As filed with the Securities and Exchange Commission on March 29, 2000
Registration No. 333-14943/811-07881
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.__ [ ]
Post-Effective Amendment No. 9 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 11 [X]
(Check appropriate box or boxes.)
BRAZOS MUTUAL FUNDS
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
5949 Sherry Lane, Suite 1600
Dallas, Texas 75225
-------------------
(Address of Principal Executive Offices) (Zip Code)
with a copy of communications to:
Audrey C. Talley, Esquire
Drinker Biddle & Reath LLP
18th and Cherry Streets
Philadelphia, PA 19103-6996
Registrant's Telephone Number, including Area Code (214) 365-5200
--------------
DAN L. HOCKENBROUGH, 5949 SHERRY LANE, SUITE 1600, DALLAS, TEXAS 75225
----------------------------------------------------------------------
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after this
Registration Statement becomes
effective.
----------------------------------
It is proposed that this filing will become effective (check appropriate box)
[X] immediately upon filing pursuant to paragraph (b)
[ ] on pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on pursuant to paragraph (a)(2) of Rule 485.
<PAGE>
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered: Shares of Beneficial Interest
<PAGE>
BRAZOS MUTUAL FUNDS
PROSPECTUS
MARCH 29, 2000
INVESTMENT OBJECTIVE
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BRAZOS Micro Cap Growth Portfolio Micro Capitalization
CLASS Y SHARES Growth
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BRAZOS Small Cap Growth Portfolio Small Capitalization
CLASS Y AND CLASS A SHARES Growth
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BRAZOS Mid Cap Growth Portfolio Mid Capitalization
CLASS Y AND CLASS A SHARES Growth
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BRAZOS Real Estate Securities Portfolio Real Estate
CLASS Y AND CLASS A SHARES Growth and Income
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BRAZOS Multi Cap Growth Portfolio Multi Cap Growth
CLASS Y AND CLASS A SHARES
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THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OF THIS PROSPECTUS.
IT IS A CRIME FOR ANYONE TO TELL YOU OTHERWISE.
Transfer Agent:
State Street Bank and Trust Company WEBSITE: WWW.BRAZOSFUND.COM
Telephone: 1-800-426-9157
<PAGE>
TABLE OF CONTENTS
Brazos Micro Cap Growth Portfolio........ 3
Brazos Small Cap Growth Portfolio........ 3
Brazos Mid Cap Growth Portfolio.......... 3
Brazos Real Estate Securities Portfolio.. 10
Brazos Multi Cap Growth Portfolio........ 15
Risk Elements.................................................. 19
Information About the Adviser.................................. 21
Information for First Time Mutual Fund Investors............... 24
Valuation of Shares............................................ 25
Dividends, Capital Gains Distributions and Taxes............... 25
Shareholder Account Information................................ 26
Purchase of Shares............................................. 29
Redemption of Shares........................................... 33
Retirement Plans............................................... 35
Financial Highlights........................................... 36
For More Information........................................... Back Cover
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INVESTMENT OBJECTIVE
INVESTMENT POLICIES
INVESTMENT SUITABILITY
RISK CONSIDERATIONS
PAST PERFORMANCE
INVESTOR EXPENSES
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2
<PAGE>
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BRAZOS MICRO CAP GROWTH PORTFOLIO
BRAZOS SMALL CAP GROWTH PORTFOLIO
BRAZOS MID CAP GROWTH PORTFOLIO
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SUMMARY OF INVESTMENT OBJECTIVES
The investment objectives of the Brazos Micro Cap Growth Portfolio ("Micro
Cap"), the Brazos Small Cap Growth Portfolio ("Small Cap") and the Brazos Mid
Cap Growth Portfolio ("Mid Cap") are to provide maximum capital appreciation,
consistent with reasonable risk to principal.
INVESTMENT POLICIES AND STRATEGIES
The majority of equity securities (65%) in each Portfolio will have market
capitalizations as follows:
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MARKET CAPITALIZATION SIZE
(AT TIME OF PURCHASE)
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Micro Cap $600 million or lower1 or a capitalization of companies
represented in the lower 50% of the Russell 2000 Index at the time of the
Portfolio's investment.
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Small Cap $1.8 billion or lower2 or a capitalization of companies
represented in the Russell 2000 Index at the time of the Portfolio's investment.
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Mid Cap $235 million to $12.9 billion3 or a capitalization of companies
represented in the S&P MidCap 400 Index at the time of the Portfolio's
investment.
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1 The $600 million target will fluctuate with changes in market conditions and
the composition of the Russell 2000 Index. As of February 29, 2000, the
company with the largest market capitalization in the lower 50% of the
Russell 2000 Index was $445 million.
2 This target will fluctuate with changes in market conditions and the
composition of the Russell 2000 Index. As of February 29, 2000, the company
with the largest market capitalization in the Russell 2000 Index was
approximately $20 billion.
3 This range will fluctuate with changes in market conditions and the
composition of the S&P MidCap 400 Index. As of February 29, 2000, the company
with the largest market capitalization in the S&P MidCap 400 Index was
approximately $51 billion.
3
<PAGE>
The Portfolios seek to achieve their objectives by investing primarily in
micro, small and mid capitalization companies, respectively. For each of the
Portfolios, the remaining securities acquired may have market capitalizations
that exceed the target capitalization. Micro Cap generally seeks investment in
securities of companies with high growth rates, average annual revenues under
$500 million, and low debt levels. Small Cap generally seeks investment in
securities of companies with above average growth rates, average annual revenues
below $1 billion, above average return on equity, and low debt levels. Mid Cap
generally seeks investment in securities of companies John McStay Investment
Counsel ("JMIC" or "the Adviser") expects to grow at a faster rate than the
average company. There can be no assurance that any securities of companies in
which a Portfolio of Brazos Mutual Funds (the "Company") invests will achieve
the targeted growth rates.
The types of equity securities that can be purchased include common stocks
and securities convertible into common stocks. Market conditions may lead to
higher levels (up to 100%) of temporary investments such as money market
instruments or U.S. Treasury Bills. Temporary investments are expected to be 5%
to 10% of each Portfolio under normal circumstances.
The investment process involves consistent communications with senior
management, suppliers, competitors and customers in an attempt to understand the
dynamics within each company's business. The Adviser then selects companies with
strong growth in revenue, earnings and cash flow, predictable operating models,
seasoned management, and unique products or services. JMIC believes that smaller
companies have greater potential to deliver above average growth rates that may
not yet have been recognized by investors.
To manage fluctuations in the value of the Portfolios' investments, JMIC
invests across 15-20 industry sectors with no industry sector representing more
than 25% of the value of each Portfolio. JMIC may sell securities when the value
of a security or a group of securities within a certain industry sector violates
diversification objectives. A high rate of portfolio turnover involves greater
transaction expenses and possible adverse tax consequences to the Portfolios'
shareholders, which may reduce performance.
The value of each security at the time of acquisition is not expected to
exceed 4% of the value of investments in each of the Micro Cap, Small Cap or Mid
Cap Portfolios. JMIC seeks to reduce risk by limiting the Portfolios' holdings
of a certain stock to an amount less than or equal to the number of shares
traded on the market by all traders during the last seven business days.
4
<PAGE>
RISK CONSIDERATIONS
Investment Suitability
Micro Cap, Small Cap and Mid Cap may be appropriate for investors who:
o are seeking long-term capital growth
o do not need current income
o are willing to hold an investment over a long period of time in
anticipation of returns that equity securities can provide and
o are able to tolerate fluctuations in principal value of their
investment.
Investment in the Portfolios involves investment risks, including the risk
that investors may lose money. The value of the Portfolios' investments could be
influenced by changes in the stock market as a whole, by changes in a certain
industry, or by changes in certain stocks. The performance results presented
below may reflect periods of above average performance attributable to a
Portfolio's investment in certain securities during the initial public offering,
the performance of a limited number of the securities in the Portfolio, or other
non-recurring factors. It is possible that the performance may not be repeated
in the future.
Each Portfolio may, for temporary defensive purposes, invest a percentage
of its total assets, without limitation, in cash or various U.S.
dollar-denominated money market instruments. The value of money market
instruments tends to fall when current interest rates rise. Money market
instruments are generally less sensitive to interest rate changes than
longer-term securities. When a Portfolio's assets are invested in these
instruments, a Portfolio may not be achieving its investment objective.
To the extent each Portfolio invests in small companies, it may be exposed
to greater risk than if it invested in larger, more established companies. Small
companies may have limited product lines, financial resources, and management
teams. Additionally, the trading volume of small company securities may make
them more difficult to sell. In addition, Micro Cap may be subject to the risk
that microcapitalization stocks may fail to reach their apparent value at the
time of investment or may even fail as a business. Microcapitalization companies
may lack resources to take advantage of a valuable product or favorable market
position or may be unable to withstand the competitive pressures of larger, more
established competitors. A more in-depth discussion of the types of risks an
equity fund could be subject to is on pages 19-20.
5
<PAGE>
PERFORMANCE BAR CHART
The bar charts below show the variability of the annual returns since
inception for the Small Cap and Micro Cap Portfolios, and provide an indication
of the risks of investing in a Portfolio by showing changes in the performance
of the Portfolio's shares from year to year. There is no past performance table
for the Mid Cap Growth Portfolio, because it has less than one year's
performance. These bar charts assume reinvestment of dividends and
distributions. As with all mutual funds, the past is not a prediction of the
future.
[Figures below represents bar chart in its printed piece]
1997 -- 54.50
1998 -- 13.60
1999 -- 37.01
1 The returns shown in the bar chart above and table below are for Class Y
shares, which have substantially similar annual returns to Class A shares
because they are invested in the same portfolio of securities. In reviewing
this performance information, however, you should be aware that returns for
Class A shares would differ to the extent that Class Y shares do not have the
same expenses and sales loads as Class A shares which are set forth on page
8 of this prospectus.
Best Quarter: Q4 1999 29.94%
Worst Quarter: Q3 1998 -19.49%
[Figures below represents bar chart in its printed piece]
1998 -- 32.80
1998 -- 80.84
BEST QUARTER: Q4 1999 36.58%
WORST QUARTER: Q3 1998 -16.26%
6
<PAGE>
PAST PERFORMANCE
The table below shows the past performance of both the Small Cap and Micro
Cap Portfolios compared to that of the Russell 2000 Index, a widely recognized
unmanaged index of small stock performance. A mutual fund's comparison of its
performance to an objective index may be viewed by an investor as a relative
measure of performance. Similar to the bar charts above, this table assumes
reinvestment of dividends and distributions. As with all mutual funds, the past
is not a prediction of the future.
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SINCE
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/99 1 YEAR INCEPTION1
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BRAZOS SMALL CAP GROWTH PORTFOLIO 37.01% 33.97%
(Class Y)
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BRAZOS MICRO CAP GROWTH PORTFOLIO 80.84% 54.97%
(Class Y)
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RUSSELL 2000 INDEX2 21.26% 13.08%
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1 The commencement of operations for the Class Y shares of the Small Cap Growth
Portfolio and the Micro Cap Growth Portfolio was 12/31/96 and 12/31/97,
respectively.
2 The Russell 2000 Index figures do not reflect any fees or expenses. Investors
cannot invest directly in the Index.
7
<PAGE>
INVESTOR EXPENSES
The expenses you should expect to pay as an investor in each of the
Portfolios are shown below.
<TABLE>
<CAPTION>
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SHAREHOLDER FEES (FEES PAID MICRO CAP SMALL CAP SMALL CAP MID CAP MID CAP
DIRECTLY FROM YOUR INVESTMENT) CLASS Y CLASS Y CLASS A CLASS Y CLASS A
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<S> <C> <C> <C> <C> <C>
Maximum Sales Charge (Load) None None 5.75% None 5.75%
Imposed on Purchases (as a
percentage of offering price)(1)
Maximum Deferred Sales None None None None None
Charge (Load) (as a
percentage of amount
redeemed)(2)
Maximum Sales Charge None None None None None
(Load) Imposed on
Reinvestment Dividends
Redemption Fee (as a
percentage of amount
redeemed)(3) None None None None None
Exchange Fee None None None None None
Maximum Account Fee None None None None None
- - ------------------------------------------------------------------------------------------------------------
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM MICRO CAP SMALL CAP SMALL CAP MID CAP MID CAP
PORTFOLIO ASSETS) CLASS Y CLASS Y CLASS A CLASS Y CLASS A
- - ------------------------------------------------------------------------------------------------------------
Management fees 1.20% .90% 0.90% 0.90% 0.90%
Distribution (12b-1) Fees(4) None None 0.35% None 0.35%
Other Expenses 0.34% 0.18% 0.54% 0.45% 0.45%
----- ----- ----- ----- -----
Total Annual Portfolio
Operating Expenses 1.54%(5) 1.08%(5) 1.79%(5) 1.35%(6) 1.70%(7)
- - ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The front-end sales charge on Class A shares decreases with the size of the
purchase to 0% for purchases of $1 million or more.
(2) Purchases of Class A shares over $1 million will be subject to a contingent
deferred sales charge (CDSC) on redemptions made within two years of
purchase.
(3) Class Y shares have a $12.00 fee for each redemption made by wire.
Additionally, some institutions may charge a fee if you buy through them. A
fee of $15.00 may be imposed on wire redemptions and overnight mail
redemptions for Class A shares.
(4) Because these fees are paid out of a Portfolio's assets on an on-going
basis, over time these fees will increase the cost of your investment and
may cost you more than paying other types of sales charges.
(5) JMIC currently reimburses fund expenses and waives advisory fees to the
extent total operating expenses exceed 1.60% for Micro Cap, 1.35% for Y
shares of Small Cap and 1.65% for A shares of Small Cap. These caps on
expenses are expected to continue until further notice.
(6) The offering of Class Y shares of Mid Cap commenced on December 31, 1999.
The amounts shown are estimated based on expenses expected to have been
incurred if Class Y shares of Mid Cap had been in existence throughout the
fiscal year ended November 30, 1999. Nevertheless, JMIC has undertaken to
cap the expense ratio set forth above should total operating expenses
exceed 1.35%. This cap on expenses is expected to continue until further
notice.
8
<PAGE>
(7) The offering of Class A shares of Mid Cap will commence on March 31, 2000.
The amounts shown are estimated based on expenses expected to have been
incurred if Class A shares of Mid Cap had been in existence throughout the
fiscal year ended November 30, 1999. Nevertheless, JMIC has undertaken to
cap the expense ratio set forth above should total operating expenses
exceed 1.70%. This cap on expenses is expected to continue until further
notice.
The example below shows what a shareholder could pay in expenses over time
and is intended to help you compare the cost of investing in the Portfolios with
the cost of investing in other mutual funds. It uses the same hypothetical
conditions other mutual funds use in their prospectuses: $10,000 initial
investment for the time periods indicated, 5% annual total return, expenses
(without fee waiver) remain unchanged. The figures shown would be the same
whether you sold your shares at the end of a period or kept them. The
Portfolios' actual return and expenses will be different.
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1 Year 3 Years 5 Years 10 Years
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MICRO CAP
(Class Y) $157 $486 $839 $1,835
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SMALL CAP
(Class Y) $110 $343 $595 $1,317
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SMALL CAP
(CLASS A) $746 $1,106 $1,489 $2,559
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MID CAP
(CLASS Y) $137 $428 $739 $1,624
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MID CAP
(CLASS A) $738 $1,080 $1,445 $2,468
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9
<PAGE>
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BRAZOS REAL ESTATE SECURITIES PORTFOLIO
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SUMMARY OF INVESTMENT OBJECTIVE
The investment objective of the Brazos Real Estate Securities Portfolio
("Real Estate" or the "Portfolio") is to invest in real estate securities that
provide a balance of income and appreciation (with reasonable risk to
principal).
INVESTMENT POLICIES AND STRATEGIES
The Portfolio seeks to achieve its objective by investing at least 65% of
its total assets in equity securities of companies principally engaged in the
real estate industry. A company is considered "principally engaged in the real
estate industry" if at least 50% of its assets, gross income, or net profits are
attributable to ownership, construction, management or sale of various real
estate. The types of equity securities that can be purchased include common
stocks and securities convertible into common stocks. Market conditions may lead
to higher levels (up to 100%) of temporary investments, such as money market
instruments or U.S. Treasury Bills. Temporary investments are expected to be 5%
to 10% of the Portfolio under normal circumstances.
Real Estate generally seeks securities of companies with strong cash flow,
management, dividend yield, dividend growth potential, and financial strength.
The list of potential investments is further filtered through the use of
fundamental security analysis and valuation methods.
JMIC seeks to manage risk by investing across 10-15 property sectors, such
as hotel, office, apartment, retail and industrial sectors. The Portfolio is
expected to maintain broad geographic diversification. JMIC may sell securities
when the value of a security or a group of securities within a certain sector
violates diversification objectives. A high rate of portfolio turnover involves
greater transaction expenses and possible adverse tax consequences to the
Portfolio's shareholders, which may reduce performance.
The Portfolio is a non-diversified Portfolio. It may invest up to 10% of
its assets in securities of any one issuer at the time of acquisition. JMIC
typically seeks to reduce risk by limiting the Portfolio's holdings of a certain
stock to an amount less than or equal to the number of shares traded on the
market by all traders during the last ten business days.
10
<PAGE>
RISK CONSIDERATIONS
INVESTMENT SUITABILITY
Real Estate may be appropriate for investors who:
o are seeking long-term capital growth
o prefer some current income
o are willing to hold an investment over a long period of time in
anticipation of returns that equity securities can provide and
o are able to tolerat fluctuations in the principal value of their
investment.
Investment in the Portfolio involves investment risks, including the risk
that investors may lose money. The value of the Portfolio may significantly
increase or decrease over a short period of time. The value could be influenced
by changes in the stock market as a whole, by changes in a certain industry, or
by changes in certain stocks. The performance results presented below may
reflect periods of above average performance attributable to the Portfolio's
investments in certain securities and non-recurring factors. It is possible that
the performance may not be repeated in the future. Because the Portfolio
concentrates its investments in a specific industry it is subject to greater
risk of loss as a result of adverse economic, business or other developments
than if its investments were diversified across different industries.
The Portfolio may, for temporary defensive purposes, invest a percentage
of its total assets, without limitation, in cash or various U.S.
dollar-denominated money market instruments. The value of money market
instruments tends to fall when current interest rates rise. Money market
instruments are generally less sensitive to interest rate changes than
longer-term securities. When the Portfolio's assets are invested in these
instruments, it may not be achieving its investment objective.
The Portfolio is subject to risks, such as market forces, that may impact
the values of its underlying real estate assets, and management's skill in
managing those assets. The Portfolio invests primarily in companies in the real
estate industry and, therefore, may be subject to risks associated with the
direct ownership of real estate, such as decreases in real estate value,
overbuilding, increased competition and other risks related to local or general
economic conditions, increases in operating costs and property taxes, changes in
zoning laws, casualty or condemnation losses, possible environmental
liabilities, regulatory limitations on rent and fluctuations in rental income.
Moreover, the trading volume of real estate securities due to their low volume
may make them more difficult to sell. A more in depth discussion of the types of
risks an equity fund could be subject to is on pages 19-20.
11
<PAGE>
PERFORMANCE BAR CHART
The bar chart below shows the variability of the Portfolio's annual
returns since inception, and provides an indication of the risks of investing in
the Portfolio by showing changes in the performance of the Portfolio's shares
from year to year. This bar chart assumes reinvestment of dividends and
distributions. As with all mutual funds, the past is not a prediction of the
future.
[Figures below represents bar chart in its printed piece]
1997 -- 29.20%
1998 -- -17.40%
1999 -- -4.61%
1 The returns shown in the bar chart above and table below are for Class Y
shares, which have substantially similar annual returns to Class A shares
because they are invested in the same portfolio of securities. In reviewing
this performance information, however, you should be aware that returns for
Class A shares would differ to the extent that Class Y shares do not have the
same expenses and sales loads as Class A shares which are set forth on page
13 of this prospectus.
BEST QUARTER: Q3 1997 12.16%
WORST QUARTER: Q3 1998 -13.52%
PAST PERFORMANCE
The table below shows the Portfolio's past performance campared to that of
the NAREIT Equity Index, a widely recognized unmanaged index of publicly traded
real estate securities. Similar to the bar chart above, this table assumes
reinvestment of dividends and distributions. As with all mutual funds, the past
is not a prediction of the future.
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
Average annual total return as of 12/31/99 1 YEAR (12/31/96)
- - --------------------------------------------------------------------------------
BRAZOS REAL ESTATE SECURITIES
PORTFOLIO (Class Y) -4.61% 0.60%
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NAREIT EQUITY INDEX1 -4.62% -1.82%
- - --------------------------------------------------------------------------------
1 The NAREIT Equity Index figures do not reflect any fees or expenses.
Investors cannot invest directly in the Index.
12
<PAGE>
INVESTOR EXPENSES
The expenses you should expect to pay as an investor in the Portfolio are
shown below.
- - --------------------------------------------------------------------------------
SHAREHOLDER FEES REAL ESTATE SECURITIES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT) CLASS Y CLASS A
- - --------------------------------------------------------------------------------
Maximum Sales Charge (Load) None 5.75%
Imposed on Purchases (as a percentage of
offering price)(1)
Maximum Deferred Sales Charge (Load) (as a None None
percentage of amount redeemed)(2)
Maximum Sales Charge (Load) Imposed on None None
Reinvestment Dividends
Redemption Fee (as a percentage of amount 1.00% 1.00%
redeemed)(3)
Exchange Fee None None
Maximum Account Fee None None
- - --------------------------------------------------------------------------------
ANNUAL PORTFOLIO OPERATING EXPENSES REAL ESTATE SECURITIES
(EXPENSES THAT ARE DEDUCTED FROM PORTFOLIO ASSETS) CLASS Y CLASS A
- - --------------------------------------------------------------------------------
Management fees 0.90% 0.90%
Distribution (12b-1) Fees(4) None 0.35%
Other Expenses 0.29% 0.58%
----- -----
Total Annual Portfolio Operating Expenses(5) 1.19% 1.83%
- - --------------------------------------------------------------------------------
(1) The front-end sales charge on Class A shares decreases with the size of the
purchase to 0% for purchases of $1 million or more.
(2) Purchases of Class A shares over $1 million will be subject to a contingent
deferred sales charge (CDSC) on redemptions made within two years of
purchase.
(3) Shares of the Portfolio that are held 90 days or more may be redeemed
without cost. This fee is intended to encourage long-term investment in the
Portfolio, to avoid transaction and other expenses caused by early
redemption, and to facilitate portfolio management. Class Y shares also
have a $12.00 fee for each redemption made by wire. Additionally, some
institutions may charge a fee if you buy through them. A fee of $15.00 may
be imposed on wire redemptions and overnight mail redemptions for Class A
shares.
(4) Because these fees are paid out of a Portfolio's assets on an on-going
basis, over time these fees will increase the cost of your investment and
may cost you more than paying other types of sales charges.
(5) JMIC currently reimburses fund expenses and waives advisory fees to the
extent total operating expenses exceed 1.25% for Y shares and 1.65% for A
shares. This cap on expenses is expected to continue until further notice.
13
<PAGE>
The example below shows what a shareholder could pay in expenses over time
and is intended to help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. It uses the same hypothetical
conditions other mutual funds use in their prospectuses: $10,000 initial
investment for the time periods indicated, 5% annual total return, expenses
(without fee waiver) remain unchanged. The figures shown would be the same
whether you sold your shares at the end of a period or kept them. The
Portfolio's actual return and expenses will be different.
- - --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- - --------------------------------------------------------------------------------
REAL ESTATE
SECURITIES PORTFOLIO (CLASS Y) $121 $378 $654 $1,443
REAL ESTATE
SECURITIES PORTFOLIO (CLASS A) $750 $1,117 $1,508 $2,599
- - --------------------------------------------------------------------------------
14
<PAGE>
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BRAZOS MULTI CAP GROWTH PORTFOLIO
- - --------------------------------------------------------------------------------
SUMMARY OF INVESTMENT OBJECTIVE
The investment objective of the Brazos Multi Cap Growth Portfolio ("Multi
Cap") is to provide maximum capital growth.
INVESTMENT POLICIES AND STRATEGIES
The Portfolio seeks to achieve its objective by investing primarily in
equity securities. Multi Cap generally seeks securities of companies with above
average growth rates, above average return on equity, and low debt levels. There
can be no assurance that any securities of companies in which the Portfolio
invests will achieve the targeted growth rate.
The types of equity securities that can be purchased include common stocks
and securities convertible into common stocks. Market conditions may lead to
higher levels (up to 100%) of temporary investments such as money market
instruments or U.S. Treasury Bills. Temporary investments are expected to be 5%
to 10% of the Portfolio under normal circumstances.
Securities are selected based on the company's potential for strong growth
in revenue, earnings and cash flow, strong management, and leading products or
services. The possible investments are further filtered through the use of
fundamental security analysis and valuation methods.
To reduce any fluctuation in the value of the Portfolio's investments,
JMIC invests across 15-20 industry sectors with no industry sector representing
more than 25% of the value of the Portfolio. JMIC may sell securities when the
value of a security or a group of securities within a certain industry sector
violates diversification objectives. A high rate of portfolio turnover involves
greater transaction expenses and possible adverse tax consequences to the
Portfolio's shareholders, which may reduce performance.
The value of each security is expected to be less than 4% of the value of
the Portfolio at the time of initial acquisition. JMIC seeks to reduce risk by
limiting the Portfolio's holdings of a certain stock to an amount less than or
equal to the number of shares traded on the market by all traders during the
last seven business days.
Multi Cap was previously named the Brazos Growth Portfolio. However, the
Portfolio's investment objective remains unchanged.
RISK CONSIDERATIONS
INVESTMENT SUITABILITY
Multi Cap may be appropriate for investors who:
o are seeking long-term capital growth
o are willing to hold an investment over a long period of time in
anticipation of returns that equity securities can provide and
o are able to tolerate fluctuations in principal value of their
investment.
15
<PAGE>
Investment in the Portfolio involves investment risks, including the risk
that investors may lose money. The value of the Portfolio may advance or decline
significantly over a short period of time. The value could be influenced by
changes in the stock market as a whole, by changes in a certain industry, or by
changes in certain stocks. The performance results of the Portfolio may reflect
periods of above average performance attributable to the Portfolio's investment
in certain securities during their initial public offering, the performance of a
limited number of the securities in the Portfolio, or other non-recurring
factors. It is possible that the performance may not be repeated in the future.
The Portfolio may, for temporary defensive purposes, invest a percentage
of its total assets, without limitation, in cash or various U.S.
dollar-denominated money market instruments. The value of money market
instruments tends to fall when current interest rates rise. Money market
instruments are generally less sensitive to interest rate changes than
longer-term securities. When the Portfolio's assets are invested in these
instruments, it may not be achieving its investment objective. A more in depth
discussion of the types of risks an equity fund could be subject to is on pages
19-20.
PERFORMANCE BAR CHART
The bar chart below shows the variability of the annual returns since
inception for the MultiCap Portfolio, and provides an indication of the risks of
investing in the Portfolio by showing the performance of the Portfolio's shares
during its first full calendar year. This bar chart assumes reinvestment of
dividends and distributions. As with all mutual funds, the past is not a
prediction of the future.
[Figures below represents bar chart in its printed piece]
1999 -- 92.05%
1 The returns shown in the bar chart above and table below are for Class Y
shares, which have substantially similar annual returns to Class A shares
because they are invested in the same portfolio of securities. In reviewing
this performance information, however, you should be aware that returns for
Class A shares would differ to the extent that Class Y shares do not have the
same expenses and sales loads as Class A shares which are set forth on pages
17 and 18 of this prospectus.
BEST QUARTER: Q4 1999 28.73%
WORST QUARTER: Q3 1999 1.21%
16
<PAGE>
PAST PERFORMANCE
The table below shows the past performance of the Multi Cap Growth
Portfolio compared to that of the S&P MidCap 400 Index, an unmanaged
capitalization-weighted index that measures the performance of the mid-range of
the U.S. stock market. A mutual fund's comparison of its performance to an
objective index may be viewed by an investor as a relative measure of
performance. Similar to the bar chart above, this table assumes reinvestment of
dividends and distributions. As with all mutual funds, the past is not a
prediction of the future.
- - --------------------------------------------------------------------------------
SINCE
INCEPTION
Average annual total return as of 12/31/99 1 YEAR (12/31/98)
- - --------------------------------------------------------------------------------
BRAZOS MULTI CAP GROWTH
PORTFOLIO (Class Y) 92.05% 92.05%
- - --------------------------------------------------------------------------------
S&P MIDCAP 400 INDEX1 14.72% 14.72%
- - --------------------------------------------------------------------------------
1 The S&P MidCap 400 Index figures do not reflect any fees or expenses.
Investors cannot invest directly in the Index.
INVESTOR EXPENSES
The expenses you should expect to pay as an investor in the Portfolio are
shown below and are based on estimated amounts for the current fiscal year.
- - --------------------------------------------------------------------------------
SHAREHOLDER FEES MULTI CAP MULTI CAP
(FEES PAID DIRECTLY FROM YOUR INVESTMENT) CLASS Y CLASS A
- - --------------------------------------------------------------------------------
Maximum Sales Charge (Load) None 5.75%
Imposed on Purchases (as a
percentage of offering price)(1)
Maximum Deferred Sales None None
Charge (Load) (as a
percentage of amount
redeemed)(2)
Maximum Sales Charge None None
(Load) Imposed on
Reinvestment Dividends
Redemption Fee None None
(as a percentage of amount
redeemed)(3)
Exchange Fee None None
Maximum Account Fee None None
- - --------------------------------------------------------------------------------
17
<PAGE>
- - --------------------------------------------------------------------------------
ANNUAL PORTFOLIO OPERATING EXPENSES(4)
(EXPENSES THAT ARE DEDUCTED FROM MULTI CAP MULTI CAP
PORTFOLIO ASSETS) CLASS Y CLASS A
- - --------------------------------------------------------------------------------
Management fees 0.90% 0.90%
Distribution (12b-1) Fees(4) None 0.35%
Other Expenses 1.09% 1.09%
----- -----
Total Annual Portfolio
Operating Expenses 1.99%(5) 2.34%(6)
----- -----
- - --------------------------------------------------------------------------------
(1) The front-end sales charge on Class A shares decreases with the size of the
purchases to 0% for purchases of $1 million or more.
(2) Purchases of Class A shares over $1 million will be subject to a contingent
deferred sales charge (CDSC) on redemptions made within two years of
purchase.
(3) Class Y shares have a $12.00 fee for each redemption made by wire.
Additionally, some institutions may charge a fee if you buy through them. A
fee of $15.00 may be imposed on wire redemptions and overnight mail
redemptions for Class A shares.
(4) Because these fees are paid out of a Portfolio's assets on an on-going
basis, over time these fees will increase the cost of your investment and
may cost you more than paying other types of sales charges.
(5) JMIC currently reimburses fund expenses and waives advisory fees to the
extent total operating expenses exceed 1.35% for Y shares. This cap on
expenses is expected to continue until further notice.
(6) The offering of Class A shares of Multi Cap will commence on March 31,
2000. The amounts shown are estimated based on expenses expected to have
been incurred if Class A shares of Multi Cap had been in existence
throughout the fiscal year ended November 30, 1999. Nevertheless, JMIC has
undertaken to cap the expense ratio set forth above should total operating
expenses exceed 1.70%. This cap on expenses is expected to continue until
further notice.
The example below shows what a shareholder could pay in expenses over time
and is intended to help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. It uses the same hypothetical
conditions other mutual funds use in their prospectuses: $10,000 initial
investment for the time periods indicated, 5% annual total return, expenses
(without fee waiver) remain unchanged. The figures shown would be the same
whether you sold your shares at the end of a period or kept them. The
Portfolio's actual return and expenses will be different.
- - --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- - --------------------------------------------------------------------------------
MULTI CAP
- - --------------------------------------------------------------------------------
(CLASS Y) $202 $624 $1,073 $2,317
- - --------------------------------------------------------------------------------
(CLASS A) $798 $1,263 $1,753 $3,097
- - --------------------------------------------------------------------------------
18
<PAGE>
RISK ELEMENTS
In seeking to achieve its investment objective, each Portfolio will rely
on different strategies to seek rewards and returns. The objective of the Micro
Cap Growth Portfolio is to provide maximum capital appreciation, consistent with
reasonable risk to principal by investing primarily in microcapitalization
companies. The objective of the Small Cap Growth Portfolio is to provide maximum
capital appreciation, consistent with reasonable risk to principal by investing
primarily in small capitalization companies. The objective of the Mid Cap Growth
Portfolio is to provide maximum capital appreciation, consistent with reasonable
risk to principal by investing primarily in midcapitalization companies. The
objective of the Real Estate Securities Portfolio is to provide a balance of
income and appreciation (with reasonable risk to principal) by investing
primarily in equity securities of companies which are principally engaged in the
real estate industry. The objective of the Multi Cap Growth Portfolio is to
provide maximum capital growth by investing primarily in equity securities.
This table identifies the main elements that make up the Portfolios'
overall risk and reward characteristics described under the Risk Considerations
section for each Portfolio presented in this prospectus. It also outlines the
Portfolios' policies toward various securities, including those that are
designed to help each Portfolio manage risk. The following policies are not
fundamental and the Trustees may change such policies without shareholder
approval.
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------
STRATEGIES TO SEEK REWARD POTENTIAL REWARDS POTENTIAL RISKS
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C>
MARKET CONDITIONS
[] Under normal circumstances [] Stocks and bonds have [] A portfolio's share price
each portfolio plans to generally outperformed more and performance will
remain fully invested. stable investments (such as fluctuate in response to
short-term bonds and cash stock and bond market
[] A portfolio seeks to limit equivalents) over the long movements.
risk through diversification term.
in a large number of stocks.
- - -----------------------------------------------------------------------------------------------------
MANAGEMENT CHOICES
[] JMIC focuses on bottom-up [] A portfolio could [] A portfolio could
research, fundamental outperform its benchmark underperform its benchmark
security analysis and due to its asset allocation due to these same choices
valuation methods to and securities choices. and due to expenses.
enhance returns.
- - -----------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------
STRATEGIES TO SEEK REWARD POTENTIAL REWARDS POTENTIAL RISKS
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM TRADING
[] Each portfolio's turnover [] A portfolio could realize [] Increasing trading would
rate generally will not gains in a short period of raise the portfolios'
exceed 200%. time. brokerage and related
costs.
[] Each portfolio generally [] A portfolio could protect [] Increased short-term
avoids short-term trading, against losses if a stock is capital gains distributions
except to take advantage of overvalued and its value would raise shareholders'
attractive or unexpected later falls. income tax liability.
opportunities or to meet
demands generated by
shareholder activity.
- - ------------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (REITS)
[] JMIC invests in companies [] Favorable market conditions [] The value of a REIT is
that provide geographic could generate gains or affected by changes in the
diversification to limit reduce losses. value of the properties
risk. owned by the REIT or
[] These investments may offer securing mortgage loans
more attractive yields or held by the REIT.
potential growth than other
securities. [] A portfolio could lose
money because of decline in
the value of real estate,
risks related to general
and local economic
conditions, overbuilding
and increased competition.
- - --------------------------------------------------------------------------------------------------------
SMALL CAP AND MICRO CAP STOCKS
[] JMIC focuses on [] Securities of companies [] The Small Cap Growth and
companies with potential with small and micro Micro Cap Growth Portfolios
for strong growth in capitalizations may have could lose money because of
revenue, earnings and cash greater potential than the potentially higher
flow; strong management; large cap companies to risks of small companies
leading products or deliver above-average and price volatility than
services; and potential for growth rates that may not investments in general
improvement. have yet been recognized by equity markets.
investors.
[] 35% of the Small Cap Growth [] The Micro Cap Growth
and the Micro Cap Growth Portfolio may be unable to
Portfolios may be invested sell some of its securities
in securities of larger and may be forced to hold
capitalization companies. them if the securities are
thinly traded.
- - --------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
The following table indicates the maximum percentage under normal
conditions, each Portfolio may make:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------
MICRO CAP SMALL CAP MID CAP REAL ESTATE MULTI CAP
GROWTH GROWTH GROWTH SECURITIES GROWTH
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ADR's, EDR's and GDR's.............. 5% 5% 5% 5% 5%
Bank obligations.................... 10% 10% 10% 10% 10%
Foreign securities.................. 5% 5% 5% 5% 5%
Futures contracts................... 5%(a) 20%(b) 5%(a) 20%(b) 5%(a) 20%(b) 5%(a) 20%(b) 5%(a) 20%(b)
Illiquid securities................. 15% 15% 15% 15% 15%
Investment companies................ 10% 10% 10% 10% 10%
Lending of securities............... 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
Options transactions................ 5%(a) 20%(b) 5%(a) 20%(b) 5%(a) 20%(b) 5%(a) 20%(b) 5%(a) 20%(b)
Reverse repurchase agreements....... 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
U.S. Government obligations......... 100% 100% 100% 100% 100%
Warrants............................ 5% 5% 5% 5% 5%
When-issued securities.............. 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
TEMPORARY INVESTMENTS(D)
Cash................................ 100% 100% 100% 100% 100%
Short-term obligations.............. 100% 100% 100% 100% 100%
INVESTMENT RESTRICTIONS
Securities of any one issuer........ 5% 5% 5% 5% 5%
Outstanding voting securities
of any one issuer................. 10% 10% 10% 10% 10%
Securities of issuers in any
one industry...................... 25% 25% 25% 25%(c) 25%
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Percentages are of total assets (except for Illiquid Securities which are shown
as a percentage of net assets).
(a) Portfolio may not purchase futures contracts or options where premiums and
margin deposits exceed 5% of total assets.
(b) Portfolio may not enter into futures contracts or options where its
obligations would exceed 20% of total assets.
(c) Portfolio may purchase more than 25% of its assets in real estate
securities.
(d) The Portfolios will invest up to 100% of their assets in temporary
investments only when market conditions so require.
INFORMATION ABOUT THE ADVISER
The Company was created in December 1996 in response to demand to provide
a means of investing with JMIC, a limited partnership, 5949 Sherry Lane, Suite
1600, Dallas, Texas, 75225, at a lower minimum account size. JMIC began managing
large accounts for pension plans, endowments, foundations and municipalities in
1983. The senior management has worked together for approximately 20 years.
On June 30, 1999, JMIC reorganized and completed the sale of an 80%
managing membership interest in JMIC to American International Group, Inc.
("AIG") resulting in JMIC becoming a majority owned indirect subsidiary of AIG
and minority owned by the employees of JMIC. In connection therewith, on June
25, 1999, shareholders of each Portfolio of the Company approved new investment
advisory and management agreements with JMIC and also approved changing the
fundamental investment restrictions relating to the ability to engage in
borrowing
21
<PAGE>
and lending transactions with respect to each Portfolio. The new agreements are
identical to the prior agreements in all respects except for their effective
dates, termination dates and language describing the existing authorization of
the Company's Board of Trustees permitting affiliate transactions. Although the
investment advisory fee waivers will no longer be in place, the fees will not
exceed the expense caps currently in place for each Portfolio due to a voluntary
expense reimbursement by JMIC or its affiliates. In connection with the
reorganization of JMIC, the Board of Trustees of the Company also approved new
service providers for the Company.
JMIC's mission is to capture excess returns while managing risk. JMIC
seeks to accomplish this objective by:
o investing in smaller companies
o investing in rapidly growing companies
o investing in companies with highly predictable revenue and profit
streams
o investing in companies positioned to accelerate profit growth above
general expectations
o constructing diversified portfolios to moderate risk
JMIC has employed a bottom-up process in researching companies. JMIC
visits virtually every company prior to investing. Bottom-up research often
includes interviews with senior management, as well as the companies'
competitors and suppliers. The list of potential investments is further filtered
by the use of traditional fundamental security analysis and valuation methods.
JMIC manages each Portfolio using a team approach. By using a team
approach, the Company avoids the risk of changes in portfolio management style
that may be encountered when a lead manager approach is utilized. The team
approach creates portfolio management stability, which provides confidence that
the process is repeatable, and has been used for the last twenty-five years.
JMIC has had minimal (one) professional turnover during the last fifteen years
of management.
For the fiscal year ended November 30, 1999, JMIC received a fee,
calculated daily and payable monthly, at the following annual rates (as a
percentage of each Portfolio's average daily net assets): 1.20% for the Micro
Cap Growth Portfolio 0.90% for the Small Cap Growth Portfolio, 0.90% for the
Real Estate Securities Portfolio and 0.90% for the Multi Cap Growth Portfolio.
The Mid Cap Growth Portfolio pays the Adviser a fee, calculated daily and
payable monthly, of 0.90% of the Portfolio's average daily net assets.
ADVISER'S HISTORICAL PERFORMANCE
Set forth below are performance data provided by the Adviser pertaining to
the composite of all separately managed accounts of the Adviser that are managed
with substantially similar (although not necessarily identical) objectives,
policies and strategies as those of the Small Cap Growth Portfolio, the Mid Cap
Growth Portfolio and the Real Estate Securities Portfolio. The investment
returns of the Small Cap Growth, Mid Cap Growth and Real Estate Securities
Portfolios may differ from those of the separately managed accounts because such
separately managed accounts may have fees and expenses that differ from those of
the Small Cap Growth, Mid Cap Growth and Real Estate Securities Portfolios.
Further, the separately managed accounts are not subject to investment
limitations, diversification requirements and other restrictions imposed by
22
<PAGE>
the Investment Company Act of 1940 and Internal Revenue Code; such conditions,
if applicable, may have lowered the returns for the separately managed accounts.
The Adviser's separately managed account performance results set forth below
under "Institutional Equity Results" are not intended to predict or suggest the
return of the Small Cap Growth Portfolio, the Mid Cap Growth Portfolio or the
Real Estate Securities Portfolio, but rather to provide the shareholder with
information about the historical investment performance of the Portfolios'
Adviser. The Indexes used in the comparisons below are unmanaged indices which
assume reinvestment of dividends on securities in the index and are generally
considered representative of securities similar to those invested in by the
Adviser for the purpose of the composite performance numbers set forth below.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------
ADVISER'S
INSTITUTIONAL
ADVISER'S SMALL MID CAP ADVISER'S
INSTITUTIONAL CAP COMPOSITE INSTITUTIONAL REAL ESTATE NAREIT
SMALL CAP GROWTH RUSSELL EQUITY S & P MIDCAP REAL ESTATE SECURITIES EQUITY
EQUITY ACCOUNTS PORTFOLIO 2000 INDEX ACCOUNTS 400 INDEX EQUITY ACCOUNTS PORTFOLIO INDEX
(AFTER (AFTER (BEFORE (AFTER (BEFORE (AFTER (AFTER (BEFORE
EXPENSES) EXPENSES) EXPENSES) EXPENSES) EXPENSES) EXPENSES) EXPENSES) EXPENSES)
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CALENDAR YEARS:
1987 25.6% -- - 8.8% -- -- -- -- --
1988 24.5% -- 24.9% -- -- -- -- --
1989 31.9% -- 16.2% 32.5% 35.6% -- -- --
1990 - 4.0% -- -19.5% -3.5% -5.1% -- -- --
1991 68.9% -- 46.1% 67.1% 50.1% -- -- --
1992 8.7% -- 18.4% 6.5% 11.9% -- -- --
1993 15.3% -- 18.9% 16.5% 14.0% -- -- --
1994 - 0.1% -- -1.8% - 4.9% -3.6% 14.6% -- 3.2%
1995 30.1% -- 28.4% 31.2% 30.9% 20.5% -- 15.3%
1996 32.9% -- 16.5% 23.3% 19.2% 42.1% -- 35.3%
1997 23.4% 54.5% 22.4% 30.1% 32.3% 26.5% 29.2% 20.3%
1998 10.4% 13.6% -2.5% 15.3% 19.1% -15.6% -17.4% -17.5%
1999 12.6% 37.01% 21.3% 25.8% 14.7% -4.3% -4.61% -4.62%
AVERAGE ANNUAL
TOTAL RETURNS
AS OF 12/31/99:
Cumulative 1010.6% 140.5% 365.8% 669.6% 569.6% 100.5% 1.81% 52.2%
Annualized 20.3% 33.97% 12.6% 20.4% 18.9% 12.3% 0.60% 7.3%
3 Year 15.3% 33.97% 13.1% 23.6% 21.8% 0.7% 0.60% -1.8%
5 Year 21.5% -- 16.7% 25.0% 23.1% 11.8% -- 8.1%
10 Year 18.3% -- 13.4% 19.2% 17.3% -- -- --
Five-Year Mean 21.9% -- 17.2% 25.1% 23.2% 13.8% -- 9.8%
Twelve-Year Mean 21.6% -- 13.9% -- -- -- -- --
Value of $1 invested
During 13 years
(1/1/87 - 12/31/99) $11.11 -- $4.66 -- -- -- -- --
</TABLE>
1 The Adviser's Institutional Equity Accounts represents the composite of all
separately managed accounts of the Adviser that are managed with
substantially similar (although not identical) objectives, policies and
strategies as those of Brazos Small Cap Growth Portfolio, those of the Brazos
Real Estate Securities Portfolio, and those of the Brazos Mid Cap Growth
Portfolio, respectively. The separately managed accounts are subject to
different expenses and governmental regulations than the Portfolios.
2 The annualized return of the Adviser's Institutional Equity Accounts is
calculated from monthly data, allowing for compounding. The formula used is
in accordance with the methods set forth by the Association for Investment
Management Research ("AIMR"), The Bank Administration Institute, and the
Investment Counsel Association of America. Market value of the account was
the sum of the account's total assets, including cash, cash equivalents,
short term investments, and securities valued at current market prices.
23
<PAGE>
3 The cumulative return means that $1 invested in the Small Cap Equity
composite account on January 1, 1987 had grown to $11.11 by December 31,
1999, that $1 invested in the Real Estate Equity Composite account on January
1, 1994 had grown to $2.00 by December 31, 1999 and that $1 invested in the
Mid Cap Equity Composite account on January 1, 1989 had grown to $7.70 by
December 31, 1999.
4 The thirteen-year arithmetic mean is the arithmetic average of the Small Cap
Equity composite accounts' annual returns listed, and the five-year mean is
the arithmetic average of the Real Estate Equity composite accounts' annual
returns for the years listed.
5 The S&P MidCap 400, Russell 2000 and the NAREIT Equity Index are unmanaged
indices which assume reinvestment of dividends on securities in the index and
are generally considered representative of securities similar to those
invested in by the Adviser for the purpose of the composite performance
numbers set forth above. The S&P MidCap 400 Index is an unmanaged
capitalization-weighted index that measures the performance of the mid-range
of the U.S. stock market. The Russell 2000 is composed of the 2000 smallest
stocks in the Russell 3000, a market value weighted index of the 3,000
largest U.S. publicly traded companies. The NAREIT Equity Index is a
compilation of market-weighted securities data collected from all
tax-qualified equity real estate investment trusts listed on the New York and
American Stock Exchanges and the NASDAQ. The comparative indices are not
adjusted to reflect expenses or other fees reflected in the performance of a
mutual fund as required by the SEC.
