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METROPOLITAN WEST FUNDS PROSPECTUS
10880 WILSHIRE BOULEVARD
SUITE 2020
LOS ANGELES, CALIFORNIA 90024 APRIL 9, 1997
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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 current income, consistent with the preservation of capital.
Capital appreciation is a secondary consideration of the Fund. 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 current income, consistent with the preservation of capital.
Capital appreciation is a secondary consideration of the Fund. 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.
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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 April 9, 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) 241-4671 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) 241-4671.
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
April 9, 1997
[METROPOLITAN LOGO]
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
SUMMARY OF EXPENSES................................................................................... 3
ADVISER INVESTMENT RETURNS............................................................................ 4
PROSPECTUS SUMMARY.................................................................................... 5
INVESTMENT OBJECTIVES AND POLICIES.................................................................... 5
SECURITIES AND TECHNIQUES USED BY THE FUNDS........................................................... 8
INVESTMENT RISKS...................................................................................... 12
PRINCIPAL INVESTMENT RESTRICTIONS..................................................................... 13
ORGANIZATION AND MANAGEMENT........................................................................... 14
HOW TO PURCHASE SHARES................................................................................ 16
HOW TO REDEEM SHARES.................................................................................. 16
DIVIDENDS AND TAX STATUS.............................................................................. 18
PERFORMANCE INFORMATION............................................................................... 19
GENERAL INFORMATION................................................................................... 19
APPENDIX -- DESCRIPTION OF RATINGS.................................................................... 20
</TABLE>
The application for investing in the Metropolitan West Funds is included in this
prospectus.
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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 you will bear directly or
indirectly as an investor in the Funds. These are the expenses, including the
estimated other expenses, of each Fund for the first full year of operations.
SHAREHOLDER TRANSACTION EXPENSES*
<TABLE>
<S> <C>
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
</TABLE>
Investment dealers and other firms may independently charge additional fees for
shareholder transactions or for advisory services. Please see their materials
for details.
Shareholders effecting transactions via wire transfer may be required to pay
fees, including the wire fee and other fees, that will be deducted directly from
redemption proceeds.
ANNUAL FUND OPERATING EXPENSES*
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
Total Low Short-Term
Return Duration Investment
Bond Fund Bond Fund Fund
--------- --------- ----------
<S> <C> <C> <C>
Management fees.................................... .55% .48% .40%
Rule 12b-1 expenses**.............................. None None None
Other expenses after expense reimbursement......... .10% .10% .10%
----- ----- -----
Total Fund operating expenses after expense
reimbursement.................................... .65% .58% .50%
===== ===== =====
</TABLE>
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*Although not required to do so, Metropolitan West Asset Management, LLC
(the "Adviser"), 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 -- 1.00% (.45% other expenses); Low Duration Bond Fund -- 1.00% (.52% other
expenses); and Short-Term Investment Fund -- .90% (.50% 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 it paid 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.
**The Funds have adopted a Rule 12b-1 plan to pay for distribution
expenses. The Funds may charge up to an annual rate of .25% of average net
assets. Currently, the Board of Trustees of the Trust is waiving these fees for
the Funds and the Adviser is paying for distribution expenses out of its own
resources.
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EXAMPLE
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<TABLE>
<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 and does not represent the projected or actual performance of
any Fund. See "Organization and Management."
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ADVISER INVESTMENT RETURNS
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Set forth in the table below is certain performance data provided by the Adviser
relating to a performance record of the Adviser for at least six investment
advisory accounts (the "Low Duration Accounts"), during the period August 1,
1996 through December 31, 1996, utilizing the specific investment approach
specified for the Low Duration Bond Fund under "Investment Objectives and
Policies." The Low Duration Accounts constitute all of the accounts managed by
the Adviser that have an identical or similar investment objective or investment
approach as the Low Duration Bond Fund. The Low Duration Accounts are not
subject to the same types of expenses to which the Low Duration Bond Fund is
subject, nor to the diversification requirements, specific tax restrictions and
investment limitations imposed on the Low Duration Bond Fund by the Investment
Company Act of 1940, as amended. From May 18, 1993 through July 31, 1996
performance data is for the Hotchkis and Wiley Low Duration Bond Fund that Tad
Rivelle and Laird Landmann, now Managing Director-Chief Investment Officer and
Managing Director of the Adviser, respectively, personally managed in their
capacities as principals and Co-Directors of Fixed Income for Hotchkis and
Wiley. The Low Duration Accounts and the Hotchkis and Wiley Low Duration Bond
Fund are collectively called the "Low Duration Assets." The Low Duration Assets
have been managed with investment objectives and investment policies and
strategies substantially similar to those to be employed by Mr. Rivelle and Mr.
