As filed with the Securities and Exchange Commission on December 24, 1996
File Nos. 333- ____
811- ____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ___
Post-Effective Amendment No. ___
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. ___
Metropolitan West Funds
(Exact Name of Registrant as Specified in its Charter)
10880 Wilshire Blvd., Suite 2020
Los Angeles, California 90024
(Address of Principal Executive Office)
(310) 446-7727
(Registrant's Telephone Number, Including Area Code)
Scott B. Dubchansky
10880 Wilshire Blvd., Suite 2020
Los Angeles, California 90024
(Name and Address of Agent for Service)
-------------------------
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date hereof.
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to Rule 485(b)
___ on _______________, pursuant to Rule 485(b)
___ 60 days after filing pursuant to Rule 485(a)
___ on _______________, pursuant to Rule 485(a)
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant is registering an indefinite number of securities under the
Securities Act of 1933.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933.
----------
Please Send Copy of Communications to:
JULIE ALLECTA, ESQ.
BRUCE W. MAISEL, ESQ.
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, California 94104
(415) 772-6000
Total number of pages _____. Exhibit Index appears at _____.
<PAGE>
Metropolitan West Funds
CONTENTS OF REGISTRATION STATEMENT
This registration statement contains the following documents:
Facing Sheet
Contents of Registration Statement
Cross - Reference Sheets for Metropolitan West Funds
Part A - Combined Prospectus for Metropolitan West Funds
Metropolitan West Total Return Bond Fund
Metropolitan West Low Duration Bond Fund
Metropolitan West Short Term Investment Fund
Part B - Combined Statement of Additional Information for Metropolitan
West Funds
Metropolitan West Total Return Bond Fund
Metropolitan West Low Duration Bond Fund
Metropolitan West Short Term Investment Fund
Part C - Other Information
Signature Page
<PAGE>
Metropolitan West Funds
CROSS REFERENCE SHEETS
FORM N-1A
<TABLE>
Part A: Information Required in Prospectus
(Combined Prospectus for Metropolitan West Funds)
Metropolitan West Total Return Bond Fund
Metropolitan West Low Duration Bond Fund
Metropolitan West Short Term Investment Fund
<CAPTION>
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- -----------------------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis "Summary of Expenses and Example" and "Prospectus Summary"
3. Condensed Financial Not Applicable
Information
4. General Description Cover Page, "Prospectus Summary", "Investment
of Registrant Objectives and Policies," "Securities and Techniques Used by
the Funds," "Investment Risks," "Principal Investment
Restrictions," and "Organization and Management"
5. Management of "Investment Objectives and Policies,"
the Fund "Securities and Techniques Used by the Funds," "Organization
and Management" and "How to Purchase Shares"
5A. Management's Discussion Not Applicable
of Fund Performance
6. Capital Stock and "Organization and Management," "Dividends
Other Securities and Tax Status" and "General Information"
7. Purchase of Securities "How to Purchase Shares," "How to Redeem
Being Offered Shares"
8. Redemption or "How to Redeem Shares"
Repurchase
9. Pending Legal Not Applicable
Proceedings
<PAGE>
PART B: Information Required in
Statement of Additional Information
(Combined Statement of Additional Information for Metropolitan West Funds)
Metropolitan West Total Return Bond Fund
Metropolitan West Low Duration Bond Fund
Metropolitan West Short Term Investment Fund
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- -----------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Cover Page and "Management"
and History
13. Investment Objectives "Investment Objectives and Policies"
14. Management of the "Management"
Registrant
15. Control Persons and "Management of the Funds" and "General
Principal Holders of Information About the Trust"
Securities
16. Investment Advisory "Management"
and Other Services
17. Brokerage Allocation "Management"
18. Capital Stock and "General Information About
Other Securities the Trust"
19. Purchase, Redemption "Net Asset Value"
and Pricing of
Securities Being
Offered
20. Tax Status "Dividends and Tax Status"
21. Underwriters "Principal Underwriter"
22. Calculation of "Performance Information"
Performance Data
23. Financial Statements Not Applicable
</TABLE>
<PAGE>
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PART A
COMBINED PROSPECTUS
Metropolitan West Funds
-----------------------
Metropolitan West Total Return Bond Fund
Metropolitan West Low Duration Bond Fund
Metropolitan West Short Term Investment Fund
---------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION -- Dated December __, 1996
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may any
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any State.
PROSPECTUS
METROPOLITAN WEST ASSET MANAGEMENT
METROPOLITAN WEST FUNDS (THE "TRUST"), IS AN OPEN-END, MANAGEMENT INVESTMENT
COMPANY CONSISTING OF THREE SEPARATE DIVERSIFIED PORTFOLIOS (THE "FUNDS"), EACH
OF WHICH IS A SEPARATE MUTUAL FUND.
TOTAL RETURN BOND FUND
Seeks to maximize long-term total return. The Fund invests in a diversified
portfolio of fixed-income securities of varying maturities with a portfolio
duration of two to eight years. The Fund's dollar-weighted average maturity will
exceed its portfolio duration.
LOW DURATION BOND FUND
Seeks to maximize total return, consistent with preservation of capital. The
Fund invests in a diversified portfolio of fixed-income securities of varying
maturities with a portfolio duration of one to three years. The Fund's
dollar-weighted average maturity will exceed its portfolio duration.
SHORT TERM INVESTMENT FUND
Seeks to maximize total return, consistent with the preservation of capital. The
Fund invests in a diversified portfolio of fixed-income securities of varying
maturities with a portfolio duration of up to one year. The Fund's
dollar-weighted average maturity will exceed its portfolio duration.
- --------------------------------------------------------------------------------
This Prospectus provides you with the basic information you should know before
investing in any of the Funds. You should read it and keep it for future
reference. A Statement of Additional Information dated _______________, 1997, as
may be revised, containing additional information about the Trust and each Fund
has been filed with the Securities and Exchange Commission and is incorporated
by reference in its entirety into this Prospectus. You may obtain a copy of the
Statement of Additional Information without charge by calling (800)
________________ or writing to the Funds at 10880 Wilshire Boulevard, Suite
2020, Los Angeles, California 90024. If you are viewing the electronic version
of this prospectus through an online computer service, you may request a printed
version free of charge by calling (800) ___________.
The Internet address for the Metropolitan West Funds is [www.mws.com].
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, any bank, nor are they federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other agency. Investment
in a Fund's shares involves risk, including the possible loss of principal.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
There can be no assurance that the investment objective of any Fund will be
achieved.
Metropolitan West Funds
10880 Wilshire Boulevard, Suite 2020
Los Angeles, California 90024
(310) 446-7727
___________________, 1997
<PAGE>
TABLE OF CONTENTS
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SUMMARY OF EXPENSES........................................................3
PROSPECTUS SUMMARY.........................................................4
INVESTMENT OBJECTIVES AND POLICIES.........................................5
SECURITIES AND TECHNIQUES USED BY THE FUNDS................................7
INVESTMENT RISKS..........................................................10
PRINCIPAL INVESTMENT RESTRICTIONS.........................................12
ORGANIZATION AND MANAGEMENT...............................................12
HOW TO PURCHASE SHARES....................................................14
HOW TO REDEEM SHARES......................................................15
DIVIDENDS AND TAX STATUS..................................................16
PERFORMANCE INFORMATION...................................................17
GENERAL INFORMATION.......................................................17
APPENDIX -- DESCRIPTION OF RATINGS........................................18
The application for investing in the Metropolitan West Funds is included in this
prospectus.
2
<PAGE>
SUMMARY OF EXPENSES
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The following information is provided in order to assist you in understanding
the various costs and expenses that, as an investor in the Funds, you will bear
directly or indirectly. These are the expenses, including the estimated other
expenses, of each Fund for the first full year of operations.
SHAREHOLDER TRANSACTION EXPENSES*
Maximum Sales Load Imposed on Purchases..............................None
Maximum Sales Load Imposed on Reinvested Dividends...................None
Deferred Sales Load..............................................None
Redemption Fees .................................................None
Exchange Fees....................................................None
Investment dealers and other firms may independently charge additional fees for
shareholder transactions or for advisory services. Please see their materials
for details.
<TABLE>
Shareholders effecting transactions via wire transfer may be required to pay
fees, including the wire fee and other fees, that will be directly deducted from
redemption proceeds.
<CAPTION>
ANNUAL FUND Total Low Short Term
OPERATING EXPENSES* Return Duration Investment
(as a percentage of average net assets) Bond Fund Bond Fund Fund
- ------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Management fees............................... .55% .48% .40%
Other expenses after expense reimbursement.... .10% .10% .10%
----------- ----------- -----------
Total Fund operating expenses after expense
reimbursement ................................ .65% .58% .50%
=========== =========== ===========
<FN>
*Although not required to do so, Metropolitan West Asset Management LLC (the
"Advisor"), has agreed to limit the annual operating expenses of the Total
Return Bond Fund to .65%, the Low Duration Bond Fund to .58% and the Short Term
Investment Fund to .50% of each Fund's respective average net assets. [The
ratios of total operating expenses to average net assets for each Fund before
the Adviser's voluntary reimbursement are estimated as follows: Total Return
Bond Fund -_____% (___% other expenses); Low Duration Bond Fund - _____% (___%
other expenses); and Short Term Investment Fund - ___ % (___% other expenses).
In subsequent years, overall operating expenses for each Fund may not fall below
the applicable percentage limitation until the Adviser has been fully reimbursed
for fees foregone or expenses paid it under the Management Agreement. Each Fund
will reimburse the Adviser in the three following years if operating expenses
(before reimbursement) are less than the applicable percentage limitation
charged to the Fund.]
</FN>
</TABLE>
<TABLE>
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EXAMPLE
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<CAPTION>
You would pay the following expenses on a $1,000 investment, assuming: Total Low Short Term
(1) 5% annual return; and Return Duration Investment
(2) redemption at the end of each time period: Bond Fund Bond Fund Fund
-------------------------------------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
One Year $ 7 $ 6 $ 5
Three Years $21 $19 $16
</TABLE>
The example assumes that the Adviser will limit the annual operating expenses of
each Fund to the total shown.
The example should not be considered a representation of past or future
expenses; actual Fund expenses may be greater or less than those shown. The
assumption in the Example of a 5% annual return is required by regulations of
the Securities and Exchange Commission applicable to all mutual funds. The
assumed 5% annual return is not a prediction of, and does not represent, the
projected or actual performance of any Fund. See "Organization and Management."
3
<PAGE>
PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
Each Fund has its own investment objective. See "Investment Objectives and
Policies" for a full discussion of the objectives of the Total Return Bond Fund,
Low Duration Bond Fund, and Short Term Investment Fund. The investment objective
of each Fund is fundamental and may not be changed without shareholder approval.
THE INVESTMENT ADVISOR
The Advisor, Metropolitan West Asset Management, LLC, is a registered investment
adviser organized as a California limited liability company in 1996. The Adviser
is owned in part by Metropolitan West Securities, Inc., a registered investment
adviser and broker-dealer. The Adviser is in the business of furnishing
investment advice to institutional and private clients and currently manages
approximately [$___] billion for such clients. The Adviser has not previously
managed a mutual fund. The Adviser's affiliate, Metropolitan West Securities,
Inc., has managed fixed-income investments since 1992 and currently manages
approximately $_______ billion for its clients.
MANAGEMENT FEE
For its services, the Adviser receives a fee, accrued daily and paid monthly, at
the following annual percentages of average daily net assets: Total Return Bond
Fund--0.55%; Low Duration Bond Fund--0.48%; and Short Term Investment
Fund--0.40%.
INVESTMENT RISKS
Like all investments, an investment in each Fund involves certain risks. The
securities held by the Funds and the value of the Funds' shares will fluctuate
with market and other economic conditions, so that investors' shares, when
redeemed, may be worth more or less than their original cost. See "Investment
Risks" for a further discussion of certain risks.
MINIMUM PURCHASE
The minimum initial investment in the Fund is [$5,000.] For retirement plan
investments and custodial accounts under the Uniform Gifts/Transfers to Minors
Act the minimum is [$________]. The minimum is reduced to [$________] for
purchases through the Automatic Investment Plan or for purchases by retirement
plans through payroll deductions. Subsequent investments must be at least $100.
OFFERING PRICE
Shares are offered at their net asset value without a sales charge and may be
redeemed at their net asset value on any business day. See "How To Purchase
Shares" and How To Redeem Shares."
DIVIDENDS AND DISTRIBUTIONS
The Total Return Bond, Low Duration Bond and Short Term Investment Funds expect
to declare dividends daily and pay them monthly to shareholders. Distributions
of net capital gains, if any, will be made at least annually. The Board of
Trustees may determine to declare dividends and make distributions more or less
frequently.
Dividends and capital gain distributions (net of any required tax withholding)
are automatically reinvested in additional shares at the net asset value per
share on the reinvestment date unless the shareholder has previously requested
in writing to the Transfer Agent that payment be made in cash.
4
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
GENERAL
The following descriptions are designed to help you choose the Fund that best
fits your investment objective. You may want to pursue more than one objective
by investing in more than one of the Funds. Each Fund's investment objective is
a fundamental policy, which cannot be changed without the approval of a majority
of the Fund's outstanding voting securities, as defined in the Investment
Company Act of 1940, as amended (the "1940 Act"). There can be no assurance that
any objective will be met. In addition, each of the Funds may make use of
certain types of investments and investing techniques that are described under
the caption "Securities and Techniques Used by the Funds." For a discussion of
certain risks associated with investment in the Funds, including their use of
derivatives, see "Investment Risks."
Metropolitan West Asset Management, LLC (the "Advisor") acts as investment
advisor to each Fund.
THE TOTAL RETURN BOND FUND
The investment objective of the TOTAL RETURN BOND FUND is to maximize long-term
total return. The Fund invests in a diversified portfolio of fixed-income
securities of varying maturities with a portfolio duration of from two to eight
years. The dollar-weighted average maturity of the portfolio of the Fund is
expected to range from two to fifteen years. Portfolio holdings will be
concentrated in areas of the bond market (based on quality, sector, coupon or
maturity) which the Advisor believes to be relatively undervalued. The Advisor
views bonds to mean any interest-bearing security that obligates the issuer to
pay the bondholder specified sums of money on specified dates and generally
requires the issuer to repay the principal amount of the loan at maturity.
THE LOW DURATION BOND FUND
The investment objective of the LOW DURATION BOND FUND is to maximize total
return, consistent with preservation of capital. The Fund invests in a
diversified portfolio of fixed-income securities of varying maturities with a
portfolio duration of from one to three years. The dollar-weighted average
maturity of the portfolio of the Fund is expected to range from one to five
years. The total rate of return for this Fund is expected to exhibit less
volatility than that of a longer duration fixed-income fund such as the TOTAL
RETURN BOND FUND.
SHORT TERM INVESTMENT FUND
The investment objective of the SHORT TERM INVESTMENT FUND is to maximize total
return, consistent with preservation of capital. The Fund invests in a portfolio
of fixed-income securities of varying maturities with a portfolio duration of up
to one year. The Fund's dollar weighted average maturity will exceed its
portfolio duration. The total rate of return for this Fund is expected to
exhibit less volatility than that of the longer duration TOTAL RETURN BOND FUND,
or the LOW DURATION BOND FUND
INVESTMENT POLICIES OF THE FUNDS
THE TOTAL RETURN BOND FUND, THE LOW DURATION BOND FUND and THE SHORT TERM
INVESTMENT FUND (the "FUNDS") will attempt to achieve their objectives by
investing in the following types of securities that may be issued by domestic or
foreign entities: (i) U.S. Government securities; (ii) corporate debt
securities, including bonds, notes and debentures; (iii) corporate commercial
paper; (iv) mortgage- and other asset-backed securities, including CMOs and
REMICs; (v) variable and floating rate debt securities (including inverse
floaters); (vi) structured debentures, bonds and notes; (vii) bank certificates
of deposit; (viii) fixed time deposits and bankers' acceptances; (ix) repurchase
agreements and reverse repurchase agreements; (x) debt securities that are
convertible into or exchangeable for equity securities ("convertible
securities"); (xi) obligations of foreign governments or their subdivisions,
agencies and instrumentalities; and (xii) obligations of international agencies
(such as the Agency for International Development) or supranational entities.
There is no limitation on the percentage of a Fund's assets that may be
committed to any of these types of securities, except to the extent that a
security may be deemed to be illiquid. See "Securities and Techniques Used by
the Funds."
Under normal circumstances, the TOTAL RETURN BOND FUND will invest at least 70%
of its net assets in debt instruments rated at least investment grade, i.e., (i)
Baa3 by Moody's or BBB- by S&P, Fitch or Duff & Phelps, (ii) A-2 by S&P, P-2 by
Moody's, F-2 by Fitch or D-2 by Duff & Phelps for short-term debt obligations,
or (iii) of comparable quality as determined by the Advisor in the case of
unrated securities. Up to 15% of the TOTAL RETURN BOND FUND'S net assets may be
invested in securities rated below investment grade but rated B or higher by one
of the nationally recognized rating agencies or, if unrated, of comparable
quality in the opinion of the Advisor.
Under normal circumstances, the LOW DURATION BOND FUND and the SHORT TERM
INVESTMENT FUND will invest at least 70% of its net assets in highly rated
securities rated at least: (i) A by Moody's, S&P, Fitch or Duff & Phelps, (ii)
A-2 by S&P, P-2 by Moody's, F-2 by Fitch or D-2 by Duff & Phelps for short-term
debt obligations, or (iii) of comparable quality as determined by the Advisor in
the case of unrated securities. Up to 10% of the LOW DURATION BOND FUND'S and
the SHORT TERM INVESTMENT FUND'S net assets may be invested in securities rated
below investment
5
<PAGE>
grade but rated B or higher by one of the nationally recognized rating agencies
or, if unrated, of comparable quality in the opinion of the Advisor. The
remainder of the LOW DURATION BOND FUND'S and the SHORT TERM INVESTMENT FUND'S
investments will be rated BAA or BBB by at least one of these rating agencies
or, if unrated, of comparable quality in the opinion of the advisor.
Securities rated Baa are considered by Moody's to have speculative
characteristics. For Baa/BBB rated securities, changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade securities.
Securities rated below BBB or Baa are judged to be predominantly speculative
with respect to their capacity to pay interest and repay principal in accordance
with the terms of their obligations and are commonly known as "junk bonds." See
"Investment Risks--Risks of Investing in Fixed-Income Securities."
After its purchase by one of the Funds, a security may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the Advisor will consider such an event in
determining whether the Fund should continue to hold the security in the
portfolio.
Each FUND may invest up to 10% of its net assets in emerging market foreign
securities, which are generally considered to be of a credit quality below
investment grade.
Each FUND may invest up to 25% of its total assets in securities of foreign
issuers that are denominated in U.S. dollars. Investment in securities of
foreign issuers that are not denominated in U.S. dollars by these Funds will be
limited to a maximum of 15% of each
FUND'S TOTAL ASSETS.
The FUNDS each invest in a diversified portfolio of fixed-income securities of
varying maturities with a different portfolio "duration." Duration is a measure
of the expected life of a fixed-income security that was developed as a more
precise alternative to the concept of "term to maturity." Duration incorporates
a bond's yield, coupon interest payments, final maturity, call and put features
and prepayment exposure into one measure. Traditionally, a fixed-income
security's "term to maturity" has been used as a proxy for the sensitivity of
the security's price to changes in interest rates (which is the "interest rate
risk" or "volatility" of the security). However, "term to maturity" measures
only the time until a fixed-income security provides its final payment, taking
no account of the pattern of the security's payments prior to maturity.
Duration is a measure of the expected life of a fixed-income security on a
present value basis. Duration takes the length of time intervals between the
present time and the time that the interest and principal payments are scheduled
or, in the case of a mortgage-backed, asset-backed, or callable bond, expected
to be received, and weights them by the present values of the cash to be
received at each future point in time. For any fixed-income security with
interest payments occurring prior to the payment of principal, duration is
ordinarily less than maturity. In general, all other things being equal, the
lower the stated or coupon rate of interest of a fixed-income security, the
longer the duration of the security; conversely, the higher the stated or coupon
rate of interest of a fixed-income security, the shorter the duration of the
security. There are some situations where even the standard duration calculation
does not properly reflect the interest rate exposure of a security. In these and
other similar situations, the Advisor will use more sophisticated analytical
techniques that incorporate the economic life of a security into the
determination of its interest rate exposure. A Fund's computation of duration is
based on estimated rather than known factors. Thus, there can be no assurance
that a particular portfolio duration will at all times be achieved by a Fund.
Duration is used in the management of the Funds as a tool to measure interest
rate risk. For example, a Fund with a 2-year duration would be expected to
change in value 2% for every 1% move in interest rates. Assuming an expected
average duration of .75 years for the SHORT TERM INVESTMENT FUND, a 1% decline
in interest rates would cause the Fund to gain .75% in value; likewise, a 1%
rise in interest would produce a decline of .75% in the Fund's value. Assuming
an expected average duration of 2 years for the LOW DURATION BOND FUND, a 1%
decline in interest rates would cause the Fund to gain 2% in value; likewise, a
1% rise in interest rates would produce a decline of 2% in the Fund's value.
Assuming an expected average duration of 4.5 years for the TOTAL RETURN BOND
FUND, a 1% decline in interest rates would cause the Fund to gain 4.5% in value;
likewise, a 1% rise in interest rates would produce a decline of 4.5% in the
Fund's value. Other factors such as changes in credit quality, prepayments, the
shape of the yield curve and liquidity affect the net asset value of the Funds
and may be correlated with changes in interest rates. These factors can
exacerbate swings in the Fund's share prices during periods of volatile interest
rate changes.
For a more detailed discussion of duration, see "Investment Objectives and
Policies--Duration" in the Statement of Additional Information.
See "Securities and Techniques Used by the Funds--Foreign Securities."
6
<PAGE>
SECURITIES AND TECHNIQUES USED BY THE FUNDS
- --------------------------------------------------------------------------------
The following provides a summary of the securities and techniques used by the
Funds. The Statement of Additional Information contains more detailed
information about these investments and the risks associated with them.
U.S. GOVERNMENT SECURITIES
The Funds may invest in U.S. Government securities. U.S. Government securities
include direct obligations issued by the United States Treasury, such as
Treasury bills, certificates of indebtedness, notes, bonds and component parts
of notes or bonds (including the principal of such obligations or the interest
payments scheduled to be paid on such obligations). U.S. Government securities
also include securities issued or guaranteed by U.S. Government, agencies and
instrumentalities that issue or guarantee securities, including, but are not
limited to, the Federal National Mortgage Association ("FNMA"), Government
National Mortgage Association ("GNMA"), Federal Home Loan Banks, Federal
Financing Bank, and Student Loan Marketing Association.
All Treasury securities are backed by the full faith and credit of the United
States. Obligations of U.S. Government agencies and instrumentalities may or may
not be supported by the full faith and credit of the United States. Some, such
as the Federal Home Loan Banks, are backed by the right of the agency or
instrumentality to borrow from the Treasury. Others, such as securities issued
by FNMA, are supported only by the credit of the instrumentality and not by the
Treasury. If the securities are not backed by the full faith and credit of the
United States, the owner of the securities must look principally to the agency
issuing the obligation for repayment and may not be able to assert a claim
against the United States in the event that the agency or instrumentality does
not meet its commitment.
Among the U.S. Government securities that may be purchased by the Funds are
certain "mortgage-backed securities" of GNMA, the Federal Home Loan Mortgage
Corporation ("FHLMC") and FNMA. See the discussion under "Mortgage-Related
Securities."
CORPORATE AND OTHER OBLIGATIONS
The Funds may invest in corporate debt securities, variable and floating rate
debt securities and corporate commercial paper in the rating categories
described above. Floating rate securities normally have a rate of interest which
is set as a specific percentage of a designated base rate, such as the rate on
Treasury bonds or bills or the prime rate at a major commercial bank. The
interest rate on floating rate securities changes periodically when there is a
change in the designated base rate. Variable rate securities provide for a
specified periodic adjustment in the interest rate based on prevailing market
rates.
Structured debentures and structured notes are hybrid instruments with
characteristics of both bonds and swap agreements. Like a bond, these securities
make regular coupon payments and generally have fixed principal amounts.
However, the coupon payments are typically tied to a swap agreement which can be
affected by changes in a variety of factors such as exchange rates, the shape of
the yield curve and foreign interest rates. Because of these factors, structured
debentures and structured notes can display price behavior that is more volatile
than and often not correlated to other fixed-income securities.
The Funds may also invest in inverse floaters and tiered index bonds. An inverse
floater is a type of derivative that bears a floating or variable interest rate
that moves in the opposite direction to the interest rate on another security or
index level. Changes in the interest rate of the other security or index
inversely affect the residual interest rate paid on the inverse floater, with
the result that the inverse floater's price will be considerably more volatile
than that of a fixed-rate bond. Tiered index bonds are also a type of derivative
instrument. The interest rate on a tiered index bond is tied to a specified
index or market rate. So long as this index or market rate is below a
predetermined "strike" rate, the interest rate on the tiered index bond remains
fixed. If, however, the specified index or market rate rises above the "strike"
rate, the interest rate on the tiered index bond will decrease. In general, the
interest rates on tiered index bonds and inverse floaters move in the opposite
direction of prevailing interest rates. The market for inverse floaters and
tiered index bonds is relatively new. These corporate debt obligations may have
characteristics similar to those of mortgage-related securities, but corporate
debt obligations, unlike mortgage-related securities, are not subject to
prepayment risk other than through contractual call provisions which generally
impose a penalty for prepayment.
ASSET-BACKED SECURITIES
The Funds may invest in securities whose principal and interest payouts are
backed by, or supported by, any of various types of assets. These assets most
typically include receivables related to the purchase of automobiles, credit
card loans, and home equity loans. These securities generally take the form of a
structured type of security, including pass-through, pay-through, and stripped
interest payout structures.
FOREIGN SECURITIES
Each Fund has the right to invest in foreign securities. Foreign economies may
differ from the U.S. economy; individual foreign companies may differ from
domestic companies in the same industry; and foreign currencies may be stronger
or weaker than the U.S. dollar. The Advisor
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believes that the ability to invest abroad will enable the Funds to take
advantage of these differences when they are favorable.
Fixed-income securities that may be purchased by the Funds include debt
obligations issued or guaranteed by foreign governments, their subdivisions,
agencies or instrumentalities, or by supranational entities that have been
constituted by the governments of several countries to promote economic
development, such as The World Bank and The Asian Development Bank. Foreign
investment in certain foreign government debt is restricted or controlled to
varying degrees.
The Funds may invest in fixed-income securities of issuers located in emerging
foreign markets. Such markets generally include every country in the world other
than the U.S., Canada, Japan, Australia, Malaysia, New Zealand, Hong Kong,
Singapore, Korea and most Western European countries. From time to time,
emerging markets have offered the opportunity for higher returns but involve a
higher level of risk. Accordingly, the Advisor believes that the Funds' limited
ability to invest in emerging markets throughout the world may enable the Funds
to obtain a wider range of attractive investment opportunities. Emerging market
securities include securities issued or guaranteed by governments, their
agencies, instrumentalities or central banks ("sovereign debt"); securities of
issuers organized and operated to restructure the investment characteristics of
sovereign debt; securities of banks and other business entities; and securities
denominated in or indexed to currencies of emerging markets. These securities
include "Brady Bonds," which afford emerging market countries a means to
restructure their outstanding commercial bank debt. Foreign governmental issuers
of debt or the governmental authorities that control repayment of the debt may
be unable or unwilling to repay principal or pay interest when due and all or a
portion of the interest payments and/or principal repayment with respect to
Brady Bonds may be uncollateralized.
Emerging market securities are generally considered to be of a credit quality
below investment grade, even though they often are not rated by any nationally
recognized rating agency. The Advisor seeks to reduce the risk associated with
emerging market securities by limiting the amount of such securities held by the
Funds, by the depth of its own credit analysis, and evaluation of political,
economic, currency and other factors that may be pertinent.
There are risks in investing in emerging market and other foreign securities.
See "Investment Risks--Risks of Investing in Emerging Market and Other Foreign
Securities."
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements involving U.S. Government
securities or other collateral including mortgage related products or corporate
securities with commercial banks or broker-dealers, whereby the seller of a
security agrees to repurchase the security on an agreed-upon date in the future.
While each Fund intends to be fully "collateralized" as to such agreements, and
the collateral will be marked to market daily, if the person obligated to
repurchase from the Fund defaults, there may be possible delays and expenses in
liquidating the securities subject to the repurchase agreement, a decline in
their value and loss of interest.
REVERSE REPURCHASE AGREEMENTS
The FUNDS may enter into reverse repurchase agreements, whereby a Fund sells
securities concurrently with entering into an agreement to repurchase those
securities at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on those securities. Reverse repurchase agreements are speculative techniques
involving leverage and are considered borrowings by the Fund for purposes of the
percentage limitations applicable to borrowings.
BORROWING
As a fundamental policy, the Funds may borrow for temporary, emergency or
investment purposes. This borrowing may be unsecured. The 1940 Act requires a
Fund to maintain continuous asset coverage (that is, total assets including
borrowings, less liabilities exclusive of borrowings) of 300% of the amount
borrowed. Borrowing subjects a Fund to interest costs which may or may not be
recovered by appreciation of the securities purchased, and can exaggerate the
effect on net asset value of any increase or decrease in the market value of a
Fund's portfolio. This is the speculative factor known as leverage.
LOANS OF PORTFOLIO SECURITIES
For the purpose of achieving income, the Funds may lend their portfolio
securities, provided: (i) the loan is secured continuously by collateral
consisting of short-term, high quality debt securities, including U.S.
Government securities, negotiable certificates of deposit, bankers' acceptances
or letters of credit, maintained on a daily marked-to-market basis in an amount
at least equal to the current market value of the securities loaned; (ii) the
Fund may at any time call the loan and obtain the return of the securities
loaned; (iii) the Fund will receive any interest or dividends paid on the loaned
securities; and (iv) the aggregate market value of securities loaned will not at
any time exceed one-third of the total assets of the Fund.
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WHEN-ISSUED SECURITIES
The Funds may purchase securities on a when-issued or delayed-delivery basis,
generally in connection with an underwriting or other offering. When-issued and
delayed-delivery transactions occur when securities are bought with payment for
and delivery of the securities scheduled to take place at a future time, beyond
normal settlement dates, generally from 15 to 45 days after the transaction. The
price that the Fund is obligated to pay on the settlement date may be different
from the market value on that date. While securities may be sold prior to the
settlement date, the Funds intend to purchase such securities with the purpose
of actually acquiring them, unless a sale would be desirable for investment
reasons. At the time the Fund makes a commitment to purchase a security on a
when-issued basis, it will record the transaction and reflect the value of the
security each day in determining the Fund's net asset value. The Fund will also
establish a segregated account with its custodian in which it will hold cash,
U.S. Government securities, equity securities or other liquid, unencumbered
assets, marked-to-market daily, equal in value to its obligations for
when-issued securities.
SHORT SALES
A Fund may make short sales of securities (i.e., sales of securities the Fund
does not own) or maintain a short position only if (i) at all times when the
short position is open, the Fund owns an equal amount of such securities or
securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issue as, and equal in amount to, the
securities sold short (a short sale "against-the-box") and (ii) not more than
25% of the Fund's net assets (taken at current value) is held as collateral for
such sales at any one time.
