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. 1 [X]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 2 [X]
STEIN ROE INSTITUTIONAL TRUST
Registrant
One South Wacker Drive, Chicago, Illinois 60606
Telephone Number: 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
(Agents for Service)
It is proposed that this filing will become effective (check
appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[X] on February 19, 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.
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) Inapplicable
(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 Managers
(d) Inapplicable
(e) Management--Transfer Agent
(f) Management--Fees and Expenses
(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) Organization and Description of Shares
(e) For More Information
(f) Distributions and Income Taxes
(g) Distributions and Income Taxes
(h) Special Considerations Regarding Master Fund/Feeder Fund
Structure
7 How to Purchase Shares
(a) Management--Distributor
(b) How to Purchase Shares; Net Asset Value
(c) How to Purchase Shares
(d) How to Purchase Shares
(e) Inapplicable
(f) Inapplicable
8 (a) How to Redeem Shares
(b) How to Redeem Shares
(c) Inapplicable
(d) 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(a) Inapplicable
(b) Principal Shareholders
(c) Inapplicable
16(a) Investment Advisory Services; Management; see prospectus:
Management
(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 Investment Performance
23 Balance Sheet
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>
The Prospectus relating to Stein Roe Institutional High Yield
Fund a series of Stein Roe Institutional Trust, is not affected
by the filing of this post-effective amendment No. 1.
<PAGE> 1
Statement of Additional Information Dated January 2, 1997
as revised and supplemented through February 19, 1997
STEIN ROE INSTITUTIONAL TRUST
Stein Roe Institutional High Yield Fund
Suite 3200, One South Wacker Drive, Chicago, Illinois 60606
This Statement of Additional Information is not a
prospectus but provides additional information that should be
read in conjunction with the Prospectus dated January 2, 1997
and any supplements thereto. The Prospectus may be obtained at
no charge by telephoning Stein Roe Advisor and Dealer Services at
800-322-0593.
TABLE OF CONTENTS
Page
General Information and History..........................2
Investment Policies......................................3
Portfolio Investments and Strategies.....................5
Investment Restrictions.................................21
Additional Investment Considerations....................24
Purchases and Redemptions...............................25
Management..............................................26
Principal Shareholders..................................29
Investment Advisory Services............................30
Distributor.............................................31
Transfer Agent..........................................32
Custodian...............................................32
Independent Auditors....................................33
Portfolio Transactions..................................33
Additional Income Tax Considerations....................34
Investment Performance..................................35
Balance Sheet...........................................39
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 Institutional Trust's outstanding
shares, Institutional Trust will call a special meeting for the
purpose of voting upon the question of removal of a trustee or
trustees and will assist in the communications with other
shareholders as required by Section 16(c) of the Investment
Company Act of 1940. All shares of Institutional Trust are
voted together in the election of trustees. On any other
matter submitted to a vote of shareholders, shares are voted
by individual series and not in the aggregate, except that
shares are voted in the aggregate when required by the Investment
Company Act of 1940 or other applicable law. When the Board
of Trustees determines that the matter affects only the interests
of one or more series, shareholders of the unaffected series are
not entitled to vote on such matters.
Stein Roe & Farnham Incorporated (the "Adviser") provides
administrative and accounting and recordkeeping services to
Institutional High Yield Fund and High Yield Portfolio and
provides investment advisory services to High Yield Portfolio.
SPECIAL CONSIDERATIONS REGARDING MASTER FUND/FEEDER FUND
STRUCTURE
Rather than invest in securities directly, Institutional
High Yield Fund seeks to achieve its objective by pooling its
assets with assets of other investment companies 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 Special Considerations
Regarding the Master Fund/Feeder Fund Structure.
INVESTMENT POLICIES
The following information supplements the discussion of the
investment objective and policies of Institutional High Yield
Fund and High Yield Portfolio described in the Prospectus. In
pursuing its objective, High Yield Portfolio will invest as
described below and may employ the investment techniques
described in the Prospectus and in this Statement of Additional
Information under Portfolio Investments and Strategies. The
investment objective is a non-fundamental policy and may be
changed by the Board of Trustees without the approval of a
"majority of the outstanding voting securities" /1/ of
Institutional High Yield Fund or High Yield Portfolio.
- -------------
/1/ A "majority of the outstanding voting securities" means the
approval of the lesser of (i) 67% or more of the shares at a
meeting if the holders of more than 50% of the outstanding
shares are present or represented by proxy or (ii) more than 50%
of the outstanding shares.
- ------------
Institutional High Yield Fund seeks to achieve its
objective by investing all of its assets in High Yield
Portfolio. The investment policies of Institutional High Yield
Fund and High Yield Portfolio are substantially identical. High
Yield Portfolio seeks total return by investing for a high level
of current income and capital growth.
High Yield Portfolio invests principally in high-yield,
high-risk medium- and lower-quality debt securities. The
medium- and lower-quality debt securities in which High Yield
Portfolio will invest normally offer a current yield or yield to
maturity that is significantly higher than the yield from
securities rated in the three highest categories assigned by
rating services such as Standard & Poor's Corporation ("S&P")
and by Moody's Investors Service, Inc. ("Moody's").
Under normal circumstances, at least 65% of High Yield
Portfolio's assets will be invested in high-yield, high-risk
medium- and lower-quality debt securities rated lower than Baa
by Moody's or lower than BBB by S&P, or equivalent ratings as
determined by other rating agencies, or unrated securities that
the Adviser determines to be of comparable quality. Medium-
quality debt securities, although considered investment grade,
have some speculative characteristics. Lower-quality debt
securities are obligations of issuers that are considered
predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal according to the terms of
the obligation and, therefore, carry greater investment risk,
including the possibility of issuer default and bankruptcy, and
are commonly referred to as "junk bonds." Some issuers of debt
securities choose not to have their securities rated by a rating
service, and High Yield Portfolio may invest in unrated
securities that the Adviser has researched thoroughly and
believes are suitable for investment. High Yield Portfolio may
invest in debt obligations that are in default, but such
obligations are not expected to exceed 10% of High Yield
Portfolio's assets.
High Yield Portfolio may invest up to 35% of its total
assets in other securities including, but not limited to, pay-
in-kind bonds, securities issued in private placements, bank
loans, zero coupon bonds, foreign securities, convertible
securities, futures, and options. High Yield Portfolio may also
invest in higher-quality debt securities. Under normal market
conditions, however, High Yield Portfolio is unlikely to
emphasize higher-quality debt securities since generally they
offer lower yields than medium- and lower-quality debt
securities with similar maturities. High Yield Portfolio may
also invest in common stocks and securities that are convertible
into common stocks, such as warrants.
Investment in medium- or lower-quality debt securities
involves greater investment risk, including the possibility of
issuer default or bankruptcy. High Yield Portfolio seeks to
reduce investment risk through diversification, credit analysis,
and evaluation of developments in both the economy and financial
markets.
An economic downturn could severely disrupt the high-yield
market and adversely affect the value of outstanding bonds and
the ability of the issuers to repay principal and interest. In
addition, lower-quality bonds are less sensitive to interest
rate changes than higher-quality instruments (see Risks and
Investment Considerations) and generally are more sensitive to
adverse economic changes or individual corporate developments.
During a period of adverse economic changes, including a period
of rising interest rates, issuers of such bonds may experience
difficulty in servicing their principal and interest payment
obligations.
Achievement of the investment objective will be more dependent
on the Adviser's credit analysis than would be the case if High
Yield Portfolio were investing in higher-quality debt
securities. Since the ratings of rating services (which
evaluate the safety of principal and interest payments, not
market risks) are used only as preliminary indicators of
investment quality, the Adviser employs its own credit research
and analysis, from which it has developed a proprietary credit
rating system based upon comparative credit analyses of issuers
within the same industry. These analyses may take into
consideration such quantitative factors as an issuer's present
and potential liquidity, profitability, internal capability to
generate funds, debt/equity ratio and debt servicing
capabilities, and such qualitative factors as an assessment of
management, industry characteristics, accounting methodology,
and foreign business exposure.
Lower-quality debt securities are obligations of issuers
that are considered predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal
according to the terms of the obligation and, therefore, carry
greater investment risk, including the possibility of issuer
default and bankruptcy, and are commonly referred to as "junk
bonds." The lowest rating assigned by Moody's is for bonds that
can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Medium- and lower-quality debt securities tend to be less
marketable than higher-quality debt securities because the
market for them is less broad. The market for unrated debt
securities is even narrower. During periods of thin trading in
these markets, the spread between bid and asked prices is likely
to increase significantly, and High Yield Portfolio may have
greater difficulty selling its portfolio securities. The market
value of these securities and their liquidity may be affected by
adverse publicity and investor perceptions.
PORTFOLIO INVESTMENTS AND STRATEGIES
DERIVATIVES
Consistent with its objective, High Yield Portfolio may
invest in a broad array of financial instruments and securities,
including conventional exchange-traded and non-exchange traded
options, futures contracts, futures options, securities
collateralized by underlying pools of mortgages or other
receivables, and other instruments the value of which is
"derived" from the performance of an underlying asset or a
"benchmark" such as a security index, an interest rate, or a
currency ("Derivatives").
Derivatives are most often used to manage investment risk
or to create an investment position indirectly because it is
more efficient or less costly than direct investment that cannot
be readily established directly due to portfolio size, cash
availability, or other factors. They also may be used in an
effort to enhance portfolio returns.
The successful use of Derivatives depends on the Adviser's
ability to correctly predict changes in the levels and
directions of movements in security prices, interest rates and
other market factors affecting the Derivative itself or the
value of the underlying asset or benchmark. In addition,
correlations in the performance of an underlying asset to a
Derivative may not be well established. Finally, privately
negotiated and over-the-counter Derivatives may not be as well
regulated and may be less marketable than exchange-traded
Derivatives.
High Yield Portfolio does not intend to invest more than 5%
of its assets in any type of Derivative except for options,
futures contracts, and futures options.
MORTGAGE AND OTHER ASSET-BACKED SECURITIES
High Yield Portfolio may invest in securities secured by
mortgages or other assets such as automobile or home improvement
loans and credit card receivables. These instruments may be
issued or guaranteed by the U.S. Government or by its agencies
or instrumentalities or by private entities such as commercial,
mortgage and investment banks and financial companies or
financial subsidiaries of industrial companies.
Mortgage-backed securities provide either a pro rata
interest in underlying mortgages or an interest in
collateralized mortgage obligations ("CMOs") which represent a
right to interest and/or principal payments from an underlying
mortgage pool. CMOs are not guaranteed by either the U.S.
Government or by its agencies or instrumentalities, and are
usually issued in multiple classes each of which has different
payment rights, pre-payment risks and yield characteristics.
Mortgage-backed securities involve the risk of pre-payment on
the underlying mortgages at a faster or slower rate than the
established schedule. Pre-payments generally increase with
falling interest rates and decrease with rising rates but they
also are influenced by economic, social and market factors. If
mortgages are pre-paid during periods of declining interest
rates, there would be a resulting loss of the full-term benefit
of any premium paid by High Yield Portfolio on purchase of the
CMO, and the proceeds of pre-payment would likely be invested at
lower interest rates. High Yield Portfolio intends to invest in
CMOs of classes known as planned amortization classes ("PACs")
which have pre-payment protection features tending to make them
less susceptible to price volatility.