Landmann in managing the Low Duration Bond Fund. The results presented are not
intended to predict or suggest the return to be experienced by the Low Duration
Bond Fund or the return an investor might achieve by investing in the Low
Duration Bond Fund. Investors should not rely on the following performance data
as an indication of future performance of the Adviser or of the Low Duration
Bond Fund.
TOTAL RETURN OF LOW DURATION ASSETS
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<TABLE>
<CAPTION>
AUGUST 1, JANUARY 1,
1996- 1996- YEAR ENDED DECEMBER 31,
1996 DECEMBER 31, JULY 31, ------------------------
(FULL YEAR) 1996* 1996 1995 1994 1993**
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<S> <C> <C> <C> <C> <C> <C>
Low Duration Assets............................... 6.67% 3.89% 2.68% 12.75% 5.23% 7.14%
Performance Record
Merrill Lynch 1-3 Year U.S. Treasury Index........ 4.98% 3.19% 1.75% 11.00% 0.57% 2.62%
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</TABLE>
* Performance results for this period are for Low Duration Accounts which Mr.
Rivelle and Mr. Landmann personally managed for Metropolitan West Securities,
Inc., an affiliate of the Adviser, while the Adviser was in formation.
** From May 18, 1993
Please read the following important notes concerning the Low Duration Assets.
1. Performance before August 1, 1996 was calculated using the standard total
return formula required by the Securities and Exchange Commission ("SEC") for
all mutual funds.
2. The results for the Low Duration Accounts reflect both income and capital
appreciation or depreciation (total return). Returns are time-weighted and net
of all applicable fees and expenses.
3. Annual rate of return for the Low Duration Accounts is calculated using the
modified Dietz method, which is defined as the portfolio gain (including all
realized and unrealized gains and losses as well as all income) over the average
capital for the period. Average capital is the beginning market value plus/minus
weighted subscriptions/redemptions. Calculation is done monthly, but is subject
to revaluation during the month when there is a cash flow that exceeds 10% of
the beginning market value of the Low Duration Accounts.
4. Investors should note that the Low Duration Bond Fund will compute and
disclose its average annual compounded rate of return using the standard formula
set forth in SEC rules, which differs in certain respects from returns for the
Low Duration Accounts noted above. The SEC total return calculation method calls
for computation and disclosure of an average annual compounded rate of return
for one, five and ten year periods or shorter periods from inception. The SEC
formula provides a rate of return that equates a hypothetical initial investment
of $1,000 to an ending redeemable value. The returns shown for the Low Duration
Accounts are net of advisory fees in accordance with the SEC calculation
formula, which requires that returns be shown for the Low Duration Bond Fund be
net of advisory fees as well as all other applicable Fund operating expenses.
Performance was calculated on a trade date basis.
5. The Merrill Lynch 1-3 Year U.S. Treasury Index includes fixed-rate debt
issues rated investment grade or higher by Moody's, S&P or Fitch.
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PROSPECTUS SUMMARY
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INVESTMENT OBJECTIVES AND POLICIES
Each Fund has its own investment objective. See "Investment Objectives and
Policies" for a full discussion of the objectives of each Fund. The investment
objective of each Fund is fundamental and may not be changed without shareholder
approval.
THE INVESTMENT ADVISER
The Adviser, 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 is commencing its
asset management business with the commencement of the Funds. 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 $12.5 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 a Fund is $5,000. For retirement plan
investments the minimum initial investment is $1,000. The Funds may waive
minimum investment requirements for shareholders investing through certain fund
networks or other financial intermediaries. In such cases, the minimums
associated with the policies and programs of the fund network or financial
intermediary shall apply.
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
Each Fund expects 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.
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INVESTMENT OBJECTIVES AND POLICIES
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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 Fund. 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 Fund may use 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 an investment in the Funds, including their use of derivatives,
see "Investment Risks."