MORTGAGE-RELATED SECURITIES
The Funds may invest in mortgage-related securities, including mortgage
pass-through securities and collateralized mortgage obligations. Mortgage
pass-through securities are securities representing interests in pools of
mortgages in which payments of both interest and principal on the securities are
generally made monthly, in effect "passing through" monthly payments made by the
individual borrowers on the residential mortgage loans which underlie the
securities (net of fees paid to the issuer or guarantor of the securities). For
a discussion of certain risks associated with investment in mortgage-related
securities, including their volatility, see "Investment Risks--Risks of
Investing in Fixed Income Securities."
Payment of principal and interest on some mortgage-related securities (but not
the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government (in the case of securities guaranteed by
GNMA) or by agencies or instrumentalities of the U S. Government (in the case of
securities guaranteed by FNMA or the FHLMC, which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities created by non-governmental
issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers) may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance, and letters of credit, which
may be issued by governmental entities, private insurers or the mortgage
poolers.
Collateralized mortgage obligations ("CMOs"), including CMOs that have elected
to be treated as Real Estate Mortgage Investment Conduits ("REMICs"), are hybrid
instruments with characteristics of both bonds and mortgage pass-through
securities. Similar to a bond, interest and prepaid principal on a CMO are paid,
in most cases, monthly. CMOs may be collateralized by whole mortgage loans but
are more typically collateralized by portfolios of securities guaranteed by
GNMA, FHLMC or FNMA or of mortgage pass-through securities created by
non-governmental issuers. CMOs are structured into multiple classes, with each
class bearing a different stated maturity. Monthly payments of principal,
including prepayments, are first returned to investors holding the shortest
maturity class. Investors holding the longer maturity classes receive principal
only after the first class has been retired.
Other mortgage-related securities include those that directly or indirectly
represent a participation in or are secured by and payable from mortgage loans
on real property, such as CMO residuals, stripped mortgage-backed securities,
variable rate securities (including inverse floaters), or tiered index bonds and
may be structured in classes with rights to receive varying proportions of
principal and interest. Stripped mortgage-backed securities are derivative,
multi-class mortgage securities. The Funds may invest in stripped
mortgage-backed securities issued by the U.S. Government, its agencies and
instrumentalities.
Stripped mortgage-backed securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. In certain cases, one class will receive all of the
interest (the interest-only or "IO" class), while the other class will receive
all of the principal (the principal-only or "PO" class). The yields to maturity
on IOs and POs are sensitive to the rate of principal repayments (including
prepayments) on the related underlying mortgage assets, and principal payments
may have a material effect on yield to maturity. If the underlying mortgage
assets experience greater than anticipated prepayments of principal, a Fund may
not fully recoup its initial investment in IOs. Conversely, if the underlying
mortgage assets experience less than expected prepayments of principal, the
yield on POs could be materially adversely affected. Such securities
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<PAGE>
will be considered liquid only if so determined in accordance with guidelines
established by the Trustees. The Funds also may invest in stripped
mortgage-backed securities that are privately issued. These securities will be
considered illiquid for purposes of each Fund's limit on illiquid securities.
CMOs and other mortgage-related securities that are issued or guaranteed by the
U.S. Government or by any of its agencies or instrumentalities will be
considered U.S. Government securities for purposes of applying a Fund's
diversification tests. Generally, the entity that has the ultimate
responsibility for the payment of interest and principal on a security is deemed
to be the issuer of an obligation.
OTHER DERIVATIVE INSTRUMENTS
In addition to the asset-backed securities and mortgage-related securities
(including tiered index bonds and inverse floaters) which may be purchased by
the Funds, the Funds may utilize certain other financial instruments whose
performance is derived from the performance of an underlying asset
("derivatives"). The Funds may purchase and write call and put options on
securities, securities indexes and on foreign currencies, and enter into futures
contracts and use options on futures contracts. The Funds also may enter into
swap agreements with other institutional investors with respect to foreign
currencies, interest rates, and securities indexes. The Funds may use these
techniques to hedge against changes in interest rates, foreign currency exchange
rates or securities prices or as part of their overall investment strategies.
Each Fund will maintain segregated accounts consisting of cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily (or, as permitted by applicable regulation, enter into
certain offsetting positions), to cover its obligations under options, futures
contracts and swap agreements to avoid leveraging of the Fund. See "Investment
Risks--Risks of Using Certain Derivatives."
The Funds may buy or sell interest rate futures contracts, options on interest
rate futures contracts and options on debt securities for the purpose of hedging
against changes in the value of securities which a Fund owns or anticipates
purchasing due to anticipated changes in interest rates. The Funds also may
engage in currency exchange transactions by means of buying or selling foreign
currency on a spot basis, entering into forward foreign currency exchange
contracts, and buying and selling foreign currency options, futures and options
on futures. Foreign currency exchange transactions may be entered into for the
purpose of hedging against foreign currency exchange risk arising from the
Funds' investment or anticipated investment in securities denominated in foreign
currencies.
A Fund will not enter into futures contracts or options thereon for non-hedging
purposes if, immediately thereafter, the aggregate initial margin deposits on
the Fund's futures positions and premiums paid for options thereon would exceed
5% of the liquidation value of the Fund's total assets. There is no other
percentage limitation on a Fund's use of options, futures and options thereon,
except for the limitation on foreign currency option contracts described below.
Also, the Funds may enter into interest rate, index and currency exchange rate
swap agreements for the purpose of attempting to obtain a particular desired
return at a lower cost to a Fund than if the Fund had invested directly in an
instrument that yielded that desired return. In a standard swap agreement, two
parties agree to exchange the returns (or differentials in rates of return)
earned or realized on a particular predetermined investment or investments. Swap
agreements are subject to the Funds' overall limit that no more than 15% of net
assets may be invested in illiquid securities, and a Fund will not enter into a
swap agreement with any single party if the net amount owed or to be received
under existing contracts with that party would exceed 5% of the Fund's assets.
The Funds may purchase foreign currency options or enter into forward foreign
currency exchange contracts for the purpose of hedging against the effect that
currency fluctuations will have on the value of Fund liabilities, such as known
or expected redemptions or the payment of any declared dividends. During the
coming year, no Fund will enter into foreign currency option contracts if the
premiums on such options exceed 5% of the Fund's total assets. See "Investment
Objectives and Policies--Derivative Instruments" in the Statement of Additional
Information.
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INVESTMENT RISKS
- --------------------------------------------------------------------------------
The investment practices described above involve certain risks. The net asset
value of any of the Funds may increase or decrease for many reasons. These
include changes in the market prices of portfolio securities, the success or
failure (and the associated costs) of investment strategies used by the Advisor
in seeking to achieve a Fund's investment objective, and the payment of
dividends and distributions to shareholders. The following provides a summary of
the more significant risks associated with investing in the Funds. The Statement
of Additional Information contains more detailed information about these
investments and the risks that are associated with them.
RISKS OF INVESTING IN EMERGING MARKET AND OTHER FOREIGN SECURITIES
Investments in emerging market and other foreign securities involve certain risk
considerations not typically associated with investing in securities of U.S.
issuers, including: (a) currency devaluations and other currency exchange rate
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fluctuations; (b) political uncertainty and instability; (c) more substantial
government involvement in the economy; (d) higher rates of inflation; (e) less
government supervision and regulation of the securities markets and participants
in those markets; (f) controls on foreign investment and limitations on
repatriation of invested capital and on a Fund's ability to exchange local
currencies for U.S. dollars; (g) greater price volatility, substantially less
liquidity and significantly smaller capitalization of securities markets; (h)
absence of uniform accounting and auditing standards; (i) generally higher
commission expenses; (j) delay in settlement of securities transactions; and (k)
greater difficulty in enforcing shareholder rights and remedies.
RISKS OF INVESTING IN FIXED-INCOME SECURITIES
The Funds are subject primarily to interest rate and credit risk. Interest rate
risk is the potential for a decline in bond prices due to rising interest rates.
In general, bond prices vary inversely with interest rates. The change in bond
price depends on several factors, including the bond's maturity date. In
general, bonds with longer maturities are more sensitive to changes in interest
rates than bonds with shorter maturities. Credit risk is the possibility that a
bond issuer will fail to make timely payments of interest or principal to a
Fund.
The Funds may invest in mortgage- and asset-backed securities. The yield
characteristics of mortgage-backed and asset backed securities differ from
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that principal
may be prepaid at any time because the underlying mortgage loans or other assets
generally may be prepaid at any time. As a result, if a Fund purchases such a
security at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity, while a prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity. Alternatively, if
a Fund purchases these securities at a discount, faster than expected
prepayments will increase yield to maturity, while slower than expected
prepayments will reduce yield to maturity. Although the extent of prepayments on
a pool of mortgage loans depends on various economic and other factors, as a
general rule, prepayments on fixed-rate mortgage loans will increase during a
period of falling interest rates and decrease during a period of rising interest
rates. Asset-backed securities, although less likely to experience the same
prepayment rates as mortgage-backed securities, may respond to certain of the
same factors influencing prepayments, while at other times different factors
will predominate.
Mortgage-backed securities and asset-backed securities may decrease in value as
a result of increases in interest rates and may benefit less than other
fixed-income securities from declining interest rates because of the risk of
prepayment.
The Funds may invest in stripped mortgage- or asset-backed securities, which
receive differing proportions of the interest and principal payments from the
underlying assets. The market value of such securities generally is more
sensitive to changes in prepayment and interest rates than is the case with
traditional mortgage- and asset-backed securities, and in some cases the market
value may be extremely volatile. With respect to certain stripped securities,
such as interest only ("IO") and principal only ("PO") classes, a rate of
prepayment that is faster or slower than anticipated may result in a Fund
failing to recover all or a portion of its investment, even though the
securities are rated investment grade. Certain of the stripped mortgage- and
asset-backed securities held by the Funds are considered to be illiquid under
guidelines established by the Trustees.
The Funds may invest a portion of their assets in non-investment grade debt
securities, commonly referred to as "junk bonds." Low-rated and comparable
unrated securities, while generally offering higher yields than investment grade
securities with similar maturities, involve greater risks, including the
possibility of default or bankruptcy. They are regarded as speculative with
respect to the issuer's capacity to pay interest and to repay principal. The
market values of certain of these securities tend to be more sensitive to
individual corporate development and changes in economic conditions than higher
quality bonds. In addition, low-rated and comparable unrated securities tend to
be less marketable than higher-quality debt securities because the market for
them is not as broad or active. The lack of a liquid secondary market may have
an adverse effect on market price and a Fund's ability to sell particular
securities.
RISKS OF USING CERTAIN DERIVATIVES
Participation in the options or futures markets involves investment risks and
transaction costs to which a Fund would not be subject absent the use of these
strategies. If the Advisor's predictions of movements in the direction of the
securities and interest rate markets are inaccurate, the adverse consequences to
a Fund may leave the Fund in a worse position than if such strategies were not
used. Risks inherent in the use of options, futures contracts and options on
futures contracts include: (i) dependence on the Advisor's ability to predict
correctly movements in the direction of interest rates and securities prices;
(ii) imperfect correlation between the price of options and futures contracts
and options thereon and movements in the prices of the securities being hedged;
(iii) the fact that skills needed to use these strategies are different from
those needed to select portfolio securities; (iv) the absence of a liquid
secondary market for any particular instrument at any time; (v) the possible
need to defer closing out certain hedged positions to avoid adverse tax
consequences; and (vi) the possible inability of a Fund to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to do so,
or the possible need for the Fund to
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<PAGE>
sell the security at a disadvantageous time, due to the requirement that the
Fund maintain "cover" or segregate securities in connection with hedging
transactions. The loss from investing in futures transactions is potentially
unlimited. There also is no assurance that a liquid secondary market will exist
for futures contracts and options thereon in which a Fund may invest. See
"Investment Objectives and Policies--Derivative Instruments" in the Statement of
Additional Information.
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PRINCIPAL INVESTMENT RESTRICTIONS
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Each Fund is subject to certain investment restrictions which are fundamental
policies. Fundamental policies are those that cannot be changed without the
approval of a majority (as defined in the 1940 Act) of that Fund's outstanding
voting securities. Each Fund's investment objective is a fundamental policy.
Among its restrictions, a Fund may not (i) with respect to 75% of its total
assets, invest more than 5% of its total assets (determined at the time of
investment) in securities of any one issuer (other than U.S. Government
securities) (ii) with respect to 75% of its total assets, purchase more than 10%
of the outstanding voting securities of any one issuer or (iii) invest more than
25% of its total assets (determined at the time of investment) in one or more
issuers having their principal business activities in a single industry.
Additional information about each investment restrictions is contained in the
Statement of Additional Information. It is the position of the Securities and
Exchange Commission that open-end investment companies such as the Funds should
not make certain investments if thereafter more than 15% of the value of their
net assets would be invested in those securities. As a matter of operating
policy (though not a fundamental policy), the Funds limit such investments to no
more than 15% of the value of their net assets. The investments in this 15%
limit include: (i) those which are restricted, i.e., those which cannot freely
be sold for legal or contractual reasons; (ii) fixed time deposits subject to
withdrawal penalties, (other than overnight deposits), and (iii) repurchase
agreements having a maturity of more than seven days. The 15% limitation does
not include obligations which are payable at principal amount plus accrued
interest within seven days after purchase.
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ORGANIZATION AND MANAGEMENT
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ORGANIZATION AND VOTING RIGHTS
The Trust was organized on December 9, 1996 as a Delaware business trust. It is
a diversified open-end, management investment company currently consisting of
three separate series. The Trust's Board Of Trustees decides on matters of
general policy and reviews the activities of the Advisor, and the Trust's
officers conduct and supervise the daily business operations of the Trust. Each
Fund is a series of shares, each having separate assets and liabilities, of the
Trust. The Board of Trustees may, at its own discretion, create additional
series of shares and classes within series.
Generally, the Funds will not hold an annual meeting of shareholders unless
required by the 1940 Act. Shareholders have one vote per dollar net asset value
of shares owned. Matters submitted to shareholders must be approved by a
majority of the outstanding securities of each fund, unless it is clear that the
interests of each Fund in the matter are identical or the matter does not affect
a Fund. At the request of the holders of at least 10% of the shares, the Trust
will hold a meeting to vote on the removal of a Trustee, which can occur by a
vote of more than two-thirds of the outstanding shares. Then shareholders
holding the lesser of $25,000 worth or one percent of a Fund's shares may advise
the Trustees in writing that they wish to communicate with other shareholders
for the purpose of requesting a meeting to remove a Trustee. The Trustees will
then, if requested by the applicants, mail at the applicants' expense the
applicants' communications to all other shareholders.
THE INVESTMENT ADVISOR
The Advisor is located at 10880 Wilshire Blvd., Suite 2020, Los Angeles,
California 90024, and acts as investment advisor to the Funds and generally
administers the affairs of the Trust. Subject to the direction and control of
the Board of Trustees, the Advisor supervises and arranges the purchase and sale
of securities held in the portfolios of the Funds. The Advisor, Metropolitan
West Asset Management, LLC, is a registered investment adviser organized as a
California limited liability company in 1996. The Adviser is owned in part by
Metropolitan West Securities, Inc., a registered investment adviser and
broker-dealer. The Adviser is in the business of furnishing investment advice to
institutional and private clients and currently manages approximately [$___]
billion for such clients. The Adviser has not previously managed a mutual fund.
The Adviser's affiliate, Metropolitan West Securities, Inc., has managed
fixed-income investments since 1992 and currently manages approximately $_______
billion for its clients.
Under the Investment Advisory Agreement relating to the TOTAL RETURN BOND FUND,
the Trust pays the
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<PAGE>
Advisor a fee, computed daily and payable monthly, at an annual rate of 0.55% of
the Fund's average daily net assets.
Under the Investment Advisory Agreement relating to the LOW DURATION BOND FUND,
the Trust pays the Advisor a fee, computed daily and payable monthly, at an
annual rate of 0.48% of the Fund's average daily net assets.
Under the Investment Advisory Agreement relating to the SHORT TERM INVESTMENT
FUND, the Trust pays the Advisor a fee, computed daily and payable monthly, at
an annual rate of 0.40% of the Fund's average daily net assets.
In addition to the fee payable to the Advisor, each Fund is responsible for its
operating expenses including; (i) interest and taxes; (ii) brokerage
commissions; (iii) insurance premiums; (iv) compensation and expenses of the
Trust's Trustees other than those affiliated with the Advisor; (v) legal and
audit expenses; (vi) fees and expenses of the Fund's custodian and any
subcustodian, shareholder servicing or transfer agent and accounting services
agent; (vii) expenses incident to the issuance of its shares, including issuance
on the payment of, or reinvestment of, dividends; (viii) fees and expenses
incident to the registration under federal or state securities laws of the Trust
or its shares; (ix) expenses of preparing, printing and mailing reports and
notices and proxy material to shareholders of the Trust; (x) all other expenses
incident to holding meetings of the Trust's shareholders; (xi) dues or
assessments of or contributions to the Investment Company Institute or any
successor; and (xii) such non-recurring expenses as may arise, including
litigation affecting the Trust and the legal obligations which the Trust may
have to indemnify its officers and Trustees with respect thereto.
Although not required to do so, the Advisor has agreed to limit the expenses of
the Total Return Bond Fund to 0.65%, the Low Duration Bond Fund to 0.58% and the
Short Term Investment Fund to 0.50% of those Funds' respective net assets. The
Advisor will give shareholders at least 30 days' notice of any decision to
change this reimbursement policy.
The Advisor also manages individual investment advisory accounts. The Advisor
credits the fees charged to individual advisory accounts by the amount of the
investment advisory fee and expenses charged to that portion of the client's
assets that are invested in any Fund.
The Investment Advisory Agreements permit the Advisor to allocate brokerage
based on sales of shares of funds managed by the Advisor. No such allocation has
been made to date.
THE ADMINISTRATOR
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
______________serves as administrator to the Trust pursuant to a Fund
Administration Servicing Agreement.
THE DISTRIBUTOR
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
____________serves as principal underwriter to the Trust pursuant to a
Distribution Agreement.
PORTFOLIO MANAGERS
The portfolio managers who have day-to-day responsibility for the management of
the Funds' portfolios are listed below, together with their biographical
information for the past five years.
Scott B. Dubchansky has been the Chief Executive Officer of the Advisor since
September 1996 and a Managing Director-Fixed Income of Metropolitan West
Securities, Inc., an affiliate of the Advisor, from August 1996 through December
1996 while the Advisor was in formation. From August 1992 through August 1996,
Mr. Dubchansky was a Senior Vice President of Donaldson Lufkin Jenrette in the
Fixed Income division. Prior to August 1992, Mr. Dubchansky was Senior Vice
President fixed income sales at Kidder Peabody and responsible for fixed income
sales to institutional clients. Mr. Dubchansky, together with Mr.
Rivelle, manages the SHORT TERM INVESTMENT FUND.
Stephen Kane has been a portfolio manager with Advisor since September 1996 and
a portfolio manager with Metropolitan West Securities, Inc from August 1996
through December 1996 while the Advisor was in formation. From November 1995
until July 1996, Mr. Kane was a portfolio manager with Hotchkiss and Wiley in
Los Angeles. From July 1992 until October 1995, he was an account manager with
Pacific Investment Management Co. ("PIMCO") in Newport Beach, California. Before
then, Mr. Kane was a Merchant Banking Associate with Union Bank in Los Angeles.
Mr. Kane, together with Messrs. Landmann and Rivelle, manages the TOTAL RETURN
BOND FUND.
Laird R. Landmann has been a Managing Director of the Advisor since September
1996 and a Managing Director-Fixed Income of Metropolitan West Securities, Inc
from August 1996 through December 1996 while the Advisor was in formation. From
November 1992 until July 1996, Mr. Landmann was a principal and Co-Director of
Fixed Income with Hotchkiss and Wiley in Los Angeles. Before then, he was a
portfolio manager with PIMCO. Mr. Landmann, together with Messrs. Kane and
Rivelle, manages the TOTAL RETURN BOND FUND and the LOW DURATION BOND FUND.
Tad Rivelle has been the Chief Investment Officer and a Managing Director of the
Advisor since September 1996
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and a Managing Director-Fixed Income of Metropolitan West Securities, Inc from
August 1996 through December 1996 while the Advisor was in formation. From
November 1992 until July 1996, Mr. Rivelle was a principal and Co-Director of
Fixed Income with Hotchkiss and Wiley in Los Angeles. Before then, he was a
portfolio manager with PIMCO in Newport Beach, California. Mr. Rivelle, together
with Messrs. Kane and Landmann, manages the TOTAL RETURN BOND FUND and the LOW
DURATION BOND FUND. Mr. Rivelle, together with Mr. Dubchansky, also manages the
SHORT TERM INVESTMENT FUND.
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HOW TO PURCHASE SHARES
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The minimum initial investment in each Fund is $5,000. For retirement plan
investments and custodial accounts under the Uniform Gufts/Transfers to Minors
Act the minimum is [$_________]. The minimum is reduced to [$___] for purchases
through the Automatic Investment Plan or for purchases by retirement plans
through payroll deductions. Subsequent investments must be at least $100. The
Trust reserves the right to reject any order and to waive its minimum investment
requirements.
Investors may invest in any Fund by wiring the amount to be invested to
Metropolitan West Funds in care of
________________________________________________________________________________
("Transfer Agent"), at the following address:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
For further credit to Metropolitan West Funds
[Name of Fund]
Account # [Shareholder account number]
Prior to wiring any funds, the shareholder should call 1-800-_________________
to notify us of the wire to insure proper credit when the wire is received. If
the wire represents an initial investment, the investor should mail an
application form to the Transfer Agent by regular mail to:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Investors may also purchase shares by sending a check payable to Metropolitan
West Funds, together with the application form to the address above.
Checks should be drawn on a U.S. bank and must be payable in U.S. dollars.
Shares of a Fund will be purchased for the account of the investor at the net
asset value next determined after receipt by the Transfer Agent, or an
authorized sub-agent, of the investor's wire or check. In the event a check is
not honored by the investor's bank, the investor will be liable for any loss
sustained by the Fund, as well as a service charge imposed by the Transfer Agent
in the amount of $15. Forms for additional contributions by check or change of
address are provided on account statements.
The Trust may also accept orders from certain qualified institutions, with
payment made to the Fund at a later time. The Advisor is responsible for
insuring that such payment is made on a timely basis. A broker-dealer which
effects such a purchase for an investor may charge the investor a reasonable
service fee, no part of which will be paid to the Fund or the Advisor.
The Advisor may make payments out of its own resources to dealers and other
persons who distribute shares of the Funds.
Shareholder inquiries should be directed to the Trust.
The Trust does not consider the U.S. Postal Service or other independent
delivery services to be its agents. Therefore, deposit in the mail or with such
services does not constitute receipt by the Transfer Agent.
NET ASSET VALUE
The net asset value per share of each Fund is determined on each day that the
New York Stock Exchange is open for trading, as of the close of regular trading
on the New York Stock Exchange (currently 4:00 p.m., Eastern time). The net
asset value per share is the value of the Fund's assets, less its liabilities,
divided by the number of shares of the Fund outstanding. The value of a Fund's
portfolio securities is determined on the basis of the market value of such
securities or, if market quotations are not readily available, at fair value
under guidelines established by the Trustees. Short-term investments maturing in
less than 60 days are valued at amortized cost which the Board has determined to
equal fair value. See "Net Asset Value" in the Statement of Additional
Information for further information.
14
<PAGE>
- --------------------------------------------------------------------------------
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
REGULAR REDEMPTION
A shareholder wishing to redeem shares may do so at any time by delivering
instructions by regular mail to the Transfer Agent. If you would like to send a
package via overnight mail to the Transfer Agent, the address is
_______________________________________________________________________________
________. The redemption request should identify the Fund, specify the number of
shares to be redeemed and be signed by all registered owners exactly as the
account is registered, and it will not be accepted unless it contains all
required documents in proper form, as described below. If the request is in
proper form, the shares will be redeemed at the net asset value next determined
after receipt of the request by the Transfer Agent.
PROPER FORM
If any shares being redeemed are represented by share certificates, the
certificates must be surrendered. The certificates must either be endorsed or
accompanied by a stock power signed by the registered owners, exactly as the
certificates are registered. If the proceeds of any redemption (a) exceed
$50,000, (b) are paid to a person other than the record owner, (c) are sent to
an address or bank account other than as shown on the Transfer Agent's records
or (d) are paid to a corporation, a partnership, trust or fiduciary, the
signatures on the redemption request and on the certificates, if any, must be
guaranteed. You may obtain a signature guarantee from: (1) a bank which is a
member of the FDIC; (2) a trust company; (3) a member firm of a national
securities exchange; or (4) another eligible guarantor institution. Guarantees
must be signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept signature guarantees from notaries public. Additional documents may be
required from corporations or other organizations, fiduciaries or anyone other
than the shareholder of record. Any questions concerning documents needed should
be directed to 1-800-________________.
TELEPHONE REDEMPTION
You may redeem shares (minimum of $1,000 and maximum of $50,000 per transaction)
by telephone and have the proceeds wired to the bank account as stated on the
Transfer Agent's records. In order to redeem by telephone, you must select the
appropriate box on the Account Application and shares must be held in
non-certificate form. In order to arrange for telephone redemptions after an
account has been opened or to change the bank account or address designated to
receive redemption proceeds, a written request must be sent to the Trust. The
request must be signed by each shareholder of the account, with the signatures
guaranteed as described above. Once this feature has been requested, shares may
be redeemed by calling [Investor Services] at ___________________ and giving the
account name, account number, and amount of the redemption. Joint accounts
require only one of the shareholders to telephone. If redemption proceeds are to
be mailed or wired to the shareholder's bank account, the bank involved must be
a commercial bank located within the United States.
If an investor redeems shares by telephone and requests wire payment, payment of
the redemption proceeds will normally be made in federal funds on the next
business day provided that the redemption order is received by the Transfer
Agent before 3:00 p.m. (Central time). There will be a $10.00 charge for all
wire redemptions.
The Funds reserve the right to reject any redemption request and the redemption
privilege may be modified or terminated at any time on 30 days' notice to
shareholders. In an effort to prevent unauthorized or fraudulent redemption
requests by telephone, the Trust and the Transfer Agent employ reasonable
procedures specified by the Funds to confirm that such instructions are genuine.
Among the procedures used to determine authenticity, investors electing to
redeem or exchange by telephone will be required to provide their account
number. All such telephone transactions will be tape recorded and confirmed in
writing to the shareholder. The Trust may implement other procedures from time
to time. If reasonable procedures are not implemented, the Trust and/or the
Transfer Agent may be liable for any loss due to unauthorized or fraudulent
transactions. In all other cases, the shareholder is liable for any loss for
unauthorized transactions. In periods of severe market or economic conditions,
the telephone redemption of shares may be difficult to implement and
shareholders should redeem shares by writing to the Transfer Agent at the
address listed above. If for any other reason a shareholder is unable to redeem
by telephone, shareholders should redeem shares by writing to the Transfer Agent
at the address listed above.
TELEPHONE EXCHANGE
Shareholders are permitted to exchange their shares in a Fund for shares of
other Funds in the Trust, provided that such shares may legally be sold in the
state of the investor's residence, the shareholder has selected the appropriate
box on the Account Application, and shares are held in non-certificate form. In
order to arrange for telephone exchange after an account has been opened, a
written request must be sent to the Transfer Agent at its address listed above.
The request must be signed by each shareholder of the account, with the
signatures guaranteed as described above. Shares exchanged for shares of another
Fund will be priced at their respective net asset values. In order to request an
exchange by telephone, an investor must
15
<PAGE>
give the account name, account number and the amount or number of shares to be
exchanged. An exchange of shares is treated for federal income tax purposes as a
redemption (sale) of shares given in exchange by the shareholder and an
exchanging shareholder may, therefore, realize a taxable gain or loss in
connection with the exchange.
Exchange requests should be directed to the Transfer Agent at
1-800-_____________________. Shares subject to an exchange must have a current
value of at least $1,000.
The Funds reserve the right to reject any exchange request and the exchange
privilege may be modified or terminated at any time on 30 days' notice to
shareholders. In periods of severe market or economic conditions, the telephone
exchange of shares may be difficult to implement and shareholders should redeem
shares by writing to the Transfer Agent at the address listed above.
In an effort to prevent unauthorized or fraudulent redemption requests by
telephone, the Trust and the Transfer Agent employ reasonable procedures
specified by the Funds to confirm that such instructions are genuine. Among the
procedures used to determine authenticity, investors electing to exchange by
telephone will be required to provide their account number. All such telephone
transactions will be tape recorded and confirmed in writing to the shareholder.
The Trust may implement other procedures from time to time. If reasonable
procedures are not implemented, the Trust and/or the Transfer Agent may be
liable for any loss due to unauthorized or fraudulent transactions. In all other
cases, the shareholder is liable for any loss for unauthorized transactions.
PAYMENTS
After the Transfer Agent has received the redemption request and all proper
documents, payment for shares tendered will generally be made within three
business days. Payment may be delayed under unusual circumstances, as specified
in the 1940 Act. Payment will be sent only to shareholders at the address of
record. In addition, if the shares being redeemed were purchased by check, the
Trust reserves the right to delay up to 12 days payment of the redemption
proceeds until it is satisfied that the check has been honored by the investor's
bank.
REDEMPTION IN KIND
If the Board of Trustees determines that it would be detrimental to the best
interests of the remaining shareholders of any Fund to make payment wholly in
cash, the Fund may pay the redemption price in part by a distribution in kind of
readily marketable securities from the portfolio of that Fund, in lieu of cash.
The Trust has elected to be governed by Rule 18f-1 under the 1940 Act pursuant
to which each Fund is obligated to redeem shares solely in cash up to the lesser
of $250,000 or one percent of the net asset value of the Fund during any 90 day
period for any one shareholder. Should redemptions by any shareholder exceed
such limitation the Fund will have the option of redeeming the excess in cash or
in kind. If shares are redeemed in kind, the redeeming shareholder would incur
brokerage costs in converting the assets into cash.
REDEMPTIONS OF SMALL ACCOUNTS
The Board of Trustees may redeem all of the shares of any shareholder whose
account has declined to a net asset value of less than $500, as a result of a
transfer or redemption, at the net asset value determined as of the close of
business on the business day preceding the sending of the proceeds of such
redemption. The Trust would give shareholders whose shares were being redeemed
60 days' prior written warning in which to purchase sufficient shares to avoid
such redemption.
REPURCHASES
The Trust may accept orders for the repurchase of its shares from certain
qualified institutions. Such an institution may charge the shareholder a fee for
its services. The Trust may also waive or modify its requirements as to proper
form for such institutions.
WITHHOLDINGS
The Fund may be required to withhold federal income tax, at a rate of 31%, from
proceeds of redemptions, if the shareholder is subject to backup withholding.
Failure to provide a certified tax identification number at the time an account
is opened will cause tax to be withheld.
- --------------------------------------------------------------------------------
DIVIDENDS AND TAX STATUS
- --------------------------------------------------------------------------------
The Funds expect to declare dividends daily and pay them monthly to
shareholders.
Distributions from net realized short-term gains, if any, and distributions from
any net capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses) realized through October 31st of each year and not
previously paid out will be paid out after that date; each Fund may also pay
supplemental distributions after the end of the Trust's fiscal year. Dividends
and distributions are paid in full and fractional shares of each Fund based on
the net asset value per share at the close of business on the record date,
unless the shareholder requests, in writing to the Trust, payment in cash. The
Trust will notify each shareholder after the close of its fiscal year of both
the dollar amount and the tax status of that year's distributions.