Non-mortgage asset-backed securities usually have less pre-
payment risk than mortgage-backed securities, but have the risk
that the collateral will not be available to support payments on
the underlying loans which finance payments on the securities
themselves. Therefore, greater emphasis is placed on the credit
quality of the security issuer and the guarantor, if any.
FLOATING RATE INSTRUMENTS
High Yield Portfolio may also invest in floating rate
instruments which provide for periodic adjustments in coupon
interest rates that are automatically reset based on changes in
amount and direction of specified market interest rates. In
addition, the adjusted duration of some of these instruments may
be materially shorter than their stated maturities. To the
extent such instruments are subject to lifetime or periodic
interest rate caps or floors, such instruments may experience
greater price volatility than debt instruments without such
features. Adjusted duration is an inverse relationship between
market price and interest rates and refers to the approximate
percentage change in price for a 100 basis point change in
yield. For example, if interest rates decrease by 100 basis
points, a market price of a security with an adjusted duration
of 2 would increase by approximately 2%. High Yield Portfolio
does not intend to invest more than 5% of its net assets in
floating rate instruments.
LENDING OF PORTFOLIO SECURITIES
Subject to restriction (7) under Investment Restrictions,
High Yield Portfolio may lend its portfolio securities to
broker-dealers and banks. Any such loan must be continuously
secured by collateral in cash or cash equivalents maintained on
a current basis in an amount at least equal to the market value
of the securities loaned by High Yield Portfolio. High Yield
Portfolio would continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities
loaned, and would also receive an additional return that may be
in the form of a fixed fee or a percentage of the collateral.
High Yield Portfolio would have the right to call the loan and
obtain the securities loaned at any time on notice of not more
than five business days. In the event of bankruptcy or other
default of the borrower, High Yield Portfolio could experience
both delays in liquidating the loan collateral or recovering the
loaned securities and losses including (a) possible decline in
the value of the collateral or in the value of the securities
loaned during the period while High Yield Portfolio seeks to
enforce its rights thereto, (b) possible subnormal levels of
income and lack of access to income during this period, and (c)
expenses of enforcing its rights.
REPURCHASE AGREEMENTS
High Yield Portfolio may invest in repurchase
agreements, provided that it will not invest more than 15% of
net assets in repurchase agreements maturing in more than
seven days and any other illiquid securities. A repurchase
agreement is a sale of securities to 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 High Yield
Portfolio originally held; and the return earned by High Yield
Portfolio with the proceeds of a dollar roll may not exceed
transaction costs.
High Yield Portfolio may enter into reverse repurchase
agreements with banks and securities dealers. A reverse
repurchase agreement is a repurchase agreement in which High
Yield Portfolio is the seller of, rather than the investor in,
securities and agrees to repurchase them at an agreed-upon time
and price. Use of a reverse repurchase agreement may be
preferable to a regular sale and later repurchase of securities
because it avoids certain market risks and transaction costs.
At the time High Yield Portfolio enters into a binding
obligation to purchase securities on a when-issued basis or
enters into a reverse repurchase agreement, liquid assets (cash,
U.S. Government or other "high grade" debt obligations) of High
Yield Portfolio having a value at least as great as the purchase
price of the securities to be purchased will be segregated on
the books of High Yield Portfolio and held by the custodian
throughout the period of the obligation. The use of these
investment strategies, as well as borrowing under a line of
credit as described below, may increase net asset value
fluctuation.
Standby commitment agreements create an additional risk for
High Yield Portfolio because the other party to the standby
agreement generally will not be obligated to deliver the
security, but High Yield Portfolio will be obligated to accept
it if delivered. Depending on market conditions, High Yield
Portfolio may receive a commitment fee for assuming this
obligation. If prevailing market interest rates increase during
the period between the date of the agreement and the settlement
date, the other party can be expected to deliver the security
and, in effect, pass any decline in value to High Yield
Portfolio. If the value of the security increases after the
agreement is made, however, the other party is unlikely to
deliver the security. In other words, a decrease in the value
of the securities to be purchased under the terms of a standby
commitment agreement will likely result in the delivery of the
security, and, therefore, such decrease will be reflected in
High Yield Portfolio's net asset value. However, any increase
in the value of the securities to be purchased will likely
result in the non-delivery of the security and, therefore, such
increase will not affect the net asset value unless and until
High Yield Portfolio actually obtains the security.
SHORT SALES AGAINST THE BOX
High Yield Portfolio may sell securities short against the
box; that is, enter into short sales of securities that it
currently owns or has the right to acquire through the
conversion or exchange of other securities that it owns at no
additional cost. High Yield Portfolio may make short sales of
securities only if at all times when a short position is open
High Yield Portfolio owns at least an equal amount of such
securities or securities convertible into or exchangeable for
securities of the same issue as, and equal in amount to, the
securities sold short, at no additional cost.
In a short sale against the box, High Yield Portfolio does
not deliver from its portfolio the securities sold. Instead,
High Yield Portfolio borrows the securities sold short from a
broker-dealer through which the short sale is executed, and the
broker-dealer delivers such securities, on behalf of High Yield
Portfolio, to the purchaser of such securities. High Yield
Portfolio is required to pay to the broker-dealer the amount of
any dividends paid on shares sold short. Finally, to secure its
obligation to deliver to such broker-dealer the securities sold
short, High Yield Portfolio must deposit and continuously
maintain in a separate account with High Yield Portfolio's
custodian an equivalent amount of the securities sold short or
securities convertible into or exchangeable for such securities
at no additional cost. High Yield Portfolio is said to have a
short position in the securities sold until it delivers to the
broker-dealer the securities sold. High Yield Portfolio may
close out a short position by purchasing on the open market and
delivering to the broker-dealer an equal amount of the
securities sold short, rather than by delivering portfolio
securities.
Short sales may protect High Yield Portfolio against the
risk of losses in the value of its portfolio securities because
any unrealized losses with respect to such portfolio securities
should be wholly or partially offset by a corresponding gain in
the short position. However, any potential gains in such
portfolio securities should be wholly or partially offset by a
corresponding loss in the short position. The extent to which
such gains or losses are offset will depend upon the amount of
securities sold short relative to the amount High Yield
Portfolio owns, either directly or indirectly, and, in the case
where High Yield Portfolio owns convertible securities, changes
in the conversion premium.
Short sale transactions involve certain risks. If the
price of the security sold short increases between the time of
the short sale and the time High Yield Portfolio replaces the
borrowed security, High Yield Portfolio will incur a loss and if
the price declines during this period, High Yield Portfolio will
realize a short-term capital gain. Any realized short-term
capital gain will be decreased, and any incurred loss increased,
by the amount of transaction costs and any premium, dividend or
interest which High Yield Portfolio may have to pay in
connection with such short sale. Certain provisions of the
Internal Revenue Code may limit the degree to which High Yield
Portfolio is able to enter into short sales. There is no
limitation on the amount of High Yield Portfolio's assets that,
in the aggregate, may be deposited as collateral for the
obligation to replace securities borrowed to effect short sales
and allocated to segregated accounts in connection with short
sales. High Yield Portfolio currently expects that no more than
5% of its total assets would be involved in short sales against
the box.
LINE OF CREDIT
Subject to restriction (8) under Investment Restrictions,
High Yield Portfolio may establish and maintain a line of credit
with a major bank in order to permit borrowing on a temporary
basis to meet share redemption requests in circumstances in
which temporary borrowing may be preferable to liquidation of
portfolio securities.
INTERFUND BORROWING AND LENDING PROGRAM
Pursuant to an exemptive order issued by the Securities and
Exchange Commission, Institutional High Yield Fund has received
permission to lend money to, and borrow money from, other mutual
funds advised by the Adviser. Institutional High Yield Fund
will borrow through the program when 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. The rated
debt securities described under Investment Policies above for
High Yield Portfolio include securities given a rating
conditionally by Moody's or provisionally by S&P. If the rating
of a security held by High Yield Portfolio is withdrawn or
reduced, High Yield Portfolio is not required to sell the
security, but the Adviser will consider such fact in determining
whether High Yield Portfolio should continue to hold the
security. To the extent that the ratings accorded by Moody's or
S&P for debt securities may change as a result of changes in
such organizations, or changes in their rating systems, High
Yield Portfolio will attempt to use comparable ratings as
standards for its investments in debt securities in accordance
with its investment policies.
FOREIGN SECURITIES
High Yield Portfolio may invest up to 25% of total assets
(taken at market value at the time of investment) in securities
of foreign issuers that are not publicly traded in the United
States ("foreign securities"). For purposes of these limits,
foreign securities do not include securities represented by
American Depositary Receipts ("ADRs"), securities denominated in
U.S. dollars, or securities guaranteed by U.S. persons.
Investment in foreign securities may involve a greater degree of
risk (including risks relating to exchange fluctuations, tax
provisions, or expropriation of assets) than does investment in
securities of domestic issuers.
High Yield Portfolio may invest in both "sponsored" and
"unsponsored" ADRs. In a sponsored ADR, the issuer typically
pays some or all of the expenses of the depositary and agrees to
provide its regular shareholder communications to ADR holders.
An unsponsored ADR is created independently of the issuer of the
underlying security. The ADR holders generally pay the expenses
of the depositary and do not have an undertaking from the issuer
of the underlying security to furnish shareholder
communications. High Yield Portfolio does not expects to invest
as much as 5% of its total assets in unsponsored ADRs.
With respect to portfolio securities that are issued by
foreign issuers or denominated in foreign currencies, High Yield
Portfolio's investment performance is affected by the strength
or weakness of the U.S. dollar against these currencies. For
example, if the dollar falls in value relative to the Japanese
yen, the dollar value of a yen-denominated stock held in the
investment portfolio will rise even though the price of the
stock remains unchanged. Conversely, if the dollar rises in
value relative to the yen, the dollar value of the yen-
denominated stock will fall. (See discussion of transaction
hedging and portfolio hedging under Currency Exchange
Transactions.)
Investors should understand and consider carefully the
risks involved in foreign investing. Investing in foreign
securities, positions in which are generally denominated in
foreign currencies, and utilization of forward foreign currency
exchange contracts involve certain considerations comprising
both risks and opportunities not typically associated with
investing in U.S. securities. These considerations include:
fluctuations in exchange rates of foreign currencies; possible
imposition of exchange control regulation or currency
restrictions that would prevent cash from being brought back to
the United States; less public information with respect to
issuers of securities; less governmental supervision of stock
exchanges, securities brokers, and issuers of securities; lack
of uniform accounting, auditing, and financial reporting
standards; lack of uniform settlement periods and trading
practices; less liquidity and frequently greater price
volatility in foreign markets than in the United States;
possible imposition of foreign taxes; possible investment in
securities of companies in developing as well as developed
countries; and sometimes less advantageous legal, operational,
and financial protections applicable to foreign sub-custodial
arrangements.
Although High Yield Portfolio will try to invest in
companies and governments of countries having stable political
environments, there is the possibility of expropriation or
confiscatory taxation, seizure or nationalization of foreign
bank deposits or other assets, establishment of exchange
controls, the adoption of foreign government restrictions, or
other adverse political, social or diplomatic developments that
could affect investment in these nations.
Currency Exchange Transactions. Currency exchange
transactions may be conducted either on a spot (i.e., cash)
basis at the spot rate for purchasing or selling currency
prevailing in the foreign exchange market or through forward
currency exchange contracts ("forward contracts"). Forward
contracts are contractual agreements to purchase or sell a
specified currency at a specified future date (or within a
specified time period) and price set at the time of the
contract. Forward contracts are usually entered into with banks
and broker-dealers, are not exchange traded, and are usually for
less than one year, but may be renewed.