6 The Adviser's average annual management fee over the thirteen-year period
(1987-1999) for the Small Cap Equity composite accounts was 1% or 100 basis
points. On January 1, 1987, the Adviser began managing the separate accounts
using objectives, policies and strategies substantially similar to those of
the BRAZOS Small Cap Growth Portfolio. During the period, fees on the
Adviser's individual accounts ranged from 1% to 1.5% (100 basis points to 150
basis points). The Adviser's average annual management fee over the five-year
period (1995-1999) for the Real Estate Equity composite accounts was .85% or
85 basis points. During the period, fees on the Adviser's individual accounts
ranged from .80% to 1% (80 basis points to 100 basis points). The Adviser's
average annual management fee over the nine-year period (1991-1999) for the
Mid Cap Equity composite accounts was 1% or 100 basis points. During the
period, fees on the Adviser's individual accounts ranged from 1% to 1.5% (100
basis points to 150 basis points). Net returns to investors vary depending on
the management fee.
7 Small Cap Equity composite accounts ("Composite") performance data is AIMR
compliant from 1/1/93 forward. Prior to that time, the only difference in the
calculation is that all portfolios were equally weighted without regard to
dollar value in determining Composite performance. The Composite includes
every account managed in JMIC's small capitalization style, consistent with
AIMR guidelines. This equal weighting method follows the standards
promulgated by the Investment Management Consultants' Association which
predates standards established by AIMR. In 1990, the Composite results
reflected portfolios ranging in number from 3 to 8 and in size from $3
million to $30 million, with a median size of $13 million. In 1991, the
Composite reflected portfolios ranging in number from 8 to 18 and in size
from $1 million to $46 million, with a median size of $15 million. In 1992,
the Composite reflected portfolios ranging in number from 20 to 27 and in
size from $4 million to $50 million, with a median size of $17 million. And,
from 1987 through 1989, the Composite consisted of only one portfolio which
for many years served as the model for all accounts managed in this style.
8 The returns shown for the Small Cap Growth and the Real Estate Securities
Portfolios are for Class Y shares and not Class A shares, which commenced
operations on September 8, 1999. The annual returns for Class A shares would
be substantially similar to the annual returns of Class Y shares because
Class A shares are invested in the same portfolio of securities. In reviewing
this performance information, you should be aware that returns would differ
to the extent Class Y shares do not have the same expenses and sales loads as
Class A shares which are set forth on pages 8 and 13 of this Prospectus.
INFORMATION FOR FIRST TIME
MUTUAL FUND INVESTORS
The Federal Deposit Insurance Corporation, the Federal Reserve Board or
any other agency does not federally insure mutual fund shares.
Investments in mutual fund shares involve risks, including possible loss
of principal.
24
<PAGE>
VALUATION OF SHARES
The net asset value of each Portfolio is determined by dividing the sum of
the total market value of a Portfolio's investments and other assets, less any
liabilities, by the total number of shares outstanding. Each Portfolio
calculates the net asset value of each class of its shares separately by
dividing the total value of each class's net assets by the shares outstanding of
such class. Net asset value per share for each Portfolio is determined as of the
close of the New York Stock Exchange ("NYSE") on each day that the NYSE is open
for business.
Each Portfolio uses the last quoted trading price as the market value for
equity securities. For listed securities, each Portfolio uses the price quoted
by the exchange on which the security is primarily traded. Unlisted securities
and listed securities which have not been traded on the valuation date or for
which market quotations are not readily available are valued at the average
between the last price asked and the last price bid. For valuation purposes,
quotations of foreign securities in a foreign currency are converted to U.S.
dollar equivalents based upon the latest available bid price of such currencies
against U.S. dollars quoted by any major bank or by any broker.
Bonds and other fixed income securities are valued according to the
broadest and most representative market which will ordinarily be the
over-the-counter market. Net asset value includes interest on fixed income
securities, which is accrued daily. Bonds and other fixed income securities may
be valued on the basis of prices provided by a pricing service when such prices
are believed to reflect the fair market value of such securities. Securities
purchased with remaining maturities of 60 days or less are valued at amortized
cost when the Board of Trustees (the "Trustees") determines that amortized cost
reflects fair value.
The value of other assets and securities for which no quotations are
readily available (including restricted securities) is determined in good faith
at fair value using methods determined by the Trustees.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS
AND TAXES
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Each Portfolio (except for the Real Estate Securities Portfolio) will
distribute annually to shareholders substantially all of its net investment
income and any net realized long-term capital gains. Capital gains
distributions, if any, of the Real Estate Securities Portfolio will be paid at
least annually and income dividends, if any, of the Real Estate Securities
Portfolio will be paid at least quarterly. A Portfolio's dividends and capital
gains distributions will be reinvested automatically in additional shares unless
the Company is notified in writing that the shareholder elects to receive
distributions in cash.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
25
<PAGE>
FEDERAL TAXES
Each Portfolio intends to make distributions that may be taxed either as
ordinary income or as a capital gain. Because the Micro Cap, Small Cap, Mid Cap
and Multi Cap Portfolios seek capital appreciation as opposed to current income,
the Company anticipates that most of these distributions will be taxed as
capital gains. Distributions from the Real Estate Portfolio are likely to
represent both capital appreciation and income, and thus are likely to
constitute both capital gain and ordinary income. All distributions, whether in
the form of cash payment to the shareholder or as reinvested in additional
shares of a Portfolio, may be subject to Federal income tax. A redemption of
shares in a Portfolio would be considered to be a taxable event under Federal
law. Any exchange of shares in a Portfolio for shares of another Portfolio would
be treated as a sale of the Portfolio's shares and any gain on the transaction
may be subject to Federal taxation.
STATE AND LOCAL TAXES
Shareholders may also be subject to state and local taxes on distributions
and redemptions. Shareholders should consult with their tax advisers regarding
the tax status of distributions in their state and locality.
SHAREHOLDER ACCOUNT INFORMATION
SELECTING A SHARE CLASS
The Small Cap Growth, Mid Cap Growth, Real Estate Securities, and Multi
Cap Growth Portfolios offer two classes of shares, Class Y and Class A shares,
through this prospectus. The Micro Cap Growth Portfolio offers one class of
shares, Class Y, through this prospectus.
Each class of shares has its own cost structure, so you can choose the one
best suited to your investment needs. Your broker or financial adviser can help
you determine which class is right for you.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------
Class Y Class A
- - ------------------------------------------------------------------------------------------------
<S> <C>
[] Initial investment of at least [] Front-end sales charges, as described below.
$1,000,000 (except for Micro Cap There are several ways to reduce these
Growth Portfolio, which has an charges, also described below.
initial investment of $50,000).
Subsequent minimum investments [] Distribution fee.
must be at least $1,000. Shares
may be purchased and subsequent [] Ongoing account maintenance and service
investments may be made without fee.
being subject to the minimum or
subsequent investment
limitations at the discretion of
the officers of the Company.
[] No front-end sales charge.
[] Lower annual expenses than Class A.
</TABLE>
26
<PAGE>
CALCULATION OF SALES CHARGES FOR CLASS A SHARES
SALES CHARGES ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SALES CHARGE CONCESSION TO DEALERS
% OF $ OF NET % OF
OFFERING AMOUNT OFFERING
PRICE INVESTED PRICE
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Your Investment
Less than $50,000 5.75% 6.10% 5.00%
$50,000 but less than $100,000 4.75% 4.99% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.00%
$250,000 but less than $500,000 3.00% 3.09% 2.25%
$500,000 but less than $1,000,000 2.10% 2.15% 1.35%
$1,000,000 or more None None 1.00%
- - --------------------------------------------------------------------------------------------------
</TABLE>
Investments of $1 million or more: Class A shares are available with no
front-end sales charge. However, a 1% CDSC is charged on shares you sell within
one year of purchase and a 0.50% CDSC is charged on shares you sell after the
first year and within the second year after purchase.
For purposes of the CDSC, we count all purchases you make during a
calendar month as having been made on the FIRST day of that month.
SALES CHARGE REDUCTIONS AND WAIVERS FOR CLASS A SHARES
Waivers for Certain Investors. Various individuals and institutions may
purchase Class A shares without front-end sales charge including:
[] financial planners, institutions, broker-dealer representatives or
registered investment advisers utilizing Portfolio shares in fee-based
investment products under an agreement with the Company or SunAmerica
Capital Services, Inc., the Distributor.
[] participants in certain retirement plans that meet applicable
conditions, as described in the Statement of Additional Information.
[] Trustees of the Company and other individuals who are affiliated with
the Company or any fund distributed by SunAmerica Capital Services and
their families.
[] selling brokers and their employees and sales representatives and
their families.
[] participants in "Net Asset Value Transfer Program."
Reducing your Class A sales charges. There are several special purchase
plans that allow you to combine multiple purchases of Class A shares of any
Portfolio of the Company or any fund distributed by SunAmerica Capital Services
to take advantage of the breakpoints in the sales charge schedule. For
information about the "Right of Accumulation," "Letter of Intent," "Combined
Purchase Privilege,"and "Reduced Sales Charges for Group Purchases," contact
your broker or financial advisor, or consult the Statement of Additional
Information.
27
<PAGE>
TO UTILIZE: IF YOU THINK YOU MAY BE ELIGIBLE FOR A SALES CHARGE REDUCTION,
CONTACT YOUR BROKER OR FINANCIAL ADVISOR.
Reinstatement privilege. If you sell shares of a Portfolio within one year
after the sale, you may invest some or all of the proceeds of the sale in the
same share class of the Portfolio without a sales charge. A shareholder may use
the reinstatement privilege only one time after selling such shares. If you are
paid a CDSC when you sold your shares, we will credit your account with the
dollar amount of the CDSC at the time of sale. All accounts involved must be
registered in the same name(s).
DISTRIBUTION AND SERVICE (12B-1) FEES FOR CLASS A SHARES
Class A shares of the Small Cap Growth, Mid Cap Growth, Real Estate
Securities, and Multi Cap Growth Portfolios have their own 12b-1 plan that
permits them to pay for distribution, account maintenance and service fees
(payable to the Distributor) based on a percentage of average daily net assets,
as follows:
Account
Maintenance
and
Class Distribution Fee Service Fee
A 0.10% 0.25%
Because 12b-1 fees are paid out of the Portfolio's assets on an ongoing
basis, over time these fees will increase the cost of your investment and may
cost you more than paying other types of sales charges.
OPENING AN ACCOUNT
1. Read this prospectus carefully.
2. Determine how much you want to invest. The minimum initial investment
for Class A shares of the Small Cap Growth, Mid Cap Growth, Real Estate
Securities, and Multi Cap Growth Portfolios is as follows:
[] non-retirement account:$500
[] retirement account: $250
[] dollar cost averaging: $500 to open; you must invest at least $25 a
month.
The minimum subsequent investment for Class A shares of the Small Cap
Growth, Mid Cap Growth, Real Estate Securities, and Multi Cap Growth
Portfolios is as follows:
[] non-retirement account:$100
[] retirement account:$25
3. Complete the appropriate parts of the Account Application, carefully
following the instructions. If you have questions, please contact your
broker or financial advisor or call Shareholder/Dealer Services at
1-800-426-9157.
4. Complete the appropriate parts of the Supplemental Account Application.
By applying for additional investor services now, you can avoid the
delay and inconvenience of having to submit an additional application
if you want to add services later.
5. Make your initial investment using the chart on the next page. You can
initiate any purchase, exchange or sales through your broker or
financial advisor.
28
<PAGE>
PURCHASE OF SHARES
Shares of the Portfolios may be purchased, at the net asset value per
share with respect to Class Y shares or at the offering price per share with
respect to Class A shares, next determined after an order, including payment in
the manner described herein, is received by the Company (see "Valuation of
Shares"). The Company reserves the right to reject your purchase order and to
suspend the offering of shares of the Company. All purchases must be in U.S.
dollars. Cash will not be accepted. There is a $25.00 fee for all checks
returned due to insufficient funds.
Class Y shares may be purchased and subsequent investments may be made by
principals, officers, associates and employees of the Company and its
affiliates, their families and their business or personal associates, and
individuals who are shareholders of any Portfolio of the Company, either
directly or through their individual retirement accounts, and by any JMIC
pension or profit-sharing plan, without being subject to the minimum or
subsequent investment limitations for Class Y shares.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------
Purchasing shares: Opening an account: Adding to an account:
- - -------------------------------------------------------------------------------------------------
<S> <C> <C>
By check [] Make out a check for the [] Make out a check for the
investment amount, payable investment amount payable
to "Brazos Mutual Funds." to "Brazos Mutual Funds."
[] Mail the check and your [] Fill out the detachable
completed Account investment slip from an
Registration Form to the account statement. If no
address indicated in slip is available, include
"-Mailing Addresses" below. a note specifying the
Portfolio name, the Fund
number, your account
[Graphic omitted] number, and the name(s) in
which the account is
registered.
- - -----------------------------------------------------------------------------------------------
By Wire [] Mail your completed [] Instruct your bank to wire
Account Registration Form the amount of your
to the address indicated in investment to:
"Mailing Addresses" below. State Street Bank and Trust
[Graphic omitted] [] Obtain your account number Company
by calling 1-800-426-9157. Boston, MA
[] Instruct your bank to wire ABA #0110-00028
the amount of your DDA #99029712
investment to: Attn: Name of Portfolio
State Street Bank and Trust FBO: Shareholder Name/
Company Account Number
Boston, MA [] Specify the Portfolio name,
ABA #0110-00028 your share class, the
DDA #99029712 Fund number, the new
FBO: Shareholder Name/ account number, and the
Account Number names in which the
[] Specify the Portfolio name, account is registered. Your
your choice of share class, bank may charge a fee to
the Fund number, the wire funds.
new account number, and
the names in which the
account is registered. Your
bank may charge a fee to
wire funds.
- - -----------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
MAILING ADDRESSES
[] For initial investments and overnight [] For subsequent investments:
or express mail: NON-RETIREMENT ACCOUNTS:
Brazos Mutual Funds Brazos Mutual Funds
Mutual Fund Operations, 3rd Floor c/o NFDS
The SunAmerica Center P.O. Box 219373
733 Third Avenue Kansas City, MO 64121-9373
New York, NY 10017-3204
RETIREMENT ACCOUNTS:
Mutual Fund Operations, 3rd Floor
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
- - --------------------------------------------------------------------------------
By exchange [] Call 1-800-426-9157 to [] Review the current prospectus for
request an exchange. the portfolio or the Fund into
which you are exchanging.
[Graphic omitted] [] Call 1-800-426-9157 to request an
exchange.
OTHER COMPANIES THROUGH WHICH YOU CAN PURCHASE BRAZOS MUTUAL FUNDS
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS, INC. CHARLES SCHWAB AND CO. JACK WHITE AND CO.
- - --------------------------------------------------------------------------------------------------
<S> <C> <C>
National Financial Services 101 Montgomery Street National Financial Services
One World Financial Center San Francisco, CA 94104 One World Financial Center
200 Liberty Street 1-800-435-8000 200 Liberty Street
New York, NY 10281 New York, NY 10281
1-800-544-6666 1-800-233-3411
</TABLE>
AUTOMATIC INVESTMENT PLAN
Shareholders may also purchase additional Portfolio shares through an
Automatic Investment Plan. Under the Plan, SunAmerica Fund Services, Inc., at
regular intervals, will automatically debit a shareholder's bank checking
account in an amount of $50 or more (subsequent to the minimum initial
investment), as specified by the shareholder. A shareholder may elect to invest
the specified amount monthly, bimonthly, quarterly, semiannually or annually.
The purchase of Portfolio shares will be effected at their offering price at 4
p.m., Eastern time, on the date of the month designated by the shareholder. For
an Application for the Automatic Investment Plan, check the appropriate box of
the Application at the end of this Prospectus, or call 1-800-426-9157. This
service may not be provided for Service Agent clients who are provided similar
services by those organizations.
OTHER PURCHASE INFORMATION
Investments received by 4 p.m. ET (the close of the NYSE) will be invested
at the price calculated after the NYSE closes that day. Orders received after 4
p.m. ET will receive the price calculated on the next business day.
30
<PAGE>
Shares of the Portfolios may be purchased by customers of
broker-dealers or other financial intermediaries ("Service Agents") which deal
with the Company on behalf of their customers. Service Agents may impose
additional or different conditions on the purchase or redemption of shares of
Portfolios and may charge transaction or other account fees. Each Service Agent
is responsible for transmitting to its customers a schedule of any such fees and
information regarding any additional or different purchase and redemption
conditions. Shareholders who are customers of Service Agents should consult
their Service Agent for information regarding these fees and conditions. Amounts
paid to Service Agents may include transaction fees and/or service fees paid by
the Company from the Company assets attributable to the Service Agent, and which
would not be imposed if shares of the Portfolios were purchased directly from
the Company or the Distributor. The Service Agents may provide shareholder
services to their customers that are not available to shareholders dealing
directly with the Company. A salesperson and any other person entitled to
receive compensation for selling or servicing shares of the Portfolios may
receive different compensation with respect to one particular class of shares
over another in the Company.
Service Agents, or if applicable, their designees, that have entered into
agreements with the Company or its agent, may enter confirmed purchase or
redemption orders on behalf of clients and customers, with payment to follow no
later than the Portfolios' pricing on the following business day. If payment is
not received by the Company's Transfer Agent by such time, the Service Agent
could be held liable for resulting fees or losses. A Portfolio may be deemed to
have received a purchase or redemption order when a Service Agent, or, if
applicable, its authorized designee, accepts the order. Orders received by the
Company in proper form will be priced at each Portfolio's net asset value next
computed after they are accepted by the Service Agent or its authorized
designee. Service Agents are responsible to their customers and the Company for
timely transmission of all subscription and redemption requests, investment
information, documentation and money.
DISTRIBUTOR
SunAmerica Capital Services Inc. ("SACS"), The SunAmerica Center, 733
Third Avenue, New York, NY 10017-3204, serves as Distributor for shares of the
Portfolios. SACS will receive no compensation for distribution of Class Y shares
of the Portfolios, except for reimbursement by the Adviser of out-of-pocket
expenses. For Class A shares, the Distributor receives the initial and deferred
sales charges, all or a portion of which may be re-allowed to other
broker-dealers. In addition, the Distributor receives fees under the 12b-1 plans
for the Class A shares of the Portfolios. The Distributor, at its expense, may
from time to time provide additional compensation to broker-dealers (including
in some instances, affiliates of the Distributor) in connection with sales of
Class A shares of a Portfolio. This compensation may include (i) full
re-allowance of the front-end sales charge on Class A shares; (ii) additional
compensation with respect to the sale of Class A shares; or (iii) financial
assistance to broker-dealers in connection with conferences, sales or training
programs for their employees, seminars for the public, advertising campaigns
regarding one or more of the Portfolios, and/or other broker-dealer sponsored
special events. In some instances, this compensation will be made available only
to certain broker-dealers whose representatives have sold a significant number
of shares of a Portfolio. Compensation may also include payment for travel
expenses, including lodging, incurred in connection with trips taken by invited
registered representatives for meetings or seminars of a business nature. In
addition,
31
<PAGE>
the following types of non-cash compensation may be offered through sales
contests: (i) travel mileage on major air carriers; (ii) tickets for
entertainment events (such as concerts or sporting events); or (iii) merchandise
(such as clothing, trophies, clocks, pens or other electronic equipment).
Broker-dealers may not use sales of the Portfolio's shares to qualify for this
compensation to the extent receipt of such compensation may be prohibited by
applicable law or the rules of any self-regulatory agency, such as the National
Association of Securities Dealers. Dealers who receive bonuses or other
incentives may be deemed to be underwriters under the Securities Act of 1933.
EXCHANGE PRIVILEGE
Shares of each Portfolio may be exchanged for the same class of shares of
any other Portfolio included in the Brazos Mutual Funds or any fund distributed
by the Distributor. Exchange requests should be made by writing to Brazos Mutual
Funds, c/o SunAmerica Fund Services, Inc., Mutual Fund Operations, The
SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204 or calling
1-800-426-9157.
Any exchange will be based on the net asset value of the shares involved.
There is no charge of any kind for an exchange. Before making an exchange into a
Portfolio, a shareholder should read the Prospectus of the Portfolio or the fund
into which you would like to exchange (contact SunAmerica Fund Services, Inc. at
1-800-426-9157 for additional copies of the Prospectus). All exchanges are
subject to applicable minimum initial investment requirements. Exchanges can
only be made with Portfolios or funds distributed by the Distributor that are
qualified for sale in a shareholder's state of residence. Exchanges of shares
generally will constitute a taxable transaction except for IRAs, Keogh Plans and
other qualified or tax exempt accounts. The exchange privilege may be terminated
or modified upon 60 days' written notice. Exchange requests may be made either
by mail or telephone. Telephone exchanges will be accepted only if the
certificates for the shares to be exchanged have not been issued to the
shareholder and if the registration of the two accounts will be identical.
Requests for exchanges with other Portfolios or funds distributed by the
Distributor received prior to 4 p.m. (ET) will be processed as of the close of
business on the same day. Requests received after that time will be processed on
the next business day. The Board of Trustees may limit frequency and amount of
exchanges permitted. For additional information regarding telephoned
instructions, see "REDEMPTION OF SHARES BY TELEPHONE" below. An exchange into
another Portfolio of the Company is a sale of shares and may result in capital
gain or loss for income tax purposes. The Company may modify or terminate the
exchange privilege at any time.
To protect the interests of other shareholders, we may cancel the exchange
privileges of any investors that, in the opinion of the Company, are using
market timing strategies or making excessive exchanges. A Portfolio may change
or cancel its exchange privilege at any time, upon 60 days' written notice to
its shareholders. A Portfolio may also refuse any exchange order.
CERTIFICATED SHARES. Most shares are electronically recorded. If you wish
to have certificates for your shares, please call Shareholder/Dealer Services at
1-800-426-9157 for further information. You may sell or exchange certificated
shares only by returning the certificates to the Portfolios, along with a letter
of instruction and a signature guarantee. The Portfolios do not issue
certificates for fractional shares.
32
<PAGE>
MULTI-PARTY CHECKS. The Company may agree to accept a "multi-party check"
in payment for Portfolio shares. This is a check made payable to the investor by
another party and then endorsed over to the Company by its investor. If you use
a multi-party check to purchase shares, you may experience processing delays. In
addition, the Company is not responsible for verifying the authenticity of any
endorsement and assumes no liability for any losses resulting from fraudulent
endorsement.
REDEMPTION OF SHARES
Any redemption may be more or less than the purchase price of your shares
depending on the market value of the investment securities held by your
Portfolio(s).
Shares of the Brazos Micro Cap Growth, Small Cap Growth, Mid Cap Growth
and Multi Cap Growth Portfolios may be redeemed by mail (subject to a fee of
$15.00 for overnight courier) or telephone, at any time, without cost, at their
net asset value as next determined after receipt of the redemption request.
Shareholders are charged a $12.00 fee for redemptions by wire for Class Y shares
and a $15.00 fee for redemptions by wire for Class A shares. Otherwise, there is
no charge for redemptions.
Shares of the Brazos Real Estate Securities Portfolio may be redeemed by
mail (subject to a fee of $15.00 for overnight courier) or telephone, at any
time, at the net asset value as next determined after receipt of the redemption
request. Shares held 90 days or more may be redeemed without cost except for a
$12.00 fee charged to shareholders for wire redemptions for Class Y shares and a
$15.00 fee charged to shareholders for wire redemptions for Class A shares.
Shares held less than 90 days will be subject to a 1% redemption fee which is
retained by the Portfolio for the benefit of the remaining shareholders and is
intended to encourage long-term investment in the Brazos Real Estate Securities
Portfolio, to avoid transaction and other expenses incurred by early redemption
and to facilitate portfolio management.
33
<PAGE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
REDEEMING SHARES: DESIGNED FOR: TO SELL SOME OR ALL OF YOUR SHARES:
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
By letter [] Accounts of any type. [] Write a letter of instruction
indicating the Portfolio name,
[] Sales of $100,000 or more, but your share class, your account
[Graphic omitted] less than $5,000,000, for Y number, the names in which the
shares should be in writing. account is registered, and the
dollar value or number of shares
[] Sales of $5,000,000 or more for you wish to sell.
Y shares and sales of $100,000
or more for A shares must be in [] Include all signatures and any
writing with a signature guarantee. additional documents that may be
required (see next page).
[] Mail the materials to:
SunAmerica Fund Services, Inc. Mutual
Fund Operations, 3rd Floor The
SunAmerica Center 733 Third Avenue
New York, New York 10017-3204
[] A check will normally be mailed on
the next business day to the
name(s) and address in which the
account is registered, or
otherwise according to your letter
of instruction.
- - -------------------------------------------------------------------------------------------------------------
By telephone [] Most accounts. [] For automated service 24 hours
a day using your touch-tone
[] Sales of $100,000 or more, but phone, dial 1-800-654-4760.
less than $5,000,000, for Y
shares should be in writing. [] To place an order or to speak
[Graphic omitted] to a representative from Brazos
[] Sales of $5,000,000 or more for Mutual Funds, call 1-800-426-9157
Y shares and sales of $100,000 or between 8:30 a.m. and 7:00 p.m.
more for A shares must be in (Eastern time) on most business
writing with a signature days.
guarantee.
- - -------------------------------------------------------------------------------------------------------------
By wire [] Accounts of any type. [] Fill out the "Telephone
Redemption" section of your new
[Graphic omitted] [] Sales of $100,000 or more, but account application.
less than $5,000,000, for Y shares
should be in writing. [] Amounts of $1,000 or more will be
wired on the next business day. A
[] Sales of $5,000,000 or more for Y $12 fee will be deducted from your
shares and sales of $100,000 or account for Class Y shares and a
more for A shares must be in $15 fee will be deducted from your
writing with a signature account for Class A shares.
guarantee.
- - --------------------------------------------------------------------------------------------------------------
By exchange [] Accounts of any type [] Review the current prospectus
for the portfolio or the Fund into
[] Sales of any amount. which you are exchanging.
[Graphic omitted]
[] Call 1-800-426-9157 to request
an exchange.
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
SIGNATURE GUARANTEES
Signature guarantees are required for the following redemptions:
o redemptions where the proceeds are to be sent to someone other than the
registered shareholder(s);
o redemptions where the proceeds are to be sent to someplace other than
the registered address;
o share transfer requests; or
o redemption requests that are $5,000,000 or more for Y shares and
$100,000 or more for A shares.
The purpose of signature guarantees is to verify the identity of the party
who has authorized a redemption.
OTHER REDEMPTION INFORMATION
Normally, each Portfolio will make a payment for all shares redeemed under
proper procedures within one business day of and no more than seven business
days after receipt of the request. The Company may suspend the right of
redemption or postpone the date, as permitted by the SEC, including under
emergency circumstances and at times when the NYSE is closed.
If the Trustees determine that it would be detrimental to the best
interests of remaining shareholders of the Portfolios to make payment wholly or
partly in cash, the Portfolios may pay redemption proceeds in whole or in part
by a distribution in-kind of liquid securities held by a Portfolio in lieu of
cash in conformity with applicable rules of the SEC. Investors may incur
brokerage charges on the sale of portfolio securities so received in payment of
redemptions.
RETIREMENT PLANS
Shares of the Portfolios are available for use in certain types of
tax-deferred retirement plans such as:
o IRAs (including Roth IRAs),
o employer-sponsored defined contribution plans (including 401(k) plans),
and
o tax-sheltered custodial accounts described in Section 403(b)(7) of the
Internal Revenue Code.
Qualified investors benefit from the tax-free compounding of income
dividends and capital gains distributions. Application forms and brochures
describing investments in the Portfolios for retirement plans can be obtained by
calling the Brazos Mutual Funds at 1-800-426-9157.
35
<PAGE>
FINANCIAL HIGHLIGHTS
The following table shows selected financial information for Class Y and/or
Class A shares outstanding of each of the Portfolios throughout the periods
indicated. The total return in the table represents the rate that an investor
would have earned on an investment in Class Y and/or Class A shares of the
Portfolio specified (assuming reinvestment of all dividends and distributions).
The information for the periods through November 30, 1999 has been audited by
PricewaterhouseCoopers LLP, whose report along with the Portfolios' financial
statements, is included in the Annual Report, which is available free of charge.
The Multi Cap Growth Portfolio's fiscal year is December 1 through November 30
(however, Class Y shares of the Multi Cap Growth Portfolio commenced operations
on December 31, 1998, indicated by the financial information shown below).
================================================================================
MICRO CAP GROWTH PORTFOLIO
<TABLE>
<CAPTION>
NET GAIN(LOSS)
ON INVEST- TOTAL DIVIDENDS DISTRI-
NET ASSET NET MENTS(BOTH FROM FROM NET BUTIONS
VALUE, INVEST- REALIZED INVEST- INVEST- FROM TOTAL
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI-
ENDED OF PERIOD INCOME(1) UNREALIZED) OPERATIONS INCOME GAINS BUTIONS
- - ----- --------- --------- ----------- ---------- ------ ----- -------
CLASS Y
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/97-
11/30/98(3) $10.00 $(0.05) $2.08 $2.03 $-- $-- $--
11/30/99. . . 12.03 (0.14) 7.91 7.77 -- (1.47) (1.47)
</TABLE>
RATIO OF NET
NET ASSET NET ASSETS RATIO OF INVESTMENT
VALUE, END OF EXPENSES INCOME (LOSS)
END OF TOTAL PERIOD TO AVERAGE TO AVERAGE PORTFOLIO
PERIOD RETURN(2) (000'S) NET ASSETS NET ASSETS TURNOVER
- - ------- -------- ------- ---------- ---------- ---------
CLASS Y
$12.03 20.30% $ 47,774 1.60%(4)(5) (0.46)%(4)(5) 121%
18.33 65.67 121,914 1.54 (0.95) 150
(1) Calculated based upon average shares outstanding
(2) Total return is not annualized and does not reflect sales load
(3) Commencement of sale of respective class of shares
(4) Annualized
(5) Net of the following expense reimbursements (based on average net assets):
11/30/98
--------
Micro Cap Growth ........................ 0.30%
================================================================================
SMALL CAP GROWTH PORTFOLIO
<TABLE>
<CAPTION>
NET GAIN(LOSS)
ON INVEST- TOTAL DIVIDENDS DISTRI-
NET ASSET NET MENTS(BOTH FROM FROM NET BUTIONS
VALUE, INVEST- REALIZED INVEST- INVEST- FROM TOTAL
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI-
ENDED OF PERIOD INCOME(1) UNREALIZED) OPERATIONS INCOME GAINS BUTIONS
- - ----- --------- --------- ----------- ---------- ------ ----- -------
CLASS Y
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/96-
11/30/97(3) $10.00 $(0.03) $4.69 $4.66 $-- $(1.17) $(1.17)
11/30/98 . . 13.49 (0.11) 0.79 0.68 -- (0.10) (0.10)
11/30/99 . . 14.07 (0.13) 4.60 4.47 -- -- --
CLASS A
9/8/99-
11/30/99(3)$16.90 $(0.05) $1.65 $1.60 $-- $-- $--
</TABLE>
RATIO OF NET
NET ASSET NET ASSETS RATIO OF INVESTMENT
VALUE, END OF EXPENSES INCOME (LOSS)
END OF TOTAL PERIOD TO AVERAGE TO AVERAGE PORTFOLIO
PERIOD RETURN(2) (000'S) NET ASSETS NET ASSETS TURNOVER
- - ------- -------- ------- ---------- ---------- ---------
CLASS Y
$13.49 47.08% $80,898 1.35%(4)(5) (0.68)%(4)(5) 148%
14.07 5.06 313,207 1.21 (0.71) 104
18.54 31.77 627,978 1.08 (0.78) 105
CLASS A
$18.50 9.47% $394 1.65%(4)(5) (1.46)%(4)(5) 105%
- - --------------------
(1) Calculated based upon average shares outstanding
(2) Total return is not annualized and does not reflect sales load
(3) Commencement of sale of respective class of shares
(4) Annualized
(5) Net of the following expense reimbursements (based on average net assets):
11/30/97 11/30/98 11/30/99
-------- -------- --------
Small Cap Growth Class Y 0.45% -- --
Small Cap Growth Class A -- -- 0.14%
36
<PAGE>
REAL ESTATE SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
NET GAIN(LOSS)
ON INVEST- TOTAL DIVIDENDS DISTRI-
NET ASSET NET MENTS(BOTH FROM FROM NET BUTIONS
VALUE, INVEST- REALIZED INVEST- INVEST- FROM TOTAL
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI-
ENDED OF PERIOD INCOME(1) UNREALIZED) OPERATIONS INCOME GAINS BUTIONS
- - ----- --------- --------- ----------- ---------- ------ ----- -------
CLASS Y
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/96-
11/30/97(3) $10.00 $0.35 $2.05 $2.40 $(0.23) $(0.93 ) $(1.16)
11/30/98.. 11.24 0.44 (1.90) -1.46 (0.43) (0.14) (0.57)
11/30/99.. 9.21 0.47 (1.17) -0.70 (0.44) -- (0.44)
CLASS A
9/8/99-
11/30/99(3) $ 8.80 $0.12 $(0.74) $(0.62) $(0.12) $-- $(0.12)
</TABLE>
RATIO OF NET
NET ASSET NET ASSETS RATIO OF INVESTMENT
VALUE, END OF EXPENSES INCOME (LOSS)
END OF TOTAL PERIOD TO AVERAGE TO AVERAGE PORTFOLIO
PERIOD RETURN(2) (000'S) NET ASSETS NET ASSETS TURNOVER
- - ------- -------- ------- ---------- ---------- ---------
CLASS Y
$11.24 24.39% $53,308 1.25%(4)(5) 4.61%(4)(5) 185%
9.21 (13.64) 84,789 1.25(5) 4.19(5) 157
$8.07 (7.86)% 128,997 1.19 5.23 100
CLASS A
$8.06 (7.06)% $143 1.65%(4)(5) 6.13%(4)(5) 100%
- - ---------------
(1) Calculated based upon average shares outstanding
(2) Total return is not annualized and does not reflect sales load
(3) Commencement of sale of respective class of shares
(4) Annualized
(5) Net of the following expense reimbursements (based on average net assets):
11/30/97 11/30/98 11/30/99
-------- -------- --------
Real Estate Securities Class Y 0.58% 0.06% --
Real Estate Securities Class A -- -- 0.18%
================================================================================
MULTI CAP GROWTH PORTFOLIO
<TABLE>
<CAPTION>
NET GAIN(LOSS)
ON INVEST- TOTAL DIVIDENDS DISTRI-
NET ASSET NET MENTS(BOTH FROM FROM NET BUTIONS
VALUE, INVEST- REALIZED INVEST- INVEST- FROM TOTAL
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI-
ENDED OF PERIOD INCOME(1) UNREALIZED) OPERATIONS INCOME GAINS BUTIONS
- - ----- --------- --------- ----------- ---------- ------ ----- -------
CLASS Y
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/98-
11/30/99(3) $10.00 $(0.05) $6.96 $6.91 $-- $(2.13) $(2.13)
</TABLE>
NET ASSET NET ASSETS RATIO OF INVESTMENT
VALUE, END OF EXPENSES INCOME (LOSS)
END OF TOTAL PERIOD TO AVERAGE TO AVERAGE PORTFOLIO
PERIOD RETURN(2) (000'S) NET ASSETS NET ASSETS TURNOVER
- - ------- -------- ------- ---------- ---------- ---------
CLASS Y
$14.78 72.39%(4) $35,944 1.35%(4)(5) (0.42)%(4)(5) 154%
- - ---------------
(1) Calculated based upon average shares outstanding
(2) Total return is not annualized and does not reflect sales load
(3) Commencement of sale of respective class of shares
(4) Annualized
(5) Net of the following expense reimbursements (based on average net assets):
11/30/99
--------
Multi Cap Growth Portfolio ........................ 0.64%
37
<PAGE>
FOR MORE INFORMATION
You may obtain the following and other information on these Portfolios free of
charge:
ANNUAL AND SEMI-ANNUAL REPORT TO SHAREHOLDERS
PROVIDES THE PORTFOLIOS' MOST RECENT FINANCIAL REPORTS AND PORTFOLIO LISTINGS.
THE ANNUAL REPORTS CONTAIN A DISCUSSION OF THE MARKET CONDITIONS AND
INVESTMENT STRATEGIES THAT AFFECTED THE PORTFOLIOS' PERFORMANCE
DURING THE LAST FISCAL YEAR.
STATEMENT OF ADDITIONAL INFORMATION (SAI) DATED MARCH 29, 2000
PROVIDES ADDITIONAL DETAILS ABOUT THE PORTFOLIOS' POLICIES AND MANAGEMENT.
Telephone:
1-800-426-9157
Mail:
Brazos Mutual Funds
c/o SunAmerica Fund Services, Inc.
Mutual Fund Operations
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
SEC:
Text only versions of Company documents can be viewed online or
downloaded from: HTTP://WWW.SEC.GOV
You may review and obtain copies of Company information at the SEC Public
Reference Room in Washington, D.C. (1-202-942-8090). Copies of the information
may be obtained upon payment of a duplicating fee by writing the Public
Reference Section, Washington, D.C.
20549-0102, or by electronic request to [email protected].
Investment Company Act of 1940 File No. 811-07881
WWW.BRAZOSFUND.COM
------------------
BRYPR
<PAGE>
MARCH 29, 2000 PROSPECTUS
BRAZOS MUTUAL FUNDS
o BRAZOS SMALL CAP GROWTH PORTFOLIO
o BRAZOS REAL ESTATE SECURITIES PORTFOLIO
(CLASS A, B AND IISHARES)
The Securities and Exchange Commission has
not approved or disapproved these securities
or passed upon the adequacy of this
prospectus. Any representation to the
contrary is a criminal offense.
[LOGO] BRAZOS
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
- - --------------------------------------------------------------------------------
FUND HIGHLIGHTS .......................................... 2
FINANCIAL HIGHLIGHTS ..................................... 8
SHAREHOLDER ACCOUNT INFORMATION .......................... 9
MORE INFORMATION ABOUT THE PORTFOLIOS..................... 16
INVESTMENT STRATEGIES ............................... 16
GLOSSARY ............................................ 17
INVESTMENT TERMINOLOGY .......................... 17
RISK TERMINOLOGY ................................ 18
FUND MANAGEMENT ..................................... 19
[LOGO] BRAZOS
MUTUAL FUNDS
<PAGE>
FUND HIGHLIGHTS
Q&A
MARKET CAPITALIZATION represents the total market value of the outstanding
securities of a corporation.The market capitalization for the Small Cap Growth
Portfolio will fluctuate with changes in market conditions and the composition
of the Russell 2000 Index. As of February 29, 2000, the company with the largest
market capitalization in the Russell 2000 Index had a market capitalization of
approximately $20 billion.
When deemed appropriate by the Adviser, a Portfolio engages in ACTIVE TRADING
when it frequently trades its portfolio securities to achieve its investment
goal.
The "GROWTH" ORIENTED philosophy to which the Small Cap Growth Portfolio
subscribes and the Real Estate Securities Portfolio partly subscribes--that of
investing in securities believed to offer the potential for capital
appreciation--focuses on securities which are considered: to have a historical
record of above average growth rate; to have significant growth potential; to
have above average earnings growth or value or the ability to sustain earnings
growth; to offer proven or unusual products or services; or to operate in
industries experiencing increasing demand.
A company is considered "principally engaged in the real estate industry" if at
least 50% of its assets, gross income, or net profits are attributable to
ownership, construction, management or sale of real estate assets.
The following questions and answers are designed to give you an overview of
Brazos Mutual Funds, and to provide you with information about two of Brazos
Mutual Funds' separate Portfolios, and their investment goals, principal
strategies and principal investment techniques. Classes A, B and II shares of
the Small Cap Growth Portfolio and Real Estate Securities Portfolio are offered
through this prospectus. There can be no assurance that any Portfolio's
investment goal will be met or that the net return on an investment in a
Portfolio will exceed what could have been obtained through other investment or
savings vehicles. More complete investment information is provided in the chart,
under "More Information About the Portfolios," which is on page 16, and the
glossary that follows on page 17.
Q: WHAT ARE THE PORTFOLIOS' INVESTMENT GOALS, STRATEGIES AND TECHNIQUES?
A:
<TABLE>
<CAPTION>
PRINCIPAL
INVESTMENT INVESTMENT PRINCIPAL INVESTMENT
PORTFOLIO GOAL STRATEGY TECHNIQUES
--------- ---- -------- ----------
<S> <C> <C> <C>
Small Cap capital appreciation growth invests primarily by
Growth Portfolio active trading in common stocks
and securities convertible into
common stocks that demonstrate the
potential for capital appreciation,
issued by companies with market
capitalizations of (a) $1.8 billion
or lower or (b) companies represented
in the Russell 2000 Index at the time
of the Portfolio's investment.
Real Estate a balance of income growth and invests primarily by
Securities Portfolio and appreciation income active trading in common stocks
and securities convertible into
common stocks issued by companies
principally engaged in the real
estate industry.
</TABLE>
Q: WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS?
A: The following section describes the principal risks of each Portfolio,
while the chart on page 16 describes various additional risks.
RISK OF INVESTING IN EQUITY SECURITIES
The Small Cap Growth and Real Estate Securities Portfolios invest primarily in
equity securities. As with any equity fund, the value of your investment in any
of these Portfolios may fluctuate in response to stock market movements. You
should be aware that the performance of different types of equity stocks may
rise or decline under varying market conditions - for example, "value" stocks
may perform well under circumstances in which "growth" stocks in general have
fallen. In addition, individual stocks selected for any of these Portfolios may
underperform the market generally.
ADDITIONAL PRINCIPAL RISKS
Shares of the Portfolios are not bank deposits and are not guaranteed or insured
by any bank, government entity or the Federal Deposit Insurance Corporation. As
with any mutual fund, there is no guarantee that a Portfolio will be able to
achieve its investment goals. If the value of the assets of a Portfolio goes
down, you could lose money.
ADDITIONAL RISKS SPECIFIC TO THE SMALL CAP GROWTH PORTFOLIO
Stocks of smaller companies may be more volatile than, and not as readily
marketable as, those of larger companies. Small companies may have limited
product lines, financial resources, and management teams. Additionally, the
trading volume of small company securities may make those securities more
difficult to sell.
ADDITIONAL RISKS SPECIFIC TO THE REAL ESTATE SECURITIES PORTFOLIO
The Real Estate Securities Portfolio is subject to risks, such as market forces,
that may impact the values of its underlying real estate assets, and
management's skill in managing those assets. The Real Estate Securities
Portfolio is also subject to concentration risk because it invests in a
particular industry, which could cause the Real Estate Securities Portfolio to
be affected by a change in value of one investment more than a portfolio that
invested across industry sectors. The trading volume of small company real
estate securities may also make these securities more difficult to sell.
2
<PAGE>
Q: HOW HAVE THE PORTFOLIOS PERFORMED HISTORICALLY?
A: The following Risk/Return Bar Charts and Tables illustrate the risks of
investing in the Portfolios by showing changes in the Portfolios'
performance from calendar year to calendar year, and compare the
Portfolios' average annual returns to those of an appropriate market index.
Sales charges are not reflected in the bar charts. If these amounts were
reflected, returns would be less than those shown. In addition, the
performance results presented below may reflect periods of above average
performance attributable to a Portfolio's investment in certain securities
during the initial public offering, the performance of a limited number of
the securities in the Portfolio, or other non-recurring factors. Of course,
past performance is not necessarily an indication of how a Portfolio will
perform in the future.
SMALL CAP GROWTH PORTFOLIO (CLASS Y)(1)
[BAR CHART OMITTED]
[BAR CHART REPRESENTED BELOW IN ITS PRINTED FORM.]
1997 ........................... 54.5%
1998 ........................... 13.6%
1999 ........................... 37.01%
During the period shown in the bar chart, the highest return for a quarter was
29.94% (quarter ended 12/31/99) and the lowest return for a quarter was -19.49%
(quarter ended 9/30/98).
(1) The returns shown in the bar chart above are for a class of shares (Class
Y) which is not offered in this prospectus that has substantially similar
annual returns because its shares are invested in the same portfolio of
securities. In reviewing this performance information, however, you should
be aware that returns would differ to the extent that Class Y shares do not
have the same expenses and sales loads as Class A, B and II shares which
are set forth in the table on page 4 of this prospectus.
Average Annual Total Returns One Return Since
(as of the calendar year ended December 31, 1999) Year Inception*
Small Cap Growth Portfolio** Class Y 37.01% 33.97%
Russell 2000 Index*** 21.26% 13.08%
* Inception Date: Class Y: 12/31/96
** Includes expenses.
*** The Russell 2000 Index is an unmanaged broad-based index of 2,000 smaller
capitalization companies. The Russell 2000 Index figures do not reflect any
fees or expenses. Investors cannot invest directly in the Index.
REAL ESTATE SECURITIES PORTFOLIO (CLASS Y)(1)
[BAR CHART OMITTED]
[BAR CHART REPRESENTED BELOW IN ITS PRINTED FORM.]
1997 ........................... 29.2%
1998 ........................... -17.4%
1999 ........................... - 4.61%
During the period shown in the bar chart, the highest return for a quarter was
12.16% (quarter ended 9/30/97) and the lowest return for a quarter was -13.52%
(quarter ended 9/30/98).
(1) The returns shown in the bar chart above are for a class of shares (Class
Y) which is not offered in this prospectus that has substantially similar
annual returns because its shares are invested in the same portfolio of
securities. In reviewing this performance information, however, you should
be aware that returns would differ to the extent that Class Y shares do not
have the same expenses and sales loads as Class A, B and II shares which
are set forth in the table on page 4 of this prospectus.
Average Annual Total Returns One Return Since
(as of the calendar year ended December 31, 1999) Year Inception*
Real Estate Securities Portfolio** Class Y -4.61% 0.60%
NAREIT Equity Index*** -4.62% -1.82%
* Inception Date: Class Y: 12/31/96
** Includes expenses.
*** The NAREIT Equity Index is a widely recognized, unmanaged index of publicly
traded real estate securities. The NAREIT Equity Index figures do not
reflect any fees or expenses. Investors cannot invest directly in the Index.
3
<PAGE>
FUND HIGHLIGHTS
- - --------------------------------------------------------------------------------
Q: WHAT ARE THE PORTFOLIOS' EXPENSES?
A: The following table describes the fees and expenses that you may pay if you
buy and hold shares of the Portfolios.
<TABLE>
<CAPTION>
Small Cap Growth Portfolio Real Estate Securities Portfolio
Class A Class B Class II Class A Class B Class II
---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID
DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load)
Imposed on Purchases (as a
percentage of offering price)(1) 5.75% None 1.00% 5.75% None 1.00%
Maximum Deferred Sales
Charge (Load) (as a percent-
age of amount redeemed)(2) None 4.00% 1.00% None 4.00% 1.00%
Maximum Sales Charge
(Load) Imposed on
Reinvested Dividends None None None None None None
Redemption Fee (as a
percentage of amount
redeemed)(3) None None None 1.00%(4) 1.00%(4) 1.00%(4)
Exchange Fee None None None None None None
Maximum Account Fee None None None None None None
ANNUAL PORTFOLIO OPERATING
EXPENSES (EXPENSES THAT ARE
DEDUCTED FROM PORTFOLIO ASSETS)
Management Fees 0.90% 0.90% 0.90% 0.90% 0.90% 0.90%
Distribution (12b-1) Fees(5) 0.35% 1.00% 1.00% 0.35% 1.00% 1.00%
Other Expenses 0.54% 0.54% 0.54% 0.58% 0.58% 0.58%
----- ----- ----- ----- ----- -----
Total Annual Portfolio
Operating Expenses(6) 1.79% 2.44% 2.44% 1.83% 2.48% 2.48%
</TABLE>
(1) The front-end sales charge on Class A shares decreases with the size of the
purchase to 0% for purchases of $1 million or more.
