1933 Act Registration No. 333-13331
1940 Act File No. 811-07823
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Post Effective Amendment No. 5 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 6 [X]
STEIN ROE INSTITUTIONAL TRUST
(Exact Name of Registrant as Specified in Charter)
One South Wacker Drive, Chicago, Illinois 60606
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 1-800-338-2550
Jilaine Hummel Bauer Cameron S. Avery
Executive Vice-President Bell, Boyd & Lloyd
& Secretary Three First National Plaza
Stein Roe Institutional Trust Suite 3300
One South Wacker Drive 70 W. Madison Street
Chicago, Illinois 60606 Chicago, Illinois 60602
(Name and Address of Agents for Service)
It is proposed that this filing will become effective (check
appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[X] on November 5, 1997 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
Registrant has previously elected to register pursuant to Rule 24f-2
an indefinite number of shares of beneficial interest of the series
Stein Roe Institutional High Yield Fund. The Rule 24f-2 Notice for
the fiscal year ended June 30, 1997 was filed on August 27, 1997.
This Registration Statement has also been signed by SR&F Base Trust
as it relates to Stein Roe Institutional High Yield Fund.
<PAGE>
STEIN ROE INSTITUTIONAL TRUST
CROSS REFERENCE SHEET
ITEM
NO. CAPTION
- ----- -------
PART A (PROSPECTUS)
1 Front cover
2 Fee Table; Summary
3 (a) Financial Highlights
(b) Inapplicable
(c) Investment Return
(d) Inapplicable
4 Organization and Description of Shares; The Fund;
Investment Policies; Investment Restrictions; Risks
and Investment Considerations; Portfolio Investments and
Strategies; Summary--Investment Risks
5 (a) Management--Trustees and Investment Adviser
(b) Management--Trustees and Investment Adviser, Fees and
Expenses
(c) Management--Portfolio Manager
(d) Inapplicable
(e) Management--Transfer Agent
(f) Management--Fees and Expenses; Financial Highlights
(g) Inapplicable
5A Inapplicable
6 (a) Organization and Description of Shares; see statement of
additional information: General Information and History
(b) Inapplicable
(c) Organization and Description of Shares
(d) Inapplicable
(e) For More Information
(f) Distributions and Income Taxes
(g) Distributions and Income Taxes
(h) Master Fund/Feeder Fund: Structure and Risk Factors
7 How to Purchase Shares
(a) Management--Distributor
(b) How to Purchase Shares; Net Asset Value
(c) Inapplicable
(d) How to Purchase Shares
(e) Inapplicable
(f) Inapplicable
(g) Inapplicable
8 How to Redeem Shares
9 Inapplicable
PART B (STATEMENT OF ADDITIONAL INFORMATION)
10 Cover page
11 Table of Contents
12 General Information and History
13 Investment Policies; Portfolio Investments and Strategies;
Investment Restrictions
14 Management
15 Principal Shareholders
16(a) Investment Advisory Services; Management; see prospectus:
Management, Fee Table
(b) Investment Advisory Services
(c) Inapplicable
(d) Investment Advisory Services
(e) Inapplicable
(f) Inapplicable
(g) Inapplicable
(h) Custodian; Independent Auditors
(i) Transfer Agent
17(a) Portfolio Transactions
(b) Inapplicable
(c) Portfolio Transactions
(d) Inapplicable
(e) Inapplicable
18 General Information and History
19(a) Purchases and Redemptions; see prospectus: How to Purchase
Shares, How to Redeem Shares
(b) Purchases and Redemptions; see prospectus: Net Asset Value
(c) Purchases and Redemptions
20 Additional Income Tax Considerations; Portfolio Investments
and Strategies--Taxation of Options and Futures
21(a) Distributor
(b) Inapplicable
(c) Inapplicable
22(a) Inapplicable
(b) Investment Performance
23 Financial Statements
PART C
24 Financial Statements and Exhibits
25 Persons Controlled By or Under Common Control with
Registrant
26 Number of Holders of Securities
27 Indemnification
28 Business and Other Connections of Investment Adviser
29 Principal Underwriters
30 Location of Accounts and Records
31 Management Services
32 Undertakings
<PAGE>
Stein Roe Mutual Funds
Stein Roe Institutional High Yield Fund
Prospectus
Nov. 5, 1997
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 SR&F High Yield Portfolio, which 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, Master Fund/Feeder Fund: Structure
and Risk Factors, 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 an 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 Nov. 5, 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 and the most recent financial
statements 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, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
TABLE OF CONTENTS
Page
Summary...................................2
Fee Table................................ 4
Financial Highlights......................5
The Fund..................................5
Investment Policies.......................6
Portfolio Investments and Strategies......8
Investment Restrictions............ .... 13
Risks and Investment Considerations..... 14
How to Purchase Shares...................15
How to Redeem Shares.................... 15
Net Asset Value......................... 16
Distributions and Income Taxes...........17
Investment Return........................18
Management.............................. 18
Organization and Description of Shares...20
Master Fund/Feeder Fund: Structure
and Risk Factors......................20
For More Information.................... 23
Appendix.................................23
SUMMARY
Stein Roe Institutional High Yield Fund ("Institutional High Yield
Fund") is a series of the Stein Roe Institutional Trust, an open-
end 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 Objective 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 objective
and policies, please see Investment Policies and Portfolio
Investments and Strategies. There is, of course, no assurance
that Institutional High Yield Fund and High Yield Portfolio will
achieve their common 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 (after fee waiver)........................0.10%
-----
Total Fund Operating Expenses (after fee waiver).........0.60%
=====
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
------ -------
$6 $19
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. 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 gains distributions are reinvested in
additional Fund shares.
From time to time, the Adviser may voluntarily waive a
portion of its fees and absorb certain expenses payable by
Institutional High Yield Fund and the Fund's pro rata share of the
fees and expenses payable by High Yield Portfolio. The Adviser
has agreed to voluntarily waive such fees and absorb such expenses
to the extent the ordinary operating expenses of Institutional
High Yield Fund exceed 0.60% of its annual average net assets.
This commitment expires on Oct. 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, Other Expenses and Total Fund
Operating Expenses would be 0.65%, 0.38% 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 fees and 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.
FINANCIAL HIGHLIGHTS
The table below reflects the results of operations of
Institutional High Yield Fund on a per-share basis and has been
audited by Ernst & Young LLP, independent auditors. The auditors'
report related to information for this period was unqualified.
The table should be read in conjunction with the Fund's financial
statements and notes thereto. The annual report may be obtained
from Institutional Trust without charge upon request.