High Yield Portfolio's foreign currency exchange
transactions are limited to transaction and portfolio hedging
involving either specific transactions or portfolio positions,
except to the extent described below under Synthetic Foreign
Positions. Transaction hedging is the purchase or sale of
forward contracts with respect to specific receivables or
payables of High Yield Portfolio arising in connection with the
purchase and sale of its portfolio securities. Portfolio
hedging is the use of forward contracts with respect to
portfolio security positions denominated or quoted in a
particular foreign currency. Portfolio hedging allows High
Yield Portfolio to limit or reduce its exposure in a foreign
currency by entering into a forward contract to sell such
foreign currency (or another foreign currency that acts as a
proxy for that currency) at a future date for a price payable in
U.S. dollars so that the value of the foreign-denominated
portfolio securities can be approximately matched by a foreign-
denominated liability. High Yield Portfolio may not engage in
portfolio hedging with respect to the currency of a particular
country to an extent greater than the aggregate market value (at
the time of making such sale) of the securities held in its
portfolio denominated or quoted in that particular currency,
except that High Yield Portfolio may hedge all or part of its
foreign currency exposure through the use of a basket of
currencies or a proxy currency where such currencies or currency
act as an effective proxy for other currencies. In such a case,
High Yield Portfolio may enter into a forward contract where the
amount of the foreign currency to be sold exceeds the value of
the securities denominated in such currency. The use of this
basket hedging technique may be more efficient and economical
than entering into separate forward contracts for each currency
held in High Yield Portfolio. High Yield Portfolio may not
engage in "speculative" currency exchange transactions.
At the maturity of a forward contract to deliver a
particular currency, High Yield Portfolio may either sell the
portfolio security related to such contract and make delivery of
the currency, or it may retain the security and either acquire
the currency on the spot market or terminate its contractual
obligation to deliver the currency by purchasing an offsetting
contract with the same currency trader obligating it to purchase
on the same maturity date the same amount of the currency.
It is impossible to forecast with absolute precision the
market value of portfolio securities at the expiration of a
forward contract. Accordingly, it may be necessary for High
Yield Portfolio to purchase additional currency on the spot
market (and bear the expense of such purchase) if the market
value of the security is less than the amount of currency High
Yield Portfolio is obligated to deliver and if a decision is
made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell on the spot market some
of the currency received upon the sale of the portfolio security
if its market value exceeds the amount of currency High Yield
Portfolio is obligated to deliver.
If High Yield Portfolio retains the portfolio security and
engages in an offsetting transaction, High Yield Portfolio will
incur a gain or a loss to the extent that there has been
movement in forward contract prices. If High Yield Portfolio
engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the currency. Should
forward prices decline during the period between High Yield
Portfolio's entering into a forward contract for the sale of a
currency and the date it enters into an offsetting contract for
the purchase of the currency, High Yield Portfolio will realize
a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to
purchase. Should forward prices increase, High Yield Portfolio
will suffer a loss to the extent the price of the currency it
has agreed to purchase exceeds the price of the currency it has
agreed to sell. A default on the contract would deprive High
Yield Portfolio of unrealized profits or force High Yield
Portfolio to cover its commitments for purchase or sale of
currency, if any, at the current market price.
Hedging against a decline in the value of a currency does
not eliminate fluctuations in the prices of portfolio securities
or prevent losses if the prices of such securities decline.
Such transactions also preclude the opportunity for gain if the
value of the hedged currency should rise. Moreover, it may not
be possible for High Yield Portfolio to hedge against a
devaluation that is so generally anticipated that High Yield
Portfolio is not able to contract to sell the currency at a
price above the devaluation level it anticipates. The cost to
High Yield Portfolio of engaging in currency exchange
transactions varies with such factors as the currency involved,
the length of the contract period, and prevailing market
conditions. Since currency exchange transactions are usually
conducted on a principal basis, no fees or commissions are
involved.
Synthetic Foreign Positions. High Yield Portfolio may
invest in debt instruments denominated in foreign currencies.
In addition to, or in lieu of, such direct investment, High
Yield Portfolio may construct a synthetic foreign position by
(a) purchasing a debt instrument denominated in one currency,
generally U.S. dollars, and (b) concurrently entering into a
forward contract to deliver a corresponding amount of that
currency in exchange for a different currency on a future date
and at a specified rate of exchange. Because of the
availability of a variety of highly liquid U.S. dollar debt
instruments, a synthetic foreign position utilizing such U.S.
dollar instruments may offer greater liquidity than direct
investment in foreign currency debt instruments. The results of
a direct investment in a foreign currency and a concurrent
construction of a synthetic position in such foreign currency,
in terms of both income yield and gain or loss from changes in
currency exchange rates, in general should be similar, but would
not be identical because the components of the alternative
investments would not be identical.
High Yield Portfolio may also construct a synthetic foreign
position by entering into a swap arrangement. A swap is a
contractual agreement between two parties to exchange cash
flows--at the time of the swap agreement and again at maturity,
and, with some swaps, at various intervals through the period of
the agreement. The use of swaps to construct a synthetic
foreign position would generally entail the swap of interest
rates and currencies. A currency swap is a contractual
arrangement between two parties to exchange principal amounts in
different currencies at a predetermined foreign exchange rate.
An interest rate swap is a contractual agreement between two
parties to exchange interest payments on identical principal
amounts. An interest rate swap may be between a floating and a
fixed rate instrument, a domestic and a foreign instrument, or
any other type of cash flow exchange. A currency swap generally
has the same risk characteristics as a forward currency
contract, and all types of swaps have counter-party risk.
Depending on the facts and circumstances, swaps may be
considered illiquid. Illiquid securities usually have greater
investment risk and are subject to greater price volatility.
The net amount of the excess, if any, of High Yield Portfolio's
obligations over which it is entitled to receive with respect to
an interest rate or currency swap will be accrued daily and
liquid assets (cash, U.S. Government securities, or other "high
grade" debt obligations) of High Yield Portfolio having a value
at least equal to such accrued excess will be segregated on the
books of High Yield Portfolio and held by the Custodian for the
duration of the swap.
High Yield Portfolio may also construct a synthetic foreign
position by purchasing an instrument whose return is tied to the
return of the desired foreign position. An investment in these
"principal exchange rate linked securities" (often called PERLS)
can produce a similar return to a direct investment in a foreign
security.
RULE 144A SECURITIES
High Yield Portfolio may purchase securities that have been
privately placed but that are eligible for purchase and sale
under Rule 144A under the 1933 Act. That Rule permits certain
qualified institutional buyers, such as High Yield Portfolio, to
trade in privately placed securities that have not been
registered for sale under the 1933 Act. The Adviser, under the
supervision of the Board of Trustees, will consider whether
securities purchased under Rule 144A are illiquid and thus
subject to High Yield Portfolio's restriction of investing no
more than 10% of its net assets in illiquid securities. A
determination of whether a Rule 144A security is liquid or not
is a question of fact. In making this determination, the
Adviser will consider the trading markets for the specific
security, taking into account the unregistered nature of a Rule
144A security. In addition, the Adviser could consider the (1)
frequency of trades and quotes, (2) number of dealers and
potential purchasers, (3) dealer undertakings to make a market,
and (4) nature of the security and of marketplace trades (e.g.,
the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). The
liquidity of Rule 144A securities would be monitored and, if as
a result of changed conditions, it is determined that a Rule
144A security is no longer liquid, High Yield Portfolio's
holdings of illiquid securities would be reviewed to determine
what, if any, steps are required to assure that High Yield
Portfolio does not invest more than 10% of its assets in
illiquid securities. Investing in Rule 144A securities could
have the effect of increasing the amount of High Yield
Portfolio's assets invested in illiquid securities if qualified
institutional buyers are unwilling to purchase such securities.
High Yield Portfolio does not expect to invest as much as 5% of
its total assets in Rule 144A securities that have not been
deemed to be liquid by the Adviser.
PORTFOLIO TURNOVER
The turnover rate for High Yield Portfolio in the future
may vary greatly from year to year, and when portfolio changes
are deemed appropriate due to market or other conditions, such
turnover rate may be greater than might otherwise be
anticipated. A high rate of portfolio turnover may result in
increased transaction expenses and the realization of capital
gains or losses. Distributions of any net realized gains are
subject to federal income tax. (See Risks and Investment
Considerations and Distributions and Income Taxes in the
Prospectus, and Additional Income Tax Considerations in this
Statement of Additional Information.)
OPTIONS ON SECURITIES AND INDEXES
High Yield Portfolio may purchase and may sell both put
options and call options on debt or other securities or indexes
in standardized contracts traded on national securities
exchanges, boards of trade, or similar entities, or quoted on
NASDAQ, and agreements, sometimes called cash puts, that may
accompany the purchase of a new issue of bonds from a dealer.
An option on a security (or index) is a contract that gives
the purchaser (holder) of the option, in return for a premium,
the right to buy from (call) or sell to (put) the seller
(writer) of the option the security underlying the option (or
the cash value of the index) at a specified exercise price at
any time during the term of the option. The writer of an option
on an individual security has the obligation upon exercise of
the option to deliver the underlying security upon payment of
the exercise price or to pay the exercise price upon delivery of
the underlying security. Upon exercise, the writer of an option
on an index is obligated to pay the difference between the cash
value of the index and the exercise price multiplied by the
specified multiplier for the index option. (An index is
designed to reflect specified facets of a particular financial
or securities market, a specific group of financial instruments
or securities, or certain economic indicators.)
High Yield Portfolio will write call options and put
options only if they are "covered." In the case of a call
option on a security, the option is "covered" if High Yield
Portfolio owns the security underlying the call or has an
absolute and immediate right to acquire that security without
additional cash consideration (or, if additional cash
consideration is required, cash or cash equivalents in such
amount are held in a segregated account by its custodian) upon
conversion or exchange of other securities held in its
portfolio.
If an option written by High Yield Portfolio expires, High
Yield Portfolio realizes a capital gain equal to the premium
received at the time the option was written. If an option
purchased by High Yield Portfolio expires, High Yield Portfolio
realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option
may be closed out by an offsetting purchase or sale of an option
of the same series (type, exchange, underlying security or
index, exercise price, and expiration). There can be no
assurance, however, that a closing purchase or sale transaction
can be effected when High Yield Portfolio desires.
High Yield Portfolio will realize a capital gain from a
closing purchase transaction if the cost of the closing option
is less than the premium received from writing the option, or,
if it is more, High Yield Portfolio will realize a capital loss.
If the premium received from a closing sale transaction is more
than the premium paid to purchase the option, High Yield
Portfolio will realize a capital gain or, if it is less, High
Yield Portfolio will realize a capital loss. The principal
factors affecting the market value of a put or a call option
include supply and demand, interest rates, the current market
price of the underlying security or index in relation to the
exercise price of the option, the volatility of the underlying
security or index, and the time remaining until the expiration
date.
A put or call option purchased by High Yield Portfolio is
an asset of High Yield Portfolio, valued initially at the
premium paid for the option. The premium received for an option
written by High Yield Portfolio is recorded as a deferred
credit. The value of an option purchased or written is marked-
to-market daily and is valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange
or no closing price is available, at the mean between the last
bid and asked prices.
Risks Associated with Options on Securities and Indexes.
There are several risks associated with transactions in options
on securities and on indexes. For example, there are
significant differences between the securities markets and
options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to
achieve its objectives. A decision as to whether, when and how
to use options involves the exercise of skill and judgment, and
even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist
when High Yield Portfolio seeks to close out an option position.
