensitive to
adverse economic changes or individual corporate developments.
During a period of adverse economic changes, including a period
of rising interest rates, issuers of such bonds may experience
difficulty in servicing their principal and interest payment
obligations.
Achievement of the investment objective will be more dependent
on the Adviser's credit analysis than would be the case if High
Yield Portfolio were investing in higher-quality debt
securities. Since the ratings of rating services (which
evaluate the safety of principal and interest payments, not
market risks) are used only as preliminary indicators of
investment quality, the Adviser employs its own credit research
and analysis, from which it has developed a proprietary credit
rating system based upon comparative credit analyses of issuers
within the same industry. These analyses may take into
consideration such quantitative factors as an issuer's present
and potential liquidity, profitability, internal capability to
generate funds, debt/equity ratio and debt servicing
capabilities, and such qualitative factors as an assessment of
management, industry characteristics, accounting methodology,
and foreign business exposure.
Lower-quality debt securities are obligations of issuers that
are considered predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal according
to the terms of the obligation and, therefore, carry greater
investment risk, including the possibility of issuer default and
bankruptcy, and are commonly referred to as "junk bonds." The
lowest rating assigned by Moody's is for bonds that can be
regarded as having extremely poor prospects of ever attaining
any real investment standing.
Medium- and lower-quality debt securities tend to be less
marketable than higher-quality debt securities because the
market for them is less broad. The market for unrated debt
securities is even narrower. During periods of thin trading in
these markets, the spread between bid and asked prices is likely
to increase significantly, and High Yield Portfolio may have
greater difficulty selling its portfolio securities. (See Net
Asset Value.) The market value of these securities and their
liquidity may be affected by adverse publicity and investor
perceptions.
PORTFOLIO INVESTMENTS AND STRATEGIES
FOREIGN SECURITIES. High Yield Portfolio may invest in foreign
securities, but will not invest in a foreign security if, as a
result of such investment, more than 25% of its total assets
would be invested in foreign securities. For purposes of this
restriction, foreign debt securities do not include securities
represented by American Depositary Receipts ("ADRs"), foreign
debt securities denominated in U.S. dollars, or securities
guaranteed by a U.S. person such as a corporation domiciled in
the United States that is a parent or affiliate of the issuer of
the securities being guaranteed. High Yield Portfolio may
invest in sponsored or unsponsored ADRs. In addition to, or in
lieu of, such direct investment, High Yield Portfolio may
construct a synthetic foreign position by (a) purchasing a debt
instrument denominated in one currency, generally U.S. dollars;
and (b) concurrently entering into a forward contract to deliver
a corresponding amount of that currency in exchange for a
different currency on a future date and at a specified rate of
exchange. Because of the availability of a variety of highly
liquid U.S. dollar debt instruments, a synthetic foreign
position utilizing such U.S. dollar instruments may offer
greater liquidity than direct investment in foreign currency
debt instruments. In connection with the purchase of foreign
securities, High Yield Portfolio may contract to purchase an
amount of foreign currency sufficient to pay the purchase price
of the securities at the settlement date. (See Risks and
Investment Considerations.)
DERIVATIVES. Consistent with its objective, High Yield
Portfolio may invest in a broad array of financial instruments
and securities, including conventional exchange-traded and non-
exchange traded options, futures contracts, futures options,
securities collateralized by underlying pools of mortgages or
other receivables, and other instruments, the value of which is
"derived" from the performance of an underlying asset or a
"benchmark" such as a security index, an interest rate, or a
currency ("Derivatives"). High Yield Portfolio does not expect
to invest more than 5% of its net assets in any type of
Derivative except: options, futures contracts, and futures
options.
Derivatives are most often used to manage investment risk or to
create an investment position indirectly because they are more
efficient or less costly than direct investment. They also may
be used in an effort to enhance portfolio returns.
The successful use of Derivatives depends on the Adviser's
ability to correctly predict changes in the levels and
directions of movements in security prices, interest rates and
other market factors affecting the Derivative itself or the
value of the underlying asset or benchmark. In addition,
correlations in the performance of an underlying asset to a
Derivative may not be well established. Finally, privately
negotiated and over-the-counter Derivatives may not be as well
regulated and may be less marketable than exchange-traded
Derivatives. For additional information on Derivatives, please
refer to the Statement of Additional Information.
MORTGAGE AND OTHER ASSET-BACKED DEBT SECURITIES. High Yield
Portfolio may invest in securities secured by mortgages or other
assets such as automobile or home improvement loans and credit
card receivables. These instruments may be issued or guaranteed
by the U.S. Government or by its agencies or instrumentalities
or by private entities such as commercial, mortgage and
investment banks and financial companies or financial
subsidiaries of industrial companies.
Securities issued by GNMA represent an interest in a pool of
mortgages insured by the Federal Housing Administration or the
Farmers Home Administration, or guaranteed by the Veterans
Administration. Securities issued by FNMA and FHLMC, U.S.
Government-sponsored corporations, also represent an interest in
a pool of mortgages.
The timely payment of principal and interest on GNMA securities
is guaranteed by GNMA and backed by the full faith and credit of
the U.S. Treasury. FNMA guarantees full and timely payment of
interest and principal on FNMA securities. FHLMC guarantees
timely payment of interest and ultimate collection of principal
on FHLMC securities. FNMA and FHLMC securities are not backed
by the full faith and credit of the U.S. Treasury.
Mortgage-backed debt securities, such as those issued by GNMA,
FNMA, and FHLMC, are of the "modified pass-through type," which
means the interest and principal payments on mortgages in the
pool are "passed through" to investors. During periods of
declining interest rates, there is increased likelihood that
mortgages will be prepaid, with a resulting loss of the full-
term benefit of any premium paid by High Yield Portfolio on
purchase of such securities; in addition, the proceeds of
prepayment would likely be invested at lower interest rates.
Mortgage-backed securities provide either a pro rata interest in
underlying mortgages or an interest in collateralized mortgage
obligations ("CMOs"), which represent a right to interest and/or
principal payments from an underlying mortgage pool. CMOs are
not guaranteed by either the U.S. Government or by its agencies
or instrumentalities and are usually issued in multiple classes,
each of which has different payment rights, pre-payment risks,
and yield characteristics. Mortgage-backed securities involve
the risk of pre-payment of the underlying mortgages at a faster
or slower rate than the established schedule. Pre-payments
generally increase with falling interest rates and decrease with
rising rates, but they also are influenced by economic, social,
and market factors. If mortgages are pre-paid during periods of
declining interest rates, there would be a resulting loss of the
full-term benefit of any premium paid by High Yield Portfolio on
purchase of the CMO, and the proceeds of pre-payment would
likely be invested at lower interest rates. High Yield
Portfolio tends to invest in CMOs of classes known as planned
amortization classes ("PACs") which have pre-payment protection
features tending to make them less susceptible to price
volatility.
Non-mortgage asset-backed securities usually have less pre-
payment risk than mortgage-backed securities, but have the risk
that the collateral will not be available to support payments on
the underlying loans which finance payments on the securities
themselves. Therefore, greater emphasis is placed on the credit
quality of the security issuer and the guarantor, if any.
Asset-backed securities tend to experience greater price
volatility than straight debt securities.
FLOATING RATE INSTRUMENTS. High Yield Portfolio may also invest
in floating rate instruments which provide for periodic
adjustments in coupon interest rates that are automatically
reset based on changes in amount and direction of specified
market interest rates. In addition, the adjusted duration of
some of these instruments may be materially shorter than their
stated maturities. To the extent such instruments are subject
to lifetime or periodic interest rate caps or floors, such
instruments may experience greater price volatility than debt
instruments without such features. Adjusted duration is an
inverse relationship between market price and interest rates and
refers to the approximate percentage change in price for a 100
basis point change in yield. For example, if interest rates
decrease by 100 basis points, a market price of a security with
an adjusted duration of 2 would increase by approximately 2%.
High Yield Portfolio does not intend to invest more than 5% of
its net assets in floating rate instruments.
FUTURES AND OPTIONS. High Yield Portfolio may purchase and
write both call options and put options on securities, indexes
and foreign currencies, and enter into interest rate, index and
foreign currency futures contracts. High Yield Portfolio may
also write options on such futures contracts and purchase other
types of forward or investment contracts linked to individual
securities, indexes or other benchmarks, consistent with its
investment objective, in order to provide additional revenue,
or to hedge against changes in security prices, interest rates,
or currency fluctuations. High Yield Portfolio may write a call
or put option only if the option is covered. As the writer of a
covered call option, High Yield Portfolio foregoes, during the
option's life, the opportunity to profit from increases in
market value of the security covering the call option above the
sum of the premium and the exercise price of the call. There
can be no assurance that a liquid market will exist when High
Yield Portfolio seeks to close out a position. Because of low
margin deposits required, the use of futures contracts involves
a high degree of leverage, and may result in losses in excess of
the amount of the margin deposit.
LENDING OF PORTFOLIO SECURITIES. Subject to certain
restrictions, High Yield Portfolio may lend portfolio securities
to broker-dealers and banks. Any such loan must be continuously
secured by collateral in cash or cash equivalents maintained on
a current basis in an amount at least equal to the market value
of the securities loaned by High Yield Portfolio. High Yield
Portfolio would continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities
loaned, and would also receive an additional return that may be
in the form of a fixed fee or a percentage of the collateral.
High Yield Portfolio would have the right to call the loan and
obtain the securities loaned at any time on notice of not more
than five business days. In the event of bankruptcy or other
default of the borrower, High Yield Portfolio could experience
both delays in liquidating the loan collateral or recovering the
loaned securities and losses including (a) possible decline in
the value of the collateral or in the value of the securities
loaned during the period while the Portfolio seeks to enforce
its rights thereto; (b) possible subnormal levels of income and
lack of access to income during this period; and (c) expenses of
enforcing its rights.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES; STANDBY
COMMITMENTS. High Yield Portfolio's assets may include
securities purchased on a when-issued or delayed-delivery basis.
Although the payment and interest terms of these securities are
established at the time the purchaser enters into the
commitment, the securities may be delivered and paid for a month
or more after the date of purchase, when their value may have
changed. High Yield Portfolio makes such commitments only with
the intention of actually acquiring the securities, but may sell
the securities before settlement date if the Adviser deems it
advisable for investment reasons. Securities purchased in this
manner involve a risk of loss if the value of the security
purchased declines before the settlement date.
When-issued or delayed-delivery securities may sometimes be
purchased on a "dollar roll" basis, meaning that High Yield
Portfolio will sell securities with a commitment to purchase
similar, but not identical, securities at a future date.
Generally, the securities are repurchased at a price lower than
the sales price. Dollar roll transactions involve the risk of
restrictions on the Portfolio's ability to repurchase the
security if the counterparty becomes insolvent; an adverse
change in the price of the security during the period of the
roll or that the value of the security repurchased will be less
than the security sold; and transaction costs exceeding the
return earned by High Yield Portfolio on the sales proceeds of
the dollar roll.
High Yield Portfolio may also invest in securities purchased on
a standby commitment basis, which is a delayed-delivery
agreement in which High Yield Portfolio binds itself to accept
delivery of a security at the option of the other party to the
agreement.
PIK AND ZERO COUPON BONDS. High Yield Portfolio may invest up
to 20% of its total assets in zero coupon bonds and bonds the
interest on which is payable in kind ("PIK bonds"). A zero
coupon bond is a bond that does not pay interest for its entire
life. A PIK bond pays interest in the form of additional
securities. The market prices of both zero coupon and PIK bonds
are affected to a greater extent by changes in prevailing levels
of interest rates and thereby tend to be more volatile in price
than securities that pay interest periodically and in cash. In
addition, because High Yield Portfolio accrues income with
respect to these securities prior to the receipt of such
interest in cash, it may have to dispose of portfolio securities
under disadvantageous circumstances in order to obtain cash
needed to pay income dividends in amounts necessary to avoid
unfavorable tax consequences.
SHORT SALES AGAINST THE BOX. The Fund may sell short securities
it owns or has the right to acquire without further
consideration, a technique called selling short "against the
box." Short sales against the box may protect the Fund against
the risk of losses in the value of its portfolio securities
because any unrealized losses with respect to such securities
should be wholly or partly offset by a corresponding gain in the
short position. However, any potential gains in such securities
should be wholly or partially offset by a corresponding loss in
the short position. Short sales against the box may be used to
lock in a profit on a security when, for tax reasons or
otherwise, the Adviser does not want to sell the security. For
a more complete explanation, please refer to the Statement of
Additional Information.
PORTFOLIO TURNOVER. In attempting to attain its objective, High
Yield Portfolio may sell portfolio securities without regard to
the period of time they have been held. Further, the Adviser
may purchase and sell securities for the investment portfolio
with a view to maximizing current return, even if portfolio
changes would cause the realization of capital gains. Although
the average stated maturity of High Yield Portfolio will be from
five to ten years, the Adviser may adjust the average effective
maturity of High Yield Portfolio's portfolio from time to time,
depending on its assessment of the relative yields available on
securities of different maturities and its expectations of
future changes in interest rates. As a result, the turnover
rate of High Yield Portfolio may vary from year to year. The
turnover rate for High Yield Portfolio may exceed 100%, but is
not expected to exceed 200% under normal market conditions. A
high rate of portfolio turnover may result in increased
transaction expenses and the realization of capital gains (which
may be taxable) or losses. (See Distributions and Income
Taxes.)