(2) Purchases of Class A shares over $1 million will be subject to a contingent
deferred sales charge (CDSC) on redemptions made within two years of
purchase. The CDSC on Class B shares applies only if shares are redeemed
within six years of their purchase. The CDSC on Class II shares applies
only if shares are redeemed within eighteen months of their purchase. See
pages 9 and 10 for more information about the CDSCs.
(3) A $15.00 fee may be imposed on wire redemptions and overnight mail
redemptions.
(4) If shares of the Real Estate Securities Portfolio are redeemed within 90
days of purchase, a 1.00% redemption fee will be assessed on the proceeds
of the transaction. This fee will be paid to the Real Estate Securities
Portfolio.
(5) Because these fees are paid out of a Portfolio's assets on an on-going
basis, over time these fees will increase the cost of your investment and
may cost you more than paying other types of sales charges.
(6) The Adviser has undertaken to cap the expense ratios set forth above should
Total Annual Portfolio Operating Expenses exceed 1.65% for Class A shares
and 2.30% for Class B and II shares. These caps on expenses are expected
to continue until further notice.
4
<PAGE>
- - --------------------------------------------------------------------------------
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolios with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in a Portfolio for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Portfolio's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions and if you redeemed your
investment at the end of the periods indicated your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
SMALL CAP GROWTH PORTFOLIO
(Class A shares) .................................................. $ 746 $1,106 $1,489 $2,559
(Class B shares) .................................................. 647 1,061 1,501 2,541
(Class II shares) ................................................. 445 853 1,388 2,848
REAL ESTATE SECURITIES PORTFOLIO
(Class A shares) .................................................. 750 1,118 1,508 2,599
(Class B shares) .................................................. 651 1,073 1,521 2,582
(Class II shares) ................................................. 449 865 1,407 2,888
<CAPTION>
You would pay the following expenses if you did not redeem your shares:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
SMALL CAP GROWTH PORTFOLIO
(Class A shares) .................................................. $ 746 $1,106 $1,489 $2,559
(Class B shares) .................................................. 247 761 1,301 2,541
(Class II shares) ................................................. 345 853 1,388 2,848
REAL ESTATE SECURITIES PORTFOLIO
(Class A shares) .................................................. 750 1,118 1,508 2,599
(Class B shares) .................................................. 251 773 1,321 2,582
(Class II shares) ................................................. 349 865 1,407 2,888
</TABLE>
5
<PAGE>
FUND HIGHLIGHTS
- - --------------------------------------------------------------------------------
Q: HOW HAS THE ADVISER PERFORMED IN MANAGING ACCOUNTS WITH SUBSTANTIALLY
SIMILAR INVESTMENT OBJECTIVES, POLICIES AND STRATEGIES TO THAT OF THE
PORTFOLIOS?
A:
ADVISER'S HISTORICAL PERFORMANCE
Set forth below are performance data provided by John McStay Investment Counsel,
L.P., the Portfolios' Adviser, pertaining to the composite of all separately
managed accounts of the Adviser that are managed with substantially similar
(although not necessarily identical) objectives, policies and strategies as
those of the Small Cap Growth Portfolio and the Real Estate Securities
Portfolio. The investment returns of the Small Cap Growth and Real Estate
Securities Portfolios may differ from those of the separately managed accounts
because such separately managed accounts may have fees and expenses that differ
from those of the Small Cap Growth and Real Estate Securities Portfolios.
Further, the separately managed accounts are not subject to investment
limitations, diversification requirements and other restrictions imposed by the
Investment Company Act of 1940 and Internal Revenue Code; such conditions, if
applicable, may have lowered the returns for separately managed accounts. The
Adviser's separately managed account performance results set forth below under
"Institutional Equity Results" are not intended to predict or suggest the return
of the Small Cap Growth Portfolio or the Real Estate Securities Portfolio, but
rather to provide the shareholder with information about the historical
investment performance of the Portfolios' Adviser. The Indexes used in the
comparisons below are unmanaged indices which assume reinvestment of dividends
on securities in the index and are generally considered representative of
securities similar to those invested in by the Adviser for the purpose of the
composite performance numbers set forth below.
<TABLE>
<CAPTION>
ADVISERS SMALL CAP ADVISER'S REAL ESTATE
INSTITUTIONAL GROWTH INSTITUTIONAL SECURITIES NAREIT
SMALL CAP PORTFOLIO RUSSELL REAL ESTATE PORTFOLIO EQUITY
EQUITY ACCOUNTS (CLASS Y) 2000 INDEX EQUITY ACCOUNTS (CLASS Y) INDEX
(AFTER (AFTER (BEFORE (AFTER (AFTER (BEFORE
EXPENSES) EXPENSES) EXPENSES) EXPENSES) EXPENSES) EXPENSES)
--------------- ---------- ---------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
CALENDAR YEARS:
1987 25.6% -- -8.8% -- -- --
1988 24.5 -- 24.9 -- -- --
1989 31.9 -- 16.2 -- -- --
1990 -4.0 -- -19.5 -- -- --
1991 68.9 -- 46.1 -- -- --
1992 8.7 -- 18.4 -- -- --
1993 15.3 -- 18.9 -- -- --
1994 -0.1 -- -1.8 14.6% -- 3.2%
1995 30.1 -- 28.4 20.5 -- 15.3
1996 32.9 -- 16.5 42.1 -- 35.3
1997 23.4 54.5% 22.4 26.5 29.2% 20.3
1998 10.4 13.6 -2.5 -15.6 -17.4 -17.5
1999 12.6 37.0 21.3 -4.3 -4.61 -4.62
AVERAGE ANNUAL
TOTAL RETURNS
AS OF 12/31/99:
Cumulative 1010.6 140.5 365.8 100.5 1.81 52.2
Annualized 20.3 33.97 12.6 12.3 0.60 7.3
3 Year 15.3 33.97 13.1 0.7 0.60 -1.8
5 Year 21.5 -- 16.7 11.8 -- 8.1
10 Year 18.3 -- 13.4 -- -- --
Five-Year Mean 21.9 -- 17.2 13.8 -- 9.8
Twelve-Year Mean 21.6 -- 13.9 -- -- --
Value of $1 invested
During 13 years
(1/1/87 - 12/31/99) $11.11 -- $4.66 -- -- --
</TABLE>
(1) The Adviser's Institutional Equity Accounts represents the composite of all
separately managed accounts of the Adviser that are managed with
substantially similar (although not identical) objectives, policies and
strategies as those of Small Cap Growth Portfolio and those of Real Estate
Securities Portfolio. The separately managed accounts are subject to
different expenses and governmental regulations than the Portfolios.
(2) The annualized return of the Adviser's Institutional Equity Accounts is
calculated from monthly data, allowing for compounding. The formula used in
accordance with the methods set forth by the Association for Investment
Management Research ("AIMR"), The Bank Administration Institute, and the
Investment Counsel Association of America. Market value of the account was
the sum of the account's total assets, including cash, cash equivalents,
short term investments, and securities valued at current market prices.
6
<PAGE>
(3) The cumulative return means that $1 invested in the Small Cap Equity
composite account on January 1, 1987 had grown to $11.11 by December 31,
1999 and that $1 invested in the Real Estate Equity Composite account on
January 1, 1994 had grown to $2.00 by December 31, 1999.
(4) The thirteen-year arithmetic mean is the arithmetic average of the Small
Cap Equity composite accounts' annual returns listed, and the five-year
mean is the arithmetic average of the Real Estate Equity composite
accounts' annual returns for the years listed.
(5) The Russell 2000 and the NAREIT EquityIndex are unmanaged indices which
assume reinvestment of dividends on securities in the index and are
generally considered representative of securities similar to those invested
in by the Adviser for the purpose of the composite performance numbers set
forth above. The Russell 2000 is comprised of the 2000 smallest stocks in
the Russell 3000, a market value weighted index of the 3,000 largest U.S.
publicly traded companies. The NAREIT Equity Index is a compilation of
market-weighted securities data collected from all tax-qualified equity
real estate investment trusts listed on the New York and American Stock
Exchanges and the NASDAQ. The comparative indices are not adjusted to
reflect expenses or other fees reflected in the performance of a mutual
fund as required by the Securities and Exchange Commission.
(6) The Adviser's average annual management fee over the thirteen-year period
(1987-1999) for the Small Cap Equity composite accounts was 1% or 100 basis
points. On January 1, 1987, the Adviser began managing the separate
accounts using objectives, policies and strategies substantially similar to
those of the Small Cap Growth Portfolio. During the period, fees on the
Adviser's individual accounts ranged from 1% to 1.5% (100 basis points to
150 basis points). The Adviser's average annual management fee over the
five-year period (1995-1999) for the Real Estate Equity composite accounts
was .85% or 85 basis points. During the period, fees on the Adviser's
individual accounts ranged from .80% to 1% (80 basis points to 100 basis
points). Net returns to investors vary depending on the management fee.
(7) Small Cap Equity composite accounts ("Composite") performance data is AIMR
compliant from 1/1/93 forward. Prior to that time, the only difference in
the calculation is that all portfolios were equally weighted without regard
to dollar value in determining Composite performance. The Composite
includes every account managed in the Adviser's small capitalization style,
consistent with AIMRguidelines. This equal weighting method follows the
standards promulgated by the Investment Management Consultants' Association
which predates standards established by AIMR. In 1990, the Composite
results reflected portfolios ranging in number from 3 to 8 and in size from
$3 million to $30 million, with a median size of $13 million. In 1991, the
Composite reflected portfolios ranging in number from 8 to 18 and in size
from $1 million to $46 million, with a median size of $15 million. In 1992,
the Composite reflected portfolios ranging in number from 20 to 27 and in
size from $4 million to $50 million, with a median size of $17 million.
And, from 1987 through 1989, the Composite consisted of only one portfolio
which for many years served as the model for all accounts managed in this
style.
(8) The returns shown for the Small Cap Growth and the Real Estate Securities
Portfolios are for Class Y shares and not Class A, B and II shares, which
commenced operations on September 8, 1999. The annual returns for Class A,
B and II shares would be substantially similar to the annual returns of
Class Y shares because Class A, B and II shares are invested in the same
portfolio of securities. In reviewing this performance information, you
should be aware that returns would differ to the extent Class Y shares do
not have the same expenses and sales loads as Class A, B and II shares
which are set forth on page 4 of this prospectus.
7
<PAGE>
FINANCIAL HIGHLIGHTS
- - --------------------------------------------------------------------------------
The Financial Highlights table for each Portfolio is intended to help you
understand the financial performance of each Portfolio's Class A, B and II
shares since their inception. Certain information reflects financial results for
a single Class A, B or II share in each Portfolio. The total returns in each
table represent the rate that an investor would have earned (or lost) on an
investment in Class A, B or II shares of a Portfolio (assuming reinvestment of
all dividends and distributions). This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with each Portfolio's financial
statements, is included in the Statement of Additional Information (SAI), which
is available upon request.
SMALL CAP GROWTH PORTFOLIO
<TABLE>
<CAPTION>
NET
GAIN(LOSS)
ON INVEST- TOTAL DIVIDENDS DISTRI-
NET ASSET NET MENTS (BOTH FROM FROM NET BUTIONS
VALUE, INVEST- REALIZED INVEST- INVEST- FROM TOTAL
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI-
ENDED OF PERIOD INCOME(1) UNREALIZED) OPERATIONS INCOME GAINS BUTIONS
- - -------- --------- --------- ----------- ---------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A
-------
9/8/99-
11/30/99(3) $16.90 $(0.05) $1.65 $1.60 $-- $-- $--
CLASS B
-------
9/8/99-
11/30/99(3) $16.90 $(0.09) $1.68 $1.59 $-- $-- $--
CLASS II
--------
9/8/99-
11/30/99(3) $16.90 $(0.08) $1.68 $1.60 $-- $-- $--
<CAPTION>
RATIO OF NET
NET ASSET NET ASSETS RATIO OF INVESTMENT
VALUE, END OF EXPENSES INCOME (LOSS)
PERIOD END OF TOTAL PERIOD TO AVERAGE TO AVERAGE PORTFOLIO
ENDED PERIOD RETURN(2) (000'S) NET ASSETS NET ASSETS TURNOVER
- - ------ --------- --------- ---------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
-------
9/8/99-
11/30/99(3) $18.50 9.47% $394 1.65%(4)(5) (1.46)%(4)(5) 105%
CLASS B
-------
9/8/99-
11/30/99(3) $18.49 9.41% $562 2.30%(4)(5) (2.12)%(4)(5) 105%
CLASS II
--------
9/8/99-
11/30/99(3) $18.50 9.47% $397 2.30%(4)(5) (2.11)%(4)(5) 105%
</TABLE>
- - ----------
(1) Calculated based upon average shares outstanding
(2) Total return is not annualized and does not reflect sales load
(3) Commencement of sale of respective class of shares
(4) Annualized
(5) Net of the following expense reimbursements (based on average net assets):
11/30/99
--------
Small Cap Growth Class A................. 0.14%
Small Cap Growth Class B................. 0.14
Small Cap Growth Class II................ 0.14
================================================================================
REAL ESTATE SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
NET
GAIN(LOSS)
ON INVEST- TOTAL DIVIDENDS DISTRI-
NET ASSET NET MENTS (BOTH FROM FROM NET BUTIONS
VALUE, INVEST- REALIZED INVEST- INVEST- FROM TOTAL
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI-
ENDED PERIOD INCOME UNREALIZED) OPERATIONS INCOME GAINS BUTIONS
- - -------- --------- ------- ----------- ---------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A
-------
9/8/99-
11/30/99(3) $8.80 $0.12 $(0.74) $(0.62) $(0.12) $-- $(0.12)
CLASS B
-------
9/8/99-
11/30/99(3) $8.80 $0.10 $(0.73) $(0.63) $(0.12) $-- $(0.12)
CLASS II
--------
9/8/99-
11/30/99(3) $8.80 $0.11 $(0.74) $(0.63) $(0.12) $-- $(0.12)
<CAPTION>
RATIO OF NET
NET ASSET NET ASSETS RATIO OF INVESTMENT
VALUE, END OF EXPENSES INCOME (LOSS)
END OF TOTAL PERIOD TO AVERAGE TO AVERAGE PORTFOLIO
PERIOD RETURN(2) (000'S) NET ASSETS NET ASSETS TURNOVER
--------- --------- ---------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
-------
9/8/99-
11/30/99(3) $8.06 (7.06)% $143 1.65%(4)(5) 6.13%(4)(5) 100%
CLASS B
-------
9/8/99-
11/30/99(3) $8.05 (7.20)% $162 2.30%(4)(5) 5.48%(4)(5) 100%
CLASS A
-------
9/8/99-
11/30/99(3) $8.05 (7.20)% $143 2.30%(4)(5) 5.61%(4)(5) 100%
</TABLE>
- - ----------
(1) Calculated based upon average shares outstanding
(2) Total return is not annualized and does not reflect sales load
(3) Commencement of sale of respective class of shares
(4) Annualized
(5) Net of the following expense reimbursements (based on average net assets):
11/30/99
--------
Real Estate Securities Class A.......... 0.18%
Real Estate Securities Class B.......... 0.18
Real Estate Securities Class II......... 0.18
8
<PAGE>
SHAREHOLDER ACCOUNT INFORMATION
- - --------------------------------------------------------------------------------
SELECTING A SHARE CLASS
Each Portfolio offers three classes of shares through this prospectus: Class A,
Class B and Class II shares.
Each class of shares has its own cost structure, so you can choose the one best
suited to your investment needs. Your broker or financial advisor can help you
determine which class is right for you.
CLASS A
o Front-end sales charges, as described below. There are several ways to
reduce these charges, also described below.
o Lower annual expenses than Class B or Class II shares.
CLASS B
o No front-end sales charge; all your money goes to work for you right away.
o Higher annual expenses than Class A shares.
o Deferred sales charge on shares you sell within six years of purchase, as
described below.
o Automatic conversion to Class A shares approximately one year after such
time that no CDSC would be payable upon redemption, as described below,
thus reducing future annual expenses.
CLASS II
o Front-end sales charge, as described below.
o Higher annual expenses than Class A shares.
o Deferred sales charge on shares you sell within eighteen months of
purchase, as described below.
o No conversion to Class A.
CALCULATION OF SALES CHARGES
CLASS A. Sales Charges are as follows:
<TABLE>
<CAPTION>
Sales Charge Concession to Dealers
--------------------------------------------------------
% OF % OF NET % OF
OFFERING AMOUNT OFFERING
YOUR INVESTMENT PRICE INVESTED PRICE
--------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 .................................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000........................ 4.75% 4.99% 4.00%
$100,000 but less than $250,000....................... 3.75% 3.90% 3.00%
$250,000 but less than $500,000....................... 3.00% 3.09% 2.25%
$500,000 but less than $1,000,000..................... 2.10% 2.15% 1.35%
$1,000,000 or more.................................... None None 1.00%
</TABLE>
INVESTMENTS OF $1 MILLION OR MORE: Class A shares are available with no
front-end sales charge. However, a 1% CDSC is charged on shares you sell within
one year of purchase and a 0.50% CDSCis charged on shares you sell after the
first year and within the second year after purchase.
CLASS B. Shares are offered at their net asset value per share, without any
initial sales charge. However, there is a CDSC on shares you sell within six
years of buying them. The longer the time between the purchase and the sale of
shares, the lower the rate of the CDSC:
Class B deferred charges:
Years after purchase CDSC on shares being sold
1st or 2nd year 4.00%
3rd or 4th year 3.00%
5th year 2.00%
6th year 1.00%
7th year and thereafter None
Class II. Sales Charges are as follows:
Sales Charge Concession to Dealers
---------------------------------------------------------
% of % of Net % of
Offering Amount Offering
Price Invested Price
---------------------------------------------------------
1.00% 1.01% 1.00%
There is also a CDSC of 1% on shares you sell within 18 months after you buy
them.
DETERMINATION OF CDSC: Each CDSC is based on the original purchase cost or the
current market value of the shares being sold, whichever is less. There is no
CDSC on shares you purchase through reinvestment of dividends. To keep your CDSC
as low as possible, each time you place a request to sell shares we will first
sell any shares in your account that are not subject to a CDSC. If there are not
enough of these shares available, we will sell shares that have the lowest CDSC.
FOR PURPOSES OF THE CDSC, WE COUNT ALL PURCHASES YOU MAKE DURING A CALENDAR
MONTH AS HAVING BEEN MADE ON THE FIRST DAY OF THAT MONTH.
9
<PAGE>
SHAREHOLDER ACCOUNT INFORMATION
- - --------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
WAIVERS FOR CERTAIN INVESTORS. Various individuals and institutions may purchase
Class A shares without front-end sales charges, including:
o financial planners, institutions, broker-dealer representatives or
registered investment advisers utilizing Portfolio shares in fee-based
investment products under an agreement with the Fund or SunAmerica
Capital Services, Inc., the Distributor of the Fund (this waiver may
also apply to front-end sales charges of Class II shares)
o participants in certain retirement plans that meet applicable
conditions, as described in the Statement of Additional Information
o Fund Trustees and other individuals who are affiliated with the Fund
or any fund distributed by SunAmerica Capital Services and their
families
o selling brokers and their employees and sales representatives and
their families
o participants in "Net Asset Value Transfer Program"
We will generally waive the CDSC for Class B or Class II shares in the following
cases:
o within one year of the shareholder's death or becoming disabled
o taxable distributions or loans to participants made by qualified
retirement plans or retirement accounts (not including rollovers) for
which SunAmerica Fund Services, Inc. serves as a fiduciary
o Trustees of the Fund and other individuals who are affiliated with the
Fund or any fund distributed by SunAmerica Capital Services and their
families
o to make payments through the Systematic Withdrawal Plan (subject to
certain conditions)
o participants in "Net Asset Value Transfer Program"
REDUCING YOUR CLASS A SALES CHARGES. There are several special purchase plans
that allow you to combine multiple purchases of Class A shares of any Portfolio
of the Fund or any fund distributed by SunAmerica Capital Services to take
advantage of the breakpoints in the sales charge schedule. For information about
the "Rights of Accumulation," "Letter of Intent," "Combined Purchase Privilege,"
and "Reduced Sales Charges for Group Purchases," contact your broker or
financial advisor, or consult the Statement of Additional Information. To
utilize: if you think you may be eligible for a sales charge reduction or CDSC
waiver, contact your broker or financial advisor.
REINSTATEMENT PRIVILEGE. If you sell shares of a Portfolio within one year after
the sale, you may invest some or all of the proceeds of the sale in the same
share class of the Portfolio, without a sales charge. A shareholder may use the
reinstatement privilege only one time after selling such shares. If you paid a
CDSC when you sold your shares, we will credit your account with the dollar
amount of the CDSC at the time of sale. All accounts involved must be registered
in the same name(s).
DISTRIBUTION AND SERVICE (12B-1) FEES
Each class of shares of each Portfolio has its own 12b-1 plan that provides for
distribution and account maintenance and service fees (payable to the
Distributor) based on a percentage of average daily net assets, as follows:
ACCOUNT MAINTENANCE AND
CLASS DISTRIBUTION FEE SERVICE FEE
A 0.10% 0.25%
B 0.75% 0.25%
II 0.75% 0.25%
Because 12b-1 fees are paid out of the Portfolio's assets on an ongoing basis,
over time these fees will increase the cost of your investment and may cost you
more than paying other types of sales charges.
OPENING AN ACCOUNT
1. Read this prospectus carefully.
2. Determine how much you want to invest. The minimum initial investment for
each Portfolio is as follows:
o non-retirement account: $500
o retirement account: $250
o dollar cost averaging: $500 to open; you must invest at least
$25 a month
The minimum subsequent investment for each Portfolio is as follows:
o non-retirement account: $100
o retirement account: $25
3. Complete the appropriate parts of the Account Application, carefully
following the instructions. If you have questions, please contact your
broker or financial advisor or call Shareholder/Dealer Services at
1-800-858-8850, extension 5125.
4. Complete the appropriate parts of the Supplemental Account Application. By
applying for additional investor services now, you can avoid the delay and
inconvenience of having to submit an additional application if you want to
add services later.
5. Make your initial investment using the chart on the next page. You can
initiate any purchase, exchange or sale of shares through your broker or
financial advisor.
10
<PAGE>
- - --------------------------------------------------------------------------------
BUYING SHARES
OPENING AN ACCOUNT
BY CHECK
- - --------------------------------------------------------------------------------
o Make out a check for the investment amount, payable to the specific
Portfolio or Brazos Mutual Funds.
o Deliver the check and your completed Account Application (and
Supplemental Account Application, if applicable) to your broker or
financial advisor, or mail them to:
SunAmerica Fund Services, Inc.
Mutual Fund Operations, 3rd Floor
The SunAmerica Center
733 Third Avenue
New York, New York 10017-3204.
o There is a $25.00 fee for all checks returned due to insufficient
funds.
ADDING TO AN ACCOUNT
BY CHECK
- - --------------------------------------------------------------------------------
o Make out a check for the investment amount payable to the specific
Portfolio or Brazos Mutual Funds.
o Include the stub from your Portfolio statement or a note specifying
the Portfolio name, your share class, your account number and the
name(s) in which the account is registered.
o Indicate the Portfolio and account number in the memo section of your
check.
o Deliver the check and your note to your broker or financial advisor,
or mail them to:
NON-RETIREMENT ACCOUNTS:
SunAmerica Fund Services, Inc.
c/o NFDS
P.O. Box 219373
Kansas City, Missouri 64141-9373
RETIREMENT ACCOUNTS:
SunAmerica Fund Services, Inc.
Mutual Fund Operations, 3rd Floor
The SunAmerica Center
733 Third Avenue
New York, New York 10017-3204
BY WIRE
- - --------------------------------------------------------------------------------
o Deliver your completed application to your broker or financial advisor
or fax it to SunAmerica Fund Services, Inc. at 212-551-5585.
o Obtain your account number by calling your broker or financial advisor
or Shareholder/Dealer Services at 1-800-858-8850, extension 5125.
o Instruct your bank to wire the amount of your investment to:
State Street Bank & Trust Company
Boston, MA
ABA #0110-00028
DDA # 99029712
Specify the Portfolio name, your choice of share class, your new Portfolio
number and account number and the name(s) in which the account is registered.
Your bank may charge a fee to wire funds.
o Instruct your bank to wire the amount of your investment to:
State Street Bank & Trust Company
Boston, MA
ABA #0110-00028
DDA # 99029712
Specify the Portfolio name, your share class, your Portfolio number, account
number and the name(s) in which the account is registered. Your bank may charge
a fee to wire funds.
TO OPEN OR ADD TO AN ACCOUNT USING DOLLAR COST AVERAGING, SEE "ADDITIONAL
INVESTOR SERVICES."
11
<PAGE>
SHAREHOLDER ACCOUNT INFORMATION
- - --------------------------------------------------------------------------------
SELLING SHARES
HOW
THROUGH YOUR BROKER OR FINANCIAL ADVISOR
- - --------------------------------------------------------------------------------
o Accounts of any type.
o Sales of any amount.
BY MAIL
- - --------------------------------------------------------------------------------
o Accounts of any type.
o Sales of less than $100,000.
o Sales of $100,000 or more require a signature guarantee.
BY PHONE
- - --------------------------------------------------------------------------------
o Most accounts.
o Sales of less than $100,000.
BY WIRE
- - --------------------------------------------------------------------------------
o Request by mail to sell any amount (accounts of any type).
o Request by phone to sell less than $100,000.
REQUIREMENTS
THROUGH YOUR BROKER OR FINANCIAL ADVISOR
- - --------------------------------------------------------------------------------
o Call your broker or financial advisor to place your order to sell
shares.
BY MAIL
- - --------------------------------------------------------------------------------
o Write a letter of instruction indicating the Portfolio name, your
share class, your account number, the name(s) in which the account is
registered and the dollar value or number of shares you wish to sell.
o Include all signatures and any additional document that may be
required (see next page).
o A check will normally be mailed on the next business day to the
name(s) and address in which the account is registered, or otherwise
according to your letter of instructions.
o Mail the materials to:
SunAmerica Fund Services, Inc.
Mutual Fund Operations, 3rd Floor
The SunAmerica Center
733 Third Avenue
New York, New York
10017-3204
BY PHONE
- - --------------------------------------------------------------------------------
o Call Shareholder/Dealer Services at 1-800-858-8850, extension 5125,
between 8:30 a.m. and 7:00 p.m. (Eastern time) on most business days.
State the Portfolio name, the name of the person requesting the
redemption, your share class, your account number, the name(s) in
which the account is registered and the dollar value or number of
shares you wish to sell.
o A check will be mailed to the name(s) and address in which the account
is registered, or to a different address indicated in a written
authorization previously provided to the Portfolio by the
shareholder(s) on the account.
BY WIRE
- - --------------------------------------------------------------------------------
o Proceeds will normally be wired on the next business day. A $15 fee
will be deducted from your account.
To sell shares through a systematic withdrawal plan, see "Additional Investor
Services."
12
<PAGE>
- - --------------------------------------------------------------------------------
SELLING SHARES IN WRITING. In certain circumstances, you will need to make your
request to sell shares in writing. Corporations, executors, administrators,
trustees or guardians may need to include additional items with a request to
sell shares. You may also need to include a signature guarantee, which protects
you against fraudulent orders. You will need a signature guarantee if:
o your address of record has changed within the past 30 days
o you are selling $100,000 or more worth of shares
o you are requesting payment other than by a check mailed to the address
of record and payable to the registered owner(s)
You can generally obtain a signature guarantee from the following sources:
o a broker or securities dealer
o a federal savings, cooperative or other type of bank
o a savings and loan or other thrift institution
o a credit union a securities exchange or clearing agency
A notary public CANNOT provide a signature guarantee.
TRANSACTION POLICIES
VALUATION OF SHARES. The net asset value per share (NAV) for each Portfolio and
class is determined each business day at the close of regular trading on the New
York Stock Exchange (generally 4:00 p.m., Eastern time) by dividing the net
assets of each class by the number of its shares outstanding. Investments for
which market quotations are readily available are valued at their price as of
the close of regular trading on the New York Stock Exchange for the day. All
other securities and assets are valued at fair value following procedures
approved by the Trustees of the Fund.
BUY AND SELL PRICES. When you buy shares, you pay the NAV plus any applicable
sales charges, as described earlier. All purchases must be in U.S. dollars. Cash
will not be accepted.
When you sell shares, you receive the NAV minus any applicable CDSCs.
EXECUTION OF REQUESTS. Each Portfolio is open on those days when the New York
Stock Exchange is open for regular trading. We execute buy and sell requests at
the next NAV to be calculated after the Fund receives your request in proper
form. If the Fund or the Distributor receives your order before a Portfolio's
close of business (generally 4:00 p.m., Eastern time), you will receive that
day's closing price. If the Fund or the Distributor receives your order after
that time, you will receive the next business day's closing price. If you place
your order through a broker or financial advisor, you should make sure the order
is transmitted to the Fund before its close of business. The Fund and the
Distributor reserve the right to reject any order to buy shares.
During periods of extreme volatility or market crisis, a Portfolio may
temporarily suspend the processing of sell requests, or may postpone payment of
proceeds for up to three business days or longer, as allowed by federal
securities laws.
Each Portfolio may invest to a small extent in securities that are primarily
listed on foreign exchanges that trade on weekends or other days when the
Portfolio does not price its shares. As a result, the value of a Portfolio's
shares may change on days when you will not be able to purchase or redeem your
shares.
If the Fund determines that it would be detrimental to the best interests of the
remaining shareholders of the Fund to make payment of redemption proceeds wholly
or partly in cash, the Fund may pay the redemption price by a distribution in
kind of securities from the Fund in lieu of cash. However, the Fund has made an
election that requires it to pay a certain portion of redemption proceeds in
cash.
At various times, a Portfolio may be requested to redeem shares for which it has
not yet received good payment. A Portfolio may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (e.g., cash or
certified check drawn on a United States bank) has been collected for the
purchase of such shares, which will not exceed 15 days.
TELEPHONE TRANSACTIONS. For your protection, telephone requests are recorded in
order to verify their accuracy. In addition, Shareholder/Dealer Services will
take measures to verify the identity of the caller, such as asking for name,
account number, social security or other taxpayer ID number and other relevant
information. If appropriate measures are not taken, the Fund is responsible for
any losses that may occur to any account due to an unauthorized telephone call.
Also for your protection, telephone transactions are not permitted on accounts
whose names or addresses have changed within the past 30 days. At times of peak
activity, it may be difficult to place requests by phone. During these times,
consider sending your request in writing.
EXCHANGES. You may exchange shares of a Portfolio for shares of the same class
of any other Portfolio of the Fund or any fund distributed by SunAmerica Capital
Services. Before making an exchange, you should review a copy of the prospectus
of the Portfolio or the fund into which you would like to exchange. All
exchanges are subject to applicable minimum investment requirements. A
Systematic Exchange Program is described under "Additional Investor Services."
13
<PAGE>
SHAREHOLDER ACCOUNT INFORMATION
If you exchange shares that were purchased subject to a CDSC, the CDSC will
continue to apply following the exchange. In determining the CDSC applicable to
shares being sold after an exchange, we will take into account the length of
time you held those shares prior to the exchange
To protect the interests of other shareholders, we may cancel the exchange
privileges of any investors that, in the opinion of the Fund, are using market
timing strategies or making excessive exchanges. A Portfolio may change or
cancel its exchange privilege at any time, upon 60 days' written notice to its
shareholders. A Portfolio may also refuse any exchange order.
CERTIFICATED SHARES. Most shares are electronically recorded. If you wish to
have certificates for your shares, please call Shareholder/Dealer Services at
1-800-858-8850, extension 5125, for further information. You may sell or
exchange certificated shares only by returning the certificates to the
Portfolios, along with a letter of instruction and a signature guarantee. The
Portfolios do not issue certificates for fractional shares.
MULTI-PARTY CHECKS. The Fund may agree to accept a "multi-party check" in
payment for Portfolio shares. This is a check made payable to the investor by
another party and then endorsed over to the Fund by the investor. If you use a
multi-party check to purchase shares, you may experience processing delays. In
addition, the Fund is not responsible for verifying the authenticity of any
endorsement and assumes no liability for any losses resulting from a fraudulent
endorsement.
ADDITIONAL INVESTOR SERVICES
To select one or more of these additional services, complete the relevant
part(s) of the Supplemental Account Application. To add a service to an existing
account, contact your broker or financial advisor, or call Shareholder/Dealer
Services at 1-800-858-8850, extension 5125.
DOLLAR COST AVERAGING lets you make regular investments from your bank account
to the Portfolios of the Fund or any funds distributed by SunAmerica Capital
Services of your choice. You determine the frequency and amount of your
investments, and you can terminate your participation at any time.
SYSTEMATIC WITHDRAWAL PLAN may be used for routine bill payment or periodic
withdrawals from your account. To use:
o Make sure you have at least $5,000 worth of shares in your account.
o Make sure you are not planning to invest more money in this account
(buying shares during a period when you are also selling shares of the
same Portfolio is not advantageous to you, because of sales charges).
o Specify the payee(s) and amount(s). The payee may be yourself or any
other party (which may require a signature guarantee), and there is no
limit to the number of payees you may have, as long as they are all on
the same payment schedule. Each withdrawal must be at least $50.
o Determine the schedule: monthly, quarterly, semi-annually, annually or
in certain selected months.
o Make sure your dividends and capital gains are being reinvested.
You cannot elect the systematic withdrawal plan if you have requested
certificates for your shares.
SYSTEMATIC EXCHANGE PROGRAM may be used to exchange shares of a Portfolio
periodically for the same class of shares of one or more other Portfolios of the
Fund or funds distributed by SunAmerica Capital Services. To use:
o Specify the Portfolio from which you would like money withdrawn and/or
specify the Portfolio into which you would like money invested.
o Determine the schedule: monthly, quarterly, semi-annually, annually or
in certain selected months.
o Specify the amount(s). Each exchange must be worth at least $50.
o Accounts must be registered identically; otherwise a signature
guarantee will be required.
ASSET PROTECTION PLAN (OPTIONAL) Anchor National Life Insurance Company offers
an Asset Protection Plan to certain investors in the Fund. The benefits of this
optional coverage payable at death will be related to the amounts paid to
purchase Portfolio shares and to the value of the Portfolio shares held for the
benefit of the insured persons. However, to the extent the purchased shares are
redeemed prior to death, coverage with respect to these shares will terminate.
Purchasers of the Asset Protection Plan are required to authorize periodic
redemptions of Portfolio shares to pay the premiums for this coverage. These
redemptions will not be subject to CDSCs but will have the same tax consequences
as any other Portfolio redemptions.
The Asset Protection Plan will be available to eligible persons who enroll for
the coverage within a limited time period after shares in any Portfolio are
initially purchased or transferred. In addition, coverage cannot be made
available unless Anchor National knows for whose benefit shares are purchased.
For instance, coverage cannot be made available for shares registered in the
name of your broker unless the broker provides Anchor National with information
regarding the beneficial owners of the shares. In addition, coverage is
available only to shares purchased on behalf of natural persons between 21 and
75 years of age; coverage is not available with respect to shares purchased for
a retirement account. Other restrictions on the coverage apply. This coverage
may not be available in all states and may be subject to additional restrictions
or limitations. Purchasers of shares should also make themselves familiar with
the impact on the Asset Protection Plan coverage of purchasing additional
shares, reinvestment of dividends and capital gains distributions and
redemptions.
14
<PAGE>
SHAREHOLDER ACCOUNT INFORMATION
- - --------------------------------------------------------------------------------
Anchor National is a SunAmerica company.
Please call 1-800-858-8850, extension 5660, for more information, including the
cost of the Asset Protection Plan option.
RETIREMENT PLANS. All funds distributed by SunAmerica Capital Services offer a
range of qualified retirement plans, including IRAs, Roth IRAs, Education IRAs,
Simplified Employee Pension Plans, Simple IRAs, 401(k) plans, 403(b) plans and
other pension and profit-sharing plans. Using these plans, you can invest in any
fund distributed by SunAmerica Capital Services with a low minimum investment of
$250 or, for some group plans, no minimum investment at all. To find out more,
call Retirement Plans at 1-800-858-8850, extension 5134.
DIVIDEND, DISTRIBUTION AND ACCOUNT POLICIES
Account statements. In general, you will receive account statements as follows:
o after every transaction that affects your account balance (except a
dividend reinvestment or automatic purchase from or automatic
redemption to your bank account)
o after any changes of name or address of the registered owner(s)
o in all other circumstances, quarterly or annually, depending upon the
Portfolio
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
DIVIDENDS. The Portfolios generally distribute most or all of their net earnings
in the form of dividends. Income dividends and capital gains distributions, if
any, of the Small Cap Growth Portfolio and capital gains distributions, if any,
of the Real Estate Securities Portfolio will be paid at least annually. Income
dividends, if any, of the Real Estate Securities Portfolio will be paid at least
quarterly.
Dividend Reinvestments. Your dividends and distributions, if any, will be
automatically reinvested in additional shares of the same Portfolio and share
class on which they were paid. Alternatively, dividends and distributions may be
reinvested in any other Portfolio of the Fund or any fund distributed by
SunAmerica Capital Services or paid in cash (if more than $10). You will need to
complete the relevant part of the Account Application to elect one of these
other options. For existing accounts, contact your broker or financial advisor
or call Shareholder/Dealer Services at 1-800-858-8850, extension 5125, to change
dividend and distribution payment options.
Taxability of dividends. Each Portfolio intends to continue to qualify for the
special tax treatment afforded regulated investment companies. As long as each
Portfolio so qualifies, the Portfolio will not be subject to federal income tax
on the earnings that it distributes to shareholders.
However, dividends you receive from a Portfolio, whether reinvested or taken as
cash, are generally considered taxable to you. Distributions of a Portfolio's
long-term capital gains are taxable as capital gains; dividends from other
sources are generally taxable as ordinary income.
Some dividends paid in January, which were declared in a previous quarter, may
be taxable as if they had been paid the previous December. Corporations may be
entitled to take a dividends-received deduction from a portion of certain
dividends they receive.
The Form 1099 that is mailed to you every January details your dividends and
their federal tax category, although you should verify tax liability with your
tax professional.
TAXABILITY OF TRANSACTIONS. Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions. If you hold Class B shares, you will not have a taxable event when
they convert into Class A shares.
"BUYING INTO A DIVIDEND." You should note that if you purchase shares just
before a distribution, you will be taxed for that distribution like other
shareholders, even though that distribution represents simply a return of part
of your investment. You may wish to defer your purchase until after the record
date for the distribution, so as to avoid this tax impact.
OTHER TAX CONSIDERATIONS. If you are neither a lawful permanent resident nor a
citizen of the U.S. or if you are a foreign entity, ordinary income dividends
paid to you (which include distributions of net short-term capital gains) will
generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate
applies.
By law, each Portfolio must withhold 31% of your distributions and proceeds if
you have not provided a taxpayer identification number or social security
number.
This section summarizes some of the consequences under current federal tax law
of an investment in a Portfolio. It is not a substitute for professional tax
advice. Consult your tax advisor about the potential tax consequences of an
investment in a Portfolio under all applicable laws.
SMALL ACCOUNTS. If you draw down an account so that its total value is less than
$500 ($250 for retirement plan accounts), you may be asked to purchase more
shares within 60 days. If you do not take action, the Fund may close out your
account and mail you the proceeds. Alternatively, you may be charged a $2.00
monthly charge to maintain your account. Your account will not be closed if its
drop in value is due to Portfolio performance or the effects of sales charges.
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INVESTMENT STRATEGIES
Each Portfolio has its own investment goal and a strategy for pursuing it. The
chart summarizes information about each Portfolio's investment approach.
Following this chart is a glossary that further describes the investment and
risk terminology that the Portfolios use. Please review the glossary in
conjunction with this chart.
<TABLE>
<CAPTION>
SMALL CAP GROWTH REAL ESTATE SECURITIES
---------------- ----------------------
<S> <C> <C>
What is the Portfolio's o Capital appreciation o A balance of income and
investment objectives? appreciation
- - -------------------------------------------------------------------------------------------------------------------
What investment strategies o Growth o Growth and income
does the Portfolio use?
- - -------------------------------------------------------------------------------------------------------------------
What are the Portfolio's o active trading of stocks o active trading of stocks of
principal investment techniques? of small companies that companies principally engaged in
offer the potential for the real estate industry that offer
capital appreciation the potential for capital apprecia-
tion and current income
- - -------------------------------------------------------------------------------------------------------------------
In what other types of securities o Mid-Cap Companies o None
may the Portfolio significantly
invest?
- - -------------------------------------------------------------------------------------------------------------------
In what types of securities o Repurchase agreements o Repurchase agreements
may the Portfolio invest as o Short-term investments o Short-term investments
part of efficient portfolio o Defensive investments o Defensive investments
management or for return o Foreign securities o Foreign securities
investment purposes? o Options and futures o Options and futures
o Special situations o Special situations
- - -------------------------------------------------------------------------------------------------------------------
What risks normally may o Stock market volatility o Stock market volatility
affect the Portfolio? o Securities selection o Securities selection
o Small market capitalization o Small market capitalization
o Foreign exposure o Volatility of real
o Interest rate fluctuations estate markets and
o Credit quality real estate investment trusts
o Illiquidity o Concentration risk
o Derivatives o Foreign exposure
o Hedging o Interest rate fluctuations
o Credit quality
o Illiquidity
o Derivatives
o Hedging
</TABLE>
16
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GLOSSARY
The two best-known debt rating agencies are Standard & Poor's Rating Services, a
Division of the McGraw-Hill Companies, Inc. and Moody's Investors Service, Inc.
"Investment grade" refers to any security rated "BBB" or above by Standard &
Poor's or "Baa" or above by Moody's.
INVESTMENT TERMINOLOGY
CAPITAL APPRECIATION is growth of the value of an investment.
ACTIVE TRADING means that a Portfolio may engage in frequent trading of
portfolio securities to achieve its investment goal. In addition, because a
Portfolio may sell a security without regard to how long it has held the
security, active trading may have tax consequences for certain shareholders,
involving a possible increase in short-term capital gains or losses. Active
trading may result in high portfolio turnover and correspondingly greater
brokerage commissions and other transaction costs, which will be borne directly
by a Portfolio. During periods of increased market volatility, active trading
may be more pronounced.
SMALL COMPANIES are companies with market capitalizations of (a) $1.8 billion or
lower or (b) companies represented in the Russell 2000 Index at the time of a
Portfolio's investment.
MID-CAP COMPANIES are companies with market capitalizations of $234 million to
$12.9 billion or companies represented in the S&P MidCap 400 Index. As of
February 29, 2000, the company with the largest market capitalization in the S&P
MidCap 400 Index had a market capitalization of approximately $51 billion.
A company is considered "PRINCIPALLY ENGAGED IN THE REAL ESTATE INDUSTRY" if at
least 50% of its assets, gross income or net profits are attributable to
ownership, construction, management or sale of real estate assets.
FIXED INCOME SECURITIES provide consistent interest or dividend payments. They
include corporate bonds, notes, debentures, preferred stocks, convertible
securities, U.S. government securities and mortgage-backed and asset-backed
securities. The issuer of a senior fixed income security is obligated to make
payments on this security ahead of other payments to security holders.
SHORT-TERM INVESTMENTS include money market securities such as short-term U.S.
government obligations, repurchase agreements, commercial paper, bankers'
acceptances and certificates of deposit. These securities provide a Portfolio
with sufficient liquidity to meet redemptions and cover expenses.
DEFENSIVE INVESTMENTS include high quality fixed income securities and money
market instruments. A Portfolio will make temporary defensive investments in
response to adverse market, economic, political or other conditions. When a
Portfolio takes a defensive position, it may miss out on investment
opportunities that could have resulted from investing in accordance with its
principal investment strategy. As a result, a Portfolio may not achieve its
investment goal.
FOREIGN SECURITIES are issued by companies located outside of the United States.
Foreign securities include American Depositary Receipts (ADRs) or other similar
securities that convert into foreign securities, such as European Depository
Receipts (EDRs) and Global Depository Receipts (GDRs).
ILLIQUID SECURITIES are subject to legal or contractual restrictions that may
make them difficult to sell. A security that cannot easily be sold within seven
days will generally be considered illiquid. Certain restricted securities (such
as Rule 144A securities) are not generally considered illiquid because of their
established trading market.
SECURITIES LENDING involves a loan of securities by a Portfolio in exchange for
cash or collateral. The Portfolio earns interest on the loan while retaining
ownership of the security.
A Portfolio may BORROW for temporary or emergency purposes including to meet
redemptions. Borrowing may exaggerate changes in the net asset value of
Portfolio shares and in the yield on a Portfolio's portfolio. Borrowing will
cost a Portfolio interest expense and other fees. The cost of borrowing may
reduce a Portfolio's return. If a Portfolio borrows through REVERSE REPURCHASE
AGREEMENTS there will be additional risks, including risks that the interest
income earned by a Portfolio (from the investment of the proceeds) may be less
than the interest expense of the transaction, the market value of the securities
sold by a Portfolio may decline below the price the Portfolio is obligated to
pay to repurchase the securities, and the securities may not be returned to the
Portfolio.
A DERIVATIVE instrument is a contract, such as an option or a future, whose
value is based on the performance of an underlying asset.
OPTIONS AND FUTURES are contracts involving the right to receive or obligation
to deliver assets or money depending on the performance of one or more
underlying assets or a market or economic index.
A SPECIAL SITUATION arises when, in the opinion of the Adviser, the securities
of a particular issuer will be recognized and appreciated in value due to a
specific development with respect to that issuer. Developments creating a
special situation might include, among others, a new product or process, a
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MORE INFORMATION ABOUT THE PORTFOLIOS
technological breakthrough, a management change or other extraordinary corporate
event, or differences in market supply of and demand for the security.
Investments in special situations may carry an additional risk of loss in the
event that the anticipated development does not occur or does not attract the
expected attention.
BANK OBLIGATIONS include bankers' acceptances, negotiable certificates of
deposit and non-negotiable time deposits, including U.S. dollar-denominated
instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions.
Each Portfolio may invest in securities of other open-end or closed-end
investment companies. A Portfolio will indirectly bear its proportionate share
of any management fees paid by an investment company in which it invests in
addition to its advisory fee.
REAL ESTATE INVESTMENT TRUSTS ("REITs") pool investors' funds for investment
primarily in commercial real estate properties or in real estate related loans.
IN A REPURCHASE AGREEMENT, a Portfolio buys a security and simultaneously
commits to sell that security back at an agreed upon price plus an agreed upon
market rate of interest. Under a repurchase agreement, the seller will be
required to maintain the value of the securities subject to the agreement at not
less than the repurchase price if such securities mature in one year or less, or
102% of the repurchase price if such securities mature in more than one year.
WHEN-ISSUED refers to securities whose terms and indenture are available, and
for which a market exists, but which are not available for immediate delivery.
When-issued transactions may be expected to occur a month or more before
delivery is due. No payment or delivery is made by a Portfolio until it receives
payment or delivery from the other party. A Portfolio will maintain a separate
account of cash, U.S. Government securities, other high grade debt obligations
or other liquid securities at least equal to the value of purchase commitments
until payment is made. Such segregated securities will either mature or, if
necessary, be sold on or before the settlement date. Typically, no income
accrues on securities purchased on a delayed delivery basis prior to the time
delivery is made, although a Portfolio may earn income on securities it has
deposited in a segregated account.
