As filed with the Securities and Exchange Commission on July 11, 1997
Securities Act File No. 333-23017
Investment Company Act File No. 811-08085
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
Registration Statement Under The Securities Act of 1933
Pre-Effective Amendment No. 3
and
Registration Statement Under The Investment Company Act of 1940
Amendment No. 3
AMERICAN SKANDIA ADVISOR FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
One Corporate Drive, Shelton, Connecticut 06484
(Address of Principal Executive Offices) (Zip Code)
(800) 628-6039
(Registrant's Telephone Number, Including Area Code)
ERIC C. FREED, ESQ., SECRETARY
AMERICAN SKANDIA ADVISOR FUNDS, INC.
One Corporate Drive, Shelton, Connecticut 06484
(Name and Address of Agent for Service)
Copies to:
ROBERT K. FULTON, ESQ.
WERNER & KENNEDY
1633 Broadway, 46th Floor, New York, New York 10019
Approximate Date of Proposed Public Offering:
On or about July 21, 1997.
Registrant hereby elects to register an indefinite
number of shares under Rule 24f-2.
This Registration Statement has also been executed by American Skandia
Master Trust.
<PAGE>
Pre-Effective Amendment No. 3 to Registration Statement on Form N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
<S> <C>
Form N-1A Item Number: Part A Prospectus Caption:`
1. Cover Page
2. Expense Information
3. (a)(b) *
(c)(d) Performance of the Funds
4. Organization and Capitalization of the Company;
Investment Programs of the Funds; Certain
Risk Factors and Investment Methods
5. (a)(b)(c)(d)(f) Management of the Funds
(e) Other Information
(g) Portfolio Transactions
5A. *
6. (a)(b)(c)(d) Organization and Capitalization of the Company
(e) Other Information
(f)(g) Dividends, Capital Gains and Taxes
(h) How to Buy Shares; Special Information on the
"Master/Feeder" Fund Structure
7. (a) Other Information
(b) Determination of Net Asset Value; How to Buy Shares
(c) Special Investment Programs and Privileges
(d)(e)(f)(g) How to Buy Shares
8. (a)(b)(d) How to Redeem Shares
(c) Shareholder Account Rules and Policies
9. *
Part B Statement of Additional Information Caption:
10. Cover Page
11. Cover Page
12. General Information
13. (a)(c) Investment Programs of the Funds
(b) Fundamental Investment Restrictions
(d) Portfolio Transactions
14. Management of the Company
15. (a)(b) Capital Stock of the Company & Principal Holders
of Securities
(c) Management of the Company
16. (a)(b) See Prospectus; Investment Advisory &
Administration Services; Management of the Company
(c)(e)(g)(i) *
(d) Investment Advisory & Administration Services
(f) See Prospectus; Distribution Arrangements
(h) Other Information
17. (a)(c) Portfolio Transactions
(b)(d)(e) *
18. (a) Capital Stock of the Company & Principal Holders
of Securities
(b) *
19. (a)(c) Additional Information on the Purchase and Redemption of Shares
(b) Determination of Net Asset Value
20. Additional Tax Considerations
21. Distribution Arrangements
22. Additional Performance Information
23. Financial Statements
</TABLE>
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
* Not Applicable
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
P R O S P E C T U S
Class A, Class B, Class C and Class X Shares
July __, 1997
---------------------------------
ASAF FOUNDERS INTERNATIONAL SMALL CAPITALIZATION FUND
ASAF T. ROWE PRICE INTERNATIONAL EQUITY FUND
ASAF FOUNDERS SMALL CAPITALIZATION FUND
ASAF T. ROWE PRICE SMALL COMPANY VALUE FUND
ASAF JANUS CAPITAL GROWTH FUND
ASAF INVESCO EQUITY INCOME FUND
ASAF AMERICAN CENTURY STRATEGIC BALANCED FUND
ASAF FEDERATED HIGH YIELD BOND FUND
ASAF TOTAL RETURN BOND FUND
ASAF JPM MONEY MARKET FUND
------------------------------------------------------------------------
This Prospectus explains the basic information you should know before investing
in the above funds. Five of the funds seek their respective investment
objectives by investing all of their investable assets in a corresponding
portfolio of American Skandia Master Trust which has an investment objective
identical to that of the investing fund. The investment experience of each of
these funds directly corresponds with the investment experience of its
corresponding portfolio. Please read this Prospectus carefully and keep it for
future reference. Additional information about the funds has been filed with the
Securities and Exchange Commission (the "Commission") in a Statement of
Additional Information ("SAI"), dated July__, 1997, which is incorporated by
reference into this Prospectus. To obtain a copy of the SAI without charge, call
1-800-SKANDIA or write to "American Skandia Advisor Funds, Inc." at P.O. Box
8012, Boston, Massachusetts 02266-8012. The Commission maintains a Web site
(http:/ /www.sec.gov) that contains the SAI, material incorporated by reference,
and other information regarding American Skandia Advisor Funds, Inc. and
American Skandia Master Trust.
An investment in the ASAF JPM Money Market Fund is neither insured nor
guaranteed by the U.S. Government. While the ASAF JPM Money Market Fund seeks to
maintain a stable net asset value of $1.00 per share, there can be no assurance
that the fund will be able to achieve this goal.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
bank or other depository institution. Shares are not insured by the FDIC, the
Federal Reserve Board, or any other agency, and are subject to investment risk,
including the possible loss of the principal amount invested.