Metropolitan West Asset Management, LLC (the "Adviser") acts as investment
adviser 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 meaning of "duration" is explained below under "Investment Policies
of the Funds." The dollar-weighted average maturity of the portfolio of the
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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 Adviser believes to be relatively undervalued. The Adviser
views bonds to mean any interest-bearing security that obligates the issuer to
pay the holder specified sums of money on specified dates (or at maturity) 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 current
income, 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 from one to three years. The meaning of "duration" is
explained below under "Investment Policies of the Funds." 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
current income, consistent with the 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 meaning of "duration" is explained below under
"Investment Policies of the Funds." 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
Portfolio Securities. 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."
Credit Ratings. Under normal circumstances, the TOTAL RETURN BOND FUND will
invest at least 80% of its net assets in debt instruments rated at least (i)
Baa3 by Moody's Investor's Service ("Moody's") or BBB- by Standard & Poor's
Rating Group ("S&P"), Fitch Investors Services, Inc. ("Fitch") or Duff & Phelps
Credit Rating Co. ("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 ("Investment Grade
Securities"), or (iii) of comparable quality to Investment Grade Securities as
determined by the Adviser in the case of unrated securities. Up to 20% of the
TOTAL RETURN BOND FUND'S net assets may be invested in securities rated below
Investment Grade Securities but rated B or higher by one of the nationally
recognized statistical rating organizations or, if unrated, of comparable
quality in the opinion of the Adviser.
Under normal circumstances, the LOW DURATION BOND FUND and the SHORT-TERM
INVESTMENT FUND each will invest at least 70% of its net assets in 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 ("Highly Rated Securities"), or (iii) of comparable quality to
Highly Rated Securities as determined by the Adviser in the case of unrated
securities. Up to 20% of the LOW DURATION BOND FUND'S and the SHORT-TERM
INVESTMENT FUND'S net assets may be invested in securities rated below Highly
Rated Securities but with ratings equal at least to Investment Grade Securities
by one of the nationally recognized statistical rating organizations or, if
unrated, of comparable quality in the opinion of the Adviser. 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 Grade Securities but rated B or
higher by one of the nationally recognized statistical rating organizations or,
if unrated, of comparable quality in the opinion of the Adviser.
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
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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. This would not require the Fund to sell the
security, but the Adviser 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 the Funds will be
limited to a maximum of 15% of each Fund's total assets.
Duration. 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 Adviser 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 rates 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.
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SECURITIES AND TECHNIQUES USED BY THE FUNDS
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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 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.
Funds may also invest in Treasury Receipts. Treasury Receipts are not issued by
the United States Treasury and, therefore, they are not U.S. Government
securities.
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 if 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.
The Funds may invest in corporate debt securities with contractual call
provisions that permit the seller of the security to repurchase the security at
a predetermined price. The market price typically reflects the presence of a
call provision.
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.
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ASSET-BACKED SECURITIES
The Funds may invest in securities with principal and interest payouts backed
by, or supported by, any of various types of assets. These assets 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 Adviser 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 Adviser 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 statistical rating organizations. The Adviser 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 from the Fund 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 delays and expenses
in liquidating the securities subject to the repurchase agreement, a decline in
their value and a loss of interest income.
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, a Fund may borrow for temporary, emergency or
investment purposes up to 10% of its total assets. This borrowing may be
unsecured. 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.
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LOANS OF PORTFOLIO SECURITIES
For the purpose of achieving income, a Fund may lend its 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.
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
If a Fund anticipates that the price of a security will decline, it may sell the
security "short" and borrow the same security from a broker or other institution
to complete the sale. The Fund may make a profit or loss depending upon whether
the market price of the security decreases or increases between the date of the
short sale and the date on which the Fund must replace the borrowed security.
Until the security is replaced, the Fund generally is required to pay to the
lender amounts equal to any interest which accrues during the period of the
loan. To borrow the security, the Fund also may be required to pay a premium,
which would also increase the cost of the security sold. The proceeds of the
short sale will be retained by the broker (or by the Fund's custodian in a
special custody account), to the extent necessary to meet the margin
requirements, until the short position is closed out.