INVESTMENT RESTRICTIONS
Neither Institutional High Yield Fund nor High Yield Portfolio
may invest in a security if, as a result of such investment: (1)
with respect to 75% of its assets, more than 5% of its total
assets would be invested in the securities of any one issuer,
except for U.S. Government Securities or repurchase agreements
/1/; for such securities; or (2) 25% or more of its total assets
would be invested in the securities of a group of issuers in the
same industry, except that this restriction does not apply to
U.S. Government Securities. Notwithstanding these limitations,
Institutional High Yield Fund, but not High Yield Portfolio, may
invest all of its assets in another registered investment
company having the same investment objective and substantially
similar investment policies as the Fund.
- --------------
/1/ A repurchase agreement involves a sale of securities to High
Yield Portfolio with the concurrent agreement of the seller
(bank or securities dealer) to repurchase the securities at the
same price plus an amount equal to an agreed-upon interest rate
within a specified time. In the event of a bankruptcy or other
default of a seller of a repurchase agreement, the Portfolio
could experience both delays in liquidating the underlying
securities and losses. The Portfolio may not invest more than
10% of its net assets in repurchase agreements maturing in more
than seven days and other illiquid securities.
- -------------
Neither Institutional High Yield Fund nor High Yield Portfolio
may make loans except that it may (1) purchase money market
instruments and enter into repurchase agreements; (2) acquire
publicly-distributed or privately-placed debt securities; (3)
lend its portfolio securities under certain conditions; and (4)
participate in an interfund lending program with other Stein Roe
Funds. Neither may borrow money, except for non-leveraging,
temporary, or emergency purposes or in connection with
participation in the interfund lending program. Neither the
aggregate borrowings (including reverse repurchase agreements)
nor the aggregate loans at any one time may exceed 33 1/3% of
the value of total assets. Additional securities may not be
purchased when borrowings, less proceeds receivable from sales
of portfolio securities, exceed 5% of total assets.
The policies set forth in the first two paragraphs under
Investment Restrictions (but not the footnote) are fundamental
policies of Institutional High Yield Fund and High Yield
Portfolio. /2/ The Statement of Additional Information contains
all of the investment restrictions.
- ---------------
/2/A fundamental policy may be changed only with the approval of
a "majority of the outstanding voting securities" as defined in
the Investment Company Act.
- --------------
RISKS AND INVESTMENT CONSIDERATIONS
The risks inherent in Institutional High Yield Fund depend
primarily upon the term and quality of the obligations in High
Yield Portfolio's investment portfolio, as well as on market
conditions. Although High Yield Portfolio seeks to reduce risk
by investing in a diversified portfolio, this does not eliminate
all risk. Institutional High Yield Fund is designed for
investors who can accept the heightened level of risk and
principal fluctuation which might result from a portfolio that
invests at least 65% of its assets in medium- and lower-quality
debt securities.
The market value of securities in the investment portfolio tends
to vary inversely with the level of interest rates. As a
result, interest rate fluctuations may affect net asset value.
(Because yields on debt securities available for purchase by
High Yield Portfolio vary over time, no specific yield on shares
of Institutional High Yield Fund can be assured.) In addition,
if the bonds in the investment portfolio contain call,
prepayment or redemption provisions, during a period of
declining interest rates, these securities are likely to be
redeemed, and High Yield Portfolio may have to replace the
security with a lower yielding security, resulting in a
decreased return for investors.
Investments in foreign securities, including ADRs, represent
both risks and opportunities not typically associated with
investments in domestic issuers. Risks of foreign investing
include currency risk, less complete financial information on
issuers, less market liquidity, more market volatility, less
well-developed and regulated markets, and greater political
instability. In addition, various restrictions by foreign
governments on investments by non-residents may apply, including
imposition of exchange controls and withholding taxes on
dividends, and seizure or nationalization of investments owned
by non-residents. Foreign investments also tend to involve
higher transaction and custody costs.
High Yield Portfolio may enter into foreign currency forward
contracts and use options and futures contracts, as described
elsewhere in this prospectus, to limit or reduce foreign
currency risk.
There can be no assurance that Institutional High Yield Fund or
High Yield Portfolio will achieve its objective, nor can High
Yield Portfolio assure that payments of interest and principal
on portfolio securities will be made when due. If, after
purchase by High Yield Portfolio, the rating of a portfolio
security is lost or reduced, High Yield Portfolio would not be
required to sell the security, but the Adviser would consider
such a change in deciding whether High Yield Portfolio should
retain the security in its investment portfolio.
The investment objective of Institutional High Yield Fund and
High Yield Portfolio is not fundamental and may be changed by
the respective Board of Trustees without a vote of shareholders.
HOW TO PURCHASE SHARES
Fund shares are available primarily through pension plan
administrators, broker-dealers, or other intermediaries (each an
"Intermediary") who provide accounting, recordkeeping, and
other services to investors and who hold Fund shares in omnibus
accounts for their clients. Shares may also be available to
clients of the Adviser if, in the judgment of the Adviser, the
sale of shares to such clients would not adversely affect the
Fund or its shareholders. The initial purchase minimum is
$250,000 and the minimum subsequent investment is $10,000.
Institutional Trust reserves the right to waive or lower its
investment minimum for any reason. Investors may be charged a
fee if they effect transactions in Fund shares through a broker
or agent. The Adviser and Institutional High Yield Fund do not
recommend, endorse, or receive compensation from any
Intermediary.
Each Intermediary will establish its own procedures applicable
to its clients for the purchase of Institutional High Yield Fund
shares in its account, including minimum initial and additional
investments and the acceptable methods of payment for shares.
Shares are purchased at the net asset value next determined
after receipt of your order by the Fund's transfer agent. Net
asset value is calculated as of the close of the New York Stock
Exchange ("NYSE"), generally 3:00 p.m., central time. Your
Intermediary may be closed on days when the NYSE is open.
As a result, prices for Fund shares may be significantly
affected on days when you have no access to your Intermediary
to buy shares. Institutional High Yield Fund will not issue
a certificate for your shares.
Any purchase of shares must be paid for in U.S. dollars.
Institutional High Yield Fund has the right to suspend the
offering of its shares for a period of time. Institutional High
Yield Fund also has the right to accept or reject a purchase
order in its sole discretion, including certain purchase orders
using an exchange of shares.
HOW TO REDEEM SHARES
If you purchased shares through an Intermediary, you can redeem
(sell) all or some of your Fund shares only through an account
with that Intermediary and in accordance with procedures
established by the Intermediary applicable to its clients for
the redemption of Fund shares. Shares are redeemed at the net
asset value next calculated after a redemption order is received
and accepted by the Fund's transfer agent. Your Intermediary may be
closed on days when the NYSE is open. As a result, prices for
Institutional High Yield Fund shares may be significantly
affected on days when you have no access to your Intermediary to
redeem shares.
Redemption proceeds will be paid to Intermediaries as agreed
with Institutional High Yield Fund, but in any case within seven
calendar days. Institutional High Yield Fund may suspend
redemptions or postpone payments on days when the NYSE is closed
(other than weekends and holidays), when trading on the NYSE is
restricted, or as permitted by the Securities and Exchange
Commission.
Institutional Trust reserves the right to redeem shares in any
account and send the proceeds to the appropriate Intermediary if
shares in that account do not have a value of at least $250,000.
An Intermediary would be notified that its account is below the
minimum and would be allowed 30 days to increase the account
before the redemption is processed.
For information regarding exchanging shares of Institutional
High Yield Fund for shares of another Stein Roe Fund, please see
the Statement of Additional Information.
NET ASSET VALUE
The purchase and redemption price of Institutional High Yield
Fund's shares is its net asset value per share. Institutional
High Yield Fund determines the net asset value of its shares as
of the close of trading on the NYSE (currently 3:00 p.m., central
time) by dividing the difference between the values of its assets
and liabilities by the number of shares outstanding. High Yield
Portfolio allocates net asset value, income, and expenses to
Institutional High Yield Fund and any other of its feeder funds
in proportion to their respective interests in High Yield Portfolio.
Net asset value will not be determined on days when the NYSE is
closed unless, in the judgment of the Board of Trustees, the net
asset value of Institutional High Yield Fund should be
determined on any such day, in which case the determination will
be made at 3:00 p.m., central time.
Securities for which market quotations are readily available at
the time of valuation are valued on that basis. Long-term
straight-debt securities for which market quotations are not
readily available are valued at a fair value based on valuations
provided by pricing services approved by the Board, which may
employ electronic data processing techniques, including a matrix
system, to determine valuations. Short-term debt securities
with remaining maturities of 60 days or less are valued at their
amortized cost, which does not take into account unrealized
gains or losses. The Board believes that the amortized cost
represents a fair value for such securities. Short-term debt
securities with remaining maturities of more than 60 days for
which market quotations are not readily available are valued by
use of a matrix prepared by the Adviser based on quotations for
comparable securities. Other assets and securities held by High
Yield Portfolio for which these valuation methods do not produce
a fair value are valued by a method that the Board believes will
determine a fair value.
DISTRIBUTIONS AND INCOME TAXES
DISTRIBUTIONS. Income dividends are declared each business day,
paid monthly, and confirmed at least quarterly. Institutional
High Yield Fund intends to distribute by the end of each
calendar year at least 98% of any net capital gains realized
from the sale of securities during the twelve-month period ended
October 31 in that year. Institutional High Yield Fund intends
to distribute any undistributed net investment income and net
realized capital gains in the following year.
All income dividends and capital gain distributions paid on
shares in an account will be reinvested in additional shares
unless the Intermediary or other account holder elects to have
distributions paid in cash. Reinvestment normally occurs on the
payable date. Institutional Trust reserves the right to
reinvest the proceeds and future distributions in additional
shares of Institutional High Yield Fund if checks for
distributions mailed to the account holder are returned as
undeliverable or are not presented for payment within six
months.
INCOME TAXES. Distributions to shareholders will be taxable,
under income tax law, whether received in cash or reinvested in
additional shares. For federal income tax purposes, any
distribution that is paid in January but was declared in the
prior calendar year is deemed paid in the prior calendar year.
Shareholders will be subject to federal income tax at ordinary
rates on income dividends and distributions of net short-term
capital gain. Distributions of net long-term capital gain will
be taxable to you as long-term capital gain regardless of the
length of time you have held your shares.
Shareholders will be advised annually as to the source of
distributions. If you are not subject to tax on your income,
you will not be required to pay tax on these amounts.
If a shareholder realizes a loss on the sale or exchange of Fund
shares held for six months or less, the short-term loss is
recharacterized as long-term to the extent of any long-term
capital gain distributions received with respect to those
shares.
For federal income tax purposes, Institutional High Yield Fund
is treated as a separate taxable entity distinct from any other
series of the Institutional Trust. High Yield Portfolio intends
to qualify for the special tax treatment afforded regulated
investment companies under Subchapter M of the Internal Revenue
Code, so that it will be relieved of federal income tax on that
part of its net investment income and net capital gain that is
distributed to shareholders.
This section is not intended to be a full discussion of income
tax laws and their effect on shareholders. You may wish to
consult your own tax advisor.
INVESTMENT RETURN
The total return from an investment in Institutional High Yield
Fund is measured by the distributions received (assuming
reinvestment) plus or minus the change in the net asset value
per share for a given period. A total return percentage may be
calculated by dividing the value of a share at the end of the
period (including reinvestment of distributions) by the value of
the share at the beginning of the period and subtracting one.
For a given period, an average annual total return may be
calculated by finding the average annual compounded rate that
would equate a hypothetical $1,000 investment to the ending
redeemable value.
The yield of Institutional High Yield Fund is calculated by
dividing its net investment income per share (a hypothetical
figure as defined in the SEC rules) during a 30-day period by
the net asset value per share on the last day of the period.
The yield formula provides for semiannual compounding, which
assumes that net investment income is earned and reinvested at a
constant rate and annualized at the end of a six-month period.
Comparison of Institutional High Yield Fund's yield or total
return with those of alternative investments should consider
differences between Institutional High Yield Fund and the
alternative investments, the periods and methods used in
calculation of the return being compared, and the impact of
taxes on alternative investments. Yield figures are not based
on actual dividends paid. Past performance is not necessarily
indicative of future results. To obtain current yield or total
return information, you may call 800-322-0593.
MANAGEMENT
TRUSTEES AND INVESTMENT ADVISER. The Board of Trustees of the
Institutional Trust has overall management responsibility for
Institutional Trust and Institutional High Yield Fund; the Board
of Base Trust has overall management responsibility for
High Yield Portfolio. See Management in the Statement of
Additional Information for the names of and other information
about the trustees and officers. Since Institutional Trust and
Base Trust have the same trustees, the trustees have adopted
conflict of interest procedures to monitor and address potential
conflicts between the interests of Institutional High Yield Fund
and High Yield Portfolio.
The Adviser, Stein Roe & Farnham Incorporated, One South Wacker
Drive, Chicago, Illinois 60606, is responsible for managing the
investment portfolio of High Yield Portfolio and the business
affairs of Institutional High Yield Fund, High Yield Portfolio,
Institutional Trust, and Base Trust, subject to the direction of
the respective Board. The Adviser is registered as an
investment adviser under the Investment Advisers Act of 1940.