WARRANTS are options to purchase equity securities at a specific price valid for
a specific period of time. The purchase of warrants involves the risk that the
Portfolio could lose the purchase value of the warrant if the right to subscribe
to additional shares is not exercised prior to the warrant's expiration. Also,
the purchase of warrants involves the risk that the effective price paid for the
warrant added to the subscription price of the related security may exceed the
value of the subscribed security.
RISK TERMINOLOGY
MARKET VOLATILITY: The stock and/or bond markets as a whole could go up or down
(sometimes dramatically). This could affect the value of the securities in a
Portfolio's portfolio.
SECURITIES SELECTION: A strategy used by a Portfolio, or securities selected by
the Adviser, may fail to produce the intended return.
SMALL MARKET CAPITALIZATION: Companies with smaller market capitalizations ($1.8
billion or lower, or capitalization of companies represented in the Russell 2000
Index at the time of a Portfolio's investment) tend to be at early stages of
development with limited product lines, market access for products, financial
resources, access to new capital, or depth in management. It may be difficult to
obtain reliable information and financial data about these companies.
Consequently, the securities of smaller companies may not be as readily
marketable and may be subject to more abrupt or erratic market movements.
VOLATILITY OF REAL ESTATE MARKETS AND REITS: The value of a REIT is affected by
changes in the value of the properties owned by the REIT or securing mortgage
loans held by the REIT. A Portfolio could lose money because of declines in the
value of real estate, risks related to general and local economic conditions,
overbuilding and increased competition.
FOREIGN EXPOSURE: Investors in foreign countries are subject to a number of
risks. A principal risk is that fluctuations in the exchange rates between the
U.S. dollar and foreign currencies may negatively affect an investment. In
addition, there may be less publicly available information about a foreign
company and it may not be subject to the same uniform accounting, auditing and
financial reporting standards as U.S. companies. Foreign governments may not
regulate securities markets and companies to the same degree as the U.S.
government. Foreign investments will also be affected by local political or
economic developments and governmental actions. Consequently, foreign securities
may be less liquid, more volatile and more difficult to price than U.S.
securities.
18
<PAGE>
- - --------------------------------------------------------------------------------
INTEREST RATE FLUCTUATIONS: Volatility of the bond market is due principally to
changes in interest rates. As interest rates rise, bond prices typically fall;
and as interest rates fall, bond prices typically rise. Longer-term and lower
coupon bonds tend to be more sensitive to changes in interest rates.
CREDIT QUALITY: The creditworthiness of the issuer is always a factor in
analyzing fixed income securities. An issuer with a lower credit rating will be
more likely than a higher rated issuer to default or otherwise become unable to
honor its financial obligations.
ILLIQUIDITY: Certain securities may be difficult or impossible to sell at the
time and the price that the seller would like.
DERIVATIVES: Derivatives are subject to general risks relating to heightened
sensitivity to market volatility, interest rate fluctuations, illiquidity and
creditworthiness of the counterparty to the derivatives transactions.
HEDGING: Hedging is a strategy in which the Adviser uses a derivative security
to reduce certain risk characteristics of an underlying security or portfolio of
securities. While hedging strategies can be very useful and inexpensive ways of
reducing risk, they are sometimes ineffective due to unexpected changes in the
market. Moreover, while hedging can reduce or eliminate losses, it can also
reduce or eliminate gains.
CONCENTRATION RISK: Concentrating a Portfolio's investments in a particular
industry could cause the Portfolio to be sensitive to changes in that industry,
and a change in value of any one investment held by the Portfolio may affect the
overall value of the Portfolio more than it would affect a diversified
Portfolio.
FUND MANAGEMENT
ADVISER. John McStay Investment Counsel, L.P. (JMIC), 5949 Sherry Lane, Suite
1600, Dallas, Texas 75225, is responsible for the management of the Fund, which
includes five separate Portfolios. JMIC is a majority-owned subsidiary of
American International Group, Inc. (AIG). AIG is a holding company which through
its subsidiaries is primarily engaged in a broad range of insurance,
insurance-related and financial services activities in the United States and
abroad. JMIC manages each Portfolio using a team approach. By using a team
approach, the Adviser avoids the risk of changes in portfolio management style
that may be encountered when a lead manager approach is utilized. The team
approach creates portfolio management stability, which provides confidence that
the process is repeatable, and has been used for the last twenty-five years.
JMIC has had minimal (one) investment professional turnover during the last
fifteen years of management.
For the fiscal year ended November 30, 1999, each Portfolio paid the Adviser a
fee equal to the following percentage of average daily net assets:
Portfolio Fee
--------- ---
Small Cap Growth 0.90%
Real Estate Securities 0.90%
DISTRIBUTOR. SunAmerica Capital Services, Inc. distributes each Portfolio's
shares offered herein. The Distributor, a SunAmerica company and an indirect
wholly owned subsidiary of AIG, receives the initial and deferred sales charges,
all or a portion of which may be re-allowed to other broker-dealers. In
addition, the Distributor receives fees under each Portfolio's 12b-1 plans.
The Distributor, at its expense, may from time to time provide additional
compensation to broker-dealers (including in some instances, affiliates of the
Distributor) in connection with sales of shares of a Portfolio. This
compensation may include (i) full re-allowance of the front-end sales charge on
Class A shares; (ii) additional compensation with respect to the sale of Class
A, Class B or Class II shares; or (iii) financial assistance to broker-dealers
in connection with conferences, sales or training programs for their employees,
seminars for the public, advertising campaigns regarding one or more of the
Portfolios, and/or other broker-dealer sponsored special events. In some
instances, this compensation will be made available only to certain
broker-dealers whose representatives have sold a significant number of shares of
a Portfolio. Compensation may also include payment for travel expenses,
including lodging, incurred in connection with trips taken by invited registered
representatives for meetings or seminars of a business nature. In addition, the
following types of non-cash compensation may be offered through sales contests:
(i) travel mileage on major air carriers; (ii) tickets for entertainment events
(such as concerts or sporting events); or (iii) merchandise (such as clothing,
19
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MORE INFORMATION ABOUT THE PORTFOLIOS
- - --------------------------------------------------------------------------------
trophies, clocks, pens or other electronic equipment). Broker-dealers may not
use sales of the Portfolio's shares to qualify for this compensation to the
extent receipt of such compensation may be prohibited by applicable law or the
rules of any self-regulatory agency, such as the National Association of
Securities Dealers. Dealers who receive bonuses or other incentives may be
deemed to be underwriters under the Securities Act of 1933.
ADMINISTRATOR. SunAmerica Asset Management Corp. provides administrative
services to each Portfolio. The Administrator, a SunAmerica company and an
indirect wholly owned subsidiary of AIG, is paid an annual fee from the Fund
equal to the greater of: (1) a minimum annual fee of $35,000 for the first
Portfolio, $25,000 for the next three Portfolios, and $20,000 for any additional
Portfolios; or (2) an asset-based fee for each Portfolio, equal to a percentage
of the average daily net assets of such Portfolio, according to the following
schedule:
0.07% on the first $200 million;
0.06% on the next $500 million;
0.04% on the balance
SHAREHOLDER SERVICING AGENT. SunAmerica Fund Services, Inc. assists the
Portfolios' transfer agent in providing shareholder services. The Shareholder
Servicing Agent, a SunAmerica company and an indirect wholly owned subsidiary of
AIG, is paid a monthly fee by each Portfolio for its services at the annual rate
of 0.22% of average daily net assets of each of Class A, B and II shares. This
fee represents the full cost of providing shareholder, transfer agency and
custodial services to the Trust.
The Distributor, Administrator and Shareholder Servicing Agent are located in
The SunAmerica Center, 733 Third Avenue, New York, New York 10017.
20
<PAGE>
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(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
FOR MORE INFORMATION
- - --------------------------------------------------------------------------------
The following documents contain more information about the Portfolios and are
available free of charge upon request:
ANNUAL AND SEMI-ANNUAL REPORTS. Contain financial statements, performance
data and information on Portfolio holdings. The reports also contain a
written analysis of market conditions and investment strategies that
significantly affected a Portfolio's performance during the applicable
period.
STATEMENT OF ADDITIONAL INFORMATION (SAI). Contains additional information
about the Portfolios' policies, investment restrictions and business
structure. This prospectus incorporates the SAI by reference.
You may obtain copies of these documents or ask questions about the Portfolios
by contacting:
SunAmerica Fund Services, Inc.
Mutual Fund Operations
The SunAmerica Center
733 Third Avenue
New York, New York 10017-3204
1-800-858-8850, extension 5125
or
by calling your broker or financial advisor.
Information about the Portfolios (including the SAI) can be reviewed and copied
at the Public Reference Room of the Securities and Exchange Commission,
Washington, D.C. Call (202) 942-8090 for information on the operation of the
Public Reference Room. Information about the Portfolios is also available on the
Securities and Exchange Commission's web-site at http://www.sec.gov and copies
may be obtained upon payment of a duplicating fee by electronic request at the
following e-mail address: [email protected], or by writing the Public Reference
Section of the Securities and Exchange Commission, Washington, D.C. 20549-0102.
You should rely only on the information contained in this prospectus. No one is
authorized to provide you with any different information.
DISTRIBUTOR: SunAmerica Capital Services, Inc.
INVESTMENT COMPANY ACT
File No. 811-07881
[LOGO] SUNAMERICA
CAPITAL SERVICES
<PAGE>
BRAZOS MUTUAL FUNDS
Statement of Additional Information
dated March 29, 2000
Suite 1600 General Marketing and
5949 Sherry Lane Shareholder Information
Dallas, TX 75225 (800) 858-8850
Brazos Mutual Funds (the "Trust") is a mutual fund consisting of multiple
investment funds. This Statement of Additional Information relates to: Brazos
Micro Cap Growth Portfolio (Class Y shares); Brazos Small Cap Growth Portfolio
(Class A, B, II and Y shares); Brazos Mid Cap Growth Portfolio (Class A and Y
shares); Brazos Multi Cap Growth Portfolio (Class A and Y shares); and Brazos
Real Estate Securities Portfolio (Class A, B, II and Y shares). Each Portfolio
has distinct investment objectives and strategies.
This Statement of Additional Information is not a Prospectus, but should be
read in conjunction with the relevant Trust Prospectus dated March 29, 2000. To
obtain a Prospectus free of charge, please call the Trust at (800) 858-8850
(with respect to Class A, B and II shares) or (800) 426-9157 (with respect to
Class Y shares). Each Trust Prospectus is incorporated by reference into this
Statement of Additional Information. Capitalized terms used herein but not
defined have the meanings assigned to them in the Prospectuses.
TABLE OF CONTENTS
PAGE
----
History of the Portfolios.................................................. B-2
Investment Objectives and Policies......................................... B-2
Investment Restrictions.................................................... B-23
Trustees and Officers...................................................... B-25
Adviser, Personal Trading, Distributor and
Administrator.............................................................. B-29
Portfolio Transactions and Brokerage....................................... B-35
Additional Information Regarding Purchase of Shares........................ B-38
Additional Information Regarding Redemption of Shares...................... B-45
Exchange Privilege......................................................... B-46
Determination of Net Asset Value........................................... B-48
Performance Data........................................................... B-49
Dividends, Distributions and Taxes......................................... B-54
Retirement Plans........................................................... B-57
Description of Shares...................................................... B-58
Additional Information..................................................... B-60
Financial Statements....................................................... B-61
Appendix............................................................. Appendix-1
B-1
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in this
Statement of Additional Information or in the Prospectuses, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Trust, the Adviser or the Distributor. This
Statement of Additional Information and the Prospectuses do not constitute an
offer to sell or a solicitation of an offer to buy any of the securities offered
hereby in any jurisdiction in which such an offer to sell or solicitation of an
offer to buy may not lawfully be made.
This Statement of Additional Information relates to: Brazos Micro Cap
Growth Portfolio, Brazos Small Cap Growth Portfolio; Brazos Mid Cap Growth
Portfolio; Brazos Multi Cap Growth Portfolio and Brazos Real Estate Securities
Portfolio (each, a "Portfolio," and collectively, the "Portfolios") of Brazos
Mutual Funds, a Delaware business trust, which is registered as an open-end
investment company under the Investment Company Act of 1940, as amended (the "
1940 Act").
HISTORY OF THE PORTFOLIOS
The Trust was organized as a Delaware business trust on October 28, 1996.
The Trust's principal office is located at 5949 Sherry Lane, Suite 1600, Dallas,
Texas 75225. Brazos Mutual Funds is a diversified open-end management investment
company.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of each of the Portfolios are
described in the respective Prospectuses. Certain types of securities in which
the Portfolios may invest and certain investment practices that the Portfolios
may employ, are described in the Prospectuses and are discussed more fully
below. Unless otherwise specified, each Portfolio may invest in the following
securities. The stated percentage limitations are applied to an investment at
the time of purchase unless indicated otherwise.
ILLIQUID AND RESTRICTED SECURITIES. No more than 15% of the value of a
Portfolio's net assets, determined as of the date of purchase, may be invested
in illiquid securities including repurchase agreements that have a maturity of
longer than seven days, interest-rate swaps, currency swaps, caps, floors and
collars, or other securities that are illiquid by virtue of the absence of a
readily available market or legal or contractual restrictions on resale.
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 that are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Repurchase agreements subject to
demand are deemed to have a maturity equal to the notice period. Securities that
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. Mutual funds 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 a mutual
fund 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. A mutual fund might also have to
register such restricted securities in order to dispose of them, resulting in
additional expense and
B-2
<PAGE>
delay. There will generally be a lapse of time between a mutual fund's decision
to sell an unregistered security and the registration of such security promoting
sale. Adverse market conditions could impede a public offering of such
securities. When purchasing unregistered securities, each of the Portfolios will
generally seek to obtain the right of registration at the expense of the issuer
(except in the case of Rule 144A securities, discussed below).
In recent years, 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.
For example, restricted securities that the Board of Trustees, or the
Adviser pursuant to guidelines established by the Board of Trustees, has
determined to be marketable, such as securities eligible for resale under Rule
144A promulgated under the Securities Act, or certain private placements of
commercial paper issued in reliance on an exemption from such Act pursuant to
Section 4(2) thereof, may be deemed to be liquid for purposes of this
restriction. This investment practice could have the effect of increasing the
level of illiquidity in a Portfolio to the extent that qualified institutional
buyers (as defined in Rule 144A) become for a time uninterested in purchasing
these restricted securities. In addition, a repurchase agreement that by its
terms can be liquidated before its nominal fixed-term on seven days or less
notice is regarded as a liquid instrument. The Adviser will monitor the
liquidity of such restricted securities subject to the supervision of the
Trustees. In reaching liquidity decisions the Adviser will consider, inter alia,
pursuant to guidelines and procedures established by the Trustees, the following
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers wishing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security;
and (4) the nature of the security and the nature of the marketplace trades (i.
e., the time needed to dispose of the security, the method of soliciting offers
and the mechanics of the transfer). Subject to the applicable limitation on
illiquid securities investments, a Portfolio may acquire securities issued by
the U.S. government, its agencies or instrumentalities in a private placement.
Commercial paper issues in which a Portfolio's net assets may be invested
include securities issued by major corporations without registration under the
Securities Act in reliance on the exemption from such registration afforded by
Section 3(a)(3) thereof, and commercial paper issued in reliance on the
so-called private placement exemption from registration afforded by Section 4(2)
of the Securities Act ("Section 4(2) paper"). Section 4(2) paper is restricted
as to disposition under the federal securities laws in that any resale must
similarly be made in an exempt transaction. Section 4(2) paper is normally
resold to other institutional investors through or with the assistance of
investment dealers who make a market in Section 4(2) paper, thus providing
liquidity. Section 4(2) paper issued by a company that files reports under the
Securities Exchange Act of 1934, as amended, is generally eligible to be sold in
reliance on the safe harbor of Rule 144A described above. A Portfolio's 15%
limitation on investments in illiquid securities includes Section 4(2) paper
other than Section 4(2) paper that the Adviser has determined to be liquid
pursuant to guidelines established by the Trustees. The Trustees have delegated
to the Adviser the function of making day
B-3
<PAGE>
to-day determinations of liquidity with respect to Section 4(2) paper, pursuant
to guidelines approved by the Trustees that require the Adviser to take into
account the same factors described above for other restricted securities and
require the Adviser to perform the same monitoring and reporting functions.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements only
involving securities in which it could otherwise invest and with selected banks
and securities dealers whose financial condition is monitored by the Adviser,
subject to the guidance of the Trustees. In such agreements, the seller agrees
to repurchase the security at a mutually agreed-upon time and price. The period
of maturity is usually quite short, either overnight or a few days, although it
may extend over a number of months. The repurchase price is in excess of the
purchase price by an amount that reflects an agreed-upon rate of return
effective for the period of time a Portfolio's money is invested in the
security. Whenever a Portfolio enters into a repurchase agreement, it obtains
collateral having a value equal to the repurchase price, including accrued
interest, or 102% of the repurchase price if such securities mature in more than
one year. The instruments held as collateral are valued daily and if the value
of the instruments declines, the Portfolio will require additional collateral.
If the seller under the repurchase agreement defaults, the Portfolio may incur a
loss if the value of the collateral securing the repurchase agreement has
declined and may incur disposition costs in connection with liquidating the
collateral. In addition, if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Portfolio may
be delayed or limited. The Trustees have established guidelines to be used by
the Adviser in connection with transactions in repurchase agreements and will
regularly monitor each Portfolio's use of repurchase agreements. A Portfolio
will not invest in repurchase agreements maturing in more than seven days if the
aggregate of such investments along with other illiquid securities exceeds 15%
of the value of its net assets. However, there is no limit on the amount of a
Portfolio's net assets that may be subject to repurchase agreements having a
maturity of seven days or less for temporary defensive purposes.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Portfolio sells a security
and agrees to repurchase it at a mutually agreed upon date and price, reflecting
the interest rate effective for the term of the agreement. The Portfolio then
invests the proceeds from the transaction in another obligation in which the
Portfolio is authorized to invest. The Portfolio's investment of the proceeds of
a reverse repurchase agreement is the speculative factor known as leverage. A
Portfolio will enter into a reverse repurchase agreement only if the interest
income from investment of the proceeds is expected to be greater than the
interest expense of the transaction and the proceeds are invested for a period
no longer than the term of the agreement. In order to minimize any risk
involved, the Portfolio will segregate cash or liquid securities in an amount at
least equal in value to its purchase obligations under these agreements
(including accrued interest). In the event that the buyer of securities under a
reverse repurchase agreement files for bankruptcy or becomes insolvent, the
buyer or its trustee or receiver may receive an extension of time to determine
whether to enforce the Portfolio's repurchase obligation, and the Portfolio's
use of proceeds of the agreement may effectively be restricted pending such
decision. Reverse repurchase agreements are considered to be borrowings and are
subject to the percentage limitations on borrowings. See "Investment
Restrictions."
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FIXED INCOME SECURITIES. Each Portfolio may invest, subject to the percentage
and credit quality limitations stated herein and in the Prospectus, in debt
securities, mainly obligations issued by governments and money market
instruments, without regard to the maturities of such securities.
Fixed income securities are broadly characterized as those that provide for
periodic payments to the holder of the security at a stated rate. Most fixed
income securities, such as bonds, represent indebtedness of the issuer and
provide for repayment of principal at a stated time in the future. Others do not
provide for repayment of a principal amount, although they may represent a
priority over common stockholders in the event of the issuer's liquidation. Many
fixed income securities are subject to scheduled retirement, or may be retired
or "called" by the issuer prior to their maturity dates. The interest rate on
certain fixed income securities, known as "variable rate obligations," is
determined by reference to or is a percentage of an objective standard, such as
a banks prime rate, the 90-day Treasury bill rate, or the rate of return on
commercial paper or bank certificates of deposit, and is periodically adjusted.
Certain variable rate obligations may have a demand feature entitling the holder
to resell the securities at a predetermined amount. The interest rate on certain
fixed income securities, called "floating rate instruments," changes whenever
there is a change in a designated base rate.
The market values of fixed income securities tend to vary inversely with
the level of interest rates -- when interest rates rise, their values will tend
to decline; when interest rates decline, their values generally will tend to
rise. The potential for capital appreciation with respect to variable rate
obligations or floating rate instruments will be less than with respect to
fixed-rate obligations. Long-term instruments are generally more sensitive to
these changes than short-term instruments. The market value of fixed income
securities and therefore their yield are also affected by the perceived ability
of the issuer to make timely payments of principal and interest.
"Investment grade" is a designation applied to intermediate and long-term
corporate debt securities rated within the highest four rating categories
assigned by Standard & Poor's (AAA, AA, A or BBB) or by Moody's (Aaa, Aa, A or
Baa), or, if unrated, considered by the Adviser to be of comparable quality. The
ability of the issuer of an investment grade debt security to pay interest and
to repay principal is considered to vary from extremely strong (for the highest
ratings) through adequate (for the lowest ratings given above), although the
lower-rated investment grade securities may be viewed as having speculative
elements as well.
Those debt securities rated "BBB" or "Baa," while considered to be
"investment grade," may have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade
bonds. As a consequence of the foregoing, the opportunities for income and gain
may be limited. While the Portfolios have no stated policy with respect to the
disposition of securities whose ratings fall below investment grade, each
occurrence is examined by the Adviser to determine the appropriate course of
action.
SHORT-TERM AND TEMPORARY DEFENSIVE INSTRUMENTS. In addition to their primary
investments, each Portfolio, except as described below, may also invest 5% to
10% under normal circumstances of its total assets in money market instruments
for liquidity purposes (to meet redemptions and expenses). For temporary
defensive purposes, each Portfolio, except as described below, may invest
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up to 100% of its total assets in fixed income securities, including money
market instruments rated in one of the two highest categories by a nationally
recognized statistical rating organization (or determined by the Adviser to be
of equivalent quality). A description of securities ratings is contained in the
Appendix to this Statement of Additional Information.
Subject to the limitations described above and below, the following is a
description of the types of money market and fixed income securities in which
the Portfolios may invest:
U.S. GOVERNMENT SECURITIES: See the section entitled "U.S. Government
Securities" below.
COMMERCIAL PAPER: Commercial paper consists of short-term (usually from 1
to 270 days) unsecured promissory notes issued by entities in order to finance
their current operations. A Portfolio's commercial paper investments may include
variable amount master demand notes and floating rate or variable rate notes.
Variable amount master demand notes and variable amount floating rate notes are
obligations that permit the investment of fluctuating amounts by a Portfolio at
varying rates of interest pursuant to direct arrangements between a Portfolio,
as lender, and the borrower. Master demand notes permit daily fluctuations in
the interest rates while the interest rate under variable amount floating rate
notes fluctuates on a weekly basis. These notes permit daily changes in the
amounts borrowed. A Portfolio has the right to increase the amount under these
notes at any time up to the full amount provided by the note agreement, or to
decrease the amount, and the borrower may repay up to the full amount of the
note without penalty. Because these types of notes are direct lending
arrangements between the lender and the borrower, it is not generally
contemplated that such instruments will be traded, and there is no secondary
market for these notes. Master demand notes are redeemable (and, thus,
immediately repayable by the borrower) at face value, plus accrued interest, at
any time. Variable amount floating rate notes are subject to next-day redemption
14 days after the initial investment therein. With both types of notes,
therefore, a Portfolio's right to redeem depends on the ability of the borrower
to pay principal and interest on demand. In connection with both types of note
arrangements, a Portfolio considers earning power, cash flow and other liquidity
ratios of the issuer. These notes, as such, are not typically rated by credit
rating agencies. Unless they are so rated, a Portfolio may invest in them only
if at the time of an investment the issuer has an outstanding issue of unsecured
debt rated in one of the two highest categories by a nationally recognized
statistical rating Organization. The Portfolios will generally purchase
commercial paper only of companies of medium to large capitalizations (I.E., $1
billion or more).
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES: Certificates of deposit
are receipts issued by a bank in exchange for the deposit of funds. The issuer
agrees to pay the amount deposited plus interest to the bearer of the receipt on
the date specified on the certificate. The certificate usually can be traded in
the secondary market prior to maturity.
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by another bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going
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rate of discount for a specific maturity. Although maturities for acceptances
can be as long as 270 days, most maturities are six months or less.
CORPORATE OBLIGATIONS: Corporate debt obligations (including master demand
notes). For a further description of variable amount master demand notes, see
the section entitled "Commercial Paper" above.
REPURCHASE AGREEMENTS: See the section entitled "Repurchase Agreements"
above.
U.S. GOVERNMENT SECURITIES. Each Portfolio may invest in U.S. Treasury
securities, including bills, notes, bonds and other debt securities issued by
the U.S. Treasury. These instruments are direct obligations of the U.S.
government and, as such, are backed by the "full faith and credit" of the United
States. They differ primarily in their interest rates, the lengths of their
maturities and the dates of their issuances. For these securities, the payment
of principal and interest is unconditionally guaranteed by the U.S. government.
They are of the highest possible credit quality. These securities are subject to
variations in market value due to fluctuations in interest rates, but if held to
maturity, are guaranteed by the U.S. government to be paid in full.
Such a Portfolio may also invest in securities issued by agencies of the
U.S. government or instrumentalities of the U.S. government. These obligations,
including those guaranteed by federal agencies or instrumentalities, may or may
not be backed by the "full faith and credit" of the United States. Obligations
of the Farmer's Home Administration ("FMHA") and the Export-Import Bank are
backed by the full faith and credit of the United States.
Such a Portfolio may also invest in securities issued by U.S. government
instrumentalities and certain federal agencies that are neither direct
obligations of, nor are they guaranteed by, the U.S. Treasury. However, they
involve federal sponsorship in one way or another. For example, some are backed
by specific types of collateral; some are supported by the issuer's right to
borrow from the Treasury; some are supported by the discretionary authority of
the Treasury to purchase certain obligations of the issuer; and others are
supported only by the credit of the issuing government agency or
instrumentality. These agencies and instrumentalities include, but are not
limited to, the Federal Land Banks, Central Bank for Cooperatives, and Federal
Intermediate Credit Banks. In the case of securities not backed by the full
faith and credit of the United States, a Portfolio must look principally to the
agency issuing or guaranteeing the obligation for ultimate repayment and may not
be able to assert a claim against the United States if the agency or
instrumentality does not meet its commitments.
INVESTMENT IN SMALL, UNSEASONED COMPANIES. As described in the relevant
Prospectus, the Small Cap Growth Portfolio and the Micro Cap Growth Portfolio
will invest, and the other Portfolios may invest, in the securities of small and
micro cap companies. Micro Cap generally refers to a capitalization of $600
million or lower or a capitalization of companies represented in the lower 50%
of the Russell 2000 Index. Small cap generally refers to a capitalization of
$1.8 billion or a capitalization of cmmpanies represented in the Russell 2000
Index. These securities may have a limited trading market, which may adversely
affect their disposition and can result in their being priced lower than might
otherwise be the case. It may be difficult to obtain reliable information and
financial data on such companies and the securities of these small companies may
not be readily
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marketable, making it difficult to dispose of shares when desirable. A risk of
investing in smaller, emerging companies is that they often are at an earlier
stage of development and therefore have limited product lines, market access for
such products, financial resources and depth in management as compared to
larger, more established companies, and their securities may be subject to more
abrupt or erratic market movements than securities of larger, more established
companies or the market averages in general. In addition, certain smaller
issuers may face difficulties in obtaining the capital necessary to continue in
operation and may go into bankruptcy, which could result in a complete loss of
an investment. Smaller companies also may be less significant factors within
their industries and may have difficulty withstanding competition from larger
companies. If other investment-companies and investors who invest in such
issuers trade the same securities when a Portfolio attempts to dispose of its
holdings, the Portfolio may receive lower prices than might otherwise be
obtained. While smaller companies may be subject to these additional risks, they
may also realize more substantial growth than larger, more established
companies. The Real Estate Securities Portfolio may invest in securities of
companies which have limited operating histories and may not yet be profitable.
The Portfolios will not invest in companies which together with predecessors
have operating histories of less than three years if immediately thereafter and
as a result of such investment the value of the Real Estate Securities
Portfolio's holdings of such securities (other than securities of companies
principally engaged in the real estate industry) exceeds 20% of the value of the
Portfolio's total assets. Although not an investment policy of the Portfolios,
it is anticipated that under normal circumstances, approximately 10% to 15% of
the companies principally engaged in the real estate industry in which the Real
Estate Securities Portfolio invests will have operating histories of less than
three years.
Companies with market capitalization of $235 million to $12.9 billion or
the capitalization of companies represented in the S&P Mid Cap 400 Index,
("Mid-Cap Companies") may also suffer more significant losses as well as realize
more substantial growth than larger, more established issuers. Thus, investments
in such companies tend to be more volatile and somewhat speculative. The Mid Cap
Growth Portfolio and the Real Estate Securities Portfolio may invest in the
securities of Mid-Cap Companies.
WARRANTS AND RIGHTS. Each Portfolio may invest in warrants, which give the
holder of the warrant a right to purchase a given number of shares of a
particular issue at a specified price until expiration (generally two or more
years). Such investments generally can provide a greater potential for profit or
loss than investments of equivalent amounts in the underlying common stock. The
prices of warrants do not necessarily move with the prices of the underlying
securities. If the holder does not sell the warrant, he risks the loss of his
entire investment if the market price of the underlying stock does not, before
the expiration date, exceed the exercise price of the warrant plus the cost
thereof. Investment in warrants is a speculative activity. Warrants pay no
dividends and confer no rights (other than the right to purchase the underlying
stock) with respect to the assets of the issuer. Rights represent a preemptive
right of stockholders to purchase additional shares of a stock at the time of a
new issuance before the stock is offered to the general public, allowing the
stockholder to retain the same ownership percentage after the new stock
offering.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase or sell
such securities on a "when-issued" or "delayed delivery" basis. Although a
Portfolio will enter into such transactions for the purpose of acquiring
securities for its portfolio or for delivery pursuant to options
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contracts it has entered into, the Portfolio may dispose of a commitment prior
to settlement. "When-issued" or "delayed delivery" refers to securities whose
terms and indenture are available and for which a market exists, but which are
not available for immediate delivery. When such transactions are negotiated, the
price (which is generally expressed in yield terms) is fixed at the time the
commitment is made, but delivery and payment for the securities take place at a
later date. During the period between commitment by a Portfolio and settlement
(generally within two months but not to exceed 120 days), no payment is made for
the securities purchased by the purchaser, and no interest accrues to the
purchaser from the transaction. Such securities are subject to market
fluctuation, and the value at delivery may be less than the purchase price. A
Portfolio will maintain a segregated account with its custodian, consisting of
cash, U.S. Government securities, other high grade debt obligations or other
liquid securities at least equal to the value of purchase commitments until
payment is made. With respect to securities sold on a delayed-delivery basis, a
Portfolio will either segregate the securities sold or liquid assets of a
comparable value.
A Portfolio will engage in when-issued transactions in order to secure what
is considered to be an advantageous price and yield at the time of entering into
the obligation. When a Portfolio engages in when-issued or delayed delivery
transactions, it relies on the buyer or seller, as the case may be, to
consummate the transaction. Failure to do so may result in a Portfolio losing
the opportunity to obtain a price and yield considered to be advantageous. If a
Portfolio chooses to (i) dispose of the right to acquire a when-issued security
prior to its acquisition or (ii) dispose of its right to deliver or receive
against a forward commitment, it may incur a gain or loss. (At the time a
Portfolio makes a commitment to purchase or sell a security on a when-issued or
forward commitment basis, it records the transaction and reflects the value of
the security purchased, or if a sale, the proceeds to be received in determining
its net asset value.)
To the extent a Portfolio engages in when-issued and delayed delivery
transactions, it will do so for the purpose of acquiring or selling securities
consistent with its investment objectives and policies and not for the purposes
of investment leverage. A Portfolio enters into such transactions only with the
intention of actually receiving or delivering the securities, although (as noted
above) when-issued securities and forward commitments may be sold prior to the
settlement date. In addition, changes in interest rates in a direction other
than that expected by the Adviser before settlement will affect the value of
such securities and may cause a loss to a Portfolio.
When-issued transactions and forward commitments may be used to offset
anticipated changes in interest rates and prices. For instance, in periods of
rising interest rates and failing prices, a Portfolio might sell securities in
its portfolio on a forward commitment basis to attempt to limit its exposure to
anticipated falling prices. In periods of falling interest rates and rising
prices, a Portfolio might sell portfolio securities and purchase the same or
similar securities on a when-issued or forward commitment basis, thereby
obtaining the benefit of currently higher cash yields.
FOREIGN SECURITIES. Investments in foreign securities offer potential benefits
not available from investments solely in securities of domestic issuers by
offering the opportunity to invest in foreign issuers that appear to offer
growth potential, or in foreign countries with economic policies or business
cycles different from those of the U.S., or to reduce fluctuations in portfolio
value by taking advantage of foreign stock markets that do not move in a manner
parallel to U.S. markets. Although foreign securities are generally not expected
to constitute a significant portion of any Portfolio's investment portfolio,
each Portfolio is authorized to invest in foreign securities. A Portfolio may
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purchase securities issued by issuers in any country.
Each Portfolio may invest in securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRS) or other similar securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are securities, typically issued by a U.S. financial
institution, that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer and deposited with the depository. ADRs
may be sponsored or unsponsored. A sponsored ADR is issued by a depository that
has an exclusive relationship with the issuer of the underlying security. An
unsponsored ADR may be issued by any number of U.S. depositories. Holders of
unsponsored ADRs generally bear all the costs associated with establishing the
unsponsored ADR. The depository of an unsponsored ADR is under no obligation to
distribute shareholder communications received from the underlying issuer or to
pass through to the holders of the unsponsored ADR voting rights with respect to
the deposited securities or pool of securities. A Portfolio may invest in either
type of ADR. Although the U.S. investor holds a substitute receipt of ownership
rather than direct stock certificates, the use of the depository receipts in the
United States can reduce costs and delays as well as potential currency exchange
and other difficulties. The Portfolio may purchase securities in local markets
and direct delivery of these ordinary shares to the local depository of an ADR
agent bank in the foreign country. Simultaneously, the ADR agents create a
certificate that settles at the Portfolio's custodian in five days. The
Portfolio may also execute trades on the U.S. markets using existing ADRs. A
foreign issuer of the security underlying an ADR is generally not subject to the
same reporting requirements in the United States as a domestic issuer.
Accordingly the information available to a U.S. investor will be limited to the
information the foreign issuer is required to disclose in its own country and
the market value of an ADR may not reflect undisclosed material information
concerning the issuer of the underlying security. For purposes of a Portfolio's
investment policies, the Portfolio's investments in these types of securities
will be deemed to be investments in the underlying securities. Generally ADRs,
in registered form, are dollar denominated securities designed for use in the
U.S. securities markets, which represent and may be converted into the
underlying foreign security. EDRs, in bearer form, are designed for use in the
European securities markets.
Each Portfolio also may invest in securities denominated in European
Currency Units (ECUs). An ECU is a "basket" consisting of specified amounts of
currencies of certain of the twelve member states of the European Community. In
addition, the Portfolios may invest in securities denominated in other currency
"baskets."
Investments in foreign securities, including securities of emerging market
countries, present special additional investment risks and considerations not
typically associated with investments in domestic securities, including
reduction of income by foreign taxes; fluctuation in value of foreign portfolio
investments due to changes in currency rates and control regulations (i.e.,
currency blockage); transaction charges for currency exchange; lack of public
information about foreign issuers; lack of uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
issuers; less volume on foreign exchanges than on U.S. exchanges; greater
volatility and less liquidity on foreign markets than in the U.S.; less
regulation of foreign issuers,
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stock exchanges and brokers than the U.S.; greater difficulties in commencing
lawsuits; higher brokerage commission rates and custodian fees than the U.S.;
increased possibilities in some countries of expropriation, confiscatory
taxation, political, financial or social instability or adverse diplomatic
developments; the imposition of foreign taxes on investment income derived from
such countries and differences (which may be favorable or unfavorable) between
the U.S. economy and foreign economies. An emerging market country is one that
the World Bank, the International Finance Corporation or the United Nations or
its authorities has determined to have a low or middle income economy.
Historical experience indicates that the markets of emerging market countries
have been more volatile than more developed markets; however, such markets can
provide higher rates of return to investors. The performance of investments in
securities denominated in a foreign currency ("non-dollar securities") will
depend on, among other things, the strength of the foreign currency against the
dollar and the interest rate environment in the country issuing the foreign
currency. Absent other events that could otherwise affect the value of
non-dollar securities (such as a change in the political climate or an issuer's
credit quality), appreciation in the value of the foreign currency generally can
be expected to increase the value of a Portfolio's non-dollar securities in
terms of U.S. dollars. A rise in foreign interest rates or decline in the value
of foreign currencies relative to the U.S. dollar generally can be expected to
depress the value of the Portfolio's non-dollar securities. Currencies are
evaluated on the basis of fundamental economic criteria (e.g., relative
inflation levels and trends, growth rate forecasts, balance of payments status
and economic policies) as well as technical and political data.
Because a Portfolio may invest in securities that are primarily listed on
foreign exchanges that trade on weekends or other days when the Trust does not
price its shares, the value of such Portfolio's shares may change on days when a
shareholder will not be able to purchase or redeem shares.
LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, each Portfolio may lend portfolio securities in amounts up to 33
1/3% of total assets to brokers, dealers and other financial institutions,
provided that such loans are callable at any time by the Portfolio and are at
all times secured by cash or equivalent collateral. In lending its portfolio
securities, a Portfolio receives income while retaining the securities'
potential for capital appreciation. The advantage of such loans is that a
Portfolio continues to receive the interest and dividends on the loaned
securities while at the same time earning interest on the collateral, which will
be invested in short-term debt securities, including repurchase agreements. A
loan may be terminated by the borrower on one business day's notice or by a
Portfolio at any time. If the borrower fails to maintain the requisite amount of
collateral, the loan automatically terminates, and the Portfolio could use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases even loss of rights in
the collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will be made only to firms deemed by the
Adviser to be creditworthy. On termination of the loan, the borrower is required
to return the securities to a Portfolio; and any gain or loss in the market
price of the loaned security during the loan would inure to the Portfolio. Each
Portfolio will pay reasonable finders', administrative and custodial fees in
connection with a loan of its securities or may share the interest earned on
collateral with the borrower.
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Since voting or consent rights that accompany loaned securities pass to the
borrower, each Portfolio will follow the policy of calling the loan, in whole or
in part as may be appropriate, to permit the exercise of such rights if the
matters involved would have a material effect on the Portfolio's investment in
the securities that are the subject of the loan.
DERIVATIVES STRATEGIES. Each Portfolio may write (I.E., sell) call options
("calls") on securities traded on U.S. and foreign securities exchanges and
over-the-counter markets to enhance income through the receipt of premiums from
expired calls and any net profits from closing purchase transactions. All such
calls written by a Portfolio must be "covered" while the call is outstanding
(I.E., the Portfolio must own the securities subject to the call or other
securities acceptable for applicable escrow requirements). If a call written by
the Portfolio is exercised, the Portfolio forgoes any profit from any increase
in the market price above the call price of the underlying investment on which
the call was written.
Each Portfolio also may write put options ("puts"), which give the holder
of the option the right to sell the underlying security to the Portfolio at the
stated exercise price. The Portfolio will receive a premium for writing a put
option that increases the Portfolio's return. The Portfolios write only covered
put options, which means that so long as a Portfolio is obligated as the writer
of the option it will, through its custodian, have deposited and maintained cash
or liquid securities denominated in U.S. dollars or non-U.S. currencies with a
securities depository with a value equal to or greater than the exercise price
of the underlying securities.
HEDGING STRATEGIES. For hedging purposes as a temporary defensive maneuver,
each Portfolio, except as described below, may also use interest rate futures
contracts, foreign currency futures contracts, and stock and bond index futures
contracts (together, "Futures"); forward contracts on foreign currencies
("Forward Contracts"); and call and put options on equity and debt securities,
Futures, stock and bond indices and foreign currencies (all the foregoing
referred to as "Hedging Instruments"). All puts and calls on securities,
interest rate Futures or stock and bond index Futures or options on such Futures
purchased or sold by the Portfolio will be listed on a national securities or
commodities exchange or on U.S. over-the-counter markets. Hedging Instruments
may be used to attempt to: (i) protect against possible declines in the market
value of a Portfolio's portfolio resulting from downward trends in the equity
and debt securities markets (generally due to a rise in interest rates); (ii)
protect a Portfolio's unrealized gains in the value of its equity and debt
securities that have appreciated; (iii) facilitate selling securities for
investment reasons; (iv) establish a position in the equity and debt securities
markets as a temporary substitute for purchasing particular equity and debt
securities; or (v) reduce the risk of adverse currency fluctuations.
A Portfolio will not enter into futures contract transactions to the extent
that, immediately thereafter, the sum of its initial margin deposits on open
contracts exceeds 5% of the market value of its total assets. In addition, a
Portfolio will not enter into futures contracts to the extent that its
outstanding obligations to purchase securities under these contracts would
exceed 20% of its total assets.
A Portfolio's strategy of hedging with Futures and options on Futures will
be incidental to its activities in the underlying cash market. When hedging to
attempt to protect against declines in
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the market value of a Portfolio's portfolio, to permit a Portfolio to retain
unrealized gains in the value of portfolio securities that have appreciated, or
to facilitate selling securities for investment reasons, a Portfolio could: (i)
sell Futures; (ii) purchase puts on such Futures or securities; or (iii) write
calls on securities held by it or on Futures. When hedging to attempt to protect
against the possibility that portfolio securities are not fully included in a
rise in value of the debt securities market, a Portfolio could: (i) purchase
Futures, or (ii) purchase calls on such Futures or on securities. When hedging
to protect against declines in the dollar value of a foreign
currency-denominated security, a Portfolio could: (i) purchase puts on that
foreign currency and on foreign currency Futures; (ii) write calls on that
currency or on such Futures; or (iii) enter into Forward Contracts at a lower
rate than the spot ("cash") rate. Additional information about the Hedging
Instruments the Portfolios may use is provided below.
OPTIONS
OPTIONS ON SECURITIES. As noted above, each Portfolio may write and
purchase call and put options (including yield curve options) on futures
contracts, equity and debt securities.
When a Portfolio writes a call on a security it receives a premium and
agrees to sell the underlying security to a purchaser of a corresponding call on
the same security during the call period (usually not more than 9 months) at a
fixed price (which may differ from the market price of the underlying security),
regardless of market price changes during the call period. In such instance, the
Portfolio retains the risk of loss should the price of the underlying security
increase during the call period, which may be offset to some extent by the
premium.
To terminate its obligation on a call it has written, a Portfolio may
purchase a corresponding call in a "closing purchase transaction." A profit or
loss will be realized, depending upon whether the net of the amount of the
option transaction costs and the premium received on the call written was more
or less than the price of the call subsequently purchased. A profit may also be
realized if the call expires unexercised, because a Portfolio retains the
underlying security and the premium received. If a Portfolio could not effect a
closing purchase transaction due to lack of a market, it would hold the callable
securities until the call expired or was exercised.
When a Portfolio purchases a call (other than in a closing purchase
transaction), it pays a premium and has the right to buy the underlying
investment from a seller of a corresponding call on the same investment during
the call period at a fixed exercise price. A Portfolio benefits only if the call
is sold at a profit or if, during the call period, the market price of the
underlying investment is above the sum of the call price plus the transaction
costs and the premium paid and the call is exercised. If the call is not
exercised or sold (whether or not at a profit), it will become worthless at its
expiration date and a Portfolio will lose its premium payment and the right to
purchase the underlying investment.
A put option on securities gives the purchaser the right to sell, and the
writer the obligation to buy, the underlying investment at the exercise price
during the option period. Writing a put covered by segregated liquid assets
equal to the exercise price of the put has the same economic
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effect to a Portfolio as writing a covered call. The premium a Portfolio
receives from writing a put option represents a profit as long as the price of
the underlying investment remains above the exercise price. However, a Portfolio
has also assumed the obligation during the option period to buy the underlying
investment from the buyer of the put at the exercise price, even though the
value of the investment may fall below the exercise price. If the put expires
unexercised, a Portfolio (as the writer of the put) realizes a gain in the
amount of the premium. If the put is exercised, a Portfolio must fulfill its
obligation to purchase the underlying investment at the exercise price, which
will usually exceed the market value of the investment at that time. In that
case, a Portfolio may incur a loss, equal to the sum of the sale price of the
underlying investment and the premium received minus the sum of the exercise
price and any transaction costs incurred.
A Portfolio may effect a closing purchase transaction to realize a profit
on an outstanding put option it has written or to prevent an underlying security
from being put. Furthermore, effecting such a closing purchase transaction will
permit a Portfolio to write another put option to the extent that the exercise
price thereof is secured by the deposited assets, or to utilize the proceeds
from the sale of such assets for other investments by the Portfolio. A Portfolio
will realize a profit or loss from a closing purchase transaction if the cost of
the transaction is less or more than the premium received from writing the
option.
When a Portfolio purchases a put, it pays a premium and has the right to
sell the underlying investment to a seller of a corresponding put on the same
investment during the put period at a fixed exercise price. Buying a put on an
investment a Portfolio owns enables the Portfolio to protect itself during the
put period against a decline in the value of the underlying investment below the
exercise price by selling such underlying investment at the exercise price to a
seller of a corresponding put. If the market price of the underlying investment
is equal to or above the exercise price and as a result the put is not exercised
or resold, the put will become worthless at its expiration date, and the
Portfolio will lose its premium payment and the right to sell the underlying
investment pursuant to the put. The put may, however, be sold prior to
expiration (whether or not at a profit).
Buying a put on an investment a Portfolio does not own permits the
Portfolio either to resell the put or buy the underlying investment and sell it
at the exercise price. The resale price of the put will vary inversely with the
price of the underlying investment. If the market price of the underlying
investment is above the exercise price and as a result the put is not exercised,
the put will become worthless on its expiration date. In the event of a decline
in the stock market, a Portfolio could exercise or sell the put at a profit to
attempt to offset some or all of its loss on its portfolio securities.
When writing put options on securities, to secure its obligation to pay for
the underlying security, a Portfolio will deposit in escrow liquid assets with a
value equal to or greater than the exercise price of the underlying securities.
A Portfolio therefore forgoes the opportunity of investing the segregated assets
or writing calls against those assets. As long as the obligation of a Portfolio
as the put writer continues, it may be assigned an exercise notice by the
broker-dealer through whom such option was sold, requiring a Portfolio to take
delivery of the underlying security against payment of the exercise price. A
Portfolio has no control over when it may be required to purchase the underlying
security, since it may be assigned an exercise notice at any time prior to the
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termination of its obligation as the writer of the put. This obligation
terminates upon expiration of the put, or such earlier time at which a Portfolio
effects a closing purchase transaction by purchasing a put of the same series as
that previously sold. Once a Portfolio has been assigned an exercise notice, it
is thereafter not allowed to effect a closing purchase transaction.
