EQ ADVISORS TRUST
1290 Avenue of the Americas - New York, New York 10104
EQ Advisors Trust ("Trust") is an open-end management investment company that
offers a selection of professionally managed investment portfolios
("Portfolios"). Each Portfolio has its own investment objective and policies
that are designed to meet different investment goals.
This Prospectus describes the following four Portfolios currently offered by the
Trust:
o T. Rowe Price Equity Income Portfolio
o MFS Emerging Growth Companies Portfolio
o Warburg Pincus Small Company Value Portfolio
o BT International Equity Index Portfolio
The Trust offers two classes of shares on behalf of each Portfolio: Class IA
shares offered hereby and Class IB shares offered pursuant to another
prospectus. The Trust currently offers Class IA shares as an investment option
only to The Equitable Investment Plan for Employees, Managers and Agents.
This Prospectus sets forth concisely the information about the Trust and the
Portfolios that a prospective investor should know before investing. Please read
the Prospectus and retain it for future reference. Additional information
contained in a Statement of Additional Information dated May 1, 1998 has been
filed with the Securities and Exchange Commission and is available upon request
without charge by writing to the Trust at the address noted above. California
residents can obtain a copy of the Statement of Additional Information by
calling 1-800-999-3527. The Statement of Additional Information is incorporated
into this Prospectus by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated November 1, 1998
<PAGE>
SUMMARY OF EXPENSES
Shareholder Transaction Expenses
Maximum initial sales charge imposed on purchases None
Maximum sales charge imposed on reinvested dividends None
Maximum contingent deferred sales charge ("CDSC") None
Exchange Fee None
Annual Operating Expenses After Fee Waivers or Assumption of Expenses
The table below shows the annual management fees and other estimated expenses
for each of the Portfolios based upon amounts paid by the Portfolios (other than
the BT International Equity Index Portfolio) during 1997. The information for
the BT International Equity Index Portfolio is based on expense ratios for that
Portfolio as reflected in the unaudited Semi-Annual Report to Shareholders.
Other expenses for each of the Portfolios may fluctuate from year to year. The
management fees and other expenses are expressed in the table below as an annual
percentage of each Portfolio's daily average net assets:
<TABLE>
<CAPTION>
T. Rowe Price Warburg Pincus MFS BT
Equity Income Small Company Emerging Growth International Equity
Value Companies Index**
<S> <C> <C> <C> <C>
Management fees 0.55% 0.65% 0.55% 0.35%
12b-1 fees None None None None
Other expenses of the Trust 0.05% 0.10% 0.05% 0.20%
Total annual operating expenses* 0.60% 0.75% 0.60% 0.55%
<FN>
* The Trust's Manager has entered into an Expense Limitation Agreement with
the Trust with respect to each Portfolio. Pursuant to that agreement, the
Manager has agreed to waive or limit its fees and to assume other expenses so
that the total annual operating expenses of each Portfolio (other than certain
expenses described in the agreement) are limited as specified in the table
above. If the agreement were not in effect, the total annual operating expenses
of each of the Portfolios (other than the BT International Equity Index
Portfolio) for the year ended December 31, 1997 would have been 1.74%, 1.70%,
and 1.82%, respectively, and the total annual operating expenses of the BT
International Equity Index Portfolio for period ended June 30, 1998 would have
been 1.27%. See "Management of the Trust" - "Expense Limitation Agreement" for
more detailed information.
** BT International Equity Index Portfolio received initial capital on
December 31, 1997 and commenced operations January 1, 1998.
</FN>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below for the period May 1, 1997* (unless
otherwise noted) to December 31, 1997 has been derived from financial statements
of Trust's Class IB shares, which information has been audited by
PricewaterhouseCoopers LLP, independent public accountants.
PricewaterhouseCoopers LLP's report on the Trust's financial statements as of
December 31, 1997 appears in the Trust's Annual Report. The financial
information in the table below for the period January 1, 1998 to June 30, 1998
has been derived from unaudited financial statements of the Trust. The Trust's
financial statements as of June 30, 1998 appear in the Trust's Semi-Annual
Report. The information provided below should be read in conjunction with the
financial statements contained in the Trust's Annual Report and Semi-Annual
Report, which are incorporated by reference into the Trust's Statement of
Additional Information. The Annual Report and Semi-Annual Report include more
information and are available without charge upon request.
<TABLE>
<CAPTION>
BT
T. Rowe Price Equity Income MFS Emerging Growth Warburg Pincus Small International
Portfolio Companies Portfolio Company Value Portfolio Equity Index
For the Portfolio
For the For the For the For the period For the For the
period ended period ended period ended period ended ended period ended period ended
6/30/98 12/31/97 6/30/98 12/31/97 6/30/98 12/31/97 06/30/98
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, $12.08 $10.00 $11.92 $10.00 $11.85 $10.00 $10.00
beginning of period
Net Investment 0.11 0.10 (0.01) 0.02 0.02 0.01 0.09
Income
Net realized and 0.65 2.11 2.59 2.21 0.77 1.90 1.49
unrealized gain
(loss) on
investments and
foreign currency
transactions
Total from 0.76 2.21 2.58 2.23 0.79 1.91 1.58
Investment
Operations
Dividends from net -- (0.09) -- (0.02) -- (0.01) --
Investment Income
Dividends in excess -- -- -- -- -- -- --
of net Investment
Income
Distribution from -- (0.04) -- (0.18) -- -- --
realized Gains
Distribution in -- -- -- (0.11) -- (0.05) --
excess of realized
gains
Total Dividends and -- (0.13) -- (0.31) -- (0.06) --
Distributions
Net Asset Value, $12.84 $12.08 $14.50 $11.92 $12.64 $11.85 $11.58
End of Period
Total Return (b) 6.29% 22.11% 21.64% 22.42% 6.67% 19.15% 15.80%
Net assets end of $199,678 $99,947 $259,338 $99,317 $181,001 $120,880 $29,098
period (000's)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BT
T. Rowe Price Equity Income MFS Emerging Growth Warburg Pincus Small International
Portfolio Companies Portfolio Company Value Portfolio Equity Index
Portfolio
For the For the For the For the For the For the For the
period ended period ended period ended period ended period ended period ended period ended
6/30/98 12/31/97 6/30/98 12/31/97 6/30/98 12/31/97 06/30/98
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of expenses 0.85% 0.85% 0.85% 0.85% 1.00% 1.00% 0.80%
to average net
assets after
waivers (a)(c)
Ratio of net 1.04% 1.74% 1.04% 1.82% 1.12% 1.70% 1.27%
expenses to average
net assets before
waivers (a)(c)
Ratio of net 2.20% 2.49% (0.26)% 0.61% 0.33% 0.26% 2.18%
investment income
to average net
assets after
waivers (a)(c)
Ratio of net 2.01% 1.60% (0.45)% (0.36)% 0.21% (0.44)% 1.71%
investment income
to average net
waivers (a)(c)
Portfolio turnover 9% 9% 28% 116% 49% 44% 1%
rate
Average commission $0.0304 $0.0293 $0.0518 $0.0422 $0.0552 $0.0545 $0.0171
rate paid
Per share benefit $0.01 $0.03 $0.01 $0.04 $0.01 $0.03 $0.02
to net investment
income (c)
<FN>
(a) Annualized
(b) Total return calculated for a period of less than one year is not
annualized.
(c) For further information concerning fee waivers, see the section entitled
"Management of the Trust" - "Expense Limitation Agreement" in the
Prospectus.
* BT International Equity Index Portfolio received initial capital on
December 31, 1997.
</FN>
</TABLE>
THE TRUST
The Trust is an open-end management investment company registered under the
Investment Company Act of 1940, as amended ("1940 Act"). As a "series" type of
mutual fund, the Trust issues shares of beneficial interest that are currently
divided among eighteen separate Portfolios, four of which are offered by this
Prospectus. Each Portfolio is a separate series of the Trust with its own
objective and policies. Each of the Portfolios set forth below are diversified
for 1940 Act purposes.
Each Portfolio is managed by EQ Financial Consultants, Inc. ("Manager") which
directs the day to day operations of each Portfolio. T. Rowe Price Associates,
Inc., Massachusetts Financial Services Company, Warburg Pincus Asset Management,
Inc., and Bankers Trust Company serve as the advisers (each an "Adviser" and,
together, the "Advisers") to one of the Portfolios, as detailed in the table
below.
<TABLE>
<CAPTION>
Portfolio Adviser
<S> <C>
T. Rowe Price Equity Income Portfolio T. Rowe Price Associates, Inc.
MFS Emerging Growth Companies Portfolio Massachusetts Financial Services Company
Warburg Pincus Small Company Value Portfolio Warburg Pincus Asset Management, Inc.
BT International Equity Index Portfolio Bankers Trust Company
</TABLE>
<PAGE>
The Manager has the ultimate responsibility to oversee each of the Advisers and
to recommend their hiring, termination and replacement. The Trust and the
Manager have received exemptive relief from the Securities and Exchange
Commission that permits the Manager, subject to approval by the Board of
Trustees, to (i) select Advisers for each of the Portfolios and (ii) materially
modify existing investment advisory agreements without obtaining shareholder
approval.
The Trust currently offers Class IA shares only to The Equitable Investment Plan
for Employees, Managers and Agents. EQ Financial Consultants ("EQ Financial"),
the Trust's Manager, serves as one of the distributors for the Class IA shares
of the Trust offered by this Prospectus as well as one of the distributors for
the Class IB shares. Equitable Distributors, Inc. ("EDI") serves as the other
distributor for the Class IA shares of the Trust as well as Class IB shares. (EQ
Financial and EDI are collectively referred to as the "Distributors.") Both
classes of shares are offered and redeemed at their net asset value without any
sales load.
The Trust's Class IB shares are currently sold only to insurance company
separate accounts in connection with variable life insurance contracts and
variable annuity certificates and contracts (collectively, "Contracts" issued by
The Equitable Life Assurance Society of The United States "Equitable Life").
Class IB shares are offered pursuant to another prospectus and are subject to
the same expenses as the Class IA shares, but unlike the Class IA shares they
are subject to distribution fees imposed pursuant to a distribution plan
("Distribution Plan") adopted pursuant to Rule 12b-1 under the 1940 Act.
Inquiries regarding Class IB shares should be addressed to Equitable Life, at
1290 Avenue of the Americas, New York, NY 10104 or by calling (212) 314-4300.
INVESTMENT OBJECTIVES AND POLICIES
The following is a brief description of the investment objectives and policies
of each of the Portfolios. All of the objectives and policies of each Portfolio,
unless otherwise noted, are not fundamental and may be changed by the Board of
Trustees of the Trust without the approval of shareholders. Certain investment
strategies and instruments discussed below are described in greater detail in
the Statement of Additional Information. Because of the uncertainty inherent in
all investments, there can be no assurance that the Portfolios will be able to
achieve their respective investment objectives.
T. Rowe Price Equity Income Portfolio
The investment objective of the T. Rowe Price Equity Income Portfolio is to seek
to provide substantial dividend income and also capital appreciation by
investing primarily in dividend-paying common stocks of established companies.
