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Securities Act Registration No.
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Investment Company Act Registration No.
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
NATIONWIDE ASSET ALLOCATION TRUST
(Exact Name of Registrant as Specified in Charter)
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(Address of Principal Executive Office)(Zip Code)
Registrant's Telephone Number, including Area Code: (614) 249-7111
Send Copies of Communications to:
MS. RAE I. MERCER ELIZABETH A. DAVIN
ONE NATIONWIDE PLAZA DRUEN, RATH & DIETRICH
COLUMBUS, OHIO 43215 ONE NATIONWIDE PLAZA
(NAME AND ADDRESS OF AGENT FOR SERVICE) COLUMBUS, OHIO 43215
Approximate Date of Proposed Public Offering:
As soon as practicable after the Registration Statement becomes effective.
In accordance with Rule 24f-2(a)(1) under the Investment Company Act of
1940, the Registrant declares that an indefinite number of its shares is being
registered by this Registration Statement. Pursuant to paragraph (a)(3) thereof,
a non-refundable fee in the amount of $500.00 accompanies this Registration
Statement.
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NATIONWIDE ASSET ALLOCATION TRUST
ASSET ALLOCATION: AGGRESSIVE FUND
ASSET ALLOCATION: MODERATELY AGGRESSIVE FUND
ASSET ALLOCATION: MODERATE FUND
ASSET ALLOCATION: MODERATELY CONSERVATIVE FUND
ASSET ALLOCATION: CONSERVATIVE FUND
CROSS REFERENCE SHEET
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N-1A Item No. Location
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PART A
Item 1. Cover Page Cover Page
Item 2. Synopsis *
Item 3. Condensed Financial Information *
Item 4. General Description of Registrant Highlights; Investment Objectives and
Policies; Description of the Underlying
Funds and Other Permissible
Investments
Item 5. Management of the Fund Management of the Trust
Item 5A. Management's Discussion of Fund *
Performance
Item 6. Capital Stock and Other Securities Additional Information; Tax Status
Item 7. Purchase of Securities Being Offered Investment in Fund Shares; Net
Income and Distributions
Item 8. Redemption or Repurchase Share Redemption
Item 9. Pending Legal Proceedings *
PART B
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History General Information and History
Item 13. Investment Objectives and Policies Investment Objectives and Policies;
Investment Restrictions
Item 14. Management of the Registrant Trustees and Officers of the Trust
Item 15. Control Persons and Principal Major Shareholders
Holders of Securities
Item 16. Investment Advisory and Other Investment Advisory and Other
Services Services
Item 17. Brokerage Allocation Brokerage Allocation
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<TABLE>
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Item 18. Capital Stock and Other Securities Additional Information
Item 19. Purchase, Redemption and Pricing of Purchases, Redemptions and Pricing
Securities Being Offered of Shares
Item 20. Tax Status Tax Status
Item 21. Underwriters *
Item 22. Calculation of Performance Data Calculating Yield and Total Return
Item 23. Financial Statements *
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PART C
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C to this Registration Statement.
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*Not applicable or negative answer.
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PROSPECTUS
January , 1997
Shares of Beneficial Interest
NATIONWIDE ASSET ALLOCATION TRUST
ASSET ALLOCATION: AGGRESSIVE FUND
ASSET ALLOCATION: MODERATELY AGGRESSIVE FUND
ASSET ALLOCATION: MODERATE FUND
ASSET ALLOCATION: MODERATELY CONSERVATIVE FUND
ASSET ALLOCATION: CONSERVATIVE FUND
One Nationwide Plaza
Columbus, Ohio 43215
For Information and Assistance, Call
(614) 249-____
Nationwide Asset Allocation Trust (the "Trust") is a diversified,
open-end management investment company organized under the laws of
Massachusetts, by a Declaration of Trust, dated September 3, 1996. The Trust
currently offers shares in the five separate mutual funds (each, an "Asset
Allocation Fund" or a "Fund"), each of which is a separately managed
non-diversified portfolio with its own investment objective and policies. The
shares of each Fund are sold only to life insurance company separate accounts to
fund the benefits of group variable annuity contracts.
Each Fund seeks to maximize total investment return (i.e., capital
growth and income) subject to the investment restrictions and asset allocation
policies described in this prospectus. Each Fund has been constructed as a "fund
of funds" which means that it pursues its investment objective primarily by
allocating its investments among other mutual funds (the "Underlying Funds").
The Underlying Funds will include portfolios advised by the Funds' investment
adviser, Nationwide Financial Services, Inc. ("NFS"), (each, a "Proprietary
Fund"), as well as other mutual funds which are not affiliated with the Funds or
NFS (the "Unaffiliated Funds"). Each of the Asset Allocation Funds, except the
Asset Allocation: Aggressive Fund will also invest in a fixed interest contract
issued by Nationwide Life Insurance Company (the "Nationwide Contract").
This Prospectus provides you with the basic information you should know
before investing in the funds. You should read it and keep it for future
reference. A Statement of Additional Information, dated January , 1997, has been
filed with the Securities and Exchange Commission. You can obtain a copy without
charge by calling (614) 249-____, or by writing Nationwide Life Insurance
Company, One Nationwide Plaza, Columbus, Ohio 43215.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE STATEMENT OF ADDITIONAL INFORMATION, DATED JANUARY , 1997, IS
INCORPORATED HEREIN BY REFERENCE.
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HIGHLIGHTS
WHAT ARE THE NATIONWIDE ASSET ALLOCATION FUNDS? The Nationwide Asset Allocation
Funds are designed to achieve an investor's retirement savings objectives
through asset allocation and to maximize long-term total returns at an
acceptable level of risk. Investors can select one of five Asset Allocation Fund
options with a range of overall investment objectives. Through exchanges among
the Asset Allocation Funds, investors will be able to adjust their investment
strategies as factors such as risk tolerance or time horizon change. It is
anticipated, however, that an investor will move into progressively more
conservative portfolios as he or she nears retirement. The Funds invest
primarily in Underlying Funds representing different combinations of stocks,
bonds, and other securities and reflecting varying degrees of potential
investment risk and reward. Each of the Funds, except the Aggressive Fund, will
also invest in a fixed interest contract issued by Nationwide Life Insurance
Company (the "Nationwide Contract"); within the Funds, the stable nature of the
Nationwide Contract should reduce a Fund's volatility to achieve an investor's
desired overall objective.
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES? Investors may select a Nationwide
Asset Allocation Fund, based on personal objectives, time horizons, risk
tolerances, and financial circumstances.
Asset Allocation: Aggressive Fund -- seeks to provide growth of
capital. It will invest in
Underlying Funds which
invest primarily in equity
securities ("Equity
Funds"). It is generally
appropriate for investors
looking for high returns
over an investment time
horizon of at least 15
years and having a higher
tolerance for market
fluctuations.
Asset Allocation: Moderately seeks to provide growth of
capital. It will invest
Aggressive Fund -- primarily in
Equity Funds, but the Fund will
attempt to reduce its
volatility by also investing in
the Nationwide Contract and
Proprietary Funds which invest
primarily in fixed income
securities ("Bond Funds"). It
is generally appropriate for
moderate investors looking for
high returns over an investment
time horizon of at least 15
years or for more aggressive
investors over an investment
time horizon from 10 to 15
years.
Asset Allocation: Moderate
Fund -- seeks both growth
of capital and income. It
will also invest primarily
in Equity Funds, but will
invest a significant
percentage of its assets in
the Nationwide Contract and
Bond Funds. It is generally
appropriate for moderate
investors seeking moderate
returns over an investment
time horizon of between 10
and 15 years, as well as
more conservative investors
with an investment time
horizon of at least 15
years and more aggressive
investors with an
investment time horizon of
5 to 10 years.
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Asset Allocation: Moderately seeks income and,
of Conservative Fund -- secondarily, long term growth
capital. It will generally
invest half of its assets in
Equity Funds with the remainder
in the Nationwide Contract and
Bond Funds. It is generally
appropriate for moderate
investors seeking lower
fluctuations in returns
combined with some of the
upside potential of equity
investments over an investment
time horizon of between 5 and
10 years, as well as more
conservative investors over an
investment time horizon of
between 10 and 15 years and
more aggressive investors over
an investment time horizon of
less than 5 years.
Asset Allocation: Conservative Fund -- seeks income and,
secondarily, long term
growth of capital. It will
invest primarily in a
combination of the
Nationwide Contract and
Bond Funds, with a smaller
investment in Equity Funds.
It is generally appropriate
for investors seeking low
fluctuations in returns
over an investment time
horizon of less than 5
years, as well as more
conservative investors over
an investment time horizon
of between 5 and 10 years.
WHAT ARE THE BENEFITS OF THE NATIONWIDE ASSET ALLOCATION FUNDS? Each
Fund will provide the following benefits for the investor:
- -ease of fund selection
- -asset allocation including periodic fund rebalancing reflecting each Fund's
overall objectives
- -diversified management resulting from the diversification in
the Underlying Funds.
RISK FACTORS AND SPECIAL CONSIDERATIONS: The assets of each Asset Allocation
Fund are invested primarily in Underlying Funds, so each Fund's investment
performance is directly related to the investment performance of the Underlying
Funds held. The ability of each Asset Allocation Fund to meet its investment
objective is directly related to the ability of the Underlying Funds to meet
their objectives, as well as to the allocation among the Underlying Funds by
NFS. There can be no assurance that the investment objective of any Asset
Allocation Fund or any Underlying Fund will be achieved.
The value of the Underlying Funds' investments, and thus the net asset value of
the Asset Allocation Funds will fluctuate in response to changes in market and
economic conditions, as well as the financial condition and prospects of issuers
in which the Underlying Funds invest. For a description of the risks involved in
an investment in the Asset Allocation Funds, see "Investment Objectives and
Policies," "Description of the Underlying Funds and Other Permissible
Investments" and the Appendix to this Prospectus.
WHO PROVIDES MANAGEMENT SERVICES TO THE NATIONWIDE ASSET ALLOCATION
FUNDS? Nationwide Financial Services, Inc. ("NFS"), a subsidiary of Nationwide
Life Insurance Company ("Nationwide"), provides investment advice and
administrative and accounting services to each Asset Allocation Fund. For these
services, NFS is entitled to a fee. NFS also serves as investment adviser and
provides administrative services for the Proprietary Funds. Several of the
Proprietary Funds, however, may be subadvised by one or more subadvisers.
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HOW DO YOU PURCHASE THE NATIONWIDE ASSET ALLOCATION FUNDS? Currently, shares of
the Funds are sold only to life insurance company separate accounts ("Accounts")
to fund the benefits of group variable annuity contracts ("Contracts") issued by
Nationwide or one of its affiliated life insurance companies. The Accounts
purchase shares of each Fund at net asset value in accordance with variable
account allocation instructions received from owners of the Contracts. The Funds
then use the proceeds to buy securities for its portfolios. Each of the
Accounts, as a shareholder, has an ownership in a Fund's investments.
DO THE NATIONWIDE ASSET ALLOCATION FUNDS CHARGE A SALES LOAD TO INVESTORS? The
Asset Allocation Funds will not charge a sales load for the purchase of a Fund's
shares or any 12b-1 fees; however, a contingent deferred sales charge may be
incurred at the time a Contract is terminated. In addition, the Funds may invest
in shares of Underlying Funds that normally charge sales loads and/or pay their
own 12b-1 distribution expenses. A Fund will not pay a sales load to buy these
Underlying Funds; instead the Fund will use quantity discounts or waivers to
avoid paying a sales load.
EXPENSE SUMMARY -- Each of the Asset Allocation Funds will incur a management
fee of 0.50% of average daily net assets. Under the Investment Advisory and
Administration Agreement with each Asset Allocation Fund, however, NFS will bear
all expenses of each Fund other than the management fee and any extraordinary
expenses.
Each Fund will indirectly bear its pro rata share of the fees and expenses
incurred by the Underlying Funds, and the investment returns of each Fund will
be net of the expenses of the Underlying Funds.
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES: The objective of the Funds is to maximize total
investment return (i.e., capital growth and income) subject to the investment
restrictions and asset allocation policies described in this prospectus.
Specifically:
- The Asset Allocation: Aggressive and Moderately Aggressive
Funds seek to provide growth of capital. The Moderately
Aggressive Fund will attempt to reduce its volatility by also
investing in Bond Funds and the Nationwide Contract.
- The Asset Allocation: Moderate Fund seeks both growth of
capital and income.
- The Asset Allocation: Moderately Conservative and Conservative
Funds each seek income and secondarily, long term growth of
capital. The Moderately Conservative Fund will seek this
objective with a greater concentration in Equity Funds.
There is no assurance that each Fund will achieve its stated objectives. The
investment objective of each Fund is fundamental, and so cannot be changed
without the approval of a majority of each Fund's shareholders.
BENEFITS OF ASSET ALLOCATION: As described above, the Asset Allocation Funds are
designed to achieve an investor's retirement savings objectives through asset
allocation and to maximize long-term total returns at an acceptable level of
risk. Investors can select one of five Asset Allocation Fund options with a
range of overall investment objectives. Through exchanges among the Asset
Allocation Funds, the investors will be able to adjust their investment
strategies as factors such as risk tolerance or time
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horizon change. By investing in one of the Asset Allocation Funds, an investor
can consolidate his or her investment decisions and reduce the need to monitor
the allocation of his or her assets within asset categories.
Each of the Asset Allocation Funds invests in particular Underlying Funds suited
to that Fund's investment objective. The allocation of assets among the
Underlying Funds within each Asset Allocation Fund is determined by NFS based on
varying degrees of potential investment risk and reward. Because the assets will
be adjusted periodically within predetermined ranges that will attempt to ensure
broad diversification, there generally will be any sudden large scale changes in
the allocation of a Fund's investments among the investment categories. The
Funds are not designed as a market timing vehicle, but rather as a simple and
conservative approach to helping investors meet retirement goals.
The selection of the Underlying Funds in which the Asset Allocation Funds will
invest, as well as the percentage of assets which can be invested in each type
of Underlying Fund, are not fundamental investment policies and can be changed
without the approval of a Fund's shareholders. A change to the percentage ranges
for the types of Underlying Funds shown below does, however, require the
approval of the Trust's Board of Trustees.
The following pie charts illustrate the expected asset allocation for each Fund:
Asset Allocation: Aggressive Fund
Equity Funds 100%
Aggressive Growth Funds 40% (can range from 30% to 50%)
Growth Funds 40% (can range from 30% to 50%)
Growth & Income Funds 20% (can range from 10% to 30%)
Asset Allocation: Moderately Aggressive Fund
Equity Funds 80%
Aggressive Growth Funds 30% (can range from 20% to 40%)
Growth Funds 30% (can range from 20% to 40%)
Growth & Income Funds 20% (can range from 10% to 30%)
Bond Funds 10% (can range from 0% to 20%)
Nationwide Contract 10% (can range from 0% to 20%)
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Asset Allocation: Moderate Fund
Equity Funds 70%
Aggressive Growth Funds 20% (can range from 10% to 30%)
Growth Funds 20% (can range from 10% to 30%)
Growth & Income Funds 30% (can range from 20% to 40%)
Bond Funds 20% (can range from 10% to 30%)
Nationwide Contract 10% (can range from 0% to 20%)
Asset Allocation: Moderately Conservative Fund
Equity Funds 50%
Aggressive Growth Funds 10% (can range from 0% to 20%)
Growth Funds 10% (can range from 0% to 20%)
Growth & Income Funds 30% (can range from 20% to 40%)
Bond Funds 30% (can range from 20% to 40%)
Nationwide Contract 20% (can range from 10% to 30%)
Asset Allocation: Conservative Fund
Equity Funds 30%
Growth Funds 10% (can range from 0% to 20%)
Growth & Income Funds 20% (can range from 10% to 30%)
Bond Funds 45% (can range from 35% to 55%)
Nationwide Contract 25% (can range from 15% to 35%)
WHO SHOULD INVEST IN EACH NATIONWIDE ASSET ALLOCATION FUND? When choosing an
Asset Allocation Fund, an investor has to weigh the investment risk of the Fund
against the possibility of reward; generally the greater the potential long term
reward of the Fund, the greater potential risk of account value fluctuation. As
discussed below, investors with longer investment time horizons and a higher
tolerance for market fluctuations, therefore, may be comfortable investing in
more aggressive funds which may provide a higher long-term return.
Asset Allocation: Aggressive Fund It is generally appropriate
for investors looking for
high returns over an
investment time horizon of
at least 15 years and
having a higher tolerance
for market fluctuations.
Asset Allocation: Moderately It is generally appropriate
Aggressive Fund for moderate investor looking
for high returns over an
investment time horizon of at
least 15 years or for more
aggressive investors over an
investment time horizon from
10 to 15 years.
Asset Allocation: Moderate Fund It is generally appropriate
for moderate investors seeking
moderate returns over an
investment time horizon of
between 10 and 15 years, as
well as more conservative
investors over an investment
time horizon of at least 15
years and more aggressive
investors over an investment
time horizon of 5 to 10 years.
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Asset Allocation: Moderately It is generally appropriate
Conservative Fund for moderate investors seeking
lower fluctuations in returns
combined with some of the
upside potential of equity
investments over an investment
time horizon of between five
and 10 years, as well as more
conservative investors over an
investment time horizon of
between 10 and 15 years and
more aggressive investors over
an investment time horizon of
less than 5 years.
Asset Allocation: Conservative Fund It is generally appropriate
for investors seeking low
fluctuations in returns over
an investment time horizon of
less than 5 years, as well as
more conservative investors
over an investment time
horizon of between 5 and 10
years.
DESCRIPTION OF THE UNDERLYING FUNDS AND OTHER PERMISSIBLE
INVESTMENTS
PROPRIETARY FUNDS
The Trust may invest in the securities of the following Proprietary Funds:
Nationwide Small Company Fund seeks long-term growth of capital. The Fund
invests primarily in equity securities of small market capitalization companies
("small company stocks"). Market capitalization means the total market value of
a company's outstanding common stock. The Fund anticipates that under normal
market conditions, it will invest at least 65% of its assets in equity
securities (common stocks, preferred stocks (both convertible and
non-convertible), warrants and rights) of domestic and foreign companies with
market capitalizations of less than $1 billion. The Fund may invest in
securities of emerging growth companies, some of which may have market
capitalizations over $1 billion. The Fund may purchase an unlimited number of
foreign securities, including securities of companies in emerging markets. The
remainder of the Fund's assets will generally be invested in equity securities
with a market capitalization of more than $1 billion, investment-grade debt
obligations and domestic and foreign money market instruments, including bankers
acceptances, certificates of deposit and discount notes of U.S. Government
securities. At various times the Fund may invest in derivative instruments for
hedging or risk management purposes or for any other permissible purposes.
Nationwide Growth Fund seeks to achieve long-term capital appreciation without
emphasis on current return. This is accomplished by retaining maximum
flexibility in the management of the Fund's portfolio which consists mainly of
common stocks, representing companies of all sizes.
The Nationwide Fund seeks to obtain a total return from a flexible combination
of current income and capital appreciation. This is accomplished by retaining
maximum flexibility in the management of the Fund's portfolio which consists
primarily of common stocks (generally of larger companies), but also may include
convertible issues, bonds and money market instruments.
Nationwide Total Return Fund seeks to obtain a reasonable, long-term total
return (i.e., earnings growth plus potential dividend yield) on invested capital
from a flexible combination of current return
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and capital gains through investments in common stocks, convertible issues,
money market instruments and bonds, with a primary emphasis on common stocks.
Nationwide Capital Appreciation Fund seeks to meet its objectives primarily
through a diversified portfolio of the common stocks of companies which the
portfolio manager determines have a better- than-average potential for sustained
capital growth over the long term. Dividend and interest income are secondary in
importance to the Fund's portfolio manager.
Nationwide Income Fund seeks to provide current income by investing in fixed
income securities. The Fund will invest primarily in investment grade bonds and
other fixed income securities with varying maturities.
Nationwide Bond Fund seeks to generate a high level of income, consistent with
capital preservation, through investment in high-quality bonds and other fixed
income securities. This is accomplished by investing primarily in corporate debt
instruments, although the fund may also invest in government obligations,
mortgage-backed securities and short-term obligations.
UNAFFILIATED FUNDS
The Funds may invest a portion of their assets in Unaffiliated Funds which are
not affiliated with the Funds or NFS. Investment by all of the Funds together is
limited to the purchase of only up to 3% of the total outstanding securities of
an Unaffiliated Fund. In addition, the 1940 Act provides that an Unaffiliated
Fund whose shares are purchased by a Fund is obliged to redeem shares held by
the Fund only in an amount up to 1% of the Unaffiliated Fund's outstanding
securities during any period of less than 30 days. Accordingly, shares held by a
Fund in excess of 1% of an Unaffiliated Fund's outstanding securities will be
considered illiquid, and therefore, together with other such securities, may not
exceed 15% of that Fund's assets. In light of these legal constraints on buying
and selling shares of Unaffiliated Funds, investors should realize that
occasions may arise when NFS might not take advantage of certain opportunities
to invest in an Unaffiliated Fund, and may seek suitable alternatives. The Funds
are not limited to such percentages when purchasing Proprietary Funds because
the Trust has obtained an exemptive order from the Securities and Exchange
Commission which allows the Fund to invest in Proprietary Funds in excess of
such limitations.
Some Unaffiliated Funds may elect to make payment for the redemption of shares
by a distribution in kind of securities from its portfolio, instead of in cash.
If a Fund receives securities as part of an in kind redemption from an
Underlying Fund, the Fund may receive and hold such securities if NFS believes
it is in the best interest of shareholders, whether or not the purchase of such
securities would have been permitted by the investment objectives and policies
of the Fund.
It is anticipated that the Funds will invest in a number of Unaffiliated Funds.
The Unaffiliated Funds will be primarily equity funds, with a variety of
investment styles, including equity index funds.
Characteristics of Equity Index Funds -- The Funds intend to invest in
underlying equity index funds, which may represent indices such as the Standard
& Poor's 500 Composite Stock Price Index (or a portion of such index, i.e.,
S&P/BARRA Value Index or S&P/BARRA Growth Index) or the Russell 2000 Small Stock
Index. Index funds are not managed according to traditional methods of active
investment management, which involve buying and selling securities based upon
economic, financial and market analyses and investment judgment. Instead, index
funds attempt to provide
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investment results that parallel an index through statistical procedures. These
statistical procedures are expected to enable a fund to track the index
performance and thus are expected to provide a highly predictable return
relative to a fund's benchmark.
Index funds attempt to parallel the performance, before fund level expenses, of
a broad market index. In some situations an index fund's adviser may attempt to
duplicate the investment results by investing in all of the stocks included in
the index and in approximately the same proportions as they are represented in
the index. In other situations such as when an index contains a very large
number of securities, an index fund's adviser may use statistical sampling
techniques to choose which stocks to invest in. This type of process selects
stocks so that various industry weightings, market capitalizations and
fundamental characteristics closely approximate those of the appropriate index.
While the use of a sampling technique is not expected to track a benchmark index
as accurately as duplicating the underlying stocks exactly, it does provide an
efficient means to invest in the universe of stocks. Index funds often have the
ability also to enter into stock index futures or options in an attempt to
increase or decrease the fund's exposure to the stock market; typically a fund
will invest in stock index futures and options when the fund has cash from new
investments or holds assets in money market instruments.
NATIONWIDE CONTRACT
As discussed above, each of the Asset Allocation Funds, except the Aggressive
Growth Fund will invest in the Nationwide Contract, a fixed interest contract.
The Nationwide Contract is issued by Nationwide and will invest the assets of
the Nationwide Contract in fixed income securities and other permissible
securities for the general accounts of life insurance companies according to
state insurance laws. The Nationwide Contract provides a minimum investment
return of 3.5% to the Funds that invest in the contract. In addition, the
Nationwide Contract may credit the Funds with additional investment income
amounts as Nationwide periodically determines and declares; the process used by
Nationwide to calculate the additional interest income will be similar to that
used for comparable contracts. The stable nature of this contract should reduce
the Fund's volatility, especially when both the bond and stock markets decline
simultaneously.
The strength of the guaranteed interest rate is subject to the creditworthiness
of Nationwide. At this time Nationwide has a credit rating of A+ "Superior" by
the independent credit rating agency A.M. Best; if at some time in the future
the credit rating of Nationwide should significantly decrease, NFS will consider
whether the Funds should continue to invest in the Nationwide Contract.
SHORT TERM FUND INVESTMENTS
The Funds may invest in certain short-term fixed income securities and the
Nationwide Money Market Fund to invest uncommitted cash balances or to maintain
liquidity to meet shareholder redemptions. They may also invest in such
securities temporarily for defensive purposes, such as against potential stock
or bond market declines. These securities include: obligations of the U.S.
Government and its agencies and instrumentalities; commercial paper, bank
certificates of deposit, and bankers' acceptances; and repurchase agreements
collateralized by these securities.
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INVESTMENT RISKS OF THE FUNDS
Like any investment program, an investment in a Fund entails certain risks.
These Funds, however, are designed to help spread risk and reduce swings in
performance through a comprehensive allocation program of investing in several
Underlying Funds and in the Nationwide Contract. Because the Underlying Funds
may invest in different combinations of equities, bonds and money market
instruments, the Asset Allocation Funds are subject to different levels of risk,
including stock market, bond market and inflation risks.
Market Risk -- Stock market risk is the possibility that stock prices in general
will decline over short or even extended periods. The stock market tends to be
cyclical, with periods when stock market prices generally rise and periods when
stock market prices generally decline.
The bond market is typically less volatile than the stock market, but there have
been times when some bonds have been just as risky. The risk of bonds declining
in value, may be offset in whole or in part by the higher level of income that
bonds generally provide. Bond prices are linked to prevailing interest rates in
the economy. The price volatility of a bond depends on its maturity; the longer
the maturity of a bond, the greater its sensitivity to interest rates. In
general, when interest rates rise, the prices of bonds fall; conversely, when
interest rates fall, bond prices generally rise.
Inflation Risk -- Inflation represents a significant threat to even a
well-diversified portfolio because inflation erodes the real return of an
investment in equities, bonds or money market instruments. Historically
inflation has not eroded as high a percentage of the total return of equities as
it has for bonds or money market instruments; therefore, equities are often seen
as an "inflation hedge."
Manager Risk -- The Funds are subject to manager risk of the Underlying Funds,
which is the possibility that the Underlying Funds' portfolio managers may fail
to execute the Underlying Funds' investment strategies effectively. Consequently
a Fund may not meet its stated objectives. With respect to the Unaffiliated
Funds, NFS and the Funds have little or no control over their investment
activities or management.
Through its investment in the Underlying Funds, a Fund may inadvertently
concentrate 25% or more of its assets in one industry, in addition to the mutual
fund industry. Such indirect concentration may subject a Fund to greater
fluctuation in value than would be the case in the absence of such
concentration.
RISKS ASSOCIATED WITH THE UNDERLYING FUNDS
Risks of Investing in Small Capitalization Companies -- Some of the Underlying
Funds may invest in small capitalization companies. Investing in securities of
small-sized and emerging growth companies may involve greater risks than
investing in larger, more established issuers since these securities may have
limited marketability and, thus, they may be more volatile than securities of
larger, more established companies or the market averages in general.
Small-sized companies may have limited product lines, markets or financial
resources and may lack management depth. In addition, small-sized companies are
typically subject to wider variations in earnings and business prospects than
are larger, more established companies. There is typically less publicly
available information concerning small-sized companies than for larger, more
established ones. Because small- sized companies normally have
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fewer shares outstanding than larger companies, it may be more difficult for the
Underlying Fund to buy or sell significant numbers of such shares without an
unfavorable impact on prevailing prices.
Although investing in securities of emerging growth companies offers potential
for above-average returns if the companies are successful, the risk exists that
the companies will not succeed and the prices of the companies' shares could
significantly decline in value.
Risks of Investing in Index Funds -- The Funds may invest their assets in
underlying index funds. Because of the investment objectives of index funds,
securities may be purchased, retained and sold by such funds when such
transactions would not be consistent with traditional investment criteria.
Accordingly, a Fund will be exposed to a greater risk of loss (and a
correspondingly greater prospect of gain) from fluctuations in the value of such
securities than would be the case if an index fund were not fully invested in
such securities. A security may be eliminated or not increased in proportion to
the index, despite its continued listing on the index if (i) the stock is no
longer publicly traded; or (ii) an unexpected adverse development occurs with
respect to a company such as bankruptcy or insolvency. As a result, the share
price of an index fund is expected to be volatile, and investors may sustain
sudden fluctuations in the value of their investment.
Risks of Foreign Securities -- Some of the Underlying Funds will invest in
foreign securities. Foreign investments involve special risks, including the
possibility of expropriation, confiscatory taxation, and withholding taxes on
dividends and interest; less extensive regulation of foreign brokers, securities
markets, and issuers; political, economic or social instability; and less
publicly available information and different accounting standards. When
investing in foreign securities, the Fund may also incur costs in conversions
between currencies, possible delays in settlement in foreign securities markets,
limitations on the use or transfer of assets (including suspension of the
ability to transfer currency from a given country), and difficulty in enforcing
obligations in other countries.
The Underlying Funds may also invest a portion of their assets in securities of
issuers in developing or emerging markets and economies. Investing in securities
of issuers in developing or emerging markets involves special risks, including
less social, political, and economic stability; smaller securities markets and
lower trading volume, which may result in a lack of liquidity and greater price
volatility; certain national policies that may restrict the Underlying Fund's
investment opportunities, including restrictions on investments in issuers or
industries deemed sensitive to national interests, or expropriation or
confiscation of assets or property, which could result in an Underlying Fund's
loss of its entire investment in that market; and less developed legal
structures governing private or foreign investment or allowing for judicial
redress for injury to private property.