Period Ended
June 30, 1997 (a)
-----------------
Net Asset Value, Beginning of Period $10.00
Income from Investment Operations
Net investment income 0.44
Net realized and unrealized gains on investments 0.31
------
Total from investment operations 0.75
Distributions from net investment income (0.44)
------
Net Asset Value, End of Period $10.31
======
Ratio of expenses to average net assets (b) .. *0.72%
Ratio of net investment income to average net
assets (c) ................................ *8.86%
Total return (c) ............................ **7.70%
Net assets, end of period (000 omitted)............ $107
- --------------
*Annualized.
**Not Annualized.
(a) From commencement of operations on Jan. 3, 1997.
(b) If Institutional High Yield Fund had paid all of its expenses
and there had been no reimbursement of expenses by the
Adviser, this ratio would have been 171.3% for the period
ended June 30, 1997.
(c) Computed giving effect to the Adviser's fee waiver.
THE FUND
Stein Roe Institutional High Yield Fund ("Institutional High Yield
Fund") is a no-load "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 with
the same investment objective invest their assets in another
investment company having the same investment objective and
substantially the same investment policies as Institutional 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 SR&F
High Yield Portfolio ("High Yield Portfolio"), which is a series
of SR&F Base Trust ("Base Trust"). (See Master Fund/Feeder Fund:
Structure and Risk Factors.)
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
invests 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 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 and 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." 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. 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 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.
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.
For the fiscal year ended June 30, 1997, High Yield
Portfolio's investment portfolio was invested, on average, as
follows: high-quality short-term instruments, 3.2%; BBB, 1.3%;
BB, 25.0%; B, 64.1%; and unrated, 6.4%. The ratings are based on
a dollar-weighted average, computed monthly, and reflect the
higher of S&P or Moody's ratings. The ratings do not necessarily
reflect the current or future composition of High Yield Portfolio.
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. 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, prepayment risks, and yield
characteristics.
Mortgage-backed securities involve the risk of prepayment of
the underlying mortgages at a faster or slower rate than the
established schedule. Prepayments generally increase with falling
interest rates and decrease with rising rates, but they also are
influenced by economic, social, and market factors. If mortgages
are prepaid 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 security, and the
proceeds of prepayment 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
prepayment protection features tending to make them less
susceptible to price volatility.
Non-mortgage asset-backed securities usually have less
prepayment risk than mortgage-backed securities, but have the risk
that the collateral will not be available to support payments on
the underlying loans 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.
REMICs. High Yield Portfolio may invest in real estate
mortgage investment conduits ("REMICs"). REMICs, which were
authorized under the Tax Reform Act of 1986, are private entities
formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to
CMOs in that they issue multiple classes of securities. A REMIC
is a CMO that qualifies for special tax treatment under the
Internal Revenue Code and invests in certain mortgages principally
secured by interests in real property. Investors may purchase
beneficial interests in REMICs, which are known as "regular"
interests, or "residual" interests. Guaranteed REMIC pass-through
certificates ("REMIC Certificates") issued by FNMA or FHLMC
represent beneficial ownership interests in a REMIC trust
consisting principally of mortgage loans or FNMA-, FHLMC- or GNMA-
guaranteed mortgage pass-through certificates. For FHLMC REMIC
Certificates, FHLMC guarantees the timely payment of interest and
also guarantees the payment of principal as payments are required
to be made on the underlying mortgage participation certificates.
FNMA REMIC Certificates are issued and guaranteed as to timely
distribution and principal and interest by FNMA.
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. High Yield
Portfolio may participate in an interfund lending program subject
to certain restrictions described in the Statement of Additional
Information.
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. High Yield Portfolio 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 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.
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 the
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 the restriction of investing no more than 10% of 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 the 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
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. 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
the investment 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
Each of Institutional High Yield Fund and High Yield Portfolio is
diversified as that term is defined in the Investment Company Act
of 1940.
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 may invest all of its
assets in another investment company (such as High Yield
Portfolio) having the identical investment objective under a
master fund/feeder fund structure.
- ----------
/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 each may (1) purchase money
market instruments and enter into repurchase agreements; (2)
acquire publicly distributed or privately placed debt securities;
(3) lend portfolio securities under certain conditions; and (4)
participate in an interfund lending program with other Stein Roe
Funds and Portfolios. Neither may borrow money, except for
nonleveraging, 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 second and third 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 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, different accounting, auditing and financial reporting
standards, different settlement practices, less market liquidity,
more market volatility, less well-developed and regulated markets,
and greater political instability. In addition, various
restrictions by foreign governments on investments by nonresidents
may apply, including imposition of exchange controls and
withholding taxes on dividends, and seizure or nationalization of
investments owned by nonresidents. 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 to retain the security in the 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.
An Intermediary, who accepts orders that are processed at the net
asset value next determined after receipt of the order by the
Intermediary, accepts such orders as agent of the Fund. The
Intermediary is required to segregate any orders received on a
business day after the close of regular session trading on the New
York Stock Exchange and transmit those orders separately for
execution at the net asset value next determined after that
business day.
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 12-month period ended October 31 in that
year. It intends to distribute any undistributed net investment
income and net realized capital gains in the following year.
All income dividends and capital gains 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 Jan. 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 gains. Distributions of net long-term capital gains
will be taxable to you as long-term capital gains 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 gains distributions received with respect to those shares.
The Taxpayer Relief Act of 1997 (the "Act") reduced from 28%
to 20% the maximum tax rate on long-term capital gains. This
reduced rate generally applies to securities held for more than 18
months and sold after July 28, 1997, and securities held for more
than one year and sold between May 6, 1997 and July 29, 1997.
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. It 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 gains 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
and its predecessor have advised and managed mutual funds since
1949. The Adviser is a wholly owned indirect subsidiary of
Liberty Financial Companies, Inc. ("Liberty Financial"), which in
turn is a majority owned indirect subsidiary of Liberty Mutual
Insurance Company.
Portfolio Manager. Stephen F. Lockman has been portfolio manager
of High Yield Portfolio since Mar. 1997. Associate portfolio
manager of Stein Roe Income Fund since October 1995 and of High
Yield Portfolio since its inception in Nov. 1996, Mr. Lockman
joined the Adviser in Jan. 1994. As a senior research analyst for
the Adviser's fixed income department from 1994 to 1997, Mr.
Lockman has broad expertise in the fixed income markets, with
specialties in the high yield sector and the aerospace,
broadcasting, entertainment, insurance, mining/metals,
paper/forest products, printing, publishing and real estate
industries. In addition, he served as the fixed income
department's sovereign debt analyst from 1994 to 1997, evaluating
securities for its more than $1 billion portfolio of dollar-
denominated foreign investments. Mr. Lockman previously served as
portfolio manager for the Illinois State Board of Investment from
1987 to 1994, and as a trust investment officer for LaSalle
National Bank from 1983 to 1987. A chartered financial analyst,
Mr. Lockman earned a bachelor's degree in 1983 from the University
of Illinois and a master's degree in 1986 from DePaul University.