In pursuing its objective, the Portfolio emphasizes companies with favorable
prospects for increasing dividend income and capital appreciation. Over time,
the income component (dividends and interest earned) of the Portfolio's
investments is expected to be a significant contributor to the Portfolio's total
return. The Portfolio's yield is expected to be significantly above that of the
Standard & Poor's 500 Composite Stock Price Index ("S & P 500"). Total return
will consist primarily of dividend income and secondarily of capital
appreciation (or depreciation).
The investment program of the Portfolio is based on several premises. First, the
Adviser believes that over time, dividend income can account for a significant
component of the total return from equity investments. Second, dividends are
normally a more stable and predictable source of return than capital
appreciation. While the price of a company's stock generally increases or
decreases in response to short-term earnings and market fluctuations, its
dividends are generally less volatile. Finally, the Adviser believes that stocks
that distribute a high level of current income tend to have less price
volatility than those that pay below average dividends.
Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in income-producing common stocks of established companies paying
above-average dividends. The Adviser uses a "value" approach and invests in
common stocks and other equities-related securities it believes are temporarily
undervalued by various measures, such as price/earnings ratios. The Portfolio's
investments will generally be made in companies that share some of the following
characteristics: established operating histories; above-average current dividend
yields relative to the S&P 500; low price/earnings ratios relative to the S&P
500; sound balance sheets and other financial characteristics; and low stock
price relative to the company's underlying value as measured by assets,
earnings, cash flow or business franchises.
Although the Portfolio will invest primarily in United States common stocks, it
may also purchase other types of securities (for example, foreign securities,
preferred stocks, convertible securities and warrants) when considered
consistent with the Portfolio's investment objective and program. The Portfolio
may invest up to 25% of its total assets in foreign securities. These include
non-dollar denominated securities traded outside the United States and
dollar-denominated securities traded in the United States, such as American
Depositary Receipts ("ADRs"). Such investments increase a portfolio's
diversification and may enhance return, but they may represent a greater degree
of risk than investing in domestic securities.
The Portfolio may also engage in a variety of investment practices, such as
buying and selling options and futures contracts and engaging in foreign
currency exchange transactions. In addition, the Portfolio may invest in up to
10% of its total assets in hybrid instruments.
The Portfolio may also invest a portion of its assets in United States
government securities and high-quality United States and foreign
dollar-denominated money market securities, i.e., within the two highest rating
categories assigned by a nationally recognized statistical rating organization
("NRSRO") including certificates of deposit, bankers' acceptances, commercial
paper, short-term corporate securities and repurchase agreements. For temporary
defensive purposes or to meet redemption requests, the Portfolio may invest
without limitation in such securities.
The Portfolio may also invest in debt securities of any type including municipal
securities, without regard to quality or rating. Such securities would be
purchased in companies that meet the investment criteria for the Portfolio. The
price of a bond generally fluctuates with changes in interest rates, rising when
interest rates fall and falling when interest rates rise. The Portfolio,
however, will not invest more than 10% of its total assets in securities rated
below investment grade (commonly known as "junk bonds").
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, futures contracts,
convertible securities, borrowings, foreign securities, repurchase agreements,
derivatives, United States government securities, securities loans, foreign
currency transactions, illiquid securities, and investment grade and lower
quality fixed income securities) are discussed under the caption "Investment
Strategies" and in the Statement of Additional Information.
MFS Emerging Growth Companies Portfolio
The investment objective of the MFS Emerging Growth Companies Portfolio is to
provide long-term growth of capital. Dividend and interest income from portfolio
securities, if any, is incidental to the Portfolio's investment objective. In
pursuing its objective, the Portfolio invests primarily (i.e., at least 80% of
its assets under normal circumstances) in common stocks of emerging growth
companies that the Adviser believes are early in their life cycle but which have
the potential to become major enterprises. Such emerging growth companies
generally are expected to: (i) show earnings growth over time that is well above
the growth rate of the overall economy and the rate of inflation; and (ii) have
the products, technologies, management and market and other opportunities that
are usually necessary to become more widely recognized as growth companies.
Emerging growth companies can be of any size and the Portfolio may invest in
larger or more established companies whose rates of earnings are expected to
accelerate because of special factors, such as rejuvenated management, new
products, changes in customer demand, or basic changes in the economic
environment. Investing in emerging growth companies involves greater risk than
is customarily associated with investments in more established companies.
Emerging growth companies often have limited product lines, markets or financial
resources and may be more dependent on one-person management. In addition, there
may be less research available on many promising small or medium-sized emerging
growth companies, making it more difficult to identify and to analyze such
companies. Moreover, the securities of such companies may have limited
marketability and may be subject to more abrupt or erratic market movements than
the securities of larger more established companies.
While the Portfolio may invest primarily in common stocks, the Portfolio may, to
a limited extent, seek long-term growth in other types of securities such as
convertible securities and warrants. To the extent that such investments comply
with the Portfolio's investment objective the Portfolio may invest up to 25% of
its total assets in foreign securities, including those in emerging markets.
These securities include non-United States dollar-denominated securities traded
outside the United States and dollar-denominated securities traded in the United
States (such as ADRs). Such foreign investments increase a portfolio's
diversification and may enhance return, but they may represent a greater degree
of risk than investing exclusively in domestic securities. The Portfolio may
also invest in debt securities and hold cash and cash equivalents. In addition,
the Portfolio may invest in lower-rated debt securities (commonly referred to as
"junk bonds").
The Portfolio is aggressively managed and, therefore, the value of its shares is
subject to greater fluctuation and investment in its shares generally involves a
higher degree of risk than would be the case with an investment in a
conservative equity or growth fund investing entirely in proven growth
companies.
Certain investment strategies and practices which may be employed by the
Portfolio (such as foreign securities, repurchase agreements, loan
participations, derivatives, United States Government securities, securities
loans, forward commitments, asset-backed securities, borrowings, options,
futures contracts, convertible securities, foreign currency transactions,
illiquid securities, and investment grade and lower-quality fixed income
securities) are discussed under the caption "Investment Strategies" and in the
Statement of Additional Information.
Warburg Pincus Small Company Value Portfolio
The investment objective of the Warburg Pincus Small Company Value Portfolio is
to seek long-term capital appreciation. The Portfolio is a diversified
management investment company that pursues its investment objective by investing
primarily in a portfolio of equity securities of small capitalization companies
(i.e., companies having market capitalization's of $1 billion or less at the
time of initial purchase) that the Adviser considers to be relatively
undervalued. Current income is a secondary consideration in selecting portfolio
investments.
Under normal market conditions, the Portfolio will invest at least 65% of its
total assets in common stocks, preferred stocks, debt securities convertible
into common stocks, warrants and other rights of small companies. The Portfolio
may invest up to 10% of its total assets in warrants.
The Adviser will determine whether a company is undervalued based on a variety
of measures, including: price/earnings ratio, price/book ratio, price/cash flow
ratio, earnings growth and debt/capital ratio. Other relevant factors, including
a company's asset value, franchise value and quality of management, will also be
considered. The Portfolio will invest primarily in companies whose securities
are traded on United States stock exchanges or in the United States
over-the-counter market, but it may invest up to 20% of its total assets in
foreign securities.
The Portfolio may also invest up to 20% of its total assets in investment grade
securities (other than money market obligations) that are not convertible into
common stock for the purpose of seeking capital appreciation. Subsequent to its
purchase by the Portfolio, an issue of securities may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Portfolio.
Neither event will require the sale of such securities by the Portfolio. The
Adviser will consider such events in its determination of whether the Portfolio
should continue to hold the securities. The interest income to be derived may be
considered as one factor in selecting debt securities by the Adviser.
The Portfolio is authorized to invest, under normal market conditions, up to 20%
of its total assets in domestic and foreign short-term (one year or less
remaining to maturity) and medium-term (five years or less remaining to
maturity) money market obligations. For temporary defensive purposes, the
Portfolio may invest in these securities without limit. These instruments
consist of: obligations issued or guaranteed by the United States Government or
a foreign government, their agencies or instrumentalities; bank obligations
(including certificates of deposit, time deposits and bankers' acceptances of
domestic or foreign banks, domestic savings and loans and similar institutions)
that are high-quality investments or, if unrated, deemed by the Adviser to be
high-quality investments; commercial paper rated no lower than A2 by Standard &
Poor's Rating Service ("S&P") or Prime2 by Moody's Investors Service, Inc.
("Moody's") or equivalent from another NRSRO or, if unrated, of an issuer having
an outstanding, unsecured debt issue then rated within the three highest rating
categories by any NRSRO; and repurchase agreements with respect to the
foregoing. When the Adviser believes that a defensive posture is warranted, the
Portfolio may invest temporarily, without limit, in investment grade debt
obligations and in domestic and foreign money market instruments, including
repurchase agreements.
Certain investment strategies and practices which may be employed by the
Portfolio (such as foreign securities, repurchase agreements, borrowings,
options, securities loans, small company securities, derivatives, futures
contracts, foreign currency transactions, United States Government securities,
short sales against the box, convertible securities, investment grade and
lower-quality fixed income securities, and illiquid securities) are discussed
under the caption "Investment Strategies" below and in the Statement of
Additional Information.
BT International Equity Index Portfolio
The Portfolio seeks to replicate as closely as possible (before deduction of
Portfolio expenses so it is consistent with similar phase below) the total
return of the Morgan Stanley Capital International Europe, Australia, Far East
Index ("EAFE Index"). The EAFE Index is a capitalization-weighted index
containing approximately 1,100 equity securities of companies located in
countries outside the United States. The countries currently included in the
EAFE Index are Australia, Austria, Belgium, Denmark, Finland, France, Germany,
Hong Kong, Ireland, Italy, Japan, Malaysia, The Netherlands, New Zealand,
Norway, Singapore, Spain, Sweden, Switzerland and The United Kingdom. The EAFE
Index is the exclusive property of Morgan Stanley. The Portfolio is not
sponsored, endorsed, sold or promoted by Morgan Stanley and Morgan Stanley makes
no guarantee as to the accuracy or completeness of the EAFE Index or any data
included therein.
The Portfolio is constructed to have aggregate investment characteristics
similar to those of the EAFE Index. The Portfolio invests in a statistically
selected sample of the securities of companies included in the EAFE Index,
although not all companies within a country will be represented in the Portfolio
at the same time. Stocks are selected for inclusion in the Portfolio based on
country of origin, market capitalization, yield, volatility and industry sector.
The Adviser will manage the Portfolio using advanced statistical techniques to
determine which stocks should be purchased or sold to replicate the EAFE Index.
From time to time, adjustments may be made in the Portfolio because of changes
in the composition of the EAFE Index, but such changes are expected to be
infrequent.