Risks of Investing in Mortgage-Related Securities -- Some of the Underlying
Funds may invest in mortgage-related securities, adjustable rate mortgage loans
("ARMs"), fixed rate mortgage loans and mortgage dollar rolls. The investment
characteristics of mortgage-related securities differ from traditional debt
securities. These differences can result in significantly greater price and
yield volatility than is the case with traditional fixed-income securities. The
major differences typically include more frequent interest and principal
payments, usually monthly, the adjustability of interest rates, and the
possibility that prepayments of principal may be made at any time. Prepayment
rates are influenced by changes in current interest rates and a variety of
economic, geographic, social and other factors. During periods of declining
interest rates, prepayment rates can be expected to accelerate. Under certain
interest rate and prepayment rate scenarios, an Underlying Fund may fail to
recoup fully its investment in mortgage-related securities notwithstanding a
direct or indirect governmental or agency
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guarantee. The Underlying Funds may use hedging techniques to attempt to control
this risk. In general, changes in the rate of prepayments on a mortgage-related
security will change that security's market value and its yield to maturity.
When interest rates fall, high prepayments could force an Underlying Fund to
reinvest principal at a time when investment opportunities are not attractive.
Thus, mortgage-related securities may not be an effective means for an
Underlying Fund to lock in long-term interest rates. Conversely, during periods
when interest rates rise, slow prepayments could cause the average life of the
security to lengthen and the value to decline more than anticipated.
Risk of Investing in Lower-Rated Bonds -- The Funds may also invest in
Underlying Funds which invest in medium or lower grade bonds. If these bonds are
downgraded, NFS will consider whether to decrease the Fund's investment in the
affected Underlying Fund. Securities rated in the fourth highest category by a
nationally recognized statistical rating organization (an "NRSRO"), although
considered investment-grade, have speculative characteristics and may be subject
to greater fluctuations in value than higher-rated securities.
Non-investment-grade debt obligations include 1) securities rated as low as C by
Standard & Poor's or its equivalents; 2) commercial paper rated as low as C by
Standard & Poor's or its equivalents; or 3) unrated debt securities judged to be
of comparable quality by the Adviser or a Subadviser.
OTHER CONSIDERATIONS
Non-Diversified Status -- Each Fund is classified as non-diversified under the
1940 Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that it may invest in securities of a single issuer.
Each Fund's investments will be limited, however, in order to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code of 1986
(the "Code"). To qualify, a Fund will comply with certain requirements,
including limiting its investments so that at the close of each quarter of the
taxable year (a) not more than 25% of the market value of its total assets will
be invested in the securities of a single issuer (other than U.S. government
securities or securities of other regulated investment companies), and (b) with
respect to 50% of the market value of its total assets, not more than 5% of the
market value of its total assets will be invested in the securities of a single
issuer (other than U.S. government securities or securities of other regulated
investment companies) and the Fund will not own more than 10% of the outstanding
voting securities of a single issuer. Being non-diversified means that a Fund
may invest a greater proportion of its assets in the obligations of a small
number of issuers and, as a result, may be subject to greater risk with respect
to portfolio securities. To the extent that a Fund assumes large positions in
the securities of a small number of issuers, its return may fluctuate to a
greater extent than that of a diversified company as a result of changes in the
financial condition or in the market's assessment of the issuers.
Portfolio Turnover -- The portfolio turnover rate is not expected to exceed 50%
annually. A portfolio turnover rate of 50% for a Fund would occur is one half of
a Fund's investments were sold within a year. A Fund will generally purchase or
sell securities: (i) to accommodate purchases and sales of Fund shares; and (ii)
to maintain or modify the allocation of the Fund's assets between the Underlying
Funds in which the Funds invest within the percentage limits described under
"INVESTMENT OBJECTIVES AND POLICIES--BENEFITS OF ASSET ALLOCATION" above.
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MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The business and affairs of the Trust are managed under the direction of its
Board of Trustees. The Board of Trustees sets and reviews policies regarding the
operation of the Trust whereas the officers perform the daily functions of the
Trust.
The trustees and officers of the Trust may also serve in similar positions in
connection with the Proprietary Funds. Therefore, if the interests of a Fund
were ever to diverge from that of the Proprietary Funds, it is possible that a
conflict of interest could arise and affect how the trustees and officers of the
Trust fulfill their fiduciary duties to that Fund and the Proprietary Funds.
Although the Funds are designed to avoid these concerns, a situation could
conceivably occur where proper action for a Fund could be adverse to the
interest of a Proprietary Fund, or the reverse could be true. If such a
possibility arises, the trustees and officers of the Trust, the affected
Proprietary Funds and NFS will carefully analyze the situation and take all
steps they believe reasonable to minimize and, where possible, eliminate the
potential conflict.
INVESTMENT MANAGEMENT OF THE FUND
Under the terms of the Investment Advisory Agreement and subject to the
supervision of the Trustees, Nationwide Financial Services, Inc., One Nationwide
Plaza, Columbus, Ohio 43216, oversees the investment of the assets of each of
the Asset Allocation Funds. NFS and its predecessors have provided investment
advice to registered investment companies and other institutional assets since
______. NFS had assets of $ 5.5 billion under management as of July 31, 1996.
NFS, an Ohio corporation, is a wholly owned subsidiary of Nationwide Life
Insurance Company, which is wholly owned by Nationwide Corporation, a holding
company in the Nationwide Insurance Enterprise.
Subject to the supervision and direction of the Trust's Board of Trustees, NFS
will determine how each Fund's assets will be invested in the Underlying Funds
and the other permissible investments. The trustees of the Trust will
periodically monitor the allocations made and the basis upon which such
allocations were made or maintained. NFS also provides various bookkeeping,
accounting and administrative services, office space and equipment and the
services of the officers and employees of the Funds. Under the Investment
Advisory Agreement, NFS has agreed to bear all expenses of the Asset Allocation
Funds other than the management fee and extraordinary expenses. Each Fund pays
to NFS a monthly fee at the annual rate of 0.50% of the Fund's average daily net
assets.
NFS also serves as investment adviser to each of the Proprietary Funds and is
responsible for the selection and management of each of the Proprietary Fund's
assets (NFS is assisted in this task by subadvisers for the Nationwide Small
Company Fund and the Nationwide Income Fund).
Each Asset Allocation Fund, as a shareholder in the Proprietary Funds, will
indirectly bear its proportionate share of any investment management fees and
other expenses paid by the Proprietary Funds. The effective management fee for
each of the Proprietary Funds is set forth below as a percentage of its annual
net assets.
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Proprietary Fund Management Fees
Nationwide Small Company Fund 1.00%
Nationwide Growth Fund 0.50%
The Nationwide Fund 0.50%
Nationwide Total Return Fund 0.50%
Nationwide Capital Appreciation Fund 0.50%
Nationwide Bond Fund 0.50%
Nationwide Income Fund _____
Wayne Frisbee, CFA is the person primarily responsible for the investment
management of the Asset Allocation Funds. Mr. Frisbee joined Nationwide in 1981
and currently manages both the Nationwide Separate Account Trust Government Bond
Fund and the Nationwide U.S. Government Income Fund. He received a Bachelor of
Science degree from The Ohio State University and is a Chartered Financial
Analyst.
OTHER SERVICES
Nationwide Investors Services, Inc., ("NISI"), One Nationwide Plaza, Columbus,
Ohio 43216, serves as transfer agent and dividend disbursing agent for the
Trust. NISI is a wholly owned subsidiary of NFS.
INVESTMENT IN FUND SHARES
Nationwide purchases the shares of a Fund at the Fund's net asset value using
purchase payments received for Contracts issued by the Accounts. These Accounts
are funded by shares of the Funds. There is no sales charge. All shares are sold
at net asset value. Shares of a Fund are currently sold only to separate
accounts of Nationwide to fund the benefits under group variable annuity
contracts.
All investments in a Fund are credited to the shareholder's account in the form
of full and fractional shares of that Fund (rounded to the nearest 1/1000 of a
share). The Trust does not issue share certificates. Initial and subsequent
purchase payments allocated to a Fund are subject to the limits applicable to
the Contracts.
SHARE REDEMPTION
An Account redeems shares to make benefit or surrender payments under the terms
of its Contracts. Redemptions are processed on any day on which the Trust is
open for business and are effected at net asset value next determined after the
redemption order, in proper form, is received by the Trust's transfer agent,
NISI.
The net asset value per share of a Fund is determined once daily, as of 4:00
P.M. on each business day the New York Stock Exchange is open and on such other
days as the Board determines and on any other day during which there is a
sufficient degree of trading in a Fund's portfolio securities that the net asset
value of the Fund is materially affected by changes in the value of portfolio
securities. The Trust will not compute net asset value on customary national
business holidays, including the following: Christmas, New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, and
Thanksgiving. The net asset value per share is calculated by adding the value
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of all securities and other assets of a Fund, deducting its liabilities, and
dividing by the number of shares outstanding.
Shares of the Underlying Funds are valued at their respective net asset values
under the 1940 Act. The Underlying Funds value securities in their portfolios
for which market quotations are readily available at their current market value
(generally the last reported sale price) and all other securities and assets at
fair value pursuant to methods established in good faith by the Board of
Trustees or Directors of the Underlying Funds. Money market funds with portfolio
securities that mature in one year or less may use the amortized cost or penny
rounding methods to value their securities. Securities having 60 days or less
remaining to maturity generally are valued at their amortized cost, which
approximates market value.
Other assets of the Funds are valued at their current market value if market
quotations are readily available and, if market quotations are not available,
they are valued at fair value pursuant to methods established in good faith by
the Board of Trustees. Securities having 60 days or less remaining to maturity
are valued at their amortized cost.
The Trust may suspend the right of redemption only under the following unusual
circumstances:
- when the New York Stock Exchange is closed (other than weekends and
holidays) or trading is restricted;
- when an emergency exists, making disposal of portfolio securities or
the valuation of net assets not reasonably practicable; or
- during any period when the Securities and Exchange Commission has by
order permitted a suspension of redemption for the protection of
shareholders.
NET INCOME AND DISTRIBUTIONS
Substantially all of the net investment income, if any, of the Funds will be
paid as dividends in March, June, September, and December. In those years in
which sales of the Fund's portfolio securities result in net realized capital
gains, the Fund will distribute such gains to its shareholders with the December
dividend.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES - The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of each
Fund and to divide or combine such shares into a greater or lesser number of
shares without thereby changing the proportionate beneficial interests in the
Trust. Each share of a Fund represents an equal proportionate interest in that
Fund with each other share. The Trust has created five different Funds and
reserves the right to create additional funds within the Trust. The shares of
each Fund participate equally in the earnings, dividends, and assets of the
particular Fund, and shares of all Funds would vote together in the election of
Trustees. Upon liquidation of a Fund, its shareholders are entitled to share pro
rata in the net assets of such Fund available for distribution to shareholders.
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VOTING RIGHTS - Shareholders are entitled to one vote for each share held.
Shareholders may vote for the election or removal of Trustees and on other
matters submitted to meetings of shareholders. No material amendment may be made
to the Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Trust. The sole shareholder of the Funds is
Nationwide, on behalf of the Accounts. The Trustees may, however, amend the
Declaration of Trust without the vote or consent of shareholders to:
- - designate series of the Trust;
- - change the name of the Trust; or
- - supply any omission, cure, correct, or supplement any ambiguous,
defective, or inconsistent provision to conform the Declaration of
Trust to the requirements of applicable federal and state laws or
regulations if the Trustees deem it necessary.
Shares have no pre-emptive or conversion rights. Shares are fully paid and
nonassessable, except as set forth below. In regard to termination, sale of
assets, or changes of investment restrictions, the right to vote is limited to
the holders of shares of the particular Fund affected by the proposal. When a
majority is required, it means the lesser of 67% or more of the shares present
at a meeting when the holders of more than 50% of the outstanding shares are
present or represented by proxy, or more than 50% of the outstanding shares.
SHAREHOLDER INQUIRIES - All inquiries regarding a Fund should be directed to
the Trust at the telephone number or address shown on the cover page of this
Prospectus.
PERFORMANCE ADVERTISING FOR THE ASSET ALLOCATION FUNDS
The Funds may use historical performance in advertisements, sales literature,
and the prospectus. Such figures will include quotations of average annual total
return for the most recent one, five, and ten year periods (or the life of a
Fund if less). Average annual total return represents the rate required each
year for an initial investment to equal the redeemable value at the end of the
specific period. Average annual total return reflects reinvestment of all
distributions.
TAX STATUS
The Trust's policy is to qualify as a regulated investment company and to meet
the requirements of Subchapter M of the Code. Each Fund intends to distribute
all its taxable net investment income and capital gains to shareholders, and
therefore, will not be required to pay any federal income taxes. Nationwide Life
Insurance Company, on behalf of the Accounts, is the sole shareholder of the
Trust.
Because each Fund of the Trust is treated as a separate entity for purposes of
the regulated investment company provisions of the Code, the assets, income, and
distributions of the Fund are considered separately for purposes of determining
whether or not the Fund qualifies as a regulated investment company. Each Fund
intends to comply with the diversification requirements currently imposed by the
Internal Revenue Service on separate accounts of insurance companies as a
condition of maintaining the tax-deferred status of the Contracts. See the
Statement of Additional Information for more specific information.
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The tax treatment of payments made by a separate account to a Contract holder
is described in the separate account prospectus.
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APPENDIX
DESCRIPTION OF PERMISSIBLE UNDERLYING FUND INVESTMENTS
The following is a description of certain of the permitted investments for the
Underlying Funds. As described above, each Fund may also invest directly in
certain of the following instruments for temporary defensive purposes. For a
more detailed description, see the Statement of Additional Information or the
prospectuses of the Underlying Funds.
FOREIGN SECURITIES -- The Underlying Funds may invest in foreign securities,
directly or indirectly through the use of depositary receipts. Depositary
receipts, including ADRs, European Depository Receipts and American Depository
Shares, are generally issued by banks or trust companies and evidence ownership
of underlying foreign securities. The Underlying Funds may also invest in
securities of foreign investment funds or trusts (including passive foreign
investment companies). Investing in foreign securities may be subject to
additional risks as described above.
WARRANTS -- The Underlying Funds may invest in securities which are subject to
warrants. A warrant is an instrument which gives the holder the right to
subscribe to a specified amount of the issuer's securities at a set price for a
specified period of time or on a specified date. Typically warrants are issued
with preferred stock or bonds.
CONVERTIBLE SECURITIES -- Some of the Underlying Funds, particularly the Equity
Funds, may invest in convertible securities. A convertible security is a fixed
income security or preferred stock that may be converted at either a stated
price or stated rate into underlying shares of common stock. Convertible
securities have general characteristics similar to both debt obligations and
equity securities. Although to a lesser extent than with debt obligations
generally, the market value of convertible securities tends to decline as
interest rates increase and, conversely, tends to increase as interest rates
decline. In addition, because of the conversion feature, the market value of
convertible securities tends to vary with fluctuations in the market value of
the underlying common stock, and therefore, also will react to variations in the
general market for equity securities. As debt obligations, convertible
securities are investments that provide for a stable stream of income with
generally higher yields than common stocks. Convertible securities, however,
generally offer lower interest or dividend yields than non-convertible
securities of similar quality because of the potential for capital appreciation.
REAL ESTATE SECURITIES -- Although the Underlying Funds are not generally
permitted to invest in real estate directly, they may invest in equity
securities of real estate investment trusts ("REITs") and other real estate
industry companies or companies with substantial real estate investments and
therefore, an Underlying Fund may be subject to certain risks associated with
direct ownership of real estate and with the real estate industry in general.
These risks include, among others: possible declines in the value of real
estate; possible lack of availability of mortgage funds; extended vacancies of
properties; risks related to general and local economic conditions;
overbuilding; increases in competition, property taxes and operating expenses;
changes in zoning laws; costs resulting from the clean-up of, and liability to
third parties for damages resulting from, environmental problems; casualty or
condemnation losses; uninsured damages from floods, earthquakes or other natural
disasters; limitations on and variations in rents; and changes in interest
rates.
REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or
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hybrid REITs. Equity REITs invest the majority of their assets directly in real
property and derive income primarily from the collection of rents. Equity REITs
can also realize capital gains by selling properties that have appreciated in
value. Mortgage REITs invest the majority of their assets in real estate
mortgages and derive income from the collection of interest payments. REITs are
not taxed on income distributed to shareholders provided they comply with
several requirements of Internal Revenue Code, as amended.
DEBT OBLIGATIONS
IN GENERAL - Debt obligations in which the Underlying Funds may invest will
typically be investment-grade debt obligations, although some Underlying Funds
may invest a portion of their assets in non-investment-grade debt obligations.
The market value of all debt obligations is affected by changes in the
prevailing interest rates. The market value of such instruments generally reacts
inversely to interest rate changes. If the prevailing interest rates decrease,
the market value of debt obligations generally increases. If the prevailing
interest rates increase, the market value of debt obligations generally
decreases. In general, the longer the maturity of a debt obligation, the greater
its sensitivity to changes in interest rates.
Investment-grade debt obligations include 1) bonds or bank obligations rated in
one of the four highest rating categories by any nationally recognized
statistical rating organization ("NRSRO") (e.g., Moody's Investors Service, Inc.
or Standard & Poor's Ratings Group); 2) U.S. government securities (as described
below); 3) commercial paper rated in one of the three highest ratings categories
of any NRSRO; 4) short-term bank obligations that are rated in one of the three
highest categories by any NRSRO, with respect to obligations maturing in one
year or less; 5) repurchase agreements involving investment-grade debt
obligations; or 6) unrated debt obligations which are determined by a fund's
investment adviser to be of comparable quality.
Non-investment-grade debt obligations include 1) securities rated as low as C by
Standard & Poor's or its equivalents; 2) commercial paper rated as low as C by
Standard & Poor's or its equivalents; or 3) unrated debt securities judged to be
of comparable quality by the fund's investment adviser.
U.S. GOVERNMENT SECURITIES - The Underlying Funds may be permitted to purchase
U.S. government securities. U.S. government securities are issued or guaranteed
by the U.S. government or its agencies or instrumentalities. Securities issued
by the government include U.S. Treasury obligations, such as Treasury bills,
notes, and bonds. Securities issued by government agencies or instrumentalities
include, but are not limited to, obligations of the following:
- the Federal Housing Administration, Farmers Home Administration, and
the Government National Mortgage Association ("GNMA"), including GNMA
pass-through certificates, whose securities are supported by the full
faith and credit of the United States;
- the Federal Home Loan Banks and the Tennessee Valley Authority, whose
securities are supported by the right of the agency to borrow from the
U.S. Treasury;
- the Federal National Mortgage Association ("FNMA"), whose securities
are supported by the discretionary authority of the U.S. government to
purchase certain obligations of the agency or instrumentality; and
- the Federal Home Loan Mortgage Corporation ("Freddie Mac"), the Student
Loan Marketing Association and the International Bank for
Reconstruction and Development, whose securities
are supported only by the credit of such agencies.
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Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
REPURCHASE AGREEMENTS - Under the terms of a typical repurchase agreement, an
Underlying Fund would acquire an underlying debt obligation for a relatively
short period (usually not more than one week) subject to an obligation of the
seller to repurchase, and the Fund to resell, the obligation at an agreed upon
price and time, thereby determining the yield during the Fund's holding period.
Under each repurchase agreement the selling institution will be required to
maintain the value of the securities subject to the repurchase agreement at not
less than their repurchase price. Repurchase agreements could involve certain
risks in the event of default or insolvency of the other party, including
possible delays or restrictions upon a Fund's ability to dispose of the
underlying securities.
SHORT-TERM OBLIGATIONS -- Each of the Underlying Funds may hold short-term
obligations generally limited to "investment grade" liquid debt securities such
as commercial paper, certificates of deposit, bankers' acceptances, repurchase
agreements and United States Treasury Bills. Bankers' acceptances are
instruments of domestic banks which are drafts or bills of exchange "accepted"
by a bank or trust company as an obligation to pay on maturity. For a discussion
of repurchase agreements, see above. "Investment grade" obligations are those
rated at the time of purchase within the four highest rating categories assigned
by an NRSRO or, if unrated, obligations the Underlying Fund's investment adviser
determines to be of comparable quality. The applicable securities ratings are
described in the Appendix to the Statement of Additional Information.
MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities are debt obligations
secured by real estate loans and pools of loans. The Underlying Funds may
acquire securities representing an interest in a pool of mortgage loans that are
issued or guaranteed by GNMA, FNMA and Freddie Mac. Mortgage-backed securities
may also be issued by non-governmental entities and may or may not have private
insurer guarantees of timely payments. The Underlying Funds may also invest in
mortgage-backed securities issued by non-government entities, which consist of
Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage Investment
Conduits ("REMICs"). Mortgage-backed securities are in most cases "pass-through"
instruments, through which the holder receives a share of all interest and
principal payments from the mortgages underlying the certificate. Because the
prepayment characteristics of the underlying mortgages vary, it is not possible
to accurately predict the average life or realized yield of a particular issue
of pass-through certificates. During periods of declining interest rates,
prepayment of mortgages underlying mortgage-backed securities can be expected to
accelerate. When the mortgage obligations are prepaid, the Underlying Funds may
have to reinvest in securities with a lower yield. Moreover, prepayment of
mortgages which underlie securities purchased at a premium could result in
capital losses.
ASSET-BACKED SECURITIES -- Asset-backed securities, which some of the Underlying
Funds may invest in, consist of securities secured by company receivables, home
equity loans, truck and auto loans, leases, credit card receivables and other
securities backed by other types of receivables or other assets. These
securities are generally pass-through securities, which means that principal and
interest payments on the underlying securities (less servicing fees) are passed
through to shareholders on a pro rata basis. These securities involve prepayment
risk, which is the risk that the underlying debt will be refinanced or paid off
prior to their maturities during periods of declining interest rates. In that
case, a portfolio manager may have to reinvest the proceeds from the securities
at a lower rate. Potential
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market gains on a security subject to prepayment risk may be more limited than
potential market gains on a comparable security that is not subject to
prepayment risk. Under certain interest rate and prepayment rate scenarios, the
Underlying Funds may fail to recoup fully their investment in asset-backed
securities.
DERIVATIVE INSTRUMENTS
Derivative instruments may be used by the Underlying Funds for hedging or risk
management purposes, or for other permissible purposes. Derivative instruments
are securities or agreements whose value is based on the value of some
underlying asset, for example, securities, currencies, or reference indices.
Options, futures, and options on futures transactions are considered to be
derivatives. Derivatives generally have investment characteristics that are
based upon either forward contracts (under which one party is obligated to buy
and the other party is obligated to sell an underlying asset at a specific price
on a specified date) or option contracts (under which the holder of the option
has the right but not the obligation to buy or sell an underlying asset at a
specified price on or before a specified date). Consequently, the change in
value of a forward-based derivative generally is roughly proportional to the
change in value of the underlying asset. In contrast, the buyer of an
option-based derivative generally will benefit from favorable movements in the
price of the underlying asset but is not exposed to corresponding losses due to
adverse movements in the value of the underlying asset. The seller of an
option-based derivative generally will receive fees or premiums but generally is
exposed to losses due to changes in the value of the underlying asset.
Derivative transactions may include elements of leverage and, accordingly, the
fluctuation of the value of the derivative transaction in relation to the
underlying asset may be magnified. In addition to options, futures, and options
on futures transactions, derivative transactions may include short sales against
the box, in which an Underlying Fund sells a security it owns for delivery at a
future date. Derivative transactions may also include forward currency contracts
and foreign currency exchange- related securities.
Derivative transactions in which the Underlying Funds may engage include the
writing of covered put and call options and the purchase of put and call
options, the purchase of put and call options on stock indexes and
exchange-traded options on currencies and the writing of put and call options on
stock indexes. An Underlying Fund also may buy and sell financial futures
contracts which may include security and interest-rate futures, futures on
currency exchanges and stock and bond index futures contracts. The Underlying
Funds may also enter into forward currency contracts to purchase or sell foreign
currencies. An Underlying Fund may also engage in short selling against the box.
Derivative instruments may be exchange-traded or traded in OTC transactions
between private parties. OTC transactions are subject to the credit risk of the
counterparty to the instrument and are less liquid than exchange-traded
derivatives since they often can only be closed out with the other party to the
transaction. When required by guidelines of the Securities and Exchange
Commission ("SEC"), an Underlying Fund will set aside permissible liquid assets
or securities positions that substantially correlate to the market movements of
the derivatives transactions in a segregated account to secure its obligations
under derivative transactions. Segregated assets cannot be sold or transferred
unless equivalent assets are substituted in their place or it is no longer
necessary to segregate them. As a result, there is a possibility that
segregation of a large percentage of an Underlying Fund's assets could impede
portfolio management or the Underlying Fund's ability to meet redemption
requests or other current obligations. In order to maintain its required cover
for a derivative transaction, the Fund
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may need to sell portfolio securities at disadvantageous prices or times since
it may not be possible to liquidate a derivative position.
The successful use of derivative transactions by an Underlying Fund is
dependent upon its investment adviser's ability to correctly anticipate trends
in the underlying asset. Hedging transactions are subject to risks; if the
investment adviser incorrectly anticipates trends in the underlying asset, the
Underlying Fund may be in a worse position than if no hedging had occurred. In
addition, there may be imperfect correlation between the Underlying Fund's
derivative transactions and the instruments being hedged.
ILLIQUID SECURITIES -- Some Underlying Funds may invest up to 15% of their net
assets in securities that are illiquid, in that they cannot be expected to be
sold within seven days at approximately the price at which they are valued. Due
to the absence of an active trading market, an Underlying Fund may experience
difficulty in valuing or disposing of illiquid securities.
RESTRICTED SECURITIES, NON-PUBLICLY TRADED SECURITIES AND RULE 144A SECURITIES
- -- Underlying Funds may be permitted to invest in restricted securities and Rule
144A securities. Restricted securities cannot be sold to the public without
registration under the Securities Act of 1933 ("1933 Act"). Unless registered
for sale, these securities can be sold only in privately negotiated transactions
or pursuant to an exemption from registration. Restricted securities are
generally considered illiquid and, therefore, subject to the 15% limitation on
illiquid securities.
Non-publicly traded securities (including Rule 144A securities) may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Fund. In particular, Rule 144A
securities may be resold only to qualified institutional buyers in accordance
with Rule 144A under the 1933 Act. Unregistered securities may also be sold
abroad pursuant to Regulation S under the 1933 Act. Companies whose securities
are not publicly traded are not subject to the disclosure and other investor
protection requirements that would be applicable if their securities were
publicly traded. Acting pursuant to board-established guidelines, some
restricted securities and Rule 144A securities may be considered liquid.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS -- An Underlying Fund
may invest in securities purchased on a when-issued or delayed delivery basis.
Although the payment and interest terms of these securities are established at
the time the purchaser enters into the commitment, these securities may be
delivered and paid for at a future date, generally within 45 days. Purchasing
when-issued securities allows the Underlying Fund to lock in a fixed price or
yield on a security it intends to purchase. However, when the Underlying Fund
purchases a when-issued security, it immediately assumes the risk of ownership,
including the risk of price fluctuation until the settlement date.
The greater the Underlying Fund's outstanding commitments for these
securities, the greater the exposure to potential fluctuations in the net asset
value of that fund. Purchasing when-issued securities may involve the additional
risk that the yield available in the market when the delivery occurs may be
higher or the market price lower than that obtained at the time of commitment.
Although the Underlying Fund may be able to sell these securities prior to the
delivery date, it will purchase when-issued securities for the purpose of
actually acquiring the securities, unless after entering into the commitment a
sale appears desirable for investment reasons. When required by SEC guidelines,
the
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<PAGE> 26
Underlying Fund will set aside permissible liquid assets in a segregated
account to secure its outstanding commitments for when-issued securities.
REVERSE REPURCHASE AGREEMENTS -- The Underlying Funds may also enter into
reverse repurchase agreements. Reverse repurchase agreements involve the sale of
securities held by the Underlying Fund pursuant to its agreement to repurchase
them at a mutually agreed upon date, price and rate of interest. At the time the
Underlying Fund enters into a reverse repurchase agreement, it will establish
and maintain a segregated account with an approved custodian containing cash or
liquid high-grade debt securities having a value not less than the repurchase
price (including accrued interest). The assets contained in the segregated
account will be marked-to-market daily and additional assets will be placed in
such account on any day in which the assets fall below the repurchase price
(plus accrued interest). An Underlying Fund's liquidity and ability to manage
its assets might be affected when it sets aside cash or portfolio securities to
cover such commitments. Reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale may decline below the
price of the securities the fund has sold but is obligated to repurchase. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the fund's
obligation to repurchase the securities, and the Underlying Fund's use of the
proceeds of the reverse repurchase agreement may effectively be restricted
pending such decision. Reverse repurchase agreements are considered to be
borrowings under the 1940 Act.
LENDING PORTFOLIO SECURITIES -- From time to time, the Underlying Funds may
lend its portfolio securities to brokers, dealers and other financial
institutions needing to borrow securities to complete certain transactions. In
connection with such loans, the Underlying Fund will receive collateral
consisting of cash, U.S. Government securities or irrevocable letters of credit.
Such collateral will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The Underlying Fund
can increase its income through the investment of such collateral. The
Underlying Fund continues to be entitled to payments in amounts equal to the
interest, dividends or other distributions payable on the loaned security and
receives interest on the amount of the loan. Such loans will be terminable at
any time upon specified notice. The Underlying Fund might experience risk of
loss if the institution with which it has engaged in a portfolio loan
transaction breaches its agreement with the Underlying Fund.