16
<PAGE>
Each Fund intends to elect and qualify to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code (the "Code"). Each Fund
is taxed as a separate entity under Subchapter M and qualifies on a separate
basis. If so qualified, each Fund will not be subject to federal income taxes on
its net investment income and capital gains, if any, realized during any fiscal
year which it distributes to its shareholders provided that at least 90% of its
net investment income earned in the fiscal year is distributed. All dividends
from net investment income together with distributions of short-term capital
gains (collectively, "income dividends"), will be taxable as ordinary income to
the shareholders even though paid in additional shares. Any net capital gains
("capital gains distributions") distributed to shareholders are taxable as
long-term capital gains to the shareholders regardless of the length of time a
shareholder has owned his shares.
The Code provides for a dividends-received deduction (the "deduction") by
corporations. Special provisions are contained in the Code as to the eligibility
of dividends for the deduction. The basic test under the Code for determining
the extent to which the dividends paid by each Fund are eligible for the
deduction is the extent to which the Fund's income is derived from qualifying
dividends received from domestic corporations. See "Dividends and Tax Status" in
the Statement of Additional Information for additional information about the
deduction.
Dividends and interest received by a Fund may be subject to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate these foreign taxes, and foreign
countries generally do not impose taxes on capital gains on investments by
foreign investors.
Any gain or loss realized upon a sale or redemption of Fund shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held for more than one year, and
otherwise as short-term capital gain or loss. Any such loss, however, on shares
that are held for six months or less will be treated as long-term capital loss
to the extent of any capital gain distributions received by the shareholder.
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Funds may quote average annual total return ("standardized
return") in advertisements or promotional materials. Advertisements and
promotional materials reflecting standardized return ("performance
advertisements") will show percentage rates reflecting the average annual change
in the value of an assumed initial investment in a Fund at the end of one, five
and ten year periods. If such periods have not yet elapsed, data will be given
as of the end of a shorter period corresponding to the duration of the Fund.
Standardized return assumes the reinvestment of all dividends and capital gain
distributions.
The Funds also may refer in advertising and promotional materials to yield. The
Funds' yield shows the rate of income that a Fund earns on its investments,
expressed as a percentage of the net asset value of Fund shares. A Fund
calculates yield by determining the interest income it earned from its portfolio
investments for a specified thirty-day period (net of expenses), dividing such
income by the average number of Fund shares outstanding, and expressing the
result as an annualized percentage based on the net asset value at the end of
that 30-day period. Yield accounting methods differ from the methods used for
other accounting purposes; accordingly, a Fund's yield may not equal the
dividend income actually paid to investors or the income reported in the Fund's
financial statements.
In addition to standardized return, performance advertisements also may include
other total return performance data ("non-standardized return").
Non-standardized return may be quoted for the same or different periods as those
for which standardized return is quoted and may consist of aggregate or average
annual percentage rate of return, actual year by year rates or any combination
thereof. Further performance information is contained in the Funds' annual
reports to shareholders, which may be obtained without cost.
All data included in performance advertisements will reflect past performance
and is not indicative of future results. The investment return and principal
value of an investment in a Fund will fluctuate, and an investor's proceeds upon
redeeming Fund shares may be more or less than the original cost of the shares.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Declaration of Trust contains an express disclaimer of shareholder liability
for the Trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or its Trustees. The Declaration of Trust provides for indemnification
and reimbursement of expenses out of the Trust's property for any shareholder
held personally liable for its obligations. While Delaware law permits a
shareholder of a trust such as this to be held personally liable as a partner
under certain circumstances,
17
<PAGE>
the risk of a shareholder incurring financial loss on account of shareholder
liability is highly unlikely and is limited to the relatively remote
circumstances in which the Trust would be unable to meet its obligations.
Common expenses incurred by the Trust are allocated among the Funds based upon
(i) relative net assets; (ii) as incurred on a specific identification basis; or
(iii) evenly among the Funds, depending on the nature of the expenditure.
Except for (i) changes which do not adversely affect the rights of Trust
shareholders, (ii) a change in the name of the Trust, or a series or class
thereof, (iii) authorization of a new series or class, (iv) changes to supply
any omission or correct any ambiguous or defective provision or (v) changes
required by any federal or state or similar regulatory authority or required by
the Code to eliminate or reduce any federal, state or local taxes which may be
payable by a Fund or its shareholders, no amendment may be made to the
Declaration of Trust without the affirmative vote of the holders of at least 67%
of the Trustees outstanding shares at a meeting at which more than 50% of its
outstanding shares are present in person or represented by proxy. The holders of
shares have no preemptive or conversion rights. Shares when issued are fully
paid and non-assessable, except as set forth above.
- --------------------------------------------------------------------------------
APPENDIX -- DESCRIPTION OF RATINGS
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE
BOND RATINGS:
"Aaa"--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
"Aa"--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical modifiers "l", "2" and "3" in each generic rating
classification from Aa through B. The modifier "l" indicates that the obligation
ranks in the higher end of its generic rating category; the modifier "2"
indicates a mid-range ranking; and the modifier "3" indicates that the company
ranks in the lower end of that generic rating category.
"A"--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
"Baa"--Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba"--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
"B"--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
SHORT-TERM DEBT RATINGS:
Moody's short-term debt ratings are opinions regarding the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
"P-1"--Issuers rated "Prime-l" or "P-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
"P-2"--ISSUERS RATED "PRIME-2" OR "P-2" (OR SUPPORTING INSTITUTIONS) HAVE A
STRONG ABILITY FOR REPAYMENT OF SENIOR SHORT-TERM
DEBT OBLIGATIONS.
18
<PAGE>
STANDARD & POOR'S RATING GROUP
BOND RATINGS:
"AAA"--Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
"AA"--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
"A"--Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
"BBB"--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
Debt rated BB and B is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to adverse
conditions.
COMMERCIAL PAPER RATINGS:
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
"A-1"--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) designation.
"A-2"--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH INVESTORS SERVICES, INC.
BOND RATINGS:
The following summarizes the ratings used by Fitch for corporate bonds:
"AAA"--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA"--Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA." Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+."
"A"--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
"BBB"--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds and, therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
"BB"--Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified, which could
assist the obligor in satisfying its debt service requirements.
"B"--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
Plus (+) Minus (-)--Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
SHORT-TERM DEBT RATINGS:
"F-1+"--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
"F-1"--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+."
"F-2"--Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as for issues assigned "F-1+" or "F-1" ratings.
19
<PAGE>
DUFF & PHELPS CREDIT RATING CO.
BOND RATINGS:
The following summarizes the ratings used by Duff & Phelps for long-term debt:
"AAA"--Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
"AA+," "AA," "AA-"--High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
"A+," "A," "A-"--Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
"BBB+," "BBB," "BBB-"--Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
"BB+," "BB," "BB-"--Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
"B+," "B," "B-"--Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
SHORT-TERM DEBT RATINGS:
"D-1+"--Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
"D-1"--Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
"D-1-"--High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
"D-2"--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
20
<PAGE>
------------------------------------------------------------
PART B
COMBINED STATEMENT OF ADDITIONAL INFORMATION
Metropolitan West Funds
------------------------
Metropolitan West Total Return Bond Fund
Metropolitan West Low Duration Bond Fund
Metropolitan West Short Term Investment Fund
------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION -- Dated December __, 1996
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may any
offers to buy be accepted prior to the time the registration statement becomes
effective. This Statement of Additional Information does not constitute a
prospectus.
METROPOLITAN WEST FUNDS
Statement of Additional Information
__________________, 1997
This Statement of Additional Information is not a prospectus, and it
should be read in conjunction with the prospectus dated ____________________,
1997 of the Total Return Bond Series (the "Total Return Bond Fund"), the Low
Duration Bond Series (the "Low Duration Bond Fund") and the Short Term
Investment Series (the "Short Term Investment Fund"). Copies of the prospectus
may be obtained at no charge from the Trust by writing to Metropolitan West
Funds, 10880 Wilshire Boulevard, Suite 2020, Los Angeles, CA 90024. In this
Statement of Additional Information, the Total Return Bond Fund, the Low
Duration Bond Fund and the Short Term Investment Fund may be referred to
collectively as "the Funds" or individually as "a Fund." Metropolitan West Asset
Management, LLC (the "Advisor") is the investment advisor to the Funds.
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Cross reference
to page in
the prospectus of the:
Fixed-Income Funds
------------------
<S> <C> <C>
Investment Objectives and Policies B-2 5
Investment Restrictions B-2 12
Repurchase Agreements B-3 8
U.S. Government Securities B-3 7
Corporate Debt Securities B-4 7
Convertible Securities B-4 5
Mortgage-Related Securities B-5 9
Asset-backed Securities B-8 7
Risk Factors Relating to Investing in Mortgage-Related and B-8 11
Asset-Backed Securities
Duration B-9 6
Derivative Instruments B-10 10
Foreign Securities B-13 7
Foreign Currency Options and Related Risks B-15 10
Forward Foreign Currency Exchange Contracts B-15 10
Risk Factors Relating to Investing in High Yield Securities B-17 11
Illiquid Securities B-18
Management B-19 12
Portfolio Transactions and Brokerage B-19 13
Administrator B-20 13
Principal Underwriter B-21 13
Net Asset Value B-21 14
Dividends and Tax Status B-22 16
Performance Information B-23 17
General Information About the Trust B-24 17
Additional Information B-25
Financial Statements B-25
</TABLE>
B-1
<PAGE>
Investment Objectives and Policies
The investment objective of the Total Return Bond Fund is to maximize
long-term total return.
The investment objective of the Low Duration Bond Fund is to maximize
total return, consistent with preservation of capital.
The investment objective of the Short Term Investment Fund is to
maximize total return, consistent with the preservation of capital.
The portfolio, and strategies with respect to the composition of each
Fund, are described in the Funds' prospectuses.
Investment Restrictions
Each Fund has adopted the following restrictions (in addition to those
indicated in the prospectuses) as fundamental policies, which may not be changed
without the favorable vote of the holders of a "majority" of that Fund's
outstanding voting securities, as defined in the Investment Company Act of 1940
(the "1940 Act"). Under the 1940 Act, the vote of the holders of a "majority" of
a Fund's outstanding voting securities means the vote of the holders of the
lesser of (i) 67% of the shares of the Fund represented at a meeting at which
the holders of more than 50% of its outstanding shares are represented or (ii)
more than 50% of the outstanding shares.
Except as noted, none of the Funds may:
1. Purchase any security, other than obligations of the U.S.
Government, its agencies, or instrumentalities ("U.S.
Government securities"), if as a result: (i) with respect to
75% of its total assets, more than 5% of the Fund's total
assets (determined at the time of investment) would then be
invested in securities of a single issuer, or (ii) more than
25% of the Fund's total assets (determined at the time of
investment) would be invested in one or more issuers having
their principal business activities in a single industry.
2. Purchase securities on margin (but any Fund may obtain such
short-term credits as may be necessary for the clearance of
transactions), provided that the deposit or payment by a Fund
of initial or maintenance margin in connection with futures or
options is not considered the purchase of a security on
margin.
3. Make short sales of securities or maintain a short position,
unless at all times when a short position is open it owns an
equal amount of such securities or securities convertible into
or exchangeable, without payment of any further consideration,
for securities of the same issue as, and equal in amount to,
the securities sold short (short sale against-the-box), and
unless not more than 25% of the Fund's net assets (taken at
current value) is held as collateral for such sales at any one
time.
4. Issue senior securities, borrow money or pledge its assets
except that any Fund may borrow from a bank for temporary or
emergency purposes in amounts not exceeding 10% (taken at the
lower of cost or current value) of its total assets (not
including the amount borrowed) and pledge its assets to secure
such borrowings. The Funds may borrow from banks or enter into
reverse repurchase agreements and pledge assets in connection
therewith, but only if immediately after each borrowing there
is asset coverage of 300%.
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5. Purchase any security (other than U.S. Government securities)
if as a result, with respect to 75% of the Fund's total
assets, the Fund would then hold more than 10% of the
outstanding voting securities of an issuer.
6. Act as an underwriter except to the extent that, in connection
with the disposition of portfolio securities, it may be deemed
to be an underwriter under certain federal securities laws.
7. Make investments for the purpose of exercising control or
management.
8. Participate on a joint or joint and several basis in any
trading account in securities.
In addition, the Trust has adopted the following non-fundamental
policies so that no Fund will: (a) purchase any security if as a result the Fund
would then have more than 5% of its total assets (taken at current value)
invested in securities of companies (including predecessors) less than three
years old; (b) invest in securities of any issuer if, to the knowledge of the
Trust, any officer or Trustee of the Trust or managing director of the Advisor
owns more than 1/2 of 1% of the outstanding securities of such issuer, and such
Trustees and managing directors who own more than 1/2 of 1% own in the aggregate
more than 5% of the outstanding securities of such issuer; (c) invest in
interests in oil, gas, or other mineral leases or exploration of development
programs, although it may invest in the common stocks of companies which invest
in or sponsor such programs; (d) invest more than 15% of its total assets in
restricted securities, excluding restricted securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1993, as amended ("Securities
Act") that have been determined to be liquid pursuant to procedures adopted by
the Board of Trustees, provided that the total amount of Fund assets invested in
restricted securities will not exceed 15% of total assets; and (e) purchase
securities of other investment companies, except in connection with a merger,
consolidation, reorganization or other acquisition of assets, unless immediately
thereafter not more than (i) 3% of the total outstanding voting stock of such
company would be owned by the Fund, (ii) 5% of the Fund's total assets would be
invested in any one such company, and (iii) 10% of the Fund's total assets would
be invested in such securities.
Repurchase Agreements
A repurchase transaction occurs when, at the time a Fund purchases a
security, that Fund also resells it to a vendor (normally a commercial bank or
broker-dealer) and must deliver the security (and/or securities substituted for
them under the repurchase agreement) to the vendor on an agreed-upon date in the
future. Such securities, including any securities so substituted, are referred
to as the "Resold Securities." The resale price is in excess of the purchase
price in that it reflects an agreed-upon market interest rate effective for the
period of time during which the Fund's money is invested in the Resold
Securities. The majority of these transactions run from day to day, and the
delivery pursuant to the resale typically will occur within one to five days of
the purchase. The Fund's risk is limited to the ability of the vendor to pay the
agreed-upon sum upon the delivery date; in the event of bankruptcy or other
default by the vendor, there may be possible delays and expenses in liquidating
the instrument purchased, decline in its value and loss of interest. The Advisor
will consider the creditworthiness of any vendor of repurchase agreements.
Repurchase agreements can be considered as loans "collateralized" by the Resold
Securities, such agreements being defined as "loans" in the 1940 Act. The return
on such collateral may be more or less than that from the repurchase agreement.
The Resold Securities will be marked to market every business day so that the
value of the collateral is at least equal to the value of the loan, including
the accrued interest earned thereon. All Resold Securities will be held by the
Fund's custodian either directly or through a securities depository (tri-party
repurchase agreement) or the Federal Reserve book-entry system.
U.S. Government Securities
U.S. Government agencies or instrumentalities which issue or guarantee
securities include, but are not limited to, the Federal National Mortgage
Association, Government National Mortgage Association, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation, Federal Intermediate Credit Banks,
Federal Land
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Banks, Tennessee Valley Authority, Inter-American Development Bank, Asian
Development Bank, Student Loan Marketing Association and the International Bank
for Reconstruction and Development.
Except for U.S. Treasury securities, obligations of U.S. Government
agencies and instrumentalities may or may not be supported by the full faith and
credit of the United States. Some are backed by the right of the issuer to
borrow from the Treasury; others by discretionary authority of the U.S.
Government to purchase the agencies' obligations; while still others, such as
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality. In the case of securities not backed by the full faith and
credit of the United States, the investor must look principally to the agency or
instrumentality issuing or guaranteeing the obligation for ultimate repayment,
and may not be able to assert a claim against the United States itself in the
event the agency or instrumentality does not meet its commitment. Each Fund will
invest in securities of such instrumentality only when the Advisor is satisfied
that the credit risk with respect to any instrumentality is acceptable.
The Funds may invest in component parts of the U.S. Treasury notes or
bonds, namely, either the corpus (principal) of such Treasury obligations or one
of the interest payments scheduled to be paid on such obligations. These
obligations may take the form of (i) Treasury obligations from which the
interest coupons have been stripped, (ii) the interest coupons that are
stripped, (iii) book-entries at a Federal Reserve member bank representing
ownership of Treasury obligation components, or (iv) receipts evidencing the
component parts (corpus or coupons) of Treasury obligations that have not
actually been stripped. Such receipts evidence ownership of component parts of
Treasury obligations (corpus or coupons) purchased by a third party (typically
an investment banking firm) and held on behalf of the third party in physical or
book-entry form by a major commercial bank or trust company pursuant to a
custody agreement with the third party. These custodial receipts are known by
various names, including "Treasury Receipts," "Treasury Investment Growth
Receipts" (TIGRs) and "Certificates of Accrual on Treasury Securities" (CATS),
and are not issued by the U.S. Treasury, therefore they are not U.S. Government
securities, although the underlying bonds represented by these receipts are debt
obligations of the U.S. Treasury.
Corporate Debt Securities
A Fund's investments in U.S. dollar or foreign currency-denominated
corporate debt securities of domestic or foreign issuers are limited to
corporate debt securities (corporate bonds, debentures, notes or other similar
corporate debt instruments) which meet the minimum ratings criteria set forth
for the Fund, or, if unrated, are in the Advisor's opinion comparable in quality
to corporate debt securities in which the Fund may invest. The rate of return or
return of principal on some debt obligations may be linked or indexed to the
level of exchange rates between the U.S. dollar and a foreign currency or
currencies.
Convertible Securities
The Funds may invest in convertible securities of domestic or foreign
issuers, which meet the ratings criteria set forth in the Prospectus. A
convertible security is a fixed-income security (a bond or preferred stock)
which may be converted at a stated price within a specific period of time into a
certain quantity of common stock or other equity securities of the same or a
different issuer. Convertible securities rank senior to common stock in a
corporation's capital structure but are usually subordinated to similar
non-convertible securities. While providing a fixed-income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar non-convertible security), a convertible security also
offers an investor the opportunity, through its conversion feature, to
participate in the capital attendant upon a market price advance in the
convertible security's underlying common stock.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security) or
its "conversion value" (i.e., its value upon conversion into its underlying
stock). As a fixed-income security, a convertible security tends to increase in
market value when interest rates
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decline and tends to decrease in value when interest rates rise. However, the
price of a convertible security is also influenced by the market value of the
security's underlying common stock. The price of a convertible security tends to
increase as the market value of the underlying stock rises, whereas it tends to
decrease as the market value of the underlying stock declines. While no
securities investment is without some risk, investments in convertible
securities generally entail less risk than investments in the common stock of
the same issuer.
Mortgage-Related Securities
The Funds may invest in residential or commercial mortgage-related
securities, including mortgage pass-through securities, collateralized mortgage
obligations (CMOs), adjustable rate mortgage securities, CMO residuals, stripped
mortgage-related securities, floating and inverse floating rate securities and
tiered index bonds.
Mortgage Pass-Through Securities. Mortgage pass-through securities
represent interests in pools of mortgages in which payments of both principal
and interest on the securities are generally made monthly, in effect "passing
through" monthly payments made by borrowers on the residential or commercial
mortgage loans which underlie the securities (net of any fees paid to the issuer
or guarantor of the securities). Mortgage pass-through securities differ from
other forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Early payment of principal on mortgage pass-through securities (arising
from prepayments of principal due to the sale of underlying property,
refinancing, or foreclosure, net of fees and costs which may be incurred) may
expose a Fund to a lower rate of return upon reinvestment of principal. Also, if
a security subject to repayment has been purchased at a premium, in the event of
prepayment, the value of the premium would be lost.
There are currently three types of mortgage pass-through securities,
(i) those issued by the U.S. Government or one of its agencies or
instrumentalities, such as the Government National Mortgage Association (GNMA),
the Federal National Mortgage Association (FNMA) and the Federal Home Loan
Mortgage Corporation (FHLMC); (ii) those issued by private issuers that
represent an interest in or are collateralized by pass-through securities issued
or guaranteed by the U.S. Government or one of its agencies or
instrumentalities; and (iii) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or pass-through
securities without a government guarantee but usually having some form of
private credit enhancement.
GNMA is a wholly-owned United States Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the United States Government, the timely
payment of principal and interest on securities issued by the institutions
approved by GNMA (such as savings and loan institutions, commercial banks and
mortgage banks), and backed by pools of FHA-insured or VA-guaranteed mortgages.
Obligations of FNMA and FHLMC are not backed by the full faith and
credit of the United States Government. In the case of obligations not backed by
the full faith and credit of the United States Government, the Fund must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment. FNMA and FHLMC may borrow from the U.S. Treasury to meet its
obligations, but the U.S. Treasury is under no obligation to lend to FNMA or
FHLMC.
Private mortgage pass-through securities are structured similarly to
GNMA, FNMA and FHLMC mortgage pass-through securities and are issued by
originators of and investors in mortgage loans, including depository
institutions, mortgage banks, investment banks and special purpose subsidiaries
of the foregoing.
Pools created by private mortgage pass-through issuers generally offer
a higher rate of interest than government and government-related pools because
there are no direct or indirect government or agency guarantees of payments in
the private pools. However, timely payment of interest and principal of these
pools may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance
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and letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers and the mortgage poolers. The insurance and
guarantees and the credit worthiness of the issuers thereof will be considered
in determining whether a mortgage-related security meets the Funds' investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. Private mortgage pass-through securities may be bought without
insurance or guarantees if, through an examination of the loan experience and
practices of the originator/services and poolers, the Advisor determines that
the securities meet the Funds' quality standards.
Collateralized Mortgage Obligations. Collateralized mortgage
obligations (CMOs) are debt obligations collateralized by residential or
commercial mortgage loans or residential or commercial mortgage pass-through
securities. Interest and prepaid principal are generally paid monthly. CMOs may
be collateralized by whole mortgage loans or private mortgage pass-through
securities but are more typically collateralized by portfolios of
mortgage-pass-through securities guaranteed by GNMA, FHLMC or FNMA. The issuer
of a series of CMOs may elect to be treated as a Real Estate Mortgage Investment
Conduit (REMIC). All future references to CMOs shall also be deemed to include
REMICs.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral which is ordinarily unrelated to the
stated maturity date. CMOs often provide for a modified form of call protection
through a de facto breakdown of the underlying pool of mortgages according to
how quickly the loans are repaid. Monthly payment of principal received from the
pool of underlying mortgages, including prepayments, is first returned to
investors holding the shortest maturity class. Investors holding the longer
maturity classes usually receive principal only after the first class has been
retired. An investor may be partially protected against a sooner than desired
return of principal because of the sequential payments.
Certain issuers of CMOs are not considered investment companies
pursuant to a rule recently adopted by the Securities and Exchange Commission
(SEC), and the Funds may invest in the securities of such issuers without the
limitations imposed by the 1940 Act on investments by the Fund in other
investment companies. In addition, in reliance on an earlier SEC interpretation,
the Fund's investments in certain other qualifying CMOs, which cannot or do not
rely on the rule, are also not subject to the limitation of the 1940 Act on
acquiring interests in other investment companies. In order to be able to rely
on the SEC's interpretation, these CMOs must be unmanaged, fixed asset issuers,
that (a) invest primarily in mortgage-backed securities, (b) do not issue
redeemable securities, (c) operate under general exemptive orders exempting them
from all provisions of the 1940 Act and (d) are not registered or regulated
under the 1940 Act as investment companies. To the extent that the Funds select
CMOs that cannot rely on the rule or do not meet the above requirements, the
Funds may not invest more than 10% of their assets in all such entities and may
not acquire more than 3% of the voting securities of any single entity.
The Funds also may invest in, among other things, parallel pay CMOs,
Planned Amortization Class CMOs (PAC bonds), sequential pay CMOs, and floating
rate CMOs. Parallel pay CMOs are structured to provide payments of principal on
each payment date to more than one class. PAC bonds generally require payments
of a specified amount of principal on each payment date. Sequential pay CMOs
generally pay principal to only one class while paying interest to several
classes. Floating rate CMOs are securities whose coupon rate fluctuates
according to some formula related to an existing mortgage index or rate. Typical
indices would include the eleventh district cost-of-funds index (COFI), the
London Interbank Offered Rate (LIBOR), one-year Treasury yields, and ten-year
Treasury yields.
Adjustable Rate Mortgage Securities. Adjustable rate mortgage
securities (ARMs) are pass-through securities collateralized by mortgages with
adjustable rather than fixed rates. ARMs eligible for inclusion in a mortgage
pool generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six, or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.
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The ARMs contain maximum and minimum rates beyond which the mortgage
interest rate may not vary over the lifetime of the security. In addition,
certain ARMs provide for additional limitations on the maximum amount by which
the mortgage interest may adjust for any single adjustment period. In the event
that market rates of interest rise more rapidly to levels above that of the
ARM's maximum rate, the ARM's coupon my represent a below market rate of
interest. In these circumstances, the market value of ARM security will likely
have fallen.
Certain ARMs contain limitations on changes in the required monthly
payment. In the event that a monthly payment if not sufficient to pay the
interest accruing on an ARM, any such excess interest is added to the principal
balance of the mortgage loan, which is repaid through future monthly payments.
If the monthly payment for such an instrument exceeds the sum of the interest
accrued at the applicable mortgage interest rate and the principal payment
required at such point to amortize the outstanding principal balance over the
remaining term of the loan, the excess is then utilized to reduce the
outstanding principal balance of the ARM.
CMO Residuals. CMO residuals are derivative mortgage securities issued
by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
part, the yield to maturity on the CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-related securities. See
"Stripped Mortgage-Related Securities" below. In addition, if a series of a CMO
includes a class that bears interest at an adjustable rate, the yield to
maturity on the related CMO residual will also be extremely sensitive to changes
in the level of the index upon which interest rate adjustments are based. As
described below with respect to stripped mortgage-related securities, in certain
circumstances a Fund may fail to recoup its initial investment in a CMO
residual.
CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The CMO residual market has recently developed and CMO residuals currently may
not have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may or, pursuant to an exemption therefrom, may not have
been registered under the Securities Act. CMO residuals, whether or not
registered under such Act, may be subject to certain restrictions on
transferability, and may be deemed "illiquid" and subject to a Fund's
limitations on investment in illiquid securities.
Stripped Mortgage-Related Securities. Stripped mortgage-related
securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be
issued by agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks, and special
purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest,
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(the IO class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on a Fund's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently introduced. As a result, established trading markets have not
yet been fully developed and accordingly, these securities may be deemed
"illiquid" and subject to a Fund's limitations on investment in illiquid
securities. See "Securities and Techniques Used by the Funds-Mortgage-Related
Securities" in the Prospectus.
Inverse Floaters. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction to the
interest rate on another security or index level. Changes in the interest rate
on the other security or index inversely affect the residual interest rate paid
on the inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. Inverse floaters may
experience gains when interest rates fall and may suffer losses in periods of
rising interest rates. The market for inverse floaters is relatively new.
Tiered Index Bonds. Tiered index bonds are relatively new forms of
mortgage-related securities. The interest rate on a tiered index bond is tied to
a specified index or market rate. So long as this index or market rate is below
a predetermined "strike" rate, the interest rate on the tiered index bond
remains fixed. If, however, the specified index or market rate rises above the
"strike" rate, the interest rate of the tiered index bond will decrease. Thus,
under these circumstances, the interest rate on a tiered index bond, like an
inverse floater, will move in the opposite direction of prevailing interest
rates, with the result that the price of the tiered index bond may be
considerably more volatile than that of a fixed rate bond.
Asset-Backed Securities
The Funds may invest in various types of asset-backed securities.
Through the use of trusts and special purpose corporations, various types of
assets, primarily automobile and credit card receivables and home equity loans,
are being securitized in pass-through structures similar to the mortgage
pass-through or in a pay-through structure similar to the CMO structure.
Investments in these and other types of asset-backed securities must be
consistent with the investment objectives and policies of the Funds.
Risk Factors Relating to Investing in Mortgage-Related and Asset-Backed
Securities
The yield characteristics of mortgage-related and asset-backed
securities differ from traditional debt securities. Among the major differences
are that interest and principal payments are made more frequently, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans or other assets generally may be prepaid at any time. As a
result, if the Funds purchase such a security at a premium, a prepayment rate
that is faster than expected will reduce yield to maturity, while a prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity. Alternatively, if the Funds purchase these securities at a
discount, faster than expected prepayments will increase, while slower than
expected prepayments will reduce, yield to maturity. The Funds may invest a
portion of their assets in derivative mortgage-related securities which are
highly sensitive to changes in prepayment and interest rates. The Advisor will
seek to manage these risks (and potential benefits) by diversifying its
investments in such securities and through hedging techniques.
During periods of declining interest rates, prepayment of mortgages
underlying mortgage-related securities can be expected to accelerate.
Accordingly, a Fund's ability to maintain positions in high-yielding
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mortgage-related securities will be affected by reductions in the principal
amount of such securities resulting from such prepayments, and its ability to
reinvest the returns of principal at comparable rates is subject to generally
prevailing interest rates at that time. Prepayments may also result in the
realization of capital losses with respect to higher yielding securities that
had been bought at a premium or the loss of opportunity to realize capital gains
in the future from possible future appreciation.
Asset-backed securities involve certain risks that are not posed by
mortgage-related securities, resulting mainly from the fact that asset-backed
securities do not usually contain the complete benefit of a security interest in
the related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, some of which may reduce the ability to obtain
full payment. In the case of automobile receivables, due to various legal and
economic factors, proceeds from repossessed collateral may not always be
sufficient to support payments on these securities.
Duration
In selecting securities for the Funds, the Advisor makes use of the
concept of duration for fixed-income securities. Duration is a measure of the
expected life of a fixed-income security that was developed as a more precise
alternative to the concept of "term to maturity." Duration incorporates a bond's
yield, coupon interest payments, final maturity and call features into one
measure.
Most debt obligations provide interest ("coupon") payments in addition
to a final ("par") payment at maturity. Some obligations also have call
provisions. Depending on the relative magnitude of these payments, the market
values of debt obligations may respond differently to changes in the level and
structure of interest rates.
Traditionally, a debt security's "term to maturity" has been used as a
proxy for the sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment, taking no account of the pattern of the security's payments prior
to maturity. Duration is a measure of the expected life of a fixed-income
security on a present value basis. Duration takes the length of the time
intervals between the present time and the time that the interest and principal
payments are scheduled or, in the case of a callable bond, expected to be
received, and weights them by the present values of the cash to be received at
each future point in time. For any fixed-income security with interest payments
occurring prior to the payment of principal, duration is always less than
maturity. In general, all other things being the same, the lower the stated or
coupon rate of interest of a fixed-income security, the longer the duration of
the security; conversely, the higher the stated or coupon rate of interest of a
fixed-income security, the shorter the duration of the security.
Futures, options and options on futures have durations, which, in
general, are closely related to the duration of the securities which underlie
them. Holding long futures or call option positions (backed by a segregated
account of cash and cash equivalents) will lengthen a Fund's duration by
approximately the same amount that holding an equivalent amount of the
underlying securities would.
Short futures or put options positions have durations roughly equal to
the negative duration of the securities that underlie those positions, and have
the effect of reducing portfolio duration by approximately the same amount that
selling an equivalent amount of the underlying securities would.