If High Yield Portfolio were unable to close out an option that
it had purchased on a security, it would have to exercise the
option in order to realize any profit or the option would expire
and become worthless. If High Yield Portfolio were unable to
close out a covered call option that it had written on a
security, it would not be able to sell the underlying security
until the option expired. As the writer of a covered call
option, High Yield Portfolio foregoes, during the option's life,
the opportunity to profit from increases in the market value of
the security covering the call option above the sum of the
premium and the exercise price of the call.
If trading were suspended in an option purchased by High
Yield Portfolio, High Yield Portfolio would not be able to close
out the option. If restrictions on exercise were imposed, High
Yield Portfolio might be unable to exercise an option it has
purchased.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
High Yield Portfolio may use interest rate futures
contracts and index futures contracts. An interest rate or
index futures contract provides for the future sale by one party
and purchase by another party of a specified quantity of a
financial instrument or the cash value of an index /2/ at a
specified price and time. A public market exists in futures
contracts covering a number of indexes as well as the following
financial instruments: U.S. Treasury bonds; U.S. Treasury notes;
GNMA Certificates; three-month U.S. Treasury bills; 90-day
commercial paper; bank certificates of deposit; Eurodollar
certificates of deposit; and foreign currencies. It is expected
that other futures contracts will be developed and traded.
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/2/A futures contract on an index is an agreement pursuant to
which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at
the close of the last trading day of the contract and the price
at which the index contract was originally written. Although
the value of a securities index is a function of the value of
certain specified securities, no physical delivery of those
securities is made.
- --------------
High Yield Portfolio may purchase and write call and put
futures options. Futures options possess many of the same
characteristics as options on securities and indexes (discussed
above). A futures option gives the holder the right, in return
for the premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified exercise
price at any time during the period of the option. Upon
exercise of a call option, the holder acquires a long position
in the futures contract and the writer is assigned the opposite
short position. In the case of a put option, the opposite is
true. High Yield Portfolio might, for example, use futures
contracts to hedge against or gain exposure to fluctuations in
the general level of security prices, anticipated changes in
interest rates or currency fluctuations that might adversely
affect either the value of High Yield Portfolio's securities or
the price of the securities that High Yield Portfolio intends to
purchase. Although other techniques could be used to reduce
High Yield Portfolio's exposure to security price, interest rate
and currency fluctuations, High Yield Portfolio may be able to
achieve its exposure more effectively and perhaps at a lower
cost by using futures contracts and futures options.
High Yield Portfolio will only enter into futures contracts
and futures options that are standardized and traded on an
exchange, board of trade, or similar entity, or quoted on an
automated quotation system.
The success of any futures transaction depends on the
Adviser correctly predicting changes in the level and direction
of security prices, interest rates, currency exchange rates and
other factors. Should those predictions be incorrect, High
Yield Portfolio's return might have been better had the
transaction not been attempted; however, in the absence of the
ability to use futures contracts, the Adviser might have taken
portfolio actions in anticipation of the same market movements
with similar investment results but, presumably, at greater
transaction costs.
When a purchase or sale of a futures contract is made by
High Yield Portfolio, High Yield Portfolio is required to
deposit with its custodian (or broker, if legally permitted) a
specified amount of cash or U.S. Government securities or other
securities acceptable to the broker ("initial margin"). The
margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term
of the contract. The initial margin is in the nature of a
performance bond or good faith deposit on the futures contract
that is returned to High Yield Portfolio upon termination of the
contract, assuming all contractual obligations have been
satisfied. High Yield Portfolio expects to earn interest income
on its initial margin deposits. A futures contract held by High
Yield Portfolio is valued daily at the official settlement price
of the exchange on which it is traded. Each day High Yield
Portfolio pays or receives cash, called "variation margin,"
equal to the daily change in value of the futures contract.
This process is known as "marking-to-market." Variation margin
paid or received by High Yield Portfolio does not represent a
borrowing or loan by High Yield Portfolio but is instead
settlement between High Yield Portfolio and the broker of the
amount one would owe the other if the futures contract had
expired at the close of the previous trading day. In computing
daily net asset value, High Yield Portfolio will mark-to-market
its open futures positions.
High Yield Portfolio is also required to deposit and
maintain margin with respect to put and call options on futures
contracts written by it. Such margin deposits will vary
depending on the nature of the underlying futures contract (and
the related initial margin requirements), the current market
value of the option, and other futures positions held by High
Yield Portfolio.
Although some futures contracts call for making or taking
delivery of the underlying securities, usually these obligations
are closed out prior to delivery by offsetting purchases or
sales of matching futures contracts (same exchange, underlying
security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, High Yield
Portfolio realizes a capital gain, or if it is more, High Yield
Portfolio realizes a capital loss. Conversely, if an offsetting
sale price is more than the original purchase price, High Yield
Portfolio realizes a capital gain, or if it is less, High Yield
Portfolio realizes a capital loss. The transaction costs must
also be included in these calculations.
RISKS ASSOCIATED WITH FUTURES
There are several risks associated with the use of futures
contracts and futures options as hedging techniques. A purchase
or sale of a futures contract may result in losses in excess of
the amount invested in the futures contract. In trying to
increase or reduce market exposure, there can be no guarantee
that there will be a correlation between price movements in the
futures contract and in the portfolio exposure sought. In
addition, there are significant differences between the
securities and futures markets that could result in an imperfect
correlation between the markets, causing a given transaction not
to achieve its objectives. The degree of imperfection of
correlation depends on circumstances such as: variations in
speculative market demand for futures, futures options and debt
securities, including technical influences in futures trading
and futures options and differences between the financial
instruments and the instruments underlying the standard
contracts available for trading in such respects as interest
rate levels, maturities, and creditworthiness of issuers. A
decision as to whether, when and how to hedge involves the
exercise of skill and judgment, and even a well-conceived
transaction may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation
permitted in certain futures contract prices during a single
trading day. The daily limit establishes the maximum amount
that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached
in a futures contract subject to the limit, no more trades may
be made on that day at a price beyond that limit. The daily
limit governs only price movements during a particular trading
day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable
positions. For example, futures prices have occasionally moved
to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of
positions and subjecting some holders of futures contracts to
substantial losses.
There can be no assurance that a liquid market will exist
at a time when High Yield Portfolio seeks to close out a futures
or a futures option position. High Yield Portfolio would be
exposed to possible loss on the position during the interval of
inability to close and would continue to be required to meet
margin requirements until the position is closed. In addition,
many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market will
develop or continue to exist.
LIMITATIONS ON OPTIONS AND FUTURES
If other options, futures contracts, or futures options of
types other than those described herein are traded in the
future, High Yield Portfolio may also use those investment
vehicles, provided the Board of Trustees determines that their
use is consistent with High Yield Portfolio's investment
objective.
High Yield Portfolio will not enter into a futures contract
or purchase an option thereon if, immediately thereafter, the
initial margin deposits for futures contracts held by High Yield
Portfolio plus premiums paid by it for open futures option
positions, less the amount by which any such positions are "in-
the-money," /3/ would exceed 5% of High Yield Portfolio's total
assets.
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/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, High Yield Portfolio also realizes a capital gain or
loss on those securities.
For federal income tax purposes, High Yield Portfolio
generally is required to recognize as income for each taxable
year its net unrealized gains and losses as of the end of the
year on options, futures and futures options positions ("year-
end mark-to-market"). Generally, any gain or loss recognized
with respect to such positions (either by year-end mark-to-
market or by actual closing of the positions) is considered to
be 60% long-term and 40% short-term, without regard to the
holding periods of the contracts. However, in the case of
positions classified as part of a "mixed straddle," the
recognition of losses on certain positions (including options,
futures and futures options positions, the related securities
and certain successor positions thereto) may be deferred to a
later taxable year. Sale of futures contracts or writing of
call options (or futures call options) or buying put options (or
futures put options) that are intended to hedge against a change
in the value of securities held by High Yield Portfolio: (1)
will affect the holding period of the hedged securities; and (2)
may cause unrealized gain or loss on such securities to be
recognized upon entry into the hedge.
In order for High Yield Portfolio to continue to qualify
for federal income tax treatment as a regulated investment
company, at least 90% of its gross income for a taxable year
must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains
from the sale of securities or foreign currencies or other
income (including but not limited to gains from options,
futures, and forward contracts). In addition, gains realized on
the sale or other disposition of securities held for less than
three months must be limited to less than 30% of High Yield
Portfolio's annual gross income. Any net gain realized from
futures (or futures options) contracts will be considered gain
from the sale of securities and therefore be qualifying income
for purposes of the 90% requirement. In order to avoid
realizing excessive gains on securities held less than three
months, High Yield Portfolio may be required to defer the
closing out of certain positions beyond the time when it would
otherwise be advantageous to do so.
Institutional High Yield Fund distributes to shareholders
annually any net capital gains that have been recognized for
federal income tax purposes (including year-end mark-to-market
gains) on options and futures transactions. Such distributions
are combined with distributions of capital gains realized on the
other investments and shareholders are advised of the nature of
the payments.
INVESTMENT RESTRICTIONS
Institutional High Yield Fund and High Yield Portfolio
operate under the following investment restrictions.
Institutional High Yield Fund and High Yield Portfolio may not:
(1) invest in a security if, as a result of such
investment, more than 25% of its total assets (taken at market
value at the time of such investment) would be invested in the
securities of issuers in any particular industry, except that
this restriction does not apply to U.S. Government Securities,
and [Institutional High Yield Fund only] except that all or
substantially all of the assets of the Fund may be invested in
another registered investment company having the same investment
objective and substantially similar investment policies as the
Fund;
(2) invest in a security if, with respect to 75% of its
assets, as a result of such investment, more than 5% of its
total assets (taken at market value at the time of such
investment) would be invested in the securities of any one
issuer, except that this restriction does not apply to U.S.
Government Securities or repurchase agreements for such
securities and [Institutional High Yield Fund only] except that
all or substantially all of the assets of the Fund may be
invested in another registered investment company having the
same investment objective and substantially similar investment
policies as the Fund;
(3) invest in a security if, as a result of such
investment, it would hold more than 10% (taken at the time of
such investment) of the outstanding voting securities of any one
issuer, [Institutional High Yield Fund only] except that all or
substantially all of the assets of the Fund may be invested in
another registered investment company having the same investment
objective and substantially similar investment policies as the
Fund;
(4) purchase or sell real estate (although it may purchase
securities secured by real estate or interests therein, or
securities issued by companies which invest in real estate, or
interests therein);
(5) purchase or sell commodities or commodities contracts
or oil, gas or mineral programs, except that it may enter into
(i) futures and options on futures and (ii) forward contracts;
(6) purchase securities on margin, except for use of
short-term credit necessary for clearance of purchases and sales
of portfolio securities, but it may make margin deposits in
connection with transactions in options, futures, and options on
futures;
(7) make loans, although it may (a) lend portfolio
securities and participate in an interfund lending program with
other Stein Roe Funds and Portfolios provided that no such loan
may be made if, as a result, the aggregate of such loans would
exceed 33 1/3% of the value of its total assets (taken at market
value at the time of such loans); (b) purchase money market
instruments and enter into repurchase agreements; and (c)
acquire publicly-distributed or privately-placed debt
securities;
(8) borrow except that it may (a) borrow for non-
leveraging, temporary or emergency purposes, (b) engage in
reverse repurchase agreements and make other borrowings,
provided that the combination of (a) and (b) shall not exceed 33
1/3% of the value of its total assets (including the amount
borrowed) less liabilities (other than borrowings) or such other
percentage permitted by law, and (c) enter into futures and
options transactions; it may borrow from banks, other Stein Roe
Funds and Portfolios, and other persons to the extent permitted
by applicable law;
(9) act as an underwriter of securities, except insofar as
it may be deemed to be an "underwriter" for purposes of the
Securities Act of 1933 on disposition of securities acquired
subject to legal or contractual restrictions on resale,
[Institutional High Yield Fund only] except that all or
substantially all of the assets of the Fund may be invested in
another registered investment company having the same investment
objective and substantially similar investment policies as the
Fund; or
(10) issue any senior security except to the extent
permitted under the Investment Company Act of 1940.