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<PAGE> 27
CONTENTS PAGE
Highlights
Investment Objectives and Policies
Description of the Underlying Funds and Other Permissible Investments
Management of the Trust
Investment in Fund Shares
Share Redemption
Net Income and Distributions
Additional Information
Performance Advertising for the Fund
Tax Status
Appendix--Description of Permissible Underlying Fund Investments
NATIONAL DISTRIBUTOR AND INVESTMENT ADVISER
Nationwide Financial Services, Inc.
One Nationwide Plaza
Columbus, Ohio 43216
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
Box 1492
One Nationwide Plaza
Columbus, Ohio 43216
AUDITORS
LEGAL COUNSEL
Druen, Rath & Dietrich
One Nationwide Plaza
Columbus, Ohio 43216
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<PAGE> 28
STATEMENT OF ADDITIONAL INFORMATION
JANUARY ___, 1997
NATIONWIDE SEPARATE ACCOUNT TRUST
--ASSET ALLOCATION: AGGRESSIVE FUND
--ASSET ALLOCATION: MODERATELY AGGRESSIVE FUND
--ASSET ALLOCATION: MODERATE FUND
--ASSET ALLOCATION: MODERATELY CONSERVATIVE FUND
--ASSET ALLOCATION: CONSERVATIVE FUND
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus. It contains
information in addition to and more detailed than that set forth in the
Prospectus for the Funds dated January ___, 1997 and should be read in
conjunction with that Prospectus. The Prospectus may be obtained from Nationwide
Life Insurance Company, One Nationwide Plaza, Columbus, Ohio 43215, or by
calling
(614) 249-____.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
General Information and History
Investment Objectives and Policies
Investment Restrictions
Major Shareholders
Trustees and Officers of the Trust
Calculating Yield and Total Return
Investment Advisory and Other Services
Brokerage Allocations
Purchases, Redemptions and Pricing of Shares
Additional Information
Tax Status
Financial Statements
GENERAL INFORMATION AND HISTORY
Nationwide Separate Accounts Trust is an open-end investment company organized
under the laws of Massachusetts, by a Declaration of Trust, dated September 3,
1996. The Trust offers shares in five separate mutual funds, each with its own
investment objectives.
<PAGE> 29
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus discusses the investment objectives of the Funds and the
Proprietary Funds in which the Funds may invest, as well as the policies
employed to achieve those objectives. The types of Unaffiliated Funds in which
the Funds may invest are also generally discussed in the Prospectus. The
following supplements the information in the Prospectus concerning the types of
securities and other instruments in which the Underlying Funds may invest (and
certain short-term investments in which the Funds may invest directly), the
investment policies and portfolios strategies the Underlying Funds may utilize
and certain risks attendant to such investments, policies and strategies. There
can be no assurance that the respective investment objectives of the Funds or
the Underlying Funds will be achieved.
The Trust's Declaration of Trust permits the Board of Trustees to establish
additional Funds from time to time. The investment objectives, policies and
restrictions applicable to additional Funds would be established by the Board of
Trustees at the time such Funds were established and may differ from those set
forth in the Prospectus and this Statement of Additional Information.
SPECIAL SITUATION COMPANIES. Some of the Underlying Funds may invest in the
securities of "special situation companies," which include those involved in an
actual or prospective acquisition or consolidation; reorganization;
recapitalization; merger, liquidation or distribution of cash, securities or
other assets; a tender or exchange offer; a breakup or workout of a holding
company; or litigation which, if resolved favorably, would improve the value of
the company's stock. If the actual or prospective situation does not materialize
as anticipated, the market price of the securities of a "special situation
company" may decline significantly. If the investment adviser of an Underlying
Fund analyzes "special situation companies" carefully and invests in the
securities of these companies at the appropriate time, the Underlying Fund may
achieve capital growth. There can be no assurance however, that a special
situation that exists at the time the Underlying Fund makes its investment will
be consummated under the terms and within the time period contemplated.
FOREIGN SECURITIES. Investors in the Funds should recognize that investment by
the Underlying Funds in foreign securities involve certain special
considerations which are not typically associated with investing in United
States securities. Since investments in foreign companies will frequently
involve currencies of foreign countries, and since the Underlying Funds may hold
securities and funds in foreign currencies, the Funds may be affected favorably
or unfavorably by changes in currency rates and in exchange control regulations,
if any, and may incur costs in connection with conversions between various
currencies. Most foreign stock markets, while growing in volume of trading
activity, have less volume than the New York Stock Exchange, and securities of
some foreign companies are less liquid and more volatile than securities of
comparable domestic companies. Similarly, volume and liquidity in most foreign
bond markets are less than in the United States and at times, volatility of
price can be greater than in the United States. Fixed commissions on foreign
securities exchanges are generally higher than negotiated commissions on United
States exchanges, although the Underlying Funds endeavor to achieve the most
favorable net results on their portfolio transactions. There is generally less
government supervision and regulation of securities exchanges, brokers and
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<PAGE> 30
listed companies in foreign countries than in the United States. In addition,
with respect to certain foreign countries, there is the possibility of exchange
control restrictions, expropriation or confiscatory taxation, and political,
economic or social instability, which could affect investments in those
countries. Foreign securities such as those purchased by the Underlying Funds
may be subject to foreign government taxes, higher custodian fees and dividend
collection fees which could reduce the yield on such securities.
Investments may be made from time to time by the Underlying Funds in companies
in developing countries as well as in developed countries. Although there is no
universally accepted definition, a developing country is generally considered to
be a country which is in the initial stages of industrialization. Shareholders
should be aware that investing in the equity and fixed income markets of
developing countries involves exposure to unstable governments, economies based
on only a few industries, and securities markets which trade a small number of
securities. Securities markets of developing countries tend to be more volatile
than the markets of developed countries; however, such markets have in the past
provided the opportunity for higher rates of return to investors.
The value and liquidity of investments in developing countries may be affected
favorably or unfavorably by political, economic, fiscal, regulatory or other
developments in the particular countries or neighboring regions. The extent of
economic development, political stability and market depth of different
countries varies widely. Certain countries in the Asia region, including
Cambodia, China, Laos, Indonesia, Malaysia, the Philippines, Thailand, and
Vietnam are either comparatively underdeveloped or are in the process of
becoming developed. Such investments typically involve greater potential for
gain or loss than investments in securities of issuers in developed countries.
The securities markets in developing countries are substantially smaller, less
liquid and more volatile than the major securities markets in the United States.
A high proportion of the shares of many issuers may be held by a limited number
of persons and financial institutions, which may limit the number of shares
available for investment by the Underlying Funds. Similarly, volume and
liquidity in the bond markets in developing countries are less than in the
United States and, at times, price volatility can be greater than in the United
States. A limited number of issuers in developing countries' securities markets
may represent a disproportionately large percentage of market capitalization and
trading volume. The limited liquidity of securities markets in developing
countries may also affect an Underlying Fund's ability to acquire or dispose of
securities at the price and time it wishes to do so. Accordingly, during periods
of rising securities prices in the more illiquid securities markets, an
Underlying Fund's ability to participate fully in such price increases may be
limited by its investment policy of investing not more than 15% of its total net
assets in illiquid securities. Conversely, an Underlying Fund's inability to
dispose fully and promptly of positions in declining markets will cause an
Underlying Fund's net asset value to decline as the value of the unsold
positions is marked to lower prices. In addition, securities markets in
developing countries are susceptible to being influenced by large investors
trading significant blocks of securities.
Political and economic structures in many of such countries may be undergoing
significant evolution and rapid development, and such countries may lack the
social, political and economic stability
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<PAGE> 31
characteristic of the United States. Certain of such countries have in the past
failed to recognize private property rights and have at times nationalized or
expropriated the assets of private companies. As a result, the risks described
above, including the risks of nationalization or expropriation of assets, may be
heightened. In addition, unanticipated political or social developments may
affect the value of an Underlying Fund's investments in those countries and the
availability to the Underlying Fund of additional investments in those
countries.
Economies of developing countries may differ favorably or unfavorably from the
United States economy in such respects as rate of growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. As export-driven economies, the economies of
countries in the Asia Region are affected by developments in the economies of
their principal trading partners. Hong Kong, Japan and Taiwan have limited
natural resources, resulting in dependence on foreign sources for certain raw
materials and economic vulnerability to global fluctuations of price and supply.
Certain developing countries do not have comprehensive systems of laws,
although substantial changes have occurred in many such countries in this regard
in recent years. Laws regarding fiduciary duties of officers and directors and
the protection of shareholders may not be well developed. Even where adequate
law exists in such developing countries, it may be impossible to obtain swift
and equitable enforcement of such law, or to obtain enforcement of the judgment
by a court of another jurisdiction.
Trading in futures contracts traded on foreign commodity exchanges may be
subject to the same or similar risks as trading in foreign securities.
DEPOSITARY RECEIPTS. Certain of the Underlying Funds may invest in foreign
securities by purchasing depositary receipts, including American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other securities
convertible into securities of issuers based in foreign countries. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, in registered
form, are denominated in U.S. dollars and are designed for use in the U.S.
securities markets, while EDRs (also referred to as Continental Depositary
Receipts ("CDRs"), in bearer form, may be denominated in other currencies and
are designed for use in European securities markets. ADRs are receipts typically
issued by a U.S. Bank or trust company evidencing ownership of the underlying
securities. EDRs are European receipts evidencing a similar arrangement.
An Underlying Fund may invest in depositary receipts through "sponsored" or
"unsponsored" facilities. A sponsored facility is established jointly by the
issuer of the underlying security and a depositary, whereas a depositary may
establish an unsponsored facility without participation by the issuer of the
deposited security. Holders of unsponsored depositary receipts generally bear
all the costs of such facilities and the depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass through voting
rights to the holders of such receipts in respect of the deposited securities.
4
<PAGE> 32
PREFERRED STOCK. A number of the Underlying Funds may invest in preferred
stocks. Preferred stocks, like debt obligations, are generally fixed-income
securities. Shareholders of preferred stocks normally have the right to receive
dividends at a fixed rate when and as declared by the issuer's board of
directors, but do not participate in other amounts available for distribution by
the issuing corporation. Dividends on the preferred stock may be cumulative, and
all cumulative dividends usually must be paid prior to common shareholders
receiving any dividends. Because preferred stock dividends must be paid before
common stock dividends, preferred stocks generally entail less risk than common
stocks. Upon liquidation, preferred stocks are entitled to a specified
liquidation preference, which is generally the same as the par or stated value,
and are senior in right of payment to common stock. Preferred stocks are,
however, equity securities in the sense that they do not represent a liability
of the issuer and, therefore, do not offer as great a degree or protection of
capital or assurance of continued income as investments in corporate debt
securities. In addition, preferred stocks are subordinated in right of payment
to all debt obligations and creditors of the issuer, and convertible preferred
stocks may be subordinated to other preferred stock of the same issuer.
CONVERTIBLE SECURITIES. Convertible securities in which some of the Underlying
Funds may invest, including both convertible debt and convertible preferred
stock, may be converted at either a stated price or stated rate into underlying
shares of common stock. Because of this feature, convertible securities enable
an investor to benefit from increases in the market price of the underlying
common stock. Convertible securities provide higher yields than the underlying
equity securities, but generally offer lower yields than non-convertible
securities of similar quality. Like bonds, the value of convertible securities
fluctuates in relation to changes in interest rates and, in addition, also
fluctuates in relation to the underlying common stock.
DEBT OBLIGATIONS. In addition to equity securities, the Underlying Funds may be
permitted to invest in debt obligations. These include money market instruments,
U.S. Government or Agency securities, and corporate bonds and debentures which
generally have received one of the four highest ratings from a nationally
recognized statistical rating organization ("NRSRO"), or if not rated by any
NRSRO, are deemed comparable by a fund's investment adviser to such rated
securities ("Comparable Unrated Securities"). The ratings of an NRSRO represent
its opinion as to the quality of securities it undertakes to rate. Ratings are
not absolute standards of quality; consequently, securities with the same
maturity, coupon, and rating may have different yields. The ratings assigned by
the NRSROs are described in Appendix A to this Statement of Additional
Information.
Fixed income securities are subject to the risk of an issuer's inability to
meet principal and interest payments on its obligations ("credit risk") and are
subject to price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness of the issuer, and general market
liquidity ("market risk"). Lower-rated securities are more likely to react to
developments affecting market and credit risk than are more highly rated
securities, which react primarily to movements in the general level of interest
rates. Subsequent to its purchase by an Underlying Fund, an issue of securities
may cease to be rated or its rating may be reduced, so that the securities may
no longer be eligible for purchase by the Underlying Fund. In such a case, the
Underlying Fund's investment adviser will evaluate whether the downgraded
security should be disposed of.
5
<PAGE> 33
RATINGS AS INVESTMENT CRITERIA. In general, the ratings of nationally
recognized statistical rating organizations ("NRSROs") represent the opinions of
these agencies as to the quality of securities that they rate. Such ratings,
however, are relative and subjective, and are not absolute standards of quality
and do not evaluate the market value risk of the securities. These ratings are
used by Underlying Funds as initial criteria for the selection of portfolio
securities, but the Underlying Funds will also rely upon the independent advice
of their respective advisers to evaluate potential investments. Among the
factors that will be considered are the long-term ability of the issuer to pay
principal and interest and general economic trends. The Appendix to this
Statement of Additional Information contains further information about the
rating categories of NRSROs and their significance.
Subsequent to its purchase by a Fund or Underlying Fund, an issue of securities
may cease to be rated or its rating may be reduced below the minimum required
for purchase by an Underlying Fund. In addition, it is possible that an NRSRO
might not change its rating of a particular issue to reflect subsequent events.
None of these events generally will require sale of such securities, but the
Underlying Fund's investment adviser will consider such events in its
determination of whether the Underlying Fund should continue to hold the
securities. In addition, to the extent that the ratings change as a result of
changes in such organizations or their rating systems, or due to a corporate
reorganizations, an Underlying Fund will attempt to use comparable rations as
standards for its investments in accordance with its investment objective and
policies.
U.S. GOVERNMENT SECURITIES. Some of the Underlying Funds may invest in U.S.
government securities. These securities are of varying types which include but
are not limited to:
- TREASURY NOTES AND BONDS - These are direct obligations of the U.S.
Government. New issues of notes mature in one to ten years while bonds
generally have a maturity of ten years or more.
- TREASURY BILLS - These are direct obligations of the U.S. Government
backed by the full faith and credit of the United States and mature in
one year or less.
- SECURITIES ISSUED BY INSTRUMENTALITIES OF THE U.S. GOVERNMENT - These
securities are issued by federally-chartered instrumentalities. Some of
these securities are guaranteed by the United States Treasury or are
supported by the issuer's right to borrow from the Treasury and are
backed by the credit of the Federal instrumentality itself. Some of
these instrumentalities (listed for example purposes only) are:
- Bank for Cooperatives (COOP)
- Federal Home Loan Banks (FHLB)
- Federal National Mortgage Association (FNMA)
- Government National Mortgage Association (GNMA)
- Tennessee Valley Authority (TVA)
- Farmers Home Administration (FHA)
6
<PAGE> 34
The value of the government securities owned an Underlying Fund will vary
inversely with changes in interest rates. As with any fixed income investment,
interest rate risk does exist; i.e., when interest rates decline, the market
value of a portfolio can be expected to rise; conversely, when interest rates
rise, the market value of the portfolio can be expected to fall. While the
Underlying Fund may engage in portfolio trading to manage this risk (i.e.,
shortening the average maturity of the portfolio in anticipation of a rise in
interest rates so as to minimize depreciation of principal, or lengthening the
portfolio in anticipation of a decline in interest rates so as to maximize
appreciation of capital), there is no assurance that capital will be preserved.
MONEY MARKET INSTRUMENTS. Both the Funds and the Underlying Funds may invest in
certain types of money market instruments which may include the following types
of instruments:
- obligations issued or guaranteed as to interest and principal by the
U.S. government, its agencies, or instrumentalities, or any federally
chartered corporation;
- repurchase agreements;
- certificates of deposit, time deposits and bankers' acceptances issued
by domestic banks (including their branches located outside the United
States and subsidiaries located in Canada), domestic branches of
foreign banks, savings and loan associations and similar institutions
- commercial paper, which are short-term unsecured promissory notes
issued by corporations in order to finance their current operations.
Generally the commercial paper will be rated within the top two rating
categories by an NRSRO, or if not rated, is issued and guaranteed as to
payment of principal and interest by companies which at the date of
investment have a high quality outstanding debt issue;
- high quality short-term (maturity in 397 days or less) corporate
obligations;
- bank loan participation agreements representing corporations and banks
having a high quality short-term rating, at the date of investment, and
under which the Fund or Underlying Fund will look to the
creditworthiness of the lender bank, which is obligated to make
payments of principal and interest on the loan, as well as to
creditworthiness of the borrower.
Some of the Underlying Funds may invest in the securities of foreign corporate
issuers and in the securities of foreign branches of U.S. banks, such as
negotiable certificates of deposit (Eurodollars) in U.S. dollar denominations.
Because of this, investment in such a Fund or Underlying Fund involves risks
that are different in some respects from an investment in a fund which invests
only in debt obligations of U.S. domestic issuers. Such risks may include future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on the securities held in the
portfolio, possible seizure or nationalization of foreign deposits, the possible
7
<PAGE> 35
establishment of exchange controls, or the adoption of other foreign
governmental restrictions which might adversely affect the payment of principal
and interest on securities in the portfolio.
REPURCHASE AGREEMENTS. In connection with the purchase of a repurchase agreement
by a Fund or by an Underlying Fund, the fund's custodian will have custody of,
and will hold in a segregated account, securities acquired by the Fund or
Underlying Fund under a repurchase agreement. Repurchase agreements are
contracts under which the buyer of a security simultaneously commits to resell
the security to the seller at an agreed-upon price and date. Repurchase
agreements are considered by the staff of the Securities and Exchange Commission
(the "SEC") to be loans by the fund. Repurchase agreements may be entered into
with respect to securities of the type in which it may invest or government
securities regardless of their remaining maturities, and will require that
additional securities be deposited with it if the value of the securities
purchased should decrease below resale price. Repurchase agreements involve
certain risks in the event of default or insolvency by the other party,
including possible delays or restrictions upon the Fund or Underlying Fund's
ability to dispose of the underlying securities, the risk of a possible decline
in the value of the underlying securities during the period in which the Fund or
Underlying Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those right and the risk of losing all or
part of the income from the repurchase agreement.
MORTGAGE-RELATED SECURITIES. The average maturity of pass-through pools of
mortgage related securities in which some of the Underlying Funds may invest
varies with the maturities of the Underlying mortgage instruments. In addition,
a pool's stated maturity may be shortened by unscheduled payments on the
underlying mortgages. Factors affecting mortgage prepayments include the level
of interest rates, general economic and social conditions, the location of the
mortgaged property and the age of the mortgage. Because prepayment rates of
individual pools vary widely, it is not possible to accurately predict the
average life of a particular pool. Common practice is to assume that prepayments
will result in an average life ranging from 2 to 10 years for pools of
fixed-rate 30-year mortgages. Pools of mortgages with other maturities or
different characteristics will have varying average life assumptions.
Mortgage-related securities may be classified as private, governmental or
government-related, depending on the issuer or guarantor. Private
mortgage-related securities represent pass-through pools consisting principally
of conventional residential mortgage loans created by non-governmental issuers,
such as commercial banks, savings and loan associations and private mortgage
insurance companies. Governmental mortgage-related securities are backed up by
the full faith and credit of the U.S. GNMA, the principal guarantor of such
securities, is a wholly owned U.S. government corporation within the Department
of Housing and Urban Development. Government-related mortgage-related securities
are not backed by the full faith and credit of the U.S. government. Issuers of
such securities include FNMA and FHLMC. FNMA is a government-sponsored
corporation owned entirely by private stockholders, which is subject to general
regulation by the Secretary of Housing and Urban Development. Pass-through
securities issued by FNMA are guaranteed as to timely payment of principal and
interest by FNMA. FHLMC is a corporate instrumentality of the U.S., the stock of
which is owned by the Federal Home Loan Banks. Participation certificates
8
<PAGE> 36
representing interests in mortgages from FHLMC's national portfolio are
guaranteed as to the timely payment of interest and ultimate collection of
principal by FHLMC.
Private U.S. governmental or government-related entities create mortgage loan
pools offering pass-through investments in addition to those described above.
The mortgages underlying these securities may be alternative mortgage
instrument, that is, mortgage instruments whose principal or interest payments
may vary or whose terms to maturity may be shorter than previously customary. As
new types of mortgage-related securities are developed and offered to investors,
certain of the Underlying Funds, consistent with their investment objective and
policies, may consider making investments in such new types of securities.
HIGH-YIELD (HIGH-RISK) SECURITIES. Some of the Underlying Funds have the
authority to invest a limited portion of their assets in non-investment grade
debt securities. Non-investment grade debt securities (hereinafter referred to
as "lower-quality securities") include (i) bonds rated as low as C by Moody's,
Standard & Poor's, or Fitch, or CCC by D&P; (ii) commercial paper rated as low
as C by Standard & Poor's, Not Prime by Moody's or Fitch 4 by Fitch; and (iii)
unrated debt securities of comparable quality. Lower-quality securities, while
generally offering higher yields than investment grade securities with similar
maturities, involve greater risks, including the possibility of default or
bankruptcy. They are regarded as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal. The special risk
considerations in connection with investments in these securities are discussed
below.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. All interest-bearing
securities typically experience appreciation when interest rates decline and
depreciation when interest rates rise. The market values of lower-quality and
comparable unrated securities tend to reflect individual corporate developments
to a greater extent than do higher rated securities, which react primarily to
fluctuations in the general level of interest rates. Lower-quality and
comparable unrated securities also tend to be more sensitive to economic
conditions than are higher-rated securities. As a result, they generally involve
more credit risks than securities in the higher-rated categories. During an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of lower-quality and comparable unrated securities may
experience financial stress and may not have sufficient revenues to meet their
payment obligations. The issuer's ability to service its debt obligations may
also be adversely affected by specific corporate developments, the issuer's
inability to meet specific projected business forecasts or the unavailability of
additional financing. The risk of loss due to default by an issuer of these
securities is significantly greater than issuers of higher-rated securities
because such securities are generally unsecured and are often subordinated to
other creditors. Further, if the issuer of a lower-quality or comparable unrated
security defaulted, an Underlying Fund might incur additional expenses to seek
recovery. Periods of economic uncertainty and changes would also generally
result in increased volatility in the market prices of these securities and thus
in the Underlying Fund's net asset value.
As previously stated, the value of a lower-quality or comparable unrated
security will decrease in a rising interest rate market, and accordingly so will
the Underlying Fund's net asst value. If the
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Underlying Fund experiences unexpected net redemptions in such a market, it may
be forced to liquidate a portion of its portfolio securities without regard to
their investment merits. Due to the limited liquidity of lower-quality and
comparable unrated securities (discussed below), the Underlying Fund may be
forced to liquidate these securities at a substantial discount. Any such
liquidation would reduce the Underlying Fund's asset base over which expenses
could be allocated and could result in a reduced rate of return for the
Underlying Fund.
PAYMENT EXPECTATIONS. Lower-quality and comparable unrated securities
typically contain redemption, call or prepayment provisions which permit the
issuer of such securities containing such provisions to, at its discretion,
redeem the securities. During periods of falling interest rates, issuers of
these securities are likely to redeem or prepay the securities and refinance
them with debt securities at a lower interest rate. To the extent an issuer is
able to refinance the securities, or otherwise redeem them, the Underlying Fund
may have to replace the securities with a lower yielding security, which would
result in a lower return for the Underlying Fund.
CREDIT RATINGS. Credit ratings issued by credit-rating agencies
evaluate the safety of principal and interest payments of rated securities. They
do not, however, evaluate the market value risk of lower-quality securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the condition of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in lower-quality and
comparable unrated securities will be more dependent on an investment adviser's
credit analysis than would be the case with investments in investment-grade debt
securities. An Underlying Fund's investment adviser will employ its own credit
research and analysis, which includes a study of existing debt, capital
structure, ability to service debt and to pay dividends, the issuer's
sensitivity to economic conditions, its operating history and the current trend
of earnings. When investing in lower-quality securities, an investment adviser
will continually monitor the investments in an Underlying Fund's portfolio and
carefully evaluate whether to dispose of or to retain lower-quality and
comparable unrated securities whose credit ratings or credit quality may have
changed.
LIQUIDITY AND VALUATION. An Underlying Fund may have difficulty
disposing of certain lower-quality and comparable unrated securities because
there may be a thin trading market for such securities. Because not all dealers
maintain markets in all lower-quality and comparable unrated securities, there
is no established retail secondary market for many of these securities and
therefore such securities may be sold only to a limited number of dealers or
institutional investors. To the extent a secondary trading market does exist, it
is generally not as liquid as the secondary market for higher-rated securities.
The lack of a liquid secondary market may have an adverse impact on the market
price of the security. As a result, an Underlying Fund's asset value and ability
to dispose of particular securities, when necessary to meet an Underlying Fund's
liquidity needs or in response to a specific economic event, may be impacted.
The lack of a liquid secondary market for certain securities may also make it
more difficult for the Underlying Fund to obtain accurate market quotations for
purposes of valuing the Underlying Fund's portfolio. Market quotations are
generally
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available on many lower-quality and comparable unrated issues only
from a limited number of dealers and may not necessarily represent firm bids of
such dealers or prices for actual sales. During periods of thin trading, the
spread between bid and asked prices is likely to increase significantly. In
addition, adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of lower-quality and
comparable unrated securities, especially in a thinly traded market.
WARRANTS. Some of the Underlying Funds may acquire warrants. Warrants are
securities giving the holder the right, but not the obligation, to buy the stock
of an issuer at a given price (generally higher than the value of the stock at
the time of issuance), on a specified date, during a specified period, or
perpetually. Warrants may be acquired separately or in connection with the
acquisition of securities. Warrants do not carry with them the right to
dividends or voting rights with respect to the securities that they entitle
their holder to purchase, and they do not represent any rights in the assets of
the issuer. As a result, warrants may be considered more speculative than
certain other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.
SHORT SALES. Certain of the Underlying Funds may from time to time sell
securities short. A short sale is a transaction in which the Underlying Fund
sells securities that it does not own (but has borrowed) in anticipation of a
decline in the market price of the securities.
When an Underlying Fund makes a short sale, the proceeds it receives from the
sale are retained by a broker under the Underlying Fund replaces the borrowed
securities. to deliver the securities to the buyer, the Underlying Fund must
arrange through a broker to borrow the securities and, in so doing, the
Underlying Fund becomes obligated to replace the securities borrowed at their
market price at the time of replacement, whatever the price may be. The
Underlying Fund may have to pay a premium to borrow the securities and must pay
any dividends or interest payable on the securities until they are replaced.
An Underlying Fund's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash or U.S. government securities. In addition, the Fund will place
in a segregated account with its custodian an amount of cash or U.S. government
securities equal to the difference, if any, between (a) the market value of the
securities sold at the time they were sold short and (b) any cash or U.S.
government securities deposited as collateral with the broker in connection with
the short sale (not including the proceeds of the short sale). Until it replaces
the borrowed securities, the Underlying Fund will maintain the segregated
account daily at a level so that the amount deposited in the account plus the
amount deposited with the broker (not including the proceeds from the short
sale) (a) will equal the current market value of the securities sold short and
(b) will not be less than the market value of the securities at the time they
were sold short.
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Some of the Underlying Funds may engage in short sales only if at the time of
the short sale the fund owns or has the right to obtain without additional cost
an equal amount of the security being sold short. This investment technique is
known as a short sale "against the box."
RESTRICTED, NON-PUBLICLY TRADED AND ILLIQUID SECURITIES. Each Fund or Underlying
Fund may not invest more than 15% of its net assets, in the aggregate, in
illiquid securities, including repurchase agreements which have a maturity of
longer than seven days, time deposits maturing in more than seven days and
securities that are illiquid because of the absence of a readily available
market or legal or contractual restrictions on resale. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Investment companies do not typically hold a significant
amount of these restricted or other illiquid securities because of the potential
for delays on resale and uncertainty in valuation. Limitations on resale may
have an adverse effect on the marketability of portfolio securities, and an
investment company might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. An investment company might
also have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for certain
securities that are not registered under the Securities Act including repurchase
agreements, commercial paper, foreign securities, municipal securities and
corporate bonds and notes. Institutional investors depend on an efficient
institutional market in which the unregistered security can be readily resold or
on an issuer's ability to honor a demand for repayment. The fact that there are
contractual or legal restrictions on resale to the general public or to certain
institutions may not be indicative of the liquidity of such investments.
The SEC has adopted Rule 144A which allows for a broader institutional trading
market for securities otherwise subject to restriction on resale to the general
public. Rule 144A establishes a "safe harbor" from the registration requirements
of the Securities Act for resales of certain securities to qualified
institutional buyers. It is anticipated that the market for certain restricted
securities such as institutional commercial paper will expand further as a
result of this regulation and use of automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc.