There are some situations where even the standard duration calculation
does not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. That
stated final maturity of such securities is generally 30 years, but current
prepayment rates are more critical in determining the securities' interest rate
exposure. In these and other similar situations,
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the Advisor will use more sophisticated analytical techniques that incorporate
the economic life of a security into the determination of its interest rate
exposure.
Derivative Instruments
As indicated in the Prospectus, to the extent consistent with their
investment objectives and policies, the Funds may purchase and write call and
put options on securities, securities indexes and on foreign currencies and
enter into futures contracts and use options on futures contracts. The
Fixed-Income Funds also may enter into swap agreements with respect to foreign
currencies, interest rates and securities indexes. The Funds may use these
techniques to hedge against changes in interest rates, foreign currency exchange
rates, or securities prices or as part of their overall investment strategies.
The Funds may also purchase and sell options relating to foreign currencies for
the purpose of increasing exposure to a foreign currency or to shift exposure to
foreign currency fluctuations from one country to another. Each Fund will
maintain segregated accounts consisting of cash, U.S. Government securities, or
other high grade debt obligations (or, as permitted by applicable regulation,
enter into certain offsetting positions) to cover its obligations under options
and futures contracts to avoid leveraging of the Fund.
Options on Securities and on Securities Indexes. A Fund may purchase
put options on securities to protect holdings in an underlying or related
security against a substantial decline in market value. A Fund may purchase call
options on securities to protect against substantial increases in prices of
securities the Fund intends to purchase pending its ability to invest in such
securities in an orderly manner. A Fund may sell put or call options it has
previously purchased, which could result in a net gain or loss depending on
whether the amount realized on the sale is more or less than the premium and
other transaction costs paid on the put or call option which is sold. A Fund may
write a call or put option only if the option is "covered" by the Fund holding a
position in the underlying securities or by other means which would permit
immediate satisfaction of the Fund's obligation as writer of the option. Prior
to exercise or expiration, an option may be closed out by an offsetting purchase
or sale of an option of the same series.
The purchase and writing of options involves certain risks. During the
option period, the covered call writer has, in return for the premium on the
option, given up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as its obligation
as a writer continues, has retained the risk of loss should the price of the
underlying securities decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying securities at the exercise price. If a
put or call option purchased by the Fund is not sold when it has remaining
value, and if the market price of the underlying security, in the case of a put,
remains equal to or greater than the exercise price or, in the case of a call,
remains less than or equal to the exercise price, the Fund will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security. There can be no assurance that a liquid market will exist when
a Fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options markets, a Fund may be
unable to close out a position.
There are several risks associated with transactions in options on
securities and on indexes. For example, there are significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objectives. A decision as to whether, when and how to use options involves
the exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Fund
seeks to close out an option position. If a Fund were unable to close out an
option that it had purchased on a security, it would have to exercise the option
in order to realize any profit or the option may expire worthless. If a Fund
were unable to
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close out a covered call option that it had written on a security, it would not
be able to sell the underlying security unless the option expired without
exercise. As the writer of a covered call option, a Fund forgoes, during the
option's life, the opportunity to profit from increases in the market value of
the security covering the call option above the sum of the premium and the
exercise price of the call.
If trading were suspended in an option purchased by a Fund, the Fund
would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it had purchased. Except
to the extent that a call option on an index written by the Fund is covered by
an option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.
Futures Contracts and Options on Futures Contracts. A Fund may use
interest rate, foreign currency or index futures contracts, as specified for
that Fund in the Prospectus. An interest rate, foreign currency or index futures
contract provides for the future sale by one party and purchase by another party
of a specified quantity of a financial instrument, foreign currency or the cash
value of an index at a specified price and time. A futures contract on an index
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written. Although the value of an index might be a
function of the value of certain specified securities, no physical delivery of
these securities is made. A public market exists in futures contracts covering
several indexes as well as a number of financial instruments and foreign
currencies, including: the S & P 500; the S & P 100; the NYSE composite; U.S.
Treasury bonds; U.S. Treasury notes; GNMA Certificates; three-month U.S.
Treasury bills; 90-day commercial paper; bank certificates of deposit; the
Australian dollar; the Canadian dollar; the British pound; the German mark; the
Japanese yen; the French franc; the Swiss franc; the Mexican peso; and certain
multinational currencies, such as the European Currency Unit ("ECU"). It is
expected that other future contracts will be developed and traded in the future.
A Fund may purchase and write call and put options on futures. Options
on futures possess many of the same characteristics as options on securities and
indexes (discussed above). An option on a futures contract gives the holder the
right, in return for the premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified exercise price at any time
during the period of the option. Upon exercise of a call option, the holder
acquires a long position in the futures contract and the writer is assigned the
opposite short position. In the case of a put option, the opposite is true.
Each Fund will use futures contracts and options on futures contracts
in accordance with the rules of the Commodity Futures Trading Commission
("CFTC"). For example, a Fund might use futures contracts to hedge against
anticipated changes in interest rates that might adversely affect either the
value of the Fund's securities or the price of the securities which the Fund
intends to purchase. A Fund's hedging activities may include sales of futures
contracts as an offset against the effect of expected increase in interest
rates, and purchases of futures contracts as an offset against the effect of
expected declines in interest rates. Although other techniques could be used to
reduce that Fund's exposure to interest rate fluctuations, the Fund may be able
to hedge its exposure more effectively and perhaps at a lower cost by using
futures contracts and options on futures contracts.
A Fund will only enter into futures contracts and options on futures
contracts which are standardized and traded on a U.S. or foreign exchange, board
of trade, or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by a Fund, the
Fund is required to deposit with its custodian (or broker, if legally permitted)
a specified amount of cash or U.S. Government securities ("initial margin"). The
margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. Each Fund
expects to earn interest income on its initial margin
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deposits. A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin," equal to the daily change in value
of the futures contract. This process is known as "marking to market." Variation
margin does not represent a borrowing or loan by a Fund but is instead a
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing daily net asset value, each Fund
will mark to market its open futures positions.
A Fund is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related margin requirements), the current market value of the option, and other
futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of
the underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund realizes a capital
gain, or if it is more, the Fund realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Fund
realizes a capital gain, or if it is less, the Fund realizes a capital loss. The
transaction costs must also be included in these calculations.
Limitations on Use of Futures and Options Thereon. When purchasing a
futures contract, a Fund will maintain with its custodian (and mark-to-market on
a daily basis) cash, U.S. Government securities, or other highly liquid debt
securities that, when added to the amounts deposited with a futures commission
merchant as margin, are equal to the market value of the futures contract.
Alternatively, the Fund may "cover" its position by purchasing a put option on
the same futures contract with a strike price as high or higher than the price
of the contract held by the Fund.
When selling a futures contract, a Fund will maintain its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amount deposited with a futures commission merchant as margin, are equal to the
market value of the instruments underlying the contract. Alternatively, the Fund
may "cover" its position by owning the instruments underlying the contract (or,
in the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Trust's custodian).
When selling a call option on a futures contract, a Fund will maintain
with its custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, or other highly liquid debt securities that, when added to the
amounts deposited with a futures commission merchant as margin, equal the total
market value of the futures contract underlying the call option. Alternatively,
the Fund may cover its position by entering into a long position in the same
futures contract at a price no higher than the strike price of the call option,
by owning the instruments underlying the futures contract, or by holding a
separate call option permitting the Fund to purchase the same futures contract
at a price not higher than the strike price of the call option sold by the Fund.
When selling a put option on a futures contract, a Fund will maintain
with its custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, or other highly liquid debt securities that equal the purchase price
of the futures contract, less any margin on deposit. Alternatively, the Fund may
cover the position either by entering into a short position in the same futures
contract, or by owning a separate put option permitting it to sell the same
futures contract so long as the strike price of the purchased put option is the
same or higher than the strike price of the put option sold by the Fund.
In order to comply with current applicable regulations of the CFTC
pursuant to which the Trust avoids being deemed a "commodity pool operator," the
Funds are limited in their futures trading activities to positions which
constitute "bona fide hedging" positions within the meaning and intent of
applicable CFTC rules, or to non-
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hedging positions for which the aggregate initial margin and premiums will not
exceed 5% of the liquidation value of the Fund's assets.
The requirements for qualification as a regulated investment company
also may limit the extent to which a Fund may enter into futures contracts,
options thereon or forward contracts. See "Dividends and Tax Status."
Risks Associated with Futures and Options on Futures Contracts. There
are several risks associated with the use of futures contracts and options on
futures contracts as hedging techniques. A purchase or sale of a futures
contract may result in losses in excess of the amount invested in the futures
contract. There can be no guarantee that there will be a correlation between
price movements in the hedging vehicle and in the Fund securities being hedged.
In addition, there are significant differences between the securities and
futures markets that could result in an imperfect correlation between the
markets, causing a given hedge not to achieve its objectives. The degree of
imperfection of correlation depends on circumstances such as variation in
speculative market demand for futures and options on futures, including
technical influences in futures trading and options on futures, and differences
between the financial instruments being hedged and the instruments underlying
the standard contracts available for trading in such respects as interest rate
levels, maturities, and creditworthiness of issuers. A decision as to whether,
when and how to hedge involves the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.
Future exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
future prices have occasionally moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of
positions and subjecting some holders of futures contracts to substantial
losses.
There can be no assurance that a liquid market will exist at a time
when a Fund seeks to close out a futures contract or an option on futures
position, and that Fund would remain obligated to meet margin requirements until
the position is closed. In addition, many of the contracts discussed above are
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market will develop or
continue to exist.
Additional Risks of Options on Securities, Futures Contracts, Options
on Futures Contracts, and Forward Currency Exchange Contracts and Options
Thereon. Options on securities, futures contracts, options on futures contracts,
currencies and options on currencies may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in the
United States; may not involve a clearing mechanism and related guarantees; and
are subject to the risk of governmental actions affecting trading in, or the
prices of, foreign securities. The value of such positions also could be
adversely affected by (i) other complex foreign political, legal and economic
factors, (ii) lesser availability that in the United States of data on which to
make trading decisions, (iii) delays in the Funds' ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, and (iv) lesser trading volume.
Foreign Securities
The Funds may also invest in fixed-income securities of issuers located
in emerging foreign markets. Emerging markets generally include every country in
the world other than the United States, Canada, Japan, Australia, Malaysia, New
Zealand, Hong Kong, Singapore and most Western European countries. In
determining what countries constitute emerging markets, the Advisor will
consider, among other things, data, analysis and
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<PAGE>
classification of countries published or disseminated by the International Bank
for Reconstruction and Development (commonly known as the World Bank) and the
International Financial Corporation. Currently, investing in many emerging
markets may not be desirable or feasible, because of the lack of adequate
custody arrangements for a Fund's assets, overly burdensome repatriation and
similar restrictions, the lack of organized and liquid securities markets,
unacceptable political risks or other reasons. As opportunities to invest in
securities in emerging markets develop, the Funds expect to expand and further
broaden the group of emerging markets in which they invest.
From time to time, emerging markets have offered the opportunity for
higher returns in exchange for a higher level of risk. Accordingly, the Advisor
believes that each Fixed-Income Fund's ability to invest in emerging markets
throughout the world may enable the achievement of results superior to those
produced by funds, with similar objectives to those of these Funds, that invest
solely in securities in developed markets. There is no assurance that any
Fixed-Income Funds will achieve these results.
The Funds may invest in the following types of emerging market
fixed-income securities: (a) fixed-income securities issued or guaranteed by
governments, their agencies, instrumentalities or political subdivisions, or by
government owned, controlled or sponsored entities, including central banks
(collectively, "Sovereign Debt"), including Brady Bonds (described below); (b)
interests in issuers organized and operated for the purpose of restructuring the
investment characteristics of Sovereign Debt; (c) fixed-income securities issued
by banks and other business entities; and (d) fixed-income securities
denominated in or indexed to the currencies of emerging markets. Fixed-income
securities held by the Funds may take the form of bonds, notes, bills,
debentures, bank debt obligations, short-term paper, loan participations,
assignments and interests issued by entities organized and operated for the
purpose of restructuring the investment characteristics of any of the foregoing.
There is no requirement with respect to the maturity of fixed-income securities
in which the Funds may invest.
The Funds may invest in Brady Bonds and other Sovereign Debt of
countries that have restructured or are in the process of restructuring
Sovereign Debt pursuant to the Brady Plan. "Brady Bonds" are debt securities
issued under the framework of the Brady Plan, an initiative announced by former
U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor
nations to restructure their outstanding external commercial bank indebtedness.
In restructuring its external debt under the Brady Plan framework, a debtor
nation negotiates with its existing bank lenders as well as multilateral
institutions such as the International Bank for Reconstruction and Development
(the "World Bank") and the International Monetary Fund ("IMF"). The Brady Plan
framework, as it has developed, contemplates the exchange of commercial bank
debt for newly issued Brady Bonds. Brady Bonds may also be issued in respect of
new money being advanced by existing lenders in connection with the debt
restructuring. The World Bank and/or the IMF support the restructuring by
providing funds pursuant to loan agreements or other agreements which enable the
debtor nation to collateralize the new Brady Bonds or to repurchase outstanding
bank debt at a discount.
Emerging market fixed-income securities generally are considered to be
of a credit quality below investment grade, even though they often are not rated
by any nationally recognized statistical rating organizations. Investment in
emerging market fixed-income securities will be allocated among various
countries based upon the Advisor's analysis of credit risk and its consideration
of a number of factors, including: prospects for relative economic growth among
the different countries in which the Fixed-Income Funds may invest; expected
levels of inflation; government policies influencing business conditions; the
outlook for currency relationships; and the range of the individual investment
opportunities available to international investors. The Advisor's emerging
market sovereign credit analysis includes an evaluation of the issuing country's
total debt levels, currency reserve levels, net exports/imports, overall
economic growth, level of inflation, currency fluctuation, political and social
climate and payment history. Particular fixed-income securities will be selected
based upon credit risk analysis of potential issuers, the characteristics of the
security and interest rate sensitivity of the various debt issues available with
respect to a particular issuer, analysis of the anticipated volatility and
liquidity of the particular debt instruments, and the tax implications to the
Fund. The emerging market fixed-
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<PAGE>
income securities in which the Fixed-Income Funds may invest are not subject to
any minimum credit quality standards.
Foreign Currency Options and Related Risks
The Funds may take positions in options on foreign currencies to hedge
against the risk of foreign exchange rate fluctuations on foreign securities the
Funds hold in their portfolios or intend to purchase. For example, if a Fund
were to enter into a contract to purchase securities denominated in a foreign
currency, it could effectively fix the maximum U.S. dollar cost of the
securities by purchasing call options on that foreign currency. Similarly, if a
Fund held securities denominated in a foreign currency and anticipated a decline
in the value of that currency against the U.S. dollar, it could hedge against
such a decline by purchasing a put option on the currency involved. The markets
in foreign currency options are relatively new, and a Fund's ability to
establish and close out positions in such options is subject to the maintenance
of a liquid secondary market. There can be no assurance that a liquid secondary
market will exist for a particular option at any specific time. In addition,
options on foreign currencies are affected by all of those factors that
influence foreign exchange rates and investments generally.
The quantities of currencies underlying option contracts represent odd
lots in a market dominated by transactions between banks, and as a result extra
transaction costs may be incurred upon exercise of an option.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations be firm or revised on a
timely basis. Quotation information is generally representative of very large
transactions in the interbank market and may not reflect smaller transactions
where rates may be less favorable. Option markets may be closed while
round-the-clock interbank currency markets are open, and this can create price
and rate discrepancies.
Risks of Options Trading. The Funds may effectively terminate their
rights or obligations under options by entering into closing transactions.
Closing transactions permit a Fund to realize profits or limit losses on its
options positions prior to the exercise or expiration of the option. The value
of a foreign currency option depends on the value of the underlying currency
relative to the U.S. dollar. Other factors affecting the value of an option are
the time remaining until expiration, the relationship of the exercise price to
market price, the historical price volatility of the underlying currency and
general market conditions. As a result, changes in the value of an option
position may have no relationship to the investment merit of a foreign security.
Whether a profit or loss is realized on a closing transaction depends on the
price movement of the underlying currency and the market value of the option.
Options normally have expiration dates of up to nine months. The
exercise price may be below, equal to or above the current market value of the
underlying currency. Options that expire unexercised have no value, and a Fund
will realize a loss of any premium paid and any transaction costs. Closing
transactions may be effected only by negotiating directly with the other party
to the option contract, unless a secondary market for the options develops.
Although the Funds intend to enter into foreign currency options only with
dealers which agree to enter into, and which are expected to be capable of
entering into, closing transactions with the Funds, there can be no assurance
that a Fund will be able to liquidate an option at a favorable price at any time
prior to expiration. In the event of insolvency of the counter-party, a Fund may
be unable to liquidate a foreign currency option. Accordingly, it may not be
possible to effect closing transactions with respect to certain options, with
the result that a Fund would have to exercise those options that it had
purchased in order to realize any profit.
Forward Foreign Currency Exchange Contracts
The Funds may use forward contracts to protect against uncertainty in
the level of future exchange rates. The Funds will not speculate with forward
contracts or foreign currency exchange rates.
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<PAGE>
A Fund may enter into forward contracts with respect to specific
transactions. For example, when a Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when a Fund
anticipates the receipt in a foreign currency of dividend or interest payments
on a security that it holds, the Fund may desire to "lock" in the U.S. dollar
price of the security or the U.S. dollar equivalent of the payment, by entering
into a forward contract for the purchase or sale, for a fixed amount of U.S.
dollars or foreign currency, of the amount of foreign currency involved in the
underlying transaction. A Fund will thereby be able to protect itself against a
possible loss resulting from an adverse change in the relationship between the
currency exchange rates during the period between the date on which the security
is purchased or sold, or on which the payment is declared, and the date on which
such payments are made or received.
A Fund also may use forward contracts in connection with portfolio
positions to lock in the U.S. dollar value of those positions, to increase the
Fund's exposure to foreign currencies that the Advisor believes may rise in
value relative to the U.S. dollar or to shift the Fund's exposure to foreign
currency fluctuations from one country to another. For example, when the Advisor
believes that the currency of a particular foreign country may suffer a
substantial decline relative to the U.S. dollar or another currency, it may
enter into a forward contract to sell the amount of the former foreign currency
approximating the value of some or all of the Funds portfolio securities
denominated in such foreign currency. This investment practice generally is
referred to as "cross-hedging" when another foreign currency is used.
The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for a
Fund to purchase additional foreign currency on the spot (i.e., cash) market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of foreign currency the Fund is obligated to deliver and if
a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security if its market
value exceeds the amount of foreign currency the Fund is obligated to deliver.
The projection of short-term currency market movements is extremely difficult,
and the successful execution of a short-term hedging strategy is highly
uncertain. Forward contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing the Fund to sustain losses
on these contracts and transaction costs. A Fund may enter into forward
contracts or maintain a net exposure to such contracts only if (1) the
consummation of the contracts would not obligate the Fund to deliver an amount
of foreign currency in excess of the value of the Fund's portfolio securities or
other assets denominated in that currency or (2) the Fund maintains cash, U.S.
Government securities or liquid, high-quality debt securities in a segregated
account in an amount not less than the value of the Fund's total assets
committed to the consummation of the contracts. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the longer term investment decisions made with regard to overall diversification
strategies. However, the Advisor believes it is important to have the
flexibility to enter into such forward contracts when it determines that the
best interests of the Fund will be served.
At or before the maturity date of a forward contract that requires a
Fund to sell a currency, the Fund may either sell a portfolio security and use
the sale proceeds to make delivery of the currency or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the currency that it is obligated to deliver. Similarly, a Fund
may close out a forward contract requiring it to purchase a specified currency
by entering into a second contract entitling it to sell the same amount of the
same currency on the maturity date of the first contract. The Fund would realize
a gain or loss as a result of entering into such an offsetting forward contract
under either circumstance to the extent the exchange rate between the currencies
involved moved between the execution dates of the first and second contracts.
The cost to the Fund of engaging in forward contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward contracts are usually
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<PAGE>
entered into on a principal basis, no fees or commissions are involved. The use
of forward contracts does not eliminate fluctuations in the prices of the
underlying securities the Fund owns or intends to acquire, but it does fix a
rate of exchange in advance. In addition, although forward contracts limit the
risk of loss due to a decline in the value of the hedged currencies, at the same
time they limit any potential gain that might result should the value of the
currencies increase.
Although the Funds value their assets daily in terms of U.S. dollars,
they do not intend to convert holdings of foreign currencies into U.S. dollars
on a daily basis. The Funds may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
Swap Agreements. The Funds may enter into interest rate, index and
currency exchange rate swap agreements for purposes of attempting to obtain a
particular desired return at a lower cost to the Fund than if the Fund had
invested directly in an instrument that yielded the desired return. Swap
agreements are two party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a "notional amount," i.e.,
the return on or increase in value of a particular dollar amount invested at a
particular interest rate, in a particular foreign currency, or in a "basket" of
securities representing a particular index. The "notional amount" of the swap
agreement is only a fictive basis on which to calculate the obligations which
the parties to a swap agreement have agreed to exchange. A Fund's obligations
(or rights) under a swap agreement will generally be equal only to the net
amount to be paid or received under the agreement based on the relative values
of the positions held by each party to the agreement (the "net amount"). A
Fund's obligations under a swap agreement will be accrued daily (offset against
any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a
swap counter-party will be covered by the maintenance of a segregated account
consisting of cash, U.S. Government securities, or high grade debt obligations,
to avoid any potential leveraging of the Fund's portfolio. A Fund will not enter
into a swap agreement with any single party if the net amount owed or to be
received under existing contracts with that party would exceed 5% of the Fund's
assets.
Whether a Fund's use of swap agreements will be successful in
furthering its investment objective of total return will depend on the Advisor's
ability correctly to predict whether certain types of investments are likely to
produce greater returns that other investments. Because they are two party
contracts and because they may have terms of greater than seven days, swap
agreements may be considered to be illiquid. Moreover, a Fund bears the risk of
loss of the amount expected to be received under a swap agreement in the event
of the default or bankruptcy of a swap agreement counter-party. The Advisor will
cause a Fund to enter into swap agreements only with counter-parties that would
be eligible for consideration as repurchase agreement counter-parties.
Restrictions imposed by the Internal Revenue Code may limit the Funds' ability
to use swap agreements. The swaps market is a relatively new market and is
largely unregulated. It is possible that developments in the swaps market,
including potential government regulation, could adversely affect a Fund's
ability to terminate existing swap agreements or to realize amounts to be
received under such agreements.
Risk Factors Relating to Investing in High Yield Securities
Lower-rated or unrated (i.e. high yield) securities are more likely to
react to developments affecting market risk (such as interest rate sensitivity,
market perception of creditworthiness of the issuer and general market
liquidity) and credit risk (such as the issuer's inability to meet its
obligations) than are more highly rated securities, which react primarily to
movements in the general level of interest rates. The Advisor considers both
credit risk and market risk in making investment decisions for the Equity Income
Fund and the Fixed-Income
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Funds. Investors should carefully consider the relative risk of investing in
high yield securities and understand that such securities are not generally
meant for short-term trading.
The amount of high yield securities outstanding proliferated in the
1980's in conjunction with the increase in merger and acquisition and leveraged
buyout activity. Under adverse economic conditions, there is a risk that highly
leveraged issuers may be unable to service their debt obligations upon maturity.
In addition, the secondary market for high yield securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities. Under adverse market or
economic conditions, the secondary market for high yield securities could
contract further, independent of any specific adverse changes in the condition
of a particular issuer. As a result, the Advisor could find it more difficult to
sell these securities or may be able to sell the securities only at prices lower
than if such securities were widely traded. Prices realized upon the sale of
such lower-rated or unrated securities, under these circumstances, may be less
than the prices used in calculating the Funds' net asset value.
Lower-rated or unrated debt obligations are present risks based on
payment expectations. If an issuer calls the obligation for redemption, the Fund
may have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If a Fund experiences unexpected net
redemptions, it may be forced to sell its higher-rated securities, resulting in
a decline in the overall credit quality of the Fund's portfolio and increasing
the exposure of the Fund to the risks of high yield securities.
Illiquid Securities
A Fund may not invest more than 15% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market (either within or outside of the United States) or
legal or contractual restrictions of resale. Historically, illiquid securities
have included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act, securities which
are otherwise not readily marketable and repurchase agreements have a maturity
of longer than seven days. Securities which have not been registered under the
Securities Act are referred to as private placements or restricted securities
and are purchased directly from the issuer or in the secondary market. Mutual
funds do not typically hold a significant amount of these restricted or other
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illegal securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemption within
seven days. A mutual fund might also have to register such restricted securities
in order to dispose of them resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities. Currently
the Fixed-Income Funds may invest in securities issued in private placements.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A established a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
B-18
<PAGE>
Restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The Advisor will monitor the liquidity
of such restricted securities subject to the supervision of the Trustees. In
reaching liquidity decisions, the Advisor will consider, inter alia, the
following factors: (1) the frequency of trades and quotes for the security; (2)
the number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (3) dealer undertakings to make a market in the
security; and (4) the nature of the security and the nature of the marketplace
trades (e.g. the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer). In addition, in order for
commercial paper that is issued in reliance on Section 4(2) of the Securities
Act to be considered liquid, (i) it must be rated in one or two of the highest
rating categories by at least two nationally recognized statistical rating
organizations (NRSRO), or if only one NRSRO rates the securities, by that NRSRO,
or, if unrated, be of comparable quality in the view of the investment adviser,
and (ii) it must not be "traded flat" (i.e., without accrued interest) or in
default as to principal or interest. Investing in Rule 144A securities could
have the effect of increasing the level of Fund illiquidity to the extent that
qualified institutional buyers become, for a time, uninterested in purchasing
these securities. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
<TABLE>
Management
The Trustees and officers of the Trust are:
<CAPTION>
Name, Address Age Position with the Trust Principal Occupations During Past Five Years
- ------------- --- ----------------------- --------------------------------------------
<S> <C> <C> <C>
Scott B. Dubchansky* 36 Chief Executive Officer Mr. Dubchansky served as Managing Director-Fixed Income of
10880 Wilshire Blvd., Suite 2020 and Trustee Metropolitan West Securities, Inc. from August, 1996 through
Los Angeles, CA 90024 December, 1996 while the Advisor was in formation. From
August, 1992 through August, 1996, Mr. Dubchansky was a
Senior Vice President of Donaldson Lufkin Jenrette in the
Fixed Income division. Prior to August, 1992, Mr. Dubchansky
was Senior Vice President fixed income sales at Kidder
Peabody and responsible for fixed income sales to
institutional clients.
<FN>
- -------------------
* "Interested" Trustee, as defined in the 1940 Act, due to the relationship
indicated with the Advisor.
</FN>
</TABLE>
The Trust does not pay salaries to any of its officers or fees to any
of its Trustees affiliated with the Advisor.
For information as to ownership of shares by officers and Trustees of
the Trust, see below under "General Information About the Trust."
Portfolio Transactions and Brokerage
The Investment Advisory Agreements state that in connection with its
duties to arrange for the purchase and sale of securities held in the portfolio
of each Fund by placing purchase and sale orders for that Fund, the Advisor
shall select such broker-dealers ("brokers") as shall, in the Advisor's
judgment, implement the policy of
B-19
<PAGE>
the Trust to achieve "best execution", i.e., prompt and efficient execution at
the most favorable securities price. In making such selection, the Advisor is
authorized in the Agreements to consider the reliability, integrity and
financial condition of the broker. (It is the Advisor's current practice
generally to pay brokerage commissions at rates determined by the Advisor, based
on the Advisor's assessment of the difficulty of execution.) The Advisor is also
authorized by the Agreements to consider whether the broker provides brokerage
and/or research services to the fund and/or other accounts of the Advisor. The
Agreements state that the commissions paid to brokers may be higher than another
broker would have charged if a good faith determination is made by the Advisor
that the commission is reasonable in relation to the services provided, viewed
in terms of either that particular transaction or the Advisor's overall
responsibilities as to the accounts as to which it exercises investment
discretion and that the Advisor shall use its judgment in determining that the
amount of commissions paid are reasonable in relation to the value of brokerage
and research services provided and need not place or attempt to place a specific
dollar value on such services or on the portion of commission rates reflecting
such services. The Agreements provide that to demonstrate that such
determinations were in good faith, and to show the overall reasonableness of
commissions paid, the Advisor shall be prepared to show that commissions paid
(i) were for purposes contemplated by the Agreements; (ii) were for products or
services which provide lawful and appropriate assistance to the Advisor's
decision-making process; and (iii) were within a reasonable range as compared to
the rates charged by brokers to other institutional investors as such rates may
become known from available information. The Advisor is also authorized to
consider sales of shares of each Fund and/or of any other investment companies
for which the Advisor acts as Advisor as a factor in the selection of brokers to
execute brokerage and principal transactions, subject to the requirements of
"best execution," as defined above.
The research services discussed above may be in written form or through
direct contact with individuals and may include information as to particular
companies and securities as well as market, economic, or institutional areas and
information assisting the Trust in the valuation of the Funds' investments. The
research which the Advisor receives for the Funds' brokerage commissions,
whether or not useful to a Fund, may be useful to the Advisor in managing the
accounts of the Advisor's other advisory clients. Similarly, the research
received for the commissions of such accounts may be useful to any Fund.
In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission although the price of the security usually includes a profit
to the dealer. Money market instruments usually trade on a "net" basis as well.
On occasion, certain money market instruments may be purchased by the Funds
directly from an issuer in which case no commissions or discounts are paid. In
underwritten offerings, securities are purchased at a fixed price which includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount.
B-20
<PAGE>
Administrator
The Funds have an Administration Agreement with
________________________________ (the "Administrator"), with offices at
______________________________________________________. The Administration
Agreement provides that the Administrator will prepare and coordinate reports
and other materials supplied to the Trustees; prepare and/or supervise the
preparation and filing of all securities filings, periodic financial reports,
prospectuses, statements of additional information, marketing materials, tax
returns, shareholder reports and other regulatory reports or filings required of
the Funds; prepare all required filings necessary to maintain the Funds'
qualifications and/or registrations to sell shares in all states where each Fund
currently does, or intends to do, business; coordinate the preparation, printing
and mailing of all materials (e.g., Annual Reports) required to be sent to
shareholders; coordinate the preparation and payment of Fund-related expenses;
monitor and oversee the activities of the Funds' servicing agents (i.e.,
transfer agent, custodian, fund accountants, etc.); review and adjust as
necessary each Fund's daily expense accruals; and perform such additional
services as may be agreed upon by the Funds and the Administrator. For its
services, the Administrator receives an annual fee equal to the greater of [__]%
of the first $100 million of the Trust's average daily net assets, [__] % of the
next $150 million, [__]% of the next $250 million and [__]% thereafter, subject
to a $______ ($______ for the first year) minimum.
Principal Underwriter
______________________ (the "Distributor"), a broker-dealer affiliated
with the Administrator, acts as each Fund's principal underwriter in a
continuous public offering of the Fund's shares. The Distribution Agreement
between the Funds and the Distributor continues in effect for periods not
exceeding one year if approved at least annually by (i) the Board of Trustees or
the vote of a majority of the outstanding shares of each Fund (as defined in the
1940 Act) and (ii) a majority of the Trustees who are not interested persons of
any such party, in each case cast in person at a meeting called for the purpose
of voting on such approval. The Distribution Agreement may be terminated without
penalty by the parties thereto upon 60 days' written notice, and is
automatically terminated in the event of its assignment as defined in the 1940
Act.