The Adviser was organized in 1986 to succeed to the business of
Stein Roe & Farnham, a partnership that had advised and managed
mutual funds since 1949. The Adviser is a wholly owned
subsidiary of Liberty Financial Companies, Inc. ("Liberty
Financial"), which in turn is a majority owned indirect
subsidiary of Liberty Mutual Insurance Company.
PORTFOLIO MANAGERS. Ann H. Benjamin has been portfolio manager
of High Yield Portfolio since its inception in 1996. She is a
senior vice president of the Adviser and has been associated
with the Adviser since 1989. She has also been portfolio
manager of Stein Roe Income Fund since 1990. Ms. Benjamin has
12 years' experience in the analysis and investment of medium-
and lower-quality debt securities. She received her B.B.A. from
Chatham College in 1980 and her M.A. from Carnegie Mellon
University in 1985. Ms. Benjamin managed $309 million in mutual
fund net assets for the Adviser as of June 30, 1996, serves as
High-Yield Credit Research Manager for the Adviser, and is a
member of the Adviser's Fixed Income Credit Review Committee.
Stephen F. Lockman has been associate portfolio manager of High
Yield Portfolio since its inception in 1996. Mr. Lockman is a
senior vice president of the Adviser and has been employed by
the Adviser since January 1994. A chartered financial analyst,
Mr. Lockman received a B.S. degree from the University of
Illinois in 1983 and an M.B.A. from DePaul University in 1986.
FEES AND EXPENSES. The Adviser is entitled to receive a monthly
administrative fee from Institutional High Yield Fund, computed
and accrued daily, at an annual rate of .150% of the first $500
million of average net assets and .125% thereafter; and a
monthly management fee from High Yield Portfolio, computed and
accrued daily, at an annual rate of .500% of the first $500
million of average net assets and .475% thereafter. However, as
noted above under Fee Table, the Adviser may voluntarily waive a
portion of its fees.
The Adviser provides office space and executive and other
personnel to Institutional Trust and Base Trust and bears any
sales or promotional expenses. All expenses of Institutional
High Yield Fund (other than those paid by the Adviser)
including, but not limited to, printing and postage charges,
securities registration fees, custodian and transfer agency
fees, legal and auditing fees, compensation of trustees not
affiliated with the Adviser, and expenses incidental to its
organization are paid out of the assets of Institutional High
Yield Fund.
Under a separate agreement with each Trust, the Adviser provides
certain accounting and bookkeeping services to Institutional
High Yield Fund and High Yield Portfolio including computation
of net asset value and calculation of net income and capital
gains and losses on disposition of assets.
PORTFOLIO TRANSACTIONS. The Adviser places the orders for the
purchase and sale of portfolio securities and options and
futures contracts for Institutional High Yield Fund and High
Yield Portfolio. In doing so, the Adviser seeks to obtain the
best combination of price and execution, which involves a number
of judgmental factors.
TRANSFER AGENT. SteinRoe Services Inc. ("SSI"), One South
Wacker Drive, Chicago, Illinois 60606, a wholly owned subsidiary
of Liberty Financial, is the agent of Institutional Trust for
the transfer of shares, disbursement of dividends, and
maintenance of shareholder accounting records.
DISTRIBUTOR. The shares of Institutional High Yield Fund are
offered for sale through Liberty Securities Corporation
("Distributor") without any sales commissions or charges to
Institutional High Yield Fund or to its shareholders. The
Distributor is a wholly owned indirect subsidiary of Liberty
Financial. The business address of the Distributor is 600
Atlantic Avenue, Boston, Massachusetts 02210; however, all Fund
correspondence (including purchase and redemption orders) should
be mailed to SteinRoe Services Inc. at P.O. Box 8900, Boston,
Massachusetts 02205. All distribution and promotional expenses
are paid by the Adviser, including payments to the Distributor
for sales of Fund shares.
CUSTODIAN. State Street Bank and Trust Company (the "Bank"),
225 Franklin Street, Boston, Massachusetts 02101, is the
custodian for Institutional High Yield Fund. Foreign securities
are maintained in the custody of foreign banks and trust
companies that are members of the Bank's Global Custody Network
or foreign depositories used by such members. (See Custodian in
the Statement of Additional Information.)
ORGANIZATION AND DESCRIPTION OF SHARES
Institutional 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 Institutional Trust's shareholders or its
trustees. Institutional Trust may issue an unlimited number of
shares, in one or more series as the Board may authorize.
Currently, Institutional High Yield Fund is the only series
authorized and outstanding.
Under Massachusetts law, shareholders of a Massachusetts
business trust such as Institutional Trust could, in some
circumstances, be held personally liable for unsatisfied
obligations of Institutional Trust. The Declaration of Trust
provides that persons extending credit to, contracting with, or
having any claim against, Institutional Trust or any particular
series shall look only to the assets of Institutional Trust or
of the respective series for payment under such credit, contract
or claim, and that the shareholders, trustees and officers of
Institutional Trust shall have no personal liability therefor.
The Declaration of Trust requires that notice of such disclaimer
of liability be given in each contract, instrument or
undertaking executed or made on behalf of Institutional 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 Institutional 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
Institutional Trust is also believed to be remote, because it
would be limited to claims to which the disclaimer did not apply
and to circumstances in which the other Fund was unable to meet
its obligations.
SPECIAL CONSIDERATIONS REGARDING THE
MASTER FUND/FEEDER FUND STRUCTURE
Institutional High Yield Fund, an open-end management investment
company, seeks to achieve its objective by investing all of its
assets in shares of another mutual fund having an investment
objective identical to that of Institutional High Yield Fund.
The initial shareholder of Institutional High Yield Fund
approved this policy of permitting Institutional High Yield Fund
to act as a feeder fund by investing in High Yield Portfolio.
Please refer to the Investment Policies, Portfolio Investments
and Strategies, and Investment Restrictions for a description of
the investment objectives, policies, and restrictions of
Institutional High Yield Fund and High Yield Portfolio. The
management and expenses of both Institutional High Yield Fund
and High Yield Portfolio are described under the Fee Table and
Management. Institutional High Yield Fund bears its
proportionate share of Portfolio expenses.
The Adviser has provided investment management services in
connection with other mutual funds employing the master
fund/feeder fund structure since 1991.
SR&F High Yield Portfolio is a separate series of SR&F Base
Trust ("Base Trust"), a Massachusetts common trust organized
under an Agreement and Declaration of Trust ("Declaration of
Trust") dated August 23, 1993. The Declaration of Trust of the
Base Trust provides that Institutional High Yield Fund and other
investors in High Yield Portfolio will each be liable for all
obligations of High Yield Portfolio that are not satisfied by
High Yield Portfolio. However, the risk of Institutional High
Yield Fund incurring financial loss on account of such liability
is limited to circumstances in which both inadequate insurance
existed and High Yield Portfolio itself were unable to meet its
obligations. Accordingly, the Trustees of Institutional Trust
believe that neither Institutional High Yield Fund nor its
shareholders will be adversely affected by reason of
Institutional High Yield Fund's investing in High Yield
Portfolio.
The Declaration of Trust of Base Trust provides that High Yield
Portfolio will terminate 120 days after the withdrawal of
Institutional High Yield Fund or any other investor in High
Yield Portfolio, unless the remaining investors vote to agree to
continue the business of High Yield Portfolio. The Trustees of
Institutional Trust may vote Institutional High Yield Fund's
interests in High Yield Portfolio for such continuation without
approval of Institutional High Yield Fund's shareholders.
The common investment objective of Institutional High Yield Fund
and High Yield Portfolio is non-fundamental and may be changed
without shareholder approval, subject, however, to at least 30
days' advance written notice to Institutional High Yield Fund's
shareholders.
The fundamental policies of Institutional High Yield Fund and
the corresponding fundamental policies of the Portfolio can be
changed only with shareholder approval.
If Institutional High Yield Fund, as a Portfolio investor, is
requested to vote on a proposed change in fundamental policy of
High Yield Portfolio or any other matter pertaining to High
Yield Portfolio (other than continuation of the business of High
Yield Portfolio after withdrawal of another investor),
Institutional High Yield Fund will solicit proxies from its
shareholders and vote its interest in High Yield Portfolio for
and against such matters proportionately to the instructions to
vote for and against such matters received from Fund
shareholders. Institutional High Yield Fund will vote shares
for which it receives no voting instructions in the same
proportion as the shares for which it receives voting
instructions. If there are other investors in High Yield
Portfolio, there can be no assurance that any matter receiving a
majority of votes cast by Fund shareholders will receive a
majority of votes cast by all High Yield Portfolio investors.
If other investors hold a majority interest in High Yield
Portfolio, they could have voting control over High Yield
Portfolio.
In the event that High Yield Portfolio's fundamental policies
were changed so as to be inconsistent with those of
Institutional High Yield Fund, the Board of Trustees of
Institutional Trust would consider what action might be taken,
including changes to Institutional High Yield Fund's fundamental
policies, withdrawal of Institutional High Yield Fund's assets
from High Yield Portfolio and investment of such assets in
another pooled investment entity, or the retention of another
investment adviser. Any of these actions would require the
approval of Institutional High Yield Fund's shareholders.
Institutional High Yield Fund's inability to find a substitute
master fund or comparable investment management could have a
significant impact upon its shareholders' investments. Any
withdrawal of Institutional High Yield Fund's assets could
result in a distribution in kind of portfolio securities (as
opposed to a cash distribution) to Institutional High Yield
Fund. Should such a distribution occur, Institutional High
Yield Fund would incur brokerage fees or other transaction costs
in converting such securities to cash. In addition, a
distribution in kind could result in a less diversified
portfolio of investments for Institutional High Yield Fund and
could affect the liquidity of Institutional High Yield Fund.
Each investor in High Yield Portfolio, including Institutional
High Yield Fund, may add to or reduce its investment in High
Yield Portfolio on each day the NYSE is open for business. The
investor's percentage of the aggregate interests in High Yield
Portfolio will be computed as the percentage equal to the
fraction (i) the numerator of which is the beginning of the day
value of such investor's investment in High Yield Portfolio on
such day plus or minus, as the case may be, the amount of any
additions to or withdrawals from the investor's investment in
High Yield Portfolio effected on such day; and (ii) the
denominator of which is the aggregate beginning of the day net
asset value of High Yield Portfolio on such day plus or minus,
as the case may be, the amount of the net additions to or
withdrawals from the aggregate investments in High Yield
Portfolio by all investors in High Yield Portfolio. The
percentage so determined will then be applied to determine the
value of the investor's interest in High Yield Portfolio as of
the close of business.
Base Trust may permit other investment companies and/or other
institutional investors to invest in High Yield Portfolio, but
members of the general public may not invest directly in High
Yield Portfolio. Other investors in High Yield Portfolio are
not required to sell their shares at the same public offering
price as Institutional High Yield Fund, could incur different
administrative fees and expenses than Institutional High Yield
Fund, and their shares might be sold with a sales commission.
Therefore, Fund shareholders might have different investment
returns than shareholders in another investment company that
invests exclusively in High Yield Portfolio. Investment by such
other investors in High Yield Portfolio would provide funds for
the purchase of additional portfolio securities and would tend
to reduce the Portfolio's operating expenses as a percentage of
its net assets. Conversely, large-scale redemptions by any such
other investors in High Yield Portfolio could result in untimely
liquidations of High Yield Portfolio's security holdings, loss
of investment flexibility, and increases in the operating
expenses of High Yield Portfolio as a percentage of its net
assets. As a result, High Yield Portfolio's security holdings
may become less diverse, resulting in increased risk.
Currently one other investment company invests in High Yield
Portfolio, and that is Stein Roe High Yield Fund, a series of
Stein Roe Income Trust. Information regarding any investment
company that may invest in High Yield Portfolio in the future
may be obtained by writing to SR&F Base Trust, Suite 3200, One
South Wacker Drive, Chicago, Illinois 60606 or by calling 800-
338-2550. The Adviser may provide administrative or other
services to one or more of such investors.
FOR MORE INFORMATION
Contact Stein Roe Advisor and Dealer Services at 800-322-0593 for
more information about this Fund.
APPENDIX--RATINGS
RATINGS IN GENERAL
A rating of a rating service represents the service's opinion as
to the credit quality of the security being rated. However, the
ratings are general and are not absolute standards of quality or
guarantees as to the creditworthiness of an issuer.
Consequently, the Adviser believes that the quality of debt
securities in which High Yield Portfolio invests should be
continuously reviewed and that individual analysts give
different weightings to the various factors involved in credit
analysis. A rating is not a recommendation to purchase, sell or
hold a security because it does not take into account market
value or suitability for a particular investor. When a security
has received a rating from more than one service, each rating
should be evaluated independently. Ratings are based on current
information furnished by the issuer or obtained by the rating
services from other sources that they consider reliable.
Ratings may be changed, suspended or withdrawn as a result of
changes in or unavailability of such information, or for other
reasons.
The following is a description of the characteristics of ratings
used by Moody's Investors Service, Inc. ("Moody's") and Standard
& Poor's Corporation ("S&P").
CORPORATE BOND RATINGS
RATINGS BY MOODY'S
Aaa. Bonds rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by
a large or an exceptionally stable margin and principal is
secure. Although the various protective elements are likely to
change, such changes as can be visualized are more unlikely to
impair the fundamentally strong position of such bonds.