Over time, the correlation between the performance of the Portfolio and the EAFE
Index is expected to be 0.95 or higher before deduction of Portfolio expenses. A
correlation of 1.00 would indicate perfect correlation, which would be achieved
when the net asset value of the Portfolio, including the value of its dividend
and any capital gain distributions, increases or decreases in exact proportion
to changes in the EAFE Index. The Portfolio's ability to track the EAFE Index
may be affected by, among other things, transaction costs, administration and
other expenses incurred by the Portfolio, changes in either the composition of
the EAFE Index or the assets of the Portfolio, and the timing and amount of
Portfolio investor contributions and withdrawals, if any. Because the Portfolio
seeks to track the EAFE Index, the Adviser generally will not attempt to judge
the merits of any particular stock as an investment. Under normal circumstances,
the Portfolio will invest at least 80% of its assets in the securities of the
EAFE Index.
The Portfolio is a diversified fund and will not concentrate more than 25% of
its assets in the securities of issuers in the same industry. In the event that
the EAFE Index should concentrate to an extent greater than 25% in the
securities of issuers in the same industry, the Portfolio's ability to achieve
its objective may be impaired since the Portfolio may not so invest.
The Portfolio may maintain up to 20% of its assets in short-term debt securities
and money market instruments to meet redemption requests or to facilitate
investment in the securities of the EAFE Index. Securities index futures
contracts and related options, warrants and convertible securities may be used
for several reasons: to simulate full investment in the EAFE Index while
retaining a cash balance for fund management purposes; to facilitate trading; to
reduce transaction costs; or to seek higher investment returns when a futures
contract, option, warrant or convertible security is priced more attractively
than the underlying equity security or EAFE Index. These instruments may be
considered derivatives. The use of derivatives for non-hedging purposes may be
considered speculative. While each of these instruments can be used as leveraged
investments, the Portfolio will not use them to leverage its net assets. The
Portfolio will not invest in such instruments as part of a temporary defensive
strategy (in anticipation of declining stock prices) to protect the Portfolio
against potential market declines.
Certain investment strategies and instruments which may be employed by the
Portfolio (such as the purchase and sale of options, futures contracts, foreign
securities, foreign currency transactions, securities loans, illiquid
securities, investment grade fixed income securities, derivatives, swaps,
repurchase agreements, reverse repurchase agreements, forward commitments,
United States Government securities, borrowings, asset-backed securities, and
convertible securities) are discussed under the caption "Investment Strategies"
below and in the Statement of Additional Information.
INVESTMENT STRATEGIES
In addition to making investments directly in securities, to the extent
described above and below, each of the Portfolios, for example, may purchase and
sell call and put options, engage in transactions in futures contracts and
related options, and engage in forward foreign currency exchange transactions.
They may also enter into repurchase agreements, and borrow funds under certain
limited circumstances. In addition, each Portfolio may engage in other types of
investment strategies as described below. Each Portfolio may invest in or
utilize any of these investment strategies and instruments or engage in any of
these practices except where otherwise prohibited by law or the Portfolio's own
investment restrictions. Portfolios that anticipate committing 5% or more of
their net assets to a particular type of investment strategy or instrument are
specifically referred to in the descriptions below of such investment strategy
or instrument. Certain investment strategies and instruments and the risks
related to them are summarized below and certain of these strategies and
instruments are described in more detail in the Statement of Additional
Information.
Asset-Backed Securities. The MFS Emerging Growth Companies Portfolio and BT
International Equity Index Portfolio may invest in asset-backed securities.
These asset-backed securities, issued by trusts and special purpose
corporations, are collateralized by a pool of assets, such as credit card or
automobile loans, home equity loans or computer leases, and represent the
obligations of a number of different parties. Asset-backed securities present
certain risks. For instance, in the case of credit card receivables, these
securities may not have the benefit of any security interest in the related
collateral. Due to the possibility that prepayments (on automobile loans and
other collateral) will alter the cash flow on asset-backed securities, it is not
possible to determine in advance the actual final maturity date or average life.
Faster prepayment will shorten the average life and slower prepayments will
lengthen it. However, it is possible to determine what the range of that
movement could be and to calculate the effect that will have on the price of the
security. In selecting these securities, the Adviser will look for those
securities that offer a higher yield to compensate for any variation in average
maturity.
Borrowings. The Portfolios may borrow money from banks or other lenders as a
temporary measure for emergency purposes, to facilitate redemption requests, or
for other purposes consistent with each Portfolio's investment objective and
program. Borrowings for the T. Rowe Price Equity Income Portfolio, MFS Emerging
Growth Companies Portfolio, and BT International Equity Index Portfolio may not
exceed 33 1/3% of each Portfolio's total assets. Borrowings for the Warburg
Pincus Small Company Value Portfolio may not exceed 30% of the Portfolio's total
assets. Each Portfolio may pledge its assets to secure these permissible
borrowings. No Portfolio may purchase additional securities when its borrowings
exceed 5% of its total assets. See also "Reverse Repurchase Agreements" for
information concerning an investment technique that may be deemed to involve a
borrowing. Further information concerning each Portfolio's fundamental policy
with respect to borrowings is provided in the Statement of Additional
Information.
Convertible Securities. Each of the Portfolios may invest in convertible
securities, including both convertible debt and convertible preferred stock.
Such securities may be converted into shares of the underlying common stock at
either a stated price or stated rate. Because of this feature, convertible
securities enable an investor to benefit from increases in the market price of
the underlying common stock. Convertible securities provide higher yields than
the underlying common stocks, but generally offer lower yields than
nonconvertible securities of similar quality. Like bonds, the value of
convertible securities fluctuates in relation to changes in interest rates and,
in addition, fluctuates in relation to the underlying common stock. Subsequent
to purchase by a Portfolio, convertible securities may cease to be rated or a
rating may be reduced below the minimum required for purchase by that Portfolio.
Neither event will require sale of such securities, although each Adviser will
consider such event in its determination of whether a Portfolio should continue
to hold the securities.
Derivatives. Each Portfolio may invest in one or more types of derivatives.
Derivatives are financial products or instruments that derive their value from
the value of one or more underlying assets, reference rates or indices.
Derivatives include, but are not limited to, the following: asset-backed
securities, collateralized mortgage obligations, floaters, futures, hybrid
instruments, inverse floaters, mortgage-backed securities, options, stripped
mortgage-backed securities, structured notes and swaps. Further information
about these instruments and the risks involved in their use are contained under
the description of each of these instruments in this section or the Statement of
Additional Information.
Foreign Securities. Foreign investments involve certain risks that are not
present in domestic securities. Because each of the Portfolios may purchase
securities denominated in foreign currencies, a change in the value of any such
currency against the United States dollar will result in a change in the United
States dollar value of a Portfolio's assets and income. In addition, although a
portion of a Portfolio's investment income may be received or realized in such
currencies, the Portfolio will be required to compute and distribute its income
in United States dollars. Therefore, if the exchange rate for any such currency
declines after a Portfolio's income has been earned and computed in United
States dollars but before conversion and payment, the Portfolio could be
required to liquidate portfolio securities to make such distributions.
Currency exchange rates may be affected unpredictably by intervention (or the
failure to intervene) by the United States, foreign governments or central
banks, by currency controls or political developments in the United States or
abroad. For example, significant uncertainty surrounds the proposed introduction
of the Euro (a common currency for the European Union) in January 1999 and its
effect on the value of securities denominated in local European currencies.
These and other currencies in which a Portfolio's assets are denominated may be
devalued against the United States dollar, resulting in a loss to the Portfolio.
The value of foreign investments and the investment income derived from them may
also be affected unfavorably by changes in currency exchange control
regulations. Although the Portfolios will invest only in securities denominated
in foreign currencies that are fully exchangeable into United States dollars
without legal restriction at the time of investment, there can be no assurance
that currency controls will not be imposed subsequently. In addition, the value
of foreign fixed income investments may fluctuate in response to changes in
United States and foreign interest rates.
There may be less information publicly available about a foreign issuer than
about a United States issuer, and a foreign issuer is not generally subject to
accounting, auditing and financial reporting standards and practices comparable
to those in the United States. Foreign stock markets are generally not as
developed or efficient as, and may be more volatile than, those in the United
States. While growing in volume, they usually have substantially less volume
than United States markets and a Portfolio's investment securities may be less
liquid and subject to more rapid and erratic price movements than securities of
comparable United States companies. Equity securities may trade at
price/earnings multiples higher than comparable United States securities and
such levels may not be sustainable. There is generally less government
supervision and regulation of foreign stock exchanges, brokers and listed
companies than in the United States. Moreover, settlement practices for
transactions in foreign markets may differ from those in United States markets.
Such differences may include delays beyond periods customary in the United
States and practices, such as delivery of securities prior to receipt of
payment, which increase the likelihood of a "failed settlement." Failed
settlements can result in losses to a Portfolio. In less liquid and
well-developed stock markets, such as those in some Asian and Latin American
countries, volatility may be heightened by actions of a few major investors. For
example, substantial increases or decreases in cash flows of mutual funds
investing in these markets could significantly affect stock prices and,
therefore, share prices.
Foreign brokerage commissions, custodial expenses and other fees are also
generally higher than for securities traded in the United States. Consequently,
the overall expense ratios of international or global funds are usually somewhat
higher than those of typical domestic stock funds.
In addition, the economies, markets and political structures of a number of the
countries in which the Portfolios can invest do not compare favorably with the
United States and other mature economies in terms of wealth and stability.
Therefore, investments in these countries may be riskier, and will be subject to
erratic and abrupt price movements. Some economies are less well developed and
less diverse (for example, Japan, Southeast Asia and Latin America). Some
countries, particularly in Latin American, are grappling with severe inflation
and high levels of national debt. Investments in countries that have recently
begun moving away from central planning and state-owned industries toward free
markets, such as the Eastern European or Chinese economies, should be regarded
as speculative.
In addition, investment in foreign securities may also include the risk of
expropriation by a foreign government.
Moreover, investments in foreign government debt securities, particularly those
of emerging market country governments, involve special risks. Certain emerging
market countries have historically experienced, and may continue to experience,
high rates of inflation, high interest rates, exchange rate fluctuations, large
amounts of external debt, balance of payments and trade difficulties and extreme
poverty and unemployment. The issuer or governmental authority that controls the
repayment of an emerging market country's debt may not be able or willing to
repay the principal and/or interest when due in accordance with the terms of
such debt. A debtor's willingness or ability to repay principal and interest due
in a timely manner may be affected by, among other factors, its cash flow
situation, and, in the case of a government debtor, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole
and the political constraints to which a government debtor may be subject.
Government debtors may default on their debt and may also be dependent on
expected disbursements from foreign governments, multilateral agencies and
others abroad to reduce principal and interest arrearages on their debt. Holders
of government debt may be requested to participate in the rescheduling of such
debt and to extend further loans to government debtors.
Certain Portfolios may invest in the following types of foreign securities or
engage in the following types of transactions related to foreign securities.
Brady Bonds. The MFS Emerging Growth Companies Portfolio may invest in "Brady
Bonds," which are fixed income securities created through the exchange of
existing commercial bank loans to foreign entities for new obligations in
connection with debt restructuring under a plan introduced by Nicholas F. Brady
when he was the United States Secretary of the Treasury. Brady Bonds have been
issued only recently, and, accordingly, do not have a long payment history. They
may be collateralized or uncollateralized and issued in various currencies
(although most are United States dollar-denominated) and they are actively
traded on the over-the-counter ("OTC") secondary market. The Portfolio will
invest in Brady Bonds only if it is consistent with quality specifications
established from time to time by the Adviser to that Portfolio.