Net Asset Value
As indicated in each Prospectus, the net asset value per share of each
Fund's shares will be determined at 4:00 p.m. New York time on each day that the
New York Stock Exchange is open for trading. That Exchange annually announces
the days on which it will not be open for trading; the most recent announcement
indicates that it will not be open on the following days: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. However, that Exchange may close on days not
included in that announcement. Also, no Fund is required to compute its net
asset value on any day on which no order to purchase or redeem its shares is
received.
Fixed-income securities which are traced on a national securities
exchange will be valued at the last sale price or, if there was no sale on such
day, at the average of readily available closing bid and asked prices on such
exchange. However, securities with a demand feature exercisable within one to
seven days are valued at par. Prices for fixed-income securities may be based on
quotations received from one or more market-makers in the securities, or on
evaluations from pricing services. Debt securities which mature in less than 60
days are valued at amortized cost (unless the Board of Trustees determines that
this method does not represent fair value), if their original maturity was 60
days or less or by amortizing the value as of the 61st day prior to maturity, if
their original term to maturity exceeded 60 days.
In determining the net asset value of each Fund's shares, equity
securities that are listed on a securities exchange (whether domestic or
foreign) or quoted by the NASDAQ National Market System are valued at the last
sale price on that day as of the close of regular trading on the New York Stock
Exchange (which is currently 4:00 p.m., New York time), or, in the absence of
recorded sales, at the average of readily closing bid and asked prices
B-21
<PAGE>
on such exchange or on such System. Unlisted equity securities that are not
included in such National Market System are valued at the average of the quoted
bid and asked prices in the over-the-counter market.
Options, futures contracts and options thereon which are traded on
exchanges are valued at their last sale or settlement price as of the close of
the exchanges or, if no sales are reported, at the average of the quoted bid and
asked prices as of the close of the exchange.
Trading in securities listed on foreign securities exchanges or
over-the-counter markets is normally completed before the close of regular
trading on the New York Stock Exchange. In addition, foreign securities trading
may not take place on all business days in New York and may occur on days on
which the New York Stock Exchange is not open. In addition, foreign currency
exchange rates are generally determined prior to the close of trading on the New
York Stock Exchange. Events affecting the value of foreign securities and
currencies will not reflected in the determination of net asset value unless the
Board of Trustees determines that the particular event would materially affect
net asset value, in which case an adjustment will be made. Investments quoted in
foreign currency are valued daily in U.S. dollars on the basis of the foreign
currency exchange rate prevailing at the time of valuation. Foreign currency
exchange transactions conducted on a spot basis are valued at the spot rate
prevailing in the foreign exchange market.
Securities and other assets for which market quotations are not readily
available are valued at their fair value as determined by the Advisor under
guidelines established by and under the general supervision and responsibility
of the Board of Trustees.
Dividends and Tax Status
The Funds intend to elect and qualify as regulated investment companies
under Subchapter M of the Internal Revenue Code. Qualification as a regulated
investment company requires, among other things, that (a) at least 90% of each
Fund's annual gross income, without offset for losses from the sale or other
disposition of securities, be derived from payments with respect to securities
loans, interest, dividends and gains from the sale or other disposition of
securities, foreign currencies or options (including forward contracts) thereon;
(b) each Fund derive less than 30% of its gross income from gains (without
offset for losses) from the sale or other disposition of securities or options
thereon held for less than three months; and (c) each Fund diversify its
holdings so that, at the end of each quarter of the taxable year, (i) at least
50% of the market value of the Fund's assets is represented by cash, U.S.
Government securities and other securities limited in respect of any one issuer
to an amount not greater than 5% of the Fund's assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities). In addition, in order not to be subject to federal
taxation, each Fund must distribute to its shareholders at least 90% of its net
investment income, other than net capital gains, earned in each year.
A Fund is required to pay an excise tax to the extent it does not
distribute to its shareholders during such calendar year at least 98% of its
ordinary income for that calendar year, 98% of its capital gains over capital
losses for the one-year period ending October 31 in such calendar year, and all
undistributed ordinary income and capital gains for the preceding respective
one-year period. The Funds intend to meet these distribution requirements to
avoid excise tax liability. The Funds also intend to continue distributing to
shareholders all of the excess of net long-term capital gain over net short-term
capital loss on sales of securities. If the net asset value of shares of a Fund
should, by reason of a distribution of realized capital gains, be reduced below
a shareholder's cost, such distribution would to that extend be a return of
capital to that shareholder even though taxable to the shareholder, and a sale
of shares by a shareholder at net asset value at that time would establish a
capital loss for federal tax purposes.
In determining the extent to which a Fund's dividends may be eligible
for the 70% dividends received deduction by corporate shareholders, interest
income, capital gain net income, gain or loss from Section 1256
B-22
<PAGE>
contracts, dividend income from foreign corporations and income from other
sources will not constitute qualified dividends. Corporate shareholders should
consult their tax advisors regarding other requirements applicable to the
dividends received deduction.
Special rules apply to the treatment of certain forward foreign
currency exchange contracts (Section 1256 contracts). At the end of each year,
such investments held by a Fund must be "marked to market" for federal income
tax purposes; that is, treated as having been sold at market value. Except to
the extent that such gains or losses are treated as "Section 988" gains or
losses, as described below, sixty percent of any gain or loss recognized on
these "deemed sales" and on actual dispositions may be treated as long-term
capital gain or loss, and the remainder will be treated as short-term capital
gain or loss.
Under the Internal Revenue Code, gains or losses attributable to
fluctuations in exchange rates which occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities are treated as ordinary income or loss.
Similarly, gains or losses on forward foreign currency exchange contracts or
dispositions of debt securities denominated in a foreign currency attributable
to fluctuations in the value of the foreign currency between the date of
acquisition of the security and the date of disposition are also treated as
ordinary gain or loss. These gains, referred to as "Section 988" gains or
losses, increase or decrease the amount of a Fund's investment company taxable
income available to be distributed to its shareholders as ordinary income,
rather than increasing or decreasing the Fund's net capital gain. If Section 988
losses exceed other investment company taxable income during a taxable year, the
Fund would not be able to make any ordinary dividend distributions, or
distributions made before the losses were realized would be recharacterized as a
return of capital to shareholders, rather than as an ordinary dividend, reducing
the basis of each shareholder's shares.
Any loss realized on a sale, redemption or exchange of shares of a Fund
by a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
received in connection with the payment of a dividend by a Fund constitute a
replacement of shares.
Performance Information
Total Return. Average annual total return quotations used in the Funds'
advertising and promotional materials are calculated according to the following
formula:
P(1 + T)n = ERV
where P equals a hypothetical initial payment of $1000; T equals average annual
total return; n equals the number of years; and ERV equals the ending redeemable
value at the end of the period of a hypothetical $1000 payment made at the
beginning of the period.
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication. Average
annual total return, or "T" in the above formula, is computed by finding the
average annual compounded rates of return over the period that would equate the
initial amount invested to the ending redeemable value. Average annual total
return assumes the reinvestment of all dividends and distributions.
Yield. Annualized yield quotations used in a Fund's advertising and
promotional materials are calculated by dividing the Fund's interest income for
a specified thirty-day period, net of expenses, by the average number of shares
outstanding during the period, and expressing the result as an annualized
percentage (assuming semi-annual compounding) of the net asset value per share
at the end of the period. Yield quotations are calculated according to the
following formula:
B-23
<PAGE>
YIELD = 2 [ (a-b + 1)6 - 1]
---
cd
where a equals dividends and interest earned during the period; b equals
expenses accrued for the period, net of reimbursements; c equals the average
daily number of shares outstanding during the period that are entitled to
receive dividends; and d equals the maximum offering price per share on the last
day of the period.
Except as noted below, in determining net investment income earned
during the period ("a" in the above formula), a Fund calculates interest earned
on each debt obligation held by it during the period by (1) computing the
obligation's yield to maturity, based on the market value of the obligation
(including actual accrued interest) on the last business day of the period or,
if the obligation was purchased during the period, the purchase price plus
accrued interest; (2) dividing the yield to maturity by 360 and multiplying the
resulting quotient by the market value of the obligation (including actual
accrued interest). Once interest earned is calculated in this fashion for each
debt obligation held by the Fund, net investment income is then determined by
totaling all such interest earned.
For purposes of these calculations, the maturity of an obligation with
one or more call provisions is assumed to be the next date on which the
obligation reasonably can be expected to be called or, if none, the maturity
date.
Other information. Each Fund's performance data quoted in advertising
and other promotional materials represents past performance and is not intended
to predict or indicate future results. The return and principal value of an
investment in a Fund will fluctuate, and an investor's redemption proceeds may
be more or less than the original investment amount. In advertising and
promotional materials a Fund may compare its performance with data published by
Lipper Analytical Services, Inc. ("Lipper") or CDA Investment Technologies, Inc.
("CDA"). The Fund also may refer in such materials to mutual fund performance
rankings and other data, such as comparative asset, expense and fee levels,
published by Lipper or CDA. Advertising and promotional materials also may refer
to discussions of the Fund and comparative mutual fund data and ratings reported
in independent periodicals including, but not limited to, The Wall Street
Journal, Money Magazine, Forbes, Business Week, Financial World and Barron's.
General Information About the Trust
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest and to divide or
combine the shares into a greater or lesser number of shares without thereby
changing the proportionate beneficial interest in each Fund. Each share
represents an interest in a Fund proportionately equal to the interest of each
other share. Upon the Trust's liquidation, all shareholders would share pro rata
in the net assets of the Fund in question available for distribution to
shareholders. If they deem it advisable and in the best interest of
shareholders, the Board of Trustees may create additional classes of shares
which differ from each other only as to dividends. The Board of Trustees has
created eight classes of shares, and may create additional classes in the
future, which have separate assets and liabilities; each of such classes has or
will have a designation including the word "Series." Income and operating
expenses not specifically attributable to a particular Fund are allocated fairly
among the Funds by the Trustees, generally on the basis of the relative net
assets of each Fund.
The Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office. The Declaration of Trust also provides that the Trust shall, upon
B-24
<PAGE>
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Trust and satisfy any judgment thereon.
Ten shareholders holding the lesser of $25,000 worth or one percent of
a Fund's shares may advise the Trustees in writing that they wish to communicate
with other shareholders for the purpose of requesting a meeting to remove a
Trustee. The Trustees will then, if requested by the applicants, mail at the
applicants' expense the applicants' communication to all other shareholders.
The Trust may be terminated upon the sale of its assets to another
issuer, if such sale is approved by the vote of the holders of more than 50% of
the Trust's outstanding shares, or upon liquidation and distribution of its
assets, if approved by the vote of the holders of more than 50% of the Trust's
outstanding shares. If not so terminated, the Trust will continue indefinitely.
Rule 18f-2 under the 1940 Act provides that as to any investment
company which has two or more series outstanding and as to any matter required
to be submitted to shareholder vote, such matter is not deemed to have been
effectively acted upon unless approved by the holders of a "majority" (as
defined in the Rule) of the voting securities of each series affected by the
matter. Such separate voting requirements do not apply to the election of
Trustees or the ratification of the selection of accountants. The Rule contains
special provisions for cases in which an advisory contract is approved by one or
more, but not all, series. A change in investment policy may go into effect as
to one or more series whose holders so approve the change even though the
required vote is not obtained as to the holders of other affected series.
The Trust's custodian is responsible for holding the Funds' assets and
acts as the Trust's accounting services agent. Subcustodians provide custodial
services for assets of the Trust held outside the U.S. The Trust's independent
accountants examine the Trust's financial statements and assist in the
preparation of certain reports to the Securities and Exchange Commission.
Additional Information
Legal Opinion
The validity of the shares offered by the Prospectus will be passed
upon by Heller, Ehrman, White & McAuliffe, 333 Bush Street, San Francisco,
California 94104.
Auditors
The annual financial statements of the Funds will be audited by
[____________________] independent public accountant for the Funds.
License to Use Name
Metropolitan West Securities, Inc. has granted the Trust and each Fund
the right to use the designation "Metropolitan West" in its name, and has
reserved the right to withdraw its consent to the use of such designation under
certain conditions, including the termination of the Adviser as the Funds'
investment adviser. Metropolitan West also has reserved the right to license
others to use this designation, including any other investment company.
Other Information
The Prospectus and this Statement of Additional Information, together,
do not contain all of the information set forth in the Registration Statement of
Metropolitan West Funds filed with the Securities and Exchange Commission.
Certain information is omitted in accordance with rules and regulations of the
B-25
<PAGE>
Commission. The Registration Statement may be inspected at the Public Reference
Room of the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and copies thereof may be obtained from the Commission
at prescribed rates.
Financial Statements
[Text to follow describing seed money audit].
B-26
<PAGE>
----------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
METROPOLITAN WEST FUNDS
--------------
FORM N-1A
--------------
PART C
--------------
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) To be filed by pre-effective amendment.
(b) Exhibits:
(1) Agreement and Declaration of Trust.
(2) By-Laws.
(3) Voting Trust Agreement - Not applicable.
(4) Specimen Share Certificate - Not applicable.
(5) Form of Investment Management Agreement.
(6) Form of Underwriting Agreement.(1)
(7) Benefit Plan(s) - Not applicable.
(8) Form of Custodian Agreement.(1)
(9) Administrative Services Agreement.(1)
(10) Consent and Opinion of Counsel as to legality of
shares.(1)
(11) Consent of Independent Public Accountants -
Not Applicable.
(12) Financial Statements omitted from Item 23 -
Not applicable.
(13) Subscription Agreement.(1)
(14) Model Retirement Plan Documents - Not applicable.
(15) Rule 12b-1 Plan - Not Applicable.
(16) Performance Computation - Not Applicable.
(17) Financial Data Schedule - Not Applicable
- --------------
(1) To be filed by pre-effective amendment.
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant.
Metropolitan West Asset Management, LLC, a California limited
liability company, is the manager of each series of the Registrant (the
"Manager"). Metropolitan West Securities, Inc., a California corporation
("MWS"), is a member of the Manager. Also members of the Manager are Scott B.
Dubchansky, Tad Rivell and Laird R. Landmann.
Persons holding more than a five percent beneficial interest
in MWS include Paul C. Chow, Terry M. Crow, Edward E. Curiel, Thomas W. Hayes,
Richard S. Hollander and Roland R. Moos. MWS is registered with the Securities
and Exchange Commission as an investment adviser and a broker-dealer.
Item 26. Number of Holders of Securities
As of __________, 1997, Metropolitan West Asset Management,
LLC, the manager of each series of the Registrant, is the sole shareholder of
each series of the Registrant.
Item 27. Indemnification
Article VII of the Agreement and Declaration of Trust empowers
the Trustees of the Trust, to the full extent permitted by law, to purchase with
Trust assets insurance for indemnification from liability and to pay for all
expenses reasonably incurred or paid or expected to be paid by a Trustee or
officer in connection with any claim, action, suit or proceeding in which he or
she becomes involved by virtue of his or her capacity or former capacity with
the Trust.
Article VII of the By-Laws of the Trust provides that the
Trust shall indemnify any person who was or is a party or is threatened to be
made a party to any proceeding by reason of the fact that such person is and
other amounts or was an agent of the Trust, against expenses, judgments, fines,
settlement and other amounts actually and reasonable incurred in connection with
such proceeding if that person acted in good faith and reasonably believed his
or her conduct to be in the best interests of the Trust. Indemnification will
not be provided in certain circumstances, however, including instances of
willful misfeasance, bad faith, gross negligence, and reckless disregard of the
duties involved in the conduct of the particular office involved.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to the Trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable in the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such Trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
Item 28. Business and Other Connections of Investment Adviser.
Information about Scott B. Dubchansky, Tad Rivell and Laird R.
Landmann is set forth in Part B under "Management."
Item 29. Principal Underwriter.
(a) [_____________________] is the principal underwriter for the
following investment companies or series thereof:
<PAGE>
(b) The following information is furnished with respect to the
officers of [__________]:
Name and Principal Position and Offices with First Positions and Offices
Business Address* Fund Distributors, Inc. with Registrant
- ----------------- ------------------------------- ----------------------
[__________________] [President and Treasurer] [None]
[__________________] [Vice President and Secretary] [None]
[__________________] [Vice President] [None]
* The principal business address of persons and entities listed is
[_________________________________].
Item 30. Location of Accounts and Records.
The accounts, books, or other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 will be kept
by the Registrant's Transfer Agent, [_____________] [_____________] except those
records relating to portfolio transactions and the basic organizational and
Trust documents of the Registrant (see Subsections (2)(iii), (4), (5), (6), (7),
(9), (10) and (11) of Rule 31a-1(b)), which will be kept by the Registrant at
10880 Wilshire Boulevard, Suite 2020, Los Angeles, California 90024
Item 31. Management Services.
There are no management-related service contracts not
discussed in Parts A and B.
Item 32. Undertakings.
(a) Registrant hereby undertakes to file a post-effective
amendment including financial statements of each series of the Registrant, which
need not be certified, within four to six months from the effective date of
Registrant's 1933 Act Registration Statement with respect to shares of each of
them.
(b) Registrant has undertaken to comply with Section 16(a) of
the Investment Company Act of 1940, as amended, which requires the prompt
convening of a meeting of shareholders to elect trustees to fill existing
vacancies in the Registrant's Board of Trustees in the event that less than a
majority of the trustees have been elected to such position by shareholders.
Registrant has also undertaken promptly to call a meeting of shareholders for
the purpose of voting upon the question of removal of any Trustee or Trustees
when requested in writing to do so by the record holders of not less than 10
percent of the Registrant's outstanding shares and to assist its shareholders in
communicating with other shareholders in accordance with the requirements of
Section 16(c) of the Investment Company Act of 1940, as amended.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, and State of California on the 20
day of December, 1996.
Metropolitan West Funds
By: /s/ SCOTT B. DUBCHANSKY
------------------------------
Scott B. Dubchansky
Principal Executive Officer,
Principal Financial and
Accounting Officer
and Sole Trustee
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following person in the capacities and on
the date indicated.
/s/ SCOTT B. DUBCHANSKY
- ------------------------ Principal Executive Officer, December 20, 1996
Scott B. Dubchansky Principal Financial and
Accounting Officer and Sole
Trustee
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
EXHIBITS
to
FORM N-1A
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
and
under
THE INVESTMENT COMPANY ACT OF 1940
-------------------------
Metropolitan West Funds
(Exact Name of Registrant as Specified in its Charter)
<PAGE>
Exhibit(s) Index
Exhibit No. Document Page No.
- ----------- -------- --------
(1) Agreement and Declaration of Trust _____
(2) By-Laws _____
(5) Form of Investment Management Agreement _____
EXHIBIT 1
Agreement and Declaration of Trust
<PAGE>
AGREEMENT AND DECLARATION OF TRUST
of
METROPOLITAN WEST FUNDS
a Delaware Business Trust
Principal Place of Business:
10880 Wilshire Boulevard, Suite 2020
Los Angeles, California 90024
Formed:
December 9, 1996
<PAGE>
TABLE OF CONTENTS
AGREEMENT AND DECLARATION OF TRUST
METROPOLITAN WEST FUNDS
Page
----
ARTICLE I Name and Definitions................................1
1. Name ....................................................1
2. Definitions..................................................1
(a) Trust...............................................1
(b) Trust Property......................................1
(c) Trustees............................................1
(d) Shares..............................................2
(e) Shareholder.........................................2
(f) Person..............................................2
(g) Investment Company Act..............................2
(h) Commission and Principal Underwriter................2
(i) Declaration of Trust................................2
(j) By-Laws.............................................2
(k) Interested Person...................................2
(l) Investment Adviser..................................2
(m) Series..............................................2
(n) Class...............................................2
(o) Voting Interest.....................................2
ARTICLE II Purpose of Trust.............................................3
ARTICLE III Shares ......................................................3
1. Division of Beneficial Interest..............................3
2. Ownership of Shares..........................................4
3. Investments in the Trust.....................................4
4. Status of Shares and Limitation of
Personal Liability...........................................4
5. Power of Board of Trustees to Change
Provisions Relating to Shares................................4
6. Establishment and Designation of Series and Classes..........5
(a) Assets With Respect to a Particular Series..........5
(b) Liabilities Held With Respect to a
Particular Series or Class..........................6
(c) Dividends, Distributions, Redemptions
and Repurchases.....................................6
(d) Voting..............................................7
(e) Equality............................................7
(f) Fractions...........................................7
(g) Exchange Privilege..................................7
(h) Combination of Series...............................7
(i) Elimination of Series...............................7
7. Indemnification of Shareholders..............................8
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<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
ARTICLE IV The Board of Trustees........................................8
1. Number, Election and Tenure..................................8
2. Effect of Death, Resignation, etc.
of a Trustee.................................................9
3. Powers ......................................................9
4. Payment of Expenses by the Trust............................12
5. Payment of Expenses by Shareholders.........................12
6. Ownership of Assets of the Trust............................12
7. Service Contracts...........................................13
ARTICLE V Shareholders' Voting Powers and Meetings...........14
1. Voting Powers...............................................14
2. Voting Power and Meetings...................................15
3. Quorum and Required Vote....................................15
4. Action by Written Consent...................................16
5. Record Dates................................................16
6. Additional Provisions.......................................16
ARTICLE VI Net Asset Value, Distributions,
and Redemptions.............................................16
1. Determination of Net Asset Value, Net
Income and Distributions....................................16
2. Redemptions and Repurchases.................................17
3. Redemptions at the Option of the Trust......................17
ARTICLE VII Compensation and Limitation of
Liability of Trustees.......................................18
1. Compensation................................................18
2. Indemnification and Limitation of Liability.................18
3. Trustee's Good Faith Action, Expert
Advice, No Bond or Surety...................................18
4. Insurance...................................................19
ARTICLE VIII Miscellaneous...............................................19
1. Liability of Third Persons Dealing
with Trustees...............................................19
2. Termination of Trust, Series or Class.......................19
3. Merger and Consolidation....................................19
4. Amendments..................................................20
5. Filing of Copies, References, Headings......................20
6. Applicable Law..............................................21
7. Provisions in Conflict with Law or Regulations..............21
8. Business Trust Only.........................................21
9. Use of the Identifying Words "Metropolitan
West" and Related Phrases...................................21
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<PAGE>
AGREEMENT AND DECLARATION OF TRUST
OF
METROPOLITAN WEST FUNDS
WHEREAS, THIS AGREEMENT AND DECLARATION OF TRUST is made and
entered into as of the date set forth below by the Trustees named hereunder for
the purpose of forming a Delaware business trust in accordance with the
provisions hereinafter set forth,
NOW, THEREFORE, the Trustees hereby direct that a Certificate
of Trust be filed with Office of the Secretary of State of the State of Delaware
and do hereby declare that the Trustees will hold IN TRUST all cash, securities
and other assets which the Trust now possesses or may hereafter acquire from
time to time in any manner and manage and dispose of the same upon the following
terms and conditions for the pro rata benefit of the holders of Shares in this
Trust.
ARTICLE I
Name and Definitions
Section 1. Name. This Trust shall be known as METROPOLITAN
WEST FUNDS, and the Trustees shall conduct the business of the Trust under that
name or any other name as they may from time to time determine.
Section 2. Definitions. Whenever used herein, unless otherwise
required by the context or specifically provided:
(a) The "Trust" refers to the Delaware business trust
established by this Agreement and Declaration of Trust, as amended from time to
time;
(b) The "Trust Property" means any and all property, real or
personal, tangible or intangible, which is owned or held by or for the account
of the Trust, including without limitation the rights referenced in Article
VIII, Section 9 hereof;
(c) "Trustees" refers to the persons who have signed this
Agreement and Declaration of Trust, so long as they continue in office in
accordance with the terms hereof, and all other persons who may from time to
time be duly elected or appointed to serve on the Board of Trustees in
accordance with the provisions hereof, and reference herein to a Trustee or the
Trustees shall refer to such person or persons in their capacity as trustees
hereunder;
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<PAGE>
(d) "Shares" means the shares of beneficial interest into
which the beneficial interest in the Trust shall be divided from time to time
and includes fractions of Shares as well as whole Shares, and if the Shares of
any Series shall be divided into Classes, "Shares" means the Shares belonging to
a particular Class (as the context may require);
(e) "Shareholder" means a record owner of outstanding Shares;
(f) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures, estates and other entities,
whether or not legal entities, and governments and agencies and political
subdivisions thereof, whether domestic or foreign;
(g) The "Investment Company Act" refers to the Investment
Company Act of 1940 and the Rules and Regulations thereunder, all as amended
from time to time;
(h) The terms "Commission" and "Principal Underwriter" shall
have the meanings given them in the Investment Company Act;
(i) "Declaration of Trust" shall mean this Agreement and
Declaration of Trust, as amended or restated from time to time;
(i) "By-Laws" shall mean the By-Laws of the Trust as amended
from time to time and incorporated herein by reference;
(k) The term "Interested Person" has the meaning given it in
Section 2(a)(19) of the Investment Company Act;
(l) "Investment Adviser" or "Manager" means a party furnishing
services to the Trust pursuant to any contract described in Article IV, Section
7(a) hereof;
(m) "Series" refers to each Series of Shares established and
designated under or in accordance with the provisions of Article III;
(n) "Class" means a Class of Shares established and designated
under or in accordance with the provisions of Article III; and
(o) "Voting Interests" shall mean (i) the number of Shares
outstanding times net asset value per Share where two or more Series or Classes
of Shares of the Trust are voted in the aggregate or (ii) the number of Shares
of each Series or Class where Shareholders vote by separate Series or Classes.
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<PAGE>
ARTICLE II
Purpose of Trust
The purpose of the Trust is to conduct, operate and carry on
the business of a management investment company registered under the Investment
Company Act through one or more Series investing primarily in securities.
ARTICLE III
Shares
Section 1. Division of Beneficial Interest. The beneficial
interest in the Trust shall at all times be divided into an unlimited number of
Shares, with a par value of $.01 per Share. The Trustees may authorize the
division of Shares into separate Series and the division of Series into separate
Classes of Shares. The different Series and Classes shall be established and
designated, and the variations in the relative rights and preferences as between
the different Series and Classes shall be fixed and determined, by the Trustees.
If only one or no Series or Classes shall be established, the Shares shall have
the rights and preferences provided for herein and in Article III, Section 6
hereof to the extent relevant and not otherwise provided for herein, and all
references to Series (and Classes) shall be construed (as the context may
require) to refer to the Trust.
Subject to the provisions of Section 6 of this Article III,
each Share shall have voting rights as provided in Article V hereof, and holders
of the Shares of any Series shall be entitled to receive dividends when, if and
as declared with respect thereto in the manner provided in Article VI, Section 1
hereof. No Shares shall have any priority or preference over any other Share of
the same Series and Class with respect to dividends or distributions upon
termination of the Trust or of such Series or such Class made pursuant to
Article VIII, Section 4 hereof. All dividends and distributions shall be made
ratably among all Shareholders of a particular Class of a particular Series and,
if no Classes, of a particular Series from the assets held with respect to such
Series according to the number of Shares of such Class of such Series or of such
Series held of record by such Shareholder on the record date for any dividend or
distribution or on the date of termination, as the case may be. Shareholders
shall have no preemptive or other right to subscribe to any additional Shares or
other securities issued by the Trust or any Series, although the Trustees may
provide for the automatic conversion of one Class of Shares of a Series into
another Class of Shares of the same Series upon the occurrence of certain
specific events. The Trustees may from time to time divide or combine the Shares
of any particular Series or Class into a greater or lesser number of Shares of
that Series or Class without thereby materially changing the proportionate
beneficial
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<PAGE>
interest of the Shares of that Series or Class in the assets held with respect
to that Series or materially affecting the rights of Shares of any other Series
or Class.
Section 2. Ownership of Shares. The ownership of Shares shall
be recorded on the books of the Trust or a transfer or similar agent for the
Trust, which books shall be maintained separately for the Shares of each Series
or Class of each Series. No certificates certifying the ownership of Shares
shall be issued except as the Board of Trustees may otherwise determine from
time to time. The Trustees may make such rules as they consider appropriate for
the transfer of Shares of each Series or Class of each Series and similar
matters. The record books of the Trust as kept by the Trust or any transfer or
similar agent, as the case may be, shall be conclusive as to the identity of the
Shareholders of each Series or Class of each Series and as to the number of
Shares of each Series or Class held from time to time by each.
Section 3. Investments in the Trust. Investments may be
accepted by the Trust from such Persons, at such times, on such terms, and for
such consideration as the Trustees from time to time may authorize.
Section 4. Status of Shares and Limitation of Personal
Liability. Shares shall be deemed to be personal property giving only the rights
provided in this instrument. Every Shareholder, by virtue of having become a
Shareholder, shall be held to have expressly assented and agreed to the terms
hereof and to have become a party hereto. The death of a Shareholder during the
existence of the Trust shall not operate to terminate the Trust, nor entitle the
representative of any deceased Shareholder to an accounting or to take any
action in court or elsewhere against the Trust or the Trustees, but entitles
such representative only to the rights of said deceased Shareholder under this
Trust. Ownership of Shares shall not entitle the Shareholder to any title in or
to the whole or any part of the Trust Property or right to call for a partition
or division of the same or for an accounting, nor shall the ownership of Shares
constitute the Shareholders as partners. Neither the Trust nor the Trustees, nor
any officer, employee or agent of the Trust shall have any power to bind
personally any Shareholder, nor, except as specifically provided herein, to call
upon any Shareholder for the payment of any sum of money or assessment
whatsoever other than such as the Shareholder may at any time personally agree
to pay.
Section 5. Power of Board of Trustees to Change Provisions
Relating to Shares. Notwithstanding any other provision of this Declaration of
Trust and without limiting the power of the Board of Trustees to amend the
Declaration of Trust as provided elsewhere herein, the Board of Trustees shall
have the power to amend this Declaration of Trust, at any time and from time to
time, in such manner as the Board of Trustees may
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<PAGE>
determine in their sole discretion, without the need for Shareholder action, so
as to add to, delete, replace or otherwise modify any provisions relating to the
Shares contained in this Declaration of Trust, provided that before adopting any
such amendment without Shareholder approval the Board of Trustees shall
determine that it is consistent with the fair and equitable treatment of all
Shareholders or that Shareholder approval is not otherwise required by the
Investment Company Act or other applicable law. If Shares have been issued,
Shareholder approval shall be required to adopt any amendments to this
Declaration of Trust that would adversely affect to a material degree the rights
and preferences of the Shares of any Series or Class of any Series or to
increase or decrease the par value of the Shares of any Series or Class of any
Series.
Subject to the foregoing Paragraph, the Board of Trustees may
amend the Declaration of Trust to amend any of the provisions set forth in
paragraphs (a) through (i) of Section 6 of this Article III.
Section 6. Establishment and Designation of Series and
Classes. The establishment and designation of any Series or Class of Shares
shall be effective upon the resolution by a majority of the then Trustees,
adopting a resolution that sets forth such establishment and designation and the
relative rights and preferences of such Series or Class. Each such resolution
shall be incorporated herein by reference upon adoption.