The above restrictions are fundamental policies and may not
be changed without the approval of a "majority of the
outstanding voting securities" of the Fund or High Yield
Portfolio, as previously defined herein. The policy on the
scope of transactions involving lending of portfolio securities
to broker-dealers and banks (as set forth herein under Portfolio
Investments and Strategies) is also a fundamental policy.
Institutional High Yield Fund and High Yield Portfolio are
also subject to the following restrictions and policies that may
be changed by the Board of Trustees. None of the following
restrictions shall prevent it from investing all or
substantially all of its assets in another investment company
having the same investment objective and substantially similar
investment policies as the Fund. Unless otherwise indicated,
Institutional High Yield Fund and High Yield Portfolio may not:
(A) invest for the purpose of exercising control or
management;
(B) purchase more than 3% of the stock of another
investment company or purchase stock of other investment
companies equal to more than 5% of its total assets (valued at
time of purchase) in the case of any one other investment
company and 10% of such assets (valued at time of purchase) in
the case of all other investment companies in the aggregate; any
such purchases are to be made in the open market where no profit
to a sponsor or dealer results from the purchase, other than the
customary broker's commission, except for securities acquired as
part of a merger, consolidation or acquisition of assets;/4/
- ------------
/4/Stein Roe Funds have been informed that the staff of the
Securities and Exchange Commission takes the position that the
issuers of certain CMOs and certain other collateralized assets
are investment companies and that subsidiaries of foreign banks
may be investment companies for purposes of Section 12(d)(1) of
the Investment Company Act of 1940, which limits the ability of
one investment company to invest in another investment company.
Accordingly, High Yield Portfolio intends to operate within the
applicable limitations under Section 12(d)(1)(A) of that Act.
- ------------
(C) 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) buy or sell an option on a security, a futures
contract, or an option on a futures contract unless the option,
the futures contract, or the option on the futures contract is
offered through the facilities of a national securities
association or listed on a national exchange or similar entity;
(I) invest in limited partnerships in real estate unless
they are readily marketable;
(J) 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;
(K) 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;
(L) invest more than 10% of its net assets (taken at
market value at the time of a particular investment) in illiquid
securities /5/, including repurchase agreements maturing in more
than seven days.
- -------------
/5/ In the judgment of the Adviser, Private Placement Notes,
which are issued pursuant to Section 4(2) of the Securities Act
of 1933, generally are readily marketable even though they are
subject to certain legal restrictions on resale. As such, they
are not treated as being subject to the limitation on illiquid
securities.
- -------------
ADDITIONAL INVESTMENT CONSIDERATIONS
The Adviser seeks to provide superior long-term investment
results through a disciplined, research-intensive approach to
investment selection and prudent risk management. In working to
build wealth for generations, it has been guided by three
primary objectives which it believes are the foundation of a
successful investment program. These objectives are
preservation of capital, limited volatility through managed
risk, and consistent above-average returns, as appropriate for
the particular client or managed account.
Because every investor's needs are different, Stein Roe
mutual funds are designed to accommodate different investment
objectives, risk tolerance levels, and time horizons. In
selecting a mutual fund, investors should ask the following
questions:
What are my investment goals?
It is important to a choose a fund that has investment
objectives compatible with your investment goals.
What is my investment time frame?
If you have a short investment time frame (e.g., less than three
years), a mutual fund that seeks to provide a stable share
price, such as a money market fund, or one that seeks capital
preservation as one of its objectives may be appropriate. If
you have a longer investment time frame, you may seek to
maximize your investment returns by investing in a mutual fund
that offers greater yield or appreciation potential in exchange
for greater investment risk.
What is my tolerance for risk?
All investments, including those in mutual funds, have risks
which will vary depending on investment objective and security
type. However, mutual funds seek to reduce risk through
professional investment management and portfolio
diversification.
In general, equity mutual funds emphasize long-term capital
appreciation and tend to have more volatile net asset values
than bond or money market mutual funds. Although there is no
guarantee that they will be able to maintain a stable net asset
value of $1.00 per share, money market funds emphasize safety of
principal and liquidity, but tend to offer lower income
potential than bond funds. Bond funds tend to offer higher
income potential than money market funds but tend to have
greater risk of principal and yield volatility.
In addition, the Adviser believes that investment in a high
yield fund provides an opportunity to diversify an investment
portfolio because the economic factors that affect the
performance of high-yield, high-risk debt securities differ from
those that affect the performance of high-quality debt
securities or equity securities.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the Prospectus
under the headings How to Purchase Shares, How to Redeem Shares,
and Net Asset Value, and that information is incorporated herein
by reference. The Prospectus discloses that shares may be
purchased (or redeemed) through investment dealers, banks, or
other intermediaries. It is the responsibility of any such
intermediary to establish procedures insuring the prompt
transmission to Institutional Trust of any such purchase order.
The state of Texas has asked that mutual funds disclose in their
Statement of Additional Information, as a reminder to any such
intermediary, that it must be registered as a dealer in Texas.
Through an account with an Intermediary, a shareholder may
be able to exchange shares of Institutional High Yield Fund for
shares of another Stein Roe Fund. Each Intermediary will
establish its own exchange policy and procedures for its
accounts. Shares are exchanged at the next price calculated on
a day the NYSE is open, after an exchange order is received and
accepted by an Intermediary.
- - Shares can be exchanged only between accounts registered in
the same name, address, and taxpayer ID number of the
Intermediary.
- - An exchange can be made only into a Stein Roe Fund whose
shares are eligible for sale in the state where the Intermediary
is located.
- - An exchange may have tax consequences.
- - Institutional High Yield Fund may refuse any exchange orders
from any Intermediary if for any reason they are not deemed to
be in the best interests of the Fund and its shareholders.
- - Institutional High Yield Fund may impose other restrictions on
the exchange privilege, or modify or terminate the privilege,
but will try to give each Intermediary advance notice whenever
it can reasonably do so.
Institutional High Yield Fund's net asset value is
determined on days on which the New York Stock Exchange (the
"NYSE") is open for trading. The NYSE is regularly closed on
Saturdays and Sundays and on New Year's Day, the third Monday in
February, Good Friday, the last Monday in May, Independence Day,
Labor Day, Thanksgiving, and Christmas. If one of these
holidays falls on a Saturday or Sunday, the NYSE will be closed
on the preceding Friday or the following Monday, respectively.
Net asset value will not be determined on days when the NYSE is
closed unless, in the judgment of the Board of Trustees, net
asset value of Institutional High Yield Fund should be
determined on any such day, in which case the determination will
be made at 3:00 p.m., central time.
Institutional Trust reserves the right to suspend or
postpone redemptions of shares of its series during any period
when: (a) trading on the NYSE is restricted, as determined by
the Securities and Exchange Commission, or the NYSE is closed
for other than customary weekend and holiday closings; (b) the
Securities and Exchange Commission has by order permitted such
suspension; or (c) an emergency, as determined by the Securities
and Exchange Commission, exists, making disposal of portfolio
securities or valuation of net assets of a series not reasonably
practicable.
Institutional Trust intends to pay all redemptions in cash
and is obligated to redeem shares of its series solely in cash
up to the lesser of $250,000 or one percent of the net assets of
Institutional High Yield Fund during any 90-day period for any
one shareholder. However, redemptions in excess of such limit
may be paid wholly or partly by a distribution in kind of
securities. If redemptions were made in kind, the redeeming
shareholders might incur transaction costs in selling the
securities received in the redemptions.
Due to the relatively high cost of maintaining smaller
accounts, Institutional Trust reserves the right to redeem
shares in any account for their then-current value (which will
be promptly paid to the investor) if at any time the shares in
the account do not have a value of at least $100,000. An
investor will be notified that the value of his account is less
than the minimum and allowed at least 30 days to bring the value
of the account up to at least $100,000 before the redemption is
processed. The Agreement and Declaration of Trust also
authorizes Institutional Trust to redeem shares under certain
other circumstances as may be specified by the Board of
Trustees.
MANAGEMENT
The following table sets forth certain information with
respect to trustees and officers of Institutional Trust:
<TABLE>
<CAPTION>
POSITION(S) HELD WITH PRINCIPAL OCCUPATION(S)
NAME AGE INSTITUTIONAL TRUST DURING PAST FIVE YEARS
<C> <S> <S> <S>
Gary A. Anetsberger 41 Senior Vice-President Chief Financial Officer of the
(4) Mutual Funds division of Stein
Roe & Farnham Incorporated
(the "Adviser"); senior vice
president of the Adviser since
April, 1996; vice president
of the Adviser prior thereto
Timothy K. Armour 48 President; Trustee President of the Mutual Funds
(1)(2)(4) division of the Adviser and
director of the Adviser since
June, 1992; senior vice president
and director of marketing of
Citibank Illinois prior thereto
Jilaine Hummel Bauer 41 Executive Vice-President; General counsel and secretary of
(4) Secretary the Adviser since November 1995;
senior vice president of the
Adviser since April, 1992; vice
president of the Adviser prior
thereto
Ann H. Benjamin 38 Vice-President Senior vice president of the
Adviser since July, 1994; vice
president of the Adviser from
January, 1992 to July, 1994;
associate of the Adviser prior
thereto
Kenneth L. Block 76 Trustee Chairman Emeritus of A. T. Kearney,
(3)(4) Inc. (international management
consultants)
William W. Boyd 70 Trustee Chairman and director of Sterling
(3)(4) Plumbing Group, Inc. (manufacturer
of plumbing products) since 1992;
chairman, president, and chief
executive officer of Sterling
Plumbing Group, Inc. prior thereto
Thomas W. Butch (4) 40 Executive Vice-President Senior vice president of the
Adviser since September, 1994;
first vice president, corporate
communications, of Mellon Bank
Corporation prior thereto
Lindsay Cook(1)(4) 45 Trustee Senior vice president of Liberty
Financial Companies, Inc. (the
indirect parent of the Adviser)
Philip J. Crosley 50 Vice-President Senior Vice President of the
Adviser since February, 1996;
Vice President, Institutional
Sales-Advisor Sales, Invesco
Funds Group prior thereto
Douglas A. Hacker 41 Trustee Senior vice president and chief
(3)(4) financial officer, United
Airlines, since July, 1994;
senior vice president - Finance,
United Airlines, February, 1993
to July, 1994; vice president,
American Airlines prior thereto
Janet Langford Kelly 39 Trustee Senior vice president, secretary
(3)(4) and general counsel, Sara Lee
Corporation (branded, packaged,
consumer-products manufacturer),
since 1995; partner, Sidley &
Austin (law firm), 1991 through 1994
Michael T. Kennedy 34 Vice-President Senior vice president of the
Adviser since October, 1994;
vice president of the Adviser
from January, 1992 to October,
1994; associate of the Adviser
prior thereto
Lynn C. Maddox 56 Vice-President Senior vice president of the Adviser
Anne E. Marcel 39 Vice-President Vice president of the Adviser
since April, 1996; manager,
Mutual Fund Sales & Services
of the Adviser since October,
1994; supervisor of the Counselor
Department of the Adviser from
October, 1992 to October, 1994;
vice president of Selected
Financial Services prior thereto
Francis W. Morley 76 Trustee Chairman of Employer Plan
(2)(3)(4) Administrators and Consultants
Co. (designer, administrator,
and communicator of employee
benefit plans)
Jane M. Naeseth 46 Vice-President Senior vice president of the
Adviser since January, 1991; vice
president of the Adviser prior thereto
Charles R. Nelson 54 Trustee Van Voorhis Professor of Political
(3) (4) Economy of the University of Washington
Nicolette D. Parrish 47 Vice-President; Senior compliance administrator and
(4) Assistant Secretary assistant secretary of the Adviser
since November 1995; senior legal
assistant for the Adviser prior thereto
Cynthia A. Prah (4) 34 Vice-President Manager of Shareholder
Transaction Processing for
the Adviser
Sharon R. Robertson 35 Controller Accounting manager for the Adviser's
(4) Mutual Funds division
Janet B. Rysz (4) 41 Assistant Secretary Senior compliance administrator
and assistant secretary of the
Adviser
Thomas P. Sorbo 36 Vice-President Senior vice president of the
Adviser since January, 1994;
vice president of the Adviser
from September, 1992 to December,
1993; associate of Travelers
Insurance Company prior thereto
Thomas C. Theobald 59 Trustee Managing director, William Blair
(3) (4) Capital Partners (private equity
fund) since 1994; chief executive
officer and chairman of the Board
of Directors of Continental Bank
Corporation prior thereto
Heidi J. Walter (4) 29 Vice-President Legal counsel for the Adviser
since March, 1995; associate with
Beeler Schad & Diamond, PC (law firm).