Depositary Receipts. Each of the Portfolios may purchase depositary receipts,
which are securities representing ownership interest in securities of foreign
companies (an "underlying issuer") and are deposited with a securities
depositary. Depositary receipts are not necessarily denominated in the same
currency as the underlying securities. Depositary receipts include ADRs and GDRs
and other types of depositary receipts (which, together with ADRs and GDRS, are
hereinafter collectively referred to as "Depositary Receipts"). ADRs are
dollar-denominated Depositary Receipts typically issued by a United States
financial institution which evidence ownership interests in a security or pool
of securities issued by a foreign issuer. ADRs are listed and traded in the
United States. GDRs and other types of depositary receipts are typically issued
by foreign banks or trust companies, although they also may be issued by United
States financial institutions, and evidence ownership interests in a security or
pool of securities issued by either a foreign or a United States corporation.
Generally, depositary receipts in registered form are designed for use in the
United States securities market and depositary receipts in bearer form are
designed for use in securities markets outside the United States. Although there
may be more reliable information available regarding issuers of certain ADRs
that are issued under so-called "sponsored" programs and ADRs do not involve
foreign currency risks, ADRs and other Depositary Receipts are subject to the
risks of other investments in foreign securities, as described directly above.
Foreign Currency Transactions. Each of the Portfolios may purchase foreign
currency on a spot (or cash) basis. In addition, each of the Portfolios may
enter into contracts to purchase or sell foreign currencies at a future date
("forward contracts"). Each of the Portfolios may also purchase and sell foreign
currency futures contracts and may purchase and sell exchange traded call and
put options on foreign currency futures contracts and on foreign currencies. MFS
Emerging Growth Companies Portfolio and BT International Equity Index Portfolio
may engage in over-the-counter ("OTC") options on foreign currency transactions.
The MFS Emerging Growth Companies Portfolio may only enter into forward
contracts on currencies in the OTC market. The Advisers may engage in these
transactions to protect against uncertainty in the level of future exchange
rates in connection with the purchase and sale of portfolio securities
("transaction hedging") and to protect the value of specific portfolio positions
("position hedging").
Hedging transactions involve costs and may result in losses. Each of the
Portfolios may also write covered call options on foreign currencies to offset
some of the costs of hedging those currencies. A Portfolio will engage in OTC
options transactions on foreign currencies only when appropriate exchange traded
transactions are unavailable and when, in the Adviser's opinion, the pricing
mechanism and liquidity are satisfactory and the participants are responsible
parties likely to meet their contractual obligations. A Portfolio's ability to
engage in hedging and related option transaction may be limited by tax
considerations.
Transactions and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Portfolios own or intended to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
the value of such currency.
Forward Commitments. Each Portfolio (except the Warburg Pincus Small Company
Value Portfolio) may make contracts to purchase securities for a fixed price at
a future date beyond customary settlement time ("forward commitments") if it
holds, and maintains until the settlement date in a segregated account, cash or
liquid securities in an amount sufficient to meet the purchase price, or if it
enters into offsetting contracts for the forward sale of other securities it
owns. Forward commitments may be considered securities in themselves and involve
a risk of loss if the value of the security to be purchased declines prior to
the settlement date, which risk is in addition to the risk of decline in value
of the Portfolio's other assets. Where such purchases are made through dealers,
a Portfolio relies on the dealer to consummate the sale. The dealer's failure to
do so may result in the loss of an advantageous yield or price.
Hybrid Instruments. The T. Rowe Price Equity Income Portfolio may invest in
hybrid instruments. Hybrid instruments have recently been developed and combine
the elements of futures contracts or options with those of debt, preferred
equity or a depository instrument. Often these hybrid instruments are indexed to
the price of a commodity, particular currency, or a domestic or foreign debt or
equity securities index. Hybrid instruments may take a variety of forms,
including, but not limited to, debt instruments with interest or principal
payments or redemption terms determined by reference to the value of currency or
commodity or securities index at a future point in time, preferred stock with
dividend rates determined by reference to the value of a currency, or
convertible securities with the conversion terms related to a particular
commodity. Hybrid instruments may bear interest or pay dividends at below market
(or even relatively nominal) rates. Under certain conditions, the redemption
value of such an instrument could be zero. Hybrid instruments can have volatile
prices and limited liquidity and their use by a Portfolio may not be successful.
Illiquid Securities. The Warburg Pincus Small Company Value Portfolio may invest
up to 10% of its assets and each of the other Portfolios may invest up to 15% of
its net assets in illiquid securities and other securities which are not readily
marketable, including nonnegotiable time deposits, certain restricted securities
not deemed by the Trust's Board of Trustees to be liquid, and repurchase
agreements with maturities longer than seven days. Securities eligible for
resale pursuant to Rule 144A under the Securities Act of 1933, as amended, which
have been determined by the Board of Trustees to be liquid, will not be
considered by the Adviser to be illiquid or not readily marketable and therefore
not subject to the 10% or 15% limit. The inability of a Portfolio to dispose of
illiquid or not readily marketable investments readily or at a reasonable price
could impair the Portfolio's ability to raise cash for redemptions or other
purposes. The liquidity of securities purchased by a Portfolio which are
eligible for resale pursuant to Rule 144A will be monitored by each Portfolio's
Adviser on an ongoing basis, subject to the oversight of the Board of Trustees
of the Trust. In the event that such a security is deemed to be no longer
liquid, a Portfolio's holdings will be reviewed to determine what action, if
any, is required to ensure that the retention of such security does not result
in a Portfolio's having more than 10% or 15% of its assets invested in illiquid
or not readily marketable securities.
Investment Grade and Lower Quality Fixed Income Securities. Each Portfolio may
invest in or hold a portion of its total assets in investment grade or lower
quality fixed income securities, except the BT International Equity Index
Portfolio which may invest in or hold investment grade securities but not lower
quality fixed income securities. Investment grade securities are securities
rated Baa or higher by Moody's or BBB or higher by S&P or comparable quality
unrated securities. Investment grade securities, while normally exhibiting
adequate protection parameters, have speculative characteristics, and,
consequently, changes in economic conditions or other circumstances are more
likely to lead to a weakened capacity of such issuers to make principal and
interest payments than is the case for higher grade fixed income securities.
Lower quality fixed income securities are securities that are rated in the lower
categories by NRSROs (i.e., Ba or lower by Moody's and BB or lower by S&P) or
comparable quality unrated securities. Such lower quality securities are known
as "junk bonds" and are regarded as predominantly speculative with respect to
the issuer's continuing ability to meet principal and interest payments. (Each
NRSRO's descriptions of these bond ratings are set forth in the Appendix to the
Statement of Additional Information.) Because investment in lower quality
securities involves greater investment risk, achievement of a Portfolio's
investment objective will be more dependent on the Adviser's analysis than would
be the case if that Portfolio were investing in higher quality bonds. In
addition, lower quality securities may be more susceptible to real or perceived
adverse economic and individual corporate developments than would investment
grade bonds. Moreover, the secondary trading market for lower quality securities
may be less liquid than the market for investment grade bonds. This potential
lack of liquidity may make it more difficult for an Adviser to value accurately
certain portfolio securities.
Loan Participations. The MFS Emerging Growth Companies Portfolio may invest a
portion of its assets in loan participations and other direct indebtedness. By
purchasing a loan, the Portfolio acquires some or all of the interest of a bank
or other lending institution in a loan to a corporate borrower. Many such loans
are secured, and most impose restrictive convenants that must be met by the
borrower. These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans may be in default at the time of purchase. The MFS
Emerging Growth Companies Portfolio may also purchase other direct indebtedness
such as trade or other claims against companies, which generally represent money
owned by a company to a supplier of goods and services. These claims may also be
purchased at a time when the company is in default. Certain of the loans and
other direct indebtedness acquired by the Portfolio may involve revolving credit
facilities or other standby financing commitments which obligate the Portfolio
to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans and other direct indebtedness may
make such loans especially vulnerable to adverse changes in economic or market
conditions. Loans and other direct indebtedness may not be in the form of
securities or may be subject to restrictions on transfer, and only limited
opportunities may exist to resell such instruments. As a result, the Portfolio
may be unable to sell such investments at an opportune time or may have to
resell them at less than fair market value.
Mortgages and Mortgage-Related Securities. The BT International Equity Index
Portfolio may invest in mortgage-related securities (i.e. mortgage-backed
securities). A mortgage-backed security may be an obligation of the issuer
backed by a mortgage or pool of mortgages or a direct interest in an underlying
pool of mortgages. Some mortgage-backed securities, such as CMOs, make payments
of both principal and interest at a variety of intervals; others make
semi-annual interest payments at a predetermined rate and repay principal at
maturity (like a typical bond). Mortgage-backed securities are based on
different types of mortgages including those on commercial real estate or
residential properties.
The value of mortgage-backed securities may change due to shifts in the market's
perception of issuers. In addition, regulatory or tax changes may adversely
affect the mortgage securities market as a whole. Non-government,
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their return.
Stripped mortgage-backed securities are created when a United States government
agency or a financial institution separates the interest and principal
components of a mortgage-backed security and sells them as individual
securities. The holder of the "principal-only" security ("PO") receives the
principal payments made by the underlying mortgage-backed security, while the
holder of the "interest-only" security ("I0") receives interest payments from
the same underlying security. The prices of stripped mortgage-backed securities
may be particularly affected by changes in interest rates. As interest rates
fall, prepayment rates tend to increase, which tends to reduce prices of IOs and
increase prices of POs. Rising interest rates can have the opposite effect.
Options and Futures Transactions. Each Portfolio may utilize futures contracts.
Futures contracts (a type of potentially high-risk security) enable the investor
to buy or sell an asset in the future at an agreed upon price. Each Portfolio
may also write and purchase put and call options. Options (another type of
potentially high-risk security) give the purchaser of an option the right, but
not the obligation, to buy or sell in the future an asset at a predetermined
price during the term of the option. (The writer of a put or call option would
be obligated to buy or sell the underlying asset at a predetermined price during
the term of the option). Each Portfolio will write put and call options only if
such options are considered to be "covered." A call option on a security is
covered, for example, when the writer of the call option owns throughout the
option period the security on which the option is written (or a security
convertible into such a security without the payment of additional
consideration). A put option on a security is covered, for example, when the
writer of the put has deposited and maintained in a segregated account
throughout the option period sufficient cash or other liquid assets in an amount
equal to or greater than the exercise price of the put option. Each Portfolio
that is permitted to invest in futures contracts and related options may utilize
such transactions for other than hedging purposes to the extent that aggregate
initial margin deposits and premiums paid do not exceed 5% of the Portfolio's
net assets. No Portfolio (other than the Warburg Pincus Small Company Value
Portfolio) will commit more than 5% of its total assets to premiums when
purchasing call or put options. In addition, the total market value of
securities against which a Portfolio has written call or put options may not
exceed 25% of its total assets. The BT International Equity Index Portfolio may
not at any time commit more than 20% of its assets to options and futures
contracts. The Warburg Pincus Small Company Value Portfolio may (i) commit up to
10% of its total assets to premiums when purchasing put or call options and (ii)
utilize up to 10% of its total assets to purchase exchange-listed and OTC put
and call options on stock indices. In addition, the MFS Emerging Growth
Companies Portfolio will not enter a futures contract if the obligations
underlying all such futures contracts would exceed 50% of the value of the
Portfolio's total assets. In addition, the MFS Emerging Growth Companies
Portfolio may engage in OTC put and call options transactions. Options traded in
the OTC market may not be as actively traded as those on an exchange, so it may
be more difficult to value such options. In addition, it may be difficult to
enter into closing transactions with respect to such options. Such OTC options,
and the securities used as "cover" for such options, may be considered illiquid
securities.