Aa. Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa bonds or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
bonds.
A. Bonds rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa. Bonds rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba. Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca. Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each
generic rating classification from Aa through B in its corporate
bond rating system. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic
rating category.
RATINGS BY S&P
AAA. Debt rated AAA has the highest rating. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from the highest rated issues
only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt
in this category than for debt in higher rated categories.
BB, B, CCC, CC, and C. Debt rated BB, B, CCC, CC, or C is
regarded, on balance, as predominantly speculative with respect
to capacity to pay interest and repay principal in accordance
with the terms of the obligation. BB indicates the lowest
degree of speculation and C the highest degree of speculation.
While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
C1. This rating is reserved for income bonds on which no
interest is being paid.
D. Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears. The D rating is also used
upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
NOTES: The ratings from AA to CCC may be modified by the
addition of a plus (+) or minus (-) sign to show relative
standing within the major rating categories. Foreign debt is
rated on the same basis as domestic debt measuring the
creditworthiness of the issuer; ratings of foreign debt do not
take into account currency exchange and related uncertainties.
The "r" is attached to highlight derivative, hybrid, and certain
other obligations that S&P believes may experience high
volatility or high variability in expected returns due to non-
credit risks. Examples of such obligations are: securities
whose principal or interest return is indexed to equities,
commodities, or currencies; certain swaps and options; and
interest only and principal only mortgage securities. The
absence of an "r" symbol should not be taken as an indication
that an obligation will exhibit no volatility or variability in
total return.
COMMERCIAL PAPER RATINGS
RATINGS BY MOODY'S
Moody's employs the following three designations, all judged to
be investment grade, to indicate the relative repayment capacity
of rated issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody's that its commercial paper
obligations are supported by the credit of another entity or
entities, Moody's, in assigning ratings to such issuers,
evaluates the financial strength of the indicated affiliated
corporations, commercial banks, insurance companies, foreign
governments or other entities, but only as one factor in the
total rating assessment.
RATINGS BY S&P
A brief description of the applicable rating symbols and their
meaning follows:
A. Issues assigned this highest rating are regarded as having
the greatest capacity for timely payment. Issues in this
category are further refined with the designations 1, 2, and 3
to indicate the relative degree of safety.
A-1. This designation indicates that the degree of safety
regarding timely payment is very strong. Those issues
determined to possess overwhelming safety characteristics will
be denoted with a plus (+) sign designation.
______________________
<PAGE>
Stein Roe Mutual Funds
P.O. Box 8900
Boston, Massachusetts 02205-8900
Financial Advisors call: 1-800-322-0593
Shareholders call: 1-800-338-2550
http:/www.steinroe.com
Liberty Securities Corporation, Distributor
Member SIPC
<PAGE> 1
Statement of Additional Information Dated January 2, 1997
STEIN ROE INSTITUTIONAL TRUST
Stein Roe Institutional High Yield Fund
Suite 3200, One South Wacker Drive, Chicago, Illinois 60606
This Statement of Additional Information is not a
prospectus but provides additional information that should be
read in conjunction with the Prospectus dated January 2, 1997
and any supplements thereto. The Prospectus may be obtained at
no charge by telephoning Stein Roe Advisor and Dealer Services at
800-322-0593.
TABLE OF CONTENTS
Page
General Information and History..........................2
Investment Policies......................................3
Portfolio Investments and Strategies.....................5
Investment Restrictions.................................21
Additional Investment Considerations....................24
Purchases and Redemptions...............................25
Management..............................................26
Principal Shareholders..................................30
Investment Advisory Services............................30
Distributor.............................................32
Transfer Agent..........................................32
Custodian...............................................32
Independent Auditors....................................33
Portfolio Transactions..................................33
Additional Income Tax Considerations....................35
Investment Performance..................................35
Balance Sheet...........................................40
GENERAL INFORMATION AND HISTORY
Stein Roe Institutional High Yield Fund ("Institutional
High Yield Fund") is a series of the Stein Roe Institutional
Trust ("Institutional Trust"). Institutional High Yield Fund
invests all of its net investable assets in shares of SR&F High
Yield Portfolio ("High Yield Portfolio"), which is a series of
shares of SR&F Base Trust ("Base Trust").
Currently Institutional High Yield Fund is the only series
of Institutional Trust authorized and outstanding. Each share
of a series 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,
Institutional 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
Institutional Trust's outstanding shares, Institutional 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 required by
Section 16(c) of the Investment Company Act of 1940. All shares
of Institutional Trust are voted together in the election of
trustees. On any other matter submitted to a vote of
shareholders, shares are voted by individual series and not in
the aggregate, except that shares are voted in the aggregate
when required by the Investment Company Act of 1940 or other
applicable law. When the Board of Trustees determines that the
matter affects only the interests of one or more series,
shareholders of the unaffected series are not entitled to vote
on such matters.
Stein Roe & Farnham Incorporated (the "Adviser") provides
administrative and accounting and recordkeeping services to
Institutional High Yield Fund and High Yield Portfolio and
provides investment advisory services to High Yield Portfolio.
SPECIAL CONSIDERATIONS REGARDING MASTER FUND/FEEDER FUND
STRUCTURE
Rather than invest in securities directly, Institutional
High Yield Fund seeks to achieve its objective by pooling its
assets with assets of other investment companies and/or
institutional investors for investment in another mutual fund
having the same investment objective and substantially the same
investment policies and restrictions. The purpose of such an
arrangement is to achieve greater operational efficiencies and
reduce costs. For more information, please refer to the
Prospectus under the caption Special Considerations Regarding
the Master Fund/Feeder Fund Structure.
INVESTMENT POLICIES
The following information supplements the discussion of the
investment objective and policies of Institutional High Yield
Fund and High Yield Portfolio described in the Prospectus. In
pursuing its objective, High Yield Portfolio will invest as
described below and may employ the investment techniques
described in the Prospectus and in this Statement of Additional
Information 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/ of
Institutional High Yield Fund or High Yield Portfolio.
- -------------
/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.
- ------------
Institutional High Yield Fund seeks to achieve its
objective by investing all of its assets in High Yield
Portfolio. The investment policies of Institutional High Yield
Fund and High Yield Portfolio are substantially identical. High
Yield Portfolio seeks total return by investing for a high level
of current income and capital growth.
High Yield Portfolio invests principally in high-yield,
high-risk medium- and lower-quality debt securities. The
medium- and lower-quality debt securities in which High Yield
Portfolio will invest normally offer a current yield or yield to
maturity that is significantly higher than the yield from
securities rated in the three highest categories assigned by
rating services such as Standard & Poor's Corporation ("S&P")
and by Moody's Investors Service, Inc. ("Moody's").
Under normal circumstances, at least 65% of High Yield
Portfolio's assets will be invested in high-yield, high-risk
medium- and lower-quality debt securities rated lower than Baa
by Moody's or lower than BBB by S&P, or equivalent ratings as
determined by other rating agencies, or unrated securities that
the Adviser determines to be of comparable quality. Medium-
quality debt securities, although considered investment grade,
have some speculative characteristics. Lower-quality debt
securities are obligations of issuers that are considered
predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal according to the terms of
the obligation and, therefore, carry greater investment risk,
including the possibility of issuer default and bankruptcy, and
are commonly referred to as "junk bonds." Some issuers of debt
securities choose not to have their securities rated by a rating
service, and High Yield Portfolio may invest in unrated
securities that the Adviser has researched thoroughly and
believes are suitable for investment. High Yield Portfolio may
invest in debt obligations that are in default, but such
obligations are not expected to exceed 10% of High Yield
Portfolio's assets.
High Yield Portfolio may invest up to 35% of its total
assets in other securities including, but not limited to, pay-
in-kind bonds, securities issued in private placements, bank
loans, zero coupon bonds, foreign securities, convertible
securities, futures, and options. High Yield Portfolio may also
invest in higher-quality debt securities. Under normal market
conditions, however, High Yield Portfolio is unlikely to
emphasize higher-quality debt securities since generally they
offer lower yields than medium- and lower-quality debt
securities with similar maturities. High Yield Portfolio may
also invest in common stocks and securities that are convertible
into common stocks, such as warrants.
Investment in medium- or lower-quality debt securities
involves greater investment risk, including the possibility of
issuer default or bankruptcy. High Yield Portfolio seeks to
reduce investment risk through diversification, credit analysis,
and evaluation of developments in both the economy and financial
markets.
An economic downturn could severely disrupt the high-yield
market and adversely affect the value of outstanding bonds and
the ability of the issuers to repay principal and interest. In
addition, lower-quality bonds are less sensitive to interest
rate changes than higher-quality instruments (see Risks and
Investment Considerations) and generally are more sensitive to
adverse economic changes or individual corporate developments.
During a period of adverse economic changes, including a period
of rising interest rates, issuers of such bonds may experience
difficulty in servicing their principal and interest payment
obligations.
Achievement of the investment objective will be more dependent
on the Adviser's credit analysis than would be the case if High
Yield Portfolio were investing in higher-quality debt
securities. Since the ratings of rating services (which
evaluate the safety of principal and interest payments, not
market risks) are used only as preliminary indicators of
investment quality, the Adviser employs its own credit research
and analysis, from which it has developed a proprietary credit
rating system based upon comparative credit analyses of issuers
within the same industry. These analyses may take into
consideration such quantitative factors as an issuer's present
and potential liquidity, profitability, internal capability to
generate funds, debt/equity ratio and debt servicing
capabilities, and such qualitative factors as an assessment of
management, industry characteristics, accounting methodology,
and foreign business exposure.
Lower-quality debt securities are obligations of issuers
that are considered predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal
according to the terms of the obligation and, therefore, carry
greater investment risk, including the possibility of issuer
default and bankruptcy, and are commonly referred to as "junk
bonds." The lowest rating assigned by Moody's is for bonds that
can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Medium- and lower-quality debt securities tend to be less
marketable than higher-quality debt securities because the
market for them is less broad. The market for unrated debt
securities is even narrower. During periods of thin trading in
these markets, the spread between bid and asked prices is likely
to increase significantly, and High Yield Portfolio may have
greater difficulty selling its portfolio securities. The market
value of these securities and their liquidity may be affected by
adverse publicity and investor perceptions.
PORTFOLIO INVESTMENTS AND STRATEGIES
DERIVATIVES
Consistent with its objective, High Yield Portfolio may
invest in a broad array of financial instruments and securities,
including conventional exchange-traded and non-exchange traded
options, futures contracts, futures options, securities
collateralized by underlying pools of mortgages or other
receivables, and other instruments the value of which is
"derived" from the performance of an underlying asset or a
"benchmark" such as a security index, an interest rate, or a
currency ("Derivatives").
Derivatives are most often used to manage investment risk
or to create an investment position indirectly because it 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 the Adviser's
ability to correctly predict changes in the levels and
directions of movements in security prices, interest rates and
other market factors affecting the Derivative itself or the
value of the underlying asset or benchmark. In addition,
correlations in the performance of an underlying asset to a
Derivative may not be well established. Finally, privately
negotiated and over-the-counter Derivatives may not be as well
regulated and may be less marketable than exchange-traded
Derivatives.
High Yield Portfolio does not intend to invest more than 5%
of its assets in any type of Derivative except for options,
futures contracts, and futures options.
MORTGAGE AND OTHER ASSET-BACKED SECURITIES
High Yield Portfolio may invest in securities secured by
mortgages or other assets such as automobile or home improvement
loans and credit card receivables. These instruments may be
issued or guaranteed by the U.S. Government or by its agencies
or instrumentalities or by private entities such as commercial,
mortgage and investment banks and financial companies or
financial subsidiaries of industrial companies.
Mortgage-backed securities provide either a pro rata
interest in underlying mortgages or an interest in
collateralized mortgage obligations ("CMOs") which represent a
right to interest and/or principal payments from an underlying
mortgage pool. CMOs are not guaranteed by either the U.S.
Government or by its agencies or instrumentalities, and are
usually issued in multiple classes each of which has different
payment rights, pre-payment risks and yield characteristics.
Mortgage-backed securities involve the risk of pre-payment on
the underlying mortgages at a faster or slower rate than the
established schedule. Pre-payments generally increase with
falling interest rates and decrease with rising rates but they
also are influenced by economic, social and market factors. If
mortgages are pre-paid during periods of declining interest
rates, there would be a resulting loss of the full-term benefit
of any premium paid by High Yield Portfolio on purchase of the
CMO, and the proceeds of pre-payment would likely be invested at
lower interest rates. High Yield Portfolio intends to invest in
CMOs of classes known as planned amortization classes ("PACs")
which have pre-payment protection features tending to make them
less susceptible to price volatility.
Non-mortgage asset-backed securities usually have less pre-
payment risk than mortgage-backed securities, but have the risk
that the collateral will not be available to support payments on
the underlying loans which finance payments on the securities
themselves. Therefore, greater emphasis is placed on the credit
quality of the security issuer and the guarantor, if any.