prior thereto
Stacy H. Winick (4) 32 Vice-President Senior legal counsel for the Adviser
since Octob er, 1996; associate of
Bell, Boyd & Lloyd (law firm), June,
1993 to September, 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 30 Treasurer Compliance manager for the Adviser's
(4) Mutual Funds division since
August 1995; compliance
accountant, January 1995 to
July 1995; section manager,
January 1994 to January 1995;
supervisor prior thereto
</TABLE>
______________________
(1) Trustee who is an "interested person" of Institutional Trust
and of the Adviser, as defined in the Investment Company Act
of 1940.
(2) Member of the Executive Committee of the Board of Trustees,
which is authorized to exercise all powers of the Board with
certain statutory exceptions.
(3) Member of the Audit Committee of the Board, which makes
recommendations to the Board regarding the selection of
auditors and confers with the auditors regarding the scope
and results of the audit.
(4) This person holds the corresponding officer or trustee
position with the Base Trust.
Certain of the trustees and officers of Institutional Trust
and of Base Trust are trustees or officers of other investment
companies managed by the Adviser. Mr. Armour, Ms. Bauer, Mr. Cook
and Ms. Walter are also vice presidents of Institutional High Yield
Fund's distributor, Liberty Securities Corporation. The address
of Mr. Block is 11 Woodley Road, Winnetka, Illinois 60093; that
of Mr. Boyd is 2900 Golf Road, Rolling Meadows, Illinois 60008;
that of Mr. Cook is 600 Atlantic Avenue, Boston, MA 02210; that
of Mr. Hacker is P.O. Box 66100, Chicago, IL 60666; that of Ms.
Kelly is Three First National Plaza, Chicago, Illinois 60602;
that of Mr. Morley is 20 North Wacker Drive, Suite 2275,
Chicago, Illinois 60606; that of Mr. Nelson is Department of
Economics, University of Washington, Seattle, Washington 98195;
that of Mr. Theobald is Suite 3300, 222 West Adams Street,
Chicago, IL 60606; and that of the officers is One South Wacker
Drive, Chicago, Illinois 60606.
Officers and trustees affiliated with the Adviser serve
without any compensation from Institutional Trust. In
compensation for their services to Institutional Trust, trustees
who are not "interested persons" of Institutional Trust or the
Adviser are paid an annual retainer of $8,000 (divided equally
among the series of Institutional Trust) plus an attendance fee
from each series for each meeting of the Board or standing
committee thereof attended at which business for the series is
conducted. The attendance fees (other than for a Nominating
Committee meeting) are based on each series' net assets as of
the preceding December 31. For a series with net assets of less
than $50 million, the fee is $50 per meeting; with $51 to $250
million, the fee is $200 per meeting; with $251 million to $500
million, $350; with $501 million to $750 million, $500; with
$751 million to $1 billion, $650; and with over $1 billion in
net assets, $800. For Institutional High Yield Fund and any
other series of Institutional Trust participating in the master
fund/feeder fund structure, the trustees' attendance fee is paid
solely by the master portfolio. Each non-interested trustee
also receives $500 from Institutional Trust for attending each
meeting of the Nominating Committee. Institutional Trust has no
retirement or pension plan. The following table sets forth
compensation paid to the trustees by the Stein Roe Fund complex:
Estimated Compensation Total Compensation from
from Institutional Trust the Stein Roe Fund
for Fiscal Year Ending Complex for the year
Name of Trustee June 30, 1997* ended June 30, 1996**
- --------------- ------------------------ -----------------------
Timothy K. Armour -0- -0-
Lindsay Cook -0- -0-
Douglas A. Hacker -0- -0-
Thomas C. Theobald -0- -0-
Kenneth L. Block $4,000 $82,417
William W. Boyd 4,000 86,317
Francis W. Morley 4,000 82,017
Charles R. Nelson 4,000 86,317
Gordon R. Worley 4,000 82,817
_______________
* Assuming less than $50 million in net assets and no
nominating committee meeting held during the period.
** During this period, the Stein Roe Fund Complex consisted
of six series of Stein Roe Income Trust, four series of
Stein Roe Municipal Trust, eight series of Stein Roe
Investment Trust, and one series of Base Trust. Messrs.
Hacker and Theobald were elected trustees of those Trusts
on June 18, 1996, and, therefore, did not receive any
compensation for the year ended June 30, 1996. Mr. Worley
retired as a trustee on December 31, 1996; and Ms. Kelly
became a trustee on January 1, 1997.
PRINCIPAL SHAREHOLDERS
As of the date of this Statement of Additional Information,
Institutional High Yield Fund had only one shareholder, Stein
Roe & Farnham Incorporated, which held 10,000 shares.
INVESTMENT ADVISORY SERVICES
Stein Roe & Farnham Incorporated provides administrative
services to Institutional High Yield Fund and High Yield
Portfolio and portfolio management services to High Yield
Portfolio. The Adviser is a wholly owned subsidiary of SteinRoe
Services Inc. ("SSI"), Institutional High Yield Funds' transfer
agent, which is a wholly owned subsidiary of Liberty Financial
Companies, Inc. ("Liberty Financial"), which is a majority owned
subsidiary of LFC Holdings, Inc., which is a wholly owned
subsidiary of Liberty Mutual Equity Corporation, which is a
wholly owned subsidiary of Liberty Mutual Insurance Company.
Liberty Mutual Insurance Company is a mutual insurance company,
principally in the property/casualty insurance field, organized
under the laws of Massachusetts in 1912.
The directors of the Adviser are Kenneth R. Leibler, Harold
W. Cogger, C. Allen Merritt, Jr., Timothy K. Armour, and Hans P.
Ziegler. Mr. Leibler is President and Chief Executive Officer
of Liberty Financial; Mr. Cogger is Executive Vice President of
Liberty Financial; Mr. Merritt is Senior Vice President and
Treasurer of Liberty Financial; Mr. Armour is President of the
Adviser's Mutual Funds division; and Mr. Ziegler is Chief
Executive Officer of the Adviser. The business address of
Messrs. Leibler, Cogger, and Merritt is Federal Reserve Plaza,
Boston, Massachusetts 02210; and that of Messrs. Armour, and
Ziegler is One South Wacker Drive, Chicago, Illinois 60606.
The Adviser and its predecessor have been providing
investment advisory services since 1932. The Adviser acts as
investment adviser to wealthy individuals, trustees, pension and
profit sharing plans, charitable organizations, and other
institutional investors. As of December 31, 1996, the Adviser
managed over $26.7 billion in assets: over $8 billion in equities
and over $18.7 billion in fixed income securities (including $1.6
billion in municipal securities). The $26.7 billion in managed
assets included over $7.5 billion held by open-end mutual funds
managed by the Adviser (approximately 16% of the mutual fund
assets were held by clients of the Adviser). These mutual funds
were owned by over 227,000 shareholders. The $7.5 billion in
mutual fund assets included over $743 million in over 47,000 IRA
accounts. In managing those assets, the Adviser utilizes a
proprietary computer-based information system that maintains and
regularly updates information for approximately 6,500 companies.
The Adviser also monitors over 1,400 issues via a proprietary
credit analysis system. At December 31, 1996, the Adviser
employed 19 research analysts and 55 account managers. The
average investment-related experience of these individuals was 22
years.
Please refer to the description of the Adviser, the
management and administrative agreements, fees, expense
limitations, and transfer agency services under Management and
Fee Table in the Prospectus, which is incorporated herein by
reference.
The Adviser provides office space and executive and other
personnel to Institutional High Yield Fund and bears any sales
or promotional expenses. Institutional High Yield Fund pays all
expenses other than those paid by the Adviser, including but not
limited to printing and postage charges and securities
registration and custodian fees and expenses incidental to its
organization.
Institutional High Yield Fund's administrative agreement
provides that the Adviser shall reimburse the Fund to the extent
that its total annual expenses (including fees paid to the
Adviser, but excluding taxes, interest, brokers' commissions and
other normal charges incident to the purchase and sale of
portfolio securities, and expenses of litigation to the extent
permitted under applicable state law) exceed the applicable
limits prescribed by any state in which shares of Institutional
High Yield Fund are being offered for sale to the public;
however, such reimbursement for any fiscal year will not exceed
the amount of the fees paid by Institutional High Yield Fund
under that agreement for such year. In addition, in the
interest of further limiting Institutional High Yield Fund's
expenses, the Adviser may voluntarily waive its management fee
and/or absorb certain its expenses, as described in the
Prospectus under Fee Table. Any such reimbursements will
enhance the yield of the Fund.
High Yield Portfolio's management agreement provides that
neither the Adviser nor any of its directors, officers,
stockholders (or partners of stockholders), agents, or employees
shall have any liability to Base Trust or any shareholder of
High Yield Portfolio for any error of judgment, mistake of law
or any loss arising out of any investment, or for any other act
or omission in the performance by the Adviser of its duties
under the agreement, except for liability resulting from willful
misfeasance, bad faith or gross negligence on the Adviser's part
in the performance of its duties or from reckless disregard by
the Adviser of the Adviser's obligations and duties under that
agreement.
Any expenses that are attributable solely to the
organization, operation, or business of Institutional High Yield
Fund shall be paid solely out of that Fund's assets. Any
expenses incurred by Institutional Trust that are not solely
attributable to a particular Fund are apportioned in such manner
as the Adviser determines is fair and appropriate, unless
otherwise specified by the Board of Trustees.