As of June 30, 1997, he was responsible for managing $415 million
in mutual fund net assets for the Adviser.
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. For the fiscal year ended June 30, 1997, Institutional
High Yield Fund's administrative fee, in addition to its pro rata
portion of High Yield Portfolio's management fees, was 0.50% of
average net assets, after the fee waiver.
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. 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. Shares of Institutional High Yield Fund are
currently distributed by Liberty Securities Corporation, 100
Manhattanville Road, Purchase, New York 10577. On Jan. 1, 1998,
Liberty Financial Investments, Inc. (formerly named Colonial
Investment Services, Inc.), One Financial Center, Boston,
Massachusetts 02111, will become the distributor. Liberty
Securities Corporation and Liberty Financial Investments, Inc. are
subsidiaries of Liberty Financial.
Fund shares are offered for sale without any sales
commissions or charges to the Fund or to its shareholders. All
distribution and promotional expenses are paid by the Adviser,
including payments to a distributor for sales of Fund shares. All
Fund correspondence (including purchase and redemption orders)
should be mailed to SteinRoe Services Inc. at P.O. Box 8900,
Boston, Massachusetts 02205.
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 the 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 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 also is believed to be remote, because it
would be limited to claims to which the disclaimer did not apply
and to circumstances in which the other series was unable to meet
its obligations.
MASTER FUND/FEEDER FUND: STRUCTURE AND RISK FACTORS
Institutional High Yield Fund, an open-end management investment
company, seeks to achieve its objective by investing all of its
assets in another mutual fund having an investment objective
identical to that of 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
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 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 law trust organized
under an Agreement and Declaration of Trust ("Declaration of
Trust") dated Aug. 23, 1993. The Declaration of Trust of Base
Trust provides that 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. 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.
Information regarding any other investors in High Yield
Portfolio 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 Institutional High Yield 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.
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>
Statement of Additional Information Dated Nov. 5, 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 Nov. 5, 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
Financial Statements...................................29
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
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 SR&F High Yield Portfolio
("High Yield Portfolio"), which is a series 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, without par value, is entitled to participate pro rata in
any dividends and other distributions declared by the Board on
shares of that series, and all shares of a series have equal
rights in the event of liquidation of that series. Each whole
share (or fractional share) outstanding on the record date
established in accordance with the By-Laws shall be entitled to a
number of votes on any matter on which it is entitled to vote
equal to the net asset value of the share (or fractional share) in
United States dollars determined at the close of business on the
record date (for example, a share having a net asset value of
$10.50 would be entitled to 10.5 votes). As a business trust,
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 its
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 those of other investment companies for investment in another
mutual fund having the same investment objective and substantially
the same investment policies. 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 Master Fund/Feeder Fund: Structure and Risk Factors.
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/
- -----------------
/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 objective and 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
invests 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 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 and 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 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 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, prepayment risks and yield
characteristics. Mortgage-backed securities involve the risk of
prepayment on the underlying mortgages at a faster or slower rate
than the established schedule. Prepayments generally increase
with falling interest rates and decrease with rising rates but
they also are influenced by economic, social and market factors.
If mortgages are prepaid 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 prepayment 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
prepayment protection features tending to make them less
susceptible to price volatility.
Non-mortgage asset-backed securities usually have less
prepayment risk than mortgage-backed securities, but have the risk
that the collateral will not be available to support payments on
the underlying loans 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.
REMICs
High Yield Portfolio may invest in real estate mortgage
investment conduits ("REMICs"). REMICs, which were authorized
under the Tax Reform Act of 1986, are private entities formed for
the purpose of holding a fixed pool of mortgages secured by an
interest in real property. REMICs are similar to CMOs in that
they issue multiple classes of securities. A REMIC is a CMO that
qualifies for special tax treatment under the Internal Revenue
Code and invests in certain mortgages principally secured by
interests in real property. Investors may purchase beneficial
interests in REMICs, which are known as "regular" interests, or
"residual" interests. Guaranteed REMIC pass-through certificates
("REMIC Certificates") issued by FNMA or FHLMC represent
beneficial ownership interests in a REMIC trust consisting
principally of mortgage loans or FNMA-, FHLMC- or GNMA-guaranteed
mortgage pass-through certificates. For FHLMC REMIC Certificates,
FHLMC guarantees the timely payment of interest and also
guarantees the payment of principal as payments are required to be
made on the underlying mortgage participation certificates. FNMA
REMIC Certificates are issued and guaranteed as to timely
distribution and principal and interest by FNMA.
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 it
seeks to enforce its rights thereto, (b) possible subnormal levels
of income and lack of access to income during this period, and (c)
expenses of enforcing its rights.
Repurchase Agreements
High Yield Portfolio may invest in repurchase agreements,
provided that it will not invest more than 10% of net assets in
repurchase agreements maturing in more than seven days and any
other illiquid securities. A repurchase agreement is a sale of
securities to High Yield Portfolio in which the seller agrees to
repurchase the securities at a higher price, which includes an
amount representing interest on the purchase price, within a
specified time. In the event of bankruptcy of the seller, High
Yield Portfolio could experience both losses and delays in
liquidating its collateral.
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 it 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 it owns at
least an equal amount of such securities or securities convertible
into or exchangeable for securities of the same issue as, and
equal in amount to, the securities sold short, at no additional
cost.
In a short sale against the box, 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 its 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 borrowing is necessary and
appropriate and 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 to the
Prospectus. The rated debt securities described under Investment
Policies include securities given a rating conditionally by
Moody's or provisionally by S&P. If the rating of a security is
withdrawn or reduced, High Yield Portfolio is not required to sell
the security, but the Adviser will consider such fact in
determining whether to 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, 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 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 it is obligated to
deliver and if a decision is made to sell the security and make
delivery of the currency. Conversely, it may be necessary to sell
on the spot market some of the currency received upon the sale of
the portfolio security if its market value exceeds the amount of
currency 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
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, it realizes a capital
loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may
be closed out by an offsetting purchase or sale of an option of
the same series (type, exchange, underlying security or index,
exercise price, and expiration). There can be no assurance,
however, that a closing purchase or sale transaction can be
effected when 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, it will realize a capital loss. If the premium received
from a closing sale transaction is more than the premium paid to
purchase the option, High Yield Portfolio will realize a capital
gain or, if it is less, it will realize a capital loss. The
principal factors affecting the market value of a put or a call
option include supply and demand, interest rates, the current
market price of the underlying security or index in relation to
the exercise price of the option, the volatility of the underlying
security or index, and the time remaining until the expiration
date.
A put or call option purchased by 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, it 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.
- ------------
/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 its
securities or the price of the securities that it intends to
purchase. Although other techniques could be used to reduce
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, 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, it 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, it realizes a capital loss. The transaction costs
must also be included in these calculations.