Until the Fund closes its short position or replaces the borrowed security, the
Fund will maintain a segregated account containing cash or liquid high-grade
debt securities at such a level that: (i) the amount deposited in the account
plus the amount deposited with the broker as collateral will equal the current
value of the security sold short and (ii) the amount deposited in the segregated
account plus the amount deposited with the broker as collateral will not be less
than the market value of the security at the time it was sold short.
A Fund may not make short sales of securities or maintain a short position if
more than 25% of the Fund's net assets (taken at current value) are 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 for federal income
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tax purposes 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 earlier classes have 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 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 with
performance derived from the performance of an underlying asset ("derivatives").
The Funds may purchase and write call and put options on securities, securities
indices 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 indices. 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 to attempt to obtain a particular desired return at a lower cost
than if
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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. 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
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The investment practices described above involve certain risks. The net asset
value of any Fund 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 Adviser 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
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
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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 IO and
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 Adviser'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 Adviser'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 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 and other derivatives 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 that 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 fundamental policies, 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 Fund's investment restrictions is contained in
the Statement of Additional Information. As a matter of operating policy (though
not a fundamental policy), the Funds limit investments in illiquid securities to
no more than 15% of the value of their net assets. Illiquid securities include:
(i) securities for which there is no readily available market; (ii) securities
which may be subject to legal restrictions (so-called "restricted securities")
other than Rule 144A securities noted below; (iii) repurchase agreements having
more than seven days to maturity; (iv) fixed time deposits subject to withdrawal
penalties (other than those with a term of less than seven days); and (v)
foreign securities subject to repatriation restrictions on the sale proceeds
other than minor settlement procedures. Restricted securities do not include
those which meet the requirements of Rule 144A under the Securities Act of 1933,
as amended, and which the Trustees have determined to be liquid based on the
applicable trading markets and the availability of reliable price information.
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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.
Beneficial interests in the Trust shall at all times be divided into an
unlimited number of shares, with a par value of $.01 per share. The Trust is a
diversified, open-end management investment company currently consisting of
three separate series. The Trust's Board of Trustees decides matters of general
policy and reviews the activities of the Adviser. The Trust's officers conduct
and supervise the daily business operations of the Trust. Each Fund is a series
of shares of the Trust, having separate assets and liabilities. 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 the
requisite vote 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. Shareholders holding the lesser of $25,000
worth or one percent of a Fund's shares may then 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 ADVISER
General. The Adviser is located at 10880 Wilshire Blvd., Suite 2020, Los
Angeles, California 90024, and acts as the investment adviser to the Funds and
generally administers the affairs of the Trust. Subject to the direction and
control of the Board of Trustees, the Adviser supervises and arranges the
purchase and sale of securities held in the portfolios of the Funds. The
Adviser, 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 is commencing its
asset management business with the commencement of the Funds. 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 $12.5 billion for its clients.
Advisory Fees. Under the Investment Advisory Agreement relating to the TOTAL
RETURN BOND FUND, the Trust pays the Adviser 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 Adviser 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 Adviser a fee, computed daily and payable monthly, at
an annual rate of 0.40% of the Fund's average daily net assets.
Rule 12b-1 Fee. The Funds have a plan of distribution or "12b-1 Plan" under
which they may finance activities primarily intended to sell shares, provided
the categories of expenses are approved in advance by the board and the expenses
paid under the plan were incurred within the last 12 months and accrued while
the plan is in effect. Expenditures by a Fund under the plan may not exceed
0.25% of its average net assets annually (all of which may be for service fees).
See "Summary of Expenses."
Other Expenses. In addition to the fee payable to the Adviser, 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 Adviser; (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.
Compensation of Other Parties. The Adviser may in its discretion and out of its
own funds compensate third parties for the sale and marketing of the Funds. The
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Adviser also may use its own funds to sponsor seminars and educational programs
on the Funds for financial intermediaries and shareholders.
Although not required to do so, the Adviser has voluntarily agreed to limit the
annual 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 average net assets. The Adviser will give shareholders at least 30
days' notice of any decision to change this policy.
The Adviser also manages individual investment advisory accounts. The Adviser
reduces 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 invested in any Fund.
The Investment Advisory Agreement permits the Adviser to allocate brokerage
based on sales of shares of Funds managed by the Adviser. No such allocation has
been made to date.
THE ADMINISTRATOR
FPS Services, Inc., 3200 Horizon Drive, P.O. Box 61503, King of Prussia,
Pennsylvania 19406-0903 serves as administrator to the Trust pursuant to an
Administration Agreement.