DISTRIBUTOR
Shares of Institutional High Yield Fund are distributed by
Liberty Securities Corporation ("LSC"), under a Distribution
Agreement as described under Management in the Prospectus, which
is incorporated herein by reference. The Distribution Agreement
continues in effect from year to year, provided such continuance
is approved annually (i) by a majority of the trustees or by a
majority of the outstanding voting securities of Institutional
Trust, and (ii) by a majority of the trustees who are not
parties to the Agreement or interested persons of any such
party. Institutional Trust has agreed to pay all expenses in
connection with registration of its shares with the Securities
and Exchange Commission and auditing and filing fees in
connection with registration of its shares under the various
state blue sky laws and assumes the cost of preparation of
prospectuses and other expenses.
As agent, LSC offers shares of Institutional High Yield
Fund to investors in states where the shares are qualified for
sale, at net asset value, without sales commissions or other
sales load to the investor. No sales commission or "12b-1"
payment is paid by Institutional High Yield Fund. LSC offers
Institutional High Yield Fund's shares only on a best-efforts
basis.
TRANSFER AGENT
SSI performs certain transfer agency services for
Institutional Trust, as described under Management in the
Prospectus. For performing these services, SSI receives from
Institutional High Yield Fund a fee based on an annual rate of
.05 of 1% of average daily net assets of Institutional High
Yield Fund. The Board of Trustees believes the charges by SSI
are comparable to those of other companies performing similar
services. (See Investment Advisory Services.)
CUSTODIAN
State Street Bank and Trust Company (the "Bank"), 225
Franklin Street, Boston, Massachusetts 02101, is the custodian
for Institutional Trust and Base Trust. It is responsible for
holding all securities and cash, receiving and paying for
securities purchased, delivering against payment securities
sold, receiving and collecting income from investments, making
all payments covering expenses, and performing other
administrative duties, all as directed by authorized persons.
The custodian does not exercise any supervisory function in such
matters as purchase and sale of portfolio securities, payment of
dividends, or payment of expenses.
Portfolio securities purchased in the U.S. are maintained
in the custody of the Bank or of other domestic banks or
depositories. Portfolio securities purchased outside of the
U.S. are maintained in the custody of foreign banks and trust
companies that are members of the Bank's Global Custody Network,
and foreign depositories ("foreign sub-custodians"). Each of
the domestic and foreign custodial institutions holding
portfolio securities has been approved by the Board of Trustees
in accordance with regulations under the Investment Company Act
of 1940.
Each Board of Trustees reviews, at least annually, whether
it is in the best interest of Institutional High Yield Fund,
High Yield Portfolio, and their shareholders to maintain assets
in each custodial institution. However, with respect to foreign
sub-custodians, there can be no assurance that it, and the value
of its shares, will not be adversely affected by acts of foreign
governments, financial or operational difficulties of the
foreign sub-custodians, difficulties and costs of obtaining
jurisdiction over, or enforcing judgments against, the foreign
sub-custodians, or application of foreign law to the foreign
sub-custodial arrangements. Accordingly, an investor should
recognize that the non-investment risks involved in holding
assets abroad are greater than those associated with investing
in the United States.
Institutional High Yield Fund and High Yield Portfolio may
invest in obligations of the custodian and may purchase or sell
securities from or to the custodian.
INDEPENDENT AUDITORS
The independent auditors for Institutional Trust and High
Yield Portfolio are Ernst & Young LLP, 233 South Wacker Drive,
Chicago, Illinois 60606. The independent auditors audit and
report on the annual financial statements, review certain
regulatory reports and the federal income tax returns, and
perform other professional accounting, auditing, tax and
advisory services when engaged to do so by the applicable Trust.
PORTFOLIO TRANSACTIONS
The Adviser places the orders for the purchase and sale of
portfolio securities and options and futures contracts for High
Yield Portfolio. Purchases and sales of portfolio securities
are ordinarily transacted with the issuer or with a primary
market maker acting as principal or agent for the securities on
a net basis, with no brokerage commission being paid by High
Yield Portfolio. Transactions placed through dealers reflect
the spread between the bid and asked prices. Occasionally, High
Yield Portfolio may make purchases of underwritten issues at
prices that include underwriting discounts or selling
concessions.
The Adviser's overriding objective in effecting portfolio
transactions is to seek to obtain the best combination of price
and execution. The best net price, giving effect to transaction
charges, if any, and other costs, normally is an important
factor in this decision, but a number of other judgmental
factors may also enter into the decision. These include: the
Adviser's knowledge of current transaction costs; the nature of
the security being traded; the size of the transaction; the
desired timing of the trade; the activity existing and expected
in the market for the particular security; confidentiality; the
execution, clearance and settlement capabilities of the broker
or dealer selected and others that are considered; the Adviser's
knowledge of the financial stability of the broker or dealer
selected and such other brokers or dealers; and the Adviser's
knowledge of actual or apparent operational problems of any
broker or dealer. Recognizing the value of these factors, High
Yield Portfolio may incur a transaction charge in excess of that
which another broker or dealer may have charged for effecting
the same transaction. Evaluations of the reasonableness of the
costs of portfolio transactions, based on the foregoing factors,
are made on an ongoing basis by the Adviser's staff and reports
are made annually to the Board of Trustees.
With respect to issues of securities involving brokerage
commissions, when more than one broker or dealer is believed to
be capable of providing the best combination of price and
execution with respect to a particular portfolio transaction for
High Yield Portfolio, the Adviser often selects a broker or
dealer that has furnished it with research products or services
such as research reports, subscriptions to financial
publications and research compilations, compilations of
securities prices, earnings, dividends and similar data, and
computer databases, quotation equipment and services, research-
oriented computer software and services, and services of
economic and other consultants. Selection of brokers or dealers
is not made pursuant to an agreement or understanding with any
of the brokers or dealers; however, the Adviser uses an internal
allocation procedure to identify those brokers or dealers who
provide it with research products or services and the amount of
research products or services they provide, and endeavors to
direct sufficient commissions generated by its clients' accounts
in the aggregate, including High Yield Portfolio, to such
brokers or dealers to ensure the continued receipt of research
products or services the Adviser feels are useful. In certain
instances, the Adviser receives from brokers and dealers
products or services which are used both as investment research
and for administrative, marketing, or other non-research
purposes. In such instances, the Adviser makes a good faith
effort to determine the relative proportions of such products or
services which may be considered as investment research. The
portion of the costs of such products or services attributable
to research usage may be defrayed by the Adviser (without prior
agreement or understanding, as noted above) through brokerage
commissions generated by transactions of clients (including High
Yield Portfolio), while the portion of the costs attributable to
non-research usage of such products or services is paid by the
Adviser in cash. No person acting on behalf of High Yield
Portfolio is authorized, in recognition of the value of research
products or services, to pay a price in excess of that which
another broker or dealer might have charged for effecting the
same transaction. 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.
The Board has reviewed the legal developments pertaining to
and the practicability of attempting to recapture underwriting
discounts or selling concessions when portfolio securities are
purchased in underwritten offerings. The Board has been advised
by counsel that recapture by a mutual fund currently is not
permitted under the Rules of Fair Practice of the National
Association of Securities Dealers ("NASD").
ADDITIONAL INCOME TAX CONSIDERATIONS
Institutional High Yield Fund and High Yield Portfolio
intend to comply with the special provisions of the Internal
Revenue Code that relieve it of federal income tax to the extent
of its net investment income and capital gains currently
distributed to shareholders.
Because capital gain distributions reduce net asset value,
if a shareholder purchases shares shortly before a record date,
he will, in effect, receive a return of a portion of his
investment in such distribution. The distribution would
nonetheless be taxable to him, even if the net asset value of
shares were reduced below his cost. However, for federal income
tax purposes the shareholder's original cost would continue as
his tax basis.
Institutional High Yield Fund expects that none of its
dividends will qualify for the deduction for dividends received
by corporate shareholders.
INVESTMENT PERFORMANCE
Institutional High Yield Fund may quote yield figures from
time to time. "Yield" is computed by dividing the net
investment income per share earned during a 30-day period (using
the average number of shares entitled to receive dividends) by
the net asset value per share on the last day of the period.
The Yield formula provides for semiannual compounding which
assumes that net investment income is earned and reinvested at a
constant rate and annualized at the end of a six-month period.
For a given period, an "Average Annual Total Return" may be
computed by finding the average annual compounded rate that
would equate a hypothetical initial amount invested of $1,000 to
the ending redeemable value.
6
The Yield formula is as follows: YIELD = 2[((a-b/cd) +1) -1].
Where: a = dividends and interest earned during the period
. (For this purpose, the Fund will recalculate the
yield to maturity based on market value of each
portfolio security on each business day on which
net asset value is calculated.)
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the ending net asset value of Institutional High
Yield Fund for the period.
_____________________
Institutional High Yield Fund may quote total return
figures from time to time. A "Total Return" on a per share
basis is the amount of dividends received per share plus or
minus the change in the net asset value per share for a period.
A "Total Return Percentage" may be calculated by dividing the
value of a share at the end of a period (including reinvestment
of distributions) by the value of the share at the beginning of
the period and subtracting one.
n
Average Annual Total Return is computed as follows: ERV = P(1+T)
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period at the
end of the period (or fractional portion thereof).
Investment performance figures assume reinvestment of all
dividends and distributions and do not take into account any
federal, state, or local income taxes which shareholders must
pay on a current basis. They are not necessarily indicative of
future results. The performance of Institutional High Yield
Fund is a result of conditions in the securities markets,
portfolio management, and operating expenses. Although
investment performance information is useful in reviewing
Institutional High Yield Fund's performance and in providing
some basis for comparison with other investment alternatives, it
should not be used for comparison with other investments using
different reinvestment assumptions or time periods.
In advertising and sales literature, Institutional High
Yield Fund may compare its yield and performance with that of
other mutual funds, indexes or averages of other mutual funds,
indexes of related financial assets or data, and other competing
investment and deposit products available from or through other
financial institutions. The composition of these indexes or
averages differs from that of Institutional High Yield.
Comparison of Institutional High Yield Fund to an alternative
investment should be made with consideration of differences in
features and expected performance.
All of the indexes and averages noted below will be
obtained from the indicated sources or reporting services, which
Institutional Trust believes to be generally accurate.
Institutional High Yield Fund may also note its mention in
newspapers, magazines, or other media from time to time.
However, Institutional Trust assumes no responsibility for the
accuracy of such data. Newspapers and magazines that might
mention Institutional High Yield Fund include, but are not
limited to, the following:
Architectural Digest
Arizona Republic
Atlanta Constitution
Associated Press
Barron's
Bloomberg
Boston Herald
Business Week
Chicago Tribune
Chicago Sun-Times
Cleveland Plain Dealer
CNBC
CNN
Crain's Chicago Business
Consumer Reports
Consumer Digest
Dow Jones Newswire
Fee Advisor
Financial Planning
Financial World
Forbes
Fortune
Fund Action
Fund Decoder
Gourmet
Individual Investor
Investment Adviser
Investment Dealers' Digest
Investor's Business Daily
Kiplinger's Personal Finance Magazine
Knight-Ridder
Lipper Analytical Services
Los Angeles Times
Louis Rukeyser's Wall Street
Money
Morningstar
Mutual Fund Market News
Mutual Fund News Service
Mutual Funds Magazine
Newsweek
The New York Times
No-Load Fund Investor
Pension World
Pensions and Investment
Personal Investor
Physicians Financial News
Jane Bryant Quinn (syndicated column)
The San Francisco Chronicle
Securities Industry Daily
Smart Money
Smithsonian
Strategic Insight
Time
Travel & Leisure
USA Today
U.S. News & World Report
Value Line
The Wall Street Journal
The Washington Post
Working Women
Worth
Your Money
Institutional High Yield Fund may compare its performance
to the Consumer Price Index (All Urban), a widely-recognized
measure of inflation.