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The Underlying Funds may also sell over-the-counter ("OTC") options and, in
connection therewith, segregate assets or cover its obligations with respect to
OTC options written by the fund. The assets used as cover for OTC options
written by an Underlying Fund will be considered illiquid unless the OTC options
are sold to qualified dealers who agree that the fund may repurchase any OTC
option it writes at a maximum price to be calculated by a formula set forth in
the option agreement. The cover for an OTC option written subject to this
procedure would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. Some of the
Underlying Funds may invest without limitation in securities purchased on a
"when-issued" basis or purchase or sell securities for delayed delivery (i.e.,
payment or delivery occurs beyond the normal settlement date at a stated price
and yield). When-issued transactions normally settle within 45 days. The payment
obligation and the interest rate that will be received on when-issued securities
are fixed at the time the buyer enters into the commitment. Due to fluctuations
in the value of securities purchased or sold on a when-issued or
delayed-delivery basis, the yields obtained on such securities may be higher or
lower than the yields available in the market on the dates when the investments
are actually delivered to the buyers.
When an Underlying Fund agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash, U.S. government securities or
other liquid high-grade debt obligations equal to the amount of the commitment
in a segregated account. Normally, the custodian will set aside portfolio
securities to satisfy a purchase commitment, and in such a case the Underlying
Fund may be required subsequently to place additional assets in the segregated
account in order to ensure that the value of the account remains equal to the
amount of such fund's commitment. It may be expected that the Underlying Fund's
net assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash. When
the Underlying Fund engages in when-issued or delayed-delivery transactions, it
relies on the other party to consummate the trade. Failure of the seller to do
so may result in a fund incurring a loss or missing an opportunity to obtain a
price considered to be advantageous.
LENDING PORTFOLIO SECURITIES. Some of the Underlying Funds may lend its
portfolio securities to brokers, dealers and other financial institutions,
provided it receives cash collateral which at all times is maintained in an
amount equal to at least 100% of the current market value of the securities
loaned. By lending its portfolio securities, an Underlying Fund can increase its
income through the investment of the cash collateral. For the purposes of this
policy, the Underlying Fund considers collateral consisting of cash, U.S.
Government securities or letters of credit issued by banks whose securities meet
the standards for investment by the Fund to be the equivalent of cash. From time
to time, the Underlying Fund may return to the borrower or a third party which
is unaffiliated with it, and which is acting as a "placing broker," a part of
the interest earned from the investment of collateral received for securities
loaned.
The SEC currently requires that the following conditions must be met whenever
portfolio securities are loaned: (1) the fund must receive at least 100% cash
collateral of the type discussed in the
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preceding paragraph from the borrower; (2) the borrower must increase such
collateral whenever the market value of the securities loaned rises above the
level of such collateral; (3) the fund must be able to terminate the loan at any
time; (4) the fund must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions payable on the loaned securities, and
any increase in market value; (5) the fund may pay only reasonable custodian
fees in connection with the loan; and (6) while any voting rights on the loaned
securities may pass to the borrower, the fund's board of directors or trustees
must be able to terminate the loan and regain the right to vote the securities
if a material event adversely affecting the investment occurs. These conditions
may be subject to future modification. Loan agreements involve certain risks in
the event of default or insolvency of the other party including possible delays
or restrictions upon the Underlying Fund's ability to recover the loaned
securities or dispose of the collateral for the loan.
BORROWING. Some of the Underlying Funds may borrow money from banks, limited by
any investment restrictions of such fund, and may engage in reverse repurchase
agreements which may be considered a form of borrowing. Some of the borrowings
by an Underlying Fund may be on a secured basis. In such situations, either the
custodian will segregate the pledged assets for the benefit of the lender or
arrangements will be made with a suitable subcustodian, which may include the
lender.
DERIVATIVE INSTRUMENTS. As discussed in its Prospectus, a number of the
Underlying Funds may use a variety of derivative instruments, including options,
futures contracts (sometimes referred to as "futures"), options on futures
contracts, stock index options, forward currency contracts and swap agreements
to hedge the Underlying Fund's portfolio or for risk management.
The use of these instruments is subject to applicable regulations of the SEC,
the several options and futures exchanges upon which they may be traded, the
Commodity Futures Trading Commission ("CFTC") and various state regulatory
authorities. In addition, an Underlying Fund's ability to use these instruments
will be limited by tax considerations.
Special Risks of Derivative Instruments. The use of derivative instruments
involves special considerations and risks as described below. Risks pertaining
to particular instruments are described in the sections that follow.
(1) Successful use of most of these instruments depends upon an investment
adviser's ability to predict movements of the overall securities and currency
markets, which requires different skills than predicting changes in the prices
of individual securities. While an investment adviser is experienced in the use
of these instruments, there can be no assurance that any particular strategy
adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of an instrument and price movements of investments being
hedged. For example, if the value of an instrument used in a short hedge (such
as writing a call option, buying a put option, or selling a futures contract)
increased by less than the decline in value of the hedged investment, the hedge
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would not be fully successful. Such a lack of correlation might occur due to
factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which these instruments are
traded. The effectiveness of hedges using instruments on indices will depend on
the degree of correlation between price movements in the index and price
movements in the investments being hedged.
(3) Hedging strategies, if successful, can reduce the risk of loss by wholly
or partially offsetting the negative effect of unfavorable price movements in
the investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if an Underlying Fund entered
into a short hedge because its investment adviser projected a decline in the
price of a security in the Underlying Fund's portfolio, and the price of that
security increased instead, the gain from that increase might be wholly or
partially offset by a decline in the price of the instrument. Moreover, if the
price of the instrument declined by more than the increase in the price of the
security, the Underlying Fund could suffer a loss.
(4) As described below, an Underlying Fund might be required to maintain
assets as "cover," maintain segregated accounts, or make margin payments when it
takes positions in these instruments involving obligations to third parties
(i.e., instruments other than purchased options). If an Underlying Fund were
unable to close out its positions in such instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. The requirements might impair an Underlying Fund's
ability to sell a portfolio security or make an investment at a time when it
would otherwise be favorable to do so, or require that the Underlying Fund sell
a portfolio security at a disadvantageous time. An Underlying Fund's ability to
close out a position in an instrument prior to expiration or maturity depends on
the existence of a liquid secondary market or, in the absence of such a market,
the ability and willingness of the other party to the transaction ("counter
party") to enter into a transaction closing out the position. Therefore, there
is no assurance that any hedging position can be closed out at a time and price
that is favorable to the Underlying Fund.
Options. An Underlying Fund may purchase or write put and call options on
securities, indices, and foreign currency, and enter into closing transactions
with respect to such options to terminate an existing position. The purchase of
call options serves as a long hedge, and the purchase of put options serves as a
short hedge. Writing put or call options can enable an Underlying Fund to
enhance income by reason of the premiums paid by the purchaser of such options.
Writing call options serves as a limited short hedge because declines in the
value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security appreciates to a price
higher than the exercise price of the call option, it can be expected that the
option will be exercised, and the Underlying Fund will be obligated to sell the
security at less than its market value or will be obligated to purchase the
security at a price greater than that at which the security must be sold under
the option. All or a portion of any assets used as cover for OTC options written
by a Fund would be considered illiquid to the extent described under "Restricted
and Illiquid Securities" above. Writing put options serves as a limited long
hedge because increases in the value
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of the hedged investment would be offset to the extent of the premium received
for writing the option. However, if the security depreciates to a price lower
than the exercise price of the put option, it can be expected that the put
option will be exercised, and the Underlying Fund will be obligated to purchase
the security at more than its market value.
The value of an option position will reflect, among other things, the historical
price volatility of the underlying investment, the current market value of the
underlying investment, the time remaining until expiration, the relationship of
the exercise price to the market price of the underlying investment, and general
market conditions. Options that expire unexercised have no value. Options used
by an Underlying Fund may include European-style options, which are only
exercisable at expiration. This is in contrast to American-style options which
are exercisable at any time prior to the expiration date of the option.
An Underlying Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, an Underlying Fund
may terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, an Underlying Fund may terminate a position in a put or
call option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit the Underlying
Fund to realize the profit or limit the loss on an option position prior to its
exercise or expiration.
An Underlying Fund may purchase or write both OTC options and options traded on
foreign and U.S. exchanges. Exchange-traded options are issued by a clearing
organization affiliated with the exchange on which the option is listed that, in
effect, guarantees completion of every exchange-traded option transaction. OTC
options are contracts between the Underlying Fund and the counter party (usually
a securities dealer or a bank) with no clearing organization guarantee. Thus,
when an Underlying Fund purchases or writes an OTC option, it relies on the
counter party to make or take delivery of the underlying investment upon
exercise of the option. Failure by the counter party to do so would result in
the loss of any premium paid by the Underlying Fund as well as the loss of any
expected benefit of the transaction.
An Underlying Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. Closing
transactions can be made for OTC options only by negotiating directly with the
counter party, or by a transaction in the secondary market if any such market
exists. Although an Underlying Fund will generally enter into OTC options only
with counter parties that are expected to be capable of entering into closing
transactions with the Underlying Fund, there is no assurance that the Underlying
Fund will in fact be able to close out an OTC option at a favorable price prior
to expiration. In the event of insolvency of the counter party, an Underlying
Fund might be unable to close out an OTC option position at any time prior to
its expiration.
If an Underlying Fund were unable to effect a closing transaction for an option
it had purchased, it would have to exercise the option to realize any profit.
The inability to enter into a closing purchase transaction for a covered call
option written by the Underlying Fund could cause material losses
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because the Underlying Fund would be unable to sell the investment used as a
cover for the written option until the option expires or is exercised.
An Underlying Fund may engage in options transactions on indices in much the
same manner as the options on securities discussed above, except that index
options may serve as a hedge against overall fluctuations in the securities
markets in general.
The writing and purchasing of options is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. Imperfect correlation between the
options and securities markets may detract from the effectiveness of attempted
hedging.
Transactions using options (other than purchased options) expose an Underlying
Fund to counter party risk. To the extent required by SEC guidelines, an
Underlying Fund will not enter into any such transactions unless it owns either
(1) an offsetting ("covered") position in securities, other options, or futures
or (2) cash and liquid high grade debt obligations with a value sufficient at
all times to cover its potential obligations to the extent not covered as
provided in (1) above. Such Underlying Fund will set aside cash and/or
appropriate liquid assets in a segregated custodial account if required to do so
by the SEC and CFTC regulations. Assets used as cover or held in a segregated
account cannot be sold while the position in the corresponding option or futures
contract is open, unless they are replaced with similar assets. As a result, the
commitment of a large portion of an Underlying Fund's assets to segregated
accounts as a cover could impede portfolio management or the Underlying Fund's
ability to meet redemption requests or other current obligations.
Futures Contracts. Some of the Underlying Funds may enter into futures
contracts, including interest rate, index, and currency futures and purchase and
write (sell) related options. The purchase of futures or call options thereon
can serve as a long hedge, and the sale of futures or the purchase of put
options thereon can serve as a short hedge. Writing covered call options on
futures contracts can serve as a limited short hedge, and writing covered put
options on futures contracts can serve as a limited long hedge, using a strategy
similar to that used for writing covered options in securities. An Underlying
Fund's hedging may include purchases of futures as an offset against the effect
of expected increases in securities prices or currency exchange rates and sales
of futures as an offset against the effect of expected declines in securities
prices or currency exchange rates. An Underlying Fund may write put options on
futures contracts while at the same time purchasing call options on the same
futures contracts in order to create synthetically a long futures contract
position. Such options would have the same strike prices and expiration dates.
An Underlying Fund will engage in this strategy only when its investment adviser
believes it is more advantageous to the Underlying Fund than is purchasing the
futures contract.
An Underlying Fund will generally only enter into futures contracts that are
traded on U.S. or foreign exchanges or boards of trade approved by the CFTC and
are standardized as to maturity date and underlying financial instrument. These
transactions may be entered into for "bona fide hedging" purposes as defined in
CFTC regulations and other permissible purposes including increasing return
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and hedging against changes in the value of portfolio securities due to
anticipated changes in interest rates, currency values and/or market conditions.
The ability of an Underlying Fund to trade in futures contracts may be limited
by the requirements of the Code applicable to a regulated investment company.
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument (e.g.,
debt security) or currency for a specified price at a designated date, time, and
place. An index futures contract is an agreement pursuant to which the parties
agree to take or make delivery of an amount of cash equal to a specified
multiplier times 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 futures
contract was originally written. Transactions costs are incurred when a futures
contract is bought or sold and margin deposits must be maintained. A futures
contract may be satisfied by delivery or purchase, as the case may be, of the
instrument, the currency, or by payment of the change in the cash value of the
index. More commonly, futures contracts are closed out prior to delivery by
entering into an offsetting transaction in a matching futures contract. Although
the value of an index might be a function of the value of certain specified
securities, no physical delivery of those securities is made. If the offsetting
purchase price is less than the original sale price, an Underlying Fund realizes
a gain; if it is more, the Underlying Fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, the Underlying
Fund realizes a gain; if it is less, the Underlying Fund realizes a loss. The
transaction costs must also be included in these calculations. There can be no
assurance, however, that the Underlying Fund will be able to enter into an
offsetting transaction with respect to a particular futures contract at a
particular time. If an Underlying Fund is not able to enter into an offsetting
transaction, the fund will continue to be required to maintain the margin
deposits on the futures contract.
No price is paid by an Underlying Fund upon entering into a futures contract.
Instead, at the inception of a futures contract, the Underlying Fund is required
to deposit in a segregated account with its custodian, in the name of the
futures broker through whom the transaction was effected, "initial margin"
consisting of cash, U.S. government securities or other liquid, high grade debt
obligations, in an amount generally equal to 10% or less of the contract value.
Margin must also be deposited when writing a call or put option on a futures
contract, in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not represent
a borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Underlying Fund at the termination of the
transaction if all contractual obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, the Underlying Fund may be
required by an exchange to increase the level of its initial margin payment, and
initial margin requirements might be increased generally in the future by
regulatory action.
Subsequent "variation margin" payments are made to and from the futures broker
daily as the value of the futures position varies, a process known as "marking
to market." Variation margin does not involve borrowing, but rather represents a
daily settlement of an Underlying Fund's obligations to or from a futures
broker. When an Underlying Fund purchases an option on a future, the premium
paid plus transaction costs is all that is at risk. In contrast, when an
Underlying Fund purchases or sells
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a futures contract or writes a call or put option thereon, it is subject to
daily variation margin calls that could be substantial in the event of adverse
price movements. If the Underlying Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous. Purchasers and sellers of futures positions and
options on futures can enter into offsetting closing transactions by selling or
purchasing, respectively, an instrument identical to the instrument held or
written. Positions in futures and options on futures may be closed only on an
exchange or board of trade on which they were entered into (or through a linked
exchange). Although an Underlying Fund will only enter into futures transactions
only on exchanges or boards of trade where there appears to be an active market,
there can be no assurance that such a market will exist for a particular
contract at a particular time.
Under certain circumstances, futures exchanges may establish daily limits on
the amount that the price of a future or option on a futures contract can vary
from the previous day's settlement price; once that limit is reached, no trades
may be made that day at a price beyond the limit. Daily price limits do not
limit potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If the Underlying Fund were unable to liquidate a futures or option on a
futures contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. An Underlying
Fund will continue to be subject to market risk with respect to the position. In
addition, except in the case of purchased options, the Underlying Fund would
continue to be required to make daily variation margin payments and might be
required to maintain the position being hedged by the future or option or to
maintain cash or securities in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or options on futures contracts
might not correlate perfectly with movements in the prices of the investments
being hedged. For example, all participants in the futures and options on
futures contracts markets are subject to daily variation margin calls and might
be compelled to liquidate futures or options on futures contracts positions
whose prices are moving unfavorably to avoid being subject to further calls.
These liquidations could increase price volatility of the instruments and
distort the normal price relationship between the futures or options and the
investments being hedged. Also, because initial margin deposit requirements in
the futures markets are less onerous than margin requirements in the securities
markets, there might be increased participation by speculators in the future
markets. This participation also might cause temporary price distortions. In
addition, activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.
Foreign Currency-Related Derivative Strategies - Special Considerations. An
Underlying Fund may use options and futures on foreign currencies and forward
currency contracts to hedge against movements in the values of the foreign
currencies in which the Underlying Fund's securities are denominated. The
Underlying Fund may engage in currency exchange transactions to protect against
uncertainty in the level of future exchange rates and may also engage in
currency transactions to
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increase income and total return. Such currency hedges can protect against price
movements in a security the Underlying Fund owns or intends to acquire that are
attributable to changes in the value of the currency in which it is denominated.
Such hedges do not, however, protect against price movements in the securities
that are attributable to other causes.
An Underlying Fund might seek to hedge against changes in the value of a
particular currency when no hedging instruments on that currency are available
or such hedging instruments are more expensive than certain other hedging
instruments. In such cases, the Underlying Fund may hedge against price
movements in that currency by entering into transactions using hedging
instruments on another foreign currency or a basket of currencies, the values of
which the fund's investment adviser believes will have a high degree of positive
correlation to the value of the currency being hedged. The risk that movements
in the price of the hedging instrument will not correlate perfectly with
movements in the price of the currency being hedged is magnified when this
strategy is used.
The value of derivative instruments on foreign currencies depends on the value
of the underlying currency relative to the U.S. dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of such hedging instruments, an
Underlying Fund could be disadvantaged by having to deal in the odd lot market
(generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the derivative instruments until they reopen.
Settlement of derivative transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
an Underlying Fund might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
might be required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
Permissible foreign currency options will include options traded primarily in
the OTC market. Although options on foreign currencies are traded primarily in
the OTC market, the Underlying Fund will normally purchase OTC options on
foreign currency only when its investment adviser believes a liquid secondary
market will exist for a particular option at any specific time.
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Forward Currency Contracts. A forward currency contract involves an obligation
to purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are entered into in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers.
At or before the maturity of a forward contract, an Underlying Fund may either
sell a portfolio security and make delivery of the currency, or retain the
security and fully or partially offset its contractual obligation to deliver the
currency by purchasing a second contract. If an Underlying Fund retains the
portfolio security and engages in an offsetting transaction, such fund, at the
time of execution of the offsetting transaction, will incur a gain or a loss to
the extent that movement has occurred in forward contract prices.
The precise matching of forward currency contract amounts and the value of the
securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, an Underlying Fund might need to
purchase or sell foreign currencies in the spot (cash) market to the extent such
foreign currencies are not covered by forward contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
Currency Hedging. While the values of forward currency contracts, currency
options, currency futures and options on futures may be expected to correlate
with exchange rates, they will not reflect other factors that may affect the
value of an Underlying Fund's investments. A currency hedge, for example, should
protect a Yen-denominated bond against a decline in the Yen, but will not
protect the fund against price decline if the issuer's creditworthiness
deteriorates. Because the value of the Underlying Fund's investments denominated
in foreign currency will change in response to many factors other than exchange
rates, a currency hedge may not be entirely successful in mitigating changes in
the value of such fund's investments denominated in that currency over time.
A decline in the dollar value of a foreign currency in which an Underlying
Fund's securities are denominated will reduce the dollar value of the
securities, even if their value in the foreign currency remains constant. The
use of currency hedges does not eliminate fluctuations in the underlying prices
of the securities, but it does establish a rate of exchange that can be achieved
in the future. In order to protect against such diminutions in the value of
securities it holds, an Underlying Fund may purchase put options on the foreign
currency. If the value of the currency does decline, the Underlying Fund will
have the right to sell the currency for a fixed amount in dollars and will
thereby offset, in whole or in part, the adverse effect on its securities that
otherwise would have resulted. Conversely, if a rise in the dollar value of a
currency in which securities to be acquired are denominated is projected,
thereby potentially increasing the cost of the securities, an Underlying Fund
may purchase call options on the particular currency. The purchase of these
options could offset, at least partially, the effects of the adverse movements
in exchange rates. Although currency hedges
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limit the risk of loss due to a decline in the value of a hedged currency, at
the same time, they also limit any potential gain that might result should the
value of the currency increase.
An Underlying Fund's currency hedging will be limited to hedging involving
either specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward currency with respect to specific receivables or
payables of the Underlying Fund generally accruing in connection with the
purchase or sale of its portfolio securities. Position hedging is the sale of
forward currency with respect to portfolio security positions. Underlying Funds
may not generally position hedge to an extent greater than the aggregate market
value (at the time of making such sale) of the hedged securities.
Commercial Paper. Some of the Underlying Funds may invest in commercial paper
which is indexed to certain specific foreign currency exchange rates. The terms
of such commercial paper provide that its principal amount is adjusted upwards
or downwards (but not below zero) at maturity to reflect changes in the exchange
rate between two currencies while the obligation is outstanding. An Underlying
Fund will purchase such commercial paper with the currency in which it is
denominated and, at maturity, will receive interest and principal payments
thereon in that currency, but the amount or principal payable by the issuer at
maturity will change in proportion to the change (if any) in the exchange rate
between two specified currencies between the date the instrument is issued and
the date the instrument matures. While such commercial paper entails the risk of
loss of principal, the potential for realizing gains as a result of changes in
foreign currency exchange rate enables the Underlying Fund to hedge or
cross-hedge against a decline in the U.S. Dollar value of investments
denominated in foreign currencies while providing an attractive money market
rate of return. Generally an Underlying Fund will purchase such commercial paper
for hedging purposes only, not for speculation. The staff of the SEC is
currently considering whether the purchase of this type of commercial paper
would result in the issuance of a "senior security" within the meaning of the
1940 Act. The Fund believes that such investments do not involve the creation of
such a senior security, but nevertheless will establish a segregated account
with respect to its investments in this type of commercial paper and to maintain
in such account cash not available for investment or U.S. Government securities
or other liquid high quality debt securities having a value equal to the
aggregate principal amount of outstanding commercial paper of this type.
INVESTMENT RESTRICTIONS
The following are the fundamental investment limitations for each of the Funds.
These fundamental investment limitations cannot be changed without shareholder
approval:
Each Fund:
1. May (i) borrow money from banks and (ii) make other investments or
engage in other transactions permissible under the Investment Company
Act of 1940 (the "1940 Act") which may involve a borrowing, provided
that the combination of (i) and (ii) shall not exceed 33- 1/3% of the
value of the Fund's total assets (including the amount borrowed), less
the Fund's
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liabilities (other than borrowings), except that the Fund may borrow up
to an additional 5% of its total assets (not including the amount
borrowed) from a bank for temporary or emergency purposes (but not for
leverage or the purchase of investments). The Fund may also borrow
money from other persons to the extent permitted by applicable law. For
purposes of this restriction, short sales, the entry into currency
transactions, options, futures contracts, options on futures contracts,
forward commitment transactions and dollar roll transactions that are
not accounted for as financings (and the segregation of assets in
connection with any of the foregoing) shall not constitute borrowing.
2. May not issue senior securities, except as permitted under the 1940
Act.
3. May not act as an underwriter of another issuer's securities, except to
the extent that the Fund may be deemed an underwriter within the
meaning of the Securities Act in connection with the purchase and sale
of portfolio securities.
4. May not purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments, but this shall
not prevent the Fund from purchasing or selling options, futures
contracts, or other derivative instruments, or from investing in
securities or other instruments backed by physical commodities.
5. May not lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets (taken at current value) would be lent
to other parties, except in accordance with its investment objective,
policies and limitations through (i) purchase of debt securities or
other debt instruments, including loan participations, assignments and
structured securities, or (ii) by engaging in repurchase agreements.
6. May not purchase or sell real estate unless acquired as a result of
ownership of securities or instruments, but this restriction shall not
prohibit the Fund from purchasing or selling securities issued by
entities or investment vehicles that own or deal in real estate or
interests therein or instruments secured by real estate or interests
therein.
The following are non-fundamental operating policies for the Funds which may
be changed by the Board of Trustees of the Trust without shareholder approval:
Each Fund may not:
1. Sell securities short or maintain a short position
2. Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions.
3. Invest in illiquid securities if, as a result of such investment, more
than 15% of its net assets would be invested in illiquid securities.
Illiquid securities include securities that cannot be
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sold within seven days in the ordinary course of business for
approximately the amount at which the Fund has valued the securities,
such as repurchase agreements maturing in more than seven days.
4. Purchase the securities of any issuer (other than securities issued or
guaranteed by domestic or foreign governments or political subdivisions
thereof) if, as a result, more than 5% of its total assets would be
invested in the securities of issuers that, including predecessor or
unconditional guarantors, have a record of less than three years of
continuous operation. This policy does not apply to securities of other
investment companies.
5. Write or sell puts, calls, straddles, spreads or combinations thereof.
6. Invest in direct interests in oil, gas, or other mineral exploration or
development programs or leases, except that the Fund may invest in
securities of companies that invest in, engage in, or sponsor oil, gas
or mineral exploration or development programs or leases.
7. Pledge, mortgage or hypothecate any assets owned by the Fund except as
may be necessary in connection with permissible borrowings or
investments and then such pledging, mortgaging, or hypothecating may
not exceed 33 1/3% of the Fund's total assets at the time of the
borrowing or investment.
8. Purchase or retain the securities of any issuer if, to the knowledge of
the Trust any officer or trustee of the Trust, or one or more of the
officers, directors or partners of NFS beneficially owns more than 1/2
of 1% of the outstanding securities of such issuer and together own
beneficially more than 5% of the securities of such issuer.
9. Invest in the securities of a company for the purpose of exercising
management or control, but the Fund will vote the securities it owns as
a shareholder in accordance with its views.
The Funds may make commitments more restrictive than the restrictions listed
above so as to permit the sale of shares of a particular Fund in certain states.
Should the Fund determine that any such commitment is no longer in the best
interests of the Fund and its shareholders, the Fund will revoke the commitment
by terminating the sale of shares of the Fund in the relevant state. The
percentage limitations contained in the restrictions listed above (other than
with respect to 1. of the fundamental restrictions above) apply at the time of
purchases of securities.
Notwithstanding the foregoing investment restrictions, the Underlying Funds in
which the Funds invest have adopted investment restrictions which may be more or
less restrictive than those listed above, thereby permitting a Fund to engage in
investment strategies indirectly that it would be prohibited to engage in
directly. The investment restrictions of an Underlying Fund are located in its
Statement of Additional Information.
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Pursuant to an exemptive order issued by the SEC (Investment Company Act Release
No. ______) each Fund by (i) purchase more than 3% of the outstanding voting
securities of a Proprietary Fund, (ii) invest more than 5% of its asset in any
one Proprietary Fund and (iii) invest substantially all of its assets in the
Proprietary Funds.
Because of their investment objectives and policies, the Funds will each
concentrate more than 25% of its assets in the mutual fund industry. In
accordance with the Funds' investment policies as set forth in the Prospectus,
each of the Funds may invest more than 25% of its assets in certain Proprietary
Funds. However, each of the Proprietary Funds in which a Fund may invest will
not concentrate more than 25% of its total assets in any one industry.
INSURANCE LAW RESTRICTIONS - In connection with the Trust's agreement to sell
shares to the Accounts, the Adviser and the insurance companies may enter into
agreements, required by certain state insurance departments, under which the
Adviser may agree to use its best efforts to assure and to permit insurance
companies to monitor that each Fund of the Trust complies with the investment
restrictions and limitations prescribed by state insurance laws and regulations
applicable to the investment of separate account assets in shares of mutual
funds. If a Fund failed to comply with such restrictions or limitations, the
Accounts would take appropriate action which might include ceasing to make
investments in the Fund or withdrawing from the state imposing the limitation.
Such restrictions and limitations are not expected to have a significant impact
on the Trust's operations.
MAJOR SHAREHOLDERS
TRUSTEES AND OFFICERS OF THE TRUST
TRUSTEES AND OFFICERS
The principal occupations of the Trustees and Officers during the last five
years and their affiliations are:
*A Trustee who is an "interested person" of the Trust as defined in the
Investment Company Act of 1940.
The Funds do not pay any fees to Officers or to Trustees who are considered
"interested persons" of the Trust. The table below lists the aggregate
compensation paid by the Trust to each disinterested Trustee during the fiscal
year ended ____________, and the aggregate compensation paid to each
disinterested Trustee during the year by all registered investment companies to
which the Adviser provides investment advisory services (the "Nationwide Fund
Complex").
The Trust does not maintain any pension or retirement plans for the Officers
or Trustees of the Trust.
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CALCULATING YIELD AND TOTAL RETURN
The Funds may from time to time advertise historical performance, subject to
Rule 482 under the Securities Act of 1933. An investor should keep in mind that
any return or yield quoted represents past performance and is not a guarantee of
future results. The investment return and principal value of investments will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
All performance advertisements shall include average annual total return
quotations for the most recent one, five, and ten year periods (or life, if a
fund has been in operation less than one of the prescribed periods). Average
annual total return represents the rate required each year for an initial
investment to equal the redeemable value at the end of the quoted period. It is
calculated in a uniform manner by dividing the ending redeemable value of a
hypothetical initial payment of $1,000 for a specified period of time, by the
amount of the initial payment, assuming reinvestment of all dividends and
distributions. The one, five, and ten year periods are calculated based on
periods that end on the last day of the calendar quarter preceding the date on
which an advertisement is submitted for publication.
The Funds may also from time to time advertise a uniformly calculated yield
quotation. This yield is calculated by dividing the net investment income per
share earned during a 30-day base period by the maximum offering price per share
on the last day of the period, assuming reinvestment of all dividends and
distributions. This yield formula uses the average number of shares entitled to
receive dividends, provides for semi-annual compounding of interest, and
includes a modified market value method for determining amortization. The yield
will fluctuate, and there is no assurance that the yield quoted on any given
occasion will remain in effect for any period of time.
INVESTMENT ADVISORY AND OTHER SERVICES
Under the terms of the Investment Advisory Agreement dated _________, 1997, and
subject to the supervision of the Trustees, Nationwide Financial Services, Inc.,
One Nationwide Plaza, Columbus, Ohio 43216, oversees the investment of the
assets of each of the Asset Allocation Funds. NFS, an Ohio corporation, is a
wholly owned subsidiary of Nationwide Life Insurance Company, which is wholly
owned by Nationwide Corporation, a holding company in the Nationwide Insurance
Enterprise.