Risks Associated with Futures
There are several risks associated with the use of futures
contracts and futures options 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 the 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 plus premiums
paid by it for open futures option positions, less the amount by
which any such positions are "in-the-money,"/3/ would exceed 5% of
total assets.
- ---------------
/3/ A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise
price. A put option is "in-the-money" if the exercise price
exceeds the value of the futures contract that is the subject of
the option.
- ---------------
When purchasing a futures contract or writing a put 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%].
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, it
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). 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.
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.
The Taxpayer Relief Act of 1997 (the "Act") imposed
constructive sale treatment for federal income tax purposes on
certain hedging strategies with respect to appreciated securities.
Under these rules, taxpayers will recognize gain, but not loss,
with respect to securities if they enter into short sales of
"offsetting notional principal contracts" (as defined by the Act)
or futures or "forward contracts" (as defined by the Act) with
respect to the same or substantially identical property, or if
they enter into such transactions and then acquire the same or
substantially identical property. These changes generally apply
to constructive sales after June 8, 1997. Furthermore, the
Secretary of the Treasury is authorized to promulgate regulations
that will treat as constructive sales certain transactions that
have substantially the same effect as short sales, offsetting
notional principal contracts, and futures or forward contracts to
deliver the same or substantially similar property.
INVESTMENT RESTRICTIONS
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 nonleveraging,
temporary or emergency purposes, (b) engage in reverse repurchase
agreements and make other borrowings, provided that the
combination of (a) and (b) shall not exceed 33 1/3% of the value
of its total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage
permitted by law, and (c) enter into futures and options
transactions; it may borrow from banks, other Stein Roe Funds and
Portfolios, and other persons to the extent permitted by
applicable law;
(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 Institutional High Yield Fund 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) 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;
(D) purchase shares of other open-end investment companies,
except in connection with a merger, consolidation, acquisition, or
reorganization;
(E) 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;
(F) 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;
(G) write an option on a security unless the option is
issued by the Options Clearing Corporation, an exchange, or
similar entity;
(H) invest in limited partnerships in real estate unless
they are readily marketable;
(I) 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;
(J) 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;
(K) 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 Jan., the third
Monday in Feb., 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
<S> <C> <C> <C>
William D. Andrews 50 Executive Vice-President Executive vice president of Stein Roe & Farnham
(4) Incorporated (the "Adviser")
Gary A. Anetsberger 41 Senior Vice-President Chief financial officer of the Mutual Funds division of the
(4) Adviser; senior vice president of the Adviser since Apr.
1996; vice president of the Adviser prior thereto
Timothy K. Armour 49 President; Trustee President of the Mutual Funds division of the Adviser
(1)(2)(4) and director of the Adviser
Jilaine Hummel Bauer 42 Executive Vice-President; General counsel and secretary (since Nov. 1995) and
(4) Secretary senior vice president of the Adviser
Kenneth L. Block 77 Trustee Chairman Emeritus of A. T. Kearney, Inc. (international
(3)(4) management consultants)
William W. Boyd 70 Trustee Chairman and director of Sterling Plumbing Group, Inc.
(3)(4) (manufacturer of plumbing products)
Thomas W. Butch (4) 40 Executive Vice-President Senior vice president of the Adviser since Sept. 1994;
first vice president, corporate communications, of
Mellon Bank Corporation prior thereto
Lindsay Cook (1)(4) 45 Trustee Executive vice president of Liberty Financial
Companies, Inc. (the indirect parent of the Adviser)
since Mar. 1997; senior vice president prior thereto
Philip J. Crosley 51 Vice-President Senior vice president of the Adviser since Feb. 1996;
vice president, institutional sales - advisor sales,
Invesco Funds Group prior thereto
Douglas A. Hacker 42 Trustee Senior vice president and chief financial officer of
(3)(4) United Airlines, since July 1994; senior vice president
- finance, United Airlines, Feb. 1993 to July 1994;
vice president, American Airlines prior thereto
Loren A. Hansen (4) 49 Eecutive Vice-President Executive vice president of the Adviser since Dec., 1995;
vice president of The Northern Trust (bank) prior thereto
Janet Langford Kelly 39 Trustee Senior vice president, secretary and general counsel of
(3)(4) Sara Lee Corporation (branded, packaged, consumer-
products manufacturer), since 1995; partner, Sidley &
Austin (law firm) prior thereto
Michael T. Kennedy 35 Vice-President Senior vice president of the Adviser since Oct. 1994;
vice president of the Adviser prior thereto
Stephen F. Lockman 36 Vice-President Senior vice president, portfolio manager, and credit
analyst of the Adviser; portfolio manager for Illinois
State Board of Investment prior thereto
Lynn C. Maddox 56 Vice-President Senior vice president of the Adviser
Anne E. Marcel 39 Vice-President Vice president of the Adviser since Apr. 1996; manager,
mutual fund sales & services of the Adviser since Oct.
1994; supervisor of the Counselor Department of the
Adviser prior thereto
Francis W. Morley 77 Trustee Chairman of Employer Plan Administrators and
(2)(3)(4) Consultants Co. (designer, administrator, and
communicator of employee benefit plans)
Jane M. Naeseth 47 Vice-President Senior vice president of the Adviser
Charles R. Nelson 55 Trustee Van Voorhis Professor of Political Economy of the
(3)(4) University of Washington
Nicolette D. Parrish 47 Vice-President; Senior compliance administrator and assistant secretary
(4) Assistant Secretary of the Adviser since Nov. 1995; senior legal assistant
for the Adviser prior thereto
Sharon R. Robertson 35 Controller Accounting manager for the Adviser's Mutual Funds
(4) division
Janet B. Rysz (4) 42 Assistant Secretary Senior compliance administrator and assistant secretary
of the Adviser
Thomas C. Theobald 60 Trustee Managing director, William Blair Capital Partners (
(3)(4) private equity fund) since 1994; chief executive
officer and chairman of the Board of Directors of
Continental Bank Corporation, 1987-1994
Scott E. Volk (4) 26 Treasurer Financial reporting manager for the Adviser's Mutual
Funds division since Oct. 1997; senior auditor with
Ernst & Young LLP from Sept. 1993 to Apr. 1996 and
from Oct. 1996 to Sept. 1997; financial analyst with
John Nuveen & Company Inc. from May 1996 to Sept. 1996;
full-time student prior to Sept. 1993
Heidi J. Walter (4) 30 Vice-President Legal counsel for the Adviser since Mar. 1995;
associate with Beeler Schad & Diamond PC (law firm)
prior thereto
Stacy H. Winick (4) 32 Vice-President Senior legal counsel for the Adviser since Oct. 1996;
associate of Bell, Boyd & Lloyd (law firm) from June
1993 to Sept. 1996; associate of Debevoise & Plimpton
(law firm) prior thereto
Hans P. Ziegler (4) 56 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 31 Assistant Treasurer Project manager for the Adviser's Mutual Funds division
(4) since Apr. 1997; compliance manager, Aug. 1995 to Apr.