OPTIONS ON FOREIGN CURRENCIES. Each Portfolio may write and purchase puts
and calls on foreign currencies. A call written on a foreign currency by a
Portfolio is "covered" if the Portfolio owns the underlying foreign currency
covered by the call or has an absolute and immediate right to acquire that
foreign currency without additional cash consideration (or for additional cash
consideration held in a segregated account by the Portfolio) upon conversion or
exchange of other foreign currency held in its portfolio. A put option is
"covered" if the Portfolio segregates cash or liquid securities with a value at
least equal to the exercise price of the put option. A call written by a
Portfolio on a foreign currency is for cross-hedging purposes if it is not
covered, but is designed to provide a hedge against a decline in the U.S. dollar
value of a security that the Portfolio owns or has the right to acquire and
which is denominated in the currency underlying the option due to an adverse
change in the exchange rate. In such circumstances, a Portfolio collateralizes
the option by segregating cash or liquid securities in an amount not less than
the value of the underlying foreign currency in U.S. dollars marked-to-market
daily. As with other kinds of option transactions, the writing of an option on
currency will constitute only a partial hedge, up to the amount of the premium
received. A Portfolio could be required to purchase or sell currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on currency may constitute an effective hedge against exchange rate
fluctuations; however, in the event of exchange rate movements adverse to a
Portfolio's position, the Portfolio may forfeit the entire amount of the premium
plus related transaction costs.
OPTIONS ON SECURITIES INDICES. As noted above, each Portfolio may write and
purchase call and put options on securities indices. Puts and calls on
broadly-based securities indices are similar to puts and calls on securities
except that all settlements are in cash and gain or loss depends on changes in
the index in question (and thus on price movements in the securities market
generally) rather than on price movements in individual securities or Futures.
When a Portfolio buys a call on a securities index; it pays a premium. During
the call period, upon exercise of a call by a Portfolio, a seller of a
corresponding call on the same investment will pay the Portfolio an amount of
cash to settle the call if the closing level of the securities index upon which
the call is based is greater than the exercise price of the call. That cash
payment is equal to the difference between the closing price of the index and
the exercise price of the call times a specified multiple (the "multiplier")
which determines the total dollar value for each point of difference. When a
Portfolio buys a put on a securities index, it pays a premium and has the right
during the put period to require a seller of a corresponding put, upon the
Portfolio's exercise of its put, to deliver to the Portfolio an amount of cash
to settle the put if the closing level of the securities index upon which the
put is based is less than the exercise price of the put. That cash payment is
determined by the multiplier, in the same manner as described above as to calls.
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FUTURES AND OPTIONS ON FUTURES
FUTURES. Upon entering into a Futures transaction, a Portfolio will be
required to deposit an initial margin payment with the futures commission
merchant (the "futures broker"). The initial margin will be deposited with the
Trust's custodian in an account registered in the futures broker's name;
however, the futures broker can gain access to that account only under specified
conditions. As the Future is marked-to-market to reflect changes in its market
value, subsequent margin payments, called variation margin, will be paid to or
by the futures broker on a daily basis. Prior to expiration of the Future, if a
Portfolio elects to close out its position by taking an opposite position, a
final determination of variation margin is made, additional cash is required to
be paid by or released to the Portfolio, and any loss or gain is realized for
tax purposes. All Futures transactions are effected through a clearinghouse
associated with the exchange on which the Futures are traded.
Interest rate futures contracts are purchased or sold for hedging purposes
to attempt to protect against the effects of interest rate changes on a
Portfolio's current or intended investments in fixed income securities. For
example, if a Portfolio owned long-term bonds and interest rates were expected
to increase, that Portfolio might sell interest rate futures contracts. Such a
sale would have much the same effect as selling some of the long-term bonds in
that Portfolio's portfolio. However, since the Futures market is more liquid
than the cash market, the use of interest rate futures contracts as a hedging
technique allows a Portfolio to hedge its interest rate risk without having to
sell its portfolio securities. If interest rates did increase, the value of the
debt securities in the portfolio would decline, but the value of that
Portfolio's interest rate futures contracts would be expected to increase at
approximately the same rate, thereby keeping the net asset value of that
Portfolio from declining as much as it otherwise would have. On the other hand,
if interest rates were expected to decline, interest rate futures contracts may
be purchased to hedge in anticipation of subsequent purchases of long-term bonds
at higher prices. Since the fluctuations in the value of the interest rate
futures contracts should be similar to that of long-term bonds, a Portfolio
could protect itself against the effects of the anticipated rise in the value of
long-term bonds without actually buying them until the necessary cash became
available or the market had stabilized. At that time, the interest rate futures
contracts could be liquidated and that Portfolio's cash reserves could then be
used to buy long-term bonds on the cash market.
Purchases or sales of stock or bond index futures contracts are used for
hedging purposes to attempt to protect a Portfolio's current or intended
investments from broad fluctuations in stock or bond prices. For example, a
Portfolio may sell stock or bond index futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of the
Portfolio's securities portfolio that might otherwise result. If such decline
occurs, the loss in value of portfolio securities may be offset, in whole or
part, by gains on the Futures position. When a Portfolio is not fully invested
in the securities market and anticipates a significant market advance, it may
purchase stock or bond index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Portfolio intends to purchase. As such purchases are made,
the corresponding positions in stock or bond index futures contracts will be
closed out.
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As noted above, each Portfolio may purchase and sell foreign currency
futures contracts for hedging to attempt to protect its current or intended
investments from fluctuations in currency exchange rates. Such fluctuations
could reduce the dollar value of portfolio securities denominated in foreign
currencies, or increase the cost of foreign-denominated securities to be
acquired, even if the value of such securities in the currencies in which they
are denominated remains constant. A Portfolio may sell futures contracts on a
foreign currency, for example, when it holds securities denominated in such
currency and it anticipates a decline in the value of such currency relative to
the dollar. In the event such decline occurs, the resulting adverse effect on
the value of foreign-denominated securities may be offset, in whole or in part,
by gains on the Futures contracts. However, if the value of the foreign currency
increases relative to the dollar, the Portfolio's loss on the foreign currency
futures contract may or may not be offset by an increase in the value of the
securities since a decline in the price of the security stated in terms of the
foreign currency may be greater than the increase in value as a result of the
change in exchange rates.
Conversely, a Portfolio could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing Futures contracts on
the relevant currency, which could offset, in whole or in part, the increased
cost of such securities resulting from a rise in the dollar value of the
underlying currencies. When a Portfolio purchases futures contracts under such
circumstances, however, and the price of securities to be acquired instead
declines as a result of appreciation of the dollar, the Portfolio will sustain
losses on its futures position, which could reduce or eliminate the benefits of
the reduced cost of portfolio securities to be acquired.
OPTIONS ON FUTURES. As noted above, certain Portfolios may purchase and
write options on interest rate futures contracts, stock and bond index futures
contracts and foreign currency futures contracts. (Unless otherwise specified,
options on interest rate futures contracts, options on stock and bond index
futures contracts and options on foreign currency futures contracts are
collectively referred to as "Options on Futures.")
The writing of a call option on a Futures contract constitutes a partial
hedge against declining prices of the securities in a Portfolio's portfolio. If
the Futures price at expiration of the option is below the exercise price, the
Portfolio will retain the full amount of the option premium, which provides a
partial hedge against any decline that may have occurred in the Portfolio's
portfolio holdings. The writing of a put option on a Futures contract
constitutes a partial hedge against increasing prices of the securities or other
instruments required to be delivered under the terms of the Futures contract. If
the Futures price at expiration of the put option is higher than the exercise
price, a Portfolio will retain the full amount of the option premium, which
provides a partial hedge against any increase in the price of securities the
Portfolio intends to purchase. If a put or call option a Portfolio has written
is exercised, the Portfolio will incur a loss that will be reduced by the amount
of the premium it receives. Depending on the degree of correlation between
changes in the value of its portfolio securities and changes in the value of its
Options on Futures positions, a Portfolio's losses from exercised Options on
Futures may to some extent be reduced or increased by changes in the value of
portfolio securities.
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The Portfolio may purchase Options on Futures for hedging purposes, instead
of purchasing or selling the underlying Futures contract. For example, where a
decrease in the value of portfolio securities is anticipated as a result of a
projected market-wide decline or changes in interest or exchange rates, a
Portfolio could, in lieu of selling a Futures contract, purchase put options
thereon. In the event that such decrease occurs, it may be offset, in whole or
part, by a profit on the option. If the market decline does not occur, the
Portfolio will suffer a loss equal to the price of the put. Where it is
projected that the value of securities to be acquired by a Portfolio will
increase prior to acquisition, due to a market advance or changes in interest or
exchange rates, a Portfolio could purchase call Options on Futures, rather than
purchasing the underlying Futures contract. If the market advances, the
increased cost of securities to be purchased may be offset by a profit on the
call. However, if the market declines, the Portfolio will suffer a loss equal to
the price of the call, but the securities that the Portfolio intends to purchase
may be less expensive.
FORWARD CONTRACTS
Each Portfolio may engage in Forward Contracts. A Forward Contract involves
bilateral obligations of one party to purchase, and another party to 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
the contract is entered into. These contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. No price is paid or received upon the purchase or sale of a
Forward Contract.
A Portfolio may use Forward Contracts to protect against uncertainty in the
level of future exchange rates. The use of Forward Contracts does not eliminate
fluctuations in the prices of the underlying securities a Portfolio owns or
intends to acquire, but it does fix a rate of exchange in advance. In addition,
although Forward Contracts limit the risk of loss due to a decline in the value
of the hedged currencies, at the same time they limit any potential gain that
might result should the value of the currencies increase. A Portfolio will not
speculate with Forward Contracts or foreign currency exchange rates.
A Portfolio may enter into Forward Contracts with respect to specific
transactions. For example, when a Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when a
Portfolio anticipates receipt of dividend payments in a foreign currency, the
Portfolio may desire to "lock-in" the U.S. dollar price of the security or the
U.S. dollar equivalent of such payment by entering into a Forward Contract, for
a fixed amount of U.S. dollars per unit of foreign currency, for the purchase or
sale of the amount of foreign currency involved in the underlying transaction. A
Portfolio will thereby be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the currency
exchange rates during the period between the date on which the security is
purchased or sold, or on which the payment is declared, and the date on which
such payments are made or received.
A Portfolio may also use Forward Contracts to lock in the U.S. dollar value
of portfolio positions ("position hedge"). In a position hedge, for example,
when a Portfolio believes that foreign currency may suffer a substantial decline
against the U.S. dollar, it may enter into a Forward
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Contract to sell an amount of that foreign currency approximating the value of
some or all of the Portfolio's portfolio securities denominated in (or affected
by fluctuations in, in the case of ADRs) such foreign currency, or when a
Portfolio believes that the U.S. dollar may suffer a substantial decline against
a foreign currency, it may enter into a Forward Contract to buy that foreign
currency for a fixed dollar amount. In this situation a Portfolio may, in the
alternative, enter into a Forward Contract to sell a different foreign currency
for a fixed U.S. dollar amount where the Portfolio believes that the U.S. dollar
value of the currency to be sold pursuant to the forward contract will fall
whenever there is a decline in the U.S. dollar value of the currency in which
portfolio securities of the Portfolio are denominated ("cross-hedged"). The
Portfolios may also hedge investments denominated in a foreign currency by
entering into forward currency contracts with respect to a foreign currency that
is expected to correlate to the currency in which the investments are
denominated ("proxy hedging").
A Portfolio will cover outstanding forward currency contracts by
maintaining liquid portfolio securities denominated in the currency underlying
the forward contract or the currency being hedged. To the extent that a
Portfolio is not able to cover its forward currency positions with underlying
portfolio securities, the Portfolio will segregate cash or liquid securities
having a value equal to the aggregate amount of the Portfolio's commitments
under Forward Contracts entered into with respect to position hedges and
cross-hedges. If the value of the segregated securities declines, additional
cash or securities will be segregated on a daily basis so that the value of the
segregated assets will equal the amount of the Portfolio's commitments with
respect to such contracts. As an alternative to segregating assets, a Portfolio
may purchase a call option permitting the Portfolio to purchase the amount of
foreign currency being hedged by a forward sale contract at a price no higher
than the Forward Contract price or the Portfolio may purchase a put option
permitting the Portfolio to sell the amount of foreign currency subject to a
forward purchase contract at a price as high or higher than the Forward Contract
price. Unanticipated changes in currency prices may result in poorer overall
performance for a Portfolio than if it had not entered into such contracts.
The precise matching of the Forward Contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date the Forward Contract
is entered into and the date it is sold. Accordingly, it may be necessary for a
Portfolio to purchase additional foreign currency on the spot (i.e., cash)
market (and bear the expense of such purchase), if the market value of the
security is less than the amount of foreign currency a Portfolio is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency a Portfolio is obligated
to deliver. The projection of short-term currency market movements is extremely
difficult, and the successful execution of a short-term hedging strategy is
highly uncertain. Forward Contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing a Portfolio to sustain
losses on these contracts and transactions costs.
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At or before the maturity of a Forward Contract requiring a Portfolio to
sell a currency, the Portfolio may either sell a portfolio security and use the
sale proceeds to make delivery of the currency or retain the security and offset
its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Portfolio will obtain, on the same maturity date,
the same amount of the currency that it is obligated to deliver. Similarly, a
Portfolio may close out a Forward Contract requiring it to purchase a specified
currency by entering into a second contract entitling it to sell the same amount
of the same currency on the maturity date of the first contract. A Portfolio
would realize a gain or loss as a result of entering into such an offsetting
Forward Contract under either circumstance to the extent the exchange rate or
rates between the currencies involved moved between the execution dates of the
first contract and offsetting contract.
The cost to a Portfolio of engaging in Forward Contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because Forward Contracts are usually
entered into on a principal basis, no fees or commissions are involved. Because
such contracts are not traded on an exchange, a Portfolio must evaluate the
credit and performance risk of each particular counterparty under a Forward
Contract.
Although a Portfolio values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. A Portfolio may convert foreign currency from time to time,
and investors should be aware of the costs of currency conversion. Foreign
exchange dealers do not charge a fee for conversion, but they do seek to realize
a profit based on the difference between the prices at which they buy and sell
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Portfolio at one rate, while offering a lesser rate of exchange should the
Portfolio desire to resell that currency to the dealer.
ADDITIONAL INFORMATION ABOUT HEDGING INSTRUMENTS AND THEIR USE
The Trust's custodian, or a securities depository acting for the custodian,
will act as the Portfolio's escrow agent, through the facilities of the Options
Clearing Corporation ("OCC"), as to the securities on which the Portfolio has
written options or as to other acceptable escrow securities, so that no margin
will be required for such transaction. OCC will release the securities on the
expiration of the option or upon a Portfolio's entering into a closing
transaction.
An option position may be closed out only on a market that provides
secondary trading for options of the same series and there is no assurance that
a liquid secondary market will exist for any particular option. A Portfolio's
option activities may affect its turnover rate and brokerage commissions. The
exercise by a Portfolio of puts on securities will cause the sale of related
investments, increasing portfolio turnover. Although such exercise is within a
Portfolio's control, holding a put might cause the Portfolio to sell the related
investments for reasons that would not exist in the absence of the put. A
Portfolio will pay a brokerage commission each time it buys a put or call, sells
a call, or buys or sells an underlying investment in connection with the
exercise of a put or call. Such commissions may be higher than those that would
apply to direct purchases or sales of such underlying investments. Premiums paid
for options are small in relation to the market value of the related
investments, and consequently, put and call options offer large amounts of
leverage. The leverage offered by trading in options could result in a
Portfolio's net asset value being more sensitive to changes in the value of the
underlying investments.
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In the future, each Portfolio may employ Hedging Instruments and strategies
that are not presently contemplated but which may be developed, to the extent
such investment methods are consistent with a Portfolio's investment objectives,
legally permissible and adequately disclosed.
REGULATORY ASPECTS OF HEDGING INSTRUMENTS
Each Portfolio must operate within certain restrictions as to its long and
short positions in Futures and options thereon under a rule (the "CFTC Rule")
adopted by the Commodity Futures Trading Commission (the "CFTC") under the
Commodity Exchange Act (the "CEA"), which excludes the Portfolio from
registration with the CFTC as a "commodity pool operator" (as defined in the
CEA) if it complies with the CFTC Rule. In particular, the Portfolio may (i)
purchase and sell Futures and options thereon for bona fide hedging purposes, as
defined under CFTC regulations, without regard to the percentage of the
Portfolio's assets committed to margin and option premiums, and (ii) enter into
non-hedging transactions, provided, that the Portfolio may not enter into such
non-hedging transactions if, immediately thereafter, the sum of the amount of
initial margin deposits on the Portfolio's existing Futures positions and option
premiums would exceed 5% of the fair value of its portfolio, after taking into
account unrealized profits and unrealized losses on any such transactions. Each
Portfolio intends to engage in Futures transactions and options thereon only for
hedging purposes. Margin deposits may consist of cash or securities acceptable
to the broker and the relevant contract market.
Transactions in options by a Portfolio are subject to limitations
established by each of the exchanges governing the maximum number of options
that may be written or held by a single investor or group of investors acting in
concert, regardless of whether the options were written or purchased on the same
or different exchanges or are held in one or more accounts or through one or
more exchanges or brokers. Thus, the number of options a Portfolio may write or
hold may be affected by options written or held by other entities, including
other investment companies having the same or an affiliated investment adviser.
Position limits also apply to Futures. An exchange may order the liquidation of
positions found to be in violation of those limits and may impose certain other
sanctions. Due to requirements under the 1940 Act, when a Portfolio purchases a
Future, the Portfolio will segregate cash or liquid securities in an amount
equal to the market value of the securities underlying such Future, less the
margin deposit applicable to it.
POSSIBLE RISK FACTORS IN HEDGING
Participation in the options or Futures markets and in currency exchange
transactions involves investment risks and transaction costs to which a
Portfolio would not be subject absent the use of these strategies. If the
Adviser's predictions of movements in the direction of the securities, foreign
currency and interest rate markets are inaccurate, the adverse consequences to a
Portfolio may leave the Portfolio in a worse position than if such strategies
were not used.
In addition to the risks discussed above, there is also a risk in using
short hedging by selling Futures to attempt to protect against decline in value
of a Portfolio's portfolio securities (due to an increase in interest rates)
that the prices of such Futures will correlate imperfectly with the behavior of
the cash (i.e., market value) prices of the Portfolio's securities. The ordinary
spreads between prices in the cash and Futures markets are subject to
distortions due to differences in the natures of
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those markets. First, all participants in the Futures markets are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close Futures contracts through
offsetting transactions that could distort the normal relationship between the
cash and Futures markets. Second, the liquidity of the Futures markets depend on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the Futures markets could be reduced, thus producing distortion. Third, from
the point-of-view of speculators, the deposit requirements in the Futures
markets are less onerous than margin requirements in the securities markets.
Therefore, increased participation by speculators in the Futures markets may
cause temporary price distortions.
If a Portfolio uses Hedging Instruments to establish a position in the debt
securities markets as a temporary substitute for the purchase of individual debt
securities (long hedging) by buying Futures and/or calls on such Futures or on
debt securities, it is possible that the market may decline; if the Adviser then
determines not to invest in such securities at that time because of concerns as
to possible further market decline or for other reasons, the Portfolio will
realize a loss on the Hedging Instruments that is not offset by a reduction in
the price of the debt securities purchased.
SHORT SALES. Each Portfolio may seek to hedge investments or realize
additional gains through short sales. A Portfolio may make short sales, which
are transactions in which a Portfolio sells a security it does not own, in
anticipation of a decline in the market value of the security. To complete such
a transaction, a Portfolio must borrow the security to make delivery to the
buyer. A Portfolio then is obligated to replace the security borrowed by
purchasing it at the market price at or prior to the time of replacement. The
price at such time may be more or less than the price at which the security was
sold. Until the security is replaced, a Portfolio is required to repay the
lender any dividends or interest that accrue during the period of the loan. To
borrow the security, a Portfolio also may be required to pay a premium, which
would increase the cost of the security sold. The net proceeds of the short sale
will be retained by the broker, to the extent necessary to meet margin
requirements, until the short position is closed out. A Portfolio also will
incur transaction costs in effecting short sales.
A Portfolio will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
a Portfolio replaces the borrowed security. A Portfolio will realize a gain if
the security declines in price between those dates. The amount of any gain will
be decreased, and the amount of any loss increased by the amount of the premium,
dividends, interest, or expenses a Portfolio may be required to pay in
connection with a short sale.
No securities will be sold short if, after effect is given to any such
short sale, the total market value of all securities sold short would exceed 25%
of the value of the Portfolio's net assets. Each Portfolio similarly will limit
its short sales of the securities of any single issuer if the market value of
the securities that have been sold short would exceed two percent (2%) of the
value of a Portfolio's net equity or if such securities would constitute more
than two percent (2%) of any class of the issuer's securities.
Whenever a Portfolio engages in short sales, its custodian segregates an
amount of cash or U.S. Government securities or other high-grade liquid debt
securities equal to the difference between (a) the market value of the
securities sold short at the time they were sold short and (b) any cash or U.S.
Government securities required to be deposited with the broker in connection
with the short sale (not including the proceeds from the short sale). The
segregated assets are marked to market daily,
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provided that at no time will the amount deposited in it plus the amount
deposited with the broker be less than the market value of the securities at the
time they were sold short.
Each Portfolio may make "short sales against the box." A short sale is
effected by selling a security that the Portfolio does not own. A short sale is
against the box to the extent that the Portfolio contemporaneously owns, or has
the right to obtain without payment, securities identical to those sold short. A
Portfolio may not enter into a short sale against the box, if, as a result, more
than 25% of its total assets would be subject to such short sales. A Portfolio
generally will recognize any gain (but not loss) for federal income tax purposes
at the time that it makes a short sale against the box.
PORTFOLIO TURNOVER. It is expected that the annual portfolio turnover rate for
the Portfolios will not exceed 200%. In addition to Portfolio trading costs,
higher rates (100% or more) of portfolio turnover may result in the realization
of capital gains, a portion of which may be short-term or mid-term gains. See
"DIVIDENDS, DISTRIBUTIONS AND TAXES" for information on taxation. The Portfolios
will not normally engage in short-term trading, but each reserves the right to
do so. The tables set forth in the "Financial Highlights" section of each
Prospectus present the historical turnover rates for the Portfolios.
INVESTMENT COMPANIES. Each Portfolio reserves the right to invest up to 10% of
its total assets, calculated at the time of investment, in securities of other
open-end or closed-end investment companies. No more than 5% of an investing
Portfolio's total assets may be invested in securities of any one investment
company nor may it acquire more than 3% of the voting securities of any
investment company. A Portfolio will indirectly bear its proportionate share of
any management fees paid by an investment company in which it invests in
addition to its advisory fee.
FUTURE DEVELOPMENTS. Each Portfolio may invest in securities and other
instruments that do not presently exist but may be developed in the future,
provided that each such investment is consistent with the Portfolio's investment
objectives, policies and restrictions and is otherwise legally permissible under
federal and state laws. Each Portfolio's Prospectus and Statement of Additional
Information will be amended or supplemented as appropriate to discuss any such
new investments.
INVESTMENT RESTRICTIONS
Each Portfolio is subject to a number of investment restrictions that are
fundamental policies and may not be changed without the approval of the holders
of a majority of that Portfolio's outstanding voting securities (as defined in
the 1940 Act). Unless otherwise indicated, all percentage limitations apply to
each Portfolio on an individual basis, and apply only at the time the investment
is made; any subsequent change in any applicable percentage resulting from
fluctuations in value will not be deemed an investment contrary to these
restrictions.
Under the following fundamental restrictions, no Portfolio may:
(1) with respect to 75% of its assets, invest more than 5% of its total
assets at the time of purchase in the securities of any single issuer
(other than obligations issued or guaranteed as to principal and
interest by the government of the U.S. or any agency or
instrumentality thereof);
B-23
<PAGE>
(2) with respect to 75% of its assets, purchase more than 10% of any class
of the outstanding voting securities of any issuer;
(3) borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 331/3 % of
the Portfolio's gross assets valued at the lower of market or cost,
and the Portfolio may not purchase additional securities when
borrowings exceed 5% of total gross assets; or
(4) pledge, mortgage or hypothecate any of its assets to an extent greater
than 33-1/3% of its total assets at fair market value;
(5) invest in physical commodities or contracts on physical commodities;
(6) purchase or sell real estate or real estate limited partnerships,
although it may purchase and sell securities of companies which deal
in real estate and may purchase and sell securities which are secured
by interests in real estate; additionally, the Real Estate Securities
Portfolio may purchase and sell mortgage-related securities and
liquidate real estate acquired as a result of default on a mortgage
and may invest in marketable securities issued by companies such as
real estate investment trusts which deal in real estate or interests
therein and participation interests in pools of real estate mortgage
loans;
(7) make loans except (i) by purchasing debt securities in accordance with
its investment objectives; (ii) by lending its portfolio securities to
banks, brokers, dealers and other financial institutions so long as
such loans are not inconsistent with the 1940 Act or the rules and
regulations or interpretations of the Commission thereunder and (iii)
as otherwise permitted by exemptive order of the Commission;
(8) underwrite the securities of other issuers;
(9) issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit a Portfolio from (i)
making any permitted borrowings, mortgages or pledges, or (ii)
entering into options, futures or repurchase transactions;
(10) invest in futures and/or options on futures unless (i) not more than
5% of the Portfolio's assets are required as deposit to secure
obligations under such futures and/or options on futures contracts,
provided, however, that in the case of an option that is in-the-money
at the time of purchase, the in-the-money amount may be excluded in
computing such 5%; and (ii) not more than 20% of a Portfolio's assets
are invested in futures and options;
(11) purchase on margin except as specified in (10) above;
(12) invest more than an aggregate of 15% of the net assets of a Portfolio,
determined at the time of investment, in securities subject to legal
or contractual restrictions on resale or securities for which there
are no readily available markets.
B-24
<PAGE>
In addition, each Portfolio (other than the Real Estate Securities Portfolio)
adopted a fundamental policy that it will not acquire any securities of
companies within one industry if, as a result of such acquisition, more than 25%
of the value of the Portfolio's total assets would be invested in securities of
companies within such industry; provided, however, that there shall be no
limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, or instruments issued by U.S.
banks when the Portfolio adopts a temporary defensive position. The Real Estate
Securities Portfolio adopted a fundamental policy that its investments will be
concentrated in the real estate industry, which means that it will invest more
than 25% of its assets in that industry.
TRUSTEES AND OFFICERS
The following table lists the Trustees and executive officers of the Trust,
their ages, business addresses, and principal occupations during the past five
years. An asterisk indicates those Trustees who are interested persons of the
Trust within the meaning of the 1940 Act.
- - --------------------------------------------------------------------------------
NAME, AGE, ADDRESS POSITION WITH PRINCIPAL OCCUPATIONS
THE TRUST DURING PAST 5 YEARS
- - --------------------------------------------------------------------------------
George W. Gau, 52 Trustee Professor of Finance, George
8009 Long Canyon Drive S. of Watson Centennial
Austin, Texas 78730 Professor in Real Business,
Estate, College and Graduate
School University of Texas
at Austin since 1988; J.
Ludwig Mosle Centennial
Memorial Professor in
Investments and Money
Management, since 1996; and
Chairman of the Board and
Chief Executive Officer, The
MBA Investment Fund, L.L.C.,
a $10 million fund that is
the first private investment
company to be managed by
students, since 1994.
- - --------------------------------------------------------------------------------
*Dan L. Hockenbrough, 40 Trustee, President, President of Pembrook
5949 Sherry Lane, Suite 1600 Treasurer and Chief Securities, Inc. since 1999;
Dallas, Texas 75225 Financial Officer Partner of John McStay
Investment Counsel since
2000; since August 1996,
Business Manager of John
McStay Investment Counsel,
L.P. Formerly, Chief
Financial Officer of Waugh
Enterprises, Inc from
November 1995 until August
1996.
- - --------------------------------------------------------------------------------
B-25
<PAGE>
- - --------------------------------------------------------------------------------
NAME, AGE, ADDRESS POSITION WITH PRINCIPAL OCCUPATIONS
THE TRUST DURING PAST 5 YEARS
- - --------------------------------------------------------------------------------
John H. Massey, 60 Trustee Private investor and
4004 Windsor Avenue corporate director: The
Dallas, Texas 75205 Paragon Group, Inc.,
Chancellor Media Corporation
Inc., The Sunrise Television
Group, Inc., Bank of the
Southwest, Columbine JDS
Systems, Inc., FSW Holdings,
Inc., National Health
Insurance Corporation, Inc.,
and Central Texas Bankshares
Holdings, Inc. until August
1996, Chairman of the Board
and Chief Executive Officer
of Life Partners Group, Inc.
- - --------------------------------------------------------------------------------
David M. Reichert, 60 Trustee Private Investor; formerly
7415 Stonecrest Drive Senior Vice President of
Dallas, Texas 75240 Moffe Capital Management, an
investment counseling firm,
from January 1995 until June
1996.
- - --------------------------------------------------------------------------------
Tricia A. Hundley, 49 Vice President, Partner of John McStay
5949 Sherry Lane, Suite 1600 Secretary and Investment Counsel , L.P.,
Dallas, Texas 75225 Compliance Officer since 1987.
- - --------------------------------------------------------------------------------
Loren J. Soetenga, 31 Vice President Principal of John McStay
5949 Sherry Lane, Suite 1600 and Treasurer Investment Counsel, L.P.,
Dallas, Texas 75225 since 1996. Formerly,
Partner of Chronos
Management, Inc. until 1996.
- - --------------------------------------------------------------------------------
B-26
<PAGE>
- - --------------------------------------------------------------------------------
NAME, AGE, ADDRESS POSITION WITH PRINCIPAL OCCUPATIONS
THE TRUST DURING PAST 5 YEARS
- - --------------------------------------------------------------------------------
Peter C. Sutton, 35 Vice President and Senior Vice President,
The SunAmerica Center Assistant Treasurer SunAmerica Asset Management
733 Third Avenue Corp., since April 1997;
New York, NY 10017-3204 Treasurer, SunAmerica Equity
Funds, SunAmerica Income
Funds and SunAmerica Money
Market Funds since February
1996, Anchor Series Trust
since 1994, Style Select
Series, Inc. since September
1996 and SunAmerica
Strategic Investment Series,
Inc. since December 1998;
Vice President and Assistant
Treasurer of SunAmerica
Series Trust and Anchor
Pathway Fund since 1994;
Vice President, Seasons
Series Trust since April
1997; formerly, Vice
President, SunAmerica Asset
Management Corp., from 1994
to 1997; Controller,
SunAmerica Equity Funds,
SunAmerica Income Funds,
SunAmerica Money Market
Funds and Anchor Series
Trust, from March 1993 to
February 1996.
- - --------------------------------------------------------------------------------
Robert M. Zakem, 42 Vice President and Senior Vice President and
The SunAmerica Center Assistant Secretary General Counsel, SunAmerica
733 Third Avenue Asset Management Corp.,
New York, NY 10017-3204 since April 1993; Executive
Vice President, General
Counsel and Director,
SunAmerica Capital Services,
Inc., since August 1993;
Vice President, General
Counsel and Assistant
Secretary, SunAmerica Fund
Services, Inc., since
January 1994; Vice
President, SunAmerica Series
Trust, Anchor Pathway Fund
and Seasons Series Trust;
Secretary and Chief
Compliance Officer, Anchor
Series Trust, SunAmerica
Equity Funds, SunAmerica
Income Funds and SunAmerica
Money Market Funds, since
1993; Secretary and Chief
Compliance Officer, Style
Select Series, Inc., since
1996; Secretary, SunAmerica
Strategic Investment Series,
Inc., since 1998.
- - --------------------------------------------------------------------------------
B-27
<PAGE>
The Trustees of the Trust are responsible for the overall supervision of
the operation of the Trust and each Portfolio and perform various duties imposed
on trustees of investment companies by the 1940 Act and under the Trust's
Agreement and Declaration of Trust. Officers of the Trust are also officers of
some or all of the other investment companies managed, administered or advised
by John McStay Investment Counsel, L.P. (the "Adviser") or its affiliates.
The Trust pays each Trustee, who is not also an officer or affiliated
person, a $1,250 quarterly retainer fee per Portfolio which currently amounts to
$6,250 per quarter. In addition, each unaffiliated Trustee receives a fee of
$1,250 per regular meeting and a fee of $1,250 per special meeting, and
reimbursement for travel and other expenses incurred while attending Board
meetings. The fees are aggregated for all the Trustees and allocated
proportionately among the Portfolios of the Trust. Trustees who are also
officers or affiliated persons receive no remuneration for their service as
Trustees. The Trust's officers and employees are paid by either the Adviser or
the Administrator (as defined below) and receive no compensation from the Trust.
The following table shows aggregate compensation paid to each of the Trustees
for the fiscal period ended November 30, 1999.
<TABLE>
<CAPTION>
COMPENSATION TABLE
(1) (2) (3) (4) (5)
Name of Person Aggregate Pension or Estimated Annual Total Compensation
Position Compensation Retirement Benefits Benefits Upon from Registrant and
From Registrant Accrued as Part of Retirement Company Complex Paid
Company Expenses to Trustees
===================================================================================================================
<S> <C> <C> <C> <C>
George W. Gau $20,000 -0- -0- $20,000
Trustee
Dan L. Hockenbrough -0- -0- -0- -0-
Trustee
John H. Massey $26,750 -0- -0- $26,750
Trustee
David M. Reichert $26,750 -0- -0- $26,750
Trustee
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES
As of February 29, 2000, the Trustees and officers of the Trust owned in
the aggregate less than 1% of each class of the Trust's total outstanding
shares.
B-28
<PAGE>
The following shareholders owned of record or beneficially 5% or more of
the indicated portfolio class shares outstanding as of February 29, 2000:
Micro Cap Growth Portfolio, Class Y Shares
National Investor Serv 7.12%
55 Water Street, 32nd Floor
New York, NY 10041-3299
National Financial Services 9.46%
One World Financial Center
200 Liberty Street
New York, NY 10281-1003
Charles Schwab & Co. Inc. 14.01%
Spec Custody for Benefit of Custodian
Ste 700 Team P-Mutual Fund Operations
4500 Cherry Creek Drive - South
Denver, CO 80246
Small Cap Growth Portfolio, Class Y Shares
Charles Schwab & Co. Inc. 13.62%
Spec Custody for Benefit of Custodian
Ste 700 Team P-Mutual Fund Operations
4500 Cherry Creek Drive - South
Denver, CO 80246
Boston Safe Deposit & Trust Company 6.16%
The Southwest Airlines Pilots Association
Retirement Savings Plan
U/A DTD Jan 01 96
135 Santilli Hwy #26-0320
Everett, MA 02149-1906
Small Cap Growth Portfolio, Class A Shares
SunAmerica Asset Management Corp 8.26%
Attn: Manpratap Shiwnath
733 Third Avenue, 4th Floor
New York, NY 10017-3204
Charles Schwab & Co. Inc. 43.40%
Spec Custody for Benefit of Custodian
Ste 700 Team P-Mutual Fund Operations
4500 Cherry Creek Drive - South
Denver, CO 80246
B-29
<PAGE>
Small Cap Growth Portfolio, Class B Shares
SunAmerica Asset Management Corp 14.75%
Attn: Frank Curran
733 Third Avenue, 3rd Floor
New York, NY 10017-3204
Donaldson Lufkin Jenrette 8.57%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
Donaldson Lufkin Jenrette 6.13%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
Small Cap Growth Portfolio, Class II Shares
Lois C. Springer 7.38%
TOD Robert C. Springer
14 Scarlet Oak Road
Levittown, PA 19056-1702
Robert C. Springer & 25.30%
Lois C. Springer JTWROS
14 Scarlet Oak Road
Levittown, PA 19056-1702
SunAmerica Asset Management Corp 25.54%
Attn: Frank Curran
733 Third Avenue, 3rd Floor
New York, NY 10017-3204
Donaldson Lufkin Jenrette 5.20%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
------------------------------------------------------------
B-30
<PAGE>
Mid Cap Growth Portfolio, Class Y Shares
AWP Investment Partnership, Ltd. 11.29%
C/O Philip J. Boschett
801 Cherry Street, Ste. 1500
For Worth, TX 76102-6815
R D & Joan Dale Hubbard 7.79%
Foundation Inc.
73-405 El Paseo, #32-D
Palm Desert, CA 92260-4214
R D Hubbard 5.20%
73-405 El Paseo, #32-D
Palm Desert, CA 92260-4214
Multi Cap Growth Portfolio, Class Y Shares
Verb & Co. 15.81%
FBO Community Foundation
Silicon Valley
4380 SW Macadam Avenue, Ste. 450
Portland, OR 97201-6407
John McStay & Ellen McStay JT Ten 5.10%
5949 Sherry Lane, Ste. 1600
Dallas, TX 75225-8012
Thomas J. Musick 6.07%
5949 Sherry Lane, Ste. 1600
Dallas, TX 75225-8012
R D & Joan Dale Hubbard 10.00%
Foundation Inc.
73-405 El Paseo, #32-D
Palm Desert, CA 92260-4214
R D Hubbard 6.72%
73-405 El Paseo, #32-D
Palm Desert, CA 92260-4214
------------------------------------------------------------
B-31
<PAGE>
Real Estate Securities Portfolio, Class Y Shares
State Street Bank & Trust Company 6.20%
FBO United Svcs Automobile Assoc
Retirement Svgs Plan
105 Rosemont Road
Westwood, MA 02090-2318
Charles Schwab & Co. Inc. 5.32%
Spec Custody for Benefit of Custodian
Ste 700 Team P-Mutual Fund Operations
4500 Cherry Creek Drive - South
Denver, CO 80246
Suntrust Bank Atlanta Custodian 6.49%
FBO University of Georgia Foundation
U/A/D 3-19-97
P.O. Box 105870
Atlanta, GA 30348-5870
Lafayette College 8.80%
Attn: Rosemary Bader, Asst. Treasurer
234 Markle Hall
Easton, PA 18042
Clarian Health Partners Inc. 6.15%
Attn: Rick Vorhies
1515 N. Senate Avenue, Fl. 1
Indianapolis, IN 46202-2212
Texas Tech University 8.59%
P.O. Box 41098
Lubbock, TX 79409-1098
The Lemelson Foundation 6.96%
PMB #363 930 Tahoe Blvd #802
Incline Village, NV 89451
Real Estate Securities Portfolio, Class A Shares
SunAmerica Asset Management Corp 78.12%
Attn: Manpratap Shiwnath
733 Third Avenue, 4th Floor
New York, NY 10017-3204
Older Discount FBO 21403427 16.24%
751 Griswold Street
Detroit, MI 48226-3224
B-32
<PAGE>
Real Estate Securities Portfolio, Class B Shares
SunAmerica Asset Management Corp 38.10%
Attn: Frank Curran
733 Third Avenue, 3rd Floor
New York, NY 10017-3204
Merrill Lynch, Pierce, Fenner & Smith, Inc. 52.52%
for the Sole Benefit of its Customers
Attn: Service Team SEC # 970K6
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Donaldson Lufkin Jenrette 5.45%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
Real Estate Securities Portfolio, Class II Shares
SunAmerica Asset Management Corp 25.54%
Attn: Frank Curran
733 Third Avenue, 3rd Floor
New York, NY 10017-3204
Donaldson Lufkin Jenrette 10.00%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
Donaldson Lufkin Jenrette 5.77%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
B-33
<PAGE>
ADVISER, PERSONAL TRADING,
DISTRIBUTOR AND ADMINISTRATOR
THE ADVISER. John McStay Investment Counsel, L.P. ("JMIC" or the "Adviser"),
which was formed in 1983, is located at 5949 Sherry Lane, Suite 1600, Dallas,
Texas 75225. JMIC acts as adviser to each of the Portfolios pursuant to (i) the
Investment Advisory Agreements dated June 25, 1999 with the Trust, on behalf of
the Micro Cap Growth Portfolio, Small Cap Growth Portfolio, Multi Cap Growth
Portfolio and Real Estate Securities Portfolio, and (ii) the Investment Advisory
Agreement dated October 14, 1999 with the Trust, on behalf of the Mid Cap Growth
Portfolio (together, the "Advisory Agreements").
On June 30, 1999, JMIC reorganized and completed the sale of an 80%
managing membership interest in JMIC to American International Group, Inc.
("AIG") resulting in JMIC becoming a majority owned indirect subsidiary of AIG
and minority owned by the employees of JMIC. AIG is the leading U.S.-based
international insurance organization. AIG, a Delaware corporation, is a holding
company that through its subsidiaries is primarily engaged in a broad range of
insurance and insurance related activities and financial services in the United
States and abroad.
Under the Advisory Agreements, the Adviser manages the investment of the
assets of each Portfolio and obtains and evaluates economic, statistical and
financial information to formulate and implement investment policies for each
Portfolio. Any investment program undertaken by the Adviser will at all times be
subject to the policies and control of the Trustees.
Except to the extent otherwise specified in the Advisory Agreements, each
Portfolio pays, or causes to be paid, all other expenses of the Trust and each
of the Portfolios, including, without limitation, brokerage commissions and all
other costs of the Trust's operation.
As compensation for services rendered by the Adviser under the Advisory
Agreements, the Portfolios pay the Adviser an annual fee in monthly
installments, calculated by applying the following annual percentage rates to
the Portfolios' average daily net assets for the month:
Micro Cap Growth Portfolio ............................................. 1.20%
Small Cap Growth Portfolio ............................................. 0.90%
Mid Cap Growth Portfolio................................................ 0.90%
Multi Cap Growth Portfolio ............................................. 0.90%
Real Estate Securities Portfolio ....................................... 0.90%
B-34
<PAGE>
The following table sets forth the total advisory fees received by the
Adviser from each Portfolio pursuant to the Advisory Agreements for the fiscal
years ended November 30, 1999, 1998 and 1997.
ADVISORY FEES
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------
ADVISORY FEES* ADVISORY FEES WAIVED
- - --------------------------------------------------------------------------------------------------------------
PORTFOLIO 1999 1998 1997 1999 1998 1997
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Micro Cap Growth $972,652 $326,266 N/A $0 $76,089 N/A
Portfolio(1)
- - --------------------------------------------------------------------------------------------------------------
Small Cap Growth $4,480,753 $1,578,588 $239,078 $0 $0 $107,342
Portfolio(2)
- - --------------------------------------------------------------------------------------------------------------
Mid Cap Growth N/A N/A N/A N/A N/A N/A
Portfolio(3)
- - --------------------------------------------------------------------------------------------------------------
Multi Cap Growth $128,625 N/A N/A $76,263 N/A N/A
Portfolio(4)
- - --------------------------------------------------------------------------------------------------------------
Real Estate Securities $1,075,480 $712,269 $237,702 $0 $47,708 $139,015
Portfolio (5)
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
* Without giving effect to voluntary fee waivers or expense reimbursements.
(1) Commencement of operations: 12/31/97.
(2) Commencement of operations: 12/31/96.
(3) Commencement of operations: 12/31/99.
(4) Commencement of operations: 12/31/98.
(5) Commencement of operations: 12/31/96.
The following table sets forth the fee waivers and expense reimbursements
made to the Portfolios by the Adviser/Administrator for the fiscal years ended
November 30, 1999, 1998, and 1997.
Fee Waivers and Expense Reimbursements
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------
Portfolio 1999 1998 1997
- - ------------------------------------------------------------------------------------------------------------------
Class A Class B Class II Class Y Class Y Class Y
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Micro Cap Growth Portfolio(1) N/A N/A N/A $0 $76,089 N/A
- - ------------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio(2) $62 $91 $67 $0 $0 $107,342
- - ------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio(3) N/A N/A N/A N/A N/A N/A
- - ------------------------------------------------------------------------------------------------------------------
Multi Cap Growth Portfolio(4) N/A N/A N/A $16,727 N/A N/A
- - ------------------------------------------------------------------------------------------------------------------
Real Estate Securities Portfolio(5) $61 $61 $60 $0 $47,708 $139,015
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commencement of operations: 12/31/97.
(2) Commencement of operations: 12/31/96.
(3) Commencement of operations: 12/31/99.
(4) Commencement of operations: 12/31/98.
(5) Commencement of operations: 12/31/96.
B-35
<PAGE>
Each Advisory Agreement continues in effect from year to year provided that
such continuance is approved annually by vote of a majority of the Trustees
including a majority of the disinterested Trustees or by the holders of a
majority of the respective Portfolio's outstanding voting securities. Each
Advisory Agreement may be terminated with respect to a Portfolio at any time,
without penalty, on 60 days' written notice by the Trustees, by the holders of a
majority of the respective Portfolio's outstanding voting securities or by the
Adviser. Each Advisory Agreement automatically terminates with respect to each
Portfolio in the event of its assignment (as defined in the 1940 Act and the
rules thereunder).
Under the terms of each Advisory Agreement, the Adviser is not
liable to the Portfolios, or their shareholders, for any act or omission by it
or for any losses sustained by the Portfolios or their shareholders, except in
the case of willful misfeasance, bad faith, gross negligence or reckless
disregard of duty.
The Adviser provides investment management services to institutions
and individuals and as of March 24, 2000 had approximately $5.8 billion in
assets under management. The Adviser may compensate its affiliated companies for
referring investors to the Portfolios. The Adviser, or any of its affiliates,
may, at its own expense, compensate a Service Agent (as defined herein) or other
person for marketing, shareholder servicing, record-keeping and/or other
services performed with respect to the Trust or a Portfolio. Payments made for
any of these purposes may be made from the paying entity's revenues, its profits
or any other source available to it. When such service arrangements are in
effect, they are made generally available to all qualified service providers.
PERSONAL TRADING. The Trust and the Adviser have adopted a written
Code of Ethics, which prescribes general rules of conduct and sets forth
guidelines with respect to personal securities trading by "Access Persons"
thereof. An Access Person as defined in the Code of Ethics is an individual who
is a trustee, officer, general partner or advisory person of the Trust. The
guidelines on personal securities trading include: (i) securities being
considered for purchase or sale, or purchased or sold, by any Investment Company
advised by the Adviser, (ii) Initial Public Offerings, (iii) private placements,
(iv) blackout periods, (v) short-term trading profits, (vi) gifts, and (vii)
services as a trustee. These guidelines are substantially similar to those
contained in the Report of the Advisory Group on Personal Investing issued by
the Investment Company Institute's Advisory Panel. The Adviser reports to the
Board of Trustees on a quarterly basis, as to whether there were any violations
of the Code of Ethics by Access Persons of the Trust or the Adviser during the
quarter.
THE DISTRIBUTOR. The Trust, on behalf of Class A, B and II shares
of the Trust, has entered into a distribution agreement (the "Class A, B and II
Distribution Agreement") with SunAmerica Capital Services, Inc. ("SACS" or the
"Distributor"), a registered broker-dealer and an indirect wholly-owned
subsidiary of AIG, to act as the principal underwriter in connection with the
continuous offering of the Class A, B and II shares of each Portfolio. The
address of the Distributor is The SunAmerica Center, 733 Third Avenue, New York,
NY 10017-3204. The Class A, B and II Distribution Agreement provides that the
Distributor has the exclusive right to distribute shares of the Portfolios
through its registered representatives and authorized broker-dealers. The Class
A, B and II Distribution Agreement also provides that the Distributor will pay
the promotional expenses, including the incremental cost of printing
Prospectuses, annual reports and other periodic reports with respect to each
Portfolio, for distribution to persons who are not shareholders of such
Portfolio and the costs of preparing and distributing any other supplemental
sales literature. However, certain promotional expenses may be borne by the
Portfolios (see "Distribution Plans" below).
B-36
<PAGE>
The Trust, on behalf of the Class Y shares of the Trust, has also
entered into a distribution agreement (the "Class Y Distribution Agreement" and
together with the Class A, B and II Distribution Agreement, the "Distribution
Agreements") with SACS. SACS receives no compensation for distribution of Class
Y shares of the Trust, except for reimbursement by the Adviser of out-of-pocket
expenses.