Shares of each Series or Class established pursuant to this
Section 6, unless otherwise provided in the resolution establishing such Series,
shall have the following relative rights and preferences:
(a) Assets Held with Respect to a Particular Series. All
consideration received by the Trust for the issue or sale of Shares of a
particular Series, together with all assets in which such consideration is
invested or reinvested, all income, earnings, profits, and proceeds thereof from
whatever source derived, including, without limitation, any proceeds derived
from the sale, exchange or liquidation of such assets, and any funds or payments
derived from any reinvestment of such proceeds in whatever form the same may be,
shall irrevocably be held with respect to that Series for all purposes, subject
only to the rights of creditors, and shall be so recorded upon the books of
account of the Trust. Such consideration, assets, income, earnings, profits and
proceeds thereof, from whatever source derived, including, without limitation,
any proceeds derived from the sale, exchange or liquidation of such assets, and
any funds or payments derived from any reinvestment of such proceeds, in
whatever form the same may be, are herein referred to as "assets held with
respect to" that Series. In the event that there are any assets, income,
earnings, profits and proceeds thereof, funds or payments which are not readily
identifiable as assets held with respect to any particular Series (collectively
"General
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<PAGE>
Assets"), the Trustees shall allocate such General Assets to, between or among
any one or more of the Series in such manner and on such basis as the Trustees,
in their sole discretion, deem fair and equitable, and any General Asset so
allocated to a particular Series shall be held with respect to that Series. Each
such allocation by the Trustees shall be conclusive and binding upon the
Shareholders of all Series for all purposes.
(b) Liabilities Held With Respect to a Particular Series or
Class. The assets of the Trust held with respect to each particular Series shall
be charged against the liabilities of the Trust held with respect to that Series
and all expenses, costs, charges and reserves attributable to that Series.
Specific Classes within each Series shall be charged with the liabilities,
expenses, costs, charges and reserves attributable to that Class. Any general
liabilities of the Trust which are not readily identifiable as being held with
respect to any particular Series, or within a Series, to any particular Class
shall be allocated and charged by the Trustees to and among any one or more of
the Series or Classes in such manner and on such basis as the Trustees in their
sole discretion deem fair and equitable. The liabilities, expenses, costs,
charges, and reserves so charged to a Series or Class are herein referred to as
"liabilities held with respect to" that Series or Class. Each allocation of
liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the holders of all Series and Classes for all
purposes. All Persons who have extended credit which has been allocated to a
particular Series, or who have a claim or contract which has been allocated to
any particular Series, shall look, and shall be required by contract to look
exclusively, to the assets of that particular Series for payment of such credit,
claim, or contract. In the absence of an express contractual agreement so
limiting the claims of such creditors, claimants and contract providers, each
creditor, claimant and contract provider will be deemed nevertheless to have
impliedly agreed to such limitation unless an express provision to the contrary
has been incorporated in the written contract or other document establishing the
claimant relationship.
(c) Dividends, Distributions, Redemptions and Repurchases.
Notwithstanding any other provisions of this Declaration of Trust, including,
without limitation, Article VI, no dividend or distribution including, without
limitation, any distribution paid upon termination of the Trust or of any Series
or Class with respect to, nor any redemption or repurchase of, the Shares of any
Series or Class shall be effected by the Trust other than from the assets held
with respect to such Series, nor, except as specifically provided in Section 7
of this Article III, shall any Shareholder of any particular Series or Class
within such Series otherwise have any right or claim against the assets held
with respect to any other Series except to the extent that such Shareholder has
such a right or claim hereunder as a Shareholder of such other Series. The
Trustees shall have full
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<PAGE>
discretion, to the extent not inconsistent with the Investment Company Act, to
determine which items shall be treated as income and which items as capital; and
each such determination and allocation shall be conclusive and binding upon the
Shareholders.
(d) Voting. All Shares of the Trust entitled to vote on a
matter shall vote separately by Series (and, if applicable, by Class): that is,
the Shareholders of each Series or Class shall have the right to approve or
disapprove matters affecting the Trust and each respective Series or Class as if
the Series or Classes were separate companies. There are, however, two
exceptions to voting by separate Series or Classes. First, if the Investment
Company Act requires all Shares of the Trust to be voted in the aggregate
without differentiation between the separate Series or Classes, then all the
Trust's Shares shall be entitled to vote based on the dollar value of their
Shares as described below in Article V, Section 1. Second, if any matter affects
only the interests of some but not all Series or Classes, then only the
Shareholders of such affected Series or Classes shall be entitled to vote on the
matter.
(e) Equality. All the Shares of each particular Series shall
represent an equal proportionate interest in the assets held with respect to
that Series (subject to the liabilities held with respect to particular Classes
within that Series and such rights and preferences as may have been established
and designated with respect to Classes of Shares within such Series), and,
except for rights and preference among Classes, each Share of any particular
Series shall be equal to each other Share of that Series.
(f) Fractions. Any fractional Share of a Series or Class shall
carry proportionately all the rights and obligations of a whole share of that
Series, including rights with respect to voting, receipt of dividends and
distributions, redemption of Shares and termination of the Trust.
(g) Exchange Privilege. The Trustees shall have the authority
to provide that the holders of Shares of any Series and Class shall have the
right to exchange said Shares for Shares of one or more other Series of Shares
or Classes of the same Series in accordance with such requirements and
procedures as may be established by the Trustees.
(h) Combination of Series. The Trustees shall have the
authority, without the approval of the Shareholders of any Series unless
otherwise required by applicable law, to combine the assets and liabilities held
with respect to any two or more Series or Classes into assets and liabilities
held with respect to a single Series or Class.
(i) Elimination of Series. At any time that there are no
Shares outstanding of any particular Series or Class previously established and
designated, the Trustees may by
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<PAGE>
resolution of a majority of the then Trustees abolish that Series or Class and
rescind the establishment and designation thereof.
Section 7. Indemnification of Shareholders. If any Shareholder
or former Shareholder shall be exposed to liability by reason of a claim or
demand relating to his or her being or having been a Shareholder, and not
because of his or her acts or omissions, the Shareholder or former Shareholder
(or his or her heirs, executors, administrators, or other legal representatives
or in the case of a corporation or other entity, its corporate or other general
successor) shall be entitled to be held harmless from and indemnified out of the
assets of the applicable Series of the Trust against all loss and expense
arising from such claim or demand.
ARTICLE IV
The Board of Trustees
Section 1. Number, Election and Tenure. The number of Trustees
constituting the Board of Trustees shall be fixed from time to time by a written
instrument signed, or by resolution approved at a duly constituted meeting, by a
majority of the Board of Trustees, provided, however, that the number of
Trustees shall in no event be fewer than one (1) nor more than fifteen (15). The
Board of Trustees, by action of a majority of the then Trustees at a duly
constituted meeting, may fill vacancies in the Board of Trustees or remove
Trustees with or without cause. Each Trustee shall serve during the continued
lifetime of the Trust until he or she dies, resigns, is declared bankrupt or
incompetent by a court of appropriate jurisdiction, or is removed, or, if
sooner, until the next meeting of Shareholders called for the purpose of
electing Trustees and until the election and qualification of his or her
successor. Any Trustee may resign at any time by written instrument signed by
him or her and delivered to any officer of the Trust or to a meeting of the
Trustees. Such resignation shall be effective upon receipt unless specified to
be effective at some other time. Except to the extent expressly provided in a
written agreement with the Trust, no Trustee resigning and no Trustee removed
shall have any right to any compensation for any period following his or her
resignation or removal, or any right to damages on account of such removal. The
Shareholders may fix the number of Trustees and elect Trustees at any meeting of
Shareholders called by the Trustees for that purpose. Any Trustee may be removed
at any meeting of Shareholders by a vote of two-thirds of the Voting Interests
of the Trust as defined in Article I, Section 2(n). A meeting of Shareholders
for the purpose of electing or removing one or more Trustees may be called (i)
by the Trustees upon their own vote, or (ii) upon the demand of Shareholders
owning 10% or
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<PAGE>
more of the Voting Interests of the Trust as defined in Article I, Section 2(n).
Section 2. Effect of Death, Resignation, etc. of a Trustee.
The death, declination, resignation, retirement, removal, or incapacity of one
or more Trustees, or all of them, shall not operate to annul the Trust or to
revoke any existing agency created pursuant to the terms of this Declaration of
Trust. Whenever a vacancy in the Board of Trustees shall occur, until such
vacancy is filled as provided in Article IV, Section l, the Trustees in office,
regardless of their number, shall have all the powers granted to the Trustees
and shall discharge all the duties imposed upon the Trustees by this Declaration
of Trust. As conclusive evidence of such vacancy, a written instrument
certifying the existence of such vacancy may be executed by an officer of the
Trust or by a majority of the Board of Trustees. In the event of the death,
declination, resignation, retirement, removal, or incapacity of all the then
Trustees within a short period of time and without the opportunity for at least
one Trustee being able to appoint additional Trustees to fill vacancies, the
Trust's Investment Adviser(s) are empowered to appoint new Trustees subject to
the provisions of Section 16(a) of the Investment Company Act.
Section 3. Powers. Subject to the provisions of this
Declaration of Trust, the business of the Trust shall be managed by the Board of
Trustees, and such Board shall have all powers necessary or convenient to carry
out that responsibility, including the power to engage in securities
transactions of all kinds on behalf of the Trust. Without limiting the
foregoing, the Trustees may: adopt By-Laws not inconsistent with this
Declaration of Trust providing for the regulation and management of the affairs
of the Trust and may amend and repeal them to the extent that such By-Laws do
not reserve that right to the Shareholders; fill vacancies in or remove from
their number, and may elect and remove such officers and appoint and terminate
such agents as they consider appropriate; appoint from their own number and
establish and terminate one or more committees consisting of one or more
Trustees, which may exercise the powers and authority of the Board of Trustees
to the extent that the Trustees determine; employ one or more custodians of the
assets of the Trust and may authorize such custodians to employ subcustodians
and to deposit all or any part of such assets in a system or systems for the
central handling of securities or with a Federal Reserve Bank; retain an
administrator and a portfolio adviser for each Series of Shares; retain a
transfer agent or a shareholder servicing agent, or both; provide for the
issuance and distribution of Shares by the Trust directly or through one or more
Principal Underwriters or otherwise; redeem, repurchase and transfer Shares
pursuant to applicable law; set record dates for the determination of
Shareholders with respect to various matters; declare and pay dividends and
distributions to Shareholders of each Series from the assets of such Series;
and, in general, delegate such authority as they consider desirable to
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<PAGE>
any officer of the Trust, to any committee of the Trustees and to any agent or
employee of the Trust or to any such custodian, transfer or shareholder
servicing agent, or Principal Underwriter. Any determination as to what is in
the interests of the Trust made by the Trustees in good faith shall be
conclusive. In construing the provisions of this Declaration of Trust, the
presumption shall be in favor of a grant of power to the Trustees. Unless
otherwise specified or required by law, any action by the Board of Trustees
shall be deemed effective if approved or taken by a majority of the Trustees
then in office.
Without limiting the foregoing, the Trust shall have power and
authority:
(a) To invest and reinvest cash, to hold cash uninvested, and
to subscribe for, invest in, reinvest in, purchase or otherwise acquire, own,
hold, pledge, sell, assign, transfer, exchange, distribute, write options on,
lend or otherwise deal in or dispose of contracts for the future acquisition or
delivery of fixed income or other securities, and securities of every nature and
kind, including, without limitation, all types of bonds, debentures, stocks,
negotiable or non-negotiable instruments, obligations, evidences of
indebtedness, certificates of deposit or indebtedness, commercial paper,
repurchase agreements, bankers' acceptances, and other securities of any kind,
issued, created, guaranteed, or sponsored by any and all Persons, including,
without limitation, states, territories, and possessions of the United States
and the District of Columbia and any political subdivision, agency, or
instrumentality thereof, any foreign government or any political subdivision of
the U.S. Government or any foreign government, or any international
instrumentality, or by any bank or savings institution, or by any corporation or
organization organized under the laws of the United States or of any state,
territory, or possession thereof, or by any corporation or organization
organized under any foreign law, or in "when issued" contracts for any such
securities, to change the investments of the assets of the Trust; and to
exercise any and all rights, powers, and privileges of ownership or interest in
respect of any and all such investments of every kind and description,
including, without limitation, the right to consent and otherwise act with
respect thereto, with power to designate one or more Persons, to exercise any of
said rights, powers, and privileges in respect of any of said instruments;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate,
lease, or write options with respect to or otherwise deal in any property rights
relating to any or all of the assets of the Trust or any Series;
(c) To vote or give assent, or exercise any rights of
ownership, with respect to stock or other securities or property; and to execute
and deliver proxies or powers of attorney to such person or persons as the
Trustees shall deem proper, granting to
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such person or persons such power and discretion with relation to securities or
property as the Trustees shall deem proper;
(d) To exercise powers and right of subscription or otherwise
which in any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating
any trust, whether in bearer, unregistered or other negotiable form, or in its
own name or in the name of a custodian or subcustodian or a nominee or nominees
or otherwise;
(f) To consent to or participate in any plan for the
reorganization, consolidation or merger of any corporation or issuer of any
security which is held in the Trust; to consent to any contract, lease,
mortgage, purchase or sale of property by such corporation or issuer; and to pay
calls or subscriptions with respect to any security held in the Trust;
(g) To join with other security holders in acting through a
committee, depositary, voting trustee or otherwise, and in that connection to
deposit any security with, or transfer any security to, any such committee,
depositary or trustee, and to delegate to them such power and authority with
relation to any security (whether or not so deposited or transferred) as the
Trustees shall deem proper, and to agree to pay, and to pay, such portion of the
expenses and compensation of such committee, depositary or trustee as the
Trustees shall deem proper;
(h) To compromise, arbitrate or otherwise adjust claims in
favor of or against the Trust or any matter in controversy, including but not
limited to claims for taxes;
(i) To enter into joint ventures, general or limited
partnerships and any other combinations or associations;
(j) To borrow funds or other property in the name of the Trust
exclusively for Trust purposes;
(k) To endorse or guarantee the payment of any notes or other
obligations of any Person; to make contracts of guaranty or suretyship, or
otherwise assume liability for payment thereof;
(l) To purchase and pay for entirely out of Trust Property
such insurance as the Trustees may deem necessary or appropriate for the conduct
of the business, including, without limitation, insurance policies insuring the
assets of the Trust or payment of distributions and principal on its portfolio
investments, and insurance policies insuring the Shareholders, Trustees,
officers, employees, agents, investment advisers, principal underwriters, or
independent contractors of the Trust, individually against all claims and
liabilities of every nature
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arising by reason of holding Shares, holding, being or having held any such
office or position, or by reason of any action alleged to have been taken or
omitted by any such Person as Trustee, officer, employee, agent, investment
adviser, principal underwriter, or independent contractor, including any action
taken or omitted that may be determined to constitute negligence, whether or not
the Trust would have the power to indemnify such Person against liability; and
(m) To adopt, establish and carry out pension, profit-sharing,
share bonus, share purchase, savings, thrift and other retirement, incentive and
benefit plans, trusts and provisions, including the purchasing of life insurance
and annuity contracts as a means of providing such retirement and other
benefits, for any or all of the Trustees, officers, employees and agents of the
Trust.
The Trust shall not be limited to investing in obligations
maturing before the possible termination of the Trust or one or more of its
Series. The Trust shall not in any way be bound or limited by any present or
future law or custom in regard to investment by fiduciaries. The Trust shall not
be required to obtain any court order to deal with any assets of the Trust or
take any other action hereunder.
Section 4. Payment of Expenses by the Trust. The Trustees are
authorized to pay or cause to be paid out of the principal or income of the
Trust, or partly out of the principal and partly out of income, as they deem
fair, all expenses, fees, charges, taxes and liabilities incurred or arising in
connection with the Trust, or in connection with the management thereof,
including, but not limited to, the Trustees' compensation and such expenses and
charges for the services of the Trust's officers, employees, investment adviser
or manager, principal underwriter, auditors, counsel, custodian, transfer agent,
Shareholder servicing agent, and such other agents or independent contractors
and such other expenses and charges as the Trustees may deem necessary or proper
to incur.
Section 5. Payment of Expenses by Shareholders. The Trustees
shall have the power, as frequently as they may determine, to cause each
Shareholder, or each Shareholder of any particular Series, to pay directly, in
advance or arrears, for charges of the Trust's custodian or transfer,
Shareholder servicing or similar agent, an amount fixed from time to time by the
Trustees, by setting off such charges due from such Shareholder from declared
but unpaid dividends owed such Shareholder and/or by reducing the number of
shares in the account of such Shareholder by that number of full and/or
fractional Shares which represents the outstanding amount of such charges due
from such Shareholder.
Section 6. Ownership of Assets of the Trust. Title to all of
the assets of the Trust shall at all times be considered
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as vested in the Trust, except that the Trustees shall have power to cause legal
title to any Trust Property to be held by or in the name of one or more of the
Trustees, or in the name of the Trust, or in the name of any other Person as
nominee, on such terms as the Trustees may determine. The right, title and
interest of the Trustees in the Trust Property shall vest automatically in each
Person who may hereafter become a Trustee. Upon the resignation, removal or
death of a Trustee, he or she shall automatically cease to have any right, title
or interest in any of the Trust Property, and the right, title and interest of
such Trustee in the Trust Property shall vest automatically in the remaining
Trustees. Such vesting and cessation of title shall be effective whether or not
conveyancing documents has been executed and delivered.
Section 7. Service Contracts.
(a) Subject to such requirements and restrictions as may be
set forth in the By-Laws, the Trustees may, at any time and from time to time,
contract for exclusive or nonexclusive advisory, management and/or
administrative services for the Trust or for any Series with any corporation,
trust, association or other organization; and any such contract may contain such
other terms as the Trustees may determine, including without limitation,
authority for the Investment Adviser or administrator to determine from time to
time without prior consultation with the Trustees what investments shall be
purchased, held, sold or exchanged and what portion, if any, of the assets of
the Trust shall be held uninvested and to make changes in the Trust's
investments, or such other activities as may specifically be delegated to such
party.
(b) The Trustees may also, at any time and from time to time,
contract with any corporation, trust, association or other organization,
appointing it exclusive or nonexclusive distributor or Principal Underwriter for
the Shares of one or more of the Series or Classes or other securities to be
issued by the Trust. Every such contract shall comply with such requirements and
restrictions as may be set forth in the By-Laws; and any such contract may
contain such other terms as the Trustees may determine.
(c) The Trustees are also empowered, at any time and from time
to time, to contract with any corporations, trusts, associations or other
organizations, appointing it or them the custodian, transfer agent and/or
shareholder servicing agent for the Trust or one or more of its Series. Every
such contract shall comply with such requirements and restrictions as may be set
forth in the By-Laws or stipulated by resolution of the Trustees.
(d) The Trustees are further empowered, at any time and from
time to time, to contract with any entity to provide such other services to the
Trust or one or more of the Series, as
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the Trustees determine to be in the best interests of the Trust and the
applicable Series.
(e) The fact that:
(i) any of the Shareholders, Trustees, or officers of
the Trust is a shareholder, director, officer, partner,
trustee, employee, investment adviser, manager, principal
underwriter, distributor, or affiliate or agent of or for any
corporation, trust, association, or other organization, or for
any parent or affiliate of any organization with which an
advisory, management or administration contract, or principal
underwriter's or distributor's contract, or transfer,
shareholder servicing or other type of service contract may
have been or may hereafter be made, or that any such
organization, or any parent or affiliate thereof, is a
Shareholder or has an interest in the Trust, or
(ii) any corporation, trust, association or other
organization with which an advisory, management or
administration contract or principal underwriter's or
distributor's contract, or transfer, shareholder servicing or
other type of service contract may have been or may hereafter
be made also has an advisory, management or administration
contract, or principal underwriter's or distributor's
contract, or transfer, shareholder servicing or other service
contract with one or more other corporations, trusts,
associations, or other organizations, or has other business or
interests,
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same, or create any liability or accountability to the Trust or its
Shareholders, provided approval of each such contract is made pursuant to the
requirements of the Investment Company Act.
ARTICLE V
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers. Subject to the provisions of Article
III, Section 6(d), the Shareholders shall have power to vote only (i) for the
election or removal of Trustees as provided in Article IV, Section 1, and (ii)
with respect to such additional matters relating to the Trust as may be required
by this Declaration of Trust, the By-Laws or any registration of the Trust with
the Commission (or any successor agency) or any state, or as the Trustees may
consider necessary or desirable. As appropriate, voting may be by Series or
Class. A Shareholder of
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each Series shall be entitled to one vote for each dollar of net asset value
(number of Shares owned times net asset value per Share) per Share of such
Series, on any matter on which such Shareholder is entitled to vote and each
fractional dollar amount shall be entitled to a proportionate fractional vote.
There shall be no cumulative voting in the election of Trustees. Shares may be
voted in person or by proxy. A proxy with respect to Shares held in the name of
two or more persons shall be valid if executed by any one of them unless at or
prior to exercise of the proxy the Trust receives a specific written notice to
the contrary from any one of them. A proxy purporting to be executed by or on
behalf of a Shareholder shall be deemed valid unless challenged at or prior to
its exercise and the burden of proving invalidity shall rest on the challenger.
Section 2. Voting Power and Meetings. Meetings of the
Shareholders may be called by the Trustees for the purpose of electing Trustees
as provided in Article IV, Section l and for such other purposes as may be
prescribed by law, by this Declaration of Trust or by the By-Laws. Meetings of
the Shareholders may also be called by the Trustees from time to time for the
purpose of taking action upon any other matter deemed by the Trustees to be
necessary or desirable. A meeting of Shareholders may be held at any place
designated by the Trustees. Written notice of any meeting of Shareholders shall
be given or caused to be given by the Trustees by mailing such notice at least
seven (7) days before such meeting, postage prepaid, stating the time and place
of the meeting, to each Shareholder at the Shareholder's address as it appears
on the records of the Trust. Whenever notice of a meeting is required to be
given to a Shareholder under this Declaration of Trust or the By-Laws, a written
waiver thereof, executed before or after the meeting by such Shareholder or his
or her attorney thereunto authorized and filed with the records of the meeting,
shall be deemed equivalent to such notice.
Section 3. Quorum and Required Vote. Except when a larger
quorum is required by applicable law, by the By-Laws or by this Declaration of
Trust, forty percent (40%) of the Voting Interests, as defined in Article I,
Section 2(o), entitled to vote shall constitute a quorum at a Shareholders'
meeting. When any one or more Series or Classes is to vote as a single Class
separate from any other Shares, forty percent (40%) of the Shares of each such
Series or Class entitled to vote shall constitute a quorum at a Shareholder's
meeting of that Series. Any meeting of Shareholders may be adjourned from time
to time by a majority of the Voting Interests, as defined in Article I, Section
2(o), properly cast upon the question of adjourning a meeting to another date
and time, whether or not a quorum is present, and the meeting may be held as
adjourned within a reasonable time after the date set for the original meeting
without further notice. Subject to the provisions of Article III, Section 6(d),
when a quorum is present at any meeting, a majority of the Voting Interests, as
defined in Article I, Section 2(o), voted shall
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decide any questions and a plurality shall elect a Trustee, except when a larger
vote is required by any provision of this Declaration of Trust or the By-Laws or
by applicable law.
Section 4. Action by Written Consent. Any action taken by
shareholders may be taken without a meeting if Shareholders holding a majority
of the Voting Interests, as defined in Article I, Section 2(o), entitled to vote
on the matter (or such larger proportion thereof as shall be required by any
express provision of this Declaration of Trust or by the By-Laws or by
applicable law) and holding a majority (or such larger proportion as aforesaid)
of the Shares of any Series or Class entitled to vote separately on the matter
consent to the action in writing and such written consents are filed with the
records of the meetings of Shareholders. Such consent shall be treated for all
purposes as a vote taken at a meeting of Shareholders.
Section 5. Record Dates. For the purpose of determining the
Shareholders of any Series or Class who are entitled to vote or act at any
meeting or any adjournment thereof, the Trustees may from time to time fix a
time, which shall be not more than ninety (90) days before the date of any
meeting of Shareholders, as the record date for determining the Shareholders of
such Series or Class having the right to notice of and to vote at such meeting
and any adjournment thereof, and in such case only Shareholders of record on
such record date shall have such right, notwithstanding any transfer of shares
on the books of the Trust after the record date. For the purpose of determining
the Shareholders of any Series or Class who are entitled to receive payment of
any dividend or of any other distribution, the Trustees may from time to time
fix a date, which shall be before the date for the payment of such dividend or
such other payment, as the record date for determining the Shareholders of such
Series or Class having the right to receive such dividend or distribution.
Without fixing a record date the Trustees may for voting and/or distribution
purposes close the register or transfer books for one or more Series for all or
any part of the period between a record date and a meeting of Shareholders or
the payment of a distribution. Nothing in this Section shall be construed as
precluding the Trustees from setting different record dates for different Series
or Classes.
Section 6. Additional Provisions. The By-Laws may include
further provisions for Shareholders' votes and meetings and related matters.
ARTICLE VI
Net Asset Value, Distributions and Redemptions
Section 1. Determination of Net Asset Value, Net Income and
Distributions. Subject to Article III, Section 6 hereof, the Trustees, in their
absolute discretion, may prescribe
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and shall set forth in the By-laws or in a duly adopted vote of the Trustees
such bases and time for determining the per-Share net asset value of the Shares
of any Series and Class or net income attributable to the Shares of any Series
and Class, or the declaration and payment of dividends and distributions on the
Shares of any Series and Class, as they may deem necessary or desirable.
Section 2. Redemptions and Repurchases. The Trust shall
purchase such Shares as are offered by any Shareholder for redemption, upon the
presentation of a proper instrument of transfer together with a request directed
to the Trust or a Person designated by the Trust that the Trust purchase such
Shares or in accordance with such other procedures for redemption as the
Trustees may from time to time authorize; and the Trust will pay therefor the
net asset value thereof, in accordance with the By-Laws and applicable law.
Payment for said Shares shall be made by the Trust to the Shareholder within
seven days after the date on which the request is made in proper form. The
obligation set forth in this Section 2 is subject to the provision that in the
event that any time the New York Stock Exchange (the "Exchange") is closed for
other than weekends or holidays, or if permitted by the Rules of the Commission
during periods when trading on the Exchange is restricted or during any
emergency which makes it impracticable for the Trust to dispose of the
investments of the applicable Series or to determine fairly the value of the net
assets held with respect to such Series or during any other period permitted by
order of the Commission for the protection of investors, such obligations may be
suspended or postponed by the Trustees.
The redemption price may in any case or cases be paid wholly
or partly in kind if the Trustees determine that such payment is advisable in
the interest of the remaining Shareholders of the Series for which the Shares
are being redeemed. Subject to the foregoing, the fair value, selection and
quantity of securities or other property so paid or delivered as all or part of
the redemption price may be determined by or under authority of the Trustees. In
no case shall the Trust be liable for any delay of any corporation or other
Person in transferring securities selected for delivery as all or part of any
payment in kind.
Section 3. Redemptions at the Option of the Trust. The Trust
shall have the right, at its option and at any time, to redeem Shares of any
Shareholder at the net asset value thereof as described in Section 1 of this
Article VI: (i) if at such time such Shareholder owns Shares of any Series
having an aggregate net asset value of less than an amount determined from time
to time by the Trustees prior to the acquisition of said Shares; or (ii) to the
extent that such Shareholder owns Shares of a particular Series equal to or in
excess of a percentage of the outstanding Shares of that Series determined from
time to time by the Trustees; or (iii) to the extent that such Shareholder owns
Shares equal to or in excess of a percentage, determined from
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time to time by the Trustees, of the outstanding Shares of the Trust or of any
Series.
ARTICLE VII
Compensation and Limitation of Liability of Trustees
Section 1. Compensation. The Trustees as such shall be
entitled to reasonable compensation from the Trust, and they may fix the amount
of such compensation. Nothing herein shall in any way prevent the employment of
any Trustee for advisory, management, legal, accounting, investment banking or
other services and payment for the same by the Trust.
Section 2. Indemnification and Limitation of Liability. The
Trustees shall not be responsible or liable in any event for any neglect or
wrong-doing of any officer, agent, employee, Investment Adviser or principal
underwriter of the Trust, nor shall any Trustee be responsible for the act or
omission of any other Trustee, and the Trust out of its assets shall indemnify
and hold harmless each and every Trustee from and against any and all claims and
demands whatsoever arising out of or related to each Trustee's performance of
his or her duties as a Trustee of the Trust; provided that nothing herein
contained shall indemnify, hold harmless or protect any Trustee from or against
any liability to the Trust or any Shareholder to which he or she would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
Every note, bond, contract, instrument, certificate or
undertaking and every other act or thing whatsoever issued, executed or done by
or on behalf of the Trust or the Trustees or any of them in connection with the
Trust shall be conclusively deemed to have been issued, executed or done only in
or with respect to their or his or her capacity as Trustees or Trustee, and such
Trustees or Trustee shall not be personally liable thereon.
Section 3. Trustee's Good Faith Action, Expert Advice, No Bond
or Surety. The exercise by the Trustees of their powers and discretion hereunder
shall be binding upon everyone interested. A Trustee shall be liable to the
Trust and to any Shareholder solely for his or her own willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee, and shall not be liable for errors of judgment
or mistakes of fact or law. The Trustees may take advice of counsel or other
experts with respect to the meaning and operation of this Declaration of Trust,
and shall be under no liability for any act or omission in accordance with such
advice nor for failing to follow such advice. The Trustees shall not be required
to give any bond as such, nor any surety if a bond is required.
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Section 4. Insurance. The Trustees shall be entitled and
empowered to the fullest extent permitted by law to purchase with Trust assets
insurance for liability and for all expenses reasonably incurred or paid or
expected to be paid by a Trustee or officer in connection with any claim,
action, suit or proceeding in which he or she becomes involved by virtue of his
or her capacity or former capacity with the Trust.
ARTICLE VIII
Miscellaneous
Section 1. Liability of Third Persons Dealing with Trustees.
No Person dealing with the Trustees shall be bound to make any inquiry
concerning the validity of any transaction made or to be made by the Trustees or
to see to the application of any payments made or property transferred to the
Trust or upon its order.
Section 2. Termination of Trust, Series or Class. Unless
terminated as provided herein, the Trust shall continue without limitation of
time. The Trust may be terminated at any time by vote of a majority of the
Shares of each Series entitled to vote, voting separately by Series, or by the
Trustees by written notice to the Shareholders. Any Series or Class (in the case
of a proposed termination of a Class) may be terminated at any time by vote of a
majority of the Shares of that Series or by the Trustees by written notice to
the Shareholders of that Series or Class.
Upon termination of the Trust (or any Series or Class, as the
case may be), after paying or otherwise providing for all charges, taxes,
expenses and liabilities held, severally, with respect to each Series and Class
(or the applicable Series or Class, as the case may be), whether due or accrued
or anticipated as may be determined by the Trustees, the Trust shall, in
accordance with such procedures as the Trustees consider appropriate, reduce the
remaining assets held, severally, with respect to each Series and Class (or the
applicable Series or Class, as the case may be), to distributable form in cash
or shares or other securities, or any combination thereof, and distribute the
proceeds held with respect to each Series and Class (or the applicable Series or
Class, as the case may be), to the Shareholders of that Series or Class, as a
Series or Class, ratably according to the number of Shares of that Series or
Class held by the several Shareholders on the date of termination.