FLOATING RATE INSTRUMENTS
High Yield Portfolio may also invest in floating rate
instruments which provide for periodic adjustments in coupon
interest rates that are automatically reset based on changes in
amount and direction of specified market interest rates. In
addition, the adjusted duration of some of these instruments may
be materially shorter than their stated maturities. To the
extent such instruments are subject to lifetime or periodic
interest rate caps or floors, such instruments may experience
greater price volatility than debt instruments without such
features. Adjusted duration is an inverse relationship between
market price and interest rates and refers to the approximate
percentage change in price for a 100 basis point change in
yield. For example, if interest rates decrease by 100 basis
points, a market price of a security with an adjusted duration
of 2 would increase by approximately 2%. High Yield Portfolio
does not intend to invest more than 5% of its net assets in
floating rate instruments.
LENDING OF PORTFOLIO SECURITIES
Subject to restriction (7) under Investment Restrictions,
High Yield 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 High Yield Portfolio. High Yield
Portfolio would continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities
loaned, and would also receive an additional return that may be
in the form of a fixed fee or a percentage of the collateral.
High Yield Portfolio would have the right to call the loan and
obtain the securities loaned at any time on notice of not more
than five business days. In the event of bankruptcy or other
default of the borrower, High Yield Portfolio could experience
both delays in liquidating the loan collateral or recovering the
loaned securities and losses including (a) possible decline in
the value of the collateral or in the value of the securities
loaned during the period while High Yield Portfolio seeks to
enforce its rights thereto, (b) possible subnormal levels of
income and lack of access to income during this period, and (c)
expenses of enforcing its rights.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES; REVERSE REPURCHASE
AGREEMENTS; STANDBY COMMITMENTS
High Yield Portfolio may purchase instruments on a when-
issued or delayed-delivery basis. Although payment terms are
established at the time High Yield Portfolio enters into the
commitment, the instruments may be delivered and paid for some
time after the date of purchase, when their value may have
changed and the yields available in the market may be greater.
High Yield Portfolio will make such commitments only with the
intention of actually acquiring the instruments, but may sell
them before settlement date if it is deemed advisable for
investment reasons. Securities purchased in this manner involve
risk of loss if the value of the security purchased declines
before settlement date.
High Yield Portfolio may purchase securities on a when-
issued or delayed-delivery basis, as described in the
Prospectus. High Yield Portfolio makes such commitments only
with the intention of actually acquiring the securities, but may
sell the securities before settlement date if the Adviser deems
it advisable for investment reasons. Securities purchased on a
when-issued or delayed-delivery basis are sometimes done on a
"dollar roll" basis. Dollar roll transactions consist of the
sale by High Yield Portfolio of securities with a commitment to
purchase similar but not identical securities, generally at a
lower price at a future date. A dollar roll may be renewed
after cash settlement and initially may involve only a firm
commitment agreement by High Yield Portfolio to buy a security.
A dollar roll transaction involves the following risks: if the
broker-dealer to whom High Yield Portfolio sells the security
becomes insolvent, High Yield Portfolio's right to purchase or
repurchase the security may be restricted; the value of the
security may change adversely over the term of the dollar roll;
the security which High Yield Portfolio is required to
repurchase may be worth less than a security which High Yield
Portfolio originally held; and the return earned by High Yield
Portfolio with the proceeds of a dollar roll may not exceed
transaction costs.
High Yield Portfolio may enter into reverse repurchase
agreements with banks and securities dealers. A reverse
repurchase agreement is a repurchase agreement in which High
Yield 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 High Yield 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 or other "high grade" debt obligations) of High
Yield 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 High Yield 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.
Standby commitment agreements create an additional risk for
High Yield Portfolio because the other party to the standby
agreement generally will not be obligated to deliver the
security, but High Yield Portfolio will be obligated to accept
it if delivered. Depending on market conditions, High Yield
Portfolio may receive a commitment fee for assuming this
obligation. If prevailing market interest rates increase during
the period between the date of the agreement and the settlement
date, the other party can be expected to deliver the security
and, in effect, pass any decline in value to High Yield
Portfolio. If the value of the security increases after the
agreement is made, however, the other party is unlikely to
deliver the security. In other words, a decrease in the value
of the securities to be purchased under the terms of a standby
commitment agreement will likely result in the delivery of the
security, and, therefore, such decrease will be reflected in
High Yield Portfolio's net asset value. However, any increase
in the value of the securities to be purchased will likely
result in the non-delivery of the security and, therefore, such
increase will not affect the net asset value unless and until
High Yield Portfolio actually obtains the security.
SHORT SALES AGAINST THE BOX
High Yield 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. High Yield Portfolio may make short sales of
securities only if at all times when a short position is open
High Yield Portfolio 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, High Yield Portfolio does
not deliver from its portfolio the securities sold. Instead,
High Yield 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 High Yield
Portfolio, to the purchaser of such securities. High Yield
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, High Yield Portfolio must deposit and continuously
maintain in a separate account with High Yield Portfolio's
custodian an equivalent amount of the securities sold short or
securities convertible into or exchangeable for such securities
at no additional cost. High Yield Portfolio is said to have a
short position in the securities sold until it delivers to the
broker-dealer the securities sold. High Yield 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 High Yield 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 High Yield
Portfolio owns, either directly or indirectly, and, in the case
where High Yield 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 High Yield Portfolio replaces the
borrowed security, High Yield Portfolio will incur a loss and if
the price declines during this period, High Yield 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 High Yield Portfolio may have to pay in
connection with such short sale. Certain provisions of the
Internal Revenue Code may limit the degree to which High Yield
Portfolio is able to enter into short sales. There is no
limitation on the amount of High Yield 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. High Yield Portfolio currently expects that no more than
5% of its total assets would be involved in short sales against
the box.
LINE OF CREDIT
Subject to restriction (8) under Investment Restrictions,
High Yield 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, Institutional High Yield Fund has received
permission to lend money to, and borrow money from, other mutual
funds advised by the Adviser. Institutional High Yield Fund
will borrow through the program when the costs are equal to or
lower than the costs of bank loans.
PIK AND ZERO COUPON BONDS
High Yield Portfolio may invest up to 20% of its assets in
zero coupon bonds and bonds the interest on which is payable in
kind ("PIK bonds"). A zero coupon bond is a bond that does not
pay interest for its entire life. A PIK bond pays interest in
the form of additional securities. The market prices of both
zero coupon and PIK bonds are affected to a greater extent by
changes in prevailing levels of interest rates and thereby tend
to be more volatile in price than securities that pay interest
periodically and in cash. In addition, because High Yield
Portfolio accrues income with respect to these securities prior
to the receipt of such interest in cash, it may have to dispose
of portfolio securities under disadvantageous circumstances in
order to obtain cash needed to pay income dividends in amounts
necessary to avoid unfavorable tax consequences.
RATED SECURITIES
For a description of the ratings applied by rating services
to debt securities, please refer to the Appendix. The rated
debt securities described under Investment Policies above for
High Yield Portfolio include securities given a rating
conditionally by Moody's or provisionally by S&P. If the rating
of a security held by High Yield Portfolio is withdrawn or
reduced, High Yield Portfolio is not required to sell the
security, but the Adviser will consider such fact in determining
whether High Yield Portfolio should continue to hold the
security. To the extent that the ratings accorded by Moody's or
S&P for debt securities may change as a result of changes in
such organizations, or changes in their rating systems, High
Yield Portfolio will attempt to use comparable ratings as
standards for its investments in debt securities in accordance
with its investment policies.
FOREIGN SECURITIES
High Yield Portfolio may invest up to 25% of total assets
(taken at market value at the time of investment) in securities
of foreign issuers that are not publicly traded in the United
States ("foreign securities"). For purposes of these limits,
foreign securities do not include securities represented by
American Depositary Receipts ("ADRs"), securities denominated in
U.S. dollars, or securities guaranteed by U.S. persons.
Investment in foreign securities may involve a greater degree of
risk (including risks relating to exchange fluctuations, tax
provisions, or expropriation of assets) than does investment in
securities of domestic issuers.
High Yield Portfolio may invest in both "sponsored" and
"unsponsored" ADRs. In a sponsored ADR, the issuer typically
pays some or all of the expenses of the depositary and agrees to
provide its regular shareholder communications to ADR holders.
An unsponsored ADR is created independently of the issuer of the
underlying security. The ADR holders generally pay the expenses
of the depositary and do not have an undertaking from the issuer
of the underlying security to furnish shareholder
communications. High Yield Portfolio does not expects to invest
as much as 5% of its total assets in unsponsored ADRs.
With respect to portfolio securities that are issued by
foreign issuers or denominated in foreign currencies, High Yield
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
investment 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 in 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 High Yield Portfolio 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.
High Yield Portfolio's foreign currency exchange
transactions are limited to transaction and portfolio hedging
involving either specific transactions or portfolio positions,
except to the extent described below under Synthetic Foreign
Positions. Transaction hedging is the purchase or sale of
forward contracts with respect to specific receivables or
payables of High Yield 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 High
Yield 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. High Yield 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 High Yield 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,
High Yield 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 High Yield Portfolio. High Yield Portfolio may not
engage in "speculative" currency exchange transactions.
At the maturity of a forward contract to deliver a
particular currency, High Yield 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 High
Yield 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 High
Yield 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 High Yield
Portfolio is obligated to deliver.
If High Yield Portfolio retains the portfolio security and
engages in an offsetting transaction, High Yield Portfolio will
incur a gain or a loss to the extent that there has been
movement in forward contract prices. If High Yield 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 High Yield
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, High Yield 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, High Yield 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 High
Yield Portfolio of unrealized profits or force High Yield
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 High Yield Portfolio to hedge against a
devaluation that is so generally anticipated that High Yield
Portfolio is not able to contract to sell the currency at a
price above the devaluation level it anticipates. The cost to
High Yield 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.
Synthetic Foreign Positions. High Yield Portfolio may
invest in debt instruments denominated in foreign currencies.
In addition to, or in lieu of, such direct investment, High
Yield Portfolio may construct a synthetic foreign position by
(a) purchasing a debt instrument denominated in one currency,
generally U.S. dollars, and (b) concurrently entering into a
forward contract to deliver a corresponding amount of that
currency in exchange for a different currency on a future date
and at a specified rate of exchange. Because of the
availability of a variety of highly liquid U.S. dollar debt
instruments, a synthetic foreign position utilizing such U.S.
dollar instruments may offer greater liquidity than direct
investment in foreign currency debt instruments. The results of
a direct investment in a foreign currency and a concurrent
construction of a synthetic position in such foreign currency,
in terms of both income yield and gain or loss from changes in
currency exchange rates, in general should be similar, but would
not be identical because the components of the alternative
investments would not be identical.
High Yield Portfolio may also construct a synthetic foreign
position by entering into a swap arrangement. A swap is a
contractual agreement between two parties to exchange cash
flows--at the time of the swap agreement and again at maturity,
and, with some swaps, at various intervals through the period of
the agreement. The use of swaps to construct a synthetic
foreign position would generally entail the swap of interest
rates and currencies. A currency swap is a contractual
arrangement between two parties to exchange principal amounts in
different currencies at a predetermined foreign exchange rate.
An interest rate swap is a contractual agreement between two
parties to exchange interest payments on identical principal
amounts. An interest rate swap may be between a floating and a
fixed rate instrument, a domestic and a foreign instrument, or
any other type of cash flow exchange. A currency swap generally
has the same risk characteristics as a forward currency
contract, and all types of swaps have counter-party risk.
Depending on the facts and circumstances, swaps may be
considered illiquid. Illiquid securities usually have greater
investment risk and are subject to greater price volatility.
The net amount of the excess, if any, of High Yield Portfolio's
obligations over which it is entitled to receive with respect to
an interest rate or currency swap will be accrued daily and
liquid assets (cash, U.S. Government securities, or other "high
grade" debt obligations) of High Yield Portfolio having a value
at least equal to such accrued excess will be segregated on the
books of High Yield Portfolio and held by the Custodian for the
duration of the swap.
High Yield Portfolio may also construct a synthetic foreign
position by purchasing an instrument whose return is tied to the
return of the desired foreign position. An investment in these
"principal exchange rate linked securities" (often called PERLS)
can produce a similar return to a direct investment in a foreign
security.
RULE 144A SECURITIES
High Yield Portfolio may purchase securities that have been
privately placed but that are eligible for purchase and sale
under Rule 144A under the 1933 Act. That Rule permits certain
qualified institutional buyers, such as High Yield Portfolio, to
trade in privately placed securities that have not been
registered for sale under the 1933 Act. The Adviser, under the
supervision of the Board of Trustees, will consider whether
securities purchased under Rule 144A are illiquid and thus
subject to High Yield Portfolio's restriction of investing no
more than 10% 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, the
Adviser will consider the trading markets for the specific
security, taking into account the unregistered nature of a Rule
144A security. In addition, the Adviser 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, High Yield Portfolio's
holdings of illiquid securities would be reviewed to determine
what, if any, steps are required to assure that High Yield
Portfolio does not invest more than 10% of its assets in
illiquid securities. Investing in Rule 144A securities could
have the effect of increasing the amount of High Yield
Portfolio's assets invested in illiquid securities if qualified
institutional buyers are unwilling to purchase such securities.
High Yield Portfolio does not expect to invest as much as 5% of
its total assets in Rule 144A securities that have not been
deemed to be liquid by the Adviser.