Each Portfolio may buy and sell futures and options contracts for any number of
reasons, including: to manage its exposure to changes in securities prices and
foreign currencies; as an efficient means of adjusting its overall exposure to
certain markets; in an effort to enhance income; to protect the value of
portfolio securities and to adjust the duration of fixed income investments.
Each Portfolio may purchase, sell, or write call and put options and futures
contracts on securities, financial indices, and foreign currencies and options
on futures contracts.
The risk of loss in trading futures contracts can be substantial because of the
low margin deposits required and the extremely high degree of leveraging
involved in futures pricing. As a result, a relatively small price movement in a
futures contract may cause an immediate and substantial loss or gain. The
primary risks associated with the use of futures contracts and options are: (i)
imperfect correlation between the change in market value of the stocks held by a
Portfolio and the prices of futures contracts and options; and (ii) possible
lack of liquid secondary market for a futures contract or an OTC option and the
resulting inability to close a futures position or OTC option prior to its
maturity date.
Repurchase Agreements. Each Portfolio may enter into repurchase agreements with
qualified and Board approved banks, broker-dealers or other financial
institutions as a means of earning a fixed rate of return on its cash reserves
for periods as short as overnight. A repurchase agreement is a contract pursuant
to which a Portfolio, against receipt of securities of at least equal value
including accrued interest, agrees to advance a specified sum to the financial
institution which agrees to reacquire the securities at a mutually agreed upon
time (usually one day) and price. Each repurchase agreement entered into by a
Portfolio will provide that the value of the collateral underlying the
repurchase agreement will always be at least equal to the repurchase price,
including any accrued interest. A Portfolio's right to liquidate such securities
in the event of a default by the seller could improve certain costs, losses or
delays and, to the extent that proceeds from any sale upon a default of the
obligation to repurchase are less than the repurchase price, the Portfolio could
suffer a loss.
Reverse Repurchase Agreements. The BT International Equity Index Portfolio may
enter into reverse repurchase agreements with brokers, dealers, domestic and
foreign banks or other financial institutions. 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. It may also be viewed as the borrowing of money by
the Portfolio. The Portfolio's investment of the proceeds of a reverse
repurchase agreement is the speculative factor known as leverage. The Portfolio
may enter into a reverse repurchase agreement only if the interest income from
investment of the proceeds is greater than the interest expense of the
transaction and the proceeds are invested for a period no longer than the term
of the agreement. The Portfolio will maintain with the custodian a separate
account with a segregated portfolio of unencumbered liquid assets in an amount
at least equal to its purchase obligations under these agreements. If interest
rates rise during a reverse repurchase agreement, it may adversely affect the
Portfolio's net asset value. See "Borrowing" for more information concerning
restrictions on borrowing by each Portfolio.
Securities Loans. The T. Rowe Price Equity Income Portfolio may seek to earn
additional income by making secured loans of portfolio securities with a value
up to 33 1/3% of its total assets. The MFS Emerging Growth Companies Portfolio
and BT International Equity Index Portfolio may lend portfolio securities in an
amount up to 30% of their respective total assets. Warburg Pincus Small Company
Value Portfolio may lend its portfolio securities in an amount up to 20% of its
total assets. All securities loans will be made pursuant to agreements requiring
the loans to be continuously secured by collateral in cash or high-grade debt
obligations at least equal at all times to the market value of the loaned
securities. The borrower pays to the Portfolios an amount equal to any dividends
or interest received on loaned securities. The Portfolios retain all or a
portion of the interest received on investment of cash collateral or receive a
fee from the borrower. Lending portfolio securities involves risks of delay in
recovery of the loaded securities or in some cases loss of rights in the
collateral should the borrower fail financially. Further information concerning
each Portfolio's fundamental policy with respect to loans is provided in the
Statement of Additional Information.
Short Sales Against the Box. The Warburg Pincus Small Company Value Portfolio
may enter into a "short sale" of securities in circumstances in which, at the
time the short position is open, the Portfolio owns an equal amount of the
securities sold short or owns preferred stocks or debt securities, convertible
or exchangeable without payment of further consideration, into an equal number
of securities sold short. This kind of short sale, which is referred to as one
"against the box," may be entered into by each Portfolio to, for example, lock
in a sale price for a security the Portfolio does not wish to sell immediately.
The Portfolio will deposit, in a segregated account with its custodian or
qualified subcustodian, the securities sold short or convertible or exchangeable
preferred stocks or debt securities sold in connection with short sales against
the box. The Portfolio will endeavor to offset transaction costs associated with
short sales against the box with the income from the investment of the cash
proceeds. Not more than 10% of the Portfolio's net assets (taken at current
value) may be held as collateral for short sales against the box at any one
time. The extent to which the Portfolio may make short sales may be limited by
Code requirements for qualification as a regulated investment company.
Small Company Securities. The Warburg Pincus Small Company Value Portfolio may
invest in the securities of smaller capitalization companies. Investing in
securities of small companies may involve greater risks since these securities
may have limited marketability and thus, may be more volatile. Because small
companies normally have fewer shares outstanding than larger companies, it may
be more difficult for the Portfolio to buy or sell significant amounts of shares
without an unfavorable impact on prevailing prices. In addition, small companies
often have limited product lines, markets or financial resources and are
typically subject to greater changes in earnings and business prospects than are
larger, more established companies. There is typically less publicly available
information concerning smaller companies than for larger, more established ones
and smaller companies may be dependent for management on one or a few key
persons. Therefore, an investment in this Portfolio may involve a greater degree
of risk than in investment in other Portfolios that seek capital appreciation by
investing in better known, larger companies.
Swaps. The BT International Equity Index Portfolio may invest in swap contracts,
which are derivatives in the form of a contract or other similar instrument
which is an agreement to exchange the return generated by one instrument for the
return generated by another instrument. The payment streams are calculated by
reference to a specified index and agreed upon notional amount. The term
"specified index" includes, but is not limited to, currencies, fixed interest
rates, prices and total return on interest rate indices, fixed income indices,
stock indices and commodity indices (as well as amounts derived from arithmetic
operations on these indices). For example, a Portfolio may agree to swap the
return generated by a fixed income index for the return generated by a second
fixed income index. The Portfolio will usually enter into swaps on a net basis,
i.e., the two return streams are netted out in a cash settlement on the payment
date or dates specified in the instrument, with the Portfolio receiving or
paying, as the case may be, only the net amount of the two returns. The
Portfolio's obligations under a swap agreement will be accrued daily (offset
against any amounts owing to the Portfolio) and any accrued but unpaid net
amounts owed to a swaps counterparty will be covered by the maintenance of a
segregated account consisting of cash, United States Government securities, or
high grade debt obligations. The Portfolio will not enter into a swap agreement
unless the counter party meets the rating requirements set forth in guidelines
established by the Trust's Board of Trustees. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Swaps that include more recent innovations for which standardized documentation
has not yet been fully developed are less liquid than "traditional" swaps. The
use of swaps is a highly specialized activity that involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If an Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of the Portfolio would be less favorable than it would have been if this
investment technique were not used.
United States Government Securities. Each Portfolio may invest in debt
obligations of varying maturities issued or guaranteed by the United States
Government, its agencies or instrumentalities ("United States Government
securities"). Direct obligations of the United States Treasury include a variety
of securities that differ in their interest rates, maturities and dates of
issuance. United States Government securities also include securities issued or
guaranteed by government agencies that are supported by the full faith and
credit of the United States (e.g., securities issued by the Government National
Mortgage Association); securities issued or guaranteed by, government agencies
that are supported. The ability to borrow from the United States Treasury (e.g.,
securities issued by the Federal National Mortgage Association); and securities
issued or guaranteed by government agencies that are only supported by the
credit of the particular agency (e.g., the Tennessee Valley Authority).
Warrants. Warrants are securities that give the holder the right, but not the
obligation to purchase equity issues of the company issuing the warrants, or a
related company, issuing the warrants, or related company, at a fixed price
either on a date certain or during a set period. At the time of issue, the cost
of a warrant is substantially less than the cost of the underlying security
itself, and price movements in the underlying security are generally magnified
in the price movements of the warrant. This effect enables the investor to gain
exposure to the underlying security with a relatively low capital investment but
increases an investor's risk in the event of a decline in the value of the
underlying security and can result in a complete loss of the amount invested in
the warrant. In addition, the price of a warrant tends to be more volatile than,
and may not correlate exactly to, the price of the underlying security. If the
market price of the underlying security is below the exercise price of the
warrant on its expiration date, the warrant will generally expire without value.
Portfolio Turnover. The length of time a Portfolio has held a particular
security is not generally a consideration in investment decisions. A change in
the securities held by a Portfolio is known as "portfolio turnover." Each new
Portfolio's turnover rate is not expected to exceed 100% during its first year
of operation. A high turnover rate (100% or more) increases transaction costs
(e.g., brokerage commissions) which must be born by the Portfolio and its
shareholders and will impact realized gains and losses. See "Financial
Highlights" above for the actual portfolio turnover rates of the Portfolios
through December 31, 1997, and also see "Dividends, Distributions and Taxes"
below.
MANAGEMENT OF THE TRUST
The Board of Trustees
The Board of Trustees of the Trust provides board supervision over the business
and affairs of the Portfolios and the Trust as provided in the Trust's Amended
and Restated Declaration of Trust and By-laws.
The Manager
The Trust is managed by EQ Financial Consultants, Inc. which, subject to the
supervision and direction of the Trustees of the Trust, has overall
responsibility for the general management and administration of the Trust. The
Manager is an investment adviser registered under the Investment Advisers Act of
1940, as amended, and a broker-dealer registered under the Securities Exchange
Act of 1934, as amended ("1934 Act"). It is located at 1290 Avenue of the
Americas, New York, New York 10104. Besides its activities with respect to the
Trust, the Manager currently furnishes specialized investment advice to other
clients, including individuals, pension and profit sharing plans, trusts,
charitable organizations, corporations and other business entities. The Manager
is a Delaware corporation and an indirect, wholly owned subsidiary of Equitable
Life, a New York stock life insurance company.