Subject to the supervision and direction of the Trust's Board of Trustees, NFS
will determine how each Fund's assets will be invested in the Underlying Funds
and the other permissible investments. The trustees of the Trust will
periodically monitor the allocations made and the basis upon which such
allocations were made or maintained. NFS also provides various bookkeeping,
accounting and administrative services, office space and equipment and the
services of the officers and employees of the Funds. Under the Investment
Advisory Agreement, NFS has agreed to bear all expenses of the Asset Allocation
Funds other than the management fee and extraordinary expenses. Each Fund pays
to NFS a monthly fee at the annual rate of 0.50% of the Fund's average daily net
assets.
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The Investment Advisory Agreement also specifically provides that NFS, including
its directors, officers, and employees, shall not be liable for any error of
judgment, or mistake of law, or for any loss arising out of any investment, or
for any act or omission in the execution and management of the Trust, except for
willful misfeasance, bad faith, or gross negligence in the performance of its
duties, or by reason of reckless disregard of its obligations and duties under
the Agreement. The Investment Advisory Agreement will continue in effect only if
its continuance is specifically approved at least annually by the Trustees, or
by vote of a majority of the outstanding voting securities of the Trust, and in
either case, by a majority of the Trustees who are not parties to the Investment
Advisory Agreement or interested persons of any such party. The Investment
Advisory Agreement terminates automatically if it is assigned. It may be
terminated without penalty by vote of a majority of the out standing voting
securities, or by either party, on not more than 60 days nor less than 30 days
written notice. The Investment Advisory Agreement further provides that NFS may
render services to others.
NFS also serves as investment adviser to each of the Proprietary Funds and is
responsible for the selection and management of each of the Proprietary Fund's
assets (NFS is assisted in this task by subadvisers for the Nationwide Small
Company Fund and the Nationwide Income Fund). Each Asset Allocation Fund, as a
shareholder in the Proprietary Funds, will indirectly bear its proportionate
share of any investment management fees and other expenses paid by the
Proprietary Funds.
BROKERAGE ALLOCATIONS
NFS is responsible for decisions to buy and sell securities and other
investments for the Funds and no Fund will pay a sales load to buy the
Underlying Funds; instead the Fund will use quantity discounts or waivers to
avoid paying a sales load. Because the Funds may purchase short-term obligations
as well as Underlying Funds and the Nationwide Contract, it will normally
purchase these short term obligations on a "principal" rather than agency basis.
This may be done through a dealer (e.g. securities firm or bank) who buys or
sells for its own account rather than as an agent for another client, or
directly with the issuer. A dealer's profit, if any, is the difference, or
spread, between the dealer's purchase and sale price for the obligation.
The primary consideration in portfolio security transactions is "best
execution," i.e., execution at the most favorable prices and in the most
effective manner possible. NFS always attempts to achieve best execution, and it
has complete freedom as to the markets in and the broker-dealers through which
it seeks this result. Subject to the requirement of seeking best execution,
securities may be bought from or sold to broker-dealers who have furnished
statistical, research, and other information or services to NFS. In placing
orders with such broker-dealers, NFS will, where possible, take into account the
comparative usefulness of such information. Such information is useful to NFS
even though its dollar value may be indeterminable, and its receipt or
availability generally does not reduce NFS's normal research activities or
expenses.
There may be occasions when portfolio transactions for the Trust are executed
as part of concurrent authorizations to purchase or sell the same security for
trusts or other accounts served by affiliated
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companies of NFS. Although such concurrent authorizations potentially could be
either advantageous or disadvantageous to the Trust, they are effected only when
NFS believes that to do so is in the interest of the Trust. When such concurrent
authorizations occur, the executions will be allocated in an equitable manner.
PURCHASES, REDEMPTIONS AND PRICING OF SHARES
An insurance company purchases shares of the Funds at their net asset value
using purchase payments received on Contracts issued by the Accounts. These
Accounts are funded by shares of the Trust.
All investments in the Trust are credited to the shareholder's account in the
form of full and fractional shares of the designated Fund (rounded to the
nearest 1/1000 of a share). The Trust does not issue share certificates.
The net asset value per share of the Funds is determined once daily, as of the
close of the New York Stock Exchange (currently 4 P.M. eastern time) on each
business day the New York Stock Exchange is open and on such days as the Board
determines and on any other day during which there is a sufficient degree of
trading in each Fund's portfolio securities that the net asset value of the Fund
is materially affected by changes in the value of portfolio securities. The Fund
will not compute net asset value on customary national business holidays,
including the following: Christmas, New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day and Thanksgiving.
The offering price for orders placed before the close of the New York Stock
Exchange, on each business day the Exchange is open for trading, will be based
upon calculation of the net asset value at the close of the Exchange. For orders
placed after the close of the Exchange, or on a day on which the Exchange is not
open for trading, the offering price is based upon net asset value at the close
of the Exchange on the next day thereafter on which the Exchange is open for
trading. The net asset value per share is calculated by adding the value of all
securities and other assets of a Fund, deducting its liabilities, and dividing
by the number of shares outstanding. Shares of the Underlying Funds are valued
as of the last published net asset value for such Underlying Funds. Securities
of the Fund listed on national exchanges are valued at the last sales price on
the principal exchange, or if there is no sale on that day, or if the securities
are traded only in the over-the-counter market, at the quoted bid prices.
Securities and other assets, for which such market prices are unavailable, are
valued at fair value as determined by the Trustees. Short-term notes and bank
certificates of deposit are valued at amortized cost, which approximates market.
An Account redeems shares to make benefit or surrender payments under the terms
of its Contracts. Redemptions are processed on any day on which the Trust is
open for business and are effected at net asset value next determined after the
redemption order, in proper form, is received by the Trust's transfer agent,
NIS.
The Trust may suspend the right of redemption for such periods as are
permitted under the 1940 Act and under the following unusual circumstances: (a)
when the New York Stock Exchange is
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closed (other than weekends and holidays) or trading is restricted; (b) when an
emergency exists, making disposal of portfolio securities or the valuation of
net assets not reasonably practicable; or (c) during any period when the
Securities and Exchange Commission has by order permitted a suspension of
redemption for the protection of shareholders.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES - The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of each
Fund and to divide or combine such shares into a greater or lesser number of
shares without thereby exchanging the proportionate beneficial interests in the
Trust. Each share of a Fund represents an equal proportionate interest in that
Fund with each other share. The Trust reserves the right to create and issue a
number of series or classes of shares. In that case, the shares of each series
or class would participate equally in the earnings, dividends, and assets of the
particular series or class, but shares of all series would vote together in the
election of Trustees. Upon liquidation of a Fund, shareholders are entitled to
share pro rata in the net assets of such Fund available for distribution to
shareholders.
VOTING RIGHTS - Shareholders are entitled to one vote for each share held.
Shareholders may vote in the election of Trustees and on other matters submitted
to meetings of shareholders. No amendment may be made to the Declaration of
Trust without the affirmative vote of a majority of the outstanding shares of
the Trust. The Trustees may, however, amend the Declaration of Trust without the
vote or consent of shareholders to:
- - designate series or classes of the Trust; or
- - change the name of the Trust; or
- - supply any omission, cure, correct, or supplement any ambiguous,
defective, or inconsistent provision to conform the Declaration of
Trust to the requirements of applicable federal laws or regulations if
they deem it necessary.
Shares have no pre-emptive or conversion rights. Shares are fully paid and
nonassessable, except as set forth below. In regard to termination, sale of
assets, or change of investment restrictions, the right to vote is limited to
the holders of shares of the particular Fund affected by the proposal. When a
majority is required, it means the lesser of 67% or more of the shares present
at a meeting when the holders of more than 50% of the outstanding shares are
present or represented by proxy, or more than 50% of the outstanding shares.
SHAREHOLDER INQUIRIES - All inquiries regarding the Trust should be directed
to the Trust at the telephone number or address shown on the cover page of this
Prospectus.
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TAX STATUS
Nationwide Life Insurance Company and Nationwide Life and Annuity Insurance
are the sole shareholders of record of the Trust. Each Fund of the Trust is
treated as a separate entity for purpose of the regulated investment company
provisions of the Internal Revenue Code, and, therefore, the assets, income, and
distributions of each Fund are considered separately for purposes of determining
whether or not the Fund qualifies as a regulated investment company.
Each Fund of the Trust intends to qualify as a "regulated investment company"
under Subchapter M of the Code. If it qualifies as a regulated investment
company, a Fund will pay no federal income taxes on its taxable net investment
income (that is, taxable income other than net realized capital gains) and its
net realized capital gains that are distributed to shareholders. To qualify
under Subchapter M, a Fund must, among other things: (i) distribute to its
shareholders at least 90% of its taxable net investment income (for this purpose
consisting of taxable net investment income and net realized short-term capital
gains); (ii) derive at least 90% of its gross income from dividends, interest,
payments with respect to loans of securities, gains from the sale or other
disposition of securities, or other income (including, but not limited to, gains
from options, futures, and forward contracts) derived with respect to its
business of investing in securities; (iii) derive less than 30% of its annual
gross income from the sale or other disposition of securities, options, futures
or forward contracts held for less than three months; and (iv) diversify its
holdings so that, at the end of each fiscal quarter of the Fund (a) at least 50%
of the market value of the Fund assets is represented by cash, U.S. government
securities, other regulated investment companies and other securities, with
those other securities limited, with respect to any one issuer, to an amount no
greater in value than 5% of the Fund's total assets and to not more than 10% of
the outstanding voting securities of the issuer, and (b) not more than 25% of
the market value of the Fund's assets is invested in the securities of any one
issuer (other than U.S. government securities or securities of other regulated
investment companies) or of two or more issuers that the Fund controls and that
are determined to be in the same or similar trades or businesses or related
trades or businesses. In meeting these requirements, a Fund may be restricted in
the selling of securities held by the Fund for less than three months and in the
utilization of certain of the investment techniques described above and in the
respective Fund's Prospectus. As a regulated investment company, a Fund will be
subject to a 4% non-deductible excise tax measured with respect to certain
undistributed amounts of ordinary income and capital gain required to be but not
distributed under a prescribed formula. The formula requires payment to
shareholders during a calendar year of distributions representing at least 98%
of the Fund's taxable ordinary income for the calendar year and at least 98% of
the excess of its capital gains over capital losses realized during the one-year
period ending October 31 during such year, together with any undistributed,
untaxed amounts of ordinary income and capital gains from the previous calendar
year. The Funds expect to pay the dividends and make the distributions necessary
to avoid the application of this excise tax.
Distributions of an Underlying Fund's investment company taxable income are
taxable as ordinary income to a Fund which invests in the Fund. Distributions of
the excess of an Underlying Fund's net long-term capital gain over its net
short-term capital loss, which are properly designated as "capital gain
dividends," are taxable as long-term capital gain to a Fund which invests in the
Underlying Fund,
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regardless of how long the Fund held the Underlying Fund's shares, and are not
eligible for the corporate dividends-received deduction. Upon the sale or other
disposition by a Fund of shares of any Underlying Fund, the Fund generally will
realize a capital gain or loss which will be long-term or short-term, generally
depending upon the Fund's holding period for the shares.
In addition, each Fund intends to comply with the diversification requirements
of Section 817(h) of the Code related to the tax-deferred status of insurance
company separate accounts. To comply with regulations under Section 817(h) of
the Code, each Fund will be required to diversify its investments so that on the
last day of each calendar quarter no more than 55% of the value of its assets is
represented by any one investment, no more than 70% is represented by any two
investments, no more than 80% is represented by any three investments and no
more than 90% is represented by any four investments. Generally, all securities
of the same issuer are treated as a single investment. For the purposes of
Section 817(h), obligations of the United States Treasury and each U.S.
government instrumentality are treated as securities of separate issuers. The
Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a Contract owner's control of the
investments of a separate account may cause the Contract owner, rather than the
participating insurance company, to be treated as the owner of the assets held
by the separate account. If the Contract owner is considered the owner of the
securities underlying the separate account, income and gains produced by those
securities would be included currently in the Contract owner's gross income. It
is not known what standards will be set forth in such pronouncements or when, if
at all, these pronouncements may be issued. In the event that rules or
regulations are adopted, there can be no assurance that the Funds will be able
to operate as currently described, or that the Trust will not have to change the
investment goal or investment policies of a Fund. The Board reserves the right
to modify the investment policies of a Fund as necessary to prevent any such
prospective rules and regulations from causing a Contract owner to be considered
the owner of the shares of the Fund underlying the separate account.
TAX CONSEQUENCES TO SHAREHOLDERS. Since shareholders of the Funds will be the
Accounts, no discussion is included herein as to the Federal income tax
consequences at the level of the holders of the Policies. For information
concerning the Federal income tax consequences to such holders, see the
Prospectuses for such Policies.
FINANCIAL STATEMENTS
31
<PAGE> 59
APPENDIX A
BOND RATINGS
STANDARD & POOR'S DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of, such
information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
INVESTMENT GRADE
AAA - Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions
32
<PAGE> 60
or changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
SPECULATIVE GRADE
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. 'BB' indicates the least degree of speculation and 'C' the highest.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB - Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B - Debt rated 'B' has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The 'B' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'BB' or 'BB-' rating.
CCC - Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The 'CCC' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
CC - Debt rated 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
C - Debt rated 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI - The rating 'CI' is reserved for income bonds on which no interest is
being paid.
D - Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grade period. The 'D' rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
33
<PAGE> 61
MOODY'S LONG-TERM DEBT RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such Bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
34
<PAGE> 62
FITCH'S BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other obligors,
underwriters, their experts, and other sources Fitch believes to be reliable.
Fitch does not audit or verify the truth or accuracy of such information.
Ratings may be changed, suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely
to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated 'AAA'. Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to
foreseeable future developments, short-term debt of the
issuers is generally rated 'F-1+'.
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate.
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<PAGE> 63
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds,
and therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
('BB' to 'C') represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ('DDD' to 'D') is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories cannot fully reflect the differences
in the degrees of credit risk. Moreover, the character of the risk factor varies
from industry to industry and between corporate, health care and municipal
obligations.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by
adverse economic changes. However, business and financial
alternatives can be identified which could assist the obligor
in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
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<PAGE> 64
DDD, DD Bonds are in default on interest and/or principal
and D payments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in
liquidation or reorganization of the obligor. 'DDD' represents
the highest potential for recovery of these bonds, and 'D'
represents the lowest potential for recovery.
DUFF & PHELPS' LONG-TERM DEBT RATINGS
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and expertise.
The projected viability of the obligor at the trough of the cycle is a critical
determination.
Each rating also takes into account the legal form of the security, (e.g.,
first mortgage bonds, subordinated debt, preferred stock, etc.). The extent of
rating dispersion among the various classes of securities is determined by
several factors including relative weightings of the different security classes
in the capital structure, the overall credit strength of the issuer, and the
nature of covenant protection. Review of indenture restrictions is important to
the analysis of a company's operating and financial constraints.
The Credit Rating Committee formally reviews all ratings once per quarter
(more frequently, if necessary). Ratings of 'BBB-' and higher fall within the
definition of investment grade securities, as defined by bank and insurance
supervisory authorities.
RATING
SCALE DEFINITION
- ----------------------------------------------------------------------------
AAA Highest credit quality. The risk factors are
negligible, being only slightly more than for
risk-free U.S. Treasury debt.
- ----------------------------------------------------------------------------
AA+ High credit quality. Protection factors are
AA strong. Risk is modest, but may vary slightly
AA- from time to time because of economic conditions.
- ----------------------------------------------------------------------------
A+ Protection factors are average but adequate.
A However, risk factors are more variable and
A- greater in periods of economic stress.
- ---------------------------------------------------------------------------
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<PAGE> 65
BBB+ Below average protection factors but still
BBB considered sufficient for prudent investment.
BBB- Considerable variability in risk during economic
cycles.
- ---------------------------------------------------------------------------
BB+ Below investment grade but deemed likely to meet
BB obligations when due. Present or prospective
BB- financial protection factors fluctuate according
to industry conditions or company fortunes. Overall
quality may move up or down frequently within this
category.
- ---------------------------------------------------------------------------
B+ Below investment grade and possessing risk that
B obligations will not be met when due. Financial
B- protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in
the rating within this category or into a higher or
lower rating grade.
- ---------------------------------------------------------------------------
CCC Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal,
interest or preferred dividends. Protection factors
are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with
unfavorable company developments.
- ---------------------------------------------------------------------------
DD Defaulted debt obligations. Issuer failed to meet
scheduled principal and/or interest payments.
DP Preferred stock with dividend arrearages.
- ---------------------------------------------------------------------------
SHORT-TERM RATINGS
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. Factors such as liquidity of the issuer,
38
<PAGE> 66
long-term debt ratings, reliability and quality of management, and earning and
cost flows are considered by Standard & Poor's when assigning these ratings.
Ratings are graded into several categories, ranging from 'A-1' for the highest
quality obligations to 'D' for the lowest. These categories are as follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with doubtful
capacity for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grade period.
MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representation as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the 1933 Act.
Moody's commercial paper ratings are opinions on the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's does not represent that any specific note is a
valid obligation of a rated issuer or issued in conformity with any applicable
law. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
(i) leading market positions in well established industries, (ii) high rates of
return on funds employed, (iii) conservative capitalization structures with
moderate
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<PAGE> 67
reliance on debt and ample asset protection, (iv) broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and (v)
well established access to a range of financial markets and assured sources of
alternative liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Issuers rated PRIME-3 (or relates supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+ (Exceptionally Strong Credit Quality) Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 (Very Strong Credit Quality) Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated 'F-1+'.
F-2 (Good Credit Quality) Issues assigned this rating have a
satisfactory degree of assurance for timely payment but the
margin of safety is not as great as for issues assigned 'F-1+'
and 'F-1' ratings.
F-3 (Fair Credit Quality) Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate, however, near-term adverse changes
could cause these securities to be rated below investment
grade.
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F-S (Weak Credit Quality) Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D (Default) Issues assigned this rating are in actual or
imminent payment default.
LOC The symbol LOC indicates that the rating is based on a letter
of credit issued by a commercial bank.
DUFF & PHELPS SHORT-TERM DEBT RATINGS
Duff & Phelps' short-term ratings are consistent with the rating criteria
utilized by money market participants. The ratings apply to all obligations with
maturities under one year, including commercial paper, the uninsured portion of
certificates of deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit, and current maturities of long-term
debt. Asset-backed commercial paper is also rated according to this scale.
Emphasis is placed on liquidity which as defined is not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
<TABLE>
<CAPTION>
Rating Scale Definition
------------ ----------
<S> <C> <C>
Duff 1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds,
is outstanding, and safety is just below risk-free U.S. Treasury short-
term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors
are minor.
Duff 1- High certainty of timely payment.
Liquidity factors are strong and supported
by good fundamental protection factors. Risk
factors are very small.
Good Grade
----------
Duff 2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good.
Risk factors are small.
</TABLE>
41
<PAGE> 69
<TABLE>
<CAPTION>
Satisfactory Grade
------------------
<S> <C> <C>
Duff 3 Satisfactory liquidity and other protection factors qualify issue as to
investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
Non-investment Grade
Duff 4 Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market
access may be subject to a high degree of variation.
Default
Duff 5 Issuer failed to meet scheduled principal and/or interest payments.
</TABLE>
THOMSON'S SHORT-TERM RATINGS
The Thomson Short-Term Ratings apply, unless otherwise noted, to
unsubordinated instruments of the rated entities with a maturity of one year or
less, including deposits, bank notes, bankers' acceptances, federal funds,
letters of credit, commercial paper and other obligations comparable in priority
and security to those specifically listed herein. These ratings do not consider
any collateral or security as the basis for the rating, although some of the
securities may in fact have collateral. Further, these ratings do not
incorporate consideration of the possible sovereign risk associated with a
foreign deposit (defined as a deposit taken in a branch outside the country in
which the rated entity is headquartered) of the rated entity. Thomson Short-Term
Ratings are intended to assess the likelihood of an untimely or incomplete
payments of principal or interest.
TBW-1 The highest category, indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2 The second highest category, while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW- 1".
TBW-3 The lowest investment-grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
TBW-4 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
42
<PAGE> 70
IBCA SHORT-TERM RATINGS
IBCA Short-Term Ratings assess the borrowing characteristics of banks and
corporations, and the capacity for timely repayment of debt obligations. The
Short-Term Ratings relate to debt which has a maturity of less than one year.
IBCA issues ratings and reports on the largest U.S. and international bank
holding companies, as well as major investment banks. IBCA's short-term rating
system utilizes a dual system--Individual Ratings and Legal Ratings. The
Individual Rating addresses 1) the current strength of consolidated banking
companies and their principal bank subsidiaries. A consolidated bank holding
company/bank with an "A" rating has a strong balance sheet, and a favorable
credit profile without significant problems. A "B" rating indicates sound credit
profile without significant problems. Performance is generally in line with or
better than that of its peers. The Legal Rating addresses the question of
whether an institution would receive support if it ran into difficulties. Issues
rated "A-1" are obligations supported by a very strong capacity for timely
repayment. Issues rated "A-2" have a very strong capacity for timely repayment
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
A1+ Obligations supported by the highest capacity for timely repayment
and possess a particularly strong credit feature.
A1 Obligations supported by the highest capacity for timely
repayment.
A2 Obligations supported by a good capacity for timely repayment.
A3 Obligations supported by a satisfactory capacity for timely
repayment.
B Obligations for which there is an uncertainty as to the capacity
to ensure timely repayment.
C Obligations for which there is a high risk of default or which are
currently in default.
D Obligations which are currently in default.
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<PAGE> 71
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENT AND EXHIBITS
(a) Financial Statements (To be filed by pre-effective amendment)
Report of Independent Certified Public Accountants
Statements of Assets and Liabilities
Notes to Statements of Assets and Liabilities
(b) Exhibits (to be filed by pre-effective amendment, except where
indicated otherwise below):
(1) Amended Declaration of Trust dated September 3, 1996 -
attached hereto
(2) Amended Bylaws (Code of Regulations)
(3) Not applicable.
(4) Not applicable.
(5) Investment Advisory Agreement
(6) Not applicable.
(7) Not applicable.
(8) Custody Agreement
(9) Not applicable.
(10) Opinion and consent of counsel
(11) Auditors' Consent
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) Not applicable.
(16) Not applicable.
(17) Financial Data Schedules
(18) Not applicable.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
No person is presently controlled by or under common
control with Registrant.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
Number of Record Holders
Title of Class as of August 30, 1996
- --------------------------------------------------------------------------------
Asset Allocation: Aggressive Fund 0
Asset Allocation: Moderately Aggressive Fund 0
Asset Allocation: Moderate Fund 0
Asset Allocation: Moderately Conservative Fund 0
Asset Allocation: Conservative Fund 0
ITEM 27. INDEMNIFICATION
Limitation of Liability and Indemnification provisions for trustees,
shareholders, officers, employees and agents of Registrant are set
forth in Article V, Sections 5.1 through 5.3 of the Declaration of
Trust. No shareholder shall be subject to any personal liability
whatsoever to any person in connection with trust property or the
acts, obligations or affairs of the Trust. No trustee, officer,
employee or agent of the Trust shall be subject to any personal
liability whatsoever to any person other than the Trust or its
shareholders, in connection with trust property or the affairs of the
Trust, except that arising from bad faith, willful misfeasance, gross
negligence or reckless disregard for his duty to such person; and all
such persons shall look solely to the trust property for satisfaction
of claims of any nature arising in connection with the affairs of the
Trust. If any shareholder, trustee, officer, employee or agent, as
such,
C-1
<PAGE> 72
of the Trust is made a party to any suit or proceeding to enforce any
such liability, he shall not, on account thereof, be held to any
personal liability. The Trust shall indemnify and hold each
shareholder harmless from and against all claims and liabilities, to
which such shareholder may become subject by reason of his being or
having been a shareholder, and shall reimburse such shareholder for
all legal and other expenses reasonably incurred by him in connection
with any such claim or liability. The rights accruing to a
shareholder under Section 5.1 of the Declaration of Trust shall not
exclude any other right to which such shareholder may be lawfully
entitled, nor shall anything herein contained restrict the right of
the Trust to indemnify or reimburse a shareholder in any appropriate
situation even though not specifically provided herein.
No trustee, officer, employee or agent of the Trust shall be liable
to the Trust, its shareholders, or to any shareholder, trustee,
officer, employee or agent thereof for any action or failure to act
(including without limitation the failure to compel in any way any
former or acting trustee to redress any breach of trust) except for
his own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties.
Mandatory Indemnification
(a) Subject to the exceptions and limitations contained in
paragraph (b) below:
(i) Every person who is or has been a trustee or officer
of the Trust shall be indemnified by the Trust
against all liability and against all expenses
reasonably incurred or paid by him in connection
with any claim, action, suit or proceeding in which
he becomes involved as a party or otherwise by
virtue of his being or having been a trustee or
officer and against amounts paid or incurred by him
in the settlement thereof:
(ii) the words "claim", "action", "suit" or "proceeding"
shall apply to all claims, actions suits or
proceedings (civil, criminal, or other, including
appeals), actual or threatened; and the words
"liability" and "expenses" shall include, without
limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and
other liabilities.
(b) No indemnification shall be provided hereunder to a trustee
or officer:
(i) against any liability to the Trust or the
shareholders by reason of a final adjudication by
the court or other body before which the proceeding
was brought that he engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office;
(ii) with respect to any matter as to which he shall have
been finally adjudicated not to have acted in good
faith in the reasonable belief that his action was
in the best interest of the Trust:
(iii) in the event of a settlement or other disposition
not involving a final adjudication as provided in
paragraphs (b) (i) or (b) (ii) resulting in a
payment by a trustee or officer, unless there has
been either a determination that such trustee or
officer did not engage in willful misfeasance, bad
faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office by the
court or other body approving the settlement or
other disposition or a reasonable determination,
based upon a review of readily available facts (as
opposed to a full trial-type inquiry) that he did
not engage in such conduct:
(A) by vote of a majority of the Disinterested
Trustees acting on the matter (provided that a
majority of the Disinterested Trustees then in
office act on the matter): or
(B) by written opinion of independent legal counsel.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be
severable, shall not affect any other rights to which any
trustee or officer may now or hereafter be entitled, shall
continue as to a person who has ceased to be such trustee or
officer and shall inure to the benefit of the heirs,
executors and administrators of such person. Nothing
contained herein shall affect any rights to
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indemnification to which personnel other than trustees and
officers may be entitled by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any
claim, action, suit or proceeding of the character described
in paragraph (a) of Section 5.3 of the Declaration of Trust
shall be advanced by the Trust prior to final disposition
thereof upon receipt of an undertaking by or on behalf of the
recipient to repay such amount if it is ultimately determined
that he is not entitled to indemnification under Section 5.3
of the Declaration of Trust, provided that either:
(i) such undertaking is secured by a surety bond
or some other appropriate security or the
Trust shall be insured against losses
arising out of any such advances; or
(ii) a majority of the Disinterested Trustees
acting on the matter (provided that a
majority of the Disinterested Trustees then
in office act on the matter) or an
independent legal counsel in a written
opinion, shall determine, based upon a
review of readily available facts (as
opposed to a full trial-type inquiry), that
there is reason to believe that the
recipient ultimately will be found entitled
to indemnification.
As used in Section 5.3 of the Declaration of Trust, a "Disinterested
Trustee" is one (i) who is not an "Interested Person" of the Trust
(including anyone who has been exempted from being an "Interested
Person" by any rule, regulation or order of the Commission), and (ii)
against whom none of such actions, suits or other proceedings or
another action, suit or other proceeding on the same or similar
grounds is then or had been pending. See Exhibit 1 above, whose terms
and conditions as summarized herein are hereby incorporated by
reference.
Limitation of Liability provisions for the Investment Adviser are set
forth in paragraph 7 of the Investment Advisory Agreement. In the
absence of willful misfeasance, bad faith or gross negligence on the
part of the Investment Adviser, or a reckless disregard of its
duties, the Investment Adviser shall not be subject to any liability
to the Trust, for any act or omission in the case of, or connected
with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of fund assets; provided,
however, that nothing herein shall relieve the Investment Adviser
from any of its obligations under applicable law, including, without
limitation, the federal and state securities laws. In addition, in no
case shall the Investment Adviser be liable for actions taken or not
taken by it in accordance with specified information, instructions or
requests given or made to the Investment Adviser by an officer or
trustee of the Trust. See Exhibit 3, whose terms and conditions as
summarized herein are hereby incorporated by reference.
Registrant undertakes that it will comply with the indemnification
provisions of its Declaration of Trust, Investment Advisory
Agreement, and any other agreement to which the Registrant is a party
containing indemnification provisions in accordance with the
provisions of Investment Company Act of 1940 release No. 11330, as
modified from time to time.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the Registrant's Bylaws, or
otherwise, the 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 a claim for indemnification against such
liabilities (other that the payment by the Registrant of expenses
incurred or paid by a trustee, officer or controlling person of the
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, the
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 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.