Continuance of the Distribution Agreements with respect to each
Portfolio is subject to annual approval by vote of the Trustees, including a
majority of the Trustees who are not "interested persons" of the Trust. The
Trust and the Distributor each has the right to terminate the Distribution
Agreements with respect to a Portfolio on 60 days' written notice, without
penalty. The Distribution Agreements will terminate automatically in the event
of its assignment as defined in the 1940 Act and the rules thereunder.
The Distributor may, from time to time, pay additional commissions
or promotional incentives to brokers, dealers or other financial services firms
that sell shares of the Portfolios. In some instances, such additional
commissions, fees or other incentives may be offered only to certain firms,
including Royal Alliance Associates, Inc., SunAmerica Securities, Inc., Keogler
Morgan & Company, Financial Service Corporation and Advantage Capital
Corporation, affiliates of the Distributor, that sell or are expected to sell
during specified time periods certain minimum amounts of shares of the
Portfolios, or of other funds underwritten by the Distributor. In addition, the
terms and conditions of any given promotional incentive may differ from firm to
firm. Such differences will, nevertheless, be fair and equitable, and based on
such factors as size, geographic location, or other reasonable determinants, and
will in no way affect the amount paid to any investor.
DISTRIBUTION PLANS. Rule 12b-1 under the 1940 Act permits an
investment company directly or indirectly to pay expenses associated with the
distribution of its shares in accordance with a plan adopted by the investment
company's board of directors/trustees. Pursuant to such rule, the Portfolios
have adopted Distribution Plans for Class A, Class B and Class II shares
(hereinafter referred to as the "Class A Plan," the "Class B Plan" and the
"Class II Plan" and collectively as the "Distribution Plans"). Class Y shares do
not have a distribution plan.
The sales charge and distribution fees of a particular class will
not be used to subsidize the sale of shares of any other class. Reference is
made to the Prospectuses for certain information with respect to the
Distribution Plans.
Under the Class A Plan,the Distributor may receive payments from a
Portfolio at an annual rate of up to 0.10% of average daily net assets of a
Portfolio's Class A shares to compensate the Distributor and certain securities
firms for providing sales and promotional activities for distributing that class
of shares. Under the Class B and Class II Plans, the Distributor may receive
payments from the relevant Portfolio at the annual rate of up to 0.75% of the
average daily net assets of such Portfolio's Class B or Class II shares to
compensate the Distributor and certain securities firms for providing sales and
promotional activities for distributing that class of shares. The distribution
costs for which the Distributor may be reimbursed out of such distribution fees
include fees paid to broker-dealers that have sold Portfolio shares, commissions
and other expenses such as sales literature, prospectus printing and
distribution and compensation to wholesalers.
B-37
<PAGE>
The Distribution Plans provide that each class of shares of the
relevant Portfolio may also pay the Distributor an account maintenance and
service fee of up to 0.25% of the aggregate average daily net assets of such
class of shares for payments to broker-dealers for providing continuing account
maintenance. In this regard, some payments are used to compensate broker-dealers
with trail commissions or account maintenance and service fees in an amount up
to 0.25% per year of the assets maintained in a Portfolio by their customers.
It is possible that in any given year the amount paid to the
Distributor under any of the Distribution Plans will exceed the Distributor's
distribution costs as described above.
The following table sets forth the distribution and account
maintenance and service fees the Distributor received from the Portfolios, with
respect to the Class A, B and II shares of such Portfolios, for the fiscal year
ended November 30, 1999.
Distribution and Account Maintenance and Service Fees
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------
Portfolio 1999
- - ----------------------------------------------------------------------------------------------------------
Class A Class B Class II
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Micro Cap Growth Portfolio N/A N/A N/A
- - ----------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio* $159 $645 $489
- - ----------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio N/A N/A N/A
- - ----------------------------------------------------------------------------------------------------------
Multi Cap Growth Portfolio N/A N/A N/A
- - ----------------------------------------------------------------------------------------------------------
Real Estate Securities Portfolio* $116 $337 $332
- - ----------------------------------------------------------------------------------------------------------
</TABLE>
* For the period from 9/8/99 (commencement of offering of shares).
Continuance of the Distribution Plans with respect to a Portfolio
is subject to annual approval by vote of the Trustees, including a majority of
the disinterested Trustees. A Distribution Plan may not be amended to increase
materially the amount authorized to be spent thereunder with respect to a class
of shares of a Portfolio, without approval of the shareholders of the affected
class of shares of such Portfolio. In addition, all material amendments to the
Distribution Plans must be approved by the Trustees in the manner described
above. A Distribution Plan may be terminated at any time with respect to a
Portfolio without payment of any penalty by vote of a majority of the
disinterested Trustees or by vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the affected class of shares of such
Portfolio. So long as the Distribution Plans are in effect, the election and
nomination of the Independent Trustees of the Trust shall be committed to the
discretion of the disinterested Trustees. In the Trustees' quarterly
review of the Distribution Plans, they will consider the continued
appropriateness of, and the level of, compensation provided in the Distribution
Plans. In their consideration of the Distribution Plans with respect to a
Portfolio, the Trustees must consider all factors they deem relevant, including
information as to the benefits of the Portfolio and the shareholders of the
relevant class of the Portfolio.
B-38
<PAGE>
THE ADMINISTRATOR. SunAmerica Asset Management Corp. ("SAAMCo" or the
"Administrator"), The SunAmerica Center, 733 Third Avenue, New York, New York
10017 serves as Administrator to the Trust and also provides accounting services
to the Trust. The Administrator is a SunAmerica Company and an indirect
wholly-owned subsidiary of AIG.
The Administrator supplies office facilities, non-investment
related statistical and research date, stationery and office supplies, executive
and administrative services, internal auditing and regulatory compliance
services. The Administrator also assists in the preparation of reports to
shareholders, prepares proxy statements, updates prospectuses and makes filings
with the Securities and Exchange Commission and state securities authorities.
The Administrator performs certain budgeting and financial reporting and
compliance monitoring activities. For the services provided, the Administrator
receives an annual fee from the Trust equal to the greater of: (1) a minimum
annual fee of $35,000 for the first Portfolio, $25,000 for the next three
Portfolios, and $20,000 for any additional Portfolios; or (2) an asset-based fee
for each Portfolio, equal to a percentage of the average daily net assets of
such Portfolio, according to the following schedule:
0.07% on the first $200 million;
0.06% on the next $500 million;
0.04% on the balance.
Prior to SAAMCo serving as Administrator, Firstar Mutual Fund
Services, LLC ("Firstar") served as administrator, account agent, transfer agent
and dividend paying agent; prior to Firstar serving in such capacities, PFPC,
Inc. ("PFPC") provided similar services to the Trust; prior to PFPC serving in
such capacities, Rodney Square Management Corporation ("Rodney Square") provided
similar services to the Trust.
The Administrator's fee shall be payable monthly, as soon as
practicable after the last day of each month, based on the Portfolio's average
daily net assets as determined at the close of business on each business day
throughout the month.
The following table sets forth the total administration fees
received by the relevant administrator from each Portfolio pursuant to the
applicable administration agreement for the fiscal years ended November 30,
1999, 1998 and 1997.
ADMINISTRATION FEES
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------------
ADMINISTRATION FEES ADMINISTRATION FEES WAIVED
- - -------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO 1999 1998 1997 1999 1998 1997
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Micro Cap Growth Portfolio(1) $ 57,271 $ 25,335 $0 $0 $2,124 $0
- - -------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio(2) $329,034 $156,579 $42,986 $0 $0 $4,051
- - -------------------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio(3) N/A N/A N/A N/A N/A N/A
- - -------------------------------------------------------------------------------------------------------------------------------
Multi Cap Growth Portfolio(4) $ 13,760 N/A N/A $3,125 N/A N/A
- - -------------------------------------------------------------------------------------------------------------------------------
Real Estate Securities $ 85,854 $ 74,824 $41,826 $0 $0 $4,051
Portfolio(5)
- - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commencement of operations: 12/31/97.
(2) Commencement of operations: 12/31/96.
(3) Commencement of operations: 12/31/99.
(4) Commencement of operations: 12/31/98.
(5) Commencement of operations: 12/31/96.
B-39
<PAGE>
The Trust has entered into a Service Agreement, under the terms of
which SunAmerica Fund Services, Inc. ("SAFS"), an indirect wholly-owned
subsidiary of AIG, acts as a servicing agent assisting State Street Bank and
Trust Company ("State Street") in connection with certain services offered to
the shareholders of each of the Portfolios. Under the terms of the Service
Agreement, SAFS may receive reimbursement of its costs in providing such
shareholder services. SAFS is located at The SunAmerica Center, 733 Third
Avenue, New York, NY 10017-3204.
Pursuant to the Service Agreement, as compensation for services
rendered, SAFS receives a fee from each Portfolio, computed and payable monthly
based upon an annual rate of 0.22% of average daily net assets. This fee
represents the full cost of providing shareholder and transfer agency services
to the Trust. From this fee, SAFS pays a fee to State Street, and its affiliate,
National Financial Data Services ("NFDS" and with State Street, the "Transfer
Agent") (other than out-of-pocket charges of the Transfer Agent which are paid
by the Trust). For further information regarding the Transfer Agent, see the
section entitled "Additional Information" below.
The Service Agreement dated June 25, 1999 continues in effect from
year to year provided that such continuance is approved annually by vote of a
majority of the Trustees including a majority of the disinterested Trustees.
PORTFOLIO TRANSACTIONS AND BROKERAGE
As discussed in the Prospectus, the Adviser is responsible for
decisions to buy and sell securities for each Portfolio, selection of
broker-dealers and negotiation of commission rates. Purchases and sales of
securities on a securities exchange are effected through broker-dealers who
charge a negotiated commission for their services. Orders may be directed to any
broker-dealer including, to the extent and in the manner permitted by applicable
law, an affiliated brokerage subsidiary of the Adviser.
In the over-the-counter market, securities are generally traded on
a "net" basis with dealers acting as principal for their own accounts without a
stated commission (although the price of the security usually includes a profit
to the dealer). In underwritten offerings, securities are purchased at a fixed
price that includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion, certain
money market instruments may be purchased directly from an issuer, in which case
no commissions or discounts are paid.
The Adviser's primary consideration in effecting a security
transaction is to obtain the best net price and the most favorable execution of
the order. However, the Adviser may select broker-dealers that provide it with
research services -- analyses and reports concerning issuers, industries,
securities, economic factors and trends -- and may cause a Portfolio to pay such
broker-dealers commissions that exceed those that other broker-dealers may have
charged, if in its view the commissions are reasonable in relation to the value
of the brokerage and/or research services provided by the broker-dealer. Certain
research services furnished by brokers may be useful to the Adviser with clients
other than the Trust and may not be used in connection with the Trust. No
specific value can be determined for research services furnished without cost to
the Adviser by a broker. The Adviser is of the opinion that because the material
must be analyzed and reviewed by its staff, its receipt does not tend to reduce
expenses, but may be beneficial in supplementing the Adviser's research and
analysis. Therefore, it may tend to benefit the Portfolios by improving the
quality of the Adviser's investment advice. The investment advisory fees paid by
the Portfolios are
B-40
<PAGE>
not reduced because the Adviser receives such services. When making purchases of
underwritten issues with fixed underwriting fees, the Adviser may designate the
use of broker-dealers who have agreed to provide the Adviser with certain
statistical, research and other information.
Subject to applicable law and regulations, consideration may also
be given to the willingness of particular brokers to sell shares of a Portfolio
as a factor in the selection of brokers for transactions effected on behalf of a
Portfolio, subject to the requirement of best price and execution.
The Adviser may effect portfolio transactions through an affiliated
broker-dealer, acting as an agent and not as principal, in accordance with Rule
17e-1 under the 1940 Act and other applicable securities laws.
Although the objectives of other accounts or investment companies
that the Adviser manages may differ from those of the Portfolios, it is possible
that, at times, identical securities will be acceptable for purchase by one or
more of the Portfolios and one or more other accounts or investment companies
that the Adviser manages. However, the position of each account or company in
the securities of the same issue may vary with the length of the time that each
account or company may choose to hold its investment in those securities. The
timing and amount of purchase by each account and company will also be
determined by its cash position. If the purchase or sale of a security is
consistent with the investment policies of one or more of the Portfolios and one
or more of these other accounts or companies is considered at or about the same
time, transactions in such securities will be allocated in a manner deemed
equitable by the Adviser. The Adviser may combine such transactions, in
accordance with applicable laws and regulations, where the size of the
transaction would enable it to negotiate a better price or reduced commission.
However, simultaneous transactions could adversely affect the ability of a
Portfolio to obtain or dispose of the full amount of a security that it seeks to
purchase or sell, or the price at which such security can be purchased or sold.
The following tables set forth the brokerage commissions paid by
the Portfolios and the amounts of the brokerage commissions paid to affiliated
broker-dealers by the Portfolios for the fiscal years ended November 30, 1999,
1998 and 1997.
1999 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------
AMOUNT PAID TO
AGGREGATE AFFILIATED PERCENTAGE PAID TO AFFILIATED
BROKERAGE BROKER-DEALERS BROKER-DEALERS
COMMISSIONS
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Micro Cap Growth Portfolio(1) $132,320 $27,212 20.57%
- - ------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio(2) $983,991 $386,992 39.33%
- - ------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio(3) N/A N/A N/A
- - ------------------------------------------------------------------------------------------------------------
Multi Cap Growth Portfolio(4) $48,884 $24,411 49.94%
- - ------------------------------------------------------------------------------------------------------------
Real Estate Securities $874,074 $36,492 4.17%
Portfolio(5)
- - ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commencement of operations: 12/31/97.
(2) Commencement of operations: 12/31/96.
(3) Commencement of operations: 12/31/99.
(4) Commencement of operations: 12/31/98.
(5) Commencement of operations: 12/31/96.
B-41
<PAGE>
1998 Brokerage Commissions*
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------
Aggregate Brokerage Commissions
- - ------------------------------------------------------------------------------------------------------------
<S> <C>
Micro Cap Growth Portfolio(1) $ 566,035
- - ------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio(2) $1,999,496
- - ------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio(3) N/A
- - ------------------------------------------------------------------------------------------------------------
Multi Cap Growth Portfolio(4) N/A
- - ------------------------------------------------------------------------------------------------------------
Real Estate Securities Portfolio(5) $851,896
- - ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commencement of operations: 12/31/97.
(2) Commencement of operations: 12/31/96.
(3) Commencement of operations: 12/31/99.
(4) Commencement of operations: 12/31/98.
(5) Commencement of operations: 12/31/96.
* Pembrook Securities ("Pembrook"), a brokerage firm directly owned by the
Adviser of the Portfolios, directly effects purchases and sales of securities
for the Portfolios. In connection therewith, brokerage commissions paid by the
Portfolios for the year ended November 30, 1998 totaled $203,723.
1997 Brokerage Commissions
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------
Aggregate Brokerage Commissions
- - ------------------------------------------------------------------------------------------------------------
<S> <C>
Micro Cap Growth Portfolio(1) N/A
- - ------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio(2) $132,283
- - ------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio(3) N/A
- - ------------------------------------------------------------------------------------------------------------
Multi Cap Growth Portfolio(4) N/A
- - ------------------------------------------------------------------------------------------------------------
Real Estate Securities Portfolio(5) $316,900
- - ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commencement of operations: 12/31/97.
(2) Commencement of operations: 12/31/96.
(3) Commencement of operations: 12/31/99.
(4) Commencement of operations: 12/31/98.
(5) Commencement of operations: 12/31/96.
ADDITIONAL INFORMATION REGARDING PURCHASE
OF CLASS A, B AND II SHARES
Upon making an investment in shares of a Portfolio, an open account
will be established under which Class A, B and II shares of such Portfolio and
additional Class A, B and II shares acquired through reinvestment of dividends
and distributions will be held for each shareholder's account by the Transfer
Agent. Shareholders will not be issued certificates for their Class A, B and II
shares unless they specifically so request in writing but no certificate is
issued for fractional Class A, B and II shares. Shareholders receive regular
statements from the Transfer Agent that report each transaction affecting their
accounts. Further information may be obtained by calling Shareholder/Dealer
Services at (800) 858-8850.
B-42
<PAGE>
Shareholders who have met the Portfolio's minimum initial
investment may elect to have periodic purchases made through a dollar cost
averaging program. At the shareholder's election, such purchases may be made
from their bank checking or savings account on a monthly, quarterly, semiannual
or annual basis. Purchases can be made via electronic funds transfer through the
Automated Clearing House or by physical draft check. Purchases made via physical
draft check require an authorization card to be filed with the shareholder's
bank.
Class A, B and II shares of each of the Portfolios are sold at the
respective net asset value next determined after receipt of a purchase order,
plus a sales charge, which, at the election of the investor, may be imposed (i)
at the time of purchase (Class A shares), (ii) on a deferred basis (Class B and
certain Class A shares), or (iii) may contain certain elements of a sales charge
that is imposed at the time of purchase and that is deferred (Class II shares).
The following table set forth the front-end sales concessions with
respect to Class A and Class II shares of each Portfolio, the amount of the
front-end sales concessions reallowed to affiliated broker-dealers, and the
contingent deferred sales charges with respect to Class B and Class II shares of
each Portfolio, received by the Distributor for the fiscal year ended November
30, 1999.
<TABLE>
<CAPTION>
1999
- - -------------------------------------------------------------------------------------------------------------------------------
Front-End Front-End Amount Contingent Contingent
Portfolio Sales Sales Reallowed to Deferred Sales Deferred Sales
Concessions- Concessions- Affiliated Charge-Class B Charge-Class II
Class A Shares Class II Shares Broker-Dealers Shares Shares
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Micro Cap Growth Portfolio N/A N/A N/A N/A N/A
- - -------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio* $9,841 $1,875 $5,168 $0 $0
- - -------------------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio N/A N/A N/A N/A N/A
- - -------------------------------------------------------------------------------------------------------------------------------
Multi Cap Growth Portfolio N/A N/A N/A N/A N/A
- - -------------------------------------------------------------------------------------------------------------------------------
Real Estate Securities Portfolio * $0 $37 $0 $0 $0
- - -------------------------------------------------------------------------------------------------------------------------------
* For the period of 9/8/99 (commencement of offering of shares).
</TABLE>
Waiver of CDSC. As discussed under "Shareholder Account Information" in the
Class A, B and II Prospectus, CDSCs may be waived on redemptions of Class B and
Class II shares under certain circumstances. The conditions set forth below are
applicable with respect to the following situations with the proper
documentation:
DEATH. CDSCs may be waived on redemptions within one year following the death
(i) of the sole shareholder on an individual account, (ii) of a joint tenant
where the surviving joint tenant is the deceased's spouse, or (iii) of the
beneficiary of a Uniform Gifts to Minors Act, Uniform Transfers to Minors Act or
other custodial account. The CDSC waiver is also applicable in the case where
the shareholder account is registered as community property. If, upon the
occurrence of one of the foregoing, the account is transferred to an account
registered in the name of the deceased's estate, the CDSC will be waived on any
redemption from the estate account occurring within one year of the death. If
the Class B or Class II shares are not redeemed within one year of the death,
they will
B-43
<PAGE>
remain Class B or Class II shares, as applicable, and be subject to the
applicable CDSC, when redeemed.
DISABILITY. CDSCs may be waived on redemptions occurring within one year after
the sole shareholder on an individual account or a joint tenant on a spousal
joint tenant account becomes disabled (as defined in Section 72(m)(7) of the
Code). To be eligible for such waiver, (i) the disability must arise after the
purchase of shares and (ii) the disabled shareholder must have been under age 65
t the time of the initial determination of disability. If the account is
transferred to a new registration and then a redemption is requested, the
applicable CDSC will be charged.
PURCHASES THROUGH THE DISTRIBUTOR. An investor may purchase shares of a
Portfolio through dealers that have entered into selected dealer agreements with
the Distributor. An investor's dealer who has entered into a distribution
arrangement with the Distributor is expected to forward purchase orders and
payment promptly to the Portfolio. Orders received by the Distributor before the
Portfolio's close of business will be executed at the offering price determined
at the close of regular trading on the New York Stock Exchange ("NYSE") that
day. Orders received by the Distributor after the Portfolio's close of business
will be executed at the offering price determined after the close of regular
trading of the NYSE on the next trading day. The Distributor reserves the right
to cancel any purchase order for which payment has not been received by the
fifth business day following the investment. A Portfolio will not be responsible
for delays caused by dealers.
PURCHASE BY CHECK. Checks should be made payable to the specific
Portfolio or to "Brazos Mutual Funds." If the payment is for a retirement plan
account for which the Adviser serves as fiduciary, please note on the check that
payment is for such an account. In the case of a new account, purchase orders by
check must be submitted directly by mail to SunAmerica Fund Services, Inc.,
Mutual Fund Operations, The SunAmerica Center, 733 Third Avenue, New York, New
York 10017-3204, together with payment for the purchase price of such Class A, B
and II shares and a completed New Account Application. Payment for subsequent
purchases should be mailed to SunAmerica Fund Services, Inc., c/o NFDS, P.O. Box
219373, Kansas City, Missouri 64121-9373 and the shareholder's Portfolio account
number should appear on the check. For fiduciary retirement plan accounts, both
initial and subsequent purchases should be mailed to SunAmerica Fund Services,
Inc., Mutual Fund Operations, The SunAmerica Center, 733 Third Avenue, New York,
New York 10017-3204. Certified checks are not necessary but checks are accepted
subject to collection at full face value in United States funds and must be
drawn on a bank located in the United States. Upon receipt of the completed New
Account Application and payment check, the Transfer Agent will purchase full and
fractional shares of the applicable Portfolio at the net asset value next
computed after the check is received, plus the applicable sales charge.
Subsequent purchases of Class A, B and II shares of each Portfolio may be
purchased directly through the Transfer Agent. SAFS reserves the right to reject
any check made payable other than in the manner indicated above. Under certain
circumstances, the Portfolio will accept a multi-party check (e.g., a check made
payable to the shareholder by another party and then endorsed by the shareholder
to the Portfolio in payment for the purchase of shares); however, the processing
of such a check may be subject to a delay. The Portfolio does not verify the
authenticity of the endorsement of such multi-party check, and acceptance of the
check by the Portfolio should not be considered verification thereof. Neither
the Portfolio nor its affiliates will be held liable for any losses incurred as
a result of a fraudulent endorsement. There are restrictions on the redemption
of shares purchased by check for which funds are being collected.
B-44
<PAGE>
PURCHASE THROUGH SAFS. SAFS will effect a purchase order on behalf of a customer
who has an investment account upon confirmation of a verified credit balance at
least equal to the amount of the purchase order (subject to the minimum $500
investment requirement for wire orders). If such order is received at or prior
to the Portfolio's close of business, the purchase of shares of a Portfolio will
be effected on that day. If the order is received after the Portfolio's close of
business, the order will be effected on the next business day.
PURCHASE BY FEDERAL FUNDS WIRE. An investor may make purchases by having his or
her bank wire Federal funds to the Transfer Agent. Federal funds purchase orders
will be accepted only on a day on which the Trust and the Transfer Agent are
open for business. In order to insure prompt receipt of a Federal funds wire, it
is important that these steps be followed:
- - - You must have an existing Brazos Mutual Funds Account before wiring funds.
To establish an account, complete the New Account Application and send it
via facsimile to SunAmerica Fund Services, Inc. at: (212) 551-5585.
- - - Call SunAmerica Fund Services' Shareholder/Dealer Services, toll free at
(800) 858-8850, extension 5125 to obtain your new account number.
- - - Instruct the bank to wire the specified amount to the Transfer Agent:
State Street Bank and Trust Company, Boston, MA, ABA# 0110-00028; DDA#
99029712, SunAmerica [name of Portfolio, Class __] (include shareholder
name and account number).
WAIVER OF SALES CHARGES WITH RESPECT TO CERTAIN PURCHASES OF CLASS A SHARES. To
the extent that sales are made for personal investment purposes, the sales
charge is waived as to Class A shares purchased by current or retired officers,
directors, and other full-time employees of the Adviser and its affiliates, as
well as members of the selling group and family members of the foregoing. In
addition, the sales charge is waived with respect to shares purchased by certain
qualified retirement plans or employee benefit plans (other than IRAs), which
are sponsored or administered by the Adviser or an affiliate thereof. Such plans
may include certain employee benefit plans qualified under Sections 401 or 457
of the Code, or employee benefit plans created pursuant to Section 403(b) of the
Code and sponsored by nonprofit organizations defined under Section 501(c)(3) of
the Code (collectively, the "Plans"). A Plan will qualify for purchases at net
asset value provided that (a) the initial amount invested in one or more of the
Portfolios (or in combination with the shares of other funds distributed by
SACS) is at least $1,000,000, (b) the sponsor signs a $1,000,000 Letter of
Intent, (c) such shares are purchased by an employer-sponsored plan with at
least 100 eligible employees, or (d) the purchases are by trustees or other
fiduciaries for certain employer-sponsored plans, the trustee, fiduciary or
administrator that has an agreement with the Distributor with respect to such
purchases and all such transactions for the plan are executed through a single
omnibus account. In addition, each Portfolio may sell its Class A shares at net
asset value without a sales charge to trustees and other fiduciaries purchasing
shares for certain employer-sponsored group plans created pursuant to a plan
qualified under Section 401 of the Code, if the fiduciary meets the minimum of
75 eligible participants or at least $750,000 in total plan assets. Further, the
sales charge is waived with respect to shares purchased by "wrap accounts" for
the benefit of clients of broker-dealers, financial institutions or financial
planners or registered investment advisers adhering to the following standards
established by the Distributor: (i) the broker-dealer, financial institution or
financial planner charges its client(s) an advisory fee based on the assets
under management on
B-45
<PAGE>
an annual basis, and (ii) such broker-dealer, financial institution or financial
planner does not advertise that shares of the Portfolios may be purchased by
clients at net asset value. Shares purchased under this waiver may not be resold
except to the Portfolio. Shares are offered at net asset value to the foregoing
persons because of anticipated economies in sales effort and sales related
expenses. Reductions in sales charges apply to purchases or shares by a "single
person" including an individual; members of a family unit comprising husband,
wife and minor children; or a trustee or other fiduciary purchasing for a single
fiduciary account. Complete details concerning how an investor may purchase
shares at reduced sales charges may be obtained by contacting the Distributor.
REDUCED SALES CHARGES (CLASS A SHARES ONLY). As discussed under "Shareholder
Account Information" in the Class A, B and II Prospectus, investors in Class A
shares of a Portfolio may be entitled to reduced sales charges pursuant to the
following special purchase plans made available by the Trust.
COMBINED PURCHASE PRIVILEGE. The following persons may qualify for the sales
charge reductions or eliminations by combining purchases of Portfolio shares
into a single transaction:
i. an individual, or a "company" as defined in Section 2(a)(8) of
the 1940 Act (which includes corporations that are corporate
affiliates of each other);
ii. an individual, his or her spouse and their minor children,
purchasing for his, her or their own account;
iii. a trustee or other fiduciary purchasing for a single trust
estate or single fiduciary account (including a pension,
profit-sharing, or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Code);
iv. tax-exempt organizations qualifying under Section 501(c)(3) of
the Code (not including 403(b) plans);
v. employee benefit plans of a single employer or of affiliated
employers, other than 403(b) plans; and
vi. group purchases as described, below.
A combined purchase currently may also include shares of other
Portfolios or funds distributed by SACS (other than money market funds)
purchased at the same time through a single investment dealer, if the dealer
places the order for such shares directly with SACS.
Rights of Accumulation. A purchaser of Portfolio shares may qualify for a
reduced sales charge by combining a current purchase (or combined purchases as
described above) with shares previously purchased and still owned; provided the
cumulative value of such shares (valued at cost or current net asset value,
whichever is higher), amounts to $50,000 or more. In determining the shares
previously purchased, the calculation will include, in addition to other Class A
shares of the particular Portfolio that were previously purchased, shares of the
other classes of the same Portfolio, as well as shares of any class of any other
Portfolio or of any other fund distributed by SACS, as long as such shares were
sold with a sales charge or acquired in exchange for shares purchased with such
a sales charge.
The shareholder's dealer, if any, or the shareholder, must notify
the Distributor at the time an order is placed of the applicability of the
reduced charge under the Right of Accumulation. Such notification must be in
writing by the dealer or shareholder when such an order is placed by mail.
B-46
<PAGE>
The reduced sales charge will not be granted if: (a) such information is not
furnished at the time of the order; or (b) a review of the Distributor's or the
Transfer Agent's records fails to confirm the investor's represented holdings.
LETTER OF INTENT. A reduction of sales charges is also available to an investor
who, pursuant to a written Letter of Intent set forth in the New Account
Application in the Prospectus, establishes a total investment goal in Class A
shares of one or more Portfolios to be achieved through any number of
investments over a thirteen-month period, of $50,000 or more. Each investment in
such Portfolios made during the period will be subject to a reduced sales charge
applicable to the goal amount. The initial purchase must be at least 5% of the
stated investment goal and shares totaling 5% of the dollar amount of the Letter
of Intent will be held in escrow by the Transfer Agent, in the name of the
investor. Shares of any class of shares of any Portfolio or of other funds
distributed by SACS, that impose a sales charge at the time of purchase, which
the investor intends to purchase or has previously purchased during a 30-day
period prior to the date of execution of the Letter of Intent and still owns,
may also be included in determining the applicable reduction; provided, the
dealer or shareholder notifies the Distributor of such prior purchase(s).
The Letter of Intent does not obligate the investor to purchase,
nor the Trust to sell, the indicated amounts of the investment goal. In the
event the investment goal is not achieved within the thirteen-month period, the
investor is required to pay the difference between the sales charge otherwise
applicable to the purchases made during this period and sales charges actually
paid. Such payment may be made directly to the Distributor or, if not paid, the
Distributor is authorized by the Letter of Intent to liquidate a sufficient
number of escrowed shares to obtain such difference. If the goal is exceeded and
purchases pass the next sales charge break-point, the sales charge on the entire
amount of the purchase that results in passing that break-point, and on
subsequent purchases, will be subject to a further reduced sales charge in the
same manner as set forth above under "Rights of Accumulation," but there will be
no retroactive reduction of sales charges on previous purchases. At any time
while a Letter of Intent is in effect, a shareholder may, by written notice to
the Distributor, increase the amount of the stated goal. In that event, shares
of the applicable Portfolios purchased during the previous 90-day period and
still owned by the shareholder will be included in determining the applicable
sales charge. The 5% escrow and the minimum purchase requirement will be
applicable to the new stated goal. Investors electing to purchase shares of one
or more of the Portfolios pursuant to this purchase plan should carefully read
such Letter of Intent.
REDUCED SALES CHARGE FOR GROUP PURCHASES. Members of qualified groups may
purchase Class A shares of the Portfolios under the combined purchase privilege
as described above.
To receive a rate based on combined purchases, group members must
purchase Class A shares of a Portfolio through a single investment dealer
designated by the group. The designated dealer must transmit each member's
initial purchase to the Distributor, together with payment and completed New
Account Application. After the initial purchase, a member may send funds for the
purchase of Class A shares directly to the Transfer Agent. Purchases of a
Portfolio's shares are made at the public offering price based on the net asset
value next determined after the Distributor or the Transfer Agent receives
payment for the Class A shares. The minimum investment requirements described
above apply to purchases by any group member.
B-47
<PAGE>
Qualified groups include the employees of a corporation or a sole
proprietorship, members and employees of a partnership or association, or other
organized groups of persons (the members of which may include other qualified
groups) provided that: (i) the group has at least 25 members of which at least
ten members participate in the initial purchase; (ii) the group has been in
existence for at least six months; (iii) the group has some purpose in addition
to the purchase of investment company shares at a reduced sales charge; (iv) the
group's sole organizational nexus or connection is not that the members are
credit card customers of a bank or broker-dealer, clients of an investment
adviser or security holders of a company; (v) the group agrees to provide to its
designated investment dealer at least annually access to the group's membership
by means of written communication or direct presentation to the membership at a
meeting; (vi) the group or its investment dealer will provide annual
certification, in form satisfactory to the Transfer Agent, that the group then
has at least 25 members and that at least ten members participated in group
purchases during the immediately preceding 12 calendar months; and (vii) the
group or its investment dealer will provide periodic certification, in form
satisfactory to the Transfer Agent, as to the eligibility of the purchasing
members of the group.
Members of a qualified group include: (i) any group that meets the
requirements stated above and which is a constituent member of a qualified
group; (ii) any individual purchasing for his or her own account who is carried
on the records of the group or on the records of any constituent member of the
group as being a good standing employee, partner, member or person of like
status of the group or constituent member; or (iii) any fiduciary purchasing
shares for the account of a member of a qualified group or a member's
beneficiary. For example, a qualified group could consist of a trade
association, which would have as its members individuals, sole proprietors,
partnerships and corporations. The members of the group would then consist of
the individuals, the sole proprietors and their employees, the members of the
partnership and their employees, and the corporations and their employees, as
well as the trustees of employee benefit trusts acquiring a Portfolio's shares
for the benefit of any of the foregoing.
Interested groups should contact their investment dealer or the
Distributor. The Trust reserves the right to revise the terms of or to suspend
or discontinue group sales with respect to shares of the Portfolios at any time.
NET ASSET VALUE TRANSFER PROGRAM. Investors may purchase Class A shares of a
Portfolio at net asset value to the extent that the investment represents the
proceeds from a redemption of a mutual fund that is not distributed by SACS in
which the investor either (a) paid a front-end sales load or (b) was subject to,
or paid a CDSC on the redemption proceeds. Nevertheless, the Distributor will
pay a commission to any dealer who initiates or is responsible for such an
investment, in the amount of .50% of the amount invested, subject, however, to
forfeiture in the event of a redemption during the first year from the date of
purchase. In addition, it is essential that a NAV Transfer Program Form
accompany the New Account Application to indicate that the investment is
intended to participate in the Net Asset Value Transfer Program (formerly,
Exchange Program for Investment Company Shares). This program may be revised or
terminated without notice by the Distributor. For current information, contact
Shareholder/Dealer Services at (800) 858-8850.
B-48
<PAGE>
TELEPHONE TRANSACTIONS. For your protection, telephone requests are recorded in
order to verify their accuracy. In addition, Shareholder/Dealer Services will
take measures to verify the identity of the caller, such as asking for name,
account number, social security or other taxpayer ID number and other relevant
information. If appropriate measures are not taken, the Trust is responsible for
any losses that may occur to any account due to an unauthorized telephone call.
Also for your protection, telephone transactions are not permitted on accounts
whose names or addresses have changed within the past 30 days. At times of peak
activity, it may be difficult to place requests by phone. During these times,
consider sending your request in writing.
ADDITIONAL INFORMATION REGARDING PURCHASE OF CLASS Y SHARES
Class Y shares of the Portfolios may be purchased without sales
commission at the net asset value per share next determined after an order is
received in proper form by the Trust. Initial investments in the Class Y shares
of the Portfolios must be at least $1,000,000, and subsequent minimum
investments must be at least $1,000, except for the Micro Cap Growth Portfolio
which has an initial investment of $50,000. Class Y shares may be purchased and
subsequent investments may be made without being subject to the minimum or
subsequent investment limitations at the discretion of the officers of the
Trust.
Class Y shares may be purchased and subsequent investments may
be made by principals, officers, associates and employees of the Trust and its
affiliates, their families and their business or personal associates, either
directly or through their individual retirement accounts, and by any JMIC
pension or profit-sharing plan, without being subject to the minimum or
subsequent investment limitations.
Payment does not need to be converted into Federal Funds (moneys
credited to the Trust's Custodian Bank by a Federal Reserve Bank) before the
Trust will accept it for investment. Specify the Portfolio in which the funds
should be invested in on the Account Registration Form. An order received in
proper form prior to the 4:00 p.m. close of the New York Stock Exchange (the
"NYSE") will be executed at the price computed on the date of receipt; and an
order received not in proper form or after the 4:00 p.m. close of the NYSE will
be executed at the price computed on the next day the NYSE is open after proper
receipt. The NYSE will be closed on the following days: New Year's Day; Martin
Luther King, Jr.'s Birthday; Presidents' Day; Good Friday; Memorial Day;
Independence Day; Labor Day; Thanksgiving Day and Christmas Day.
The Portfolios reserve the right in their sole discretion (1)
to suspend the offering of their shares, (2) to reject purchase orders when in
the judgment of management such rejection is in the best interests of the Trust,
and (3) to reduce or waive the minimum for initial and subsequent investment for
certain fiduciary accounts such as employee benefit plans or under circumstances
where certain economies can be achieved in sales of the Portfolios' shares.
Class Y shares of the Portfolios may be purchased by customers
of broker-dealers or other financial intermediaries ("Service Agents") which
deal with the Trust on behalf of their customers. Service Agents may impose
additional or different conditions on the purchase or redemption of shares of
the Portfolios and may charge transaction or other account fees. Each Service
Agent is responsible for transmitting to its customers a schedule of any such
fees and
B-49
<PAGE>
information regarding any additional or different purchase and redemption
conditions. Shareholders who are customers of Service Agents should consult
their Service Agent for information regarding these fees and conditions. Amounts
paid to Service Agents may include transaction fees and/or service fees paid by
the Trust from the Trust's assets attributable to the Service Agent, and which
would not be imposed if Class Y shares of the Portfolios were purchased directly
from the Trust or the Distributor. The Service Agents may provide shareholder
services to their customers that are not available to a shareholder dealing
directly with the Trust. A salesperson and any other person entitled to receive
compensation for selling or servicing shares of the Portfolios may receive
different compensation with respect to one particular class of shares over
another in the Trust.
Service Agents, or if applicable, their designees, that have
entered into agreements with the Trust or its agent, may enter confirmed
purchase or redemption orders on behalf of clients and customers, with payment
to follow no later than the Portfolios' pricing on the following business day.
If payment is not received by the Trust's Transfer Agent by such time, the
Service Agent could be held liable for resulting fees or losses. A Portfolio may
be deemed to have received a purchase or redemption order when a Service Agent,
or, if applicable, its authorized designee, accepts the order. Orders received
by the Trust in proper form will be priced at each Portfolio's net asset value
next computed after they are accepted by the Service Agent or its authorized
designee. Service Agents are responsible to their customers and the Trust for
timely transmission of all subscription and redemption requests, investment
information, documentation and money.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
Reference is made to each Prospectus for certain information as
to the redemption of Portfolio shares and to "Additional Information Regarding
Purchase of Class A, B and II Shares - Telephone Transactions" above.
If the Trustees determine that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, the Trust, having filed with the SEC a notification of
election pursuant to Rule 18f-1 on behalf of each of the Portfolios, may pay the
redemption price in whole, or in part, by a distribution in kind of securities
from a Portfolio in lieu of cash. In conformity with applicable rules of the
SEC, the Portfolios are committed to pay in cash all requests for redemption, by
any shareholder of record, limited in amount with respect to each shareholder
during any 90-day period to the lesser of (i) $250,000, or (ii) 1% of the net
asset value of the applicable Portfolio at the beginning of such period. If
shares are redeemed in kind, the redeeming shareholder would incur brokerage
costs in converting the assets into cash. The method of valuing portfolio
securities is described below in the section entitled "Determination of Net
Asset Value," and such valuation will be made as of the same time the redemption
price is determined.
The Trust and the Trust's Transfer Agent will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine,
and they may be liable for any losses if they fail to do so. These procedures
include requiring the investor to provide certain personal identification at the
time an account is opened, as well as prior to effecting each transaction
requested by telephone. In addition, all telephone transaction requests will be
recorded and investors may be required to provide additional telecopied written
instructions of such transaction requests. The Trust or Transfer Agent may be
liable for any losses due to unauthorized or fraudulent telephone instructions
if the Trust or Transfer Agent does not employ the procedures described above.
Neither the Trust nor the Transfer Agent will be responsible for any loss,
liability, cost or expense for following instructions received by telephone that
it reasonably believes to be genuine.
B-50
<PAGE>
The Distributor is authorized, as agent for the Portfolios, to
offer to repurchase shares that are presented by telephone to the Distributor by
investment dealers. Orders received by dealers must be at least $500. The
repurchase price is the net asset value per share of the applicable class of
shares of a Portfolio next-determined after the repurchase order is received,
less any applicable CDSC. Repurchase orders received by the Distributor after
the Portfolio's close of business will be priced based on the next business
day's close. Dealers may charge for their services in connection with the
repurchase, but neither the Portfolios nor the Distributor imposes any such
charge. The offer to repurchase may be suspended at any time.
MICRO CAP GROWTH, SMALL CAP GROWTH, MID CAP GROWTH AND MULTI
CAP GROWTH PORTFOLIOS. No charge is made by these Portfolios for redemptions.
REAL ESTATE SECURITIES PORTFOLIO. No charge is made by the Real
Estate Securities Portfolio for redemptions if shares are held for at least 90
days. Shares held for less than 90 days will be subject to a 1% redemption fee
which is retained by the Trust for the benefit of the remaining shareholders and
is intended to encourage long-term investment in the Real Estate Securities
Portfolio, to avoid transaction and other expenses caused by early redemption
and to facilitate portfolio management.
EXCHANGE PRIVILEGE - CLASS A, B AND II SHARES
Shareholders in any of the Portfolios may exchange their Class
A, B and II shares for the same class of shares of any other Portfolio or any
fund distributed by SACS that offer such class at the respective net asset value
per share. Before making an exchange, a shareholder should obtain and review the
prospectus of the fund whose shares are being acquired. All exchanges are
subject to applicable minimum initial or subsequent investment requirements.
Notwithstanding the foregoing, shareholders may elect to make periodic exchanges
on a monthly, quarterly, semi-annual and annual basis through the Systematic
Exchange Program. Through this program, the minimum exchange amount is $25 and
there is no fee for exchanges made. All exchanges can be effected only if the
shares to be acquired are qualified for sale in the state in which the
shareholder resides. Exchanges of Class A, B and II shares generally will
constitute a taxable transaction except for IRAs, Keogh Plans and other
qualified or tax-exempt accounts. The exchange privilege may be terminated or
modified upon 60 days' written notice. Further information about the exchange
privilege may be obtained by calling Shareholder/Dealer Services at (800)
858-8850.
If a shareholder acquires Class A shares through an exchange
from another Portfolio or fund distributed by SACS where the original purchase
of such fund's Class A shares was not subject to an initial sales charge because
the purchase was in excess of $1 million, such shareholder will remain subject
to the 1% CDSC, if any, applicable to such redemptions. In such event, the
period for which the original shares were held prior to the exchange will be
"tacked" with the holding period of the shares acquired in the exchange for
purposes of determining whether the 1% CDSC is applicable upon a redemption of
any of such shares.
B-51
<PAGE>
A shareholder who acquires Class B or Class II shares through
an exchange from another Portfolio or a fund distributed by SACS will retain
liability for any deferred sales charge outstanding on the date of the exchange.
In such event, the period for which the original shares were held prior to the
exchange will be "tacked" with the holding period of the shares acquired in the
exchange for purposes of determining what, if any, CDSC is applicable upon a
redemption of any of such shares and the timing of conversion of Class B shares
to Class A.
Because excessive trading (including short-term "market timing"
trading) can hurt a Portfolio's performance, each Portfolio may refuse any
exchange sell order (1) if it appears to be a market timing transaction
involving a significant portion of a Portfolio's assets or (2) from any
shareholder account if previous use of the exchange privilege is considered
excessive. Accounts under common ownership or control, including, but not
limited to, those with the same taxpayer identification number and those
administered so as to redeem or purchase shares based upon certain predetermined
market indications, will be considered one account for this purpose.
In addition, a Portfolio reserves the right to refuse any
exchange purchase order if, in the judgment of the Adviser, the Portfolio would
be unable to invest effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected. A shareholder's
purchase exchange may be restricted or refused if the Portfolio receives or
anticipates simultaneous orders affecting significant portions of the
Portfolio's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Portfolio and may therefore be
refused.
EXCHANGE PRIVILEGE - CLASS Y SHARES
Class Y shares of a Portfolio may be exchanged for Class Y
shares of any other Portfolio included within the Trust. Exchange requests
should be made by calling 1-800-426-9157 or by writing to Brazos Mutual Funds,
c/o SAFS, The SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204. The
exchange privilege is only available with respect to Portfolios that are
registered for sale in the shareholder's state of residence.
Any such exchange will be based on the respective net asset
values of the shares involved. There is no sales commission or charge of any
kind. Before making an exchange into a Portfolio, a shareholder should read the
Prospectus and consider the investment objectives of the Portfolio to be
purchased. You may obtain a Prospectus for the Portfolio(s) you are interested
in by calling the Trust at 1-800-426-9157. Investor correspondence should be
directed to the Brazos Mutual Funds, c/o SAFS, The SunAmerica Center, 733 Third
Avenue, New York, NY 10017-3204.
Exchange requests may be made either by mail or telephone.
Telephone exchanges will be accepted only if the certificates for the shares to
be exchanged are held by the Trust for the account of the shareholder and the
registration of the two accounts will be identical. Requests for exchanges
received prior to 4:00 p.m. (Eastern Time) will be processed as of the close of
business on the same day. Requests received after 4:00 p.m. will be processed on
the next business day. Neither the Trust nor the Administrator will be
responsible for the authenticity of the exchange
B-52
<PAGE>
instructions received by telephone. Exchanges may also be subject to limitations
as to amounts or frequency, and to other restrictions established by the Board
of Trustees to assure that such exchanges do not disadvantage the Trust and its
shareholders.
For Federal income tax purposes, an exchange between Portfolios
is a taxable event, and, accordingly, a capital gain or loss may be realized. In
a revenue ruling relating to circumstances similar to the Trust's, an exchange
between Portfolios was also deemed to be a taxable event. It is likely,
therefore, that a capital gain or loss would be realized on an exchange between
Portfolios; you may want to consult your tax adviser for further information in
this regard. The exchange privilege may be modified or terminated at any time.
DETERMINATION OF NET ASSET VALUE
The Trust is open for business on any day the NYSE is open for
regular trading. Shares are valued each day as of the close of regular trading
on the NYSE (generally 4:00 p.m., Eastern time). Each Portfolio calculates the
net asset value of each class of its shares separately by dividing the total
value of each class's net assets by the shares outstanding of such class.
Investments for which market quotations are readily available are valued at
their price as of the close of regular trading on the New York Stock Exchange
for the day. All other securities and assets are valued at fair value following
procedures approved by the Trustees.
Stocks are stated at value based upon closing sales prices
reported on recognized securities exchanges or, for listed securities having no
sales reported and for unlisted securities, upon last reported bid prices.
Non-convertible bonds, debentures, other long-term debt securities and
short-term securities with original or remaining maturities in excess of 60
days, are normally valued at prices obtained for the day of valuation from a
bond pricing service of a major dealer in bonds, when such prices are available;
however, in circumstances in which the Adviser deems it appropriate to do so, an
over-the-counter quotation may be used.
A Portfolio's liabilities, including proper accruals of expense
items, are deducted from total assets.
PERFORMANCE DATA
Each Portfolio may advertise, with respect to each class
thereof, performance data that reflects various measures of total return. An
explanation of the data presented and the methods of computation that will be
used are as follows.
A Portfolio's performance may be compared to the historical
returns of various investments, performance indices of those investments or
economic indicators, including, but not limited to, stocks, bonds, certificates
of deposit, money market funds and U.S. Treasury Bills. Certain of these
alternative investments may offer fixed rates of return and guaranteed principal
and may be insured.