1997; compliance accountant, Jan. 1995 to July 1995;
section manager, Jan. 1994 to Jan. 1995; supervisor
prior thereto
<FN>
______________________
(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 Base Trust.
</TABLE>
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, Mr.
Cook, and Ms. Walter are also vice presidents of Institutional
High Yield Fund's current 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 or Compensation Committee meeting) are based on each
series' net assets as of the preceding Dec. 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 fees
are paid solely by the master portfolio. Each non-interested
trustee also receives $500 from Institutional Trust for attending
each meeting of the Nominating Committee and the Compensation
Committee. Institutional Trust has no retirement or pension plan.
The following table sets forth compensation paid to the trustees
during the fiscal year ended June 30, 1997:
Total Compensation
Aggregate Compensation from the Stein
Name of Trustee from Institutional Trust Roe Fund Complex*
- -------------------- ----------------------- ------------------
Timothy K. Armour -0- -0-
Lindsay Cook -0- -0-
Kenneth L. Block $4,000 $70,693
William W. Boyd 4,000 80,593
Douglas A. Hacker 4,000 76,593
Janet Langford Kelly 4,000 51,600
Francis W. Morley 4,000 76,943
Charles R. Nelson 4,000 80,593
Thomas C. Theobald 4,000 76,593
________________
* At June 30, 1997, the Stein Roe Fund Complex consisted of one
series of Institutional Trust, six series of Stein Roe Income
Trust, four series of Stein Roe Municipal Trust, ten series of
Stein Roe Investment Trust, seven series of Stein Roe Advisor
Trust, one series of Stein Roe Trust, and nine series of Base
Trust.
FINANCIAL STATEMENTS
Please refer to the June 30, 1997 Financial Statements
(balance sheets and schedule of investments as of June 30, 1997
and the statements of operations, changes in net assets, and notes
thereto) and the report of independent auditors contained in the
June 30, 1997 Annual Report of Institutional Trust. The Financial
Statements and the report of independent auditors (but no other
material from the Annual Report) are incorporated herein by
reference. The Annual Report may be obtained at no charge by
telephoning 800-338-2550.
PRINCIPAL SHAREHOLDERS
As of Oct. 31, 1997, Institutional High Yield Fund had only
one shareholder, Stein Roe & Farnham Incorporated, which held
10,686 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 Fund's 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 Executive 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, 1997, the Adviser managed
over $28 billion in assets: over $9 billion in equities and over
$19 billion in fixed income securities (including $1.7 billion in
municipal securities). The $28 billion in managed assets included
over $7.9 billion held by open-end mutual funds managed by the
Adviser (approximately 15% of the mutual fund assets were held by
clients of the Adviser). These mutual funds were owned by over
259,000 shareholders. The $7.9 billion in mutual fund assets
included over $766 million in over 50,000 IRA accounts. In
managing those assets, the Adviser utilizes a proprietary
computer-based information system that maintains and regularly
updates information for approximately 7,000 companies. The
Adviser also monitors over 1,400 issues via a proprietary credit
analysis system. At June 30, 1997, the Adviser employed 16
research analysts and 55 account managers. The average
investment-related experience of these individuals was 24 years.
Please refer to the descriptions 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 table below shows gross fees paid and any expense
reimbursements by the Adviser:
Type of Payment Year Ended 6/30/97
----------------- ------------------
Institutional High Yield Fund Administrative fee $ 76
Reimbursement 86,221
High Yield Portfolio Management fee 52,997
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 series are apportioned in such manner as the
Adviser determines is fair and appropriate, unless otherwise
specified by the Board of Trustees.
Bookkeeping and Accounting Agreement
Pursuant to separate agreements with Advisor Trust and Base
Trust, the Adviser receives a fee for performing certain
bookkeeping and accounting services. For services provided to
Institutional High Yield Fund, the Adviser receives an annual fee
of $25,000 plus .0025 of 1% of average net assets over $50
million. During the fiscal year ended June 30, 1997, the Adviser
received aggregate fees of $11,895 from Institutional Trust for
services performed under this agreement.
DISTRIBUTOR
Shares of Institutional High Yield Fund are currently
distributed by Liberty Securities Corporation, 100 Manhattanville
Road, Purchase, NY 10577. On Jan. 1, 1998, Liberty Financial
Investments (formerly named Colonial Investment Services, Inc.),
One Financial Center, Boston, MA 02111, will become the
distributor under a new Distribution Agreement. Liberty
Securities Corporation and Liberty Financial Investments, Inc. are
subsidiaries of Liberty Financial.
The Distribution Agreement continues in effect from year to
year, provided such continuance is approved annually (1) by a
majority of the trustees or by a majority of the outstanding
voting securities of Institutional Trust, and (2) 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, the distributor offers Fund shares 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. The distributor offers 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 its average daily net assets. The Board of Trustees
believes the charges by SSI are comparable to those of other
companies performing similar services. (See Investment Advisory
Services.) Under a separate agreement, SSI provides certain
investor accounting services to High Yield Portfolio.
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 Bank does not exercise any
supervisory function in such matters as purchase and sale of
portfolio securities, payment of dividends, or payment of
expenses.
Portfolio securities purchased in the U.S. are maintained in
the custody of the Bank or of other domestic banks or
depositories. Portfolio securities purchased outside of the U.S.
are maintained in the custody of foreign banks and trust companies
that are members of the Bank's Global Custody Network, and foreign
depositories ("foreign sub-custodians"). Each of the domestic and
foreign custodial institutions holding portfolio securities has
been approved by the Board of Trustees in accordance with
regulations under the Investment Company Act of 1940.
Each Board of Trustees reviews, at least annually, whether it
is in the best interests 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 Bank and may purchase or sell
securities from or to the Bank.
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. The Adviser may also receive research in
connection with selling concessions and designations in fixed
price offerings in which High Yield Portfolio participates.
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.
For the fiscal year ended June 30, 1997, High Yield Portfolio
paid no brokerage commissions on futures transactions or on any
other transactions.
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 the Association 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 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.
For example, the Yield of Institutional High Yield Fund for the 30-day
period ended June 30, 1997 was 9.36%.
_____________________
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).
For example, for a $1,000 investment in Institutional High
Yield Fund, the "Total Return," the "Total Return Percentage," and
the "Average Annual Total Return" at June 30, 1997 were:
Total Total Return Average Annual
Return Percentage Total Return
------- ------------ ---------------
Life of Fund* $1,077 7.70% 7.70%
_______
*Since commencement of operations on Jan. 2, 1997.