PORTFOLIO TURNOVER
The turnover rate for High Yield Portfolio in the future
may vary greatly from year to year, and when portfolio changes
are deemed appropriate due to market or other conditions, such
turnover rate may be greater than might otherwise be
anticipated. A high rate of portfolio turnover may result in
increased transaction expenses and the realization of capital
gains or losses. Distributions of any net realized gains are
subject to federal income tax. (See Risks and Investment
Considerations and Distributions and Income Taxes in the
Prospectus, and Additional Income Tax Considerations in this
Statement of Additional Information.)
OPTIONS ON SECURITIES AND INDEXES
High Yield Portfolio may purchase and may sell both put
options and call options on debt or other securities or indexes
in standardized contracts traded on national securities
exchanges, boards of trade, or similar entities, or quoted on
NASDAQ, and 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. The writer of an option
on an individual security has the obligation upon exercise of
the option to deliver the underlying security upon payment of
the exercise price or to pay the exercise price upon delivery of
the underlying security. 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.)
High Yield Portfolio will write call options and put
options only if they are "covered." In the case of a call
option on a security, the option is "covered" if High Yield
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 High Yield Portfolio expires, High
Yield Portfolio realizes a capital gain equal to the premium
received at the time the option was written. If an option
purchased by High Yield Portfolio expires, High Yield 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 High Yield Portfolio desires.
High Yield 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, High Yield 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, High Yield
Portfolio will realize a capital gain or, if it is less, High
Yield 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 High Yield Portfolio is
an asset of High Yield Portfolio, valued initially at the
premium paid for the option. The premium received for an option
written by High Yield 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
on securities and on indexes. For example, there are
significant differences between the securities markets and
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 High Yield Portfolio seeks to close out an option position.
If High Yield 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 High Yield 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, High Yield 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 by High
Yield Portfolio, High Yield Portfolio would not be able to close
out the option. If restrictions on exercise were imposed, High
Yield Portfolio might be unable to exercise an option it has
purchased.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
High Yield Portfolio may use interest rate futures
contracts and index futures contracts. An interest rate or
index 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 as well as the following
financial instruments: U.S. Treasury bonds; U.S. Treasury notes;
GNMA Certificates; three-month U.S. Treasury bills; 90-day
commercial paper; bank certificates of deposit; Eurodollar
certificates of deposit; and foreign currencies. It is expected
that other 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.
- --------------
High Yield Portfolio may purchase and write call and put
futures options. Futures options possess many of the same
characteristics as options on securities and indexes (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. High Yield Portfolio might, for example, use futures
contracts to hedge against or gain exposure to fluctuations in
the general level of security prices, anticipated changes in
interest rates or currency fluctuations that might adversely
affect either the value of High Yield Portfolio's securities or
the price of the securities that High Yield Portfolio intends to
purchase. Although other techniques could be used to reduce
High Yield Portfolio's exposure to security price, interest rate
and currency fluctuations, High Yield Portfolio may be able to
achieve its exposure more effectively and perhaps at a lower
cost by using futures contracts and futures options.
High Yield 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 the
Adviser correctly predicting changes in the level and direction
of security prices, interest rates, currency exchange rates and
other factors. Should those predictions be incorrect, High
Yield Portfolio's return might have been better had the
transaction not been attempted; however, in the absence of the
ability to use futures contracts, the Adviser 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
High Yield Portfolio, High Yield 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
that is returned to High Yield Portfolio upon termination of the
contract, assuming all contractual obligations have been
satisfied. High Yield Portfolio expects to earn interest income
on its initial margin deposits. A futures contract held by High
Yield Portfolio is valued daily at the official settlement price
of the exchange on which it is traded. Each day High Yield
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 High Yield Portfolio does not represent a
borrowing or loan by High Yield Portfolio but is instead
settlement between High Yield Portfolio and the broker of the
amount one would owe the other if the futures contract had
expired at the close of the previous trading day. In computing
daily net asset value, High Yield Portfolio will mark-to-market
its open futures positions.
High Yield 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 High
Yield 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, High Yield
Portfolio realizes a capital gain, or if it is more, High Yield
Portfolio realizes a capital loss. Conversely, if an offsetting
sale price is more than the original purchase price, High Yield
Portfolio realizes a capital gain, or if it is less, High Yield
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 as hedging techniques. 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 debt
securities, including technical influences in futures trading
and futures options and differences between the financial
instruments and the instruments underlying the standard
contracts available for trading in such respects as interest
rate levels, maturities, and creditworthiness of issuers. A
decision as to whether, when and how to hedge 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 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.
There can be no assurance that a liquid market will exist
at a time when High Yield Portfolio seeks to close out a futures
or a futures option position. High Yield 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, High Yield Portfolio may also use those investment
vehicles, provided the Board of Trustees determines that their
use is consistent with High Yield Portfolio's investment
objective.
High Yield 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 High Yield
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 High Yield 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 on a
futures contract, High Yield 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, High Yield 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 High Yield Portfolio.
High Yield 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 High Yield 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," High Yield 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 High Yield
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%].
As long as Institutional High Yield Fund continues to sell
its shares in certain states, High Yield Portfolio's options
transactions will also be subject to certain non-fundamental
investment restrictions set forth under Investment Restrictions
in this Statement of Additional Information.
TAXATION OF OPTIONS AND FUTURES
If High Yield 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 High Yield 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 High Yield 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 High Yield 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 High Yield
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.
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
High Yield Portfolio delivers securities under a futures
contract, High Yield Portfolio also realizes a capital gain or
loss on those securities.
For federal income tax purposes, High Yield 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 options, futures and futures 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 High Yield 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.
In order for High Yield 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, and forward contracts). In addition, gains realized on
the sale or other disposition of securities held for less than
three months must be limited to less than 30% of High Yield
Portfolio's annual gross income. 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. In order to avoid
realizing excessive gains on securities held less than three
months, High Yield Portfolio may be required to defer the
closing out of certain positions beyond the time when it would
otherwise be advantageous to do so.
Institutional High Yield 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.
INVESTMENT RESTRICTIONS
Institutional High Yield Fund and High Yield Portfolio
operate under the following investment restrictions.
Institutional High Yield Fund and High Yield Portfolio may not:
(1) invest in a security if, as a result of such
investment, more than 25% of its total assets (taken at market
value at the time of such investment) would be invested in the
securities of issuers in any particular industry, except that
this restriction does not apply to U.S. Government Securities,
and [Institutional High Yield Fund 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) invest in a security if, with respect to 75% of its
assets, as a result of such investment, more than 5% of its
total assets (taken at market value at the time of such
investment) would be invested in the securities of any one
issuer, except that this restriction does not apply to U.S.
Government Securities or repurchase agreements for such
securities and [Institutional High Yield Fund 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) invest in a security if, as a result of such
investment, it would hold more than 10% (taken at the time of
such investment) of the outstanding voting securities of any one
issuer, [Institutional High Yield Fund 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);
(5) purchase or sell commodities or commodities contracts
or oil, gas or mineral programs, except that it may enter into
(i) futures and options on futures and (ii) forward contracts;
(6) purchase securities on margin, except for use of
short-term credit necessary for clearance of purchases and sales
of portfolio securities, but it may make margin deposits in
connection with transactions in options, futures, and options on
futures;
(7) 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;
(8) borrow except that it may (a) borrow for non-
leveraging, 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;
(9) act as an underwriter of securities, except insofar as
it may be deemed to be an "underwriter" for purposes of the
Securities Act of 1933 on disposition of securities acquired
subject to legal or contractual restrictions on resale,
[Institutional High Yield Fund 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
(10) issue any senior security except to the extent
permitted under the Investment Company Act of 1940.
The above restrictions are fundamental policies and may not
be changed without the approval of a "majority of the
outstanding voting securities" of the Fund or High Yield
Portfolio, as previously defined herein. The policy on the
scope of transactions involving lending of portfolio securities
to broker-dealers and banks (as set forth herein under Portfolio
Investments and Strategies) is also a fundamental policy.
Institutional High Yield Fund and High Yield Portfolio are
also subject to the following restrictions and policies that may
be changed by the Board of Trustees. None of the following
restrictions shall prevent it from investing all or
substantially all of its assets in another investment company
having the same investment objective and substantially similar
investment policies as the Fund. Unless otherwise indicated,
Institutional High Yield Fund and High Yield Portfolio may not:
(A) invest for the purpose of exercising control or
management;
(B) 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;/4/
- ------------
/4/Stein Roe Funds have been informed that the staff of the
Securities and Exchange Commission takes the position that the
issuers of certain CMOs and certain other collateralized assets
are investment companies and that subsidiaries of foreign banks
may be investment companies for purposes of Section 12(d)(1) of
the Investment Company Act of 1940, which limits the ability of
one investment company to invest in another investment company.
Accordingly, High Yield Portfolio intends to operate within the
applicable limitations under Section 12(d)(1)(A) of that Act.
- ------------
(C) mortgage, pledge, hypothecate or in any manner
transfer, as security for indebtedness, any securities owned or
held by it, except as may be necessary in connection with (i)
borrowings permitted in (8) above and (ii) options, futures, and
options on futures;
(D) purchase or retain securities of any issuer if 5% of
the securities of such issuer are owned by those officers and
trustees or directors of the Trust or of its investment adviser
who each own beneficially more than l/2 of 1% of its securities;
(E) purchase portfolio securities from, or sell portfolio
securities to, any of the officers and directors or trustees of
the Trust or of its investment adviser;
(F) purchase shares of other open-end investment
companies, except in connection with a merger, consolidation,
acquisition, or reorganization;
(G) invest more than 5% of its net assets (valued at time
of investment) in warrants, nor more than 2% of its net assets
in warrants which are not listed on the New York or American
Stock Exchange;
(H) 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;
(I) write an option on a security unless the option is
issued by the Options Clearing Corporation, an exchange, or
similar entity;
(J) buy or sell an option on a security, a futures
contract, or an option on a futures contract unless the option,
the futures contract, or the option on the futures contract is
offered through the facilities of a national securities
association or listed on a national exchange or similar entity;
(K) invest in limited partnerships in real estate unless
they are readily marketable;
(L) 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;
(M) invest more than 5% of its total assets (taken at
market value at the time of a particular investment) in
securities of issuers (other than issuers of federal agency
obligations or securities issued or guaranteed by any foreign
country or asset-backed securities) that, together with any
predecessors or unconditional guarantors, have been in
continuous operation for less than three years ("unseasoned
issuers");
(N) invest more than 15% 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;
(O) invest more than 15% of its total assets (taken at
market value at the time of a particular investment) in
restricted securities and securities of unseasoned issuers; or
(P) invest more than 10% of its net assets (taken at
market value at the time of a particular investment) in illiquid
securities /5/, including repurchase agreements maturing in more
than seven days.
- -------------
/5/ In the judgment of the Adviser, Private Placement Notes,
which are issued pursuant to Section 4(2) of the Securities Act
of 1933, generally are readily marketable even though they are
subject to certain legal restrictions on resale. As such, they
are not treated as being subject to the limitation on illiquid
securities.
- -------------
ADDITIONAL INVESTMENT CONSIDERATIONS
The Adviser seeks to provide superior long-term investment
results through a disciplined, research-intensive approach to
investment selection and prudent risk management. In working to
build wealth for generations, 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.
In addition, the Adviser believes that investment in a high
yield fund provides an opportunity to diversify an investment
portfolio because the economic factors that affect the
performance of high-yield, high-risk debt securities differ from
those that affect the performance of high-quality debt
securities or equity securities.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the Prospectus
under the headings How to Purchase Shares, How to Redeem Shares,
and Net Asset Value, and that information is incorporated herein
by reference. The Prospectus discloses that shares may be
purchased (or redeemed) through investment dealers, banks, or
other intermediaries. It is the responsibility of any such
intermediary to establish procedures insuring the prompt
transmission to Institutional Trust of any such purchase order.
The state of Texas has asked that mutual funds disclose in their
Statement of Additional Information, as a reminder to any such
intermediary, that it must be registered as a dealer in Texas.
Through an account with an Intermediary, a shareholder may
be able to exchange shares of Institutional High Yield Fund for
shares of another Stein Roe Fund. Each Intermediary will
establish its own exchange policy and procedures for its
accounts. Shares are exchanged at the next price calculated on
a day the NYSE is open, after an exchange order is received and
accepted by an Intermediary.
- - Shares can be exchanged only between accounts registered in
the same name, address, and taxpayer ID number of the
Intermediary.
- - An exchange can be made only into a Stein Roe Fund whose
shares are eligible for sale in the state where the Intermediary
is located.
- - An exchange may have tax consequences.
- - Institutional High Yield Fund may refuse any exchange orders
from any Intermediary if for any reason they are not deemed to
be in the best interests of the Fund and its shareholders.
- - Institutional High Yield Fund may impose other restrictions on
the exchange privilege, or modify or terminate the privilege,
but will try to give each Intermediary advance notice whenever
it can reasonably do so.
Institutional High Yield Fund's net asset value 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
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 Institutional High Yield Fund should be
determined on any such day, in which case the determination will
be made at 3:00 p.m., central time.
Institutional Trust reserves the right to suspend or
postpone redemptions of shares of its series 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 series not reasonably
practicable.
Institutional Trust intends to pay all redemptions in cash
and is obligated to redeem shares of its series solely in cash
up to the lesser of $250,000 or one percent of the net assets of
Institutional High Yield Fund 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, Institutional 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 $100,000. An
investor will be notified that the value of his account is less
than the minimum and allowed at least 30 days to bring the value
of the account up to at least $100,000 before the redemption is
processed. The Agreement and Declaration of Trust also
authorizes Institutional Trust to redeem shares under certain
other circumstances as may be specified by the Board of
Trustees.