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.
<PAGE>
American Skandia Advisor Funds, Inc. (the "Company") is an open-end
management investment company comprised of ten diversified investment portfolios
(each a "Fund" and together the "Funds"). Five of the Funds -- ASAF T. Rowe
Price International Equity Fund, ASAF Janus Capital Growth Fund, ASAF INVESCO
Equity Income Fund, ASAF Total Return Bond Fund and ASAF JPM Money Market Fund
(each a "Feeder Fund" and together the "Feeder Funds") -- invest all of their
investable assets in a corresponding portfolio (each a "Portfolio" and together
the "Portfolios") of American Skandia Master Trust (the "Trust"), an open-end
management investment company comprised of five diversified investment
portfolios. Each Portfolio invests in securities in accordance with an
investment objective, investment policies and limitations identical to those of
its corresponding Feeder Fund. This "master/feeder" fund structure differs from
that of the other Funds of the Company and many other investment companies which
directly invest and manage their own portfolio of securities. Those Funds of the
Company which currently are not organized under a "master/feeder" fund structure
(the "Non-Feeder Funds") retain the right to invest all of their investable
assets in a corresponding Portfolio of the Trust in the future. For additional
information regarding the "master/feeder" fund structure, see this Prospectus
under "Special Information on the 'Master/Feeder' Fund Structure."
American Skandia Investment Services, Incorporated ("ASISI" or the
"Investment Manager") acts as the investment manager for both the Non-Feeder
Funds and the Portfolios. Currently, ASISI engages a sub-advisor ("Sub-advisor")
for the investment management of each Non-Feeder Fund and Portfolio. The
following table highlights certain features of each Fund (and corresponding
Portfolio, where applicable):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Fund/Portfolio: Sub-Advisor: Investment Goal: Investment Style:
Int'l Small Founders Asset Capital growth Invests primarily in securities of foreign
Capitalization Management, Inc. companies with market capitalizations or
annual revenues of $1 billion or less.
Int'l Equity Rowe Price-Fleming Total return on assets Invests primarily in common stocks of
International, Inc. from long-term growth of established foreign companies which have
capital and income the potential for growth of capital or
income or both.
Small Capitalization Founders Asset Capital growth Invests primarily in common stocks of U.S.
Management, Inc. companies with market capitalizations or
annual revenues of $1.5 billion or less.
Small Company Value T. Rowe Price Long-term capital growth Invests primarily in common stocks of U.S.
Associates, Inc. companies with market capitalizations of $1
billion or less that appear to be
undervalued.
Capital Growth Janus Capital Capital growth Invests primarily in common stocks.
Corporation
Equity Income INVESCO Trust Company High current income and, Invests in securities which will provide a
secondarily, capital growth relatively high yield and stable return and
which, over a period of years, may also
provide capital appreciation.
Strategic Balanced American Century Capital growth and current Invests in common stocks that are
Investment income considered to have better-than-average
Management, Inc. prospects for appreciation and the
remainder in bonds and other fixed income
securities.
High Yield Bond Federated Investment High current income Invests primarily in lower-rated fixed
Counseling income securities.
Total Return Bond Pacific Investment Maximize total return, Invests in fixed-income securities of
Management Company consistent with varying maturities with an expected average
preservation of capital portfolio duration from three to six years.
Money Market J.P. Morgan Maximize current income Maintains a dollar-weighted average
Investment and maintain high levels portfolio maturity of not more than 90 days
Management, Inc. of liquidity and invests in high quality U.S.
dollar-denominated money market instruments.
</TABLE>
<PAGE>
T A B L E O F C O N T E N T S
EXPENSE INFORMATION
Shareholder Transaction Expenses
Annual Fund Operating Expenses
Expense Examples
INVESTMENT PROGRAMS OF THE FUNDS
ASAF Founders International Small Capitalization Fund ASAF T. Rowe
Price International Equity Fund ASAF Founders Small Capitalization Fund
ASAF T. Rowe Price Small Company Value Fund ASAF Janus Capital Growth
Fund ASAF INVESCO Equity Income Fund ASAF American Century Strategic
Balanced Fund ASAF Federated High Yield Bond Fund ASAF Total Return
Bond Fund ASAF JPM Money Market Fund
CERTAIN RISK FACTORS AND INVESTMENT METHODS
PERFORMANCE OF THE FUNDS
HOW TO BUY SHARES
SPECIAL INVESTMENT PROGRAMS AND PRIVILEGES
HOW TO REDEEM SHARES
HOW TO EXCHANGE SHARES
DETERMINATION OF NET ASSET VALUE
SHAREHOLDER ACCOUNT RULES AND POLICIES
ORGANIZATION AND CAPITALIZATION OF THE COMPANY
SPECIAL INFORMATION ON THE "MASTER/FEEDER" FUND STRUCTURE
MANAGEMENT OF THE FUNDS
The Directors, Trustees and Officers
The Investment Manager
The Sub-Advisors
Fees and Expenses
The Administrator
PORTFOLIO TRANSACTIONS
DIVIDENDS, CAPITAL GAINS AND TAXES
OTHER INFORMATION
<PAGE>
EXPENSE INFORMATION
The maximum transaction costs and anticipated aggregate operating
expenses associated with investing in Class A, Class B, Class C or Class X
shares of each Fund are reflected in the following tables:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