THE DISTRIBUTOR
FPS Broker Services, Inc., 3200 Horizon Drive, P.O. Box 61503, King of Prussia,
Pennsylvania 19406-0903 serves as principal underwriter to the Trust pursuant to
an Underwriting 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 Adviser since
September 1996 and a Managing Director-Fixed Income of Metropolitan West
Securities, Inc., an affiliate of the Adviser, from August 1996 through December
1996 while the Adviser 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 the Adviser since September 1996
and a portfolio manager with Metropolitan West Securities, Inc. from August 1996
through December 1996 while the Adviser was in formation. From November 1995
until July 1996, Mr. Kane was a portfolio manager with Hotchkis 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 Adviser since September
1996 and a Managing Director-Fixed Income of Metropolitan West Securities, Inc.
from August 1996 through December 1996 while the Adviser was in formation. From
November 1992 until July 1996, Mr. Landmann was a principal and Co-Director of
Fixed Income with Hotchkis 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
Adviser since September 1996 and a Managing Director-Fixed Income of
Metropolitan West Securities, Inc. from August 1996 through December 1996 while
the Adviser was in formation. From November 1992 until July 1996, Mr. Rivelle
was a principal and Co-Director of Fixed Income with Hotchkis 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.
15
<PAGE> 16
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HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------
The minimum initial investment in each Fund is $5,000. For retirement plan
investments the initial minimum is $1,000. The Trust and the Transfer Agent
reserve the right to reject any order and to waive minimum investment
requirements. The Funds may waive minimum investment requirements for
shareholders investing through certain fund networks or other financial
intermediaries. In such cases, the minimums associated with the policies and
programs of the fund network or financial intermediary shall apply. Investors
may invest in any Fund by wiring the amount to be invested to Metropolitan West
Funds.
Wire to: UMB Bank, N.A.
ABA # 10-10-00695
for FPS Services, Inc.
Account number 98-7037-071-9
FBO (Name of Fund)
Shareholder name and account number
The shareholder's bank may impose a fee for investments by wire. The Fund or the
Transfer Agent will not be responsible for the consequence of delays, including
delays in the banking or Federal Reserve wire systems. Wires received after the
close of the New York Stock Exchange will be considered received by the next
business day.
To ensure proper credit, prior to wiring any funds the shareholder must call 1
(800) 241-4671 to give notification of the wire and to get an account number
assigned if the wire is an initial investment. In addition, if the wire
represents an initial investment, the investor must mail an application form, by
regular mail, to the Transfer Agent at the following address:
Metropolitan West Funds
c/o FPS Services, Inc.
3200 Horizon Drive
P.O. Box 61503
King of Prussia, Pennsylvania 19406-0903
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 $20 service charge imposed by the Transfer
Agent. Forms for additional contributions by check or change of address are
provided on account statements.
The Trust will only accept a check when the Trust is the primary payee. The
Trust may also accept orders from certain qualified institutions, with payment
made to the Fund at a later time. The Adviser is responsible for insuring that
such payment is made on a timely basis. Investors may be charged a fee if they
effect transactions through a broker or agent.
The Adviser 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, c/o FPS Services, Inc.,
P.O. Box 61503, King of Prussia, Pennsylvania 19406-0903.
The Trust does not consider the U.S. Postal Service or other independent
delivery service to be its agent. Therefore, deposit in the mail or with such
service 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.
- --------------------------------------------------------------------------------
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
REGULAR REDEMPTION
A shareholder may redeem shares 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 Trust, c/o the Transfer Agent, the address is: 3200
Horizon Drive, P.O. Box 61503, King of Prussia, Pennsylvania 19406-0903.
16
<PAGE> 17
The redemption request should identify the Fund and the account number, specify
the number of shares to be redeemed, and be signed by all registered owners
exactly as the account is registered, and will not be accepted unless it
contains all required documents. The shares will be redeemed at the net asset
value next determined after receipt of the request in proper form by the
Transfer Agent. A redemption of shares is a sale of shares and a shareholder may
realize a taxable gain or loss.