MANAGEMENT
The following table sets forth certain information with
respect to trustees and officers of Institutional Trust:
<TABLE>
<CAPTION>
POSITION(S) HELD WITH PRINCIPAL OCCUPATION(S)
NAME AGE INSTITUTIONAL TRUST DURING PAST FIVE YEARS
<C> <S> <S> <S>
Gary A. Anetsberger 41 Senior Vice-President Chief Financial Officer of the
(4) Mutual Funds division of Stein
Roe & Farnham Incorporated
(the "Adviser"); senior vice
president of the Adviser since
April, 1996; vice president
of the Adviser prior thereto
Timothy K. Armour 48 President; Trustee President of the Mutual Funds
(1)(2)(4) division of the Adviser and
director of the Adviser since
June, 1992; senior vice president
and director of marketing of
Citibank Illinois prior thereto
Jilaine Hummel Bauer 41 Executive Vice-President; General counsel and secretary of
(4) Secretary the Adviser since November 1995;
senior vice president of the
Adviser since April, 1992; vice
president of the Adviser prior
thereto
Ann H. Benjamin 38 Vice-President Senior vice president of the
Adviser since July, 1994; vice
president of the Adviser from
January, 1992 to July, 1994;
associate of the Adviser prior
thereto
Kenneth L. Block 76 Trustee Chairman Emeritus of A. T. Kearney,
(3)(4) Inc. (international management
consultants)
William W. Boyd 70 Trustee Chairman and director of Sterling
(3)(4) Plumbing Group, Inc. (manufacturer
of plumbing products) since 1992;
chairman, president, and chief
executive officer of Sterling
Plumbing Group, Inc. prior thereto
Thomas W. Butch 39 Vice-President Senior vice president of the
Adviser since September, 1994;
first vice president, corporate
communications, of Mellon Bank
Corporation prior thereto
Lindsay Cook(1)(4) 44 Trustee Senior vice president of Liberty
Financial Companies, Inc. (the
indirect parent of the Adviser)
Philip J. Crosley 50 Vice-President Senior Vice President of the
Adviser since February, 1996;
Vice President, Institutional
Sales-Advisor Sales, Invesco
Funds Group prior thereto
Douglas A. Hacker 41 Trustee Senior vice president and chief
(3)(4) financial officer, United
Airlines, since July, 1994;
senior vice president - Finance,
United Airlines, February, 1993
to July, 1994; vice president,
American Airlines prior thereto
Janet Langford Kelly 39 Trustee Senior vice president, secretary
(3)(4) and general counsel, Sara Lee
Corporation (branded, packaged,
consumer-products manufacturer),
since 1995; partner, Sidley &
Austin (law firm), 1991 through 1994
Michael T. Kennedy 34 Vice-President Senior vice president of the
Adviser since October, 1994;
vice president of the Adviser
from January, 1992 to October,
1994; associate of the Adviser
prior thereto
Steven P. Luetger 43 Vice-President Senior vice president of the Adviser
Lynn C. Maddox 55 Vice-President Senior vice president of the Adviser
Anne E. Marcel 38 Vice-President Vice president of the Adviser
since April, 1996; manager,
Mutual Fund Sales & Services
of the Adviser since October,
1994; supervisor of the Counselor
Department of the Adviser from
October, 1992 to October, 1994;
vice president of Selected
Financial Services prior thereto
Francis W. Morley 76 Trustee Chairman of Employer Plan
(2)(3)(4) Administrators and Consultants
Co. (designer, administrator,
and communicator of employee
benefit plans)
Jane M. Naeseth 46 Vice-President Senior vice president of the
Adviser since January, 1991; vice
president of the Adviser prior thereto
Charles R. Nelson 54 Trustee Van Voorhis Professor of Political
(3) (4) Economy of the University of Washington
Nicolette D. Parrish 47 Vice-President; Senior compliance administrator and
(4) Assistant Secretary assistant secretary of the Adviser
since November 1995; senior legal
assistant for the Adviser prior thereto
Cynthia A. Prah (4) 34 Vice-President Manager of Shareholder
Transaction Processing for
the Adviser
Sharon R. Robertson 35 Controller Accounting manager for the Adviser's
(4) Mutual Funds division
Janet B. Rysz (4) 41 Assistant Secretary Senior compliance administrator
and assistant secretary of the
Adviser
Thomas P. Sorbo 35 Vice-President Senior vice president of the
Adviser since January, 1994;
vice president of the Adviser
from September, 1992 to December,
1993; associate of Travelers
Insurance Company prior thereto
Thomas C. Theobald 59 Trustee Managing partner, William Blair
(3) (4) Capital Partners (private equity
fund) since 1994; chief executive
officer and chairman of the Board
of Directors of Continental Bank
Corporation prior thereto
Heidi J. Walter (4) 29 Vice-President Legal counsel for the Adviser
since March, 1995; associate with
Beeler Schad & Diamond, P,C.
prior thereto
Hans P. Ziegler (4) 55 Executive Vice-President Chief executive officer of the
Adviser since May, 1994;
president of the Investment
Counsel division of the Adviser
from July, 1993 to June, 1994;
president and chief executive
officer, Pitcairn Financial
Management Group prior thereto
Margaret O. Zwick 30 Treasurer Compliance manager for the Adviser's
(4) Mutual Funds division since
August 1995; compliance
accountant, January 1995 to
July 1995; section manager,
January 1994 to January 1995;
supervisor prior thereto
</TABLE>
______________________
(1) Trustee who is an "interested person" of Institutional Trust
and of the Adviser, 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 the Base Trust.
Certain of the trustees and officers of Institutional Trust
and of Base Trust are trustees or officers of other investment
companies managed by the Adviser. Mr. Armour, Ms. Bauer, and
Mr. Cook are also vice presidents of Institutional High Yield
Fund's distributor, Liberty Securities Corporation. The address
of Mr. Block is 11 Woodley Road, Winnetka, Illinois 60093; that
of Mr. Boyd is 2900 Golf Road, Rolling Meadows, Illinois 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, Illinois 60602;
that of Mr. Morley is 20 North Wacker Drive, Suite 2275,
Chicago, Illinois 60606; that of Mr. Nelson is Department of
Economics, University of Washington, Seattle, Washington 98195;
that of Mr. Theobald is Suite 3300, 222 West Adams Street,
Chicago, IL 60606; and that of the officers is One South Wacker
Drive, Chicago, Illinois 60606.
Officers and trustees affiliated with the Adviser serve
without any compensation from Institutional Trust. In
compensation for their services to Institutional Trust, trustees
who are not "interested persons" of Institutional Trust or the
Adviser are paid an annual retainer of $8,000 (divided equally
among the series of Institutional Trust) plus an attendance fee
from each series for each meeting of the Board or standing
committee thereof attended at which business for the series is
conducted. The attendance fees (other than for a Nominating
Committee meeting) are based on each series' net assets as of
the preceding December 31. For a series with net assets of less
than $50 million, the fee is $50 per meeting; with $51 to $250
million, the fee is $200 per meeting; with $251 million to $500
million, $350; with $501 million to $750 million, $500; with
$751 million to $1 billion, $650; and with over $1 billion in
net assets, $800. For Institutional High Yield Fund and any
other series of Institutional Trust participating in the master
fund/feeder fund structure, the trustees' attendance fee is paid
solely by the master portfolio. Each non-interested trustee
also receives $500 from Institutional Trust for attending each
meeting of the Nominating Committee. Institutional Trust has no
retirement or pension plan. The following table sets forth
compensation paid to the trustees by the Stein Roe Fund complex:
Estimated Compensation Total Compensation from
from Institutional Trust the Stein Roe Fund
for Fiscal Year Ending Complex for the year
Name of Trustee June 30, 1997* ended June 30, 1996**
- --------------- ------------------------ -----------------------
Timothy K. Armour -0- -0-
Lindsay Cook -0- -0-
Douglas A. Hacker -0- -0-
Thomas C. Theobald -0- -0-
Kenneth L. Block $4,000 $82,417
William W. Boyd 4,000 86,317
Francis W. Morley 4,000 82,017
Charles R. Nelson 4,000 86,317
Gordon R. Worley 4,000 82,817
_______________
* Assuming less than $50 million in net assets and no
nominating committee meeting held during the period.
** During this period, the Stein Roe Fund Complex consisted
of six series of Stein Roe Income Trust, four series of
Stein Roe Municipal Trust, eight series of Stein Roe
Investment Trust, and one series of Base Trust. Messrs.
Hacker and Theobald were elected trustees of those Trusts
on June 18, 1996, and, therefore, did not receive any
compensation for the year ended June 30, 1996. Mr. Worley
retired as a trustee on December 31, 1996; and Ms. Kelly
became a trustee on January 1, 1997.
PRINCIPAL SHAREHOLDERS
As of the date of this Statement of Additional Information,
Institutional High Yield Fund had only one shareholder, Stein
Roe & Farnham Incorporated, which held 10,000 shares.
INVESTMENT ADVISORY SERVICES
Stein Roe & Farnham Incorporated provides administrative
services to Institutional High Yield Fund and High Yield
Portfolio and portfolio management services to High Yield
Portfolio. The Adviser is a wholly owned subsidiary of SteinRoe
Services Inc. ("SSI"), Institutional High Yield Funds' transfer
agent, which is a wholly owned subsidiary of Liberty Financial
Companies, Inc. ("Liberty Financial"), which is a majority 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 the Adviser are Kenneth R. Leibler, Harold
W. Cogger, C. Allen Merritt, Jr., Timothy K. Armour, and Hans P.
Ziegler. Mr. Leibler is President and Chief Executive Officer
of Liberty Financial; Mr. Cogger is Executive Vice President of
Liberty Financial; Mr. Merritt is Senior Vice President and
Treasurer of Liberty Financial; Mr. Armour is President of the
Adviser's Mutual Funds division; and Mr. Ziegler is Chief
Executive Officer of the Adviser. The business address of
Messrs. Leibler, Cogger, and Merritt is Federal Reserve Plaza,
Boston, Massachusetts 02210; and that of Messrs. Armour, and
Ziegler is One South Wacker Drive, Chicago, Illinois 60606.
The Adviser and its predecessor have been providing
investment advisory services since 1932. The Adviser acts as
investment adviser to wealthy individuals, trustees, pension and
profit sharing plans, charitable organizations, and other
institutional investors. As of June 30, 1996, the Adviser
managed over $24.7 billion in assets: over $7.4 billion in
equities and over $17.3 billion in fixed-income securities
(including $1.2 billion in municipal securities). The $24.7
billion in managed assets included over $7 billion held by open-
end mutual funds managed by the Adviser (approximately 16% of
the mutual fund assets were held by clients of the Adviser).
These mutual funds were owned by over 189,000 shareholders. The
$7 billion in mutual fund assets included over $660 million in
over 38,000 IRA accounts. In managing those assets, the Adviser
utilizes a proprietary computer-based information system that
maintains and regularly updates information for approximately
6,500 companies. The Adviser also monitors over 1,400 issues
via a proprietary credit analysis system. At June 30, 1996, the
Adviser employed approximately 16 research analysts and 32
account managers. The average investment-related experience of
these individuals was 20 years.
Please refer to the description of the Adviser, the
management and administrative agreements, fees, expense
limitations, and transfer agency services under Management and
Fee Table in the Prospectus, which is incorporated herein by
reference.
The Adviser provides office space and executive and other
personnel to Institutional High Yield Fund and bears any sales
or promotional expenses. Institutional High Yield Fund pays all
expenses other than those paid by the Adviser, including but not
limited to printing and postage charges and securities
registration and custodian fees and expenses incidental to its
organization.
Institutional High Yield Fund's administrative agreement
provides that the Adviser shall reimburse the Fund to the extent
that its total annual expenses (including fees paid to the
Adviser, but excluding taxes, interest, brokers' 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 shares of Institutional
High Yield Fund are being offered for sale to the public;
however, such reimbursement for any fiscal year will not exceed
the amount of the fees paid by Institutional High Yield Fund
under that agreement for such year. In addition, in the
interest of further limiting Institutional High Yield Fund's
expenses, the Adviser may voluntarily waive its management fee
and/or absorb certain its expenses, as described in the
Prospectus under Fee Table. Any such reimbursements will
enhance the yield of the Fund.
High Yield Portfolio's management agreement provides that
neither the Adviser nor any of its directors, officers,
stockholders (or partners of stockholders), agents, or employees
shall have any liability to Base Trust or any shareholder of
High Yield Portfolio 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 the Adviser of its duties
under the agreement, except for liability resulting from willful
misfeasance, bad faith or gross negligence on the Adviser's part
in the performance of its duties or from reckless disregard by
the Adviser of the Adviser's obligations and duties under that
agreement.
Any expenses that are attributable solely to the
organization, operation, or business of Institutional High Yield
Fund shall be paid solely out of that Fund's assets. Any
expenses incurred by Institutional Trust that are not solely
attributable to a particular Fund are apportioned in such manner
as the Adviser determines is fair and appropriate, unless
otherwise specified by the Board of Trustees.