High Yield Bond & Total Return Bond Funds: All Other Funds:
<S> <C> <C> <C> <C> <C> <C>
Class A Class B & X Class C Class A Class B & X Class C
Maximum Sales Charge on Purchases
(as % of offering price) 4.25% None None 5.00% None None
Maximum Contingent Deferred Sales
Charge
(as % of lower of original purchase None(1) 6.00%(2) 1.00%(2) None(1)
price or redemption proceeds) 6.00%(2) 1.00%(2)
Redemption Fees None(3) None(3) None(3) None(3) None(3) None(3)
Exchange Fees None None None None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (as % of average net assets):
Total Expenses
12b-1 Distribution Other Expenses (after any
ASAF Fund: Management Fee Fees(4) (after any reimbursement)(5)
reimbursement)(5)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Int'l Small Capitalization
Class A 1.10 0.50 0.50 2.10
Class B, C & X 1.10 1.00 0.50 2.60
International Equity
Class A 1.00 0.50 0.60 2.10
Class B, C & X 1.00 1.00 0.60 2.60
Small Capitalization
Class A 0.90 0.50 0.30 1.70
Class B, C & X 0.90 1.00 0.30 2.20
Small Company Value
Class A 1.00 0.50 0.25 1.75
Class B, C & X 1.00 1.00 0.25 2.25
Capital Growth
Class A 1.00 0.50 0.20 1.70
Class B, C& X 1.00 1.00 0.20 2.20
Equity Income
Class A 0.75 0.50 0.30 1.55
Class B, C & X 0.75 1.00 0.30 2.05
Strategic Balanced
Class A 0.90 0.50 0.20 1.60
Class B, C & X 0.90 1.00 0.20 2.10
High Yield Bond
Class A 0.70 0.50 0.30 1.50
Class B, C & X 0.70 1.00 0.30 2.00
Total Return Bond
Class A 0.65 0.50 0.25 1.40
Class B, C & X 0.65 1.00 0.25 1.90
Money Market
Class A 0.50 0.50 0.50 1.50
Class B, C & X 0.50 1.00 0.50 2.00
</TABLE>
(1) Under certain circumstances, purchases of Class A shares not subject to an
initial sales charge will be subject to a contingent deferred sales charge
("CDSC") if redeemed within 12 months of the calendar month of purchase. For an
additional discussion of the Class A CDSC, see this Prospectus under "How to Buy
Shares."
(2) If you purchase Class B or X shares, you do not pay an initial sales charge
but you may incur a CDSC if you redeem some or all of your Class B or X shares
before the end of the seventh year after which you purchased such shares. The
CDSC is 6%, 5%, 4%, 3%, 2%, 2% and 1% for redemptions occurring in years one
through seven, respectively. No CDSC is charged after the seventh year. If you
purchase Class C shares, you do not pay an initial sales charge but you may
incur a CDSC if you redeem some or all of your Class C shares within 12 months
of the calendar month of purchase. For a discussion of the Class B, X and C
CDSC, see this Prospectus under "How to Buy Shares."
(3) A $10 fee may be imposed for wire transfers of redemption proceeds. For an
additional discussion of wire redemptions, see this Prospectus under "How to
Redeem Shares."
(4) As a result of distribution fees, a long-term investor in the Fund may pay
more than the economic equivalent of the maximum front-end sales charge
permitted by the rules of the National Association of Securities Dealers, Inc.
(5) Expenses shown are based on estimated amounts for the current fiscal year.
The Investment Manager has voluntarily agreed to reimburse each Fund until
October 31, 1998 for its respective operating expenses (and, in the case of the
Feeder Funds, the Feeder Fund's pro rata share of operating expenses of the
Fund's corresponding Portfolio), exclusive of taxes, interest, brokerage
commissions, distribution fees and extraordinary expenses, which in the
aggregate exceed specified percentages of the Fund's average net assets as
follows: ASAF Founders International Small Capitalization Fund -- 1.60%; ASAF T.
Rowe Price International Equity Fund -- 1.60%; ASAF Founders Small
Capitalization Fund -- 1.20%; ASAF T. Rowe Price Small Company Value Fund --
1.25%; ASAF Janus Capital Growth Fund -- 1.20%; ASAF INVESCO Equity Income Fund
- -- 1.05%; ASAF American Century Strategic Balanced Fund -- 1.10%; ASAF Federated
High Yield Bond Fund -- 1.00%; ASAF Total Return Bond Fund -- 0.90%; and ASAF
JPM Money Market Fund -- 1.00%. Such voluntary agreements may be discontinued at
any time after October 31, 1998. Absent these reimbursements, the estimated
"other expenses" for all classes of shares of the Funds would be: ASAF Founders
International Small Capitalization Fund -- 1.95%; ASAF T. Rowe Price
International Equity Fund -- 1.48%; ASAF Founders Small Capitalization Fund --
1.34%; ASAF T. Rowe Price Small Company Value Fund -- 1.32%; ASAF Janus Capital
Growth Fund -- 1.03%; ASAF INVESCO Equity Income Fund -- 1.26%; ASAF American
Century Strategic Balanced Fund -- 1.48%; ASAF Federated High Yield Bond Fund --
1.61%; ASAF Total Return Bond Fund -- 1.29%; and ASAF JPM Money Market Fund --
1.70%. Additionally, absent these reimbursements, the estimated "total expenses"
for Class A shares and Class B, C and X shares, respectively, of the Funds would
be: ASAF Founders International Small Capitalization Fund -- 3.55% and 4.05%;
ASAF T. Rowe Price International Equity Fund -- 2.98% and 3.48%; ASAF Founders
Small Capitalization Fund -- 2.74% and 3.24%; ASAF T. Rowe Price Small Company
Value Fund -- 2.82% and 3.32%; ASAF Janus Capital Growth Fund -- 2.53% and
3.03%; ASAF INVESCO Equity Income Fund -- 2.51% and 3.01%; ASAF American Century
Strategic Balanced Fund -- 2.88% and 3.38%; ASAF Federated High Yield Bond Fund
- -- 2.81% and 3.31%; ASAF Total Return Bond Fund -- 2.44% and 2.94; and ASAF JPM
Money Market Fund -- 2.70% and 3.20%. For an additional discussion of Fund
expense limitations, see the Company's SAI under "Fund Expenses."