The performance of Institutional High Yield Fund may be
compared to the following as indicated below:
CS First Boston High Yield Index
ICD High Yield Index
Lehman High Yield Bond Index
Lehman High Yield Corporate Bond Index
Merrill Lynch High-Yield Master Index
Morningstar Corporate Bond (General) Average
Salomon Brothers Extended High Yield Market Index
Salomon Brothers High Yield Market Index
The Lipper and Morningstar averages are unweighted averages
of total return performance of mutual funds as classified,
calculated, and published by these independent services that
monitor the performance of mutual funds. Institutional High
Yield Fund may also use comparative performance as computed in a
ranking by these services or category averages and rankings
provided by another independent service. Should these services
reclassify Institutional High Yield Fund to a different category
or develop (and place it into) a new category, it may compare
its performance or rank against other funds in the newly-
assigned category (or the average of such category) as published
by the service.
In advertising and sales literature, Institutional High
Yield Fund may also cite its rating, recognition, or other
mention by Morningstar or any other entity. Morningstar's
rating system is based on risk-adjusted total return performance
and is expressed in a star-rating format. The risk-adjusted
number is computed by subtracting 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 January 1, for any specified period, in both a Tax-
Deferred Investment and a Taxable Investment, that both
investments earn either 6%, 8% or 10% compounded annually, and
that the investor withdrew the entire amount at the end of the
period. (A tax rate of 39.6% is applied annually to the Taxable
Investment and on the withdrawal of earnings on the Tax-Deferred
Investment.)
TAX-DEFERRED INVESTMENT VS. TAXABLE INVESTMENT
INTEREST RATE 6% 8% 10% 6% 8% 10%
Compounding
Years Tax-Deferred Investment Taxable Investment
30 $124,992 $171,554 $242,340 $109,197 $135,346 $168,852
25 90,053 115,177 150,484 82,067 97,780 117,014
20 62,943 75,543 91,947 59,362 68,109 78,351
15 41,684 47,304 54,099 40,358 44,675 49,514
10 24,797 26,820 29,098 24,453 26,165 28,006
5 11,178 11,613 12,072 11,141 11,546 11,965
1 2,072 2,096 2,121 2,072 2,096 2,121
Average Life Calculations. From time to time,
Institutional High Yield Fund may quote an average life figure
for its portfolio. Average life is the weighted average period
over which the Adviser expects the principal to be paid, and
differs from stated maturity in that it estimates the effect of
expected principal prepayments and call provisions. With
respect to GNMA securities and other mortgage-backed securities,
average life is likely to be substantially less than the stated
maturity of the mortgages in the underlying pools. With respect
to obligations with call provisions, average life is typically
the next call date on which the obligation reasonably may be
expected to be called. Securities without prepayment or call
provisions generally have an average life equal to their stated
maturity.
Dollar Cost Averaging. Dollar cost averaging is an
investment strategy that requires investing a fixed amount of
money in Fund shares at set intervals. This allows you to
purchase more shares when prices are low and fewer shares when
prices are high. Over time, this tends to lower your average
cost per share.
Like any investment strategy, dollar cost averaging can't
guarantee a profit or protect against losses in a steadily
declining market. Dollar cost averaging involves uninterrupted
investing regardless of share price and therefore may not be
appropriate for every investor.
<PAGE>
BALANCE SEET
Stein Roe Institutional High Yield Fund
Statement of Net Assets
December 12, 1996
Assets:
Cash $100,000
Unamortized organization costs 50,000
--------
Total Assets 150,000
========
Liabilities:
Payable to the Adviser for
organization costs incurred 50,000
Capital
Paid in Capital (net assets) 100,000
--------
Total Liabilities and Capital $150,000
========
Shares Outstanding (Unlimited number
authorized) 10,000
========
Net Asset Value (Capital) Per Share $ 10.00
========
NOTES TO STATEMENT OF NET ASSETS
Note 1. Organization:
Stein Roe Institutional High Yield Fund (the "Fund") is a
separate series of the Stein Roe Institutional Trust (the
"Trust"), an open-end diversified management investment
company organized as a Massachusetts business trust. The
Fund will invest all of its net investable assets in SR&F
High Yield Portfolio (the "Portfolio"), a separate series of
the SR&F Base Trust. The Fund is inactive except for matters
relating to its organization and registration as an open-end
investment company under the Investment Company Act of 1940,
and the sale of 10,000 shares of the Fund for $100,000 to
Stein Roe & Farnham Incorporated (the "Adviser"), an indirect
wholly owned subsidiary of Liberty Financial Companies, Inc.
Organization costs will be amortized on a straight-line basis
against income over various periods of up to sixty months
from the commencement of public offering by the Fund,
depending on the nature of the individual costs.
Note 2. Transactions with Affiliates:
Upon commencement of investment operations, the Adviser will
receive a management fee from the Portfolio computed and
accrued daily, at an annual rate of 0.500% of the first $500
million of daily net assets and 0.475% thereafter. The
Adviser will also receive an administrative fee from the
Fund, computed and accrued daily, at an annual rate of 0.150%
of the first $500 million of daily net assets and 0.125%
thereafter.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees
Stein Roe Institutional Trust
We have audited the accompanying statement of net assets of
Stein Roe Institutional High Yield Fund, a series of Stein
Roe Institutional Trust, as of December 12, 1996. This
statement of net assets is the responsibility of the Fund's
management. Our responsibility is to express an opinion on
this statement of net assets based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about
whether the statement of net assets is free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
statement of net assets. An audit also includes assessing
the accounting principles used and significant estimates made
by management, as well as evaluating the overall statement of
net assets presentation. We believe that our audit of the
statement of net assets provides a reasonable basis for our
opinion.
In our opinion, the statement of net assets referred to above
presents fairly, in all material respects, the financial
position of Stein Roe Institutional High Yield Fund at
December 12, 1996, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
December 12, 1996
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) 1. Financial statements included in Part A of this
Registration Statement: None.
2. Financial statements included in Part B of this Registration
Statement:
(a) Balance sheet as of December 12 1996.
(b) Report of independent auditors.
(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. (Exhibit 1 to
Registration Statement.)*
2. By-Laws of Registrant as amended on October 30, 1997.
(Exhibit 2 to Pre-Effective Amendment.)*
3. None.
4. None.
5. None.
6. Form of underwriting agreement between Registrant and
Liberty Securities Corporation. (Exhibit 6 to Pre-
Effective Amendment.)*
7. None.
8. Form of custodian contract between Registrant and State
Street Bank and Trust Company. (Exhibit 8 to Pre-Effective
Amendment.)*
9. (a) Form of transfer agency agreement between Registrant
and Stein Roe Services Inc. (Exhibit 9(a) to Pre-
Effective Amendment.)*
(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.)*
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. Inapplicable.
17. Inapplicable.
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 January 31, 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
wilful 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
wilful 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 wilful 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 wilful 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 wilful 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 wilful
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 wilful 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 wilful 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 wilful 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 wilful 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,
Stein Roe Investment Trust, Stein Roe Municipal Trust, SR&F Base
Trust, Stein Roe Income Trust, Stein Roe Advisor Trust,
Stein Roe Trust, SteinRoe Variable Investment Trust and LFC Utilities
Trust, 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, which is
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
Gary A. Anetsberger Senior Vice-President Controller
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive Vice-President; Secy.
Ann H. Benjamin Vice-President
Thomas W. Butch Executive Vice-President
Michael T. Kennedy Vice-President
Lynn C. Maddox Vice-President
Jane M. Naeseth Vice-President
Thomas P. Sorbo Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE INCOME TRUST
Gary A. Anetsberger Senior Vice-President Controller
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary t
Ann H. Benjamin Vice-President
Thomas W. Butch Executive Vice-President Vice-President
Philip J. Crosley Vice-President
Michael T. Kennedy Vice-President
Steven P. Luetger Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
Jane M. Naeseth Vice-President
Thomas P. Sorbo Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE INVESTMENT TRUST
Gary A. Anetsberger Senior Vice-President Controller
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
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
Richard B. Peterson Vice-President
Gloria J. Santella Vice-President
Thomas P. Sorbo Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE MUNICIPAL TRUST
Gary A. Anetsberger Senior Vice-President Controller
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
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
M. Jane McCart Vice-President
Thomas P. Sorbo Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE ADVISOR TRUST
Gary A. Anetsberger Senior Vice-President
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
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
Richard B. Peterson Vice-President
Gloria J. Santella Vice-President
Thomas P. Sorbo Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE INSTITUTIONAL TRUST and STEIN ROE TRUST
Gary A. Anetsberger Senior Vice-President
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Ann H. Benjamin Vice-President
Thomas W. Butch Executive Vice-President Vice-President
Philip J. Crosley Vice-President
Michael T. Kennedy Vice-President
Steven P. Luetger Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
Jane M. Naeseth Vice-President
Thomas P. Sorbo 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
Ann H. Benjamin 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
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 Advisor 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; 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 hereby undertakes to file a post-effective amendment
using financial statements, which need not be certified, within
four to six months from the effective date of this Registration
Statement.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it
meets all of the requirements for effectiveness of this
registration statement pursuant to Rule 485(b) under the Securities
Act of 1933 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Chicago and State of Illinois on the 18th day of
February, 1997.
STEIN ROE INSTITUTIONAL TRUST
By TIMOTHY K. ARMOUR
Timothy K. Armour
President
Pursuant to the requirements of the Securities Act of 1933, this
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 February 18, 1997
Timothy K. Armour
Principal Executive Officer
GARY A. ANETSBERGER Senior Vice-President February 18, 1997
Gary A. Anetsberger
Principal Financial Officer
SHARON R. ROBERTSON Controller February 18, 1997
Sharon R. Robertson
Principal Accounting Officer
KENNETH L. BLOCK Trustee February 18, 1997
Kenneth L. Block
WILLIAM W. BOYD Trustee February 18, 1997
William W. Boyd
LINDSAY COOK Trustee February 18, 1997
Lindsay Cook
__________________ Trustee ________________
Douglas A. Hacker
JANET LANGFORD KELLY Trustee February 18, 1997
Janet Langford Kelly
FRANCIS W. MORLEY Trustee February 18, 1997
Francis W. Morley
CHARLES R. NELSON Trustee February 18, 1997
Charles R. Nelson
THOMAS C. THEOBALD Trustee February 18, 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 REGISTRATION STATEMENT
Exhibit
Number Description
- ------- -------------
11 Consent of Ernst & Young LLP
EXHIBIT 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption
"Independent Auditors" and to the use of our report dated
December 12, 1996 with respect to Stein Roe Institutional
High Yield Fund in the Registration Statement (Form N-1A) of
Stein Roe Institutional Trust and related Statement of
Additional Information of Stein Roe Institutional High Yield
Fund, filed with the Securities and Exchange Commission in
this Post-Effective Amendment No. 1 to the Registration
Statement under the Securities Act of 1933 (Registration No.
333-13331) and in this Amendment No. 2 to the Registration
Statement under the Investment Company Act of 1940
(Registration No. 811-07823).
ERNST & YOUNG LLP
Chicago, Illinois
February 13, 1997