DISTRIBUTOR
Shares of Institutional High Yield Fund are distributed by
Liberty Securities Corporation ("LSC"), under a Distribution
Agreement as described under Management in the Prospectus, which
is incorporated herein by reference. 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 Institutional
Trust, and (ii) by a majority of the trustees who are not
parties to the Agreement or interested persons of any such
party. Institutional 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.
As agent, LSC offers shares of Institutional High Yield
Fund to investors in states where the shares are qualified for
sale, at net asset value, without sales commissions or other
sales load to the investor. No sales commission or "12b-1"
payment is paid by Institutional High Yield Fund. LSC offers
Institutional High Yield Fund's shares only on a best-efforts
basis.
TRANSFER AGENT
SSI performs certain transfer agency services for
Institutional Trust, as described under Management in the
Prospectus. For performing these services, SSI receives from
Institutional High Yield Fund a fee based on an annual rate of
.05 of 1% of average daily net assets of Institutional High
Yield Fund. The Board of Trustees believes the charges by SSI
are comparable to those of other companies performing similar
services. (See Investment Advisory Services.)
CUSTODIAN
State Street Bank and Trust Company (the "Bank"), 225
Franklin Street, Boston, Massachusetts 02101, is the custodian
for Institutional Trust and 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 custodian 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.
Each Board of Trustees reviews, at least annually, whether
it is in the best interest of Institutional High Yield Fund,
High Yield Portfolio, and their shareholders to maintain assets
in each custodial institution. However, with respect to foreign
sub-custodians, there can be no assurance that it, 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 the 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.
Institutional High Yield Fund and High Yield Portfolio may
invest in obligations of the custodian and may purchase or sell
securities from or to the custodian.
INDEPENDENT AUDITORS
The independent auditors for Institutional Trust and High
Yield Portfolio are Ernst & Young LLP, 233 South Wacker Drive,
Chicago, Illinois 60606. The independent auditors 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 the applicable Trust.
PORTFOLIO TRANSACTIONS
The Adviser places the orders for the purchase and sale of
portfolio securities and options and futures contracts for High
Yield Portfolio. Purchases and sales of portfolio securities
are ordinarily transacted with the issuer or with a primary
market maker acting as principal or agent for the securities on
a net basis, with no brokerage commission being paid by High
Yield Portfolio. Transactions placed through dealers reflect
the spread between the bid and asked prices. Occasionally, High
Yield Portfolio may make purchases of underwritten issues at
prices that include underwriting discounts or selling
concessions.
The Adviser's overriding objective in effecting portfolio
transactions is to seek to obtain the best combination of price
and execution. The best net price, giving effect to transaction
charges, if any, and other costs, normally is an important
factor in this decision, but a number of other judgmental
factors may also enter into the decision. These include: the
Adviser's knowledge of current transaction costs; the nature of
the security being traded; the size of the transaction; the
desired timing of the trade; 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 that are considered; the Adviser's
knowledge of the financial stability of the broker or dealer
selected and such other brokers or dealers; and the Adviser's
knowledge of actual or apparent operational problems of any
broker or dealer. Recognizing the value of these factors, High
Yield Portfolio may incur a transaction charge in excess of that
which another broker or dealer may have charged for effecting
the same transaction. Evaluations of the reasonableness of the
costs of portfolio transactions, based on the foregoing factors,
are made on an ongoing basis by the Adviser's staff and reports
are made annually to the Board of Trustees.
With respect to issues of securities involving brokerage
commissions, when more than one broker or dealer is believed to
be capable of providing the best combination of price and
execution with respect to a particular portfolio transaction for
High Yield Portfolio, the Adviser often selects a broker or
dealer that has furnished it with research products or services
such as research reports, subscriptions to financial
publications and research compilations, compilations of
securities prices, earnings, dividends and similar data, and
computer databases, quotation equipment and services, research-
oriented computer software and services, and services of
economic and other consultants. Selection of brokers or dealers
is not made pursuant to an agreement or understanding with any
of the brokers or dealers; however, the Adviser uses an internal
allocation procedure to identify those brokers or dealers who
provide it with research products or services and the amount of
research products or services they provide, and endeavors to
direct sufficient commissions generated by its clients' accounts
in the aggregate, including High Yield Portfolio, to such
brokers or dealers to ensure the continued receipt of research
products or services the Adviser feels are useful. In certain
instances, the Adviser receives from brokers and dealers
products or services which are used both as investment research
and for administrative, marketing, or other non-research
purposes. In such instances, the Adviser makes a good faith
effort to determine the relative proportions of such products or
services which may be considered as investment research. The
portion of the costs of such products or services attributable
to research usage may be defrayed by the Adviser (without prior
agreement or understanding, as noted above) through brokerage
commissions generated by transactions of clients (including High
Yield Portfolio), while the portion of the costs attributable to
non-research usage of such products or services is paid by the
Adviser in cash. No person acting on behalf of High Yield
Portfolio is authorized, in recognition of the value of research
products or services, to pay a price in excess of that which
another broker or dealer might have charged for effecting the
same transaction. Research products or services furnished by
brokers and dealers through whom transactions are effected may
be used in servicing any or all of the clients of the Adviser
and not all such research products or services are used in
connection with the management of High Yield Portfolio.
The Board 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. The Board has been advised
by counsel that recapture by a mutual fund currently is not
permitted under the Rules of Fair Practice of the National
Association of Securities Dealers ("NASD").
ADDITIONAL INCOME TAX CONSIDERATIONS
Institutional High Yield Fund and High Yield Portfolio
intend 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 capital gain distributions reduce net asset value,
if a shareholder purchases shares shortly before a record date,
he 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.
Institutional High Yield Fund expects that none of its
dividends will qualify for the deduction for dividends received
by corporate shareholders.
INVESTMENT PERFORMANCE
Institutional High Yield Fund may quote yield figures from
time to time. "Yield" is computed by dividing the net
investment income per share earned during a 30-day period (using
the average number of shares entitled to receive dividends) by
the net asset value per share on the last day of the period.
The Yield formula provides for semiannual compounding which
assumes that net investment income is earned and reinvested at a
constant rate and annualized at the end of a six-month period.
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.
6
The Yield formula is as follows: YIELD = 2[((a-b/cd) +1) -1].
Where: a = dividends and interest earned during the period
. (For this purpose, the Fund will recalculate the
yield to maturity based on market value of each
portfolio security on each business day on which
net asset value is calculated.)
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the ending net asset value of Institutional High
Yield Fund for the period.
_____________________
Institutional High Yield Fund may quote total return
figures from time to time. A "Total Return" on a per share
basis is the amount of dividends received 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 (including reinvestment
of distributions) by the value of the share at the beginning of
the period and subtracting one.
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 thereof).
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. They are not necessarily indicative of
future results. The performance of Institutional High Yield
Fund is a result of conditions in the securities markets,
portfolio management, and operating expenses. Although
investment performance information is useful in reviewing
Institutional High Yield 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.
In advertising and sales literature, Institutional High
Yield Fund may compare its yield and 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 Institutional High Yield.
Comparison of Institutional High Yield 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
Institutional Trust believes to be generally accurate.
Institutional High Yield Fund may also note its mention in
newspapers, magazines, or other media from time to time.
However, Institutional Trust assumes no responsibility for the
accuracy of such data. Newspapers and magazines that might
mention Institutional High Yield Fund include, but are not
limited to, the following:
Architectural Digest
Arizona Republic
Atlanta Constitution
Associated Press
Barron's
Bloomberg
Boston Herald
Business Week
Chicago Tribune
Chicago Sun-Times
Cleveland Plain Dealer
CNBC
CNN
Crain's Chicago Business
Consumer Reports
Consumer Digest
Dow Jones Newswire
Fee Advisor
Financial Planning
Financial World
Forbes
Fortune
Fund Action
Fund Decoder
Gourmet
Individual Investor
Investment Adviser
Investment Dealers' Digest
Investor's Business Daily
Kiplinger's Personal Finance Magazine
Knight-Ridder
Lipper Analytical Services
Los Angeles Times
Louis Rukeyser's Wall Street
Money
Morningstar
Mutual Fund Market News
Mutual Fund News Service
Mutual Funds Magazine
Newsweek
The New York Times
No-Load Fund Investor
Pension World
Pensions and Investment
Personal Investor
Physicians Financial News
Jane Bryant Quinn (syndicated column)
The San Francisco Chronicle
Securities Industry Daily
Smart Money
Smithsonian
Strategic Insight
Time
Travel & Leisure
USA Today
U.S. News & World Report
Value Line
The Wall Street Journal
The Washington Post
Working Women
Worth
Your Money
Institutional High Yield Fund may compare its performance
to the Consumer Price Index (All Urban), a widely-recognized
measure of inflation.
The performance of Institutional High Yield Fund may be
compared to the following as indicated below:
CS First Boston High Yield Index
ICD High Yield Index
Lehman High Yield Bond Index
Lehman High Yield Corporate Bond Index
Merrill Lynch High-Yield Master Index
Morningstar Corporate Bond (General) Average
Salomon Brothers Extended High Yield Market Index
Salomon Brothers High Yield Market Index
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. Institutional High
Yield Fund may also use comparative performance as computed in a
ranking by these services or category averages and rankings
provided by another independent service. Should these services
reclassify Institutional High Yield Fund to a different category
or develop (and place it into) a new category, it may compare
its performance or rank against other funds in the newly-
assigned category (or the average of such category) as published
by the service.
In advertising and sales literature, Institutional High
Yield 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 Institutional High Yield
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, Institutional High Yield 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
____________________
Institutional High Yield 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.)
TAX-DEFERRED INVESTMENT VS. TAXABLE INVESTMENT
INTEREST RATE 6% 8% 10% 6% 8% 10%
Compounding
Years Tax-Deferred Investment Taxable Investment
30 $124,992 $171,554 $242,340 $109,197 $135,346 $168,852
25 90,053 115,177 150,484 82,067 97,780 117,014
20 62,943 75,543 91,947 59,362 68,109 78,351
15 41,684 47,304 54,099 40,358 44,675 49,514
10 24,797 26,820 29,098 24,453 26,165 28,006
5 11,178 11,613 12,072 11,141 11,546 11,965
1 2,072 2,096 2,121 2,072 2,096 2,121
Average Life Calculations. From time to time,
Institutional High Yield Fund may quote an average life figure
for its portfolio. Average life is the weighted average period
over which the Adviser expects the principal to be paid, and
differs from stated maturity in that it estimates the effect of
expected principal prepayments and call provisions. With
respect to GNMA securities and other mortgage-backed securities,
average life is likely to be substantially less than the stated
maturity of the mortgages in the underlying pools. With respect
to obligations with call provisions, average life is typically
the next call date on which the obligation reasonably may be
expected to be called. Securities without prepayment or call
provisions generally have an average life equal to their stated
maturity.
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.
<PAGE>
BALANCE SEET
Stein Roe Institutional High Yield Fund
Statement of Net Assets
December 12, 1996
Assets:
Cash $100,000
Unamortized organization costs 50,000
--------
Total Assets 150,000
========
Liabilities:
Payable to the Adviser for
organization costs incurred 50,000
Capital
Paid in Capital (net assets) 100,000
--------
Total Liabilities and Capital $150,000
========
Shares Outstanding (Unlimited number
authorized) 10,000
========
Net Asset Value (Capital) Per Share $ 10.00
========
NOTES TO STATEMENT OF NET ASSETS
Note 1. Organization:
Stein Roe Institutional High Yield Fund (the "Fund") is a
separate series of the Stein Roe Institutional Trust (the
"Trust"), an open-end diversified management investment
company organized as a Massachusetts business trust. The
Fund will invest all of its net investable assets in SR&F
High Yield Portfolio (the "Portfolio"), a separate series of
the SR&F Base Trust. The Fund is inactive except for matters
relating to its organization and registration as an open-end
investment company under the Investment Company Act of 1940,
and the sale of 10,000 shares of the Fund for $100,000 to
Stein Roe & Farnham Incorporated (the "Adviser"), an indirect
wholly owned subsidiary of Liberty Financial Companies, Inc.
Organization costs will be amortized on a straight-line basis
against income over various periods of up to sixty months
from the commencement of public offering by the Fund,
depending on the nature of the individual costs.
Note 2. Transactions with Affiliates:
Upon commencement of investment operations, the Adviser will
receive a management fee from the Portfolio computed and
accrued daily, at an annual rate of 0.500% of the first $500
million of daily net assets and 0.475% thereafter. The
Adviser will also receive an administrative fee from the
Fund, computed and accrued daily, at an annual rate of 0.150%
of the first $500 million of daily net assets and 0.125%
thereafter.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees
Stein Roe Institutional Trust
We have audited the accompanying statement of net assets of
Stein Roe Institutional High Yield Fund, a series of Stein
Roe Institutional Trust, as of December 12, 1996. This
statement of net assets is the responsibility of the Fund's
management. Our responsibility is to express an opinion on
this statement of net assets based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about
whether the statement of net assets is free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
statement of net assets. An audit also includes assessing
the accounting principles used and significant estimates made
by management, as well as evaluating the overall statement of
net assets presentation. We believe that our audit of the
statement of net assets provides a reasonable basis for our
opinion.
In our opinion, the statement of net assets referred to above
presents fairly, in all material respects, the financial
position of Stein Roe Institutional High Yield Fund at
December 12, 1996, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
December 12, 1996