B-53
<PAGE>
Average annual total return is determined separately for Class A,
Class B and Class II shares in accordance with a formula specified by the SEC.
Average annual total return is computed by finding the average annual compounded
rates of return for the l-, 5-, and 10-year periods or for the lesser included
periods of effectiveness. The formula used is as follows:
P(1 + T)n = ERV
P= hypothetical initial purchase payment of $ 1,000
T= average annual total return
N= number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1-, 5-, or 10- year periods at the end of the 1-,
5-, or 10-year periods (or fractional portion thereof).
The above formula assumes that:
a. The maximum sales load (i.e., either the
front-end sales load in the case of the Class A
shares or Class II shares or the deferred sales
load that would be applicable to a complete
redemption of the investment at the end of the
specified period in the case of the Class B or
Class II shares) is deducted from the initial
$1,000 purchase payment;
b. All dividends and distributions are reinvested
at net asset value; and
c. Complete redemption occurs at the end of the 1-,
5-, or 10- year periods or fractional portion
thereof with all nonrecurring charges deducted
accordingly.
The Portfolios' average annual total returns since inception and one-year period
ended November 30, 1999 are as follows:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------
Class A Shares Since Inception(1) One Year
- - -----------------------------------------------------------------------------------------------
<S> <C> <C>
Micro Cap Growth Portfolio N/A N/A
- - -----------------------------------------------------------------------------------------------
Small Cap Growth Portfolio 3.17% N/A
- - -----------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio N/A N/A
- - -----------------------------------------------------------------------------------------------
Multi Cap Growth Portfolio N/A N/A
- - -----------------------------------------------------------------------------------------------
Real Estate Securities Portfolio -12.40% N/A
- - -----------------------------------------------------------------------------------------------
</TABLE>
(1) From date of inception: September 8, 1999.
B-54
<PAGE>
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------
Class B Shares Since Inception(1) One Year
- - -----------------------------------------------------------------------------------------------
<S> <C> <C>
Micro Cap Growth Portfolio N/A N/A
- - -----------------------------------------------------------------------------------------------
Small Cap Growth Portfolio 5.41% N/A
- - -----------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio N/A N/A
- - -----------------------------------------------------------------------------------------------
Multi Cap Growth Portfolio N/A N/A
- - -----------------------------------------------------------------------------------------------
Real Estate Securities Portfolio -10.92% N/A
- - -----------------------------------------------------------------------------------------------
(1) From date of inception: September 8, 1999.
- - -----------------------------------------------------------------------------------------------
Class II Shares Since Inception(1) One Year
- - ------------------------------------------------------------------------------------------------
Micro Cap Growth Portfolio N/A N/A
- - -----------------------------------------------------------------------------------------------
Small Cap Growth Portfolio 7.37% N/A
- - -----------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio N/A N/A
- - -----------------------------------------------------------------------------------------------
Multi Cap Growth Portfolio N/A N/A
- - -----------------------------------------------------------------------------------------------
Real Estate Securities Portfolio -9.06% N/A
- - -----------------------------------------------------------------------------------------------
(1) From date of inception: September 8, 1999.
- - -----------------------------------------------------------------------------------------------
Class Y Shares Since Inception One Year
- - -----------------------------------------------------------------------------------------------
Micro Cap Growth Portfolio(1) 43.35% 65.67%
- - -----------------------------------------------------------------------------------------------
Small Cap Growth Portfolio(2) 27.63% 31.77%
- - -----------------------------------------------------------------------------------------------
Mid Cap Growth Portfolio(3) N/A N/A
- - ----------------------------------------------------------------------------------------------
Multi Cap Growth Portfolio(4) 72.39% N/A
- - -----------------------------------------------------------------------------------------------
Real Estate Securities Portfolio(5) -0.35% -7.86%
- - -----------------------------------------------------------------------------------------------
</TABLE>
(1) Commencement of operations: 12/31/97.
(2) Commencement of operations: 12/31/96.
(3) Commencement of operations: 12/31/99.
(4) Commencement of operations: 12/31/98.
(5) Commencement of operations: 12/31/96.
COMPARISONS
Each Portfolio may compare its total return or yield to similar
measures as calculated by various publications, services, indices, or averages.
Such comparisons are made to assist in evaluating an investment in a Portfolio.
The following references may be used:
(1) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation
stocks. Comparisons of performance assume reinvestment of dividends.
B-55
<PAGE>
(2) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
(3) Standard & Poor's MidCap 400 Index - an unmanaged index measuring the
performance of non-S&P 500 stocks in the mid-range sector of the U.S.
stock market.
(4) The New York Stock Exchange composite or component indices - unmanaged
indices of all industrial, utilities, transportation and finance stocks
listed on the New York Stock Exchange.
(5) Wilshire 5000 Equity Index or its component indices - represents the
return on the market value of all common equity securities for which daily
pricing is available. Comparisons of performance assume reinvestment of
dividends.
(6) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry. Rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
(7) Morgan Stanley Capital International EAFE Index and World Index -
respectively, arithmetic, market value-weighted averages of the
performance of over 900 securities listed on the stock exchanges of
countries in Europe, Australia and the Far East, and over 1,400 securities
listed on the stock exchanges of these continents, including North
America.
(8) Goldman Sachs 100 Convertible Bond Index - currently includes 67 bonds and
33 preferred. The original list of names was generated by screening for
convertible issues of 100 million or greater in market capitalization. The
index is priced monthly.
(9) Salomon Brothers GNMA Index - includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government
National Mortgage Association.
(10) Salomon Brothers High Grade Corporate Bond Index - consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a
value-weighted, total return index, including approximately 800 issues
with maturities of 12 years or greater.
(11) Salomon Brothers Broad Investment Grade Bond - is a market-weighted index
that contains approximately 4,700 individually priced investment grade
corporate bonds rated BBB or better, U.S. Treasury/agency issues and
mortgage pass through securities.
(12) Lehman Brothers Long-Term Treasury Bond - is composed of all bonds covered
by the Lehman Brothers Treasury Bond Index with maturities of 10 years or
greater.
(13) NASDAQ Industrial Index - is composed of more than 3,000 industrial
issues. It is a value-weighted index calculated on price change only and
does not include income.
B-56
<PAGE>
(14) Value Line - composed of over 1,600 stocks in the Value Line Investment
Survey.
(15) Russell 2000 - composed of the 2,000 smallest stocks in the Russell 3000,
a market value-weighted index of the 3,000 largest U.S. publicly-traded
companies.
(16) Russell 2000 Growth - measures the performance of those Russell 2000
companies with higher price-to-book ratios and higher forecasted growth
values.
(17) Russell 2000 Value - measures the performance of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth
values.
18) Russell 2500 - composed of the 2,500 smallest stocks in the Russell 3000,
a market value-weighted index of the 3,000 largest U.S. publicly-traded
companies.
(19) Composite Indices - 60% Standard & Poor's 500 Stock Index, 30% Lehman
Brothers Long-Term Treasury Bond and 10% U.S. Treasury Bills; 70% Standard
& Poor's 500 Stock Index and 30% NASDAQ Industrial Index; 35% Standard &
Poor's 500 Stock Index and 65% Salomon Brothers High Grade Bond Index; all
stocks on the NASDAQ system exclusive of those traded on an exchange, and
65% Standard & Poor's 500 Stock Index and 35% Salomon Brothers High Grade
Bond Index.
(20) CDA Mutual Fund Report published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return and average rate of
return (average compounded growth rate) over specified time periods for
the mutual fund industry.
(21) Mutual Fund Source Book published by Morningstar, Inc. - analyzes price,
yield, risk and total return for equity funds.
(22) Financial publications: Business Week, Changing Times, Financial World,
Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial Times,
Global Investor, Wall Street Journal and Weisenberger Investment Companies
Service - publications that rate fund performance over specified time
periods.
(23) Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change over time in
the price of goods and services in major expenditure groups.
(24) Stocks, Bonds, Bills and Inflation, published by Ibbotson Associates -
historical measure of yield, price and total return for common and small
company stock, long-term government bonds, U.S. Treasury bills and
inflation.
(25) Savings and Loan Historical Interest Rates - as published by the U.S.
Savings & Loan League Fact Book.
B-57
<PAGE>
(26) Lehman Brothers Government/Corporate Index - a combination of the
Government and Corporate Bond Indices. The Government Index includes
public obligations of the U.S. Treasury, issues of Government agencies,
and corporate debt backed by the U.S. Government. The Corporate Bond Index
includes fixed-rate nonconvertible corporate debt. Also included are
Yankee Bonds and nonconvertible debt issued by or guaranteed by foreign or
international governments and agencies. All issues are investment grade
(BBB) or higher, with maturities of at least one year and an outstanding
par value of at least $100 million for U.S. Government issues and $25
million for others. Any security downgraded during the month is held in
the index until month-end and then removed. All returns are market value
weighted inclusive of accrued income.
(27) Lehman Brothers Intermediate Government/Corporate Index - an unmanaged
index composed of a combination of the Government and Corporate Bond
Indices. All issues are investment grade (BBB) or higher, with maturities
of one to ten years and an outstanding par value of at least $100 million
for U.S. Government issues and $25 million for others. The Government
Index includes public obligations of the U.S. Treasury, issues of
Government agencies, and corporate debt backed by the U.S. Government. The
Corporate Bond Index includes fixed-rate nonconvertible corporate debt.
Also included are Yankee Bonds and nonconvertible debt issued by or
guaranteed by foreign or international governments and agencies. Any
security downgraded during the month is held in the index until month-end
and then removed. All returns are market value weighted inclusive of
accrued income.
(28) Historical data supplied by the research departments of First Boston
Corporation; the J.P. Morgan companies; WP Brothers; Merrill Lynch,
Pierce, Fenner & Smith; Lehman Brothers, Inc.; and Bloomberg L.P.
(29) NAREIT Equity Index - a compilation of market-weighted securities data
collected from all tax-qualified equity real estate investment trusts
listed on the New York and American Stock Exchanges and the NASDAQ. The
index tracks performance, as well as REIT assets, by property type and
geographic region.
(30) Wilshire Real Estate Securities Index, published by Wilshire Associates -
a market capitalization-weighted index of publicly traded real estate
securities, such as real estate investment trusts, real estate operating
companies and partnerships.
In assessing such comparisons of performance, an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to a Portfolio's portfolio, that the averages are
generally unmanaged and that the items included in the calculations of such
averages may not be identical to the formula used by a Portfolio to calculate
its figures. Specifically, a Portfolio may compare its performance to that of
certain indices that include securities with government guarantees. However, a
Portfolio's shares do not contain any such guarantees. In addition, there can be
no assurance that a Portfolio will continue its performance as compared to such
other standards.
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<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. Dividends from net investment income, if any, and
the excess of net realized long-term capital gains over net capital losses
("capital gain distributions"), if any, will be distributed at least annually to
the registered holders of the Portfolios (other than the Real Estate Securities
Portfolio). With respect to the Real Estate Securities Portfolio, dividends from
net investment income, if any, will be distributed at least quarterly and
capital gains distributions, if any, will be distributed at least annually. With
respect to capital gain distributions, each Portfolio's policy is to offset any
prior year capital loss carry forward against any realized capital gains, and
accordingly, no distribution of capital gains will be made until gains have been
realized in excess of any such loss carry forward.
Dividends and distributions will be paid in additional Portfolio shares
of the same class based on the net asset value of the applicable class of shares
at the Portfolio's close of business on the dividend date or, unless the
shareholder notifies the Portfolio at least five business days prior to the
payment date to receive such distributions in excess of $10 in cash.
TAXES. Each Portfolio intends to continue to qualify for the special tax
treatment afforded regulated investment companies ("RICs") under the Internal
Revenue Code (the "Code"). As long as each Portfolio so qualifies, each
Portfolio (but not its shareholders) will not be subject to Federal income tax
on the part of its net ordinary income and net realized capital gains that it
distributes to shareholders. Each Portfolio intends to distribute substantially
all of such income.
In order to qualify as a RIC, each Portfolio generally must, among
other things, (a) derive at least 90% of its gross income from dividends,
interest, proceeds from loans of stock or securities and certain other related
income; and (b) diversify its holdings so that, at the end of each fiscal
quarter, (i) 50% of the market value of each Portfolio's assets is represented
by cash, government securities, securities of other RICs and other securities
limited, in respect of any one issuer, to an amount no greater than 5% of each
Portfolio's assets and not greater than 10% of the outstanding voting securities
of such issuer, and (ii) not more than 25% of the value of its assets is
invested in the securities of any one issuer (other than government securities
or the securities of other regulated investment companies).
As a RIC, each Portfolio will not be subject to U.S. Federal income tax
on its income and capital gains that it distributes provided that it distributes
to shareholders at least 90% of its investment company taxable income for the
taxable year. Each Portfolio intends to distribute sufficient income to meet
this qualification requirement.
Under the Code, amounts not distributed on a timely basis in accordance
with a calendar year distribution requirement are subject to a nondeductible 4%
excise tax. To avoid the tax, each Portfolio must distribute during each
calendar year (1) at least 98% of its ordinary income (not taking into account
any capital gains or losses) for the calendar year, (2) at least 98% of its
capital gains in excess of its capital losses for the 12-month period ending on
October 31 of the calendar year, and (3) all ordinary income and net capital
gains for the previous years that were not distributed
B-59
<PAGE>
during such years. To avoid application of the excise tax, each Portfolio
intends to make distributions in accordance with the calendar year distribution
requirement. A distribution will be treated as paid on December 31 of the
calendar year if declared by each Portfolio in October, November or December of
such year, payable to shareholders of record on a date in such month and paid by
each Portfolio during January of the following year. Any such distributions paid
during January of the following year will be taxable to shareholders as of such
December 31, rather than the date on which the distributions are received.
Dividends paid by each Portfolio from its ordinary income and
distributions of each Portfolio's net realized short-term capital gains
(together referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income, whether or not reinvested. The portion of such
dividends received from each Portfolio that will be eligible for the dividends
received deduction for corporations will be determined on the basis of the
amount of each Portfolio's gross income, exclusive of capital gains from the
sales of stock or securities, which is derived as dividends from domestic
corporations, other than certain tax-exempt corporations and certain real estate
investment trusts, and will be designated as such in a written notice to
shareholders mailed not later than 60 days after the end of each fiscal year.
Any net capital gains (i. e., the excess of net capital gains from the
sale of assets held for more than 12 months over net short-term capital losses,
and including such gains from certain transactions in futures and options)
distributed to shareholders will be taxable as long-term capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 20% with respect to assets held for more than 12 months. The
maximum capital gains rate for corporate shareholders currently is the same as
the maximum tax rate for ordinary income.
Upon a sale or exchange of its shares, a shareholder will realize a
taxable gain or loss depending on its basis in the shares. Such gain or loss
will be treated as capital gain or loss if the shares are capital assets in the
shareholder's hands. In the case of an individual, any such capital gain will
generally be treated as short-term capital gain, taxable at the same rates as
ordinary income if the shares were held for not more than 12 months and
long-term capital gain taxable at the maximum rate of 20% if such shares were
held for more than 12 months. A loss recognized on the sale or exchange of
shares held for six months or less, however, will be treated as long-term
capital loss to the extent of any long-term capital gains distribution with
respect to such shares.
Generally, any loss realized on a sale or exchange of shares of a
Portfolio will be disallowed if other shares of such Portfolio are acquired
(whether through the automatic reinvestment of dividends or otherwise) within a
61-day period beginning 30 days before and ending 30 days after the date that
the shares are disposed of. In such a case, the basis of the shares acquired
will be adjusted to reflect the disallowed loss.
Under certain circumstances (such as the exercise of an exchange
privilege), the tax effect of sales load charges imposed on the purchase of
shares in a regulated investment company is deferred if the shareholder does not
hold the shares for at least 90 days.
B-60
<PAGE>
Income received by a Portfolio from sources within foreign countries
may be subject to withholding and other taxes imposed by such countries. Income
tax treaties between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine in advance the effective
rate of foreign tax to which a Portfolio will be subject, since the amount of
that Portfolio's assets to be invested in various countries is not known. It is
not anticipated that any Portfolio will qualify to pass through to its
shareholders the ability to claim as a foreign tax credit their respective
shares of foreign taxes paid by such Portfolio.
The tax principles applicable to futures contracts and options are
complex and, in some cases, uncertain. Such investments may cause a Portfolio to
recognize taxable income prior to the receipt of cash, thereby requiring the
Portfolio to liquidate other positions, or to borrow money, so as to make
sufficient distributions to shareholders to avoid corporate-level tax. Moreover,
some or all of the taxable income recognized may be ordinary income or
short-term capital gain, so that the distributions to shareholders may be
taxable as ordinary income.
A Portfolio may be required to withhold U.S. Federal income tax at the
rate of 31% of all taxable distributions payable to shareholders who fail to
provide their correct taxpayer identification number or fail to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against a shareholder's U.S. Federal
income tax liability.
Ordinary income dividends paid by a Portfolio to shareholders who are
non-resident aliens or foreign entities generally will be subject to a 30%
United States withholding tax under existing provisions of the Code applicable
to foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Nonresident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations currently in effect.
Shareholders are urged to consult their tax advisors regarding specific
questions as to Federal, state and local taxes. In addition, foreign investors
should consult with their own tax advisors regarding the particular tax
consequences to them of an investment in each Portfolio. Qualification as a
regulated investment company under the Code for tax purposes does not entail
government supervision of management and investment policies.
RETIREMENT PLANS
Shares of each Portfolio are eligible to be purchased in conjunction
with various types of qualified retirement plans. The summary below is only a
brief description of the Federal income tax laws for each plan and does not
purport to be complete. Further information or an application to invest in
shares of a Portfolio by establishing any of the retirement plans described
below may be obtained by calling Retirement Plans at (800) 858-8850. However, it
is recommended that a shareholder considering any retirement plan consult a tax
adviser before participating.
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<PAGE>
PENSION AND PROFIT-SHARING PLANS. Sections 401(a) and 401(k) of the Code permit
business employers and certain associations to establish pension and profit
sharing plans for employees. Shares of a Portfolio may be purchased by those who
would have been covered under the rules governing old H. R. 10 (Keogh) Plans, as
well as by corporate plans. Each business retirement plan provides tax
advantages for owners and participants. Contributions made by the employer are
tax-deductible, and participants do not pay taxes on contributions or earnings
until withdrawn.
TAX-SHELTERED CUSTODIAL ACCOUNTS. Section 403(b)(7) of the Code permits public
school employees and employees of certain types of charitable, educational and
scientific organizations specified in Section 501(c)(3) of the Code, to purchase
shares of a Portfolio and, subject to certain limitations, exclude the amount of
purchase payments from gross income for tax purposes.
INDIVIDUAL RETIREMENT ACCOUNTS (IRA). Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program, including
Simplified Employee Pension Plans, commonly referred to as SEP-IRA. These IRAs
are subject to limitations with respect to the amount that may be contributed,
the eligibility of individuals, and the time in which distributions would be
allowed to commence. In addition, certain distributions from some other types of
retirement plans may be placed on a tax-deferred basis in an IRA.
SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES ("SIMPLE IRA"). This plan was
introduced by a provision of the Small Business Job Protection Act of 1996 to
provide small employers with a simplified tax-favored retirement plan.
Contributions are deducted from the employee's paycheck before taxes and are
deposited into a SIMPLE IRA by the employer, who must make either matching
contributions or non-elective contributions. Contributions are tax-deductible
for the employer and participants do not pay taxes on contributions on earnings
until they are withdrawn.
ROTH IRA. This plan, introduced by Section 302 of the Taxpayer Relief Act of
1997, generally permits individuals with adjusted gross income of up to $95,000,
and married couples with joint adjusted gross income of up to $150,000, to
contribute to a "Roth IRA." Contributions are not tax-deductible, but
distribution of assets (contributions and earnings) held in the account for at
least five years may be distributed tax-free under certain qualifying
conditions.
EDUCATION IRA. Established by the Taxpayer Relief Act of 1997, under Section 530
of the Code, this plan permits individuals to contribute to an IRA on behalf of
any child under the age of 18. Contributions are not tax-deductible but
distributions are tax-free if used for qualified educational expenses.
DESCRIPTION OF SHARES
Ownership of the Trust is represented by transferable shares of
beneficial interest. The Agreement and Declaration of Trust of the Trust (the
"Declaration of Trust") permits the Trustees to issue an unlimited number of
full and fractional shares, $.00l par value, and to divide or combine the shares
into a greater or lesser number of shares without thereby changing the
proportionate beneficial interests of the Trust.
Currently, five series of shares of the Trust have been authorized
pursuant to the Declaration of Trust: Micro Cap Growth Portfolio, Small Cap
Growth Portfolio, Mid Cap Growth Portfolio, Multi Cap Growth Portfolio and Real
Estate Securities Portfolio. Four classes of shares have been
B-62
<PAGE>
authorized by the Trust. The Small Cap Growth Portfolio and Real Estate
Securities Portfolio currently offer four classes of shares: Class A, Class B,
Class II and Class Y shares. The Mid Cap Growth Portfolio and the Multi Cap
Growth Portfolio currently offer two classes of shares: Class A and Class Y
shares. The Micro Cap Growth Portfolio currently offers one class of shares:
Class Y shares. The Trustees may authorize the creation of additional series and
classes of shares so as to be able to offer to investors additional investment
portfolios within the Trust that would operate independently from the Trust's
present portfolios, or to distinguish among shareholders, as may be necessary,
to comply with future regulations or other unforeseen circumstances. Each series
of the Trust's shares represents the interests of the shareholders of that
series in a particular portfolio of Trust assets. In addition, the Trustees may
authorize the creation of additional classes of shares in the future, which may
have fee structures different from those of existing classes and/or may be
offered only to certain qualified investors.
Shareholders are entitled to a full vote for each full share held. The
Trustees have terms of unlimited duration (subject to certain removal
procedures) and have the power to alter the number of Trustees, and appoint
their own successors, provided that at all times at least a majority of the
Trustees have been elected by shareholders. The voting rights of shareholders
are not cumulative, so that holders of more than 50% of the shares voting can,
if they choose, elect all Trustees being elected, while the holders of the
remaining shares would be unable to elect any Trustees. Although the Trust need
not hold annual meetings of shareholders, the Trustees may call special meetings
of shareholders for action by shareholder vote as may be required by the 1940
Act or the Declaration of Trust. Also, a shareholders meeting for the purpose of
electing or removing trustees must be called, if so requested by the holders of
record of 10% or more of the outstanding shares of the Trust. In addition, the
Trustees may be removed by the action of the holders of record of two-thirds or
more of the outstanding shares. All series of shares will vote with respect to
certain matters, such as election of Trustees. When all series of shares are not
affected by a matter to be voted upon, such as approval of investment advisory
agreements or changes in a Portfolio's policies, only shareholders of the series
affected by the matter may be entitled to vote.
All classes of shares of a given Portfolio are identical in all
respects, except that (i) each class may bear differing amounts of certain
class-specific expenses, (ii) Class A shares are subject to an initial sales
charge, a distribution fee and an ongoing account maintenance and service fee,
(iii) Class B shares are subject to a CDSC, a distribution fee and an ongoing
account maintenance and service fee, (iv) Class II shares are subject to an
initial sales charge, a CDSC, a distribution fee and an ongoing account
maintenance and service fee; (v) Class B shares convert automatically to Class A
shares on the first business day of the month seven years after the purchase of
such Class B shares, (vi) each of Class A, B, and II has voting rights on
matters that pertain to the Rule 12b-1 plan adopted with respect to such class,
except that under certain circumstances, the holders of Class B shares may be
entitled to vote on material changes to the Class A Rule 12b-1 plan, (vii) Class
Y shares are sold without a sales charge or Rule 12b-1 distribution fee and have
a minimum initial investment requirement of $1,000,000 or over, and (viii) each
class of shares will be exchangeable only into the same class of shares of any
of the other Portfolios or any fund distributed by SACS that offers that class
except that Class II shares will be exchangeable into Class C shares of any fund
distributed by SACS that does not offer Class II. All shares of the Trust issued
and outstanding and all shares offered by each Prospectus when issued are fully
paid and non-assessable. Shares have no preemptive or other subscription rights
and are freely transferable on the books of the Trust. In addition, shares have
no conversion rights, except as described above.
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<PAGE>
The Declaration of Trust provides that no Trustee of the Trust is
liable to the Trust or to a shareholder, nor is any Trustee liable to any third
persons in connection with the affairs of the Trust, except as such liability
may arise from his or its own bad faith, willful misfeasance, gross negligence
or reckless disregard of his duties. It also provides that all third persons
shall look solely to the Trust's property for satisfaction of claims arising in
connection with the affairs of the Trust. With the exceptions stated, the
Declaration of Trust provides that a Trustee, officer, employee or agent is
entitled to be indemnified against all liability in connection with the affairs
of the Trust. The Trust shall continue, without limitation of time, subject to
the provisions in the Declaration of Trust concerning termination by action of
the shareholders.
ADDITIONAL INFORMATION
COMPUTATION OF OFFERING PRICE PER SHARE
The following is the offering price calculation for Class A, B and II
shares of the following Portfolios, based on the value of each Portfolio's net
assets and number of shares outstanding as of November 30, 1999.
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Portfolio Real Estate Securities Portfolio
--------------------------------------- ----------------------------------------
Class A Class B Class II Class A Class B Class II
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Assets $393,786 $562,445 $396,965 $142,682 $162,422 $143,018
- - -----------------------------------------------------------------------------------------------------------------------------
Number of Shares Outstanding 21,287 30,424 21,452 17,710 20,173 17,755
- - -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value Per Share (net $18.50 $18.49 $18.50 $8.06 $8.05 $8.05
assets divided by number of shares)
- - -----------------------------------------------------------------------------------------------------------------------------
Sales Charge 1.13 -- -- 0.49 -- --
for Class A Shares: 5.75%
of offering price (6.10% of
net asset value per share)
- - -----------------------------------------------------------------------------------------------------------------------------
for Class II Shares: 1.00% -- -- 0.19 -- -- 0.08
of offering price (1.01% of
net asset value per share)
- - -----------------------------------------------------------------------------------------------------------------------------
Offering Price $19.63 $18.49 $18.69 $8.55 $8.05 $8.13
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
REPORTS TO SHAREHOLDERS. The Trust sends audited annual and unaudited
semi-annual reports to shareholders of each of the Portfolios. In
addition, the Transfer Agent sends a statement to each shareholder
having an account directly with the Trust to confirm transactions in
the account.
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CUSTODIAN AND TRANSFER AGENCY. State Street Bank and Trust Company,
1776 Heritage Drive, North Quincy, MA 02171, serves as custodian and as
Transfer Agent for the Trust and in those capacities maintains certain
financial and accounting books and records pursuant to agreements with
the Trust. Transfer agent functions are performed for State Street, by
National Financial Data Services, P.O. Box 419572, Kansas City, MO
64141-6572, an affiliate of State Street.
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL. PricewaterhouseCoopers LLP,
1177 Avenue of the Americas, New York, NY 10036, has been selected to
serve as the Trust's independent accountants and in that capacity
examines the annual financial statements of the Trust. The firm of
Drinker Biddle & Reath LLP, One Logan Square, 18th and Cherry Streets,
Philadelphia PA 19103, has been selected as legal counsel to the Trust.
FINANCIAL STATEMENTS
The Trust's audited financial statements are incorporated into this
Statement of Additional Information by reference to its 1999 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 858-8850 (with respect to Class A, B and II shares) or (800)
426-9157 (with respect to Class Y shares) or by writing the Trust at SunAmerica
Fund Services, Inc., The SunAmerica Center, 733 Third Avenue, New York, New York
10017-3204.
B-65
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APPENDIX
CORPORATE BOND AND COMMERCIAL PAPER RATINGS
Description of moody's corporate ratings
Aaa Bonds 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 edge." 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 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 that make the long-term risks appear somewhat
larger than in Aaa securities.
A Bonds rated A possess many favorable investment attributes and
are considered as upper medium grade obligations. Factors
giving security to principal and interest are considered
adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa Bonds rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Ba Bonds rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate, and therefore not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or
of maintenance of other terms of the contract
over any long period of time may be small.
Appendix - 1
<PAGE>
Caa Bonds 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 rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds rated C are the lowest-rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
NOTE: Moody's may apply numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of the generic rating
category.
DESCRIPTION OF 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 representations as to whether such commercial paper is by any other
definition " commercial paper" or is exempt from registration under the
Securities Act.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act, nor does it 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:
-- Leading market positions in well-established industries
-- High rates of return on funds employed
-- Conservative capitalization structures with moderate reliance on
debt and ample asset protection
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Appendix - 2
<PAGE>
Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidences 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 related 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
level of debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuer rated NOT PRIME do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its commercial paper
obligations are supported by the credit of another entity or entities, then the
name or names of such supporting entity or entities are listed within
parentheses beneath the name of the issuer, or there is a footnote referring the
reader to another page for the name or names of the supporting entity or
entities. In assigning ratings to such issuers, Moody's evaluates the financial
strength of the indicated affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment. Moody's makes no representation and gives no opinion on
the legal validity or enforceability of any support arrangement. You are
cautioned to review with your counsel any questions regarding particular support
arrangements.
Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative type risks that may be inherent in certain areas; (93) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships that exist with the issuer; and (8) recognition by management of
obligations that may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
DESCRIPTION OF STANDARD & POOR'S CORPORATE DEBT RATINGS
A Standard & Poor's corporate or municipal 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 debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
Appendix - 3
<PAGE>
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 reasons.
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; and (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.
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 or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than for debt in higher-rated categories.
Debt rated BB, B, CCC, CC and C are 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 degree of
speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than
other speculative grade debt. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or
economic conditions that could lead to inadequate capacity to
meet timely interest and principal payment. The BB rating
category is also used for debt subordinated to senior debt
that is assigned an actual or implied BBB- rating.
Appendix - 4
<PAGE>
B Debt rated B has a greater vulnerability to default but
presently has the capacity to meet interest payments and
principal repayments. Adverse business, financial or economic
conditions would 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 current identifiable vulnerability to
default and is dependent upon favorable business, financial
and economic conditions to meet timely payments of interest
and repayments 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 The rating CC is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to
senior debt 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 default. The D rating is assigned on the
day an interest or principal payment is missed. The D rating
also will be used upon the filing of a bankruptcy petition if
debt service payments are jeopardized.
Plus (+) or minus (-): The ratings of AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within these
ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion. The investor
should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the
principal amount of those bonds to the extent that the
underlying deposit collateral is insured by the Federal
Savings & Loan Insurance Corp. or the Federal Deposit
Insurance Corp. and interest is adequately collateralized.
Appendix - 5
<PAGE>
* Continuance of the rating is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that
Standard & Poor's does not rate a particular type of
obligation as a matter of policy.
Debt Obligations of Issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the credit worthiness of the obligor but do not take
into account currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA," "AA," "A," "BBB," commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
DESCRIPTION OF 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 having an original maturity of not more
than 365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest.
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category
are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety.
A-1 This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those
issues designated "A-1" that are determined to possess
overwhelming safety characteristics are denoted with a plus
(+) sign designation.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high
as for issues designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat more
vulnerable to the adverse effect of changes in circumstances
than obligations carrying the higher designations.
Appendix - 6
<PAGE>
B Issues rated "B" are regarded as having only adequate capacity
for timely payment. However, such capacity may be damaged by
changing conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D This rating indicates that the issue is either in default or
is expected to be in default upon maturity.
The commercial paper rating is not a recommendation to purchase or sell
a security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
Appendix - 7
<PAGE>
PART C
FORM N-1A
OTHER INFORMATION
Item 23. Exhibits
(a) (1) Certificate of Trust filed October 24, 1996 is incorporated
by reference to Exhibit (1)(a) to the Registration
Statement on Form N-1A, filed October 13, 1996 ("Form N-1A")
(2) Agreement and Declaration of Trust filed October 28, 1996 is
incorporated by reference to Exhibit (b)(1)(b) to
Pre-Effective Amendment No. 1 to the Registration Statement,
filed December 2, 1997 ("Pre-Effective Amendment No. 1").
(3) Amendment to Agreement and Declaration of Trust filed May
13, 1999 is incorporated by reference to Exhibit (a)(3) to
Post-Effective Amendment No. 6 to the Registration
Statement, filed June 1, 1999 ("Post-Effective Amendment No.
6").
(b) (1) Bylaws adopted November 25, 1996 is incorporated by
reference to Exhibit (b)(2) to Pre-Effective Amendment No.
1.
(2) Amended Bylaws dated November 14, 1997 is incorporated by
reference to Exhibit (b)(2) to Post-Effective Amendment No.
3 ("Post-Effective Amendment No. 3").
(c) Not Applicable
(d) (1) Investment Advisory Agreement between Registrant and
John McStay Investment Counsel dated November 25, 1996 with
respect to the BRAZOS Small Cap Growth Portfolio and BRAZOS
Real Estate Securities Portfolio is incorporated by
reference to Exhibit (b)(5) to Pre-Effective Amendment No.
1.
(2) Investment Advisory Agreement between Registrant and John
McStay Investment Counsel dated November 17, 1997 with
respect to the BRAZOS Micro Cap Growth Portfolio is
incorporated by reference to
<PAGE>
Exhibit (5)(b) to Post-Effective Amendment No. 2
("Post-Effective Amendment No. 2").
(3) Investment Advisory Contract between Registrant and John
McStay Investment Counsel dated December 31, 1998 with
respect to the BRAZOS Growth Portfolio is incorporated by
reference to Exhibit (d)(3) to Post-Effective Amendment No.
4 ("Post-Effective Amendment No. 4").
(4) Form of Investment Advisory Agreement between Registrant and
John McStay Investment Counsel, L.L.C. with respect to the
BRAZOS Small Cap Growth Portfolio is incorporated by
reference to Exhibit (d)(4) to Post-Effective Amendment No.
6.
(5) Form of Investment Advisory Agreement between Registrant and
John McStay Investment Counsel, L.L.C. with respect to the
BRAZOS Real Estate Securities Portfolio is incorporated by
reference to Exhibit (d)(5) to Post-Effective Amendment No.
6.
(6) Form of Investment Advisory Agreement between Registrant and
John McStay Investment Counsel, L.L.C. with respect to the
BRAZOS Micro Cap Growth Portfolio is incorporated by
reference to Exhibit (d)(6) to Post-Effective Amendment No.
6.
(7) Form of Investment Advisory Agreement between Registrant and
John McStay Investment Counsel, L.L.C. with respect to the
BRAZOS Growth Portfolio is incorporated by reference to
Exhibit (d)(7) to Post-Effective Amendment No. 6.
(8) Form of Investment Advisory Agreement between Registrant and
John McStay Investment Counsel, L.L.C. with respect to the
BRAZOS Mid Cap Growth Portfolio is incorporated by reference
to Exhibit (d)(8) to Post-Effective Amendment No. 7.
(e) (1) Underwriting Contract and Selected Dealer Agreement between
Registrant and Rafferty Capital
<PAGE>
Markets dated October 1, 1998 with respect to BRAZOS
MicroCap Growth Portfolio, BRAZOS Small Cap Growth
Portfolio, BRAZOS Real Estate Securities Portfolio and the
BRAZOS Growth Portfolio is incorporated by reference to
Exhibit (e)(1) to Post-Effective Amendment No. 4.
(2) Form of Distribution Agreement dated June 25, 1999 between
Registrant and SunAmerica Capital Services, Inc. for Class
A, B and II Shares is incorporated by reference to Exhibit
(e)(2) to Post-Effective Amendment No. 6.
(3) Form of Selling Agreement between Registrant and SunAmerica
Capital Services, Inc. is incorporated by reference to
Exhibit (e)(2) to Post-Effective Amendment No. 6.
(4) Form of Distribution Agreement between the Registrant and
SunAmerica Capital Services, Inc. with respect to the Class
Y shares of the BRAZOS Micro Cap Growth, Small Cap Growth,
Mid Cap Growth, Multi Growth and Real Estate Securities
Portfolios, is incorporated by reference to Exhibit (e)(4)
to Post-Effective Amendment No. 7.
(f) Not Applicable
(g) (1) Custodian Agreement between Registrant and Firstar Mutual
Fund Services, LLC dated October 1, 1998 is incorporated by
reference to Exhibit (g) to Post-Effective Amendment No. 4.
(2) Form of Custodian Contract between Registrant and State
Street Bank and Trust Company is incorporated by reference
to Exhibit (g)(2) to Post-Effective Amendment No. 6.
(h) (1) Administration Agreement between Registrant and Firstar
Mutual Fund Services, LLC dated October 1, 1998 is
incorporated by reference to Exhibit (h)(1) to
Post-Effective Amendment No. 4.
<PAGE>
(2) Transfer Agency Agreement between Registrant and Firstar
Mutual Fund Services, LLC dated October 1, 1998 is
incorporated by reference to Exhibit (h)(2) to
Post-Effective Amendment No. 4.
(3) Fund Accounting Services Agreement between Registrant and
Firstar Mutual Fund Services, LLC dated October 1, 1998 is
incorporated by reference to Exhibit (h)(3) to
Post-Effective Amendment No. 4.
(4) Fulfillment Servicing Agreement between Registrant and
Firstar Mutual Fund Services, LLC dated October 1, 1998 is
incorporated by reference to Exhibit (h)(4) to
Post-Effective Amendment No. 4.
(5) Form of Transfer Agency Agreement between Registrant and
State Street Bank and Trust Company is incorporated by
reference to Exhibit (h)(5) to Post-Effective Amendment No.
6.
(6) Form of Administration Agreement between Registrant and
SunAmerica Asset Management Corporation is incorporated by
reference to Exhibit (h)(6) to Post-Effective Amendment No.
6.
(7) Form of Service Agreement between Registrant and SunAmerica
Fund Services, Inc. is incorporated by reference to Exhibit
(h)(7) to Post-Effective Amendment No. 6.
(i) Opinion of Drinker Biddle & Reath LLP. Filed herewith
(j) (1) Consent of Drinker Biddle & Reath LLP. Filed herewith.
(2) Consent of PricewaterhouseCoopers LLP, independent auditors
for the Registrant. Filed herewith.
(k) Not Applicable
(l) Subscription Agreement between Registrant and John McStay
Investment Counsel dated December 11, 1999 is incorporated by
reference to Exhibit (b)(13) to Pre
<PAGE>
Effective Amendment No. 2 ("Pre-Effective Amendment No. 2").
(m) (1) Form of Distribution Plan for Class A Shares is incorporated
by reference to Exhibit (m)(1) to Post-Effective Amendment
No. 6.
(2) Form of Distribution Plan for Class B Shares is incorporated
by reference to Exhibit (m)(2) to Post-Effective Amendment
No. 6.
(3) Form of Distribution Plan for Class II Shares is
incorporated by reference to Exhibit (m)(3) to
Post-Effective Amendment No. 6.
(n) Form of Plan Pursuant to Rule 18f-3 for Operation of Multi-Series
System is incorporated by reference to Exhibit (o) to
Post-Effective Amendment No. 6.
(p) (1) Code of Ethics of the Fund. Filed herewith.
(2) Code of Ethics of the Adviser. Filed herewith.
Item 24. Persons Controlled by or Under Common Control with Registrant
Registrant is not controlled by or under common control with any
person.
Item 25. Indemnification
Reference is made to Article VII of Registrant's Agreement and
Declaration of Trust, which is incorporated herein by reference.
Registrant hereby also makes the undertaking consistent with Rule
484 under the Securities Act of 1933, as amended.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, 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 that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, office 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
<PAGE>
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, office 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.
Item 26. Business and Other Connections of Investment Adviser
Reference is made to the caption "Information about the Adviser"
in the Prospectuses constituting Part A of this Registration
Statement and "Investment Adviser and Other Services" in Part B of
this Registration Statement. The information required by this Item
26 with respect to each director, officer, or partner of the
investment adviser of the Registrant is incorporated by reference
to the Form ADV filed by the investment adviser listed below with
the Securities and Exchange Commission pursuant to the Investment
Advisers Act of 1940, as amended, on the date and under the File
number indicated:
John McStay Investment Counsel3-31-96
SEC File No. 801-20244
<PAGE>
Item 27. Principal Underwriters
(a) Investment Companies for which SunAmerica Capital Services,
Inc. also acts as principal underwriter:
SunAmerica Income Funds
SunAmerica Equity Funds
SunAmerica Money Market Funds, Inc.
SunAmerica Style Select Series, Inc.
SunAmerica Strategic Investment Series, Inc.
(b) Reference is made to the caption "Distributor" in the
Prospectuses constituting Part A of this Registration
Statement. The information required by this Item 27 with
respect to each director of the underwriter is incorporated by
reference to the Form BD filed by the Underwriter with the
Commission pursuant to the Securities Exchange Act of 1934, as
amended under the File Number indicated:
SunAmerica Capital Services, Inc.
NASD File No. 13158
Item 28. Location of Accounts and Records
The books, accounts and other documents required by Section 31(a)
under the Investment Company Act of 1940, as amended, and the
rules promulgated thereunder will be maintained in the physical
possession of the Registrant, Brazos Mutual Funds, 5949 Sherry
Lane, Dallas, TX 75225; the Registrant's Adviser, John McStay
Investment Counsel, 5949 Sherry Lane, Dallas, TX 75225; the
Registrant's Transfer Agent and Custodian Bank, State Street Bank
and Trust Company, 1776 Heritage Drive, North Quincy, MA 02171;
and the Registrant's Administrator, SunAmerica Asset Management
Corp., 733 Third Avenue, 3rd Floor, New York, NY 10017-3204.
<PAGE>
Item 29. Management Services
Not Applicable.
Item 30. Undertakings
Registrant hereby undertakes to call a meeting of shareholders for
the purpose of voting upon the question of the removal of a
Trustee or Trustees when requested in writing to do so by the
holders of at least 10% of the Registrant's outstanding shares and
in connection with such meeting to comply with the provisions of
Section 16(c) of the Investment Company Act of 1940, as amended,
relating to shareholder communications.
Registrant hereby undertakes to furnish its Annual Report to
Shareholders upon request and without charge to any person to whom
a prospectus is delivered.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant certifies
that it meets all the requirements for effectiveness of this Post-Effective
Amendment No. 9 to its Registration Statement under Rule 485(b) under the
Securities Act of 1933 and has duly caused this Post-Effective Amendment No. 9
to its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Dallas, and State of Texas on the 29th
day of March, 2000.
Brazos Mutual Funds
Registrant
By: /s/ Dan L. Hockenbrough
------------------------
Dan L. Hockenbrough
President, Chief Financial
Officer and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 9 to the Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the date
indicated.
/s/ George Gau*
- - --------------------
George Gau Trustee March 29, 2000
/s/ Dan L. Hockenbrough
- - -----------------------
Dan L. Hockenbrough Trustee, Chief Executive March 29, 2000
And Financial Officer
/s/ John H. Massey *
- - --------------------
John H. Massey Trustee March 29, 2000
/s/ David M. Reichert *
- - --------------------
David M. Reichert Trustee March 29, 2000
* Pursuant to authority granted in a Power of Attorney filed with Post-Effective
Amendment No. 9
By: /s/ Dan L. Hockenbrough
-----------------------
Dan L. Hockenbrough
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
Exhibit No. Item
- - ----------- ----
(23) (i) Opinion of Drinker Biddle & Reach LLP.
(23) (j) (1) Consent of Drinker Biddle & Reach LLP.
(23) (j) (a) Consent of PriceWaterhouseCoopers LLP.
(23) (p) (1) Code of Ethics of the Fund.
(23) (p) (2) Code of Ethics of the Advisor.
DRINKER BIDDLE & REATH LLP
One Logan Square
18th and Cherry Streets
Philadelphia, PA 19103-6996
Direct Dial (215) 988-2719
March 29, 2000
Brazos Mutual Funds
5949 Sherry Lane
Suite 1600
Dallas, Texas 75225
Re: Brazos Mutual Funds
-------------------
Gentlemen:
We have acted as counsel for Brazos Mutual Funds, a Delaware business
trust (the "Fund"), in connection with the registration by the Fund of its
shares of beneficial interests, without par value. The Agreement and Declaration
of Trust of the Fund authorizes the issuance of an indefinite number of shares
of beneficial interest, which are divided into multiple classes. The Board of
Trustees of the Fund (the "Board") has previously classified certain of the
shares of beneficial interest and has previously authorized the issuance of
shares of these series to the public. The shares of beneficial interest
designated into each such series are referred to herein as the "Current Series
Beneficial Interests"; the shares of beneficial interests that are not
designated into series are referred to herein as the "Future Beneficial
Interests"; and the Current Series Beneficial Interests and the Future
Beneficial Interests are referred to collectively herein as the "Beneficial
Interests." You have asked for our opinion on certain matters relating to the
Beneficial Interests.
We have reviewed the Fund's Agreement and Declaration of Trust and
By-laws, resolutions of the Board, certificates of public officials and of the
Fund's officers and such other legal and factual matters as we have deemed
appropriate. We have also reviewed the Fund's Registration Statement on Form
N-1A under the Securities Act of 1933 (the "Registration Statement"), as amended
through Post-Effective Amendment No. 9 thereto.
<PAGE>
This opinion is based exclusively on the laws of the Delaware Business
Trust Act and the federal law of the United States of America.
We have assumed the following for purposes of this opinion:
1. The shares of Current Series Beneficial Interests have been, and
will continue to be, issued in accordance with the Agreement and Declaration of
Trust and By-laws of the Fund and resolutions of the Board and shareholders
relating to the creation, authorization and issuance of the Current Series
Beneficial Interests.
2. Prior to the issuance of any shares of Future Beneficial Interests,
the Board (a) will duly authorize the issuance of such Future Beneficial
Interests, (b) will determine with respect to each class of such Future
Beneficial Interests the preferences, limitations and relative rights applicable
thereto and (c) if such Future Beneficial Interests are classified into separate
series, will duly take the action necessary to create such series and to
determine the number of shares of such series and the relative designations,
preferences, limitations and relative rights thereof ("Future Series
Designations").
3. With respect to the shares of Future Beneficial Interests, there
will be compliance with the terms, conditions and restrictions applicable to the
issuance of such shares that are set forth in (i) the Fund's Agreement and
Declaration of Trust and By-laws, each as amended as of the date of such
issuance, and (ii) the applicable Future Series Designations.
4. The Board will not change the number of shares of any series of
Beneficial Interests that may be issued, or the preferences, limitations or
relative rights of any class or series of Beneficial Interests after any shares
of such class or series have been issued.
Based upon the foregoing, we are of the opinion that:
1. The Fund is authorized to issue an indefinite number of shares of
Beneficial Interests.
2. The Board is authorized (i) to create from time to time one or more
additional series of shares of Beneficial Interests and (ii) to determine, at
the time of creation of any such series, the number of shares of such series and
the designations, preferences, limitations and relative rights thereof.
3. All necessary action by the Fund to authorize the shares of Current
Series Beneficial Interests has been taken, and the Fund has the power to issue
the shares of Current Series Beneficial Interests.
4. The shares of Beneficial Interests will be, when issued in
accordance with, and sold for the consideration described in, the Registration
Statement (provided that (i) the price of such shares is not less than the par
value thereof and (ii) the number of shares of any class or series
2
<PAGE>
issued does not exceed the authorized number of shares for such class or series
as of the date of issuance of the shares), validly issued, fully paid and
non-assessable by the Fund.