If the proceeds of any redemption (a) exceed $50,000, (b) are paid to a person
other than the owner of record, or (c) are sent to an address or bank account
other than shown on the Transfer Agent's records, the signature(s) on the
redemption request must be guaranteed by a commercial bank or trust company in
the United States, a member firm of the National Association of Securities
Dealers, Inc., or other eligible guarantor institution. A notary public is not
an acceptable guarantor.
Additional documentation may be required for the redemption of shares held in
corporate, partnership or fiduciary accounts. In case of any questions, please
contact the Funds in advance.
Redemptions will be processed only on a day during which the New York Stock
Exchange is open for business. Investors who purchase shares by check or money
order will not have redemption requests processed until there is reasonable
belief that the check or money order has cleared, which may take up to 15
calendar days after the purchase order.
TELEPHONE REDEMPTION
You may redeem shares 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. In
order to arrange for telephone redemptions or change payment instructions 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 1 (800) 241-4671 and giving the
account name, account number, and amount of the redemption. Joint accounts
require only one shareholder to call. 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 4:00 p.m. (Eastern time). There will be a $9 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
or other identifying information. 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 and the shareholder has selected the
appropriate box on the Account Application. 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
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) 241-4671.
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
17
<PAGE> 18
of severe market or economic conditions, the telephone exchange of shares may be
difficult to implement and shareholders should exchange shares by writing to the
Transfer Agent at the address listed above.
In an effort to prevent unauthorized or fraudulent exchange 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.
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
A Fund 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; REPORTING
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. A Fund also may be required to report
redemptions to the Internal Revenue Service.
- --------------------------------------------------------------------------------
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 Fund'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 ex-dividend 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.
Each Fund intends to elect and qualify to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). Each Fund is taxed as a separate entity under Subchapter M and must
qualify 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 will be taxable as ordinary income to
the shareholders even though paid in
18
<PAGE> 19
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.
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.
Dividends, interest and gains 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.
Distributions will be taxable in the year in which they are received, except for
certain distributions received in January, which will be taxable as if received
the prior December. Shareholders of a Fund will be informed annually of the
amount and nature of the Fund's distributions, including the portions, if any,
that qualify for the dividends-received deduction, that are capital gain
distributions and that are a return of capital.
Additional information about taxes is set forth in the Statement of Additional
Information. The foregoing discussion has been prepared by the management of the
Funds, and does not purport to be a complete description of all tax implications
of an investment in a Fund. Shareholders should consult their own advisors
concerning the application of federal, state and local tax laws to their
particular situations.
- --------------------------------------------------------------------------------
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. A
Fund's 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 income it earned from its portfolio
investments for a specified 30-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 are 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
- --------------------------------------------------------------------------------
Financial Statements. The Statements of Assets and Liabilities of the
Metropolitan West Total Return Bond Fund and the Metropolitan West Low Duration
Bond Fund as of March 27, 1997, which have been audited by Deloitte & Touche
LLP, are included in the Statement of Additional Information and incorporated by
reference herein.
Shareholder Report and Inquiries. Shareholders will receive annual financial
statements, which are examined by the Funds' independent auditors, Deloitte &
Touche LLP, as well as unaudited semi-annual financial statements. Unless
otherwise requested, only one copy of each shareholder report or other material
sent to shareholders will be sent to each household or address regardless of the
number of shareholders or accounts at that household or address. Shareholder
inquiries should be addressed to Metropolitan West Funds, c/o FPS Services,
Inc., 3200 Horizon Drive, P.O. Box 61503, King of Prussia, Pennsylvania
19406-0903, (800) 241-4671.
19
<PAGE> 20
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APPENDIX -- DESCRIPTION OF RATINGS
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
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.
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
20
<PAGE> 21
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.
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.
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<PAGE> 22
"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.