Expenses shown for each of the Feeder Funds are based upon distribution
and administration fees for the Fund and management fees and other expenses for
the Fund's corresponding Portfolio. The Directors of the Company believe that
the aggregate per share expenses of the Feeder Funds and their corresponding
Portfolios over the long term will be approximately equal to the expenses the
Funds would incur if their assets were invested directly in the type of
securities held by their corresponding Portfolios. The Directors of the Company
also believe that investment in the Portfolios by investors in addition to the
Feeder Funds may enable the Portfolios to achieve economies of scale which could
reduce expenses. The expenses and, accordingly, the returns of other funds that
may invest in the Portfolios may differ from the expenses and returns of the
Feeder Funds. For additional information regarding the "master/feeder" fund
structure, see this Prospectus under "Special Information on the 'Master/Feeder'
Fund Structure."
EXPENSE EXAMPLES:
Full Redemption. You would have paid the following expenses on a $1,000
investment, assuming a hypothetical 5% annual return and full redemption of your
shares at the end of each period shown below:
<TABLE>
<CAPTION>
1 Year 3 Years
ASAF Fund: Class A Class B Class C Class X(*) Class A Class B Class C Class X(*)
- --------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Int'l Small 70 87 37 87 113 122 82 124
Capitalization
International Equity 70 87 37 87 113 122 82 124
Small Capitalization 67 83 33 83 102 110 70 111
Small Company Value 67 83 33 84 103 111 71 113
Capital Growth 67 83 33 83 102 110 70 111
Equity Income 65 81 31 82 97 105 65 107
Strategic Balanced 66 82 32 82 99 107 67 108
High Yield Bond 57 80 30 81 88 103 63 105
Total Return Bond 56 79 29 80 85 100 60 102
Money Market 65 80 30 81 96 103 63 105
</TABLE>
No Redemption. You would have paid the following expenses on a $1,000
investment, assuming a hypothetical 5% annual return and no redemption of your
shares at the end of each period shown below:
<TABLE>
<CAPTION>
1 Year 3 Years
ASAF Fund: Class A Class B Class C Class X(*) Class A Class B Class C Class X(*)
- --------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Int'l Small 70 27 27 27 113 82 82 84
Capitalization
International Equity 70 27 27 27 113 82 82 84
Small Capitalization 67 23 23 23 102 70 70 71
Small Company Value 67 23 23 24 103 71 71 73
Capital Growth 67 23 23 23 102 70 70 71
Equity Income 65 21 21 22 97 65 65 67
Strategic Balanced 66 22 22 22 99 67 67 68
High Yield Bond 57 20 20 21 88 63 63 65
Total Return Bond 56 19 19 20 85 60 60 62
Money Market 65 20 20 21 96 63 63 65
</TABLE>
(*) Expense examples for purchases of Class X shares of the Funds reflect the
shareholder's receipt of additional "bonus shares." For a discussion of the
issuance of "bonus shares," see this Prospectus under "How to Buy Shares:
Purchase of Class X Shares."
The above tables are provided to assist you in understanding the
various costs and expenses that you would bear directly or indirectly as an
investor in the Fund(s). THE EXAMPLES PROVIDED SHOULD NOT BE CONSIDERED AS A
REPRESENTATION OF THE FUNDS' PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN. IN ADDITION, WHILE THE EXAMPLES ASSUME A 5%
ANNUAL RETURN, EACH FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN
ACTUAL RETURN THAT IS GREATER OR LESS THAN 5%.
INVESTMENT PROGRAMS OF THE FUNDS
The investment objective, policies and limitations for each of the Funds
are described below and should be considered separately. The investment
objective, policies and limitations of each Feeder Fund are identical to those
of its corresponding Portfolio. As such, the following discussion of the Feeder
Funds, including references to the Directors of the Company, apply equally to
the Funds' corresponding Portfolios and the Trustees of the Trust, respectively.
Each Feeder Fund seeks to meet its investment objective by investing all of its
investable assets in a corresponding Portfolio of the Trust, which in turn
invests directly in a portfolio of securities in accordance with the investment
objective, policies and limitations of its Feeder Fund.
While certain policies apply to all Funds and Portfolios, generally
each Fund and Portfolio has a different investment objective and certain
policies may vary. As a result, the risks, opportunities and returns of
investing in each Fund may differ. Those investment policies specifically
labeled as "fundamental" may not be changed without shareholder approval. The
investment objective of each Fund and Portfolio is not a fundamental policy and
may be changed by the Directors of the Company or the Trustees of the Trust,
where applicable, without shareholder approval. The investment policies and
limitations of the Funds and Portfolios, unless otherwise specified, are not
fundamental policies and may also be changed without shareholder approval.