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ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Nationwide Financial Services, Inc. (NFS), the investment
adviser of the Trust, also serves as investment adviser to the
Nationwide Investing Foundation, Nationwide Investing Foundation
II, Nationwide Separate Account Trust and Financial Horizons
Investment Trust, and serves as general distributor to the
Nationwide Multi-Flex Variable Account, Nationwide Variable
Account-II, Nationwide Variable Account-5, Nationwide Variable
Account-8, Nationwide DC Variable Account, Nationwide VA
Separate Account-A, NACo Variable Account, Nationwide VLI
Separate Account-2, Nationwide VLI Separate Account-3,
Nationwide VL Separate Account-A, Nationwide VA Separate
Account-B and Nationwide Variable Account, separate accounts of
Nationwide Life Insurance Company, or its subsidiary Nationwide
Life and Annuity Insurance Company, registered as unit
investment trusts under the Investment Company Act of 1940.
Joseph J. Gasper President, Chief Operating Officer and
Director
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance
Company
President and Director
Nationwide Financial Services, Inc.
Nationwide Investors Services, Inc.
Vice Chairman and Director
Nationwide Financial Institution
Distributors Agency, Inc.
NEA Valuebuilder Investor Services, Inc.
Public Employees Benefit Services
Corporation
Colonial County Mutual Insurance Company
Lone Star General Agency, Inc.
Director
Affiliate Agency, Inc.
Affiliate Agency of Ohio, Inc.
Financial Horizons Distributors Agency of
Alabama, Inc.
Financial Horizons Distributors Agency of
Ohio, Inc.
Financial Horizons Distributors Agency of
Oklahoma, Inc.
Financial Horizons Securities Corporation
Gates, McDonald and Company
Nationwide HMO, Inc.
Nationwide Management Systems, Inc.
Landmark Financial Services of New York,
Inc.
Nationwide Agency, Inc.
Nationwide Indemnity Corporation
Nationwide Property Management, Inc.
Public Employees Benefit Services
Corporation of New Mexico
PEBSCO of Massachusetts Insurance Agency,
Inc.
Public Employees Benefit Services
Corporation of Arkansas
Public Employees Benefit Services
Corporation of Alabama
Chairman of the Board and Director
West Coast Life Insurance Company
Colonial Insurance Company of California
Nationwide Investment Services Corporation
President and Trustee
Nationwide Insurance Golf Charities, Inc.
Gordon E. McCutchan Executive Vice President-Law and Corporate
Services and Secretary
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide Life Insurance Company
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Nationwide General Insurance Company
Nationwide Property and Casualty Insurance
Company
Nationwide Life and Annuity Insurance
Company
NEA Valuebuilder Investor Services, Inc.
NEA Valuebuilder Investor Services of
Arizona, Inc.
Nationwide Financial Institution
Distributors Agency, Inc.
Colonial County Mutual Insurance Company
Colonial Insurance Company of California
Farmland Mutual Insurance Company
Nationwide Agribusiness Insurance Company
Lone Star General Agency, Inc.
Nationwide Communications Inc.
Nationwide Corporation
Nationwide Investment Services Corporation
Scottsdale Indemnity Company
Scottsdale Insurance Company
Wausau Service Corporation
Wausau Business Insurance Company
Wausau General Insurance Company
West Coast Life Insurance Company
Nationwide Insurance Enterprise Foundation
National Premium and Benefit Administration
Company
Employers Insurance of Wausau A Mutual
Company
Wausau Underwriters Insurance Company
Executive Vice President-Law and Corporate
Services
American Marine Underwriters, Inc.
Employers Life Insurance Company of Wausau
Pension Associations of Wausau, Inc.
Public Employees Benefit Services
Corporation
Wausau International Underwriters
Wausau Preferred Health Insurance Company
Companies Agency, Inc.
Companies Agency of Alabama, Inc.
Companies Agency Insurance Services of
California
Companies Agency of Idaho, Inc.
Companies Agency of Illinois, Inc.
Companies Agency of Kentucky, Inc.
Companies Agency of Massachusetts, Inc.
Companies Agency of New York, Inc.
Companies Agency of Pennsylvania, Inc.
Companies Agency of Phoenix, Inc.
Countrywide Services Corporation
Nationwide Development Company
Executive Vice President-Law and Corporate
Services and Director
Nationwide Financial Services, Inc.
Nationwide Investor Services, Inc.
Nationwide Property Management Inc.
Executive Vice President-Law and Corporate
Services, Secretary and Director
California Cash Management Company
National Casualty Company
Nationwide Cash Management Company
Nationwide Indemnity Company
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<TABLE>
<S> <C>
Nationwide Community Urban Redevelopment
Corporation
Vice Chairman and Director
Neckura Insurance Company
Neckura Life Insurance Company
Neckura Holding Company
Secretary
The Beak and Wire Corporation
Affiliate Agency, Inc.
Affiliate Agency of Ohio, Inc.
Financial Horizons Distributors Agency of Alabama, Inc.
Financial Horizons Distributors Agency of Ohio, Inc.
Financial Horizons Distributors Agency of Oklahoma, Inc.
Financial Horizons Securities Corporation
Landmark Financial Services of New York, Inc.
NEA Valuebuilder Investor Services of Alabama, Inc.
NEA Valuebuilder Investor Services of Montana, Inc.
NEA Valuebuilder Investor Services of Nevada, Inc.
NEA Valuebuilder Investor Services of Ohio, Inc.
NEA Valuebuilder Investor Services of Oklahoma, Inc.
NEA Valuebuilder Investor Services of Wyoming, Inc.
Vice Chairman, Secretary and Director
Gates, McDonald & Company
Chairman of the Board. Secretary and
Director
Gates, McDonald & Company of Nevada
Gates, McDonald & Company of New York, Inc.
Secretary and Director
Nationwide Agency, Inc.
Nationwide HMO, Inc.
Nationwide Management Systems, Inc.
Director and Chairman of the Board
Peoples Travel Services, Inc.
Director
Leben Direkt Insurance Company
MRM Investments, Inc.
NWE, Inc.
Clerk
NEA Valuebuilder Services Insurance Agency, Inc.
Trustee
Ohio Tuition Trust Authority
Franklin University
D. Richard McFerson Chairman and Chief Executive Officer-Nationwide Insurance
Enterprise and Director
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
Colonial Insurance Company of California
Scottsdale Insurance Company
Scottsdale Indemnity Company
West Coast Life Insurance Company
Nationwide Communications Inc.
</TABLE>
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<TABLE>
<S> <C>
Nationwide Corporation
Nationwide Development Company
Farmland Mutual Insurance Company
Nationwide Investment Services Corporation
Nationwide Agribusiness Insurance Company
National Casualty Company
California Cash Management Company
Wausau Service Corporation
Wausau General Insurance Company
Wausau Business Insurance Company
Wausau Underwriters Insurance Company
Employers Insurance of Wausau A Mutual Company
Chairman, Chairman and Chief Executive Officer-
Nationwide Insurance Enterprise and Director
American Marine Underwriters, Inc.
Companies Agency, Inc.
Companies Agency of Alabama, Inc.
Companies Agency Insurance Services of California
Companies Agency of Idaho, Inc.
Companies Agency of Illinois, Inc.
Companies Agency of Kentucky, Inc.
Companies Agency of Massachusetts, Inc.
Companies Agency of New York, Inc.
Companies Agency of Pennsylvania, Inc.
Companies Agency of Phoenix, Inc.
Employers Insurance of Wausau A Mutual Company
Countrywide Services Corporation
Public Employees Benefit Services Corporation
Gates, McDonald and Company
Nationwide Financial Services, Inc.
Nationwide Investors Services, Inc.
Employers Life Insurance Company of Wausau
Wausau International Underwriters
Wausau Preferred Health Insurance Company
Nationwide Financial Institution Distributors Agency, Inc.
Chairman and Director
NEA Valuebuilder Investor Services, Inc.
NEA Valuebuilder Services of Arizona, Inc.
Chairman and Chief Executive Officer and Director
Nationwide Indemnity Company
Chairman and Trustee
Financial Horizons Investment Trust
Nationwide Investing Foundation
Nationwide Separate Account Trust
Chairman of the Board
Nationwide Insurance Golf Charities, Inc.
Lone Star General Agency, Inc.
Nationwide Community Urban Redevelopment Corporation
Colonial County Mutual Insurance Company
Nationwide Property Management, Inc.
Director
Gates, McDonald & Company of Nevada
</TABLE>
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<TABLE>
<S> <C>
Gates, McDonald & Company of New York
Chairman of the Board. Chairman and Chief
Executive
Officer-Nationwide Insurance Enterprise and Trustee
Nationwide Insurance Enterprise Foundation
Robert A. Oakley Executive President-Chief Financial Officer
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
American Marine Underwriters, Inc.
Companies Agency, Inc.
Companies Agency of Alabama, Inc.
Companies Agency of Idaho, Inc.
Companies Agency of Illinois, Inc.
Companies Agency of Kentucky, Inc.
Companies Agency of Massachusetts, Inc.
Companies Agency of New York, Inc.
Companies Agency of Pennsylvania, Inc.
Companies Agency of Phoenix, Inc.
Countrywide Services Corporation
Employers Life Insurance Company of Wausau
National Casualty Company
National Premium and Benefit Administration Company
The Beak and Wire Corporation
Colonial Insurance Company of California
Employers Insurance of Wausau A Mutual
Company
Farmland Mutual Insurance Company
NEA Valuebuilder Investor Services of Arizona, Inc.
Nationwide Financial Institution Distributors Agency, Inc.
Lone Star General Agency, Inc.
Nationwide Agribusiness Insurance Company
Nationwide Communications Inc.
Nationwide Corporation
Nationwide Development Company
Nationwide Investor Services, Inc.
Nationwide Insurance Enterprise Foundation
NEA Valuebuilder Investor Services, Inc.
Colonial County Mutual Insurance Company
Nationwide Investment Services Corporation
Public Employees Benefit Services Corporation
Scottsdale Indemnity Company
Scottsdale Insurance Company
Wausau Business Insurance Company
Wausau General Insurance Company
Wausau Preferred Health Insurance Company
Wausau Service Corporation
Wausau Underwriters Insurance Company
West Coast Life Insurance Company
Executive Vice President-Chief Financial Officer and Director
California Cash Management Company
</TABLE>
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<TABLE>
<S> <C>
Nationwide Cash Management Company
Nationwide Community Urban Redevelopment
Corporation
Nationwide Indemnity Company
Nationwide Financial Services, Inc.
Nationwide Property Management Inc.
MRM Investments, Inc.
Executive Vice President
Companies Agency Insurance Services of
California
Wausau International Underwriters
Director
Peoples Travel Services, Inc.
Wausau Insurance Company (U.K.) Limited
NWE, Inc.
Director and Vice Chairman
Leben Direkt Insurance Company
Auto Direkt Insurance Company
Chairman and Director
Neckura Insurance Company
Neckura Life Insurance Company
Neckura Holding Company
Robert J. Woodward, Jr. Executive Vice President-Chief Investment Officer
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
Nationwide Life and
Annuity Insurance Company
Colonial Country Mutual Insurance Company
Colonial Insurance Company of California
Employers Insurance of Wausau A Mutual Company
Employers Life Insurance Company of Wausau
Farmland Mutual Insurance Company
Gates, McDonald & Company
Lone Star General Agency, Inc.
Nationwide Investment Services Corporation
Public Employees Benefit Services Corporation
Pension Associates of Wausau
Nationwide Agribusiness Insurance Company
Nationwide Corporation
Nationwide Insurance Enterprise Foundation
Scottsdale Indemnity Company
Scottsdale Insurance Company
Wausau Business Insurance Company
Wausau General Insurance Company
Wausau Preferred Health Insurance Company
Wausau Service Corporation
Wausau Underwriters Insurance Company
West Coast Life Insurance Company
Vice Chairman and Director Nationwide
Communications, Inc.
Executive Vice-President-Chief Investment Officer
and Director
</TABLE>
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<PAGE> 80
<TABLE>
<S> <C>
Nationwide Financial Services, Inc.
Nationwide Indemnity Company
Director and President
Nationwide Property Management, Inc.
Nationwide Development Company
Nationwide Community Urban Redevelopment Corporation
MRM Investments, Inc.
NWE, Inc.
California Cash Management Company
Nationwide Cash Management Company
Director and Vice Chairman
The Palmer-Donavin Manufacturing Company
Trustee
Franklin County Board of Mental Retardation and
Development Disabilities
Capital University
The I-670 Corridor Development Corporation
James F. Laird, Jr. Vice President and General Manager
Nationwide Financial Services, Inc.
Vice President , General Manager and Director
Nationwide Investors Services, Inc.
Treasurer
Nationwide Investing Foundation
Nationwide Separate Account Trust
Nationwide Investing Foundation II
Assistant Treasurer
Financial Horizons Investment Trust.
Harry A. Schermer Vice President-Equity Securities
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
Nationwide Indemnity Company
Vice President-Investments
Nationwide Financial Services, Inc.
Vice President
Nationwide Insurance Enterprise Foundation
Assistant Treasurer
Financial Horizons Investment Trust
Nationwide Separate Account Trust
Nationwide Investing Foundation
Nationwide Investing Foundation II
W. Sidney Druen Senior Vice President and General Counsel and
Assistant Secretary
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
</TABLE>
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<TABLE>
<S> <C>
Nationwide Life and Annuity Insurance Company
Nationwide Financial Services, Inc.
Nationwide Investors Services, Inc.
Employers Insurance of Wausau A Mutual Company
Employers Life Insurance Company of Wausau
Wausau Business Insurance Company
Wausau General Insurance Company
Wausau Underwriters Insurance Company
Wausau Preferred Health Insurance Company
Wausau Service Corporation
Senior Vice President and General Counsel
Affiliate Agency, Inc.
Affiliate Agency of Ohio, Inc.
American Marine Underwriters, Inc.
The Beak and Wire Corporation
California Cash Management Company
Colonial County Mutual Insurance Company
Colonial Insurance Company of California
Farmland Mutual Insurance Company
Nationwide Agribusiness Insurance Company
Nationwide Financial Institution Distributors Agency, Inc.
Financial Horizons Distributors Agency of Alabama, Inc.
Financial Horizons Distributors Agency of Ohio, Inc.
Financial Horizons Distributors Agency of Oklahoma, Inc.
Financial Horizons Securities Corporation
Gates, McDonald & Company
Gates, McDonald & Company of Nevada
Gates, McDonald & Company of New York, Inc.
Landmark Financial Services of New York, Inc.
National Casualty Company
Nationwide Cash Management Company
Nationwide Communications Inc.
Nationwide Corporation Companies Agency, Inc.
Companies Agency Insurance Services of California
Companies Agency of Alabama, Inc.
Companies Agency of Idaho, Inc.
Companies Agency of Illinois, Inc.
Companies Agency of Kentucky, Inc.
Companies Agency of Massachusetts, Inc.
Companies Agency of New York, Inc.
Companies Agency of Pennsylvania, Inc.
Companies Agency of Phoenix, Inc.
Countrywide Services Corporation
Lone Star General Agency Inc.
Nationwide Development Company
Nationwide Insurance Enterprise Foundation
Nationwide Indemnity Company
NEA Valuebuilder Investor Services, Inc.
Wausau International Underwriters
NEA Valuebuilder Investor Services of Arizona, Inc.
NEA Valuebuilder Services Insurance Agency, Inc.
NEA Valuebuilder Investor Services of Alabama, Inc.
NEA Valuebuilder Investor Services of Ohio, Inc.
</TABLE>
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<TABLE>
<S> <C>
NEA Valuebuilder Investor Services of Oklahoma, Inc.
NEA Valuebuilder Investor Services of Montana, Inc.
NEA Valuebuilder Investor Services of Nevada, Inc.
NEA Valuebuilder Investor Services of Wyoming, Inc.
MRM Investments Services, Inc.
NWE, Inc.
Nationwide Property Management, Inc.
PEBSCO of Massachusetts Insurance Agency, Inc.
Nationwide Investment Services Corporation
Pension Associates of Wausau, Inc.
Public Employees Benefit Services Corporation
Public Employees Benefit Services Corporation of Alabama
Public Employees Benefit Services Corporation of Arkansas
Public Employees Benefit Services Corporation of Montana
Public Employees Benefit Services Corporation of New Mexico
Scottsdale Indemnity Company
Scottsdale Insurance Company
West Coast Life Insurance Company
Senior Vice President and General
Counsel and Director
Nationwide Community Urban Redevelopment Corporation
General Counsel
Nationwide Insurance Golf Charities, Inc.
William G. Goslee Treasurer
Nationwide Financial Services, Inc.
Nationwide Investors Services, Inc.
Assistant Treasurer
Nationwide Investing Foundation
Nationwide Separate Account Trust
Nationwide Investing Foundation II
Financial Horizons Investment Trust
Rae I. Mercer Secretary
Nationwide Financial Services, Inc.
Nationwide Investors Services, Inc.
Nationwide Investing Foundation
Nationwide Separate Account Trust
Nationwide Investing Foundation II
Financial Horizons Investment Trust
Peter J. Neckermann Vice President - Economic and Investment Services
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
Nationwide Indemnity Company
Vice President
Nationwide Financial Services, Inc.
Director
Nationwide Investors Services, Inc.
Leben Direkt Insurance Company
Neckura Holding Company
</TABLE>
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<TABLE>
<S> <C>
Assistant Secretary
West Coast Life Insurance Company
Assistant Treasurer
Financial Horizons Investment Trust
National Casualty Company
National Premium and Benefit Administration Company
Nationwide Investing Foundation
Nationwide Investing Foundation II
Nationwide Separate Account Trust
</TABLE>
Except as otherwise noted, the principal business address of any
company with which any person specified above is connected in the
capacity of director, officer, employee, partner or trustee is One
Nationwide Plaza, Columbus, Ohio 43215, except for the following
companies:
Farmland Mutual Insurance Company
Farmland Life Insurance Company
Nationwide Agribusiness Insurance Company
1963 Bell Avenue
Des Moines, Iowa 50315-1000
Colonial Insurance Company of California
2390 East Orangewood Avenue
P.O. Box 4347
Anaheim, California 92803-1347
Employers Insurance of Wausau A Mutual Company
2000 Westwood Drive
Wausau, Wisconsin 54401-7881
Scottsdale Insurance Company
8877 Nord Gainey Center Drive
P.O. Box 4110
Scottsdale, Arizona 85261-4110
West Coast Life Insurance Company
343 Sansome Street
San Francisco, California 94104-1303
National Casualty Company
8877 North Gainey Center Drive
P.O. Box 4110
Scottsdale, Arizona 85261-4110
Lone Star General Agency, Inc.
P.O. Box 14700
Austin, Texas 78761
Auto Direkt Insurance Company
Columbus Service, GMBH
Neckura General Insurance Company
Neckura Holding Company
Neckura Insurance Company
Neckura Life
SVM Sales GMBH, Neckura Group
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<PAGE> 84
John E. Fisher Str. 1
61440 Oberursel/Ts.
Germany
Public Employees Benefit Services Corporation
Two Nationwide Plaza
Columbus, Ohio 43215
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
William G. Goslee
Nationwide Financial Services, Inc.
One Nationwide Plaza
Columbus, OH 43216
ITEM 31. MANAGEMENT SERVICES
All management-related service contracts entered into by Registrant are
discussed in parts A and B of this Registration Statement.
ITEM 32. UNDERTAKINGS
The Trust undertakes to file a post-effective amendment, using
financial statements which need not be certified, within four to six
months of the effective date of the Registrant's Registration
Statement.
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<PAGE> 85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Columbus, and State of Ohio, on this 11th day of September, 1996.
NATIONWIDE ASSET ALLOCATION TRUST
By: /s/ Elizabeth A. Davin
----------------------------------------
Elizabeth A. Davin, Trustee
PURSUANT TO THE REQUIREMENT OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES
INDICATED ON THE 11TH DAY OF SEPTEMBER, 1996.
Signature & Title
- -----------------
Elizabeth A. Davin
- ---------------------------------------
Elizabeth A. Davin, Trustee & President
James F. Laird, Jr.
- ---------------------------------------
James F. Laird, Jr., Treasurer
<PAGE> 1
EXHIBIT 1
NATIONWIDE ASSET ALLOCATION TRUST
-----------------------------------------
DECLARATION OF TRUST
(AS ADOPTED SEPTEMBER 3, 1996)
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
ARTICLE I - Name and Definitions 1
--------------------
Section 1.1. Name
Section 1.2. Definitions
ARTICLE II - Trustees 2
--------
Section 2.1. Number of Trustees
Section 2.2. Election and Term
Section 2.3. Resignation and Removal
Section 2.4. Vacancies
Section 2.5. Delegation of Power to Other Trustees
ARTICLE III - Powers of Trustees 4
------------------
Section 3.1. General
Section 3.2. Investments
Section 3.3 Legal Title
Section 3.4. Issuance and Repurchase of Securities
Section 3.5. Borrowing Money; Lending Trust Assets
Section 3.6. Delegation; Committees
Section 3.7. Collection and Payment
Section 3.8. Expenses
Section 3.9. Manner of Acting; Bylaws
Section 3.10. Miscellaneous Powers
Section 3.11. Principal Transactions
Section 3.12. Trustees and Officers as Shareholders
Section 3.13. Litigation
ARTICLE IV - Investment Advisor, Distributor,
-------------------------------
Administrator and Transfer Agent
-------------------------------- 8
Section 4.1. Investment Advisor
Section 4.2. Distributor
Section 4.3 Administrator
Section 4.4. Transfer Agent
Section 4.5. Parties to Contract
Section 4.6. Compliance with 1940 Act
ARTICLE V - Limitations of Liability of Shareholders,
----------------------------------------
Trustees and Others
------------------- 10
Section 5.1. No Personal Liability of Shareholders, Trustees, etc.
Section 5.2. Non-Liability of Trustees, etc.
Section 5.3. Mandatory Indemnification
Section 5.4. No Bond Required of Trustees
Section 5.5. No Duty of Investigation; Notice in Trust Instruments, etc.
Section 5.6. Reliance on Experts, etc.
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
ARTICLE VI - Shares of Beneficial Interest 13
-----------------------------
Section 6.1. Beneficial Interest
Section 6.2. Rights of Shareholders
Section 6.3. Trust Only
Section 6.4. Issuance of Shares
Section 6.5. Register of Shares; Share Certificates
Section 6.6. Transfer of Shares
Section 6.7. Notices
Section 6.8. Treasury Shares
Section 6.9. Voting Powers
Section 6.10. Series or Class Designation
Section 6.11. Meetings of Shareholders
ARTICLE VII - Redemptions 18
-----------
Section 7.1. Redemption of Shares
Section 7.2. Price
Section 7.3. Payment
Section 7.4. Effect of Suspension of Determination of Net Asset Value
Section 7.5. Repurchase by Agreement
Section 7.6. Redemption of Shareholder's Interest
Section 7.7. Reductions in Number of Outstanding Shares Pursuant to Net Asset
Value Formula
Section 7.8. Suspension of Right of Redemption
Section 7.9. Redemption of Shares; Disclosure of Holding
ARTICLE VIII - Determination of Net Asset Value, Net 20
-------------------------------------
Income and Distributions
------------------------
Section 8.1. Net Asset Value
Section 8.2. Distribution to Shareholders
Section 8.3. Determination of Net Income
Section 8.4. Power to Modify Foregoing Procedures
ARTICLE IX - Duration; Termination and Trust; Amendment; 22
-------------------------------------------
Mergers, etc.
Section 9.1. Duration
Section 9.2. Termination of Trust
Section 9.3. Amendment Procedure
Section 9.4. Merger, Consolidation and Sale of Assets
Section 9.5. Incorporation
ARTICLE X - Reports to Shareholders 24
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ARTICLE XI - Miscellaneous 25
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Section 11.1. Filing
Section 11.2 Governing Law
Section 11.3. Counterparts
Section 11.4. Reliance by Third Parties
Section 11.5. Provisions in Conflict with Law or Regulations
Section 11.6. Index and Heading for Reference Only
SIGNATURES 26
</TABLE>
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DECLARATION OF TRUST
NATIONWIDE ASSET ALLOCATION TRUST
WHEREAS, the Trustees desire to establish a trust for the investment
and reinvestment of funds contributed thereto; and
WHEREAS, the Trustees desire that the beneficial interest in the trust
assets be divided into transferable shares of beneficial interest, as
hereinafter provided:
NOW THEREFORE, the Trustees hereby declare that all money and property
contributed to the trust established hereunder shall be held and managed in
trust for the benefit of holders, from time to time, of the shares of beneficial
interest issued hereunder and subject to the provisions hereof.
ARTICLE I
NAME AND DEFINITIONS
SECTION 1.1. NAME. The name of the trust created hereby is "Nationwide
Asset Allocation Trust".
SECTION 1.2. DEFINITIONS. Wherever they are used herein, the following
terms have the following respective meanings:
(a) "ADMINISTRATOR" means the party other than the Trust, to the
contract described in Section 4.3 hereof.
(b) "BYLAWS" means the Bylaws referred to in Section 3.9 hereof, as
from time to time amended.
(c) The terms "COMMISSION", "INTERESTED PERSON", and "MAJORITY
SHAREHOLDER VOTE" (the 67% or 50% requirement of the third sentence of
Section 2(a)(42) of the 1940 Act, whichever may be applicable) have the
meanings given them in the 1940 Act, except to the extent that the
Trustees have otherwise defined "Majority Shareholder Vote" in
conjunction with the establishment of any series of shares.
(d) "DECLARATION" means this Declaration of Trust as amended from time
to time. Reference in this Declaration of Trust to "DECLARATION",
"HEREOF", "HEREIN" and "HEREUNDER" shall be deemed to refer to this
Declaration rather than the article or section in which such words
appear.
(e) "DISTRIBUTOR" means the party, other than the Trust, to the
contract described in Section 4.2 hereof.
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(f) "INVESTMENT ADVISER" means the party, other than the Trust, to the
contract described in Section 4.1 hereof.
(g) The "1940 ACT" means the Investment Company Act of 1940 and the
rules and regulations thereunder, as amended from time to time.
(h) "PERSON" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures and other entities,
whether or not legal entities, and governments and agencies and
political subdivisions thereof.
(i) "SHAREHOLDER" means a record owner of outstanding Shares.
(j) "SHARES" means the units of interest into which the beneficial
interest in the Trust shall be divided from time to time, including the
shares of any and all series or class which may be established by the
Trustees, and includes fractions of Shares as well as whole Shares.
(k) "TRANSFER AGENT" means the party, other than the Trust, to the
contract described in Section 4.4 hereof.
(l) The "TRUST" means Nationwide Asset Allocation Trust.
(m) The "TRUST PROPERTY" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of
the Trust or the Trustees.
(n) The "TRUSTEES" means the persons who have signed this Declaration,
so long as they shall continue in office in accordance with the terms
hereof, and all other persons who may from time to time be duly
elected, qualified and serving as Trustees in accordance with the
provisions hereof, and reference herein to a Trustee or the Trustees
shall refer to such person or persons in their capacity as trustees
hereunder.
ARTICLE II
TRUSTEES
SECTION 2.1. NUMBER OF TRUSTEES. The number of Trustees shall be such
number as shall be fixed from time to time by a written instrument signed by a
majority of the Trustees, provided, however, that the number of Trustees shall
in no event be less than two (2) nor more than fifteen (15), except that the
number of Trustees may be one (1) prior to the commencement of public sale of
Trust Shares.
SECTION 2.2. ELECTION AND TERM. Except for the Trustees named herein or
appointed to fill vacancies pursuant to Section 2.4 hereof, the Trustees shall
be elected by the Shareholders at an annual meeting or at a special meeting of
Shareholders. There is no requirement that the Trustees have an annual meeting
of the Shareholders. In the event the Trustees determine to have an annual or
special meeting of the Shareholders, it shall be held at such time and place and
in such manner as the Bylaws shall provide notwithstanding anything in this
section to the contrary. Except in the event
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of resignations or removals pursuant to Section 2.3 hereof, each Trustee shall
hold office until the next meeting of Shareholders and until his successor is
elected and qualified to serve at Trustee.
SECTION 2.3. RESIGNATION AND REMOVAL. Any Trustee may resign his trust
(without need for prior or subsequent accounting) by an instrument in writing
signed by him and delivered to the other Trustees and such resignation shall be
effective upon such delivery, or at a later date according to the terms of the
instrument. Any of the Trustees may be removed (provided the aggregate number of
Trustees after such removal shall not be less than the number required by
Section 2.1. hereof) with cause, by the action of two-thirds of the remaining
Trustees. Upon the resignation or removal of a Trustee, or his otherwise ceasing
to be a Trustee, he shall execute and deliver such documents as the remaining
Trustees shall require for the purpose of conveying to the Trust or the
remaining Trustees any Trust Property held in the name of the resigning or
removed Trustee. Upon the incapacity or death of any Trustee, his legal
representative shall execute and deliver on his behalf such documents as the
remaining Trustees shall require as provided in the preceding sentence.
SECTION 2.4. VACANCIES. The term of office of a Trustee shall terminate
and a vacancy shall occur in the event of the death, resignation, removal,
bankruptcy, adjudicated incompetence or other incapacity to perform the duties
of the office of a Trustee. No such vacancy shall operate to annul this
Declaration or to revoke any existing agency created pursuant to the terms of
the Declaration. In the case of an existing vacancy, including a vacancy
existing by reason of an increase in the number of Trustees, subject to the
provisions of Section 16(a) of the 1940 Act, the remaining Trustees shall fill
such vacancy by the appointment of such other person as they in their discretion
shall see fit, made by a written instrument signed by a majority of the
Trustees. Any such appointment shall not become effective, however, until the
person named in the written instrument of appointment shall have accepted in
writing such appointment and agreed in writing to be bound by the terms of the
Declaration. An appointment of a Trustee may be made in anticipation of a
vacancy to occur at a later date by reason of retirement, resignation or
increase in the number of Trustees, provided that such appointment shall not
become effective prior to such retirement, resignation or increase in the number
of Trustees. Whenever a vacancy in the number of Trustees shall occur, until
such vacancy is filled as provided in this Section 2.4., the Trustees in office,
regardless of their number, shall have all the powers granted to the Trustees
and shall discharge all the duties imposed upon the Trustees by the Declaration.