We consent to the filing of this opinion with Post-Effective Amendment
No. 9 to the Registration Statement to be filed by the Fund with the Securities
and Exchange Commission.
Very truly yours,
/s/ DRINKER BIDDLE & REATH LLP
------------------------------
DRINKER BIDDLE & REATH LLP
AT\HH
3
Exhibit j(1)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our
Firm under the caption "Counsel" in the Statement of Additional Information
included in Post-Effective Amendment No. 9 to the Registration Statement (File
No. 33-14943; and File No. 811-7881) on Form N-1A under the Securities Act of
1933 and the Investment Company Act of 1940, as amended, of Brazos Mutual Funds.
This consent does not constitute a consent under Section 7 of the Securities Act
of 1933, and in consenting to the use of our name and the references to our Firm
under such caption we have not certified any part of the Registration Statement
and do not otherwise come within the categories of persons whose consent is
required under said Section 7 or the rules and regulations of the Securities and
Exchange Commission thereunder.
/s/ DRINKER BIDDLE & REATH LLP
------------------------------
DRINKER BIDDLE & REATH LLP
Philadelphia, Pennsylvania
March 29, 2000
Exhibit j.(2)
CONSENT OF INDEPENDENT ACCOUNTANTS
- - -----------------------------------
We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A of our report dated January 21, 2000, relating to the
financial statements and financial highlights which appears in the November 30,
1999 Annual Report to Shareholders of Small Cap Growth Portfolio, Real Estate
Securities Portfolio, Micro Cap Growth Portfolio and Multi Cap Growth Portfolio
(formerly Growth Portfolio) (constituting Brazos Mutual Funds), which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the headings "Financial Highlights" and "Additional
Information - Independent Accountants and Legal Counsel" in such Registration
Statement.
/s/ PricewaterhouseCoopers LLP
- - ------------------------------
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
March 24, 2000
<PAGE>
Exhibit j(1)
POWER OF ATTORNEY
The undersigned hereby appoints each of Audrey Talley and Daniel
Hockenbrough as attorney-in-fact and agent, each individually in all capacities,
to execute, and to file any of the documents referred to below relating to the
registration of Brazos Mutual Funds (the "Fund") as an investment company under
the Investment Company Act of 1940, as amended, (the "Act") and the Fund's
Registration Statement on Form N-1A under the Act and under the Securities Act
of 1933, including any and all amendments thereto, covering the registration of
the Fund as an investment company and the sale of shares of the series of the
Fund, including all exhibits and any and all documents required to be filed with
respect thereto with any regulatory authority, including applications for
exemptive order rulings. The undersigned grants to said attorney full authority
to do every act necessary to be done in order to effectuate the same as fully,
to all intents and purposes, as he could do if personally present, thereby
ratifying all that said attorney-in-fact and agent may lawfully do or cause to
be done by virtue hereof.
The undersigned hereby executes this Power of Attorney as of this 13th
day of May, 1999.
/s/ David Reichert
---------------------
Name: David Reichert
Title: Trustee
<PAGE>
POWER OF ATTORNEY
The undersigned hereby appoints each of Audrey Talley and Daniel
Hockenbrough as attorney-in-fact and agent, each individually in all capacities,
to execute, and to file any of the documents referred to below relating to the
registration of Brazos Mutual Funds (the "Fund") as an investment company under
the Investment Company Act of 1940, as amended, (the "Act") and the Fund's
Registration Statement on Form N-1A under the Act and under the Securities Act
of 1933, including any and all amendments thereto, covering the registration of
the Fund as an investment company and the sale of shares of the series of the
Fund, including all exhibits and any and all documents required to be filed with
respect thereto with any regulatory authority, including applications for
exemptive order rulings. The undersigned grants to said attorney full authority
to do every act necessary to be done in order to effectuate the same as fully,
to all intents and purposes, as he could do if personally present, thereby
ratifying all that said attorney-in-fact and agent may lawfully do or cause to
be done by virtue hereof.
The undersigned hereby executes this Power of Attorney as of this 13th
day of May, 1999.
/s/ John Massey
-----------------
Name: John Massey
Title: Trustee
<PAGE>
POWER OF ATTORNEY
The undersigned hereby appoints each of Audrey Talley and Daniel
Hockenbrough as attorney-in-fact and agent, each individually in all capacities,
to execute, and to file any of the documents referred to below relating to the
registration of Brazos Mutual Funds (the "Fund") as an investment company under
the Investment Company Act of 1940, as amended, (the "Act") and the Fund's
Registration Statement on Form N-1A under the Act and under the Securities Act
of 1933, including any and all amendments thereto, covering the registration of
the Fund as an investment company and the sale of shares of the series of the
Fund, including all exhibits and any and all documents required to be filed with
respect thereto with any regulatory authority, including applications for
exemptive order rulings. The undersigned grants to said attorney full authority
to do every act necessary to be done in order to effectuate the same as fully,
to all intents and purposes, as he could do if personally present, thereby
ratifying all that said attorney-in-fact and agent may lawfully do or cause to
be done by virtue hereof.
The undersigned hereby executes this Power of Attorney as of this 13th
day of May, 1999.
/s/ George Gau
-----------------
Name: George Gau
Title: Trustee
CODE OF ETHICS AND STANDARDS
OF PROFESSIONAL CONDUCT OF
THE FINANCIAL ANALYSTS FEDERATION
AS AMENDED MAY 9, 1982
Members of the Financial Analysts Federation are obligated to conduct their
professional activities in accordance with the following Code of Ethics and
Standards of Professional Conduct. Disciplinary sanctions may be imposed for
violation of the Code of Standards.
WHEREAS, the profession of financial analysis and investment management has
evolved because of the increasing public need for competent, objective and
trustworthy advice with regard to investments and financial management; and
WHEREAS, those engaged in this profession have joined together in an
organization known as The Financial Analysts Federation; and
WHEREAS, despite a wide diversity of interest among analysts employed by
brokers and securities dealers, investment advisers, banks, insurance companies,
investment companies and trusts, pensions trusts and other institutional
investors and investment entities, there are nevertheless certain fundamental
standards of conduct which should be common to all engaged in the profession of
financial analysis and investment management and accepted and maintained by
them; and
WHEREAS, the members of The Financial Analysts Federation adopted a Code of
Ethics and Standards on May 20, 1962, which have been amended from time to time;
and
WHEREAS, The Financial Analysts Federation provides for individual
membership in it, requires that all of its member societies adopt its Code of
Ethics and Standards of Professional Conduct, and requires that all individual
members comply with them;
NOW, THEREFORE, the following are the Code of Ethics and Standards of
Professional Conduct of The Financial Analysts Federation:
CODE OF ETHICS
A financial analyst should conduct himself with integrity and dignity and
act in an ethical manner in his dealings with the public, clients, customers,
employers, employees, and fellow analysts.
A financial analyst should conduct himself and should encourage others to
practice financial analysis in a professional and ethical manner that will
reflect credit on himself and his profession.
A financial analyst should act with competence and should strive to
maintain and improve his competence and that of others in the profession.
A financial analyst should use proper care and exercise independent
professional judgment.
STANDARDS OF PROFESSIONAL CONDUCT
I. OBLIGATION TO INFORM EMPLOYER OF CODE AND STANDARDS
The financial analyst shall inform his employer, through his direct
supervisor, that the analyst is obligated to comply with the Code of Ethics and
Standards of Professional Conduct and is subject to disciplinary sanctions for
violations thereof. He shall deliver a copy of the Code and Standards to his
employer if the employer does not have a copy.
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II. COMPLIANCE WITH GOVERNING LAWS AND REGULATIONS AND THE CODE AND STANDARDS
A. Required Knowledge and Compliance
The financial analyst shall maintain knowledge of and shall comply with all
applicable laws, rules and regulations of any government, governmental agency,
and regulatory organization governing his professional activities, as well as
with these Standards of Professional Conduct and the accompanying Code of
Ethics.
B. Prohibition Against Assisting Legal and Ethical Violations
The financial analyst shall not knowingly participate in, or assist, any
acts in violation of any statute or regulation governing securities matters, nor
any act which would violate any provision of the Code of Ethics or the Standards
of Professional Conduct.
C. Prohibition Against Use of Material Non-Public Information
The financial analyst shall comply with all laws and regulations relating
to the use of material non-public information. (a) If the analyst acquires
such information as a result of a special or confidential relationship with
the issuer, he shall not communicate the information (other than within the
relationship), or take investment action on the basis of such information,
until it is publicly disseminated. (b) If the analyst is not in a special
or confidential relationship with the issuer, he shall not communicate or
act on material non-public information, and shall make reasonable efforts
to achieve public dissemination of such information by the issuer.
D. Responsibilities of Supervisors
A financial analyst with supervisory responsibility shall exercise
reasonable supervision over those subordinate employees subject to his
control, to prevent any violation by such persons of applicable statutes,
regulations, or provisions of the Code of Ethics or Standards of
Professional Conduct. In so doing, the analyst is entitled to rely upon
reasonable procedures established by his employer.
III. RESEARCH REPORTS, INVESTMENT RECOMMENDATIONS AND ACTIONS
A. Reasonable Basis
1. The financial analyst shall exercise diligence and thoroughness
in making an investment recommendation to others or in taking an
investment action for others.
2. The financial analyst shall have a reasonable and adequate basis
for such recommendations and actions, supported by appropriate
research and investigation.
3. The financial analyst shall maintain appropriate records to
support the reasonableness of such recommendations.
B. Research Reports
1. The financial analyst shall use reasonable judgment as to the
inclusion of relevant factors in research reports.
2. The financial analyst shall distinguish between facts and
opinions in research reports.
3. The financial analyst shall indicate the basic characteristics of
the investment involved when preparing for general public
distribution a research report that is not directly related to a
specific portfolio or client.
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C. Portfolio Investment Recommendations and Actions
The financial analyst shall, when making an investment recommendation or
taking an investment action for a specific portfolio or client, consider its
appropriateness and suitability for such portfolio or client. In considering
such matters, the financial analyst shall take into account (a) the needs and
circumstances of the client, (b) the basic characteristics of the total
portfolio, and (c) the basic characteristics of the investment involved. The
financial analyst shall use reasonable judgment to determine the applicable
relevant factors. The financial analyst shall distinguish between facts and
opinions in the presentation of investment recommendations.
D. Protection Against Plagiarism
The financial analyst shall not, when presenting material to his employer,
associates, customers, clients, or the general public, copy or use in
substantially the same form, material prepared by other persons without
acknowledging its use and identifying the name of the author or publisher of
such material. The analyst may, however, use without acknowledgement factual
information published by recognized financial and statistical reporting services
or similar sources.
E. Prohibition Against Misrepresentation
The financial analyst shall not make any statements, orally or in writing,
which materially misrepresent (a) the services that the analyst or his firm is
capable of performing for the client, (b) the qualifications of such analyst or
his firm, (c) the investment performance that the analyst or his firm has
accomplished or can reasonably be expected to achieve for the client, or (d) the
expected performance of any investment. The financial analyst shall not make any
unsupported statement, regarding the foregoing, and shall not make any
statement, orally or in writing, about any investment which guarantees or
conveys any unsupported assurances, explicitly or implicitly.
F. Fair Dealing with Customers and Clients
The financial analyst shall act in a manner consistent with his obligation
to deal fairly with all customers and clients when (a) disseminating investment
recommendations, (b) disseminating material changes in prior investment advice,
and (c) taking investment action.
IV. PRIORITY OF TRANSACTIONS
The financial analyst shall conduct himself in such a manner that
transactions for his customers, clients, and employer have priority over
personal transactions and so that his personal transactions do not operate
adversely to their interests. If an analyst decides to make a recommendation
about the purchase or sale of a security, he shall give his customers, clients,
and employer adequate opportunity to act on this recommendation before acting on
his own behalf.
V. DISCLOSURE OF CONFLICTS
The financial analyst, when making investment recommendations, or taking
investment actions, shall disclose to his customers and clients any material
conflict of interest relating to him and any material beneficial ownership of
the securities involved, which could reasonably be expected to impair his
ability to render unbiased and objective advice.
The financial analyst shall disclose to his employer all matters which
could reasonably be expected to interfere with his duty to the employer, or with
his ability to render unbiased and objective advice.
The financial analyst shall also comply with all requirements as to
disclosure of conflicts of interest imposed by law and by rules and regulations
of organizations governing his activities and shall comply with any prohibitions
on his activities if a conflict of interest exists.
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VI. COMPENSATION
A. Disclosure of Additional Compensation Arrangements
The financial analyst shall inform his customers, clients, and employer of
compensation arrangements in connection with his services to them which are in
addition to compensation from them for such services.
B. Disclosure of Referral Fees
The financial analyst shall make appropriate disclosure to a prospective
client or customer of any consideration paid to others for recommending his
services to that prospective client or customer.
C. Duty to Employer
The financial analyst shall not undertake independent practice for
compensation in competition with his employer unless he has received written
consent from both his employer and the person for whom he undertakes independent
employment.
VII. RELATIONSHIP WITH OTHERS
A. Preservation of Confidentiality
A financial analyst shall preserve the confidentiality of information
communicated by the client concerning matters within the scope of the
confidential relationship, unless the financial analyst receives information
concerning illegal activities on the part of the client.
B. Maintenance of Independence and Objectivity
The financial analyst, in relationships and contacts with an issuer of
securities, whether individually or as a member of a group, shall use particular
care and good judgment to achieve and maintain independence and objectivity.
VIII. USE OF PROFESSIONAL DESIGNATION
The qualified financial analyst may use the professional designation
"Fellow of The Financial Analysts Federation," and is encouraged to do so, but
only in a dignified and judicious manner. The use of the designation may be
accompanied by an accurate explanation (a) of the requirements that have been
met to obtain the designation and (b) of The Financial Analysts Federation.
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PERSONAL INVESTMENT TRANSACTION POLICY
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PERSONAL INVESTMENT TRANSACTION POLICY
This policy is designed to prevent any potential conflict of interest, or even
the appearance of a conflict of interest, with respect to personal transactions.
Most importantly, we completely endorse the Code of Ethics and the standards of
professional conduct as articulated and embraced by the Financial Analysts
Federation (Exhibit B). Employees are required to put their fiduciary obligation
first in all dealings, and should not benefit from positions that their clients
occupy in the marketplace.
As it relates to transactions in our own or related (family) or indirect
(advisory) account, we recognize that it is imperative that we be above reproach
in appearance, as well as in fact. With that thought in mind, the following
procedure is in effect.
1. The following steps must be adhered to upon the purchase or sale of
any equity security. This policy refers to all securities and is not
limited to the securities held in our investment accounts.
Transactions in securities where we own stocks for our clients are
strongly discouraged. Additionally, our management of a mutual fund
requires that we observe a seven-day blackout. That is, employees are
not allowed to buy or sell an equity security that is owned for our
clients, seven days prior to and/or after the completion of a
purchase/sale for any of our clients.
Steps to be completed prior to transaction:
o Check for any pending trades or transactions recently
completed.
o Complete the Employee Transaction Pre-Approval Form.
(Exhibit C)
o Attain written approval from the Portfolio Manager/Stock
sponsor of that industry.
o Attain written approval from the Trading Department.
Steps to be completed after the transaction:
o Provide a copy of the confirmation to the Compliance
Department. Confirmation should be presented as soon as it
is received following the execution.
In the event that a purchase or sale of an equity security that is
being utilized in our investment portfolios is desired, the following
procedure is also applicable;
a. Purchases can only be made after our investment accounts have
completed their own purchase transactions, and there is no
imminent trade pending.
b. Sales can only be made after our investment accounts have
completed their sales transactions, and there is not imminent
trade pending.
c. If the stock sponsor transacts in his own stocks, written
documentation must be attached to the Employee Transaction
Pre-Approval Form.
2. In addition, under any circumstances, a quarterly transaction report
is to be completed by each employee, identifying the specific
purchases and/or sales, date of transaction, etc., (Exhibit D) and
filed with the Compliance Officer with 10 days after the end of each
calendar quarter. It is strongly recommended that each person be
required to direct their brokers to supply JMIC with duplicate copies
of periodic statements (in additional to confirmation) of all
securities accounts for which you are responsible or have any
interest.
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3. In the event that the Compliance Officer and Managing Partner
determine that a material violation of this Code has occurred, further
action and sanctions will be instituted. Disgorgement is recommended
by the Task Force. That is, a person should disgorge any profits and
assume any losses, even if he/she acted innocently and the action is
discovered later.
4. While there is no prohibition in the Code of Ethics on short-term
trading profits, the Compliance Officer will monitor reports and
address any abuses of short-term trading profits on a case-by-case
basis. To avoid any doubt, you are advised to avoid the purchase and
sale or the sale and purchase, within 60 calendar days, of the same
(or equivalent) Securities of which you have ownership. If an abuse is
discovered, you will be required to disgorge any profits realized on
personal trades executed within the above prescribed period.
5. The Compliance Officer will maintain these confirmations, Employee
Transaction Pre-Approval Forms, and quarterly reports in an orderly
manner for inspection by any appropriate party.
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EMPLOYEE TRANSACTION APPROVAL FORM
Employee Name: ________________________________________________________________
Date: __________________________ Time: ______________
...............................................................................
EQUITY SECURITY INFORMATION:
Name of Equity Security: ____________________________________________
Ticker Symbol: __________________
Type of Transaction: (circle one) PURCHASE SELL
...............................................................................
APPROVAL REQUIRED:
VALID FOR 24 HOURS AFTER OBTAINING APPROVAL
Please get approvals in the following order BEFORE placing your transaction.
1. COMPLIANCE: Axys shows no activity within the 7-day time limit for the
above referenced equity security.
--------------- ---------------
Initials Date
2. PORTFOLIO MANAGER: No near term (7-day) activity is planned for the
above referenced equity security.
--------------- ---------------
Initials Date
3. TRADING: The above referenced equity security does not appear on our
daily pending sheet, nor has had any activity today.
--------------- ---------------
Initials Date
4. COMPLIANCE: Form is complete with approvals and ready for filing.
While there is no prohibition in the Code of Ethics on short-term trading
profits, the Compliance Officer will monitor reports and address any abuses of
short-term trading on a case by case basis. To avoid any doubt, you are advised
to avoid the purchase and sale, or the sale and purchase, within 60 calendar
days, of the same (or equivalent) securities of which you have ownership. If an
abuse is discovered, you will be required to disgorge any profits realized on
personal trades executed within the above prescribed period.
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CODE OF ETHICS
OF
BRAZOS MUTUAL FUNDS
PREAMBLE
This Code of Ethics is being adopted in compliance with the requirements of
Rule 17j-1 (the "Rule") adopted by the United States Securities and Exchange
Commission under the Investment Company Act of 1940 (the "Act") to effectuate
the purposes and objectives of that Rule. The Rule makes it unlawful for certain
persons, including any officer or trustee of Brazos Mutual Funds (the "Fund') in
connection with the purchase or sale by such person of a security held or to be
acquired by the Fund1:
(1) To employ a device, scheme or artifice to defraud the Fund;
(2) To make to the Fund any untrue statement of a material fact or omit to
state to the Fund a material fact necessary in order to make the
statements made, in light of the circumstances in which they are made,
not misleading;
(3) To engage in any act, practice or course of business which operates or
would operate as a fraud or deceit upon the Fund; or
(4) To engage in a manipulative practice with respect to the Fund.
The Rule also requires that the Fund and its investment adviser, John McStay
Investment Counsel (the "Adviser"), adopt a written code of ethics containing
provisions reasonably necessary to prevent persons from engaging in acts in
violation of the above standard and use reasonable diligence and institute
procedures reasonably necessary, to prevent violations of the Code.
This Code of Ethics is adopted by the Board of Trustees of the Fund in
compliance with the Rule. This Code of Ethics is based upon the principle that
the trustees and officers of the Fund, and certain affiliated persons of the
Fund and its investment adviser, owe a fiduciary duty to, among others, the
shareholders of the Fund to conduct their affairs, including their personal
securities transactions, in such manner to avoid (i) serving their own personal
interests ahead of shareholders; (ii) taking inappropriate advantage of their
position with the
- - ----------
1 A security is deemed to be "held or to be acquired" if within the
most recent fifteen (15) days it (i) is or has been held by the Fund, or (ii) is
being or has been considered by the Fund or its investment adviser for purchase
by the Fund.
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Fund; and (iii) any actual or potential conflicts of interest or any abuse
of their position of trust and responsibility. This fiduciary duty includes
the duty of the investment advisers to the portfolios of the Fund to report
violations of this Code of Ethics to the Fund's Compliance Officer.
A. DEFINITIONS
(1) "ACCESS PERSON" means any trustee, officer, general partner or
advisory person of the Fund.
(2) "ADVISORY PERSON" means (a) any employee of the Fund who, in
connection with his regular functions or duties, normally makes,
participates in, or obtains current information regarding the
purchase or sale of a security by the Fund, or whose functions
relate to the making of any recommendations with respect to such
purchases or sales; and (b) any natural person in a control
relationship to the Fund who obtains information concerning
recommendations made to the Fund with regard to the purchase or
sale of a security by the Fund.
(3) "AFFILIATED COMPANY" means a company which is an affiliated
person.
(4) "AFFILIATED PERSON" of another person means (a) any person
directly or indirectly owning, controlling, or holding with power
to vote, 5 per centum or more of the outstanding voting
securities or such other person; (b) any person 5 per centum or
more of whose outstanding voting securities are directly or
indirectly owned, controlled, or held with power to vote, by such
other person; (c) any person directly or indirectly controlling,
controlled by, or under common control with, such other person;
(d) any officer, director, partner, copartner, or employee of
such other person; (e) if such other person is an investment
company, any investment adviser thereof or any member of an
advisory board thereof, and (f) if such other person is an
unincorporated investment company not having a board of
directors, the depositor thereof.
(5) A security is "BEING CONSIDERED FOR PURCHASE OR SALE" or is
"being purchased or sold" when a recommendation to purchase or
sell the security has been made and communicated, which includes
when the Fund has a pending 'buy' or 'sell" order with respect to
a security, and, with respect to the person making the
recommendation, when such person seriously considers making such
a recommendation. "PURCHASE OR SALE OF A SECURITY" includes the
writing of an option to purchase or sell a security.
(6) "BENEFICIAL OWNERSHIP" shall be as defined in, and interpreted in
the same manner as it would be in determining whether a person is
subject to the provisions of, Section 16 of the Securities
Exchange Act of 1934 and the rules and regulations thereunder
which, generally speaking, encompasses those situations where the
beneficial owner has the right to enjoy some economic benefit
from the ownership of the security. A person is normally regarded
as the beneficial owner of securities held in the name of his or
her spouse or minor children living in his or her household.
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(7) "CONTROL" means the power to exercise a controlling influence
over the management or policies of a company, unless such power
is solely the result of an official position with such company.
Any person who owns beneficially, either directly or through one
or more controlled companies, more than 25 per centum of the
voting securities of a company shall be presumed to control such
company. Any person who does not so own more than 25 per centum
of the voting securities of any company shall be presumed not to
control such company. A natural person shall be presumed not to
be a controlled person.
(8) "DISINTERESTED DIRECTOR" means a director who is not: an
affiliated person (as defined above) of the Fund; a member of the
immediate family of any natural person who is an affiliated
person of the Fund; an interested person (as defined below) of
the Fund, any investment adviser of the Fund or any principal
underwriter for the Fund.
(9) "INTERESTED PERSON" of another person means--
(a) when used with respect to an investment company--
(i) any affiliated person of such company,
(ii) any member of the immediate family of any natural person who is
an affiliated person of such company,
(iii)any interested person of any investment adviser of or principal
underwriter for such company,
(iv) any person or partner or employee of any person who at any time
since the beginning of the last two completed fiscal years of
such company has acted as legal counsel for such company,
(v) any broker or dealer registered under the Securities Exchange Act
of 1934 or any affiliated person of such a broker or dealer, and
(vi) any natural person whom the Commission by order shall have
determined to be an interested person by reason of having had, at
any time since the beginning of the last two completed fiscal
years of such company, a material business or professional
relationship with such company or with the principal executive
officer of such company or with any other investment company
having the same investment adviser or principal underwriter or
with the principal executive officer of such other investment
company:
PROVIDED, That no person shall be deemed to be an interested person of an
investment company solely by reason of (aa) his being a member of its board of
directors or advisory board or an owner of its securities, or (bb) his
membership in the immediate family of any person specified in clause (aa) of
this proviso.
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(10) "INVESTMENT PERSONNEL" means (a) any portfolio manager of the
Fund as defined in (12) below; and (b) securities analysts,
traders and other personnel who provide information and advice to
the portfolio manager or who help execute the portfolio manager's
decisions.
(11) "PERSON" means a natural person or a company.
(12) "PORTFOLIO MANAGER" means an employee of the investment adviser
or sub-investment adviser of the Fund entrusted with the direct
responsibility and authority to make investment decisions
affecting an investment company.
(13) "SECURITY" means any note, stock, treasury stock, bond,
debenture, evidence of indebtedness, certificate of interest or
participation in any profit-sharing agreement, collateral-trust
certificate, preorganization certificate or subscription,
transferable share, investment contract, voting-trust
certificate, certificate of deposit for a security, fractional
undivided interest in oil, gas, or other mineral rights, any put,
call, straddle, option, or privilege on any security (including a
certificate of deposit) or on any group or index of securities
(including any interest therein or based on the value thereof),
or any put, call, straddle, option, or privilege entered into on
a national securities exchange relating to foreign currency, or,
in general, any interest or instrument commonly known as a
"security," or any certificate of interest or participation in,
temporary or interim certificate for, receipt for, guarantee of,
or warrant or right to subscribe to or purchase, any of the
foregoing.
"SECURITY" shall not include securities issued by the government of the
United States or by federal agencies and which are direct obligations of the
United States, bankers' acceptances, bank certificates of deposit, commercial
paper and shares of unaffiliated registered open-end investment companies
(mutual funds).
B. PROHIBITED TRANSACTIONS
(1) ACCESS PERSONS
(a) NO ACCESS PERSON shall engage in any act, practice or course
of conduct, which would violate the provisions of Rule 17j-1
set forth above.
(b) NO ACCESS PERSON SHALL:
(i) purchase or sell, directly or indirectly, any security
in which he has or by reason of such transaction
acquires, any direct or indirect beneficial ownership
and which to his or her actual knowledge at the time of
such purchase or sale:
(A) is being considered for purchase or sale by the
Fund, or
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(B) is being purchased or sold by any portfolio
of the Fund; or
(ii) disclose to other persons the securities activities
engaged in or contemplated for the various portfolios
of the Fund.
(2) INVESTMENT PERSONNEL
NO INVESTMENT PERSONNEL SHALL:
(a) accept any gift or other thing of more than de minimis value
from any person or entity that does business with or on
behalf of the Fund; for the purpose of this Code, de minimis
shall be considered to be the annual receipt of gifts from
the same source valued at $100 or less per individual
recipient, when the gifts are in relation to the conduct of
the Fund's business;
(b) acquire securities, other than fixed income securities, in
an initial public offering, in order to preclude any
possibility of such person profiting from their positions
with the Fund;
(c) purchase any securities in a private placement, without
prior approval of the Compliance Officer of the Adviser or
other officer designated by the Board of Trustees. Any
person authorized to purchase securities in a private
placement shall disclose that investment when they play a
part in any Fund's subsequent consideration of an investment
in the issuer. In such circumstances, the Fund's decision to
purchase securities of the issuer shall be subject to
independent review by investment personnel with no personal
interest in the issuer;
(d) profit in the purchase and sale, or sale and purchase, of
the same (or equivalent) securities within sixty (60)
calendar days. Trades made in violation of this prohibition
should be unwound, if possible. Otherwise, any profits
realized on such short-term trades shall be subject to
disgorgement to the appropriate portfolio of the investment
company.
Exceptions: The Compliance Officer of the Adviser may allow
exceptions to this policy on a case-by-case basis when the
abusive practices that the policy is designed to prevent,
such as frontrunning or conflicts of interest, are not
present and the equity of the situation strongly supports an
exemption. An example is the involuntary sale of securities
due to unforeseen corporate activity such as a merger.
[See ss. C below]. The ban on short-term trading profits is
specifically designed to deter potential conflicts of
interest and
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frontrunning transactions, which typically involve a quick
trading pattern to capitalize on a short-lived market impact
of a trade by one of the Fund's portfolios. The Adviser
shall consider the policy reasons for the ban on short-term
trades, as stated herein, in determining when an exception
to the prohibition is permissible. The granting of an
exception to this prohibition shall be permissible if the
securities involved in the transaction are not (i) being
considered for purchase or sale by the portfolio of the Fund
that serves as the basis of the individual's "investment
personnel" status or (ii) being purchased or sold by the
portfolio of the Fund that serves as the basis of the
individual's "investment personnel" status and, are not
economically related to such securities; exceptions granted
under this provision are conditioned upon receipt by a duly
authorized officer of the Adviser of a report (Exhibit D) of
the transaction and certification by the respective
investment personnel that the transaction is in compliance
with this Code of Ethics (see Exhibit D).
(e) serve on the board of directors of any publicly traded
company without prior authorization of the President or
other duly authorized officer of the Fund. Any such
authorization shall be based upon a determination that the
board service would be consistent with the interests of the
Fund and its shareholders. Authorization of board service
shall be subject to the implementation by the Adviser of
"Chinese Wall" or other procedures to isolate such
investment personnel from the investment personnel making
decisions about trading in that company's securities.
(3) Portfolio Managers
(a) NO PORTFOLIO MANAGER SHALL:
(i) buy or sell a security within seven (7) calendar days
before and within seven (7) calendar days after any
portfolio of the Fund that he or she manages trades in
that security. Any trades made within the proscribed
period shall be unwound, if possible. Otherwise, any
profits realized on trades within the proscribed period
shall be disgorged to the appropriate portfolio of the
Fund.
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C. EXEMPTED TRANSACTIONS
The prohibitions of Sections B(1)(b), B(2)(d) and B(3)(a) shall not apply
to:
(1) purchases or sales effected in any account over which the access
person has no direct or indirect influence or control;
(2) purchases or sales which are non-volitional on the part of either the
access person or the Fund;
(3) purchases which are part of an automatic dividend reinvestment plan;
(4) purchases effected upon the exercise of rights issued by an issuer pro
rata to all holders of a class of its securities, to the extent such
rights were acquired from such issuer, and sales of such rights so
acquired;
(5) purchases or sales of securities which are not eligible for purchase
by the Fund and which are not related economically to securities
purchased, sold or held by the Fund;
(6) transactions which appear upon reasonable inquiry and investigation to
present no reasonable likelihood of harm to the Fund and which are
otherwise in accordance with Rule 17j-1; For example, such
transactions would normally include purchases or sales of.
(a) securities contained in the Standard and Poor's 100 Composite
Stock Index;
(b) up to $25,000 principal amount of a fixed income security or 100
shares of an equity security within any three-consecutive month
period (all trades within a three-consecutive month period shall
be integrated to determine the availability of this exemption);
(c) up to 1,000 shares of a security which is being considered for
purchase or sale by a Fund (but not then being purchased or sold)
if the issuer has a market capitalization of over $1 billion and
if the proposed acquisition or disposition by the Fund is less
than one percent of the class outstanding as shown by the most
recent report or statement published by the issuer, or less than
one percent of the average weekly reported volume of trading in
such securities on all national securities exchanges and/or
reported through the automated quotation system of a registered
securities association, during the four calendar weeks prior to
the individual's personal securities transaction; or
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(d) any amount of securities if the proposed acquisition or
disposition by the Fund is in the amount of 1,000 or less shares
and the security is listed on a national securities exchange or
the National Association of Securities Dealers Automated
Quotation System.
D. COMPLIANCE PROCEDURES
(1) PRE-CLEARANCE
All access persons shall receive prior written approval (Exhibit
E) from the Compliance Officer of the Adviser or other officer designated by the
Board of Trustees before purchasing or selling securities.
Procedures implemented herein to pre-clear the securities
transactions of access persons shall not apply to a trustee of the Fund who is
not an "interested person" of the Fund as defined in this Code, except where
such trustee knew or, in the ordinary course of fulfilling his official duties
as a trustee of the Fund, should have known that during the 15-day period
immediately preceding or after the date of the transaction in a security by the
director, such security is or was purchased or sold by the Fund or such purchase
or sale by the Fund is or was considered by the Fund.
Purchases or sales by access persons who are employees of the
Adviser are not subject to the pre-clearance procedures set forth herein,
provided that such persons are required to pre-clear proposed transactions in
securities pursuant to a Code of Ethics.
Purchases or sales by access persons who are employees of the
administrator for the Fund, SunAmerica Asset Management Corp., are not subject
to the pre-clearance procedures set forth herein, provided that such persons are
required to pre-clear proposed transactions in securities pursuant to a Code of
Ethics.
Purchases or sales of securities which are not eligible for
purchase or sale by the Fund or any portfolio of the Fund that serves as the
basis of the individual's "access person" status shall be entitled to clearance
automatically from the Compliance Officer of the Fund. This provision shall not
relieve any access person from compliance with pre-clearance procedures.
(2) DISCLOSURE OF PERSONAL HOLDINGS
All investment personnel shall disclose to the Compliance Officer
of the Adviser all personal securities holdings upon the later of commencement
of employment or adoption of this Code of Ethics and thereafter on an annual
basis as of December 31. This initial report shall be made on the form attached
as Exhibit A and shall be delivered to the Compliance Officer of the Adviser
and, upon request, to the Compliance Officer of the Fund.
8
<PAGE>
(3) CERTIFICATION OF COMPLIANCE WITH CODE OF ETHICS
(a) Every access person shall certify annually that:
(i) they have read and understand the Code of Ethics and
recognize that they are subject thereto;
(ii) they have complied with the requirements of the Code of
Ethics; and
(iii)they have reported all personal securities
transactions required to be reported pursuant to the
requirements of the Code of Ethics.
The annual report shall be made on the form attached as
Exhibit B and delivered to the Compliance Officers of the Fund and the Adviser.
(4) Reporting Requirements
(a) Every access person shall report to the Compliance Officer
of the Fund and the Adviser the information described in
Sub-paragraph (4)(b) of this Section with respect to
transactions in any security in which such person has, or by
reason of such transaction acquires, any direct or indirect
beneficial ownership in the security; provided, however,
that an access person shall not be required to make a report
with respect to transactions effected for any account over
which such person does not have any direct or indirect
influence.
(b) Reports required to be made under this Paragraph (4) shall
be made not later than 10 days after the end of the calendar
quarter in which the transaction to which the report relates
was effected.
Every access person shall be required to submit a report for
all periods, including those periods in which no securities
transactions were effected. A report shall be made on the
form attached hereto as Exhibit C or on any other form
containing the following information:
(i) the date of the transaction, the title and the number
of shares, and the principal amount of each security
involved;
(ii) the nature of the transaction (i.e., purchase, sale or
any other type of acquisition or disposition);
(iii) the price at which the transaction was effected; and
9
<PAGE>
(iv) the name of the broker, dealer or bank with or through
whom the transaction was effected.
Duplicate copies of the broker confirmation of all personal
transactions and copies of periodic statements for all
securities accounts may be appended to Exhibit C to fulfill
the reporting requirement.
(c) Any such report may contain a statement that the report
shall not be construed as an admission by the person making
such report that he or she has any direct or indirect
beneficial ownership in the security to which the report
relates.
(d) The Compliance Officer of the Fund shall notify each access
person that he or she is subject to these reporting
requirements, and shall deliver a copy of this Code of
Ethics to each such person upon request.
(e) Reports submitted to the Fund pursuant to this Code of
Ethics shall be confidential and shall be provided only to
the officers and trustees of the Fund, Fund counsel or
regulatory authorities upon appropriate request.
(f) Each trustee who is not an "interested person" of the Fund
as defined in the Act need only report a transaction in a
security if such trustee, at the time of that transaction
knew, or, in the ordinary course of fulfilling his official
duties as a trustee, should have known that, during the
15-day period immediately preceding or after the date of the
transaction by the trustee, such security was purchased or
sold by the Fund or was being considered for purchase by the
Fund or by its investment adviser or sub-investment adviser.
Such reports will include the information described in
Sub-paragraph (4)(b) of this Section.
(5) CONFLICT OF INTEREST
Every access person, except officers and trustees of the Fund, shall
notify the Compliance Officer of the Adviser of any personal conflict of
interest relationship which may involve the Fund, such as the existence of any
economic relationship between their transactions and securities held or to be
acquired by any portfolio of the Fund. Officers and trustees of the Fund shall
notify the Compliance Officer of the Fund of any personal conflict of interest
relationship which may involve the Fund. Such notification shall occur in the
pre-clearance process.
10
<PAGE>
E. REPORTING OF VIOLATIONS TO THE BOARD OF TRUSTEES
(1) The Compliance Officer of the Fund shall promptly report to the
Board of Trustees all apparent violations of this Code of Ethics
and the reporting requirements thereunder.
(2) When the Compliance Officer of the Fund finds that a transaction
otherwise reportable to the Board of Trustees under Paragraph (1)
of this Section could not reasonably be found to have resulted in
a fraud, deceit or manipulative practice in violation of Rule
17j-l(a), he may, in his discretion, lodge a written memorandum
of such finding and the reasons therefor with the reports made
pursuant to this Code of Ethics, in lieu of reporting the
transaction to the Board of Trustees.
(3) The Board of Trustees, or a Committee of Trustees created by the
Board of Trustees for that purpose, shall consider reports made
to the Board of Trustees hereunder and shall determine whether or
not this Code of Ethics has been violated and what sanctions, if
any, should be imposed.
F. ANNUAL REPORTING TO THE BOARD OF TRUSTEES
(1) The Compliance Officer of the Fund shall prepare an annual report
relating to this Code of Ethics to the Board of Trustees. Such
annual report shall:
(a) summarize existing procedures concerning personal investing
and any changes in the procedures made during the past year;
(b) identify any violations requiring significant remedial
action during the past year; and
(c) identify any recommended changes in the existing
restrictions or procedures based upon the Fund's experience
under its Code of Ethics, evolving industry practices or
developments in applicable laws or regulations.
G. SANCTIONS
Upon discovering a violation of this Code, the Board of Trustees may
impose such sanctions as they deem appropriate, including, among other things, a
letter of censure or suspension or termination of the employment of the
violator.
H. RETENTION OF RECORDS
The Fund shall maintain the following records as required under Rule
17j-1; reports received by the Adviser on behalf of the Fund shall be maintained
as required under Rule 17j-1:
11
<PAGE>
(a) a copy of any Code of Ethics in effect within the most
recent five years;
(b) a list of all persons required to make reports hereunder
within the most recent five years, as shall be updated by
the Compliance Officer of the Fund;
(c) a copy of each report made by an access person hereunder for
a period of five years from the end of the fiscal year in
which it was made;
(d) each memorandum made by the Compliance Officer of the Fund
hereunder, for a period of five years from the end of the
fiscal year in which it was made; and
(e) a record of any violation hereof and any action taken as a
result of such violation, for a period of five years
following the end of the fiscal year in which the violation
occurred.
Dated: April 8, 1999
12
<PAGE>
Exhibit A
BRAZOS MUTUAL FUNDS
CODE OF ETHICS
INITIAL REPORT OF INVESTMENT PERSONNEL
To the Compliance Officer of John McStay Investment Counsel on behalf of Brazos
Mutual Funds:
1. I hereby acknowledge receipt of a copy of the Code of Ethics for
Brazos Mutual Funds (the "Fund").
2. I have read and understand the Code and recognize that I am subject
thereto in the capacity of "Investment Personnel."
3. Except as noted below, I hereby certify that I have no knowledge of
the existence of any personal conflict of interest relationship which may
involve the Fund, such as any economic relationship between my transactions and
securities held or to be acquired by the Fund or any of its portfolios.
4. As of the date below I had a direct or indirect beneficial ownership
in the following securities:
================================================================================
Type of Interest
Name of Securities Number of Shares (Direct or Indirect)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
================================================================================
NOTE: Do NOT report transactions in U.S. Government securities, bankers'
acceptances, bank certificates of deposit, commercial paper and unaffiliated
registered open-end investment companies (mutual funds).
Date:________________________ Signature:___________________________________
(First date of investment
personnel status) Print Name:________________________________
Title:_____________________________________
Employer's Name:___________________________
Date:________________________ Signature:___________________________________
Compliance Officer
<PAGE>
Exhibit B
BRAZOS MUTUAL FUNDS
CODE OF ETHICS
ANNUAL REPORT OF ACCESS PERSONS
To the Compliance Officer of John McStay Investment Counsel and the Fund:
1. I have read and understand the Code and recognize that I am subject
thereto in the capacity of an "Access Person."
2. I hereby certify that, during the year ended December 31, 19___, I
have complied with the requirements of the Code and I have reported all
securities transactions required to be reported pursuant to the Code.
3. Except as noted below, I hereby certify that I have no knowledge of
the existence of any personal conflict of interest relationship which may
involve the Fund, such as any economic relationship between my transactions and
securities held or to be acquired by the Fund or any of its portfolios.
4. Only access persons who are also investment personnel complete this
item. As of December 31, 19___, I had a direct or indirect beneficial ownership
in the following securities:
================================================================================
Type of Interest
Name of Securities Number of Shares (Direct or Indirect)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
================================================================================
NOTE: Do NOT report transactions in U.S. Government securities, bankers'
acceptances, bank certificates of deposit, commercial paper and unaffiliated
registered open-end investment companies (mutual funds).
Trustees who are not "interested persons" of the Fund are required to
complete this form but are not required to make a report of personal securities
holdings except where such director knew or should have known that during the
15-day period immediately preceding or after the date of the transaction in a
security by the director, such security is or was purchased or sold by the Fund
or such purchase or sale by the Fund is or was considered by the Fund or an
adviser.
Date:________________________ Signature:___________________________________
(First date of investment
personnel status) Print Name:________________________________
Title:_____________________________________
Employer's Name:___________________________
Date:________________________ Signature:___________________________________
Compliance Officer
<PAGE>
Exhibit C
BRAZOS MUTUAL FUNDS
ACCESS PERSONS
Securities Transactions Report For the Calendar Quarter
Ended:_____________
To the Compliance Officer of Brazos Mutual Funds (the "Fund") (with a copy to
the Compliance Officer of John McStay Investment Counsel):
During the quarter referred to above, the following transactions were
effected in securities of which I had, or by reason of such transaction
acquired, direct or indirect beneficial ownership, and which are required to be
reported pursuant to the Code of Ethics adopted by the Fund.
<TABLE>
<CAPTION>
================================================================================================================================
NATURE OF
DOLLAR TRANSACTION BROKER/DEALER
DATE OF No. of AMOUNT OF (Purchase, Sale, OR BANK THROUGH
SECURITY TRANSACTION SHARES TRANSACTION Other) PRICE WHOM EFFECTED
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- - --------------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------------------
================================================================================================================================
</TABLE>
This report (i) excludes transactions with respect to which I had no
direct or indirect influence or control, (ii) excludes other transactions not
required to be reported, and (iii) is not an admission that I have or had any
direct or indirect beneficial ownership in the securities listed above.
Except as noted on the reverse side of this report, I hereby certify
that I have no knowledge of the existence of any personal conflict of interest
relationship which may involve the Fund, such as the existence of any economic
relationship between my transactions and securities held or to be acquired by
the Fund or any of its Series.
NOTE: Do NOT report transactions in U.S. Government securities,
bankers' acceptances, bank certificates of deposit, commercial paper and
unaffiliated registered open-end investment companies (mutual funds).
Trustees who are not interested persons of the Fund are not required to
make a report except where such director knew or should have known that during
the 15-day period immediately preceding or after the date of the transaction in
a security by the director, such security is or was purchased or sold by the
Fund or such purchase or sale by the Fund is or was considered by the Fund or an
adviser.
Date:________________________ Signature:___________________________________
(First date of investment
personnel status) Print Name:________________________________
Title:_____________________________________
Employer's Name:___________________________
Date:________________________ Signature:___________________________________
Compliance Officer
<PAGE>
Exhibit E
BRAZOS MUTUAL FUNDS
INVESTMENT PERSONNEL
Securities Transactions Report Relating to Short-Term Trading
(see Section B(2)(d), Code of Ethics)
For the Sixty-Day Period from ________________ to _______________:
To the Compliance Officer of John McStay Investment Counsel on behalf of Brazos
Mutual Funds (the "Fund"):
During the 60 calendar day period referred to above, the following
purchases and sales, or sales and purchases, of the same (or equivalent)
securities were effected or are proposed to be effected in securities (which I
have, or by reason of such transaction acquired, direct or indirect beneficial
ownership.
<TABLE>
<CAPTION>
================================================================================================================================
NATURE OF
DOLLAR TRANSACTION PRICE (OR BROKER/DEALER
DATE OF NO. OF AMOUNT OF (Purchase, Sale, PROPOSE OR BANK THROUGH
SECURITY TRANSACTION SHARES TRANSACTION Other) PRICE) WHOM EFFECTED
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- - --------------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------------------
================================================================================================================================
</TABLE>
This report (i) excludes transactions with respect to which I have or
had no direct or indirect influence or control, (ii) excludes other transactions
not required to be reported, and (iii) is not an admission that I have or had
any direct or indirect beneficial ownership in the securities listed above.
WITH RESPECT TO THE (1) PORTFOLIO OF THE FUND THAT SERVES AS THE BASIS
FOR MY "INVESTMENT PERSONNEL" STATUS WITH THE FUND (THE "PORTFOLIO"); AND (2)
TRANSACTIONS IN THE SECURITIES SET FORTH IN THE TABLE ABOVE, I HEREBY CERTIFY
THAT:
(a) I have no knowledge of the existence of any personal conflict
of interest relationship which may involve the Portfolio, such
as frontrunning transactions or the existence of any economic
relationship between my transactions and securities held or to
be acquired by the Portfolio;
(b) such securities, including securities that are economically
related to such securities, involved in the transaction are
not (i) being considered for purchase or sale by the
Portfolio, or (ii) being purchased or sole by the Portfolio;
and
<PAGE>
(c) are in compliance with the Code of Ethics of the Fund.
Date:______________________ Signature:_________________________________
Print Name:________________________________
Title:_____________________________________
Employer's Name:___________________________
- - --------------------------------------------------------------------------------
In accordance with the provisions of Section B(2)(d) of the Code of
Ethics of the Fund, the transaction proposed to be effected as set forth in this
Report is:
Authorized: [ ]
Unauthorized: [ ]
Date:_____________________ Signature:________________________________________
Compliance Officer
- - --------------------------------------------------------------------------------
-2-
<PAGE>
Exhibit E
BRAZOS MUTUAL FUNDS
ACCESS PERSONS
Personal Securities Transactions Pre-clearance Form
(see Section D(1), Code of Ethics)
To the Compliance Officer of John McStay Investment Counsel:
I hereby request pre-clearance of the following proposed transactions:
<TABLE>
<CAPTION>
==============================================================================================================================
NATURE OF PRICE BROKER/
DOLLAR TRANSACTION (OR DEALER AUTHORIZED
NO. OF AMOUNT OF (Purchase, Sale, PROPOSED OR BANK THROUGH
SECURITY SHARES TRANSACTION Other) PRICE) WHOM EFFECTED YES NO
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
==============================================================================================================================
</TABLE>
Signature:_________________________________________ _____________________
Print Name:_______________________________________ Date
Employer:__________________________________________
Signature:_________________________________________ _____________________
Compliance Officer of Date
John McStay Investment Counsel