There can be no assurance that the investment objective of any Fund or
Portfolio will be achieved. Risks relating to various securities and instruments
in which the Funds and Portfolios may invest are described in this Prospectus
and the Company's SAI under "Certain Risk Factors and Investment Methods."
Additional information about the investment objectives, policies and
limitations, as well as certain fundamental investment restrictions, of each
Fund and Portfolio may be found in the Company's SAI under "Investment Programs
of the Funds" and "Fundamental Investment Restrictions."
Subject to the approval of the Directors of the Company, the Company
may add one or more Funds and may cease to offer any one or more Funds in the
future. Any such addition or cessation shall be subject to obtaining any
required regulatory approvals.
ASAF FOUNDERS INTERNATIONAL SMALL CAPITALIZATION FUND:
Investment Objective: The investment objective of the Fund is to seek capital
growth.
Investment Policies:
To achieve its objective, the Fund normally invests primarily in
securities issued by foreign companies which have market capitalizations or
annual revenues of $1 billion or less. These securities may represent companies
in both established and emerging economies throughout the world.
At least 65% of the Fund's total assets normally will be invested in
foreign securities representing a minimum of three countries. The Fund may
invest in larger foreign companies or in U.S.-based companies if, in the
Sub-advisor's opinion, they represent better prospects for capital appreciation.
Risks of Investments in Small and Medium-Sized Companies. The Fund
normally will invest a significant proportion of its assets in the securities of
small and medium-sized companies. As used with respect to this Fund, small and
medium-sized companies are those which are still in the developing stages of
their life cycles and are attempting to achieve rapid growth in both sales and
earnings. Capable management and fertile operating areas are two of the most
important characteristics of such companies. In addition, these companies should
employ sound financial and accounting policies; demonstrate effective research
and successful product development and marketing; provide efficient service; and
possess pricing flexibility.
Investments in small and medium-sized companies involve greater risk
than is customarily associated with more established companies. These companies
often have sales and earnings growth rates which exceed those of large
companies. Such growth rates may in turn be reflected in more rapid share price
appreciation. However, smaller companies often have limited operating histories,
product lines, markets, or financial resources, and they may be dependent upon
one-person management. These companies may be subject to intense competition
from larger entities, and the securities of such companies may have limited
marketability and may be subject to more abrupt or erratic movements in price
than securities of larger companies or the market averages in general.
Therefore, the net asset value of the Fund's shares may fluctuate more widely
than the popular market averages.
Foreign Securities. The Fund may invest without limit in American
Depositary Receipts ("ADRs") and foreign securities. The term "foreign
securities" refers to securities of issuers, wherever organized, which, in the
judgment of the Sub-advisor, have their principal business activities outside of
the United States. The determination of whether an issuer's principal activities
are outside of the United States will be based on the location of the issuer's
assets, personnel, sales, and earnings, and specifically on whether more than
50% of the issuer's assets are located, or more than 50% of the issuer's gross
income is earned, outside of the United States, or on whether the issuer's sole
or principal stock exchange listing is outside of the United States. Foreign
securities typically will be traded on the applicable country's principal stock
exchange but may also be traded on regional exchanges or over-the-counter. For a
discussion of ADRs, see this Prospectus under "Certain Risk Factors and
Investment Methods."
Foreign investments of the Fund may include securities issued by
companies located in countries not considered to be major industrialized
nations. Such countries are subject to more economic, political and business
risk than major industrialized nations, and the securities they issue are
expected to be more volatile and more uncertain as to payment of interest and
principal. The secondary market for such securities is expected to be less
liquid than for securities of major industrialized nations. Such countries may
include (but are not limited to): Argentina, Australia, Austria, Belgium,
Bolivia, Brazil, Chile, China, Colombia, Costa Rica, Croatia, Czech Republic,
Denmark, Ecuador, Egypt, Finland, Greece, Hong Kong, Hungary, India, Indonesia,
Ireland, Italy, Israel, Jordan, Malaysia, Mexico, Netherlands, New Zealand,
Nigeria, North Korea, Norway, Pakistan, Paraguay, Peru, Philippines, Poland,
Portugal, Singapore, Slovak Republic, South Africa, South Korea, Spain, Sri
Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, Uruguay, Venezuela,
Vietnam and the countries of the former Soviet Union. Investments may include
securities created through the Brady Plan, a program under which heavily
indebted countries have restructured their bank debt into bonds.
Investments in foreign securities involve certain risks which are not
typically associated with U.S. investments. For a discussion of the special
risks involved in investing in developing countries and certain risks involved
in investing in foreign securities, in general, including the risk of currency
fluctuations, see this Prospectus and the Company's SAI under "Certain Risk
Factors and Investment Methods."
Foreign Currency Exchange Contracts. The Fund is permitted to use
forward foreign currency contracts in connection with the purchase or sale of a
specific security. The Fund may conduct its foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign exchange currency market, or on a forward basis to "lock in" the U.S.
dollar price of the security. By entering into a forward contract for the
purchase or sale, for a fixed amount of U.S. dollars, of the amount of foreign
currency involved in the underlying transactions, the Fund attempts to protect
itself against possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the applicable foreign currency during
the period between the date on which the security is purchased or sold and the
date on which such payments are made or received.