The Manager is responsible for providing general management services to the
Trust and in the exercise of such responsibility selects, subject to review and
approval by the Trustees, the investment advisers for the Trust's Portfolios and
monitors the Advisers' investment programs and results, reviews brokerage
matters, oversees compliance by the Trust with various federal and state
statutes, and carries out the directives of the Board of Trustees. The Manager
is responsible for providing the Trust with office space, office equipment, and
personnel necessary to operate the Trust's business, and also supervises the
provision of services by third parties such as the Trust's custodian and
administrator.
As compensation for managing the T. Rowe Price Equity Income Portfolio and MFS
Emerging Growth Companies Portfolio, the Trust pays the Manager a monthly fee at
the annual rate of .55% of the respective Portfolio's average daily net assets.
As compensation for managing the Warburg Pincus Small Company Value Portfolio,
the Trust pays the Manager a monthly fee at the annual rate of .65% of the
Portfolio's average daily net assets. As compensation for managing the BT
International Equity Index Portfolio, the Trust pays the Manager a monthly fee
at the annual rate of .35% of the Portfolio's average daily net assets. The
Manager pays the expenses of providing investment advisory services to the
Portfolios, including the fees of the Adviser of each Portfolio.
In addition to the management fees, the Trust pays all expenses not assumed by
the Manager, including, without limitation: the fees and expenses of its
independent accountants and of its legal counsel; the costs of printing and
mailing annual and semi-annual reports to shareholders, proxy statements,
prospectuses, prospectus supplements and statements of additional information to
the extent they are sent to existing investors in the Trust; the costs of
printing registration statements; bank transaction charges and custodian's fees;
any proxy solicitors' fees and expenses; filing fees; any federal, state or
local income or other taxes; any interest; any membership fees of the Investment
Company Institute and similar organizations; fidelity bond and Trustees'
liability insurance premiums; and any extraordinary expenses, such as
indemnification payments or damages awarded in litigations or settlements made.
All general Trust expenses are allocated among and charged to the assets of the
Portfolios of the Trust on a basis that the Trustees deem fair and equitable,
which may be on the basis of relative net assets of each Portfolio or the nature
of the services performed and relative applicability to each Portfolio.
The Class IB shares of the Trust, which are offered through means of another
prospectus, may pay for certain distribution-related expenses in connection with
activities primarily intended to result in the sale of its shares, pursuant to a
distribution plan for the Class IB shares adopted pursuant to Rule 12b-1 under
the 1940 Act ("Rule 12b-1 Plan"). The Class IA shares offered pursuant to this
prospectus have not adopted a Rule 12b-1 Plan.
The Advisers
Pursuant to an investment advisory agreement with the Manager, each Adviser to a
Portfolio furnishes continuously an investment program for the Portfolio, makes
investment decisions on behalf of the Portfolio, places all orders for the
purchase and sale of investments for the Portfolio's account with brokers or
dealers selected by such Adviser and may perform certain limited related
administrative functions in connection therewith.
For its services, the Manager pays each Adviser an advisory fee based on a
percentage of the average daily net assets of the Portfolio that it advises.
Monthly, with respect to each Portfolio, each Adviser is paid the pro rata
portion of an annual fee, based on the monthly average of the assets of the
Portfolio for which it serves as the Adviser. The Manager will retain, as
compensation for the services described under "The Manager" and to pay its
expenses, the difference between the fees paid to each Adviser and the
management fee of the applicable Portfolio. Each Adviser has agreed that once
the Portfolio has paid the Manager its management fee the Adviser will look only
to the Manager as the party responsible for making the payment of its advisory
fee.
The Advisers are employed for management of the assets of a Portfolio pursuant
to investment advisory agreements approved by the Board of Trustees of the Trust
(including a majority of certain Trustees who are not interested persons of the
Trust or the Manager), and an Adviser's services may be terminated at any time
by the Manager, the Board of Trustees, or the shareholders of an affected
Portfolio.
The Trust has received an exemptive order from the Securities and Exchange
Commission ("SEC") that permits the Manager, subject to certain conditions, and
without the approval of shareholders to: (a) employ a new Adviser or Advisers
for any Portfolio pursuant to the terms of a new advisory agreement, in each
case either a replacement for an existing Adviser or as an additional Adviser;
(b) change the terms of any advisory agreement, and (c) continue the employment
of an existing Adviser on the same advisory contract terms where a contract has
been assigned because of a change in control of the Adviser. In such
circumstances, shareholders would receive notice of such action, including the
information concerning the Adviser that normally is provided in the Prospectus.
T. Rowe Price Associates, Inc. ("T. Rowe Price"), 100 East Pratt Street,
Baltimore, MD 21202, has been the Adviser to the T. Rowe Price Equity Income
Portfolio since the Portfolio commenced its operations. As compensation for
services as the Portfolio's Adviser, the Manager pays T. Rowe Price a monthly
fee at an annual rate equal to .40% of the Portfolio's average daily net assets.
T. Rowe Price was incorporated in Maryland in 1947 as successor to the
investment counseling business founded by the late Thomas Rowe Price, Jr., in
l937. As of December 31, 1997, T. Rowe Price and its affiliates managed more
than $126 billion of assets. T. Rowe Price serves as investment manager to a
variety of individual and institutional investor accounts, including limited and
real estate partnerships and other mutual funds. Investment decisions with
respect to the T. Rowe Price Equity Income Portfolio are made by an Investment
Advisory Committee composed of the following members: Brian C. Rogers, Chairman,
Richard P. Howard, and William J. Stomberg. The Committee Chairman has
day-to-day responsibility for managing the Portfolio and works with the
Committee in developing and executing the Portfolio's investment program. Mr.
Rogers has been chairman of the Committee since 1993. He joined T. Rowe Price in
1982 and has been managing investments since 1983.
Massachusetts Financial Services Company ("MFS") has been the Adviser to the MFS
Emerging Growth Companies Portfolio since it commenced operations. As
compensation for services as the Adviser to this Portfolio, the Manager pays MFS
a monthly fee at an annual rate equal to: .40% of the Portfolio's average daily
net assets up to and including $150 million; .375% of the Portfolio's average
daily net assets over $150 million and up to an including $300 million; and .35%
of the Portfolio's average daily net assets in excess of $300 million.
MFS is America's oldest mutual fund organization. MFS is located at 500 Boylston
Street, Boston, MA 02116. MFS and its predecessor organizations have a history
of money management dating from 1924 and the founding of the first mutual fund
in the United States, Massachusetts Investors Trust. As of December 31, 1997,
MFS managed more than $70.2 billion on behalf of over 2.7 million investors'
accounts. MFS is a subsidiary of Sun Life of Canada (United States) Financial
Services Holdings Inc., which, in turn, is an indirect wholly-owned subsidiary
of Sun Life Assurance Company of Canada. Since it commenced operations, the MFS
Emerging Growth Companies Portfolio has been managed by John W. Ballen, an
Executive Vice President of MFS, who has been employed by the Adviser as a
portfolio manager since 1984, and Toni K. Shimura, Vice President of MFS, who
has been employed as a portfolio manager by the Adviser since 1987.
Warburg Pincus Asset Management, Inc. ("WPAM") has been the Adviser to the
Warburg Pincus Small Company Value Portfolio since the Portfolio commenced
operations. WPAM is located at 466 Lexington Avenue, New York, New York 10017.
As compensation for services as the Portfolio's Adviser, the Manager pays WPAM a
monthly fee at an annual rate equal to .50% of the Portfolio's average daily net
assets.
WPAM is a professional investment advisory firm that provides investment
services to investment companies, employee benefit plans, endowment funds,
foundations and other institutions and individuals. As of December 31, 1997,
WPAM managed approximately $19.7 billion in assets. WPAM, incorporated in 1970,
is indirectly controlled by Warburg, Pincus & Co., ("WP&Co."), a New York
partnership which has no business other than being a holding company of WPAM and
its affiliates. Lionel Pincus, the managing partner of WP&Co., may be deemed to
control both WP&Co. and WPAM.
Kyle F. Frey, a senior vice president of WPAM, has been responsible for the day
to day management of Warburg Pincus Small Company Value Portfolio's securities
portfolio since the Portfolio commenced operations. Mr. Frey has been with WPAM
since 1989.
Bankers Trust Company ("Bankers Trust') has been the Adviser to the BT
International Equity Index Portfolio since the Portfolio commenced operations.
As compensation for services as the Adviser to the BT International Equity Index
Portfolio, the Manager pays Bankers Trust a monthly fee at an annual rate equal
to .15% of the Portfolio's average daily net assets.
Bankers Trust is a New York banking corporation with executive offices at 130
Liberty Street (One Bankers Trust Plaza), New York, New York 10006. Bankers
Trust is a wholly-owned subsidiary of Bankers Trust New York Corporation.
Bankers Trust conducts a variety of general banking and trust activities and is
a major wholesale supplier of financial services to the international and
domestic institutional markets. Investment management is a core business of
Bankers Trust built on a tradition of excellence from its roots as a trust bank
founded in 1903. The scope of Bankers Trust's management capability is unique
due to its leadership positions in both active and passive quantitative
management and its presence in major equity and fixed income markets around the
world. Bankers Trust is one of the nation's largest and most experienced
investment managers with approximately $317.8 billion in assets under management
as of December 31, 1997.
The Administrator
Pursuant to an agreement ("Mutual Funds Service Agreement"), Chase Global Funds
Services Company (the "Administrator") assists the Manager in the performance of
its administrative responsibilities to the Trust and provides the Trust with
other necessary administrative, fund accounting and compliance services. In
addition, the Administrator makes available the office space, equipment,
personnel and facilities required to provide such services to the Trust. For
these services, the Trust pays the Administrator a monthly fee at the annual
rate of .0525 of 1% of the total Trust assets, plus $25,000 for each Portfolio,
until the total Trust assets reach $2.0 billion, and when the total Trust assets
exceed $2.0 billion: .0425 of 1% of the next $0.5 billion of the total Trust
assets; .035 of 1% of the next $2.0 billion of the total Trust assets; .025 of
1% of the next $ 1.0 billion of the total Trust assets; .015 of 1% of the next
$2.5 billion of the total Trust assets; .01 of 1% of the total Trust assets in
excess of $8.0 billion; provided, however, that the annual fee payable to Chase
with respect to any Portfolio which commences operations after July 1, 1997 and
whose assets do not exceed $200 million shall be computed at the annual rate of
.0525 of 1% of the total Portfolio's total assets plus $25,000.
The Transfer Agent
Equitable Life serves as the transfer agent and dividend-disbursing agent of the
Trust and receives no compensation for serving in such capacity.
Expense Limitation Agreement
In the interest of limiting expenses of the Portfolios, the Manager has entered
into an expense limitation agreement with the Trust, with respect to each
Portfolio ("Expense Limitation Agreement"), pursuant to which the Manager has
agreed to waive or limit its fees and to assume other expenses so that the total
annual operating expenses of each Portfolio other than interest, taxes,
brokerage commissions, other expenditures which are capitalized in accordance
with generally accepted accounting principles and other extraordinary expenses
not incurred in the ordinary course of each Portfolio's business and amounts
payable pursuant to a Rule 12b-1 Plan are limited to: 0.60% of the respective
average daily net assets of the T. Rowe Price Equity Income and MFS Emerging
Growth Companies; 0.75% of the Warburg Pincus Small Company Value Portfolio's
average daily net assets; and 0.55% of the respective average daily net assets
of the BT International Equity Index Portfolio.