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 benchmarks:
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 a fund's risk score (which is a function of its
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 Jan. 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>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) 1. Financial statements included in Part A of this
Registration Statement: Financial Highlights.
2. Financial statements included in Part B of this Registration
Statement: The following financial statements are
incorporated by reference to Registrant's June 30, 1997
annual report: Schedule of investments at June 30, 1997 of
SR&F High Yield Portfolio; and balance sheets as of June 30,
1997, statements of operations for the period ended June 30,
1997, statements of changes in net assets for the period
ended June 30, 1997, notes thereto and report of independent
auditors of Stein Roe Institutional High Yield Fund and
SR&F High Yield Portfolio.
(b) Exhibits: [Note: As used herein, the term "Registration
Statement" refers to the Registration Statement of the
Registrant on Form N-1A under the Securities Act of 1933, No.
333-13331. The terms "Pre-Effective Amendment" and "PEA"
refer, respectively, to a pre-effective amendment and a post-
effective amendment to the Registration Statement.]
1. Agreement and Declaration of Trust as amended through
December 13, 1996. (Exhibit 1 to PEA #2.)*
2. By-Laws of Registrant as amended on October 30, 1996.
(Exhibit 2 to Pre-Effective Amendment.)*
3. None.
4. None.
5. None.
6. Underwriting agreement between Registrant and
Liberty Securities Corporation dated December 12, 1996.
(Exhibit 6 to PEA #3.)*
7. None.
8. Custodian contract between Registrant and State
Street Bank and Trust Company dated January 2, 1997.
(Exhibit 8 to PEA #3.)*
9. (a) Transfer agency agreement between Registrant
and Stein Roe Services Inc. dated January 2, 1997.
(Exhibit 9(b) to PEA #3.)*
(b) Administrative agreement between Registrant and Stein
Roe & Farnham Incorporated dated December 12, 1996.
(Exhibit 9(b) to Pre-Effective Amendment.)*
(c) Accounting and bookkeeping agreement between Regis-
trant and Stein Roe & Farnham Incorporated dated
December 12, 1996. (Exhibit 9(c) to Pre-Effective
Amendment.)*
(d) Sub-transfer agent agreement with Colonial Investors
Service Center as amended through June 30, 1997.
(Exhibit 9(d) to PEA #3.)*
10. Opinion and consent of Bell, Boyd & Lloyd. (Exhibit 10 to
Pre-Effective Amendment.)*
11. Consent of Ernst & Young LLP.
12. None.
13. Subscription agreement. (Exhibit 13 to Pre-Effective
Amendment.)*
14. None.
15. None.
16. Schedule for computation of yield and total return of
Stein Roe Institutional High Yield Fund. (Exhibit 16 to PEA
#4.)*
17. Financial data schedule, 6/30/97--Stein Roe Institutional
High Yield Fund.
18. Inapplicable.
-----------
*Incorporated by reference.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT.
The Registrant does not consider that it is directly or indirectly
controlling, controlled by, or under common control with other
persons within the meaning of this Item. See "Investment Advisory
Services," "Management," and "Transfer Agent" in the Statement of
Additional Information, each of which is incorporated herein by
reference.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
Number of Record Holders
Title of Series as of September 30, 1997
--------------- -----------------------
Stein Roe Institutional High Yield Fund 1
ITEM 27. INDEMNIFICATION.
Article VIII of the Agreement and Declaration of Trust of
Registrant (Exhibit 1), which Article is incorporated herein by
reference, provides that Registrant shall provide indemnification
of its trustees and officers (including persons who serve or
have served at Registrant's request as directors, officers, or
trustees of another organization in which Registrant has any
interest as a shareholder, creditor or otherwise) ("Covered
Persons") under specified circumstances.
Section 17(h) of the Investment Company Act of 1940 ("1940 Act")
provides that neither the Agreement and Declaration of Trust nor
the By-Laws of Registrant, nor any other instrument pursuant to
which Registrant is organized or administered, shall contain any
provision which protects or purports to protect any trustee or
officer of Registrant against any liability to Registrant or its
shareholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office. In
accordance with Section 17(h) of the 1940 Act, Article VIII shall
not protect any person against any liability to Registrant or its
shareholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
Unless otherwise permitted under the 1940 Act,
(i) Article VIII does not protect any person against any
liability to Registrant or to its shareholders to which he would
otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in
the conduct of his office;
(ii) in the absence of a final decision on the merits by a
court or other body before whom a proceeding was brought that a
Covered Person was not liable to the Registrant or its shareholders
by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his
office, indemnification is permitted under Article VIII if (a)
approved as in the best interest of the Registrant, after notice
that it involves such indemnification, by at least a majority of
the Trustees who are disinterested persons are not "interested
persons" as defined in Section 2(a)(19) of the 1940 Act
("disinterested trustees"), upon determination, based upon a review
of readily available facts (but not a full trial-type inquiry) that
such Covered Person is not liable to the Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the
conduct of such Covered Person's office or (b) there has been
obtained a opinion in writing of independent legal counsel, based
upon a review of readily available facts (but not a full trial-type
inquiry) to the effect that such indemnification would not protect
such Covered Person against any liability to the Trust to which
such Covered Person would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office; and
(iii) Registrant will not advance expenses, including counsel
fees(but excluding amounts paid in satisfaction of judgments, in
compromise or as fines or penalties), incurred by a Covered Person
unless Registrant receives an undertaking by or on behalf of the
Covered Person to repay the advance if it is ultimately determined
that indemnification of such expenses is not authorized by Article
VII and (a) the Covered Person provides security for his
undertaking, or (b) Registrant is insured against losses arising by
reason of such Covered Person's failure to fulfill his undertaking,
or (c) a majority of the disinterested trustees of Registrant or an
independent legal counsel as expressed in a written opinion,
determine, based on a review of readily available facts (as opposed
to a full trial-type inquiry), that there is reason to believe that
the Covered Person ultimately will be found entitled to indemnification.
Any approval of indemnification pursuant to Article VIII does not
prevent the recovery from any Covered Person of any amount paid to
such Covered Person in accordance with Article VIII as
indemnification if such Covered Person is subsequently adjudicated
by a court of competent jurisdiction to have been liable to the
Trust or its shareholders by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties
involved in the conduct of such Covered Person's office.