A written instrument certifying the existence of such vacancy signed by a
majority of the Trustees shall be conclusive evidence of the existence of such
vacancy.
SECTION 2.5. DELEGATION OF POWER TO OTHER TRUSTEES. Any Trustee may, be
power of attorney, delegate his power for a period not exceeding six (6) months
at any one time to any other Trustee or Trustees; provided that in no case shall
less than two (2) Trustees personally exercise the powers granted to the
Trustees under the Declaration except as herein otherwise expressly provided.
ARTICLE III
POWERS OF TRUSTEES
SECTION 3.1. GENERAL. The Trustees shall have exclusive and absolute
control over the Trust Property and over the business of the Trust to the same
extent as if the Trustees were the sole owners of the Trust Property and
business in their own right, but with such powers of delegation as may be
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permitted by the Declaration. The Trustees shall have power to conduct the
business of the Trust and carry on its operations and maintain offices both
within and without the Commonwealth of Massachusetts, in any and all states of
the United States of America, in the District of Columbia, and in any and all
commonwealths, territories, dependencies, colonies, possessions, agencies or
instrumentalities of the United States of America and of foreign governments,
and to do all such other things and execute all such instruments as they deem
necessary, proper or desirable in order to promote the interests of the Trust
although such things are not herein specifically mentioned. Any determination as
to what is in the interest of the Trust made by the Trustees in good faith shall
be conclusive. In construing the provisions of the Declaration, the presumption
shall be in favor of a grant of power to the Trustees.
The enumeration of any specific power herein shall not be construed as
limiting the aforesaid power. Such powers of the Trustees may be exercised
without order of or resort to any court.
SECTION 3.2. INVESTMENTS. The Trustees shall have the power to:
(a) Conduct, operate and carry on the business of an investment company
and exercise all the powers necessary and appropriate for the conduct
of such operations;
(b) Invest in, hold for investment, or reinvest in, securities,
including common and preferred stocks; warrants; bonds; debentures;
bills; time notes and all other evidences of indebtedness; negotiable
or non-negotiable instruments; government securities, including
securities of any state, municipality or other political subdivision,
or any governmental or quasi-governmental agency or instrumentality;
and money market instruments including bank certificates of deposit,
finance paper, commercial paper, bankers' acceptances and all kinds of
repurchase agreements, of any corporation, company, trust, association,
firm or other business organization however established, and of any
country, state, municipality or other political subdivisions, or any
governmental or quasi-governmental agency or instrumentality.
(c) Acquire (by purchase, subscription or otherwise), to hold, to trade
in and deal in, to acquire or write any rights or options to purchase
or sell, to sell or otherwise dispose of, to lend, and to pledge any
such securities and repurchase agreements and forward foreign currency
exchange contracts, to purchase and sell futures contracts on
securities, securities indices and foreign currencies, to purchase or
sell options on such contracts, foreign currency contracts and foreign
currencies and to engage in all types of hedging and risk management
transactions.
(d) Exercise all rights, powers and privileges of ownership or interest
in all securities and repurchase agreements included in the Trust
Property, including the right to vote thereon and otherwise act with
respect thereto and to do all acts for the preservation, protection,
improvements and enhancement in value of all such securities and
repurchase agreements.
(e) Acquire (by purchase, lease or otherwise) and to hold, use,
maintain, develop and dispose of (by sale or otherwise) any property,
real or personal, including cash, and any interest therein.
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(f) Aid by further investment any corporation, company, trust,
association or firm, any obligation of or interest in which is included
in the Trust Property or in the affairs of which the Trustees have any
direct or indirect interest; to do all acts and things designed to
protect, preserve, improve or enhance the value of such obligation or
interest; to guarantee or become surety on any or all of the contracts,
stocks, bonds, notes, debentures and other obligations of any such
corporation, company, trust, association or firm.
(g) In general to carry on any other business in connection with or
incidental to any of the foregoing powers, to do everything necessary,
suitable or proper for the accomplishment of any purpose or the
attainment of any object or the furtherance of any power hereinbefore
set forth, either alone or in association with others, and to do every
other act or thing incidental or appurtenant to or growing out of or
connected with the aforesaid business or purposes, objects or powers.
The foregoing clauses shall be construed both as objects and powers,
and the foregoing enumeration of specific powers shall not be held to limit or
restrict in any manner the general powers of the Trustees.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust, nor shall the Trustees be limited
by any law limiting the investments which may be made by fiduciaries.
SECTION 3.3. LEGAL TITLE. Legal title to all the Trust Property shall
be vested in the Trustees as joint tenants except that the Trustees shall have
power to cause legal title to any Trust Property to be held by or in the name of
one or more of the Trustees, or in the name of the Trust, or in the name of any
other Person as nominee, on such terms as the Trustees may determine, provided
that the interest of the Trust therein is appropriately protected. The right,
title and interest of the Trustees in the Trust Property shall vest
automatically in each Person who may hereafter become a Trustee. Upon the
resignation, removal or death of a Trustee, he shall automatically cease to have
any right, title or interest in any of the Trust Property, and the right, title
and interest of such Trustee in the Trust Property shall vest automatically in
the remaining Trustees. Such vesting and cessation of title shall be effective
whether or not conveyancing documents have been executed and delivered.
SECTION 3.4. ISSUANCE AND REPURCHASE OF SECURITIES. The Trustees shall
have the power to issue, sell, repurchase, redeem, retire, cancel, acquire,
hold, resell, reissue, dispose of, transfer, and otherwise deal in Shares and,
subject to the provisions set forth in Articles VII, VIII, and IX and Section
6.10 hereof, to apply to any such repurchase, redemption, retirement,
cancellation or acquisition of Shares any funds or property of the Trust whether
capital or surplus or otherwise, to the full extent now or hereafter permitted
by the laws of the Commonwealth of Massachusetts governing business
corporations.
SECTION 3.5. BORROWING MONEY; LENDING TRUST ASSETS. The Trustees shall
have power to borrow money or otherwise obtain credit to secure the same by
mortgaging, pledging or otherwise subjecting as security the assets of the
Trust, to endorse, guarantee, or undertake the performance of any obligation,
contract or engagement of any other Person and to lend Trust assets.
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SECTION 3.6. DELEGATION; COMMITTEES. The Trustees shall have power to
delegate from time to time to such of their number or to officers, employees or
agents of the Trust the doing of such things and the execution of such
instruments either in the name of the Trust or the names of the Trustees or
otherwise as the Trustees may deem expedient, to the extent such delegation is
permitted by the 1940 Act.
SECTION 3.7. COLLECTION AND PAYMENT. The Trustees shall have power to
collect all property due to the Trust; to pay all claims, including taxes,
against the Trust Property; to prosecute, defend, compromise or abandon any
claims relating to the Trust Property; to foreclose any security interest
securing any obligations, by virtue of which any property is owed to the Trust;
and to enter into releases, agreements and other instruments.
SECTION 3.8. EXPENSES. The Trustees shall have the power to incur and
pay any expenses which in the opinion of the Trustees are necessary or
incidental to carry out any of the purposes of the Declaration, and to pay
reasonable compensation from the funds of the Trust to themselves as Trustees.
The Trustees shall fix the compensation of all officers, employees and Trustees.
SECTION 3.9. MANNER OF ACTION; BYLAWS. Except as otherwise provided
herein or in the Bylaws, any action to be taken by the Trustees may be taken by
a majority of the Trustees present at a meeting of Trustees (a quorum being
present), including any meeting held by means of a conference telephone circuit
or similar communications equipment by means of which all persons participating
in the meeting can hear each other, or by written consents of a majority of the
Trustees (unless a higher proportion is required by law). The Trustees may adopt
Bylaws not inconsistent with this Declaration to provide for the conduct of the
business of the Trust and may amend or repeal such Bylaws to the extent such
power is not reserved to the Shareholders.
Notwithstanding the foregoing provisions of this Section 3.9 and in
addition to such provisions or any other provision of this Declaration or of the
By-laws, the Trustees may by resolution appoint a committee consisting of less
than the whole number of Trustees then in office, which committee may be
empowered to act for and bind the Trustees and the Trust, as if the acts of such
committee were the acts of all the Trustees then in office, with respect to the
institution, prosecution, dismissal, settlement, review or investigation of any
action, suit or proceeding which shall be pending or threatened to be brought
before any court, administrative agency or other adjudicatory body.
SECTION 3.10. MISCELLANEOUS POWERS. The Trustees shall have the power
to: (a) employ or contract with such Persons as the Trustees may deem desirable
for the transaction of the business of the Trust; (b) enter into joint ventures,
partnerships and any other combinations or associations; (c) remove Trustees or
fill vacancies in or add to their number, elect and remove such officers and
appoint and terminate such agents or employees as they consider appropriate, and
appoint from their own number, and terminate, any one or more committee which
may exercise some or all of the power and authority of the Trustees as the
Trustees may determine; (d) purchase, and pay for out of Trust Property,
insurance policies insuring the Shareholders, Trustees, officers, employees,
agents, investment advisers, distributors, selected dealers or independent
contractors of the Trust against all claims arising by reason of holding any
such position or by reason of any action taken or omitted by any such Person in
such capacity, whether or not constituting negligence, or whether or not the
Trust
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would have the power to indemnify such Person against such liability; (e)
establish pension, profit-sharing, Share purchase, and other retirement,
incentive and benefit plans for any Trustees, officers, employees and agents of
the Trust; (f) to the extent permitted by law, indemnify any person with whom
the Trust has dealings, including the Investment Adviser, Distributor,
Administrator, Transfer Agent and selected dealers, to such extent a the
Trustees shall determine; (g) guarantee indebtedness or contractual obligations
of others; (h) determine and change the fiscal year of the Trust and the method
by which its accounts shall be kept; and (i) adopt a seal for the Trust, but the
absence of such seal shall not impair the validity of any instrument executed on
behalf of the Trust.
SECTION 3.11. PRINCIPAL TRANSACTIONS. Except in transactions permitted
by the 1940 Act or any rule or regulation thereunder, or any order of exemption
issued by the Commission, the Trustees shall not, on behalf of the Trust, buy
any securities (other than Shares) from or sell any securities (other than
Shares) to, or lend any assets of the Trust to, any Trustee or officer of the
Trust or any firm of which any such Trustee or officer is a member acting as
principal, or have any such dealings with the Investment Adviser, Distributor,
Administrator or Transfer Agent or with any Interested Person of such Person;
but the Trust may employee any such Person, or firm or company in which such
Person is an Interested Person, as broker, legal counsel, registrar, transfer
agent, dividend disbursing agent or custodian upon customary terms.
SECTION 3.12. TRUSTEES AND OFFICERS AS SHAREHOLDERS. Except as
hereinafter provided, no officer or Trustee of the Trust, and no member,
officer, director or trustee of the Investment Adviser or of the Distributor and
no Investment Adviser or Distributor of the Trust, shall take long or short
positions in the securities issued by the Trust.
(a) The foregoing provision shall not prevent the Distributor from
purchasing from the Trust Shares if such purchases are limited (except
for reasonable allowances for clerical errors, delays and errors of
transmission and cancellation of orders) to purchases for the purpose
of filling orders for Shares received by the Distributor and provided
that orders to purchase from the Trust are entered with the Trust or
the Custodian promptly upon receipt by the Distributor of purchase
orders for Shares, unless the Distributor is otherwise instructed by
its customer.
(b) The foregoing provision shall not prevent the Distributor from
purchasing Shares as agent for the account of the Trust.
(c) The foregoing provision shall not prevent the purchase from the
Trust or from the Distributor of Shares by any officer, Trustee or
member of the Advisory Board of the Trust or by any member, officer,
director or trustee of the Investment Adviser or of the Distributor at
a price not lower than the net asset value of the Shares at the moment
of such purchase, provided that any such sales are only to be made
pursuant to a uniform offer described in the Trust's current
prospectus.
(d) The foregoing provision shall not prevent the Investment Adviser,
the Distributor, or their affiliates, or any of their officers,
directors or trustees from purchasing Shares prior to the effective
date of the Registration Statement relating to the Shares under the
Securities Act of 1933, as amended.
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SECTION 3.13. LITIGATION. The Trustees shall have the power to engage
in and to prosecute, defend, compromise, abandon, or adjust, by arbitration, or
otherwise, any actions, suits, proceedings, disputes, claims, and demands
relating to the Trust, and out of the assets of the Trust to pay or to satisfy
any debts, claims or expenses incurred in connection therewith, including those
of litigation, and such power shall include without limitation the power of the
Trustees or any appropriate committee thereof, in the exercise of their or its
good faith business judgment, to dismiss any action, suit, proceeding, dispute,
claim, or demand, derivative or otherwise, brought by any person, including a
Shareholder in its own name or the name of the Trust, whether or not the Trust
or any of the Trustees may be named individually therein or the subject matter
arises by reason of business for or on behalf of the Trust.
ARTICLE IV
INVESTMENT ADVISER, DISTRIBUTOR, ADMINISTRATOR
AND TRANSFER AGENT
SECTION 4.1. INVESTMENT ADVISER. Subject to a Majority Shareholder
Vote, the Trustees may, in their discretion, from time to time enter into one or
more investment advisory or management contracts whereby the other party to such
contract shall undertake to furnish the Trust such management, investment
advisory, statistical and research facilities and services, promotional
activities, and such other facilities and services, if any, as the Trustees
shall from time to time consider desirable and all upon such terms and
conditions as the Trustees may, in their discretion, determine. Notwithstanding
any provisions of the Declaration, the Trustees may authorize the Investment
Adviser (subject to such general or specific instructions as the Trustees may
from time to time adopt) to effect purchases, sales, loans or exchanges of
portfolio securities of the Trust on behalf of the Trustees or may authorize any
officer, employee or Trustee to effect such purchases, sales, loans or exchanges
pursuant to recommendations of the Investment Adviser (and all without further
action by the Trustees). Any such purchases, sales, loans and exchanges shall be
deemed to have been authorized by all of the Trustees.
SECTION 4.2. DISTRIBUTOR. The Trustees may, in their discretion, from
time to time enter into a contract, providing for the sale of Shares to the
Trust not less than the net asset value per Share (as described in Article VIII
hereof), whereby the Trust may either agree to sell the Shares to the other
party to the contract or appoint such other party its sales agent for such
Shares. In either case, the contract shall be on such terms and conditions as
the Trustees may in their discretion determine not inconsistent with the
provisions of this Article IV or the Bylaws; and such contract may also provide
for the repurchase or sale of Shares of the Trust by such other party as
principal or as agent of the Trust and may provide that such other party may
enter into selected dealer agreements with registered securities dealers to
further the purpose of the distribution or repurchase of the Shares.
SECTION 4.3. ADMINISTRATOR. The Trustees may, in their discretion, from
time to time enter into an administrative services agreement whereby the other
party to such contract shall provide facilities, equipment, and personnel to
carry out certain administrative services for the operation of the business and
affairs of the Trust and each of its separate series. The contract shall have
such terms and conditions as the Trustees may, in their discretion, determine
not inconsistent with the Declaration or the Bylaws. Such services may be
provided by one or more Persons.
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SECTION 4.4. TRANSFER AGENT. The Trustees may, in their discretion,
from time to time enter into a transfer agency and shareholder service contract
whereby the other party to such contract shall undertake to furnish transfer
agency and shareholder services to the Trust. The contract shall have such terms
and conditions as the Trustees may, in their discretion, determine not
inconsistent with the Declaration or the Bylaws. Such services may be provided
by one or more Persons.
SECTION 4.5. PARTIES TO CONTRACT. Any contract of the character
described in Sections 4.1, 4.2, 4.3, and 4.4 of this Article IV or any Custodian
contract, as described in the Bylaws, may be entered into with any Person,
although one or more of the Trustees or officers of the Trust may be an officer,
director, trustee, shareholder, or member of such other party to the contract,
and no such contract shall be invalidated or rendered voidable by reason of the
existence of any such relationship; nor shall any Person holding such
relationship be liable merely by reason of such relationship for any loss or
expense to the Trust under or by reason of said contract or accountable for any
profit realized directly or indirectly therefrom, provided that the contract,
when entered into, was not inconsistent with the provisions of this Article IV
or the Bylaws. The same Person may be the other party to contracts entered into
pursuant to Sections 4.1, 4.2, 4.3 and 4.4 above or Custodian contracts, and any
individual may be financially interested or otherwise affiliated with Persons
who are parties to any or all of the contracts mentioned in this Section 4.5.
SECTION 4.6. COMPLIANCE WITH 1940 ACT. Any contract entered into
pursuant to Sections 4.1 or 4.2 shall be consistent with and subject to the
requirements of Section 15 of the 1940 Act (including any amendment thereof or
other applicable Act of Congress hereafter enacted) with respect to its
continuance in effect, its termination and the method of authorization and
approval of such contract or renewal thereof.
ARTICLE V
LIMITATIONS OF LIABILITY OF SHAREHOLDERS
TRUSTEES AND OTHERS
SECTION 5.1. NO PERSONAL LIABILITY OF SHAREHOLDERS, TRUSTEES, ETC. No
Shareholder as such shall be subject to any personal liability whatsoever to any
Person in connection with Trust Property or the acts, obligations or affairs of
the Trust. No Trustee, officer, employee or agent of the Trust shall be subject
to any personal liability whatsoever to any Person, other than the Trust or its
Shareholders, in connection with Trust Property or the affairs of the Trust,
except that arising from bad faith, willful misfeasance, gross negligence or
reckless disregard for his duty to such Person; and all such Persons shall look
solely to the Trust Property for satisfaction of claims of any nature arising in
connection with the affairs of the Trust. If any Shareholder, Trustee, officer,
employee or agent, as such, of the Trust is made a party to any suit or
proceeding to enforce any such liability, he shall not, on account thereof, be
held to any personal liability. The Trust shall indemnify and hold each
Shareholder harmless from and against all claims and liabilities, to which such
Shareholder may become subject by reason of his being or having been a
Shareholder, and shall reimburse such Shareholder for all legal and other
expenses reasonable incurred by him in connection with any such claim or
liability. The rights accruing to a Shareholder under this Section 5.1 shall not
exclude any other right to which such Shareholder may be lawfully entitled, nor
shall anything herein contained
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restrict the right of the Trust to indemnify or reimburse a Shareholder in any
appropriate situation even though not specifically provided herein.
SECTION 5.2. NON-LIABILITY OF TRUSTEES, ETC. No Trustee, officer,
employee or agent of the Trust shall be liable to the Trust, its Shareholders,
or to any Shareholder, Trustee, officer, employee agent, or service provider
thereof for any action or failure to act (including without limitation the
failure to compel in any way any former or acting Trustee to redress any breach
of trust) except for his own bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties. The term "service provider" as used in this
Section 5.2 shall include any investment adviser, principal underwriter or other
person with whom the Trust has an agreement for provision of services.
SECTION 5.3. MANDATORY INDEMNIFICATION.
(a) Subject to the exceptions and limitations contained in paragraph
(b) below:
(i) Every person who is, or has been a Trustee or officer of
the Trust shall be indemnified by the Trust against all
liability and against all expenses reasonably incurred or paid
by him in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or
otherwise by virtue of his being or having been a Trustee or
officer and against amounts paid or incurred by him in the
settlement thereof.
(ii) The words "claim", "action", "suit" or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil,
criminal or other, including appeals), actual or threatened;
and the words "liability" and "expenses" shall include,
without limitation, attorneys' fees, costs, judgments, amounts
paid in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or
officer:
(i) against any liability to the Trust or the Shareholders by
reason of a final adjudication by the court or other body
before which the proceeding was brought that he engaged in
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office;
(ii) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in the
reasonable belief that his action was in the best interest of
the Trust;
(iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in paragraphs
(b)(i) or (b)(ii) resulting in a payment by a Trustee or
officer, unless there has been either a determination that
such Trustee or officer did not engage in willful misfeasance,
bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office by the court or
other body approving the settlement or other disposition or by
a reasonable determination, based
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upon a review of readily available facts (as opposed to a full
trial-type inquiry) that he did not engage in such conduct:
(A) by vote of a majority of the Disinterested
Trustees acting on the matter (provided that a
majority of the Disinterested Trustees then in
office act on the matter); or
(B) by written opinion of independent legal
counsel.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall
not affect any other rights to which any Trustee or officer may now or
hereafter be entitled, shall continue as to a Person who has ceased to
be such Trustee or officer and shall inure to the benefit of the heirs,
executors and administrators of such Person. Nothing contained herein
shall affect any rights to indemnification to which personnel other
than Trustees and officers may be entitled by contract or otherwise
under law.
(d) Expenses of preparation and presentation of a defense to any claim,
action, suit or proceeding of the character described in paragraph (a)
of this Section 5.3 shall be advanced by the Trust prior to final
disposition thereof upon receipt of an undertaking by or on behalf of
the recipient to repay such amount if it is ultimately determined that
he is not entitled to indemnification under this Section 5.3, provided
that either:
(i) such undertaking is secured by a surety bond or some other
appropriate security or the Trust shall be insured against
losses arising out of any such advances; or
(ii) a majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested Trustees
then in office act on the matter) or an independent legal
counsel in a written opinion, shall determine, based upon a
review of readily available facts (as opposed to a full
trial-type inquiry), that there is reason to believe that the
recipient ultimately will be found entitled to
indemnification.
As used in this Section 5.3, a "Disinterested Trustee" is one (i) who
is not an "Interested Person" of the Trust (including anyone who has been
exempted from being an "Interested Person" by any rule, regulation or order of
the Commission), and (ii) against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same similar
grounds is then or had been pending.
Agents and employees of the Trust who are not Trustees or officers of
the Trust may be indemnified under the same standards and procedures set forth
in this Section 5.3., in the discretion of the Board.
SECTION 5.4. NO BOND REQUIRED OF TRUSTEES. No Trustee shall be
obligated to give any bond or other security for the performance of any of his
duties hereunder.
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SECTION 5.5. NO DUTY OF INVESTIGATION; NOTICE IN TRUST INSTRUMENTS,
ETC. No purchaser, lender, Transfer Agent or other Person dealing with the
Trustees or any officer, employee or agent of the Trust shall be bound to make
any inquiry concerning the validity of any transaction purporting to be made by
the Trustees or by said officer, employee or agent or be liable for the
application of money or property paid, loaned, or delivered to or on the order
of the Trustees or of said officer, employee or agent. Every obligation,
contract, instrument, certificate, Share, other security of the Trust or
undertaking, and every other act or thing whatsoever executed in connection with
the Trust shall be conclusively presumed to have been executed or done by the
executors thereof only in their capacity as Trustees under the Declaration or in
their capacity as officers, employees or agents of the Trust. Every written
obligation, contract, instrument, certificate, Share, other security of the
Trust or undertaking made or issued by the Trustees may recite that the same is
executed or made by them not individually, but as Trustees under the
Declaration, and that the obligations of any such instrument are not binding
upon any of the Trustees or Shareholders, individually, but bind only the estate
of the Trust, series or class, as applicable, and may contain any further
recital which they or he may deem appropriate, but the omission of such recital
shall not operate to bind the Trustees individually. The Trustees shall at all
times maintain insurance for the protection of the Trust Property, its
Shareholders, Trustees, officers, employees and agents in such amount as the
Trustees shall deem adequate to cover possible tort liability, and such other
insurance as the Trustees in their sole judgment shall deem advisable.
SECTION 5.6. RELIANCE ON EXPERTS, ETC. Each Trustee and officer or
employee of the Trust shall, in the performance of his duties, be fully and
completely justified and protected with regard to any act or any failure to act
resulting from reliance in good faith upon the books of account or other records
of the Trust, upon an opinion of counsel, or upon reports made to the Trust by
any of its officers or employees or by the Investment Adviser, the Distributor,
the Administrator, Transfer Agent, selected dealers, accountants, appraisers or
other experts or consultants selected with reasonable care by the Trustees,
officers or employees of the Trust, regardless of whether such counsel or expert
may also be a Trustee.
ARTICLE VI
SHARES OF BENEFICIAL INTEREST
SECTION 6.1. BENEFICIAL INTEREST. The interest of the beneficiaries
hereunder shall be divided into transferable shares of beneficial interest,
without par value. The number of shares of beneficial interest authorized
hereunder, and the number of Shares of each series or class thereof that may be
issued hereunder is unlimited. The Trustees shall have the exclusive authority
without the requirement of Shareholder authorization or approval to establish
and designate one or more series of Shares and one or more classes thereof as
the Trustees deem necessary, appropriate or desirable. Each Share of any series
shall represent a beneficial interest only in the assets of that series. Subject
to the provisions of Section 6.10 hereof, the Trustees may also authorize the
creation of additional series of Shares (the proceeds of which may be invested
in separate and independent investment portfolios) and additional classes of
Shares within any series. All Shares issued hereunder including, without
limitation, Shares issued in connection with a dividend in Shares or a split of
Shares, shall be fully paid and non-assessable.
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SECTION 6.2. RIGHTS OF SHAREHOLDERS. The ownership of the Trust
Property and the property of each Series of the Trust of every description and
the right to conduct any business hereinbefore described are vested exclusively
in the Trustees, and the Shareholders shall have no interest therein other than
the beneficial interest conferred by their Shares, and they shall have no right
to call for any partition or division of any property, profits, rights or
interests of the Trust nor can they be called upon to assume any losses of the
Trust or suffer an assessment of any kind by virtue of their ownership of
Shares. The Shares shall be personal property giving only the rights in the
Declaration specifically set forth. The Shares shall not entitle the holder to
preference, preemptive, appraisal, conversion or exchange rights, except as the
Trustees may determine with respect to any series or class of Shares.
SECTION 6.3. TRUST ONLY. It is the intention of the Trustees to create
only the relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to create
a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a
Massachusetts business trust. Nothing in the Declaration shall be construed to
make the Shareholders, either by themselves or with the Trustees, partners or
members of a joint stock association.
SECTION 6.4. ISSUANCE OF SHARES . The Trustees, in their discretion,
may, from time to time without vote of the shareholders, issue Shares, in
addition to the then issued and outstanding Shares and Shares held in the
treasury, to such party or parties and for such amount and type of
consideration, including cash or property, at such time or times (including,
without limitation, each business day in accordance with the determination of
net asset value per Share as set forth in Section 8.3 hereof), and on such terms
as the Trustees may deem best, except that only Shares previously contracted to
be sold may be issued during any period when the right of redemption is
suspended, and may in such manner acquire other assets (including the
acquisition of assets subject to, and in connection with the assumption of
liabilities) and businesses. In connection with any issuance of Shares, the
Trustees may issue fractional Shares and reissue and resell full and fractional
Shares held in the treasury. Shares may also be issued in separate series or
classes as provided in Section 6.10 hereof. The Trustees may from time to time
divide or combine the Shares into a greater or lesser number without thereby
changing the proportionate beneficial interests in the Trust. Contributions to
the Trust may be accepted for, and Shares shall be redeemed as, whole Shares
and/or 1/1,000ths of a Share or integral multiples thereof.
SECTION 6.5. REGISTER OF SHARES; SHARE CERTIFICATES. A register will be
kept at the principal office of the Trust or at an office of the Transfer Agent
which shall contain the names and addresses of the Shareholders and the number
of Shares held by them respectively and a record of all transfers thereof. Such
register shall be conclusive as to who are the holders of the Shares and who
shall be entitled to receive dividends or distributions or otherwise to exercise
or enjoy the rights of Shareholders. No Shareholder shall be entitled to receive
payment of any dividend or distribution, nor to have notice given to him as
herein or in the Bylaws provided, until he has given his address to the Transfer
Agent or such other officer or agent of the Trustees as shall keep the said
register for entry thereon. It is not contemplated that certificates will be
issued for the Shares; however, the Trustees, in their discretion, may authorize
the issuance of Share certificates and promulgate appropriate rules and
regulations as to their use.
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SECTION 6.6. TRANSFER OF SHARES. Shares shall be transferable on the
records of the Trust only by the record holder thereof or by his agent thereunto
duly authorized in writing, upon delivery to the Trustees or the Transfer Agent
of a duly executed instrument of transfer, together with such evidence of the
genuineness of each such execution and authorization and of other matters as may
reasonably be required. Upon such delivery, the transfer shall be recorded on
the register of the Trust. Until such record is made, the Shareholder of record
shall be deemed to be the holder of such Shares for all purposes hereunder and
neither the Trustees nor any Transfer Agent or registrar nor any officer,
employee or agent of the Trust shall be affected by any notice of the proposed
transfer.
Any person becoming entitled to any Shares in consequence of the death,
bankruptcy, or incompetence of any Shareholder, or otherwise by operation of
law, shall be recorded on the register of Shares as the holder of such Shares
upon production of the proper evidence thereof to the Trustees or the Transfer
Agent, but until such record is made, the Shareholder of record shall be deemed
to be the holder of such Shares for all purposes hereunder and neither the
Trustees nor any Transfer Agent or registrar nor any officer or agent of the
Trust shall be affected by any notice of such death, bankruptcy or incompetence,
or other operation of law.
SECTION 6.7. NOTICES. Any and all notices to which any Shareholder may
be entitled and any and all communications shall be deemed duly served or given
if mailed, postage prepaid, addressed to any Shareholder of record at his last
known address as recorded on the register of the Trust.