Each Portfolio may at a later date reimburse to the Manager the management fees
waived or limited and other expenses assumed and paid by the Manager pursuant to
the Expense Limitation Agreement, provided such Portfolio has reached a
sufficient asset size to permit such reimbursement to be made without causing
the total annual expense ratio of each Portfolio to exceed the percentage limits
stated above. Consequently, no reimbursement by a Portfolio will be made unless:
(i) the Portfolio's assets exceed $100 million; (ii) the Portfolio's total
annual expense ratio is less than the respective percentages stated above; and
(iii) the payment of such reimbursement has been approved by the Trust's Board
of Trustees on a quarterly basis.
Brokerage Practices
In selecting brokers and dealers, the Manager and each Adviser may consider
research and brokerage services furnished to either company and their
affiliates. Subject to seeking the most favorable net price and execution
available, the Manager and each Adviser may also consider sales of shares of the
Trust as a factor in the selection of brokers and dealers.
Transactions with Affiliates
In December 1984, Equitable Life acquired Donaldson, Lufkin & Jenrette, Inc.
("DLJ"). A DLJ subsidiary, Donaldson, Lufkin & Jenrette Securities Corporation,
is one of the nation's largest investment banking and securities firms. Another
DLJ subsidiary, Autranet, Inc., is a securities broker that markets
independently originated research to institutions. Through the Pershing Division
of Donaldson, Lufkin & Jenrette Securities Corporation, DLJ supplies security
execution and clearance services to financial intermediaries including
broker-dealers and banks. To the extent permitted by law, the Trust may engage
in securities and other transactions with the above entities or may invest in
shares of the investment companies with which those entities have affiliations.
T. Rowe Price, the Adviser to the T. Rowe Price Equity Income Portfolio, may
execute portfolio transactions through certain affiliates of Rowe Price-Fleming
International, Inc. and Jardine Fleming Group Limited, which are persons
indirectly related to T. Rowe Price, acting as an agent in accordance with
procedures established by the Trust's Board of Trustees. BT International Equity
Index Portfolio, may execute portfolio transactions through certain affiliates
of Bankers Trust.
The 1940 Act generally prohibits the Trust from engaging in principal securities
transactions with an affiliate of the Manager or Advisers unless pursuant to an
exemptive order from the SEC. The Trust may apply for such exemptive relief. The
Trust does not consider broker-dealer affiliates of an Adviser to one Portfolio
to be an affiliate of the Advisers to other Portfolios for which such Adviser
does not provide investment advice. The Trust has adopted procedures, prescribed
by Section 17(e)(2)(A) of the 1940 Act and Rule 17e-1 thereunder, which are
reasonably designed to provide that any commission it pays to affiliates of the
Manager or Advisers does not exceed the usual and customary broker's commission.
In addition, the Trust will adhere to Section 11 (a) of the 1934 Act and any
applicable rules thereunder governing floor trading. The Trust has adopted
procedures permitting it to purchase securities, under certain restrictions
prescribed by rule under the 1940 Act, in a public offering in which an
affiliate of the Manager or Advisers is an underwriter.
Year 2000
Like other mutual funds, the Trust and the service providers for the Trust and
each of its Portfolios rely heavily on the reasonably consistent operation of
their computer systems. Many software programs and certain computer hardware in
use today, cannot properly process information after December 31, 1999 because
of the method by which dates are encoded and calculated in such programs and
hardware. This problem, commonly referred to as the "Year 2000 Issue," could,
among other things, negatively impact the processing of trades, the distribution
of securities, the pricing of securities and their investment-related and
settlement activities. The Trust is currently obtaining information with respect
to the actions that have been taken and the actions that are planned to be taken
by each of its service providers to prepare their computer systems for the Year
2000. While the Trust expects that each of the Trust's service providers will
have adapted their computer systems to address the Year 2000 Issue, there can be
no assurance that this will be the case or that the steps taken by the Trust
will be sufficient to avoid any adverse impact to the Trust and each of its
Portfolios.
DESCRIPTION OF THE TRUST AND TRUST'S SHARES
The Trust
The Trust is a registered open-end management investment company that was
organized as a Delaware business trust on October 31, 1996. The Trust is
currently divided into eighteen portfolios, each of which has Class IA and Class
IB shares. The Trust currently offers Class IA shares on behalf of the four
Portfolios described in this prospectus only to participants in The Equitable
Investment Plan for Employees, Managers and Agents. The Board of Trustees may
establish additional portfolios and additional classes of shares.
Characteristics of Trust's Shares
The Board of Trustees of the Trust has authority to issue an unlimited number of
shares of beneficial interest, without par value. Each share of a Portfolio
shall be entitled to one vote (or fraction thereof in respect of a fractional
share) on matters that such shares (or class of shares) shall be entitled to
vote. Shareholders of each Portfolio shall vote together on any matter, except
to the extent otherwise required by the 1940 Act or when the Board of Trustees
of the Trust has determined that the matter affects only the interest of
shareholders of one or more classes, in which case only the shareholders of such
class or classes shall be entitled to vote thereon. Any matter shall be deemed
to have been effectively acted upon with respect to each Portfolio if acted upon
as provided in Rule 18f-2 under the 1940 Act, or any successor rule, and in the
Amended and Restated Declaration of Trust. The Trust is not required to hold
annual shareholder meetings, but special meetings may be called for purposes
such as electing or removing Trustees, changing fundamental policies or
approving an investment management or advisory agreement.
Under the Trust's multi-class system, shares of each class of a Portfolio
represent an equal pro rata interest in that Portfolio and, generally, shall
have identical voting, dividend, liquidation, and other rights, preferences,
powers, restrictions, limitations, qualifications and terms and conditions,
except that: (a) each class shall have a different designation; (b) each class
of shares shall bear its "Class Expenses;" (c) each class shall have exclusive
voting rights on any matter submitted to shareholders that relates solely to its
distribution arrangements; (d) each class shall have separate voting rights on
any matter submitted to shareholders in which the interests of one class differ
from the interests of any other class; (e) each class may have separate exchange
privileges, although exchange privileges are not currently contemplated; and (f)
each class may have different conversion features, although a conversion feature
is not currently contemplated. Expenses currently designated as "Class Expenses"
by the Trust's Board of Trustees under the plan pursuant to Rule 18f-3 are
currently limited to payments made to the Distributors for the Class IB shares,
pursuant to the Distribution Plan for the Class IB shares adopted pursuant to
Rule 12b-1 under the 1940 Act.
As of September 30, 1998, Equitable Life owned 100% of the outstanding shares of
the Trust.
Purchase and Redemption of Shares
EQ Financial, 1290 Avenue of the Americas, New York, New York, 10104, formerly
Equico Securities, Inc., a wholly-owned subsidiary of Equitable Life, serves as
one of the Distributors for the Trust's Class IA shares pursuant to a
distribution agreement with the Trust. EDI, 1290 Avenue of the Americas, New
York, New York, 10104, a Delaware corporation and an indirect wholly-owned
subsidiary of Equitable Life also serves as one of the Distributors for the
Trust's Class IA shares pursuant to a distribution agreement with the Trust.
Class IA shares are offered and redeemed without any sales charge, at net asset
value.
The price at which a purchase or redemption is effected is based on the next
calculation of net asset value after an order is placed by an insurance company
investing in or redeeming from the Trust. Net asset value per share is
calculated for purchases and redemption of shares of each Portfolio by dividing
the value of total Portfolio assets, less liabilities (including Trust expenses,
which are accrued daily), by the total number of outstanding shares of that
Portfolio. The net asset value per share of each portfolio is determined each
business day at 4:00 p.m. Eastern time. Net asset value per share is not
calculated on national business holidays.
All shares are purchased and redeemed in accordance with the Trust's Amended and
Restated Declaration of Trust and By-Laws. Sales and redemptions of shares of
the same class by the same shareholder on the same day will be netted for each
Portfolio. All redemption requests will be processed and payment with respect
thereto will normally be made within seven days after tenders. The Trust may
suspend redemption, if permitted by the 1940 Act, for any period during which
the New York Stock Exchange is closed or during which trading is restricted by
the SEC or the SEC declares that an emergency exists. Redemption may also be
suspended during other periods permitted by the SEC for the protection of the
Trust's shareholders. If the Board of Trustees determines that it would be
detrimental to the best interest of the Trust's remaining shareholders to make
payment in cash, the Trust may pay redemption proceeds in whole or in part by a
distribution-in-kind of readily marketable securities.
How Assets are Valued
Values are determined according to accepted accounting practices and all laws
and regulations that apply. The assets of each Portfolio are generally valued as
follows:
o Stocks and debt securities which mature in more than 60 days are valued on
the basis of market quotations.
o Foreign securities not traded directly in the United States are valued at
representative quoted prices in the currency of the country of origin.
Foreign currency amounts are translated into United States dollars at the
bid price last quoted by a composite list of major United States banks.
o Short-term debt securities in the Portfolios which mature in 60 days or
less are valued at amortized cost, which approximates market value.
o Other securities and assets for which market quotations are not readily
available or for which valuation cannot be provided are valued in good
faith by the Valuation Committee of the Board of Trustees of the Trust
using its best judgment.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Under current federal income tax law, the Trust believes that each Portfolio is
entitled, and the Trust intends that each Portfolio shall be treated as a
regulated investment company ("RIC") under Subchapter M of the Code. As a RIC, a
Portfolio will not be subject to federal tax on its net investment income and
net realized capital gains to the extent such income and gains are timely
distributed to its insurance company shareholders. Accordingly, each Portfolio
intends to distribute all of its net investment income and net realized capital
gains to its shareholders. An insurance company that is a shareholder of a
Portfolio will generally not be taxed on distributions from that Portfolio. All
dividend distributions will be reinvested in full and fractional shares of the
Portfolio to which they relate.
Although the Trust intends that it and the Portfolios will be operated so that
they will have no federal income or excise tax liability, if any such liability
is, nevertheless, incurred, the investment performance of the Portfolio or
Portfolios incurring such liability will be adversely affected. In addition,
Portfolios investing in foreign securities and currencies may be subject to
foreign taxes which could reduce the investment performance of such Portfolios.
In addition to meeting investment diversification rules applicable to RICs under
Subchapter M of the Code, each Portfolio will comply with the investment
diversification requirements of Subchapter L of the Code. Should any Portfolio
fail to comply with those requirements, owners of Contracts (other than "pension
plan contracts") funded through the Trust would be taxed immediately on the
accumulated investment earnings under their Contracts and would thereby lose any
benefit of tax deferral. The Equitable Investment Plan for Employees, Managers
and Agents is considered by Equitable to be a pension plan contract for these
purposes. Compliance with the diversification requirements of Section 817(h) of
the Code is carefully monitored by the Administrator and the Manager.
Certain additional tax information appears in the Statement of Additional
Information.