22
<PAGE> 23
[MET WEST LOGO] ACCOUNT APPLICATION
- --------------------------------------------------------------------------------
AMOUNT INVESTED ($5,000 MINIMUM)
FORM OF PAYMENT -- INITIAL INVESTMENT
<TABLE>
<S> <C> <C>
[ ] Check enclosed -- payable to: [ ] Metropolitan West Low Duration Bond Fund $
----------------------------
[ ] Metropolitan West Total Return Bond Fund $
----------------------------
[ ] By Wire -- Funds were wired on in the amount of $
----------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REGISTRATION (PLEASE PRINT)
[ ] INDIVIDUAL (Joint ownership with rights of survivorship unless otherwise
noted)
- --------------------------------------------------------------------------------
Individual Owner's First Name Middle Initial Last Name Social Security
#
- --------------------------------------------------------------------------------
Joint Owner's First Name Middle Initial Last Name Social Security
#
[ ] GIFT TO MINORS
- --------------------------------------------------------------- Under the
- ------------------- UGMA/UTMA
Name of Custodian (one name
only) State
- --------------------------------------------------------------------------------
As Custodian For (one name only) Minor's Social Security #
[ ] CORPORATIONS, PARTNERSHIPS, TRUSTS AND OTHERS (Complete Corporate
Resolution)
- --------------------------------------------------------------------------------
Tax I.D. # Name of Trustee(s) Date of
Trust
- --------------------------------------------------------------------------------
Name of Corporation, Partnership, Trust or Other
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MAILING ADDRESS OF RECORD AND TELEPHONE NUMBER(S)
- --------------------------------------------------------------------------------
Street Address & Apt.
# City State Zip
Daytime Phone Number ( )
- ------------------------- Evening Phone Number ( )
- -------------------------
If you have an account in another Metropolitan West Fund registered under
the same name as above, please indicate the following:
- --------------------------------------------------------------------------------
Fund Name Account Number
- --------------------------------------------------------------------------------
(over)
<PAGE> 24
- --------------------------------------------------------------------------------
DISTRIBUTION OPTIONS (Please indicate one -- Distributions will be reinvested
if no option is checked)
[ ] Automatic Compounding (dividends & capital gains reinvested in additional
shares)
[ ] Cash Dividends (dividends in cash, capital gains reinvested in additional
shares)
[ ] All Cash (dividends & capital gains in cash)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TELEPHONE OPTIONS
[ ] TELEPHONE REDEMPTION
I (we) authorize FPS Services to honor telephone instructions for my (our)
account. Neither the Fund nor FPS Services will be liable for properly
acting upon telephone instructions believed to be genuine. Please attach a
voided check and complete below if you wish to have redemption proceeds
wired to your bank.
- --------------------------------------------------------------------------------
Name of Bank City State
- --------------------------------------------------------------------------------
Bank Routing Number (nine digits) Account Number [ ] Checking [ ] Savings
[ ] TELEPHONE EXCHANGE -- Permits switching at any time among the mutual funds
in the Fund Group.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SIGNATURE AND CERTIFICATION
Required by Federal tax law to avoid 31% backup withholding: "By signing, I
certify under penalties of perjury that the social security or taxpayer
identification number entered above is correct and that I have not been
notified by the IRS that I am subject to backup withholding unless I have
checked the box to the right." Receipt of current prospectus is hereby
acknowledged.
[ ] I am subject to backup withholding.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION
OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO AVOID BACKUP
WITHHOLDING.
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Signature [ ] Owner [ ] Custodian [ ] Trustee Date
Citizen of: [ ] United States [ ] Other (Please Indicate)
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Signature of Joint Owner (if applicable) Date
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FOR INVESTMENT DEALER ONLY:
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Firm's Name Representative's/Advisor's Name Number
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Branch Address Authorized Signature
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Mail completed application to: Metropolitan West Funds
c/o FPS Services, Inc.
3200 Horizon Dr.
P.O. Box 61503
King of Prussia, PA 19406-0903
Telephone: (800) 241-4671
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ADVISER:
Metropolitan West Asset Management, LLC
10880 Wilshire Boulevard, Suite 2020
Los Angeles, California 90024
(310) 446-7727
CUSTODIAN:
The Bank of New York
48 Wall Street
New York, New York 10286
TRANSFER AGENT:
FPS Services, Inc.
3200 Horizon Drive
P.O. Box 61503
King of Prussia, Pennsylvania 19406-0903
(800) 241-4671
AUDITORS:
Deloitte & Touche LLP
1000 Wilshire Boulevard, Suite 1500
Los Angeles, California 90017
DISTRIBUTOR:
FPS Broker Services, Inc.
3200 Horizon Drive
P.O. Box 61503
King of Prussia, Pennsylvania 19406-0903
LEGAL COUNSEL:
Heller Ehrman White & McAuliffe
333 Bush Street
San Francisco, California 94104