In addition, the Fund may enter into forward contracts for hedging
purposes. When the Sub-advisor believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar (or
sometimes against another currency), the Fund may enter into forward contracts
to sell, for a fixed-dollar or other currency amount, foreign currency
approximating the value of some or all of the Fund's securities denominated in
that currency. The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible. The future
value of such securities in foreign currencies changes as a consequence of
market movements in the value of those securities between the date on which the
contract is entered into and the date it expires.
The Fund generally will not enter into forward contracts with a term
greater than one year. In addition, the Fund generally will not enter into
forward contracts or maintain a net exposure to such contracts where the
fulfillment of the contracts would require the Fund to deliver an amount of
foreign currency in excess of the value of the Fund's securities or other assets
denominated in that currency. Under normal circumstances, consideration of the
possibility of changes in currency exchange rates will be incorporated into the
Fund's long-term investment strategies. In the event that forward contracts are
considered to be illiquid, the securities would be subject to the Fund's
limitation on investing in illiquid securities. For an additional discussion of
foreign currency contracts and the risks involved therein, see this Prospectus
and the Company's SAI under "Certain Risk Factors and Investment Methods."
Fixed-Income Securities. The Fund may invest in convertible securities,
preferred stocks, bonds, debentures, and other corporate obligations when the
Sub-advisor believes that these investments offer opportunities for capital
appreciation. Current income will not be a substantial factor in the selection
of these securities.
The Fund will only invest in bonds, debentures, and corporate
obligations (other than convertible securities and preferred stock) rated
investment grade (BBB or higher) at the time of purchase. Bonds in the lowest
investment grade category (BBB) have speculative characteristics, with changes
in the economy or other circumstances more likely to lead to a weakened capacity
of the bonds to make principal and interest payments than would occur with bonds
rated in higher categories. Convertible securities and preferred stocks
purchased by the Fund may be rated in medium and lower categories by Moody's or
S&P (Ba or lower by Moody's and BB or lower by S&P), but will not be rated lower
than B. The Fund may also invest in unrated convertible securities and preferred
stocks in instances in which the Sub-advisor believes that the financial
condition of the issuer or the protection afforded by the terms of the
securities limits risk to a level similar to that of securities eligible for
purchase by the Fund rated in categories no lower than B. Securities rated B are
referred to as "high-risk" securities, generally lack characteristics of a
desirable investment, and are deemed speculative with respect to the issuer's
capacity to pay interest and repay principal over a long period of time. At no
time will the Fund have more than 5% of its total assets invested in any
fixed-income securities (not including convertible securities and preferred
stock) which are unrated or are rated below investment grade either at the time
of purchase or as a result of a reduction in rating after purchase. For a
description of securities ratings, see the Appendix to the Company's SAI. For a
discussion of the special risks involved in investing in lower-rated debt
securities, see this Prospectus and the Company's SAI under "Certain Risk
Factors and Investment Methods."
The fixed-income securities in which the Fund may invest are generally
subject to two kinds of risk: credit risk and market risk. Credit risk relates
to the ability of the issuer to meet interest or principal payments, or both, as
they come due. The ratings given a security by Moody's and S&P provide a
generally useful guide as to such credit risk. The lower the rating given a
security by such rating service, the greater the credit risk such rating service
perceives to exist with respect to such security. Increasing the amount of Fund
assets invested in unrated or lower-grade securities, while intended to increase
the yield produced by those assets, also will increase the credit risk to which
those assets are subject. Market risk relates to the fact that the market values
of securities in which the Fund may invest generally will be affected by changes
in the level of interest rates. An increase in interest rates will tend to
reduce the market values of such securities, whereas a decline in interest rates
will tend to increase their values. Medium- and lower-rated securities (Baa or
BBB and lower) and non-rated securities of comparable quality tend to be subject
to wider fluctuations in yields and market values than higher-rated securities.
Medium-rated securities (those rated Baa or BBB) have speculative
characteristics while lower-rated securities are predominantly speculative. The
Fund is not required to dispose of straight debt securities whose ratings are
downgraded below Baa or BBB subsequent to the Fund's purchase of the securities,
unless such a disposition is necessary to reduce the Fund's holdings of such
securities to less than 5% of its total assets. Relying in part on ratings
assigned by credit agencies in making investments will not protect the Fund from
the risk that fixed-income securities in which it invests will decline in value,
since credit ratings represent evaluations of the safety of principal, dividend
and interest payments on preferred stocks and debt securities, not the market
values of such securities, and such ratings may not be changed on a timely basis
to reflect subsequent events.
The Sub-advisor seeks to reduce overall risk associated with the
investments of the Fund through diversification and consideration of relevant
factors affecting the value of securities. No assurance can be given, however,
regarding the degree of success that will be achieved in this regard or in the
Fund achieving its investment objective.
Illiquid Securities. Subject to guidelines promulgated by the Directors
of the Company, the Fund may invest up to 15% of the market value of its net
assets, measured at the time of purchase, in securities which are not readily
marketable, including repurchase agreements maturing in more than seven days.
Securities which are not readily marketable are those that, for whatever reason,
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the investment.