SECTION 6.8. TREASURY SHARES. Shares held in the treasury shall, until
reissued pursuant to Section 6.4, not confer any voting rights on the Trustees,
nor shall such Shares be entitled to any dividends or other distributions
declared with respect to the Shares.
SECTION 6.9. VOTING POWERS. The Shareholders shall have power to vote
only (i) for the election of Trustees as provided in Section 2.2 hereof or as
required by Section 16 (a) of the 1940 Act; (ii) with respect to any investment
advisory or management contract as provided in Section 4.1; (iii) with respect
to termination of the Trust as provided in Section 9.2; (iv) with respect to any
amendment of the Declaration to the extent and as provided in Section 9.3; (v)
with respect to any merger, consolidation or sale of assets as provided in
Section 9.4; (vi) with respect to incorporation of the Trust to the extent and
as provided in Section 9.5; (vii) to the same extent as the stockholders of a
Massachusetts business corporation as to whether or not a court action,
proceeding or claim should or should not be brought or maintained derivatively
or as a class action on behalf of the Trust or the Shareholders; and (viii) with
respect to such additional matters relating to the Trust as may be required by
the Declaration, the Bylaws, the 1940 Act or any registration of the Trust with
the Commission (or any successor agency) or any state, or as the Trustees may
consider necessary or desirable. Each whole Share shall be entitled to one vote
as to any matter on which it is entitled to vote and each fractional Share shall
be entitled to proportionate fractional vote, except that Shares held in the
treasury of the Trust shall not be voted and that the Trustees may, in
conjunction with the establishment of any series of Shares, establish conditions
under which the several series shall have separate voting rights or no voting
rights. There shall be no cumulative voting in the election of Trustees. Until
Shares are issued, the Trustees may exercise all rights of Shareholders and may
take any action required by law, the Declaration or the Bylaws to be taken by
Shareholders. The Bylaws may include further provisions for Shareholders' votes
and meetings and related matters.
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SECTION 6.10. SERIES OR CLASS DESIGNATION. The Trustees, in their
discretion, may authorize the division of Shares into additional series, and the
different series shall be established and designated, and the variations in the
relative rights and preferences as between the different series shall be fixed
and determined by the Trustees, provided, that all Shares shall be identical
except that there may be variations so fixed and determined between different
series as to investment objective, purchase price, right of redemption and the
price, terms and manner of redemption, special and relative rights as to
dividends and on liquidation, conversion rights, and conditions under which the
several series shall have separate voting rights. All references to Shares in
the Declaration shall be deemed to be shares of any or all series as the context
may require.
If the Trustees shall divide the shares of the Trust into series or
classes, the following provisions shall be applicable:
(a) The number of authorized shares and the number of shares of each
series or class that may be issued shall be unlimited. The Trustees may
classify or reclassify any unissued Shares or any Shares previously
issued and reacquired of any series or class into one or more other
series, or one or more other classes that may be established and
designated from time to time. The Trustees may hold as treasury shares
(of the same or some other series or class), reissue for such
consideration and on such terms as they may determine, or cancel any
Shares of any series or class reacquired by the Trust at their
discretion from time to time.
(b) The power of the Trustees to invest and reinvest the Trust Property
shall be governed by Section 3.2 of this Declaration with respect to
the existing series or classes which represents the interests in the
assets of the Trust immediately prior to the establishment of any
additional series or classes and the power of the Trustees to invest
and reinvest assets applicable to any such additional series or classes
shall be as set forth in the instrument of the Trustees establishing
such series or classes which is hereinafter described.
(c) All consideration received by the Trust for the issue or sale of
Shares of a particular series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits
and proceeds thereof, including any proceeds derived from the sale,
exchange or liquidation of such assets, and any funds or payments
derived from any reinvestment of such proceeds in whatever form the
same may be, shall irrevocably belong to that series for all purposes,
subject only to the rights of creditors of such series, and shall be so
recorded upon the books of account of the Trust. In the event that
there are any assets, income, earnings, profits, and proceeds thereof,
funds, or payments which are not readily identifiable as belonging to
any particular series, the Trustees or their delegate shall allocate
them among any one or more of the series established and designated
from time to time in such manner and on such basis as the Trustees, in
their sole discretion, deem fair and equitable. Each such allocation by
the Trustees shall be conclusive and binding upon the shareholders of
all series for all purposes. No holder of Shares of any series shall
have any claim on or right to any assets allocated or belonging to any
other series.
(d) The assets belonging to each particular series shall be charged
with the liabilities of the Trust allocated to that series and all
expenses, costs, charges and reserves attributable to that series which
are not readily identifiable as belonging to any particular class, and
any
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general liabilities, expenses, costs, charges or reserves of the Trust
which are not readily identifiable as belonging to any particular
series shall be allocated and charged by the Trustees or their delegate
to and among any one or more of the series established and designated
from time to time in such manner and on such basis as the Trustees, in
their sole discretion, deem fair and equitable and no series shall be
liable to any person except for its allocated share. Each allocation of
liabilities, expenses, costs, charges and reserves by the Trustees or
their delegate shall be conclusive and binding upon the Shareholders of
all series and classes for all purposes. The Trustees shall have full
discretion, to the extent not inconsistent with the 1940 Act, to
determine which items shall be treated as income and which items as
capital; and each such determination and allocation shall be conclusive
and binding upon the Shareholders. The assets of a particular series of
the Trust shall, under no circumstances, be charged with liabilities,
expenses, costs, charges and reserves attributable to any other series
or class thereof of the Trust. All Persons extending credit to, or
contracting with or having any claim against a particular series of the
Trust shall look only to the assets of that particular series for
payment of such credit, contract or claim.
(e) The power of the Trustees to pay dividends and make distributions
shall be governed by Section 8.2 of this Trust with respect to the five
existing series which represents the interests in the assets of the
Trust immediately prior to the establishment of any additional series.
With respect to any other series, dividends and distributions on Shares
of a particular series or class may be paid or credited in such manner
and with such frequency as the Trustees may determine, which may be
daily or otherwise, pursuant to a standing resolution or resolutions
adopted only once or with such frequency as the Trustees may determine,
to the holders of Shares of that series or class, from such of the
income and capital gains, accrued or realized, from the assets
belonging to that series, as the Trustees may determine, after
providing for actual and accrued liabilities belonging to that series
or class. All dividends and distributions on Shares of a particular
series or class shall be distributed pro rate to the holders of that
series or class in proportion to the number of Shares of that series or
class held by such holders at the date and time of record established
for the payment of such dividends or distributions.
(f) Each Share of a series of the Trust shall represent a beneficial
interest in the net assets of such series. Each holder of Shares of a
series or class thereof shall be entitled to receive his pro rata Share
of distributions of income and capital gains made with respect to such
series or class net of liabilities, expenses, costs, charges and
reserves belonging and allocated to such series or class. Upon
redemption of his Shares or indemnification for liabilities incurred by
reason of his being or having been a Shareholder of a series, such
Shareholder shall be paid solely out of the funds and property of such
series or class of the Trust. Upon liquidation or termination of a
series or class thereof of the Trust, a Shareholder of such series or
class thereof shall be entitled to receive a pro rata Share of the net
assets of such series based on the net asset value of his Shares. A
Shareholder of a particular series of the Trust shall not be entitled
to commence or participate in a derivative or class action on behalf of
any other series or the Shareholders of any other series of the Trust.
(g) On any matter submitted to a vote of Shareholders, the Shares
entitled to vote thereon and the manner in which such Shares shall be
voted shall be as set forth in the By-Laws or
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proxy materials for the meeting or other solicitation materials or as
otherwise determined by the Trustees, subject to any applicable
requirements of the 1940 Act. The Trustees shall have full power and
authority to call meetings of the Shareholders of a particular class or
classes of shares or of one or more particular series of Shares, or
otherwise call for the action of such Shareholders on any particular
matter.
(h) Except as otherwise provided in this Article VI, the Trustees shall
have full power and authority to determine the designations,
preferences, privileges, sales charges, purchase prices, assets,
liabilities, expenses, costs, charges and reserves belonging or
allocated thereto, limitations and rights, including without limitation
voting, dividend, distribution and liquidation rights, of each class
and series of Shares. Subject to any applicable requirements of the
1940 Act, the Trustees shall have the authority to provide that the
Shares of one class shall be automatically converted into Shares of
another class of the same series or that the holders of Shares of any
series or class shall have the right to convert or exchange such Shares
into Shares of one or more other series or classes of Shares, all in
accordance with such requirements, conditions and procedures as may be
established by the Trustees.
(i) The establishment and designation of any series or class of shares
shall be effective upon the execution by a majority of the then
Trustees of an instrument setting forth such establishment and
designation and the relative rights and preferences of such series, or
as otherwise provided in such instrument. At any time that there are no
shares outstanding of any particular series or class previously
established and designated, the Trustees may, by an instrument executed
by a majority of their number, abolish that series or class and the
establishment and designation thereof. Each instrument referred to in
this paragraph shall have the status of an amendment to this
Declaration.
SECTION 6.11. MEETINGS OF SHAREHOLDERS. A meeting of the Shareholders
shall be held at such times, on such day and at such hour as the Trustees may
from time to time determine, or at the written request of the holder or holders
of ten percent (10%) or more of the total number of Shares then issued and
outstanding of the Trust entitled to vote as such meeting. Any such request
shall state the purpose of the proposed meeting. The meeting shall be held
either at the principal office of the Trust, or at such other place as may be
designated by the Trustees, for such purposes as may be specified by the
Trustees.
ARTICLE VII
REDEMPTIONS
SECTION 7.1. REDEMPTION OF SHARES. All Shares of the Trust shall be
redeemable, at the redemption price determined in the manner set out in this
Declaration. The Trustees shall have full power and authority to vary and change
the right of redemption applicable to the various series and classes of Shares.
Redeemed or repurchased Shares may be resold by the Trust.
The Trust shall redeem the Shares at the price determined as
hereinafter set forth, upon the appropriately verified written application of
the record holder thereof (or upon such other form of request as the Trustees
may determine) at such office or agency as may be designated from time to
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time for that purpose by the Trustees. The Trustees may from time to time
specify additional conditions, not inconsistent with the 1940 Act, regarding the
redemption of Shares in the Trust's then effective registration statement or
prospectus under the Securities Act of 1933.
SECTION 7.2. PRICE. Shares will be redeemed at their net asset value
determined as set forth in Section 8.1 hereof as of such time as the Trustees
shall have theretofore prescribed by resolution. In the absence of such
resolution, the redemption price of Shares deposited shall be the net asset
value of such Shares next determined as set forth in Section 8.1 hereof after
receipt of such application.
SECTION 7.3. PAYMENT. Payment for such Shares shall be made in cash or
in property out of the assets of the relevant series or class of the Trust to
the Shareholder of record at such time and in the manner, not inconsistent with
the 1940 Act or other applicable laws, as may be specified from time to time in
the Trust's then effective registration statement or prospectus under the
Securities Act of 1933, subject to the provisions of Section 7.4 hereof.
Notwithstanding the foregoing, the Trust or its delegate may withhold from such
redemption proceeds any amount arising (i) from a liability of the redeeming
Shareholder to the Trust, or (ii) in connection with any federal or state tax
withholding requirements.
SECTION 7.4. EFFECT OF SUSPENSION OF DETERMINATION OF NET ASSET VALUE.
If, pursuant to Section 7.8 hereof, the Trustees shall declare a suspension of
the determination of net asset value with respect to Shares of the Trust or of
any series or class thereof, the rights of Shareholders (including those who
shall have applied for redemption pursuant to Section 7.1 hereof but who shall
not yet have received payment) to have Shares redeemed and paid for by the Trust
shall be suspended until the termination of such suspension is declared. Any
record holder who shall have his redemption right so suspended may, during the
period of such suspension, by appropriate written notice of revocation at the
office or agency where application was made, revoke any application for
redemption not honored and withdraw any certificates on deposit. The redemption
price of Shares for which redemption applications have not been revoked shall be
the net asset value of such Shares next determined as set forth in Section 8.1
after the termination of such suspension, and payment shall be made within seven
(7) days after the date upon which the application was made plus the period
after such application during which the determination of net asset value was
suspended.
SECTION 7.5. REPURCHASE BY AGREEMENT. The Trust may repurchase Shares
directly, or through the Distributor or another agent designated for the
purpose, by agreement with the owner thereof at a price not exceeding the net
asset value per Share determined as of the time when the purchase or contract of
purchase is made or the net asset value as of any time which may be later
determined pursuant to Section 8.1 hereof, provided payment is not made for the
Shares prior to the time as of which such net asset value is determined.
SECTION 7.6. REDEMPTION OF SHAREHOLDER'S INTEREST. The Trust shall have
the right at any time without prior notice to the Shareholder to redeem Shares
of any Shareholder for their then current net asset value per Share if the
aggregate net asset value of such Shares is less than the minimum amount
established by the Trustees from time to time, subject to such terms and
conditions as the Trustees may approve, and subject to the Trust's giving
general notice to all Shareholders of
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its intention to avail itself of such right, either by publication in the
Trust's prospectus, if any, or by such other means as the Trustees may
determine.
SECTION 7.7. REDUCTIONS IN NUMBER OF OUTSTANDING SHARES PURSUANT TO NET
ASSET VALUE FORMULA. The Trust may also reduce the number of outstanding Shares
pursuant to the provisions of Section 8.3.
SECTION 7.8. SUSPENSION OF RIGHT OF REDEMPTION. The Trust may declare a
suspension of the right of redemption or postpone the date of payment or
redemption for the whole or any part of any period (i) during which the New York
Stock Exchange is closed other than customary weekend and holiday closings; (ii)
during which trading on the New York Stock Exchange is restricted; (iii) during
which an emergency exists as a result of which disposal by the Trust of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Trust fairly to determine the value of its net assets; or
(iv) during any other period when the Commission may for the protection of
security holders of the Trust by order permit suspension of the right of
redemption or postponement of the date of payment or redemption; provided that
applicable rules and regulations of the Commission shall govern as to whether
the conditions prescribed in (ii), (iii), or (iv) exist. Such suspension shall
take effect at such time as the Trust shall specify, but not later than the
close of business on the business day next following the declaration of
suspension, and thereafter there shall be no right of redemption or payment on
redemption until the Trust shall declare the suspension at an end, except that
the suspension shall terminate in any event on the first day on which said stock
exchange shall have reopened or the period specified in (ii) or (iii) shall have
expired (as to which, in the absence of an official ruling by the Commission,
the determination of the Trust shall be conclusive). In the case of a suspension
of the right of redemption, a Shareholder may either withdraw his request for
redemption or receive payment based on the net asset value existing after the
termination of the suspension.
SECTION 7.9. REDEMPTION OF SHARES; DISCLOSURE OF HOLDING. If the
Trustees shall, at any time and in good faith, be of the opinion that direct or
indirect ownership of Shares or other securities of the Trust has or may become
concentrated in any Person to an extent which would disqualify the Trust as a
regulated investment company under the Internal Revenue Code, then the Trustees
shall have the power by lot or other means deemed equitable by them (i) to call
for redemption by any such Person of a number, or principal amount, of Shares or
other securities of the Trust sufficient to maintain or bring the direct or
indirect ownership of Shares or other securities of the Trust into conformity
with the requirements for such qualification; and (ii) to refuse to transfer or
issue Shares or other securities of the Trust to any Person whose acquisition of
the Shares or other securities of the Trust in question would result in such
disqualification. The redemption shall be effected at the redemption price and
in the manner provided in Section 7.1.
The holders of Shares or other securities of the Trust shall upon
demand disclose to the Trustees in writing such information with respect to
direct and indirect ownership of Shares or other securities of the Trust as the
Trustees deem necessary to comply with the provisions of the Internal Revenue
Code, or to comply with the requirements of any other authority.
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ARTICLE VIII
DETERMINATION OF NET ASSET VALUE
NET INCOME AND DISTRIBUTIONS
SECTION 8.1. NET ASSET VALUE. For all purposes under this Declaration
of Trust, the net asset value of any series or class shall be determined by at
least once on each business day, as of the close of the New York Stock Exchange
or as of such other time or times as the Trustees shall determine.
The value of the assets of any series of the Trust shall be determined
by appraisal of the securities allocated to such series, such appraisal to be on
the basis of the amortized cost of money market securities or market value in
the case of other securities, or, consistent with the rules and regulations of
the Commission, by such other method as shall be deemed to reflect the fair
value thereof, determined in good faith by or under the direction of the
Trustees. From the total value of said assets, there shall be deducted all
indebtedness, interest, taxes, payable or accrued, including estimated taxes on
unrealized book profits, expenses and management charges accrued to the
appraisal date, net income determined and declared as a distribution and all
other items in the nature of liabilities attributable to such series which shall
be deemed appropriate. The resulting amount which shall represent the total net
assets of the series shall be deemed to be the net asset value of the Shares of
such series. The power and duty to make the daily calculations may be delegated
by the Trustees to the Investment Adviser, the Custodian, the Transfer Agent or
such other Person as the Trustees by resolution may determine. The Trustees may
suspend the daily determination of net asset value to the extent permitted by
the 1940 Act.
SECTION 8.2. DISTRIBUTIONS TO SHAREHOLDERS. The Trustees shall from
time to time distribute ratably among the Shareholders of the Trust or of a
series or a class thereof such proportion of the net profits, surplus (including
paid-in surplus), capital, or assets held by the Trustees as they may deem
proper. Such distribution may be made in cash or property (including without
limitation any type of obligations of the Trust or any assets thereof), and the
Trustees may distribute ratably among the Shareholders, or such series or class,
additional Shares issuable hereunder in such manner, at such times, and on such
terms as the Trustees may deem proper. Such distributions may be among the
Shareholders of record at the time of declaring a distribution or among the
Shareholders of record at such later date as the Trustees shall determine. The
Trustees may in their discretion determine that, solely for the purposes of such
distributions, outstanding Shares shall exclude Shares for which orders have
been placed subsequent to a specified time. The Trustees may always retain from
the net profits such amount as they may deem necessary to pay the debts or
expenses of the series or class or to meet obligations of the series or class,
or as they may deem desirable to use in the conduct of its affairs or to retain
for future requirements or extensions of the business. The Trustees may adopt
and offer to Shareholders such dividend reinvestment plans, cash dividend payout
plans or related plans as the Trustees shall deem appropriate.
Inasmuch as the computation of net income and gains for Federal income
tax purposes may vary from the computation thereof on the books, the above
provisions shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust or the series to avoid or reduce liability for taxes.
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SECTION 8.3. DETERMINATION OF NET INCOME. The term "net income" with
respect to a series or class of shares is hereby defined as the gross earnings
of the series or class, excluding gains on sales of securities and stock
dividends received, less the expenses of the Trust allocated to the series or
class by the Trustees in such manner as they determine to be fair and equitable
or otherwise chargeable to the series or class. The expenses shall include (1)
taxes attributable to the income of the Trust exclusive of gains on sales, and
(2) other charges properly deductible for the maintenance and administration of
the Trust; but there shall not be deducted from gross or net income any losses
on securities, realized or unrealized. The Trustees shall otherwise have full
discretion to determine which items shall be treated as income and which items
as capital and their determination shall be binding upon the Shareholders.
SECTION 8.4. POWER TO MODIFY FOREGOING PROCEDURES. Notwithstanding any
of the foregoing provisions of this Article VIII, the Trustees may prescribe, in
their absolute discretion, such other bases and times for determining the per
Share net asset value of the Shares or net income, or the declaration and
payment of dividends and distributions as they may deem necessary or desirable.
Without limiting the generality of the foregoing, the Trustees may establish
additional series or classes of Shares in accordance with Section 6.9, and
declare dividends thereon in such manner as they shall determine.
ARTICLE IX
DURATION; TERMINATION OF TRUST
AMENDMENT; MERGERS; ETC.
SECTION 9.1. DURATION. The Trust shall continue without limitation of
time but subject to the provisions of this Article IX.
SECTION 9.2. TERMINATION OF TRUST.
(a) The Trust or any series or class of the Trust may be terminated:
(i) by the affirmative vote of the holders of not less than
two-thirds of the Shares outstanding and entitled to vote at
any meeting of Shareholders, or (ii) by an instrument in
writing, without a meeting, signed by a majority of the
Trustees and consented to by the holders of not less than
two-thirds of such Shares, or by such other vote as may be
established by the Trustees with respect to any series or
class of Shares.
Upon the termination of the Trust:
(i) The Trust shall carry on no business except for the
purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the
Trust and all of the powers of the Trustees under this
Declaration shall continue until the affairs of the Trust or
any series or class shall have been wound up, including the
power to fulfill
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or discharge the contracts of the Trust or the series of the
Trust, collect its assets, sell, convey, assign, exchange,
transfer or otherwise dispose of all or any part of the
remaining Trust Property to one or more persons at public or
private sale for consideration which may consist in whole or
in part of cash, securities or other property of any kind,
discharge or pay its liabilities, and to do all other acts
appropriate to liquidate its business; provided that any sale,
conveyance, assignment, exchange, transfer or other
disposition of all or substantially all the Trust Property
shall require Shareholder approval in accordance with Section
9.4 hereof.
(iii) After paying or adequately providing for the payment of
all liabilities, and upon receipt of such releases,
indemnities and refunding agreements, as they deem necessary
for their protection, the Trustees may distribute the
remaining Trust Property, in cash or in kind or partly each,
among the Shareholders according to their respective rights.
(b) After termination of the Trust or any series or class of the Trust
and distribution to the Shareholders as herein provided, a majority of
the Trustees shall execute and lodge among the records of the Trust an
instrument in writing setting forth the fact of such termination, and
the Trustees shall thereupon be discharged from all further liabilities
and duties hereunder, and the rights and interests of all Shareholders
shall thereupon cease.
SECTION 9.3. AMENDMENT PROCEDURE.
(a) This Declaration may be amended by a Majority Shareholder Vote by
the Shareholder entitled to vote, or by any instrument in writing,
without a meeting, signed by a majority of the Trustees and consented
to by the holders of not less than a majority of the Shares outstanding
and entitled to vote. Amendments shall be effective upon the taking of
action as provided in this section or at such later time as shall be
specified in the applicable vote or instrument. The Trustees may also
amend this Declaration without the vote or consent of Shareholders to
designate series in accordance with Section 6.9 hereof, to change the
name of the Trust, to supply any omission, to cure, correct or
supplement any ambiguous, defective or inconsistent provision hereof,
or if they deem it necessary to conform this Declaration to the
requirements of applicable federal laws or regulations or the
requirements of the regulated investment company provisions of the
Internal Revenue Code, or to make any other changes in the Declaration
which do not materially adversely affect the rights of Shareholders
hereunder, but the Trustees shall not be liable for failing to do so.
(b) No amendment may be made under this Section 9.3 which would change
any rights with respect to any Shares of the Trust by reducing the
amount payable thereon upon liquidation of the Trust or by diminishing
or eliminating any voting rights pertaining thereto, except with the
vote or consent of the holders of two-thirds of the Shares outstanding
and entitled to vote, or by such other vote as may be established by
the Trustees with respect to any series of Shares. Nothing contained in
this Declaration shall permit the amendment of this Declaration to
impair the exemption from personal liability of the Shareholders,
Trustees, officers, employees and agents of the Trust or to permit
assessments upon Shareholders.
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(c) A certificate signed by a majority of the Trustees setting forth an
amendment and reciting that it was duly adopted by the Shareholders or
by the Trustees as aforesaid or a copy of the Declaration, as amended,
and executed by a majority of the Trustees, shall be conclusive
evidence of such amendment when lodged among the records of the Trust.
Notwithstanding any other provision hereof, until such time as a
Registration Statement under the Securities Act of 1933, as amended, covering
the first public offering of securities of the Trust shall become effective,
this Declaration may be terminated or amended in any respect by the affirmative
vote of a majority of the Trustees or by an instrument signed by a majority of
the Trustees.
SECTION 9.4. MERGER, CONSOLIDATION AND SALE OF ASSETS. The Trust may
merge or consolidate with any other corporation, association, trust or other
organization or may sell, lease or exchange all or substantially all of the
Trust Property, including its goodwill, upon such terms and conditions and for
such consideration when and as authorized at any meeting of Shareholders called
for the purpose by the affirmative vote of the holders of not less than
two-thirds of the Shares outstanding and entitled to vote, or by an instrument
or instruments in writing without a meeting, consented to by the holders of not
less than two-thirds of such Shares, or by such other vote as may be established
by the Trustees with respect to any series of Shares; provided, however, that,
if such merger, consolidation, sale, lease or exchange is recommended by the
Trustees, the vote or written consent of the holders of a majority of Shares
outstanding and entitled to vote, or by such other vote as may be established by
the Trustees with respect to any series of Shares, shall be sufficient
authorization; and any such merger, consolidation, sale, lease or exchange shall
be deemed for all purposes to have been accomplished under and pursuant to the
statutes of the Commonwealth of Massachusetts.
SECTION 9.5. INCORPORATION. With the approval of the holders of a
majority of the Shares outstanding and entitled to vote, or by such other vote
as may be established by the Trustees with respect to any series of Shares, the
Trustees may cause to be organized or assist in organizing a corporation or
corporations under the laws of any jurisdiction or any other trust, partnership,
association or other organization to take over all of the Trust Property or to
carry on any business in which the Trust shall directly or indirectly have any
interest, and to sell, convey and transfer the Trust Property to any such
corporation, trust, association or organization in exchange for the shares or
securities thereof or otherwise, and to lend money to, subscribe for the shares
or securities of, and enter into any contracts with any such corporation, trust,
partnership, association or organization in which the Trust holds or is about to
acquire shares or any other interest. The Trustees may also cause a merger or
consolidation between the Trust or any successor thereto and any such
corporation, trust, partnership, association or other organization if and to the
extent permitted by law, as provided under the law then in effect. Nothing
contained herein shall be construed as requiring approval of Shareholders for
the Trustees to organize or assist in organizing one or more corporations,
trusts, partnerships, associations or other organizations and selling, conveying
or transferring a portion of the Trust Property to such organization or
entities.
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ARTICLE X
REPORTS TO SHAREHOLDERS
The Trustees shall at least semi-annually submit to the Shareholders a
written financial report of the transactions of the Trust, including financial
statements which shall at least annually be certified by independent public
accountants.
ARTICLE XI
MISCELLANEOUS
SECTION 11.1. FILING. This Declaration and any amendment hereto shall
be filed in the office of the Secretary of the Commonwealth of Massachusetts and
in such other places as may be required under the laws of Massachusetts and may
also be filed or recorded in such other places as the Trustees deem appropriate.
Each amendment so filed shall be accompanied by a certificate signed and
acknowledged by a Trustee stating that such action was duly taken in a manner
provided herein, and unless such amendment or such certificate sets forth some
later time for the effectiveness of such amendment, such amendment shall be
effective upon its filing. A restated Declaration, integrating into a single
instrument all of the provisions of the Declaration which are then in effect and
operative, may be executed from time to time by a majority of the Trustees and
shall, upon filing with the Secretary of the Commonwealth of Massachusetts, be
conclusive evidence of all amendments contained herein and may thereafter be
referred to in lieu of the original Declaration and the various amendments
thereto. The restated Declaration may include any amendment which the Trustees
are empowered to adopt, whether or not such amendment has been adopted prior to
the execution of the restated Declaration.
SECTION 11.2. GOVERNING LAW. This Declaration is executed by the
Trustees and delivered with reference to the laws of the Commonwealth of
Massachusetts, and the rights of all parties and the validity and construction
of every provision hereof shall be subject to and construed according to the
laws of said State.
SECTION 11.3. COUNTERPARTS. This Declaration may be simultaneously
executed in several counterparts, each of which shall be deemed to be an
original, and such counterparts, together, shall constitute one and the same
instrument, which shall sufficiently evidenced by any such original counterpart.
SECTION 11.4. RELIANCE BY THIRD PARTIES. Any certificate executed by an
individual who, according to the records of the Trust appears to be a Trustee
hereunder, certifying to: (a) the number or identity of Trustees or
Shareholders, (b) the due authorization of the execution of any instrument or
writing, (c) the form of any vote passed at a meeting of Trustees or
Shareholders, (d) the fact that the number of Trustees or Shareholders present
at any meeting or executing any written instrument satisfies the requirements of
this Declaration, (e) the form of any Bylaws adopted by or the identity of any
officers elected by the Trustees, or (f) the existence of any fact or facts
which in any manner
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relate to the affairs of the Trust, shall be conclusive evidence as to the
matters so certified in favor of any Person dealing with the Trustees and their
successors.
SECTION 11.5. PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS.
(a) The provisions of the Declaration are severable, and if the
Trustees shall determine, with the advice of counsel, that any of such
provisions is in conflict with the 1940 Act, the regulated investment
company provisions of the Internal Revenue Code or with other
applicable laws and regulations, the conflicting provisions shall be
deemed never to have constituted a part of the Declaration; provided,
however, that such determination shall not affect any of the remaining
provisions of the Declaration or render invalid or improper any action
taken or omitted prior to such determination.
(b) If any provision of the Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability
shall attach only to such provision in such jurisdiction and shall not
in any manner affect such provision in any other jurisdiction or any
other provision of the Declaration in any jurisdiction.
SECTION 11.6. INDEX AND HEADING FOR REFERENCE ONLY. The Index and
heading preceding the text, articles and sections hereof have been inserted for
convenience and reference only and shall not be construed to affect the meaning,
construction or effect of this Declaration.
IN WITNESS WHEREOF, the undersigned Trustee has hereunto set his hands this 3rd
day of September, 1996.
------------------------------
Elizabeth A. Davin, as Trustee
and not individually
Address: One Nationwide Plaza
25th Floor
Columbus, Ohio 43216
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