Article VIII also provides that its indemnification provisions
are not exclusive.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers, and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, Registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by Registrant of expenses incurred or paid by a trustee, officer,
or controlling person of Registrant in the successful defense of
any action, suit, or proceeding) is asserted by such trustee,
officer, or controlling person in connection with the securities
being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
Registrant, its trustees and officers, its investment adviser, the
other investment companies advised by the adviser, and persons
affiliated with them are insured against certain expenses in
connection with the defense of actions, suits, or proceedings, and
certain liabilities that might be imposed as a result of such
actions, suits, or proceedings. Registrant will not pay any
portion of the premiums for coverage under such insurance that
would (1) protect any trustee or officer against any liability to
Registrant or its shareholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the
conduct of his office or (2) protect its investment adviser or
principal underwriter, if any, against any liability to Registrant
or its shareholders to which such person would otherwise be
subject by reason of willful misfeasance, bad faith, or gross
negligence, in the performance of its duties, or by reason of its
reckless disregard of its duties and obligations under its
contract or agreement with the Registrant; for this purpose the
Registrant will rely on an allocation of premiums determined by
the insurance company.
Registrant expects to enter into an indemnification agreement among
Registrant, its transfer agent and its investment adviser pursuant
to which Registrant, its trustees, officers and employees, its
transfer agent and the transfer agent's directors, officers and
employees are indemnified by Registrant's investment adviser
against any and all losses, liabilities, damages, claims and
expenses arising out of any act or omission of Registrant or its
transfer agent performed in conformity with a request of the
investment adviser that the transfer agent and Registrant deviate
from their normal procedures in connection with the issue,
redemption or transfer of shares for a client of the investment
adviser.
Registrant, its trustees, officers, employees and representatives
and each person, if any, who controls the Registrant within the
meaning of Section 15 of the Securities Act of 1933 are
indemnified by the distributor of Registrant's shares (the
"distributor"), pursuant to the terms of the distribution
agreement, which governs the distribution of Registrant's shares,
against any and all losses, liabilities, damages, claims and
expenses arising out of the acquisition of any shares of the
Registrant by any person which (i) may be based upon any wrongful
act by the distributor or any of the distributor's directors,
officers, employees or representatives or (ii) may be based upon
any untrue or alleged untrue statement of a material fact
contained in a registration statement, prospectus, statement of
additional information, shareholder report or other information
covering shares of the Registrant filed or made public by the
Registrant or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statement
therein not misleading if such statement or omission was made in
reliance upon information furnished to the Registrant by the
distributor in writing. In no case does the distributor's
indemnity indemnify an indemnified party against any liability to
which such indemnified party would otherwise be subject by reason
of willful misfeasance, bad faith, or negligence in the
performance of its or his duties or by reason of its or his
reckless disregard of its or his obligations and duties under the
distribution agreement.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The Adviser is a wholly-owned subsidiary of SteinRoe Services Inc.
("SSI"), which in turn is a wholly-owned subsidiary of Liberty
Financial Companies, Inc., which is a majority owned subsidiary of
LFC Holdings, Inc., which in turn is a subsidiary of Liberty Mutual
Equity Corporation, which in turn is a subsidiary of Liberty Mutual
Insurance Company. The Adviser acts as investment adviser to
individuals, trustees, pension and profit-sharing plans, charitable
organizations, and other investors. In addition to Registrant, it
also acts as investment adviser to other investment companies
having different investment policies.
For a two-year business history of officers and directors of the
Adviser, please refer to the Form ADV of Stein Roe & Farnham
Incorporated and to the section of the statement of additional
information (part B) entitled "Investment Advisory Services."
Certain directors and officers of the Adviser also serve and have
during the past two years served in various capacities as
officers, directors, or trustees of SSI and of the Registrant, SR&F
Base Trust, and/or other investment companies managed by the
Adviser. (The listed entities are located at One South Wacker
Drive, Chicago, Illinois 60606, except for SteinRoe Variable
Investment Trust and Keyport Variable Investment Trust, which are
located at Federal Reserve Plaza, Boston, MA 02210 and LFC
Utilities Trust, which is located at One Financial Center, Boston,
MA 02111.) A list of such capacities is given below.
POSITION FORMERLY
HELD WITHIN
CURRENT POSITION PAST TWO YEARS
------------------- --------------
STEINROE SERVICES INC.
Gary A. Anetsberger Vice President
Timothy K. Armour Vice President
Jilaine Hummel Bauer Vice President; Secretary
Kenneth J. Kozanda Vice President; Treasurer
Kenneth R. Leibler Director
C. Allen Merritt, Jr. Director; Vice President
Hans P. Ziegler Director, President, Vice Chairman
Chairman
SR&F BASE TRUST
William D.Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive Vice-President; Secy.
Thomas W. Butch Executive Vice-President
Loren A. Hansen Executive Vice-President
Michael T. Kennedy Vice-President
Lynn C. Maddox Vice-President
Jane M. Naeseth Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE INCOME TRUST; STEIN ROE INSTITUTIONAL TRUST; AND STEIN
ROE TRUST
William D.Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Thomas W. Butch Executive Vice-President Vice-President
Philip J. Crosley Vice-President
Loren A. Hansen Executive Vice-President
Michael T. Kennedy Vice-President
Stephen F. Lockman Vice-President
Steven P. Luetger Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
Jane M. Naeseth Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE INVESTMENT TRUST
William D.Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Bruno Bertocci Vice-President
David P. Brady Vice-President
Thomas W. Butch Executive Vice-President Vice-President
Daniel K. Cantor Vice-President
Philip J. Crosley Vice-President
E. Bruce Dunn Vice-President
Erik P. Gustafson Vice-President
Loren A. Hansen Executive Vice-President
David P. Harris Vice-President
Harvey B. Hirschhorn Vice-President
Eric S. Maddix Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
Arthur J. McQueen Vice-President
Richard B. Peterson Vice-President
M. Gerard Sandel Vice-President
Gloria J. Santella Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE ADVISOR TRUST
William D.Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Bruno Bertocci Vice-President
David P. Brady Vice-President
Thomas W. Butch Executive Vice-President Vice-President
Daniel K. Cantor Vice-President
Philip J. Crosley Vice-President
E. Bruce Dunn Vice-President
Erik P. Gustafson Vice-President
Loren A. Hansen Executive Vice-President
David P. Harris Vice-President
Harvey B. Hirschhorn Vice-President
Michael T. Kennedy Vice-President
Stephen F. Lockman Vice-President
Eric S. Maddix Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
M. Jane McCart Vice-President
Arthur J. McQueen Vice-President
Richard B. Peterson Vice-President
M. Gerard Sandel Vice-President
Gloria J. Santella Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE MUNICIPAL TRUST
William D.Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Thomas W. Butch Executive Vice-President Vice-President
Joanne T. Costopoulos Vice-President
Philip J. Crosley Vice-President
Loren A. Hansen Executive Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
M. Jane McCart Vice-President
Hans P. Ziegler Executive Vice-President
STEINROE VARIABLE INVESTMENT TRUST
Gary A. Anetsberger Treasurer
Timothy K. Armour Vice President
Jilaine Hummel Bauer Vice President
E. Bruce Dunn Vice President
Erik P. Gustafson Vice President
Harvey B. Hirschhorn Vice President
Michael T. Kennedy Vice President
Jane M. Naeseth Vice President
Richard B. Peterson Vice President
LFC UTILITIES TRUST
Gary A. Anetsberger Vice President
Ophelia L. Barsketis Vice President
Deborah A. Jansen Vice President
KEYPORT VARIABLE INVESTMENT TRUST
Ophelia L. Barsketis Vice President
Deborah A. Jansen Vice President
ITEM 29. PRINCIPAL UNDERWRITERS.