The Fund may invest in Rule 144A securities (securities issued in
offerings made pursuant to Rule 144A under the Securities Act of 1933). Rule
144A securities may be resold to qualified institutional buyers as defined under
Rule 144A and may or may not be deemed to be readily marketable. Factors
considered in evaluating whether such a security is readily marketable include
eligibility for trading, trading activity, dealer interest, purchase interest,
and ownership transfer requirements. The Sub-advisor is required to monitor the
readily marketable nature of each Rule 144A security no less frequently than
quarterly. For an additional discussion of Rule 144A securities and illiquid and
restricted securities, and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Borrowing. The Fund may borrow money from banks in amounts up to 33
1/3% of the Fund's total assets. If the Fund borrows money, its share price may
be subject to greater fluctuation until the borrowing is repaid. The Fund will
attempt to minimize such fluctuations by not purchasing securities when
borrowings are greater than 5% of the value of the Fund's total assets. For an
additional discussion of the Fund's limitations on borrowing and certain risks
involved in borrowing, see this Prospectus under "Certain Risk Factors and
Investment Methods" and the Company's SAI under "Fundamental Investment
Restrictions."
Futures Contracts and Options. The Fund may enter into futures
contracts (or options thereon) for hedging purposes. The acquisition or sale of
a futures contract could occur, for example, if the Fund held or considered
purchasing equity securities and sought to protect itself from fluctuations in
prices without buying or selling those securities. The Fund may also enter into
interest rate and foreign currency futures contracts. Interest rate futures
contracts currently are traded on a variety of fixed-income securities. Foreign
currency futures contracts currently are traded on the British pound, Canadian
dollar, Japanese yen, Swiss franc, German mark and on Eurodollar deposits.
An option is a right to buy or sell a security at a specified price
within a limited period of time. The Fund may write ("sell") covered call
options on any or all of its portfolio securities from time to time as the
Sub-advisor shall deem appropriate. The extent of the Fund's option writing
activities will vary from time to time depending upon the Sub-advisor's
evaluation of market, economic and monetary conditions.
The Fund may purchase options on securities and stock indices. Options
on stock indices are similar to options on securities. However, because options
on stock indices do not involve the delivery of an underlying security, the
option represents the holder's right to obtain from the writer in cash a fixed
multiple of the amount by which the exercise price exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the underlying
index on the exercise date. The purpose of these transactions is not to generate
gain, but to "hedge" against possible loss. Therefore, successful hedging
activity will not produce net gain to the Fund. The Fund may also purchase put
and call options on futures contracts. An option on a futures contract provides
the holder with the right to enter into a "long" position in the underlying
futures contract, in the case of a call option, or a "short" position in the
underlying futures contract, in the case of a put option, at a fixed exercise
price to a stated expiration date. Upon exercise of the option by the holder, a
contract market clearing house establishes a corresponding short position for
the writer of the option, in the case of a call option, or a corresponding long
position, in the case of a put option.
The Fund will not, as to any positions, whether long, short or a
combination thereof, enter into futures and options thereon for which the
aggregate initial margins and premiums exceed 5% of the fair market value of its
total assets after taking into account unrealized profits and losses on options
entered into. The Fund may buy and sell options on foreign currencies for
hedging purposes in a manner similar to that in which futures on foreign
currencies would be utilized. For an additional discussion of futures contracts
and options and the risks involved therein, see this Prospectus and the
Company's SAI under "Certain Risk Factors and Investment Methods."
Temporary Investments. Up to 100% of the assets of the Fund may be
invested temporarily in U.S. government obligations, commercial paper, bank
obligations, repurchase agreements, negotiable U.S. dollar-denominated
obligations of domestic and foreign branches of U.S. depository institutions,
U.S. branches of foreign depository institutions, and foreign depository
institutions, in cash, or in other cash equivalents, if the Sub-advisor
determines it to be appropriate for purposes of enhancing liquidity or
preserving capital in light of prevailing market or economic conditions. While
the Fund is in a defensive position, the opportunity to achieve capital growth
will be limited, and, to the extent that this assessment of market conditions is
incorrect, the Fund will be foregoing the opportunity to benefit from capital
growth resulting from increases in the value of equity investments.
U.S. government obligations include Treasury bills, notes and bonds,
and issues of United States agencies, authorities and instrumentalities. Some
government obligations, such as Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
United States Treasury. Other obligations, such as securities of the Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
United States Treasury; and others, such as bonds issued by Federal National
Mortgage Association (a private corporation), are supported only by the credit
of the agency, authority or instrumentality. The Fund also may invest in
obligations issued by the International Bank for Reconstruction and Development
(IBRD or "World Bank").
The Fund may also acquire certificates of deposit and bankers'
acceptances of banks which meet criteria established by the Directors of the
Company, if any. A certificate of deposit is a short-term obligation of a bank.
A bankers' acceptance is a time draft drawn by a borrower on a bank, usually
relating to an international commercial transaction.
The obligations of foreign branches of U.S. depository institutions may
be general obligations of the parent depository institution in addition to being
an obligation of the issuing branch. These obligations, and those of foreign
depository institutions, may be limited by the terms of the specific obligation
and by governmental regulation. The payment of these obligations, both interest
and principal, also may be affected by governmental action in the country of
domicile of the institution or branch, such as imposition of currency controls
and interest limitations. In connection with these investments, the Fund will be
subject to the risks associated with the holding of portfolio securities
overseas, such as possible changes in investment or exchange control
regulations, expropriation, confiscatory taxation, or political or financial
instability.