Section 3. Merger and Consolidation. The Trustees may cause
(i) the Trust or one or more of its Series or Classes to the extent consistent
with applicable law to be merged into or consolidated with another trust or
company, (ii) the Shares of the Trust or any Series to be converted into
beneficial interests
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in another business trust (or series thereof) created pursuant to this Section 3
of Article VIII, or (iii) the Shares to be exchanged under or pursuant to any
state or federal statute to the extent permitted by law. Such merger or
consolidation, Share conversion or Share exchange must be authorized by vote of
a majority of the Voting Interests of the Trust, as defined in Article I,
Section 2(o), as a whole, or any affected Series, as may be applicable; provided
that in all respects not governed by statute or applicable law, the Trustees
shall have the power to prescribe the procedure necessary or appropriate to
accomplish a sale of assets, merger or consolidation including the power to
create one or more separate business trusts to which all or any part of the
assets, liabilities, profits or losses of the Trust may be transferred and to
provide for the conversion of Shares of the Trust or any Series into beneficial
interests in such separate business trust or trusts (or series thereof).
Section 4. Amendments. This Declaration of Trust may be
restated and/or amended at any time by an instrument in writing signed by a
majority of the then Trustees and, if required, by approval of such amendment by
Shareholders in accordance with Article V, Section 3 hereof. Any such
restatement and/or amendment hereto shall be effective immediately upon
execution and approval. The Certificate of Trust of the Trust may be restated
and/or amended by a similar procedure, and any such restatement and/or amendment
shall be effective immediately upon filing with the Office of the Secretary of
State of the State of Delaware or upon such future date as may be stated
therein.
Section 5. Filing of Copies, References, Headings. The
original or a copy of this instrument and of each restatement and/or amendment
hereto shall be kept at the office of the Trust where it may be inspected by any
Shareholder. Anyone dealing with the Trust may rely on a certificate by an
officer of the Trust as to whether or not any such restatements and/or
amendments have been made and as to any matters in connection with the Trust
hereunder; and, with the same effect as if it were the original, may rely on a
copy certified by an officer of the Trust to be a copy of this instrument or of
any such restatements and/or amendments. In this instrument and in any such
restatements and/or amendment, references to this instrument, and all
expressions like "herein," "hereof" and "hereunder," shall be deemed to refer to
this instrument as amended or affected by any such restatements and/or
amendments. Headings are placed herein for convenience of reference only and
shall not be taken as a part hereof or control or affect the meaning,
construction or effect of this instrument. Whenever the singular number is used
herein, the same shall include the plural; and the neuter, masculine and
feminine genders shall include each other, as applicable. This instrument may be
executed in any number of counterparts each of which shall be deemed an
original.
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Section 6. Applicable Law. This Agreement and Declaration of
Trust is created under and is to be governed by and construed and administered
according to the laws of the State of Delaware and the Delaware Business Trust
Act, as amended from time to time (the "Act"). The Trust shall be a Delaware
business trust pursuant to such Act, and without limiting the provisions hereof,
the Trust may exercise all powers which are ordinarily exercised by such a
business trust.
Section 7. Provisions in Conflict with Law or Regulations.
(a) The provisions of the Declaration of Trust are
severable, and if the Trustees shall determine, with the advice of counsel, that
any of such provisions is in conflict with the Investment Company Act, the
regulated investment company provisions of the Internal Revenue Code or with
other applicable laws and regulations, the conflicting provision shall be deemed
never to have constituted a part of the Declaration of Trust; provided, however,
that such determination shall not affect any of the remaining provisions of the
Declaration of Trust or render invalid or improper any action taken or omitted
prior to such determination.
(b) If any provision of the Declaration of Trust shall be
held invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such jurisdiction and
shall not in any manner affect such provision in any other jurisdiction or any
other provision of the Declaration of Trust in any jurisdiction.
Section 8. Business Trust Only. It is the intention of the
Trustees to create a business trust pursuant to the Delaware Business Trust Act,
as amended from time to time (the "Act"), and thereby to create only the
relationship of trustee and beneficial owners within the meaning of such Act
between the Trustees and each Shareholder. It is not the intention of the
Trustees to create a general partnership, limited partnership, joint stock
association, corporation, bailment, or any form of legal relationship other than
a business trust pursuant to such Act. Nothing in this Declaration of Trust
shall be construed to make the Shareholders, either by themselves or with the
Trustees, partners or members of a joint stock association.
Section 9. Use of the Identifying Words "Metropolitan West"
and Related Phrases. The identifying words "Metropolitan West" and all rights to
the use of such identifying words belong to Metropolitan West Securities, Inc.
Metropolitan West Securities, Inc. has licensed the Trust to use the identifying
words "Metropolitan West" in the Trust's name and to use the identifying words
"Metropolitan West" in the name of any series of the Trust. If Metropolitan West
Asset Management LLC or another affiliate of Metropolitan West Securities, Inc.
is not appointed or ceases to be the Investment Adviser for the Trust,
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the non-exclusive license may be revoked by Metropolitan West Securities, Inc.,
and the Trust and any series thereof shall respectively cease using the
identifying words "Metropolitan West" and related derivative phrases such as
"MetroWest" unless otherwise consented to by Metropolitan West Securities, Inc.
or any successor to Metropolitan West Securities, Inc.'s interest.
[REMAINDER OF PAGE LEFT BLANK]
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IN WITNESS WHEREOF, the initial Trustee named below does hereby make
and enter into this Declaration of Trust as of the 9th day of December 1996.
Scott Dubchansky
10880 Wilshire Boulevard
Suite 2020
Los Angeles, California 90024
THE PRINCIPAL PLACE OF BUSINESS OF THE TRUST IS 10880 WILSHIRE BOULEVARD, SUITE
2020, LOS ANGELES, CALIFORNIA 90024.
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EXHIBIT 2
By-Laws
<PAGE>
BY-LAWS
for the regulation, except as
otherwise provided by statute or in
the Agreement and Declaration of Trust, of
METROPOLITAN WEST FUNDS
a Delaware Business Trust
(as of December 9th, 1996)
<PAGE>
TABLE OF CONTENTS
BY-LAWS
METROPOLITAN WEST FUNDS
Page
----
ARTICLE I OFFICES ..........................................1
Section 1. PRINCIPAL OFFICE........................................1
Section 2. DELAWARE OFFICE.........................................1
Section 3. OTHER OFFICES ..........................................1
ARTICLE II MEETINGS OF SHAREHOLDERS....................................1
Section 1. PLACE OF MEETINGS.......................................1
Section 2. CALL OF MEETING.........................................1
Section 3. NOTICE OF SHAREHOLDERS' MEETING.........................1
Section 4. MANNER OF GIVING NOTICE; AFFIDAVIT OF
NOTICE..............................................2
Section 5. ADJOURNED MEETING; NOTICE...............................3
Section 6. VOTING .................................................3
Section 7. WAIVER OF NOTICE BY CONSENT OF ABSENT
SHAREHOLDERS........................................3
Section 8. SHAREHOLDER ACTION BY WRITTEN CONSENT
WITHOUT A MEETING...................................4
Section 9. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING
AND GIVING CONSENTS.................................5
Section 10. PROXIES ................................................5
Section 11. INSPECTORS OF ELECTION..................................6
ARTICLE III TRUSTEES ...................................................7
Section 1. POWERS .................................................7
Section 2. NUMBER OF TRUSTEES......................................7
Section 3. VACANCIES ..............................................7
Section 4. PLACE OF MEETINGS AND MEETINGS BY
TELEPHONE...........................................8
Section 5. REGULAR MEETINGS........................................8
Section 6. SPECIAL MEETINGS........................................8
Section 7. QUORUM .................................................8
Section 8. WAIVER OF NOTICE........................................9
Section 9. ADJOURNMENT ............................................9
Section 10. NOTICE OF ADJOURNMENT...................................9
Section 11. ACTION WITHOUT A MEETING................................9
Section 12. FEES AND COMPENSATION OF TRUSTEES.......................9
Section 13. DELEGATION OF POWER TO OTHER TRUSTEES..................10
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ARTICLE IV COMMITTEES.................................................10
Section 1. COMMITTEES OF TRUSTEES.................................10
Section 2. MEETINGS AND ACTION OF COMMITTEES......................11
ARTICLE V OFFICERS ..................................................11
Section 1. OFFICERS ..............................................11
Section 2. ELECTION OF OFFICERS...................................11
Section 3. SUBORDINATE OFFICERS...................................12
Section 4. REMOVAL AND RESIGNATION OF OFFICERS....................12
Section 5. VACANCIES IN OFFICES...................................12
Section 6. CHAIRMAN OF THE BOARD..................................12
Section 7. PRESIDENT .............................................13
Section 8. VICE PRESIDENTS........................................13
Section 9. SECRETARY .............................................13
Section 10. TREASURER .............................................14
ARTICLE VI INDEMNIFICATION OF TRUSTEES OFFICERS,
EMPLOYEES AND OTHER AGENTS.................................14
Section 1. AGENTS, PROCEEDINGS AND EXPENSES.......................14
Section 2. ACTIONS OTHER THAN BY TRUST............................15
Section 3. ACTIONS BY THE TRUST...................................15
Section 4. EXCLUSION OF INDEMNIFICATION...........................15
Section 5. SUCCESSFUL DEFENSE BY AGENT............................16
Section 6. REQUIRED APPROVAL......................................16
Section 7. ADVANCE OF EXPENSES....................................17
Section 8. OTHER CONTRACTUAL RIGHTS...............................17
Section 9. LIMITATIONS ...........................................17
Section 10. INSURANCE .............................................18
Section 11. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN...................18
ARTICLE VII RECORDS AND REPORTS........................................18
Section 1. MAINTENANCE AND INSPECTION OF SHARE
REGISTER...........................................18
Section 2. MAINTENANCE AND INSPECTION OF BY-LAWS..................18
Section 3. MAINTENANCE AND INSPECTION OF OTHER
RECORDS............................................19
Section 4. INSPECTION BY TRUSTEES.................................19
Section 5. FINANCIAL STATEMENTS...................................19
ARTICLE VIII GENERAL MATTERS............................................20
Section 1. CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS...............20
Section 2. CONTRACTS AND INSTRUMENTS; HOW EXECUTED................20
Section 3. CERTIFICATES FOR SHARES................................20
Section 4. LOST CERTIFICATES......................................21
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Section 5. REPRESENTATION OF SHARES OF OTHER ENTITIES
HELD BY TRUST......................................21
Section 6. FISCAL YEAR ...........................................21
ARTICLE IX AMENDMENTS.................................................21
Section 1. AMENDMENT BY SHAREHOLDERS..............................21
Section 2. AMENDMENT BY TRUSTEES..................................21
Section 3. INCORPORATION BY REFERENCE INTO AGREEMENT
AND DECLARATION OF TRUST OF THE TRUST..............22
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BY-LAWS
OF
METROPOLITAN WEST FUNDS
A Delaware Business Trust
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The Board of Trustees shall fix and, from
time to time, may change the location of the principal executive office of the
METROPOLITAN WEST FUNDS (the "Trust") at any place within or outside the State
of Delaware.
Section 2. DELAWARE OFFICE. The Board of Trustees shall establish a
registered office in the State of Delaware and shall appoint as the Trust's
registered agent for service of process in the State of Delaware an individual
resident of the State of Delaware or a Delaware corporation or a corporation
authorized to transact business in the State of Delaware; in each case the
business office of such registered agent for service of process shall be
identical with the registered Delaware office of the Trust.
Section 3. OTHER OFFICES. The Board of Trustees may at any time
establish branch or subordinate offices at any place or places where the Trust
intends to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at
any place designated by the Board of Trustees. In the absence of any such
designation, shareholders' meetings shall be held at the principal executive
office of the Trust.
Section 2. CALL OF MEETING. A meeting of the shareholders may be called
at any time by the Board of Trustees or by the Chairman of the Board or by the
President.
Section 3. NOTICE OF SHAREHOLDERS' MEETING. All notices of meetings of
shareholders shall be sent or otherwise given in
<PAGE>
accordance with Section 4 of this Article II not less than seven (7) nor more
than seventy-five (75) days before the date of the meeting. The notice shall
specify (i) the place, date and hour of the meeting, and (ii) the general nature
of the business to be transacted. The notice of any meeting at which Trustees
are to be elected also shall include the name of any nominee or nominees whom at
the time of the notice are intended to be presented for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a Trustee has a direct or indirect financial
interest, (ii) an amendment of the Trust's Agreement and Declaration of Trust,
(iii) a reorganization of the Trust, or (iv) a voluntary dissolution of the
Trust, the notice shall also state the general nature of that proposal.
Section 4. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any
meeting of shareholders shall be given either personally or by first-class mail
or telegraphic or other written communication, charges prepaid, addressed to the
shareholder at the address of that shareholder appearing on the books of the
Trust or its transfer agent or given by the shareholder to the Trust for the
purpose of notice. If no such address appears on the Trust's books or is given,
notice shall be deemed to have been given if sent to that shareholder by
first-class mail or telegraphic or other written communication to the Trust's
principal executive office, or if published at least once in a newspaper of
general circulation in the county where that office is located. Notice shall be
deemed to have been given at the time when delivered personally or deposited in
the mail or sent by telegram or other means of written communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the Trust is returned to the Trust by the
United States Postal Service marked to indicate that the Postal Service is
unable to deliver the notice to the shareholder at that address, all future
notices or reports shall be deemed to have been duly given without further
mailing if these shall be available to the shareholder on written demand of the
shareholder at the principal executive office of the Trust for a period of one
year from the date of the giving of the notice.
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An affidavit of the mailing or other means of giving any notice of any
shareholder's meeting shall be executed by the Secretary, Assistant Secretary or
any transfer agent of the Trust giving the notice and shall be filed and
maintained in the minute book of the Trust.
Section 5. ADJOURNED MEETING; NOTICE. Any shareholder's meeting,
whether or not a quorum is present, may be adjourned from time to time by the
vote of the majority of the Voting Interests, as defined in Article I, Section
2(n) of the Agreement and Declaration of Trust of the Trust, represented at that
meeting, either in person or by proxy.
When any meeting of shareholders is adjourned to another time or place,
notice need not be given of the adjourned meeting at which the adjournment is
taken, unless a new record date of the adjourned meeting is fixed or unless the
adjournment is for more than sixty (60) days from the date set for the original
meeting, in which case the Board of Trustees shall set a new record date. Notice
of any such adjourned meeting shall be given to each shareholder of record
entitled to vote at the adjourned meeting in accordance with the provisions of
Section 3 and 4 of this Article II. At any adjourned meeting, the Trust may
transact any business which might have been transacted at the original meeting.
Section 6. VOTING. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of the
Agreement and Declaration of Trust of the Trust, as in effect at such time. The
shareholders' vote may be by voice vote or by ballot, provided, however, that
any election for Trustees must be by ballot if demanded by any shareholder
before the voting has begun. On any matter other than elections of Trustees, any
shareholder may vote part of the shares in favor of the proposal and refrain
from voting the remaining shares or vote them against the proposal, but if the
shareholder fails to specify the number of shares which the shareholder is
voting affirmatively, it will be conclusively presumed that the shareholder's
approving vote is with respect to the total shares that the shareholder is
entitled to vote on such proposal.
Section 7. WAIVER OF NOTICE BY CONSENT OF ABSENT SHAREHOLDERS. The
transactions of the meeting of shareholders, however called and noticed and
wherever held, shall be as valid
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as though had at a meeting duly held after regular call and notice if a quorum
be present either in person or by proxy and if either before or after the
meeting, each person entitled to vote who was not present in person or by proxy
signs a written waiver of notice or a consent to a holding of the meeting or an
approval of the minutes. The waiver of notice or consent need not specify either
the business to be transacted or the purpose of any meeting of shareholders.
Attendance by a person at a meeting shall also constitute a waiver of
notice of that meeting, except when the person objects at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if that objection is expressly made at the beginning of the
meeting.
Section 8. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any
action which may be taken at any meeting of shareholders may be taken without a
meeting and without prior notice if a consent in writing setting forth the
action so taken is signed by the holders of the Voting Interests, as defined in
Article I, Section 2(n) in the Agreement and Declaration of Trust of the Trust,
having not less than the minimum number of votes that would be necessary to
authorize or take that action at a meeting at which all shares entitled to vote
on that action were present and voted. All such consents shall be filed with the
Secretary of the Trust and shall be maintained in the Trust's records. Any
shareholder giving a written consent or the shareholder's proxy holder or a
transferee of the shares or a personal representative of the shareholder or
their respective proxy holders may revoke the consent by a writing received by
the Secretary of the Trust before written consents of the number of shares
required to authorize the proposed action have been filed with the Secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing and if the unanimous written consent of all such
shareholders shall not have been received, the Secretary shall give prompt
notice of the action approved by the shareholders without a meeting. This notice
shall be given in the manner specified in Section 4 of this Article II. In the
case of approval of (i) contracts or transactions in which a Trustee has a
direct or indirect financial interest, (ii)
4
<PAGE>
indemnification of agents of the Trust, and (iii) a reorganization of the Trust,
the notice shall be given at least ten (10) days before the consummation of any
action authorized by that approval.
Section 9. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING AND GIVING
CONSENTS. For purposes of determining the shareholders entitled to notice of any
meeting or to vote or entitled to give consent to action without a meeting, the
Board of Trustees may fix in advance a record date which shall not be more than
ninety (90) days nor less than seven (7) days before the date of any such
meeting as provided in the Agreement and Declaration of Trust of the Trust.
If the Board of Trustees does not so fix a record date:
(a) The record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at
the close of business on the business day next preceding the
day on which notice is given or if notice is waived, at the
close of business on the business day next preceding the day
on which the meeting is held.
(b) The record date for determining shareholders entitled to give
consent to action in writing without a meeting, (i) when no
prior action by the Board of Trustees has been taken, shall be
the day on which the first written consent is given, or (ii)
when prior action of the Board of Trustees has been taken,
shall be at the close of business on the day on which the
Board of Trustees adopt the resolution relating to that action
or the seventy-fifth day before the date of such other action,
whichever is later.
Section 10. PROXIES. Every person entitled to vote for Trustees or on
any other matter shall have the right to do so either in person or by one or
more agents authorized by a written proxy signed by the person and filed with
the Secretary of the Trust. A proxy shall be deemed signed if the shareholder's
name is placed on the proxy (whether by manual signature, typewriting,
telegraphic transmission or otherwise) by the shareholder or the shareholder's
attorney-in-fact. A validly executed proxy which does not state that it is
irrevocable shall continue in full force and effect unless (i) revoked by the
person executing it
5
<PAGE>
before the vote pursuant to that proxy by a writing delivered to the Trust
stating that the proxy is revoked or by a subsequent proxy executed by or
attendance at the meeting and voting in person by the person executing that
proxy; or (ii) written notice of the death or incapacity of the maker of that
proxy is received by the Trust before the vote pursuant to that proxy is
counted; provided however, that no proxy shall be valid after the expiration of
eleven (11) months from the date of the proxy unless otherwise provided in the
proxy.
Section 11. INSPECTORS OF ELECTION. Before any meeting of shareholders,
the Board of Trustees may appoint any persons other than nominees for office to
act as inspectors of election at the meeting or its adjournment. If no
inspectors of election are so appointed, the chairman of the meeting may and on
the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one (1) or three (3). If inspectors are appointed at a meeting on the request of
one or more shareholders or proxies, the holders of a majority of shares or
their proxies present at the meeting shall determine whether one (1) or three
(3) inspectors are to be appointed. If any person appointed as inspector fails
to appear or fails or refuses to act, the Chairman of the meeting may and on the
request of any shareholder or a shareholder's proxy, shall appoint a person to
fill the vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting
power of each, the shares represented at the meeting, the
existence of a quorum and the authenticity, validity and
effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
6
<PAGE>
(g) Do any other acts that may be proper to conduct the election
or vote with fairness to all shareholders.
ARTICLE III
TRUSTEES
Section 1. POWERS. Subject to the applicable provisions of the
Agreement and Declaration of Trust of the Trust and these By-Laws relating to
action required to be approved by the shareholders or by the outstanding shares,
the business and affairs of the Trust shall be managed and all powers shall be
exercised by or under the direction of the Board of Trustees.
Section 2. NUMBER OF TRUSTEES. The exact number of Trustees within the
limits specified in the Agreement and Declaration of Trust of the Trust shall be
fixed from time to time by a written instrument signed or a resolution approved
at a duly constituted meeting by a majority of the Board of Trustees.
Section 3. VACANCIES. Vacancies in the Board of Trustees may be filled
by a majority of the remaining Trustees, though less than a quorum, or by a sole
remaining Trustee, unless the Board of Trustees calls a meeting of shareholders
for the purposes of electing Trustees. In the event that at any time less than a
majority of the Trustees holding office at that time were so elected by the
holders of the Voting Interests of the Trust as defined in Article I, Section
2(n) of the Agreement and Declaration of Trust of the Trust, the Board of
Trustees shall forthwith cause to be held as promptly as possible, and in any
event within sixty (60) days, a meeting of such holders for the purpose of
electing Trustees to fill any existing vacancies in the Board of Trustees,
unless such period is extended by order of the United States Securities and
Exchange Commission.
Notwithstanding the above, whenever and for so long as the Trust is a
participant in or otherwise has in effect a Plan under which the Trust may be
deemed to bear expenses of distributing its shares as that practice is described
in Rule 12b-1 under the Investment Company Act of 1940, then the selection and
nomination of the Trustees who are not interested persons of the Trust (as that
term is defined in the Investment Company Act of 1940) shall be, and is,
committed to the discretion of such disinterested Trustees.
7
<PAGE>
Section 4. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. All meetings of
the Board of Trustees may be held at any place that has been designated from
time to time by resolution of the Board. In the absence of such a designation,
regular meetings shall be held at the principal executive office of the Trust.
With the exception of meetings at which an Investment Management Agreement,
Portfolio Advisory Agreement or any Distribution Plan adopted pursuant to Rule
12b-1 is approved by the Board, any meeting, regular or special, may be held by
conference telephone or similar communication equipment, so long as all Trustees
participating in the meeting can hear one another and all such Trustees shall be
deemed to be present in person at the meeting.
Section 5. REGULAR MEETINGS. Regular meetings of the Board of Trustees
shall be held without call at such time as shall from time to time be fixed by
the Board of Trustees. Such regular meetings may be held without notice.
Section 6. SPECIAL MEETINGS. Special meetings of the Board of Trustees
for any purpose or purposes may be called at any time by the Chairman of the
Board or the President or any Vice President or the Secretary or any two (2)
Trustees.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each Trustee or sent by first-class mail or
telegram, charges prepaid, addressed to each Trustee at that Trustee's address
as it is shown on the records of the Trust. In case the notice is mailed, it
shall be deposited in the United States mail at least seven (7) calendar days
before the time of the holding of the meeting. In case the notice is delivered
personally or by telephone or to the telegraph company or by express mail or
similar service, it shall be given at least forty-eight (48) hours before the
time of the holding of the meeting. Any oral notice given personally or by
telephone may be communicated either to the Trustee or to a person at the office
of the Trustee whom the person giving the notice has reason to believe will
promptly communicate it to the Trustee. The notice need not specify the purpose
of the meeting or the place if the meeting is to be held at the principal
executive office of the Trust.
Section 7. QUORUM. A majority of the authorized number of Trustees
shall constitute a quorum for the transaction of business, except to adjourn as
provided in Section 10 of this Article III. Every act or decision done or made
by a majority of
8
<PAGE>
the Trustees present at a meeting duly held at which a quorum is present shall
be regarded as the act of the Board of Trustees, subject to the provisions of
the Trust's Agreement and Declaration of Trust. A meeting at which a quorum is
initially present may continue to transact business notwithstanding the
withdrawal of Trustees if any action taken is approved by a least a majority of
the required quorum for that meeting.
Section 8. WAIVER OF NOTICE. Notice of any meeting need not be given to
any Trustee who either before or after the meeting signs a written waiver of
notice, a consent to holding the meeting, or an approval of the minutes. The
waiver of notice or consent need not specify the purpose of the meeting. All
such waivers, consents, and approvals shall be filed with the records of the
Trust or made a part of the minutes of the meeting. Notice of a meeting shall
also be deemed given to any Trustee who attends the meeting without protesting
before or at its commencement the lack of notice to that Trustee.
Section 9. ADJOURNMENT. A majority of the Trustees present, whether or
not constituting a quorum, may adjourn any meeting to another time and place.
Section 10. NOTICE OF ADJOURNMENT. Notice of the time and place of
holding an adjourned meeting need not be given unless the meeting is adjourned
for more than forty-eight (48) hours, in which case notice of the time and place
shall be given before the time of the adjourned meeting in the manner specified
in Section 7 of this Article III to the Trustees who were present at the time of
the adjournment.
Section 11. ACTION WITHOUT A MEETING. With the exception of the
approval of an investment management agreement, portfolio advisory agreement, or
any distribution plan adopted pursuant to Rule 12b-1, any action required or
permitted to be taken by the Board of Trustees may be taken without a meeting if
a majority of the members of the Board of Trustees shall individually or
collectively consent in writing to that action. Such action by written consent
shall have the same force and effect as a majority vote of the Board of
Trustees. Such written consent or consents shall be filed with the minutes of
the proceedings of the Board of Trustees.
Section 12. FEES AND COMPENSATION OF TRUSTEES. Trustees and members of
committees may receive such compensation, if any,
9
<PAGE>
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the Board of Trustees. This Section 12 shall not be
construed to preclude any Trustee from serving the Trust in any other capacity
as an officer, agent, employee or otherwise and receiving compensation for those
services.
Section 13. DELEGATION OF POWER TO OTHER TRUSTEES. Any Trustee may, by
power of attorney, delegate his or her power for a period not exceeding six (6)
months at any one time to any other Trustee or Trustees; provided that in no
case shall fewer than two (2) Trustees personally exercise the powers granted to
the Trustees under the Trust's Agreement and Declaration of Trust except as
otherwise expressly provided herein or by resolution of the Board of Trustees.
Except where applicable law may require a Trustee to be present in person, a
Trustee represented by another Trustee pursuant to such power of attorney shall
be deemed to be present for purposes of establishing a quorum and satisfying the
required majority vote.
ARTICLE IV
COMMITTEES
Section 1. COMMITTEES OF TRUSTEES. The Board of Trustees may by
resolution adopted by a majority of the authorized number of Trustees designate
one or more committees, each consisting of one (1) or more Trustees, to serve at
the pleasure of the Board. The Board may designate one or more Trustees as
alternate members of any committee who may replace any absent member at any
meeting of the committee. Any committee to the extent provided in the resolution
of the Board, shall have the authority of the Board, except with respect to:
(a) the approval of any action which under applicable law also
requires shareholders' approval or approval of the outstanding
shares, or requires approval by a majority of the entire Board
or certain members of said Board;
(b) the filling of vacancies on the Board of Trustees or in any
committee;
(c) the fixing of compensation of the Trustees for serving on the
Board of Trustees or on any committee;
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(d) the amendment or repeal of the Trust's Agreement and
Declaration of Trust or of the By-Laws or the adoption of new
By-Laws;
(e) the amendment or repeal of any resolution of the Board of
Trustees which by its express terms is not so amendable or
repealable;
(f) a distribution to the shareholders of the Trust, except at a
rate or in a periodic amount or within a designated range
determined by the Board of Trustees; or
(g) the appointment of any other committees of the Board of
Trustees or the members of these committees.
Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of
committees shall be governed by and held and taken in accordance with the
provisions of Article III of these By-Laws, with such changes in the context
thereof as are necessary to substitute the committee and its members for the
Board of Trustees and its members, except that the time of regular meetings of
committees may be determined either by resolution of the Board of Trustees or by
resolution of the committee. Special meetings of committees may also be called
by resolution of the Board of Trustees. Alternate members shall be given notice
of meetings of committees and shall have the right to attend all meetings of
committees. The Board of Trustees may adopt rules for the government of any
committee not inconsistent with the provisions of these By-Laws.
ARTICLE V
OFFICERS
Section 1. OFFICERS. The officers of the Trust shall be a President, a
Secretary and a Treasurer. The Trust may also have, at the discretion of the
Board of Trustees, a Chairman of the Board, one or more Vice Presidents, one or
more Assistant Secretaries, one or more Assistant Treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 3 of
this Article V. Any number of offices may be held by the same person.
Section 2. ELECTION OF OFFICERS. The officers of the Trust, except such
officers as may appointed in accordance with
11
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the provisions of Section 3 or Sections of this Article V, shall be chosen by
the Board of Trustees, and each shall serve at the pleasure of the Board of
Trustees, subject to the rights, if any, of an officer under any contract of
employment.
Section 3. SUBORDINATE OFFICERS. The Board of Trustees may appoint and
may empower the President to appoint such other officers as the business of the
Trust may require, each of whom shall hold office for such period, have such
authority and perform such duties as are provided in these By-Laws or as the
Board of Trustees may from time to time determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights,
if any, of an officer under any contract of employment, any officer may be
removed, either with or without cause, by the Board of Trustees at any regular
or special meeting of the Board of Trustees or by the principal executive
officer or by such other officer upon whom such power of removal may be
conferred by the Board of Trustees.
Any officer may resign at any time by giving written notice to the
Trust. Any resignation shall take effect at the date of the receipt of that
notice or at any later time specified in that notice; and unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the Trust under any contract to which the officer is a party.
Section 5. VACANCIES IN OFFICES. A vacancy in any office because of
death, resignation, removal, disqualification or other cause shall be filled in
the manner prescribed in these By-Laws for regular appointment to that office.
The President may make temporary appointments to a vacant office pending action
by the Board of Trustees.
Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such an
Officer is elected, shall, if present, preside at meetings of the Board of
Trustees, subject to the control of the Board of Trustees, have general
supervision, direction and control of the business and the Officers of the Trust
and exercise and perform such other powers and duties as may be from time to
time assigned to him or her by the Board of Trustees or prescribed by the
By-Laws. The Chairman of the Board shall serve
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as chief executive officer in the chief executive officer's absence.
Section 7. PRESIDENT. Subject to such supervisory powers, if any, as
may be given by the Board of Trustees to the Chairman of the Board, if there be
such an officer, the President shall, subject to the control of the Board of
Trustees and the Chairman, have general supervision, direction and control of
the business and the officers of the Trust. He or she shall preside at all
meetings of the shareholders and, in the absence of the Chairman of the Board or
if there be none, at all meetings of the Board of Trustees. He or she shall have
the general powers and duties of management usually vested in the offices of
president, chief executive officer and chief operating officer of a corporation
and shall have such other powers and duties as may be prescribed by the Board of
Trustees or these By-Laws.
Section 8. VICE PRESIDENTS. In the absence or disability of the
President, the Vice Presidents, if any, in order of their rank as fixed by the
Board of Trustees or if not ranked, the Executive Vice President (who shall be
considered first ranked) and such other Vice Presidents as shall be designated
by the Board of Trustees, shall perform all the duties of the President and,
when so acting, shall have all powers of and be subject to all the restrictions
upon the President. The Vice Presidents shall have such other powers and perform
such other duties as from time to time may be prescribed for them respectively
by the Board of Trustees or the President or the Chairman of the Board or by
these By-Laws.
Section 9. SECRETARY. The Secretary shall keep or cause to be kept at
the principal executive office of the Trust or such other place as the Board of
Trustees may direct a book of minutes of all meetings and actions of Trustees,
committees of Trustees and shareholders with the time and place of holding,
whether regular or special, and if special, how authorized, the notice given,
the names of those present at Trustees' meetings or committee meetings, the
number of shares present or represented at shareholders' meetings, and the
proceedings.