PERFORMANCE INFORMATION
From time to time, the Trust may advertise the "average annual or cumulative
total return" and may compare the performance of the Portfolios with that of
other mutual funds with similar investment objectives as listed in rankings
prepared by Lipper Analytical Services, Inc., or similar independent services
monitoring mutual fund performance, and with appropriate securities or other
relevant indices. The "average annual total return" of a Portfolio refers to the
average annual compounded rate of return over the stated period that would
equate an initial investment in that Portfolio at the beginning of the period to
its ending redeemable value, assuming reinvestment of all dividends and
distributions and deduction of all recurring charges. Performance figures will
be given for the recent one, five and ten year periods and for the life of the
Portfolio if it has not been in existence for any such periods. When considering
"average annual total return" figures for periods longer than one year, it is
important to note that a Portfolio's annual total return for any given year
might have been greater or less than its average for the entire period.
"Cumulative total return" represents the total change in value of an investment
in a Portfolio for a specified period (again reflecting changes in Portfolio
share prices and assuming reinvestment of Portfolio distributions). The methods
used to calculate "average annual and cumulative total return" are described
further in the Statement of Additional Information.
The average annual total return of each Portfolio for the one year period from
September 30, 1997 to September 30, 1998 and since inception, i.e., May 1, 1997
to September 30, 1998 (unless otherwise noted) is as follows:
<TABLE>
<CAPTION>
Since Inception
Portfolio One Year (Annualized)
<S> <C> <C>
T. Rowe Price Equity Income Portfolio............................... 2.29% 13.80%
MFS Emerging Growth Companies Portfolio............................. 2.62% 20.42%
Warburg Pincus Small Company Value Portfolio........................ (21.78)% 1.07%
BT International Equity Index Portfolio*............................ N/A (0.10)%
<FN>
*The total return is for the since inception period from December 31, 1997
to September 30, 1998 and is not annualized.
</FN>
</TABLE>
The performance of each Portfolio will vary from time to time in response to
fluctuations in market conditions, interest rates, the composition of the
Portfolio's investments and expenses. Consequently, a Portfolio's performance
figures are historical and should not be considered representative of the
performance of the Portfolio for any future period.
Class IA shares of EQ Advisors Trust were not available prior to November 1,
1998. Performance results shown above represent the historical performance of
Class IB shares and have been restated to exclude the distribution fees to which
only the class IB shares are subject.
PRIOR PERFORMANCE OF EACH ADVISER
The following tables provide information concerning the historical performance
of another registered investment company (or series) or other institutional
private account managed by each Adviser, that has investment objectives,
policies, strategies and risks substantially similar to those of the respective
Portfolio(s) of the Trust for which it serves as Adviser. The data is provided
to illustrate the past performance of each Adviser in managing a substantially
similar investment vehicle as measured against specified market indices and does
not represent the past performance of any of the Portfolios or the future
performance of any Portfolio or its Adviser. Consequently, potential investors
should not consider this performance data as an indication of the future
performance of any Portfolio of the Trust or of its Adviser.
Each Adviser's performance data shown below for other registered investment
companies or series thereof was calculated in accordance with standards
prescribed by the SEC for the calculation of average annual total return
information for registered investment companies. Share prices and investment
returns will fluctuate reflecting market conditions as well as changes in
company-specific fundamentals of portfolio securities. Composite performance
data relating to the historical performance of institutional private accounts
managed by the relevant Adviser was calculated in accordance with recommended
standards of the Association for Investment Management and Research ("AIMR")
retroactively applied to all time periods. All returns presented were calculated
on a total return basis and include all losses. All returns reflect the relevant
Adviser's institutional private accounts, without provision for federal or state
income taxes.
Custodial fees, if any, were not included in the calculation. The Composite
includes all actual, fee-paying, discretionary institutional private accounts
managed by the relevant Adviser that have investment objectives, policies,
strategies and risks substantially similar to those of the relevant Portfolio.
Securities transactions are accounted for on the trade date and accrual
accounting is utilized. Cash and equivalents are included in performance
returns.
<PAGE>
T. ROWE PRICE EQUITY INCOME PORTFOLIO
In the table below, the only account which is included is another registered
investment company, i.e., T. Rowe Price Equity Income Fund, which is managed by
T. Rowe Price Associates, Inc., and whose investment policies are substantially
similar to the T. Rowe Price Equity Income Portfolio. However, the T. Rowe Price
Equity Income Fund will be subject to different expenses than the T. Rowe Price
Equity Income Portfolio.
The investment results of T. Rowe Price Equity Income Fund presented below are
unaudited and are not intended to predict or suggest the returns that might be
experienced by the T. Rowe Price Equity Income Portfolio or an individual
investor investing in the T. Rowe Price Equity Income Portfolio.
Year Ended T. Rowe Price
9/30/98 Equity Income Fund1 S&P 500 Index2
One Year3 2.38% 9.05%
Five Years3 16.99% 19.91%
Ten Years3 14.23% 17.29%
- ----------------
1 Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
2 The S&P 500 Index ("S&P 500") is an unmanaged index containing common
stocks of 500 industrial, transportation, utility and financial companies,
regarded as generally representative of the United States stock market. The
S&P 500 reflects the reinvestment of income dividends and capital gain
distributions, if any, but does not reflect fees, brokerage commissions, or
other expenses of investing.
3 Annualized performance for the shares of the T. Rowe Price Equity Income
Fund.
<PAGE>
MFS EMERGING GROWTH COMPANIES PORTFOLIO
In the table below, the only account which is included is another registered
investment company, i.e., MFS Emerging Growth Fund, which is managed by
Massachusetts Financial Services Company, and whose investment policies are
substantially similar to MFS Emerging Growth Companies Portfolio. However, MFS
Emerging Growth Fund will be subject to different expenses than the MFS Emerging
Growth Companies Portfolio.
The investment results of MFS Emerging Growth Fund presented below are unaudited
and are not intended to predict or suggest the returns that might be experienced
by MFS Emerging Growth Companies Portfolio or an individual investor investing
in the MFS Emerging Growth Companies Portfolio.
Year Ended MFS Emerging Russell 2000
9/30/98 Growth Fund1 Index2
One Year3 -9.85% -19.02%
Five Years3 15.48% 9.09%
Ten Years3 20.06% 11.16%
- -------------
1 Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
2 The Russell 2000 Index is an unmanaged index (with no defined investment
objective) of 2000 small-cap stocks and it includes reinvestment of
dividends. It is compiled by the Frank Russell Company.
3 Annualized performance for the Class B shares of the MFS Emerging Growth
Fund, excluding any applicable sales load.
<PAGE>
WARBURG PINCUS SMALL COMPANY VALUE PORTFOLIO
In the table below, the only account which is included is another registered
investment company, i.e., Warburg Pincus Small Company Value Fund, which is
managed by Warburg Pincus Asset Management, Inc. and whose investment policies
are substantially similar to Warburg Pincus Small Company Value Portfolio.
However, the Warburg Pincus Small Company Value Fund will be subject to
different expenses than the Warburg Pincus Small Company Value Portfolio.
The investment results of Warburg Pincus Small Company Value Fund presented
below are unaudited and are not intended to predict or suggest the terms that
might be experienced by Warburg Pincus Small Company Value Portfolio or an
individual investor investing in such Portfolio.
Year Ended Warburg Pincus Small Russell 2000
9/30/98 Company Value Fund1,2 Index3
One Year4 -22.65% -19.02%
Since inception4 17.35% 6.68%
- --------------------
1 Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
2 Absent the waiver of fees by the Warburg Pincus Small Company Value Fund's
investment adviser and co-administrator, management fees of the Warburg
Pincus Small Company Value Fund would have equaled 1.00%, other expenses
would have equaled 0.94% and total operating expenses would have equaled
2.19% for the year ended 12/31/97. The investment adviser and
co-administrator of the Warburg Pincus Small Company Value Fund are under
no obligation to continue these waivers.
3 The Russell 2000 Index is an unmanaged index (with no defined investment
objective) of 2,000 small-cap stocks, and includes reinvestment of
dividends. It is compiled by the Frank Russell Company.
4 Annualized performance for shares of the Warburg Pincus Small Company Value
Fund. The inception date for the Warburg Pincus Small Company Value Fund is
December 29, 1995.
<PAGE>
BT INTERNATIONAL EQUITY INDEX PORTFOLIO
In the table below, the only account which is included is a series of another
registered investment company, i.e., EAFE Equity Index Fund - Institutional
Class, a series of BT Advisor Funds, which is managed by Bankers Trust Company,
and whose investment policies are substantially similar to the BT International
Equity Index Portfolio. However, the BT International Equity Index Portfolio
will be subject to different expenses than the EAFE Equity Index Fund -
Institutional Class.
The investment results of the EAFE Equity Index Fund - Institutional Class
presented below are unaudited and are not intended to predict or suggest the
return that might be experienced by the BT International Equity Index Portfolio
or an individual investor investing in the BT International Equity Index
Portfolio.
Year Ended EAFE Equity Index MSCI EAFE Index2
9/30/98 Fund - Institutional Class1
One Year3 -8.16% -8.34%
Since inception3 3.36% 3.14%
- -------------------
1 Average annual total return reflects changes in shares prices and
reinvestment of dividends and distributions and is net of fund expenses.
2 The Morgan Stanley Capital International EAFE Index ("MSCI EAFE Index") is
an unmanaged capitalization-weighted measure of stock markets in Europe,
Australia and the Far East. MSCI EAFE returns assume dividends reinvested
net of withholding tax and do not reflect any fees or operating expenses.
The index does not include fees or operating expenses and is not available
for actual investment.
3 The inception date for the EAFE Equity Index Fund -- Institutional Class is
January 24, 1996.
<PAGE>
APPENDIX A
The following table summarizes the historical performance information of certain
other registered investment companies or accounts that appears on pages 30
through 33 of this Prospectus. Each other registered investment company or
account is managed by an Adviser and has investment objectives, policies,
strategies and risks substantially similar to the Portfolio managed by that
Adviser. For further information regarding each of the registered investment
companies and the indices presented below, please refer to pages 5 through 10 of
this Prospectus.
<TABLE>
<CAPTION>
Annualized Rates of Return
Period Ended September 30, 1998
SINCE
FUND NAME 1 YR 5 YRS 10 YRS INCEPTION
- --------- ---- ----- ------ ---------
<S> <C> <C> <C> <C>
BT EAFE EQUITY INDEX FUND - INSTITUTIONAL CLASS -8.16% N/A N/A 3.36%
MSCI EAFE INDEX -8.34% N/A N/A 3.14%
MFS EMERGING GROWTH FUND -9.85% 15.48% 20.06% N/A
RUSSELL 2000 INDEX -19.02% 9.09% 11.16% N/A
T. ROWE PRICE EQUITY INCOME FUND 2.38% 16.99% 14.23% N/A
S&P 500 INDEX 9.05% 19.91% 17.29% N/A
WARBURG PINCUS SMALL COMPANY VALUE FUND -22.65% N/A N/A 17.35%
RUSSELL 2000 INDEX -19.02% N/A N/A 6.68%
</TABLE>