Registrant's principal underwriter, Liberty Securities
Corporation, is a wholly owned subsidiary of Liberty Investment
Services, Inc., a wholly owned subsidiary of Liberty Financial
Services, Inc. which, in turn, is a wholly owned subsidiary of
Liberty Financial Companies, Inc. Liberty Financial Companies,
Inc. is a public corporation whose majority shareholder is LFC
Holdings, Inc., a wholly owned subsidiary of Liberty Mutual Equity
Corporation. Liberty Mutual Equity Corporation is a wholly owned
subsidiary of Liberty Mutual Insurance Company.
Liberty Securities Corporation is principal underwriter for the
following investment companies:
Stein Roe Income Trust
Stein Roe Municipal Trust
Stein Roe Investment Trust
Stein Roe Institutional Trust
Stein Roe Trust
Set forth below is information concerning the directors and
officers of Liberty Securities Corporation:
Positions
Positions and Offices and Offices
Name with Underwriter with Registrant
- ------------------ -------------------- ---------------
Porter P. Morgan Chairman of the Board; Director None
Frank L. Tarantino President; Chief Operating
Officer; Director None
Robert L. Spadafora Executive Vice President -
Sales and Marketing None
John T. Treece, Jr. Senior Vice President - Operations None
John W. Reading Senior Vice President and
Assistant Secretary None
Valerie A. Arendell Senior Vice President - Sales None
Gerald H. Stanney, Vice President and Compliance
Jr. Officer (Boston) None
Jilaine Hummel Bauer Vice President and Compliance Exec. V-P &
Officer (Chicago) Secretary
Bruce F. Ripepi Vice President, General Counsel None
and Assistant Secretary
Timothy K. Armour Vice President President,
Trustee
Lindsay Cook Vice President Trustee
Ralph E. Nixon Vice President None
Joyce B. Riegel Vice President None
Heidi J. Walter Vice President V-P
Glenn E. Williams Assistant Vice President None
Philip J. Iudice Treasurer None
John A. Benning Secretary None
John A. Davenport Assistant Secretary None
Marjorie M. Pluskota Assistant Secretary None
C. Allen Merritt, Jr. Assistant Treasurer; Assistant
Secretary; Director None
The principal business address of Mr. Armour, Ms. Bauer, Ms.
Pluskota, Ms. Riegel and Ms. Walter is One South Wacker Drive,
Chicago, IL 60606; that of Mr. Williams is Two Righter Parkway,
Wilmington, DE 19803; that of Mr. Ripepi is 100 Manhattanville
Road, Purchase, NY 10577; and that of the other officers is 600
Atlantic Avenue, Boston, MA 02210-2214.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Jilaine Hummel Bauer
Executive Vice-President and Secretary
One South Wacker Drive
Chicago, Illinois 60606
ITEM 31. MANAGEMENT SERVICES.
None.
ITEM 32. UNDERTAKINGS.
Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of the latest annual report to
shareholders upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it
meets all of the requirements for effectiveness of this registration
statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this amendment to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago and State of Illinois on the 5th
day of November, 1997.
STEIN ROE INSTITUTIONAL TRUST
By TIMOTHY K. ARMOUR
Timothy K. Armour
President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated:
Signature* Title Date
- ------------------------ --------------------- ----------------
TIMOTHY K. ARMOUR President and Trustee November 5, 1997
Timothy K. Armour
Principal Executive Officer
GARY A. ANETSBERGER Senior Vice-President November 5, 1997
Gary A. Anetsberger
Principal Financial Officer
SHARON R. ROBERTSON Controller November 5, 1997
Sharon R. Robertson
Principal Accounting Officer
KENNETH L. BLOCK Trustee November 5, 1997
Kenneth L. Block
WILLIAM W. BOYD Trustee November 5, 1997
William W. Boyd
LINDSAY COOK Trustee November 5, 1997
Lindsay Cook
DOUGLAS A. HACKER Trustee November 5, 1997
Douglas A. Hacker
JANET LANGFORD KELLY Trustee November 5, 1997
Janet Langford Kelly
FRANCIS W. MORLEY Trustee November 5, 1997
Francis W. Morley
CHARLES R. NELSON Trustee November 5, 1997
Charles R. Nelson
THOMAS C. THEOBALD Trustee November 5, 1997
Thomas C. Theobald
*This Registration Statement has also been signed by the above
persons in their capacities as trustees and officers of SR&F Base
Trust
<PAGE>
STEIN ROE INSTITUTIONAL TRUST
INDEX TO EXHIBITS FILED WITH THIS AMENDMENT
Exhibit
Number Description
- ------- -------------
11 Consent of Ernst & Young LLP
17 Financial data schedule--Stein Roe Institutional High
Yield Fund
EXHIBIT 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions
"Financial Highlights" and "Independent Auditors" and to the
incorporation by reference of our report dated August 11,
1997 with respect to Stein Roe Institutional High Yield Fund
in the Registration Statement (Form N-1A) of Stein Roe
Institutional Trust and related Prospectus and Statement of
Additional Information of Stein Roe Institutional High Yield
Fund, filed with the Securities and Exchange Commission in
this Post-Effective Amendment No. 5 to the Registration
Statement under the Securities Act of 1933 (Registration No.
333-13331) and in this Amendment No. 6 to the Registration
Statement under the Investment Company Act of 1940
(Registration No. 811-07823).
ERNST & YOUNG LLP
Chicago, Illinois
November 4, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> STEIN ROE INSTITUTIONAL HIGH YIELD FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JAN-02-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 104
<INVESTMENTS-AT-VALUE> 107
<RECEIVABLES> 56
<ASSETS-OTHER> 20
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 183
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 76
<TOTAL-LIABILITIES> 76
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 104
<SHARES-COMMON-STOCK> 10
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2
<NET-ASSETS> 107
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 5
<REALIZED-GAINS-CURRENT> 1
<APPREC-INCREASE-CURRENT> 2
<NET-CHANGE-FROM-OPS> 7
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 100
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 4
<NET-CHANGE-IN-ASSETS> 107
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 86
<AVERAGE-NET-ASSETS> 103
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.40
<PER-SHARE-GAIN-APPREC> 0.27
<PER-SHARE-DIVIDEND> 0.40
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.27
<EXPENSE-RATIO> 0.67
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