The Secretary shall keep or cause to be kept at the principal executive
office of the Trust or at the office of the Trust's transfer agent or registrar,
a share register or a duplicate share register showing the names of all
shareholders and their addresses, the number and classes of shares held by
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each, the number and date of certificates issued for the same and the number and
date of cancellation of every certificate surrendered for cancellation.
The Secretary shall give or cause to be given notice of all meetings of
the shareholders and of the Board of Trustees required to be given by these
By-Laws or by applicable law and shall have such other powers and perform such
other duties as may be prescribed by the Board of Trustees or by these By-Laws.
Section 10. TREASURER. The Treasurer shall be the chief financial
officer and chief accounting officer of the Trust and shall keep and maintain or
cause to be kept and maintained adequate and correct books and records of
accounts of the properties and business transactions of the Trust, including
accounts of its assets, liabilities, receipts, disbursements, gains, losses,
capital, retained earnings and shares. The books of account shall at all
reasonable times be open to inspection by any Trustee.
The Treasurer shall deposit all monies and other valuables in the name
and to the credit of the Trust with such depositaries as may be designated by
the Board of Trustees. The Treasurer shall disburse the funds of the Trust as
may be ordered by the Board of Trustees, shall render to the President and
Trustees, whenever they request it, an account of all of his or her transactions
as chief financial officer and of the financial condition of the Trust and shall
have other powers and perform such other duties as may be prescribed by the
Board of Trustees or these By-Laws.
ARTICLE VI
INDEMNIFICATION OF TRUSTEES OFFICERS
EMPLOYEES AND OTHER AGENTS
Section 1. AGENTS, PROCEEDINGS AND EXPENSES. For the purpose of this
Article, "agent" means any person who is or was a Trustee, officer, employee or
other agent of this Trust or is or was serving at the request of this Trust as a
Trustee, director, officer, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise or was a
Trustee, director, officer, employee or agent of a foreign or domestic
corporation that was a predecessor of another enterprise at the request of such
predecessor entity;
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"proceeding" means any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative; and "expenses"
includes, without limitation, attorney's fees and any expenses of establishing a
right to indemnification under this Article.
Section 2. ACTIONS OTHER THAN BY TRUST. This Trust shall indemnify any
person who was or is a party or is threatened to be made a party to any
proceeding (other than an action by or in the right of this Trust) by reason of
the fact that such person is or was an agent of this Trust, against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with such proceeding, if it is determined that person acted in
good faith and reasonably believed: (a) in the case of conduct in his or her
official capacity as a Trustee of the Trust, that his or her conduct was in the
Trust's best interests and (b), in all other cases, that his or her conduct was
at least not opposed to the Trust's best interests and (c) in the case of a
criminal proceeding, that he or she had no reasonable cause to believe the
conduct of that person was unlawful. The termination of any proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent shall not of itself create a presumption that the person did not act
in good faith and in a manner which the person reasonably believed to be in the
best interests of this Trust or that the person had reasonable cause to believe
that the person's conduct was unlawful.
Section 3. ACTIONS BY THE TRUST. This Trust shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action by or in the right of this Trust to procure a
judgment in its favor by reason of the fact that that person is or was an agent
of this Trust, against expenses actually and reasonably incurred by that person
in connection with the defense or settlement of that action if that person acted
in good faith, in a manner that person believed to be in the best interests of
this Trust and with such care, including reasonable inquiry, as an ordinarily
prudent person in a like position would use under similar circumstances.
Section 4. EXCLUSION OF INDEMNIFICATION. Notwithstanding any provision
to the contrary contained herein, there shall be no right to indemnification for
any liability arising by reason of willful misfeasance, bad faith, gross
negligence, or the reckless
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disregard of the duties involved in the conduct of the agent's office with this
Trust.
No indemnification shall be made under Sections 2 or 3 of this Article:
(a) In respect of any claim, issue or matter as to which that
person shall have been adjudged to be liable on the basis that
personal benefit was improperly received by him or her,
whether or not the benefit resulted from an action taken in
the person's official capacity; or
(b) In respect of any claim, issue or matter as to which that
person shall have been adjudged to be liable in the
performance of that person's duty to this Trust, unless and
only to the extent that the court in which that action was
brought shall determine upon application that in view of all
the circumstances of the case, that person was not liable by
reason of the disabling conduct set forth in the preceding
paragraph and is fairly and reasonably entitled to indemnity
for the expenses which the court shall determine; or
(c) Of amounts paid in settling or otherwise disposing of a
threatened or pending action, with or without court approval,
or of expenses incurred in defending a threatened or pending
action that is settled or otherwise disposed of without court
approval, unless the required approval set forth in Section 6
of this Article is obtained.
Section 5. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of
this Trust has been successful on the merits in defense of any proceeding
referred to in Sections 2 or 3 of this Article or in defense of any claim, issue
or matter therein, before the court or other body before whom the proceeding was
brought, the agent shall be indemnified against expenses actually and reasonably
incurred by the agent in connection therewith, provided that the Board of
Trustees, including a majority who are disinterested, non-party Trustees, also
determines that, based upon a review of the facts, the agent was not liable by
reason of the disabling conduct referred to in Section 4 of this Article.
Section 6. REQUIRED APPROVAL. Except as provided in Section 5 of this
Article, any indemnification under this Article shall be made by this Trust only
if authorized in the specific
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case on a determination that indemnification of the agent is proper in the
circumstances because the agent has met the applicable standard of conduct set
forth in Sections or 3 of this Article and is not prohibited from
indemnification because of the disabling conduct set forth in Section 4 of this
Article, by:
(a) a majority vote of a quorum consisting of Trustees who are not
parties to the proceeding and are not interested persons of
the Trust (as defined in the Investment Company Act of 1940);
or
(b) a written opinion by an independent legal counsel.
Section 7. ADVANCE OF EXPENSES. Expenses incurred in defending any
proceeding may be advanced by this Trust before the final disposition of the
proceeding upon a written undertaking by or on behalf of the agent, to repay the
amount of the advance if it is ultimately determined that he or she is not
entitled to indemnification, together with at least one of the following as a
condition to the advance: (i) security for the undertaking; or (ii) the
existence of insurance protecting the Trust against losses arising by reason of
any lawful advances; or (iii) a determination by a majority of a quorum of
Trustees who are not parties to the proceeding and are not interested persons of
the Trust, or by an independent legal counsel in a written opinion, based on a
review of readily available facts, that there is reason to believe that the
agent ultimately will be found entitled to indemnification. Determinations and
authorizations of payments under this Section must conform to the standards set
forth in Section 6 of this Article for determining that the indemnification is
permissible.
Section 8. OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article
shall affect any right to indemnification to which persons other than Trustees
and officers of this Trust or any subsidiary hereof may be entitled by contract
or otherwise.
Section 9. LIMITATIONS. No indemnification or advance shall be made
under this Article, except as provided in Sections 5 or 6 in any circumstances
where it appears:
(a) that it would be inconsistent with a provision of the Trust's
Agreement and Declaration of Trust, a resolution of the
shareholders of the Trust, or an agreement in effect at the
time of accrual of the
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alleged cause of action asserted in the proceeding in which
the expenses were incurred or other amounts were paid which
prohibits or otherwise limits indemnification; or
(b) that it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
Section 10. INSURANCE. Upon and in the event of a determination by the
Board of Trustees of this Trust to purchase such insurance, this Trust shall
purchase and maintain insurance on behalf of any agent of this Trust against any
liability asserted against or incurred by the agent in such capacity or arising
out of the agent's status as such, but only to the extent that this Trust would
have the power to indemnify the agent against that liability under the
provisions of this Article and the Trust's Agreement and Declaration of Trust.
Section 11. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This Article VI does
not apply to any proceeding against any Trustee, investment manager or other
fiduciary of an employee benefit plan in that person's capacity as such, even
though that person may also be an agent of this Trust as defined in Section l of
this Article VI. Nothing contained in this Article VI shall limit any right to
indemnification to which such a Trustee, investment manager, or other fiduciary
may be entitled by contractor, otherwise which shall be enforceable to the
extent permitted by applicable law other than this Article VI.
ARTICLE VII
RECORDS AND REPORTS
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. This Trust
shall keep at its principal executive office or at the office of its transfer
agent or registrar, if either be appointed and as determined by resolution of
the Board of Trustees, a record of its shareholders, giving the names and
addresses of all shareholders and the number, series and, where applicable,
class of shares held by each shareholder.
Section 2. MAINTENANCE AND INSPECTION OF BY-LAWS. The Trust shall keep
at its principal executive office the original or a copy of these By-Laws as
amended from time to time, which
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shall be open to inspection by the shareholders at all reasonable times during
office hours.
Section 3. MAINTENANCE AND INSPECTION OF OTHER RECORDS. The accounting
books and records and minutes of proceedings of the shareholders and the Board
of Trustees and any committee or committees of the Board of Trustees shall be
kept at such place or places designated by the Board of Trustees or in the
absence of such designation, at the principal executive office of the Trust. The
minutes shall be kept in written form, and the accounting books and records
shall be kept either in written form or in any other form capable of being
converted into written form. The minutes and accounting books and records shall
be open to inspection upon the written demand of any shareholder or holder of a
voting trust certificate at any reasonable time during usual business hours of
the Trust for a purpose reasonably related to the holder's interests as a
shareholder or as the holder of a voting trust certificate. The inspection may
be made in person or by an agent or attorney and shall include the right to copy
and make extracts.
Section 4. INSPECTION BY TRUSTEES. Every Trustee shall have the
absolute right at any reasonable time to inspect all books, records and
documents of every kind as well as the physical properties of the Trust. This
inspection by a Trustee may be made in person or by an agent or attorney, and
the right of inspection includes the right to copy and make extracts of
documents.
Section 5. FINANCIAL STATEMENTS. A copy of any financial statements and
any income statement of the Trust for each quarterly period of each fiscal year
and accompanying balance sheet of the Trust as of the end of each such period
that has been prepared by the Trust shall be kept on file in the principal
executive office of the Trust for at least twelve (12) months, and each such
statement shall be exhibited at all reasonable times to any shareholder
demanding an examination of any such statement or a copy shall be mailed to any
such shareholder.
The quarterly income statements and balance sheets referred to in this
Section shall be accompanied by the report, if any, of any independent
accountants engaged by the Trust or the certificate of an authorized officer of
the Trust that the financial statements were prepared without audit from the
books and records of the Trust.
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ARTICLE VIII
GENERAL MATTERS
Section 1. CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS. All checks, drafts
or other orders for payment of money, notes or other evidences of indebtedness
issued in the name of or payable to the Trust shall be signed or endorsed in
such manner and by such person or persons as shall be designated from time to
time in accordance with the resolution of the Board of Trustees.
Section 2. CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board of
Trustees, except as otherwise provided in these By-Laws, may authorize any
officer or officers, agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the Trust and this authority may be
general or confined to specific instances; and unless so authorized or ratified
by the Board of Trustees or within the agency power of an officer, no officer,
agent or employee shall have any power or authority to bind the Trust by any
contract or engagement, to pledge its credit or to render it liable for any
purpose or for any amount.
Section 3. CERTIFICATES FOR SHARES. A certificate or certificates for
shares of beneficial interest in any series of the Trust may be issued to a
shareholder upon the shareholder's request when such shares are fully paid. All
certificates shall be signed in the name of the Trust by the Chairman of the
Board or the President or Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or any Assistant Secretary, certifying the number of
shares and the series of shares owned by the shareholders. Any or all of the
signatures on the certificate may be facsimile. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
on a certificate shall have ceased to be that officer, transfer agent or
registrar before that certificate is issued, it may be issued by the Trust with
the same effect as if that person were an officer, transfer agent or registrar
at the date of issue. Notwithstanding the foregoing, the Trust may adopt and use
a system of issuance, recordation and transfer of its shares by electronic or
other means.
Section 4. LOST CERTIFICATES. Except as provided in this Section 4, no
new certificate for shares shall be issued to replace an old certificate unless
the latter is surrendered to the Trust and cancelled at the same time. The Board
of Trustees
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may in case any share certificate or certificate for any other security is lost,
stolen or destroyed, authorize the issuance of a replacement certificate on such
terms and conditions as the Board of Trustees may require, including a provision
for indemnification of the Trust secured by a bond or other adequate security
sufficient to protect the Trust against any claim that may be made against it,
including any expense or liability on account of the alleged loss, theft or
destruction of the certificate or the issuance of the replacement certificate.
Section 5. REPRESENTATION OF SHARES OF OTHER ENTITIES HELD BY TRUST.
The Chairman of the Board, the President, any Vice President or any other person
authorized by resolution of the Board of Trustees or by any of the foregoing
designated officers, is authorized to vote or represent on behalf of the Trust
any and all shares of any corporation, partnership, trusts or other entities,
foreign or domestic, standing in the name of the Trust. The authority granted
may be exercised in person or by a proxy duly executed by such designated
person.
Section 6. FISCAL YEAR. The fiscal year of the Trust shall be fixed and
refixed or changed from time to time by resolution of the Trustees. The fiscal
year of the Trust shall be the taxable year of each Series of the Trust.
ARTICLE IX
AMENDMENTS
Section l. AMENDMENT BY SHAREHOLDERS. These By-Laws may be amended or
repealed by the affirmative vote or written consent of a majority of the Voting
Interests, as defined in Article I, Section 2(n) of the Agreement and
Declaration of Trust of the Trust, entitled to vote, except as otherwise
provided by applicable law or by the Trust's Agreement and Declaration of Trust
or these By-Laws.
Section 2. AMENDMENT BY TRUSTEES. Subject to the right of shareholders
as provided in Section l of this Article IX to adopt, amend or repeal By-Laws,
and except as otherwise provided by applicable law or by the Trust's Agreement
and Declaration of Trust, these By-Laws may be adopted, amended or repealed by
the Board of Trustees.
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Section 3. INCORPORATION BY REFERENCE INTO AGREEMENT AND DECLARATION OF
TRUST OF THE TRUST. These By-Laws and any amendments thereto shall be
incorporated by reference to the Trust's Agreement and Declaration of Trust.
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EXHIBIT 5
Form of Investment Management Agreement
<PAGE>
FORM OF INVESTMENT
MANAGEMENT AGREEMENT
THIS INVESTMENT MANAGEMENT AGREEMENT made as of the ____ day
of __________, 1997, by and between Metropolitan West Funds, a Delaware business
trust (hereinafter called the "Trust"), on behalf of each series of the Trust
listed in Appendix A hereto, as such may be amended from time to time
(hereinafter referred to individually as a "Fund" and collectively as the
"Funds") and Metropolitan West Asset Management, LLC, a California limited
liability company (hereinafter called the "Manager").
WITNESSETH:
WHEREAS, the Trust is an open-end management investment
company, registered as such under the Investment Company Act of 1940, as amended
(the "1940 Act"); and
WHEREAS, the Manager is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended, and is engaged in the
business of supplying investment advice, investment management and
administrative services, as an independent contractor; and
WHEREAS, the Trust desires to retain the Manager to render
advice and services to the Funds pursuant to the terms and provisions of this
Agreement, and the Manager is interested in furnishing said advice and services;
NOW, THEREFORE, in consideration of the covenants and the
mutual promises hereinafter set forth, the parties hereto, intending to be
legally bound hereby, mutually agree as follows:
1. Appointment of Manager. The Trust hereby employs the
Manager and the Manager hereby accepts such employment, to render investment
advice and management services with respect to the assets of the Funds for the
period and on the terms set forth in this Agreement, subject to the supervision
and direction of the Trust's Board of Trustees.
2. Duties of Manager.
(a) General Duties. The Manager shall act as
investment manager to the Funds and shall supervise investments of the Funds on
behalf of the Funds in accordance with the investment objectives, programs and
restrictions of the Funds as provided in the Trust's governing documents,
including, without limitation, the Trust's Agreement and Declaration of Trust
and By-Laws, or otherwise and such other limitations as the Trustees may impose
from time to time in writing to the Manager. Without limiting the generality of
the foregoing, the Manager shall: (i) furnish the Funds with advice and
recommendations with respect to the investment of each Fund's assets and the
purchase and sale of portfolio securities for the Funds, including the taking of
such other steps as may be necessary to implement such advice and
recommendations; (ii) furnish the Funds with reports, statements and other data
on securities, economic conditions and other
<PAGE>
FORM OF INVESTMENT
MANAGEMENT AGREEMENT
pertinent subjects which the Trust's Board of Trustees may reasonably request;
(iii) manage the investments of the Funds, subject to the ultimate supervision
and direction of the Trust's Board of Trustees; (iv) provide persons
satisfactory to the Trust's Board of Trustees to act as officers and employees
of the Trust and the Funds (such officers and employees, as well as certain
trustees, may be trustees, directors, officers, partners, or employees of the
Manager or its affiliates) but not including personnel to provide limited
administrative services to the Fund not typically provided by the Fund's
administrator under separate agreement; and (v) render to the Trust's Board of
Trustees such periodic and special reports with respect to each Fund's
investment activities as the Board may reasonably request.
(b) Brokerage. The Manager shall place orders for the
purchase and sale of securities either directly with the issuer or with a broker
or dealer selected by the Manager. In placing each Fund's securities trades, it
is recognized that the Manager will give primary consideration to securing the
most favorable price and efficient execution, so that each Fund's total cost or
proceeds in each transaction will be the most favorable under all the
circumstances. Within the framework of this policy, the Manager may consider the
financial responsibility, research and investment information, and other
services provided by brokers or dealers who may effect or be a party to any such
transaction or other transactions to which other clients of the Manager may be a
party.
It is also understood that it is desirable for the Funds that
the Manager have access to investment and market research and securities and
economic analyses provided by brokers and others. It is also understood that
brokers providing such services may execute brokerage transactions at a higher
cost to the Funds than might result from the allocation of brokerage to other
brokers on the basis of seeking the most favorable price and efficient
execution. Therefore, the purchase and sale of securities for the Funds may be
made with brokers who provide such research and analysis, subject to review by
the Trust's Board of Trustees from time to time with respect to the extent and
continuation of this practice to determine whether each Fund benefits, directly
or indirectly, from such practice. It is understood by both parties that the
Manager may select broker-dealers for the execution of the Funds' portfolio
transactions who provide research and analysis as the Manager may lawfully and
appropriately use in its investment management and advisory capacities, whether
or not such research and analysis may also be useful to the Manager in
connection with its services to other clients.
On occasions when the Manager deems the purchase or sale of a
security to be in the best interest of one or more of the Funds as well as of
other clients, the Manager, to the extent
<PAGE>
FORM OF INVESTMENT
MANAGEMENT AGREEMENT
permitted by applicable laws and regulations, may aggregate the securities to be
so purchased or sold in order to obtain the most favorable price or lower
brokerage commissions and the most efficient execution. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Manager in the manner it
considers to be the most equitable and consistent with its fiduciary obligations
to the Funds and to such other clients.
(c) Administrative Services. The Manager shall
oversee the administration of the Funds' business and affairs although the
provision of administrative services, to the extent not covered by subparagraphs
(a) or (b) above, is not the obligation of the Manager under this Agreement.
Notwithstanding any other provisions of this Agreement, the Manager shall be
entitled to reimbursement from the Funds for all or a portion of the reasonable
costs and expenses, including salary, associated with the provision by Manager
of personnel to render administrative services to the Funds.
3. Best Efforts and Judgment. The Manager shall use its
best judgment and efforts in rendering the advice and services to the Funds as
contemplated by this Agreement.
4. Independent Contractor. The Manager shall, for all
purposes herein, be deemed to be an independent contractor, and shall, unless
otherwise expressly provided and authorized to do so, have no authority to act
for or represent the Trust or the Funds in any way, or in any way be deemed an
agent for the Trust or for the Funds. It is expressly understood and agreed that
the services to be rendered by the Manager to the Funds under the provisions of
this Agreement are not to be deemed exclusive, and the Manager shall be free to
render similar or different services to others so long as its ability to render
the services provided for in this Agreement shall not be impaired thereby.
5. Manager's Personnel. The Manager shall, at its own
expense, maintain such staff and employ or retain such personnel and consult
with such other persons as it shall from time to time determine to be necessary
to the performance of its obligations under this Agreement. Without limiting the
generality of the foregoing, the staff and personnel of the Manager shall be
deemed to include persons employed or retained by the Manager to furnish
statistical information, research, and other factual information, advice
regarding economic factors and trends, information with respect to technical and
scientific developments, and such other information, advice and assistance as
the Manager or the Trust's Board of Trustees may desire and reasonably request.
6. Reports by Funds to Manager. Each Fund will from time
to time furnish to the Manager detailed statements of its investments and
assets, and information as to its investment
<PAGE>
FORM OF INVESTMENT
MANAGEMENT AGREEMENT
objective and needs, and will make available to the Manager such financial
reports, proxy statements, legal and other information relating to each Fund's
investments as may be in its possession or available to it, together with such
other information as the Manager may reasonably request.
7. Expenses.
(a) With respect to the operation of each Fund, the
Manager is responsible for (i) the compensation of any of the Trust's trustees,
officers, and employees who are affiliates of the Manager (but not the
compensation of employees performing services in connection with expenses which
are the Fund's responsibility under Subparagraph 7(b) below or the compensation
of affiliates performing distribution and marketing duties outside of the scope
of this Agreement if a Rule 12b-1 plan has been adopted by the Trust), (ii) the
expenses of printing and distributing the Funds' prospectuses, statements of
additional information, and sales and advertising materials (but not the legal,
auditing or accounting fees attendant thereto) to prospective investors (but not
to existing shareholders), and (iii) providing office space and equipment
reasonably necessary for the operation of the Funds.
(b) Each Fund is responsible for and has assumed the
obligation for payment of all of its expenses, other than as stated in
Subparagraph 7(a) above, including but not limited to: fees and expenses
incurred in connection with the issuance, registration and transfer of its
shares; brokerage and commission expenses; all expenses of transfer, receipt,
safekeeping, servicing and accounting for the cash, securities and other
property of the Trust for the benefit of the Funds including all fees and
expenses of its custodian, shareholder services agent and accounting services
agent; interest charges on any borrowings; costs and expenses of pricing and
calculating its daily net asset value and of maintaining its books of account
required under the 1940 Act; taxes, if any; expenditures in connection with
meetings of each Fund's shareholders and Board of Trustees that are properly
payable by the Fund; salaries and expenses of officers and fees and expenses of
members of the Trust's Board of Trustees or members of any advisory board or
committee who are not members of, affiliated with or interested persons of the
Manager; insurance premiums on property or personnel of each Fund which inure to
its benefit, including liability and fidelity bond insurance; the cost of
preparing and printing reports, proxy statements, prospectuses and statements of
additional information of the Fund or other communications for distribution to
existing shareholders; legal, auditing and accounting fees; trade association
dues; fees and expenses (including legal fees) of registering and maintaining
registration of its shares for sale under federal and applicable state and
foreign securities laws; all expenses of maintaining
<PAGE>
FORM OF INVESTMENT
MANAGEMENT AGREEMENT
and servicing shareholder accounts, including all charges for transfer,
shareholder recordkeeping, dividend disbursing, redemption, and other agents for
the benefit of the Funds, if any; and all other charges and costs of its
operation plus any extraordinary and non-recurring expenses, except as herein
otherwise prescribed.
(c) To the extent the Manager incurs any costs by
assuming expenses which are an obligation of a Fund as set forth herein, such
Fund shall promptly reimburse the Manager for such costs and expenses, except to
the extent the Manager has otherwise agreed to bear such expenses. To the extent
the services for which a Fund is obligated to pay are performed by the Manager,
the Manager shall be entitled to recover from such Fund to the extent of the
Manager's actual costs for providing such services.
8. Investment Advisory and Management Fee.
(a) Each Fund shall pay to the Manager, and the
Manager agrees to accept, as full compensation for all administrative and
investment management and advisory services furnished or provided to such Fund
pursuant to this Agreement, a management fee at the annual rate set forth in the
Fee Schedule attached hereto as Appendix A, as may be amended in writing from
time to time by the Trust and the Manager.
(b) The management fee shall be accrued daily by each
Fund and paid to the Manager on the first business day of the succeeding month
or when demanded by the Manager.
(c) The initial fee under this Agreement shall be
payable on the first business day of the first month following the effective
date of this Agreement and shall be prorated as set forth below. If this
Agreement is terminated before the end of any month, the fee to the Manager
shall be prorated for the portion of any month in which this Agreement is in
effect which is not a complete month according to the proportion which the
number of calendar days in the month during which the Agreement is in effect
bears to the number of calendar days in the month, and shall be payable within
ten (10) days after the date of termination.
(d) The Manager may reduce any portion of the
compensation or reimbursement of expenses due to it pursuant to this Agreement
and may agree to make payments to limit the expenses which are the
responsibility of a Fund under this Agreement. Any such reduction or payment
shall be applicable only to such specific reduction or payment and shall not
constitute an agreement to reduce any future compensation or reimbursement due
to the Manager hereunder or to continue future payments. Any such reduction will
be agreed to prior to accrual of the related expense or fee and will be
estimated daily and reconciled and paid on a monthly basis. Any fee withheld
<PAGE>
FORM OF INVESTMENT
MANAGEMENT AGREEMENT
pursuant to this paragraph from the Manager shall be reimbursed by the
appropriate Fund to the Manager in the first, second or third (or any
combination thereof) fiscal year next succeeding the fiscal year of the
withholding to the extent permitted by the applicable state law if the aggregate
expenses for the next succeeding fiscal year, second succeeding fiscal year or
third succeeding fiscal year do not exceed the applicable state limitation or
any more restrictive limitation to which the Manager has agreed. The Manager may
elect to seek reimbursement for the oldest reductions and waivers before payment
by a Fund of fees or expenses for the current year.
(e) The Manager may agree not to require payment of
any portion of the compensation or reimbursement of expenses otherwise due to it
pursuant to this Agreement prior to the time such compensation or reimbursement
has accrued as a liability of the Fund. Any such agreement shall be applicable
only with respect to the specific items covered thereby and shall not constitute
an agreement not to require payment of any future compensation or reimbursement
due to the Manager hereunder.
9. Fund Share Activities of Manager's Officers and
Employees. The Manager agrees that neither it nor any of its officers or
employees shall take any short position in the shares of the Funds. This
prohibition shall not prevent the purchase of such shares by any of the officers
or bona fide employees of the Manager or any trust, pension, profit-sharing or
other benefit plan for such persons or affiliates thereof, at a price not less
than the net asset value thereof at the time of purchase, as allowed pursuant to
rules promulgated under the 1940 Act.
10. Conflicts with Trust's Governing Documents and
Applicable Laws. Nothing herein contained shall be deemed to require the Trust
or the Funds to take any action contrary to the Trust's Agreement and
Declaration of Trust, By-Laws, or any applicable statute or regulation, or to
relieve or deprive the Board of Trustees of the Trust of its responsibility for
and control of the conduct of the affairs of the Trust and Funds.
11. Manager's Liabilities.
(a) In the absence of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the obligations or duties hereunder
on the part of the Manager, the Manager shall not be subject to liability to the
Trust or the Funds or to any shareholder of the Funds for any act or omission in
the course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security by the
Funds.
(b) The Funds shall indemnify and hold harmless the
Manager and the partners, members, officers and employees of the Manager and its
general partner (any such person, an "Indemnified Party") against any loss,
liability, claim, damage or expense (including the reasonable cost of
investigating and defending any alleged loss, liability, claim, damage
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FORM OF INVESTMENT
MANAGEMENT AGREEMENT
or expenses and reasonable counsel fees incurred in connection therewith)
arising out of the Indemnified Party's performance or non-performance of any
duties under this Agreement provided, however, that nothing herein shall be
deemed to protect any Indemnified Party against any liability to which such
Indemnified Party would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence in the performance of duties hereunder or by
reason of reckless disregard of obligations and duties under this Agreement.
(c) No provision of this Agreement shall be construed
to protect any Trustee or officer of the Trust, or officer of the Manager (or
its general partner), from liability in violation of Sections 17(h) and (i) of
the 1940 Act.
12. Non-Exclusivity. The Trust's employment of the
Manager is not an exclusive arrangement, and the Trust may from time to time
employ other individuals or entities to furnish it with the services provided
for herein. If this Agreement is terminated with respect to any Fund, this
Agreement shall remain in full force and effect with respect to all other Funds
listed on Appendix A hereto, as the same may be amended.
13. Term. This Agreement shall become effective at the
time the Trust's initial Registration Statement under the Securities Act of 1933
with respect to the shares of the Trust is declared effective by the Securities
and Exchange Commission and shall remain in effect for a period of two (2)
years, unless sooner terminated as hereinafter provided. This Agreement shall
continue in effect thereafter for additional periods not exceeding one (l) year
so long as such continuation is approved for each Fund at least annually by (i)
the Board of Trustees of the Trust or by the vote of a majority of the
outstanding voting securities of each Fund and (ii) the vote of a majority of
the Trustees of the Trust who are not parties to this Agreement nor interested
persons thereof, cast in person at a meeting called for the purpose of voting on
such approval.
14. Termination. This Agreement may be terminated by the
Trust on behalf of any one or more of the Funds at any time without payment of
any penalty, by the Board of Trustees of the Trust or by vote of a majority of
the outstanding voting securities of a Fund, upon sixty (60) days' written
notice to the Manager, and by the Manager upon sixty (60) days' written notice
to a Fund.
15. Termination by Assignment. This Agreement shall
terminate automatically in the event of any transfer or assignment thereof, as
defined in the 1940 Act.
16. Transfer, Assignment. This Agreement may not be
transferred, assigned, sold or in any manner hypothecated or
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FORM OF INVESTMENT
MANAGEMENT AGREEMENT
pledged without the affirmative vote or written consent of the holders of a
majority of the outstanding voting securities of each Fund.
17. Severability. If any provision of this Agreement
shall be held or made invalid by a court decision, statute or rule, or shall be
otherwise rendered invalid, the remainder of this Agreement shall not be
affected thereby.
18. Definitions. The terms "majority of the outstanding
voting securities" and "interested persons" shall have the meanings as set forth
in the 1940 Act.
19. Notice of Declaration of Trust. The Manager agrees
that the Trust's obligations under this Agreement shall be limited to the Funds
and to their assets, and that the Manager shall not seek satisfaction of any
such obligation from the shareholders of the Funds nor from any trustee,
officer, employee or agent of the Trust or the Funds.
20. Captions. The captions in this Agreement are included
for convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect.
21. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of California without
giving effect to the conflict of laws principles thereof; provided that nothing
herein shall be construed to preempt, or to be inconsistent with, any federal
law, regulation or rule, including the 1940 Act and the Investment Advisors Act
of 1940 and any rules and regulations promulgated thereunder.
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FORM OF INVESTMENT
MANAGEMENT AGREEMENT
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and attested by their duly authorized officers,
all on the day and year first above written.
METROPOLITAN WEST FUNDS METROPOLITAN WEST ASSET
MANAGEMENT, LLC
By: _______________________ By: __________________________
Title:_____________________ Title: _______________________
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FORM OF INVESTMENT
MANAGEMENT AGREEMENT
Appendix A to
Investment Management
Agreement
FEE SCHEDULE
Name of Fund Applicable Fee
- ------------ --------------
Metropolitan West Total Return Bond Fund 0.55%
Metropolitan West Low Duration Bond Fund 0.48%
Metropolitan West Short Term Investment Fund 0.40%
This Fee Schedule is effective as of this __th day of __________, 1997.
METROPOLITAN WEST FUNDS METROPOLITAN WEST ASSET
MANAGEMENT, LLC
By:________________________ By:___________________________
Title:_____________________ Title: _______________________