Obligations of U.S. branches of foreign depository institutions may be
general obligations of the parent depository institution in addition to being an
obligation of the issuing branch, or may be limited by the terms of a specific
foreign regulation applicable to the depository institutions and by government
regulation (both domestic and foreign).
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements with
banks or well-established securities dealers. All repurchase agreements entered
into by the Fund will be fully collateralized and marked to market daily. The
Fund has not adopted any limits on the amount of its total assets that may be
invested in repurchase agreements which mature in less than seven days. For a
discussion of repurchase agreements and certain risks involved therein, see this
Prospectus under "Certain Risk Factors and Investment Methods."
Portfolio Turnover. The Fund reserves the right to sell its securities,
regardless of the length of time that they have been held, when it is determined
by the Sub-advisor that those securities have attained or are unable to meet the
investment objective of the Fund. The Fund may engage in short-term trading and
therefore normally will have annual portfolio turnover rates which are
considered to be high and may be greater than those of other investment
companies seeking capital appreciation. Portfolio turnover rates may also
increase as a result of the need for the Fund to effect significant amounts of
purchases or redemptions of portfolio securities due to economic, market, or
other factors that are not within the Sub-advisor's control. For a discussion of
portfolio turnover and its effects, see this Prospectus and the Company's SAI
under "Portfolio Transactions."
ASAF T. ROWE PRICE INTERNATIONAL EQUITY FUND:
Investment Objective: The investment objective of the Fund is to seek a total
return on its assets from long-term growth of capital and income, principally
through investments in common stocks of established, non-U.S. companies.
Investments may be made solely for capital appreciation or solely for income or
any combination of both for the purpose of achieving a higher overall return.
Total return consists of capital appreciation or depreciation, dividend income,
and currency gains or losses.
Investment Policies:
The Fund intends to diversify investments broadly among countries and
to normally have at least three different countries represented in the Fund. The
Fund may invest in countries of the Far East and Western Europe as well as South
Africa, Australia, Canada and other areas (including developing countries).
Under unusual circumstances, the Fund may invest substantially all of its assets
in one or two countries.
In seeking its objective, the Fund will invest primarily in common
stocks of established foreign companies which have the potential for growth of
capital or income or both. However, the Fund may also invest in a variety of
other equity-related securities, such as preferred stocks, warrants and
convertible securities, as well as corporate and governmental debt securities,
when considered consistent with the Fund's investment objectives and program.
Under normal market conditions, the Fund's investment in securities other than
common stocks is limited to no more than 35% of total assets. Under exceptional
economic or market conditions abroad, the Fund may temporarily invest all or a
major portion of its assets in U.S. government obligations or debt obligations
of U.S. companies. The Fund will not purchase any debt security which at the
time of purchase is rated below investment grade. This would not prevent the
Fund from retaining a security downgraded to below investment grade after
purchase.
The Fund may also invest its reserves in domestic as well as foreign
money market instruments. Also, the Fund may enter into forward foreign currency
exchange contracts in order to protect against uncertainty in the level of
future foreign exchange rates.
In addition to the investments described below, the Fund's investments
may include, but are not limited to, American Depositary Receipts (ADRs), bonds,
notes, other debt securities of foreign issuers, and the securities of foreign
investment funds or trusts (including passive foreign investment companies).
Cash Reserves. While the Fund will remain primarily invested in common
stocks, it may, for temporary defensive measures, invest in cash reserves
without limitation. The Fund may establish and maintain reserves as the
Sub-advisor believes is advisable to facilitate the Fund's cash flow needs
(e.g., redemptions, expenses and purchases of portfolio securities) or for
temporary, defensive purposes. The Fund's reserves may be invested in domestic
and foreign money market instruments rated within the top two credit categories
by a national rating organization, or if unrated, of equivalent investment
quality as determined by the Sub-advisor.
Convertible Securities, Preferred Stocks, and Warrants. The Fund may
invest in debt or preferred equity securities convertible into or exchangeable
for equity securities. Preferred stocks are securities that represent an
ownership interest in a corporation providing the owner with claims on the
company's earnings and assets before common stock owners, but after bond owners.
Warrants are options to buy a stated number of shares of common stock at a
specified price any time during the life of the warrants (generally, two or more
years).
Foreign Currency Transactions. The Fund will normally conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. The Fund
will generally not enter into a forward contract with a term of greater than one
year.
The Fund will generally enter into forward foreign currency exchange
contracts only under two circumstances. First, when the Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security.
Second, when the Sub-advisor believes that the currency of a particular foreign
country may suffer or enjoy a substantial movement against another currency, it
may enter into a forward contract to sell or buy the former foreign currency (or
another currency which acts as a proxy for that currency) approximating the
value of some or all of the Fund's securities denominated in such foreign
currency. Under certain circumstances, the Fund may commit a substantial portion
or the entire value of its portfolio to the consummation of these contracts. The
Sub-advisor will consider the effect such a commitment of its portfolio to
forward contracts would have on the investment program of the Fund and the
flexibility of the Fund to purchase additional securities. For a discussion of
foreign currency contracts and the risks involved therein, see this Prospectus
and the Company's SAI under "Certain Risk Factors and Investment Methods."
Futures Contracts and Options. The Fund may enter into stock index or
currency futures contracts (or options thereon) to hedge a portion of the Fund,
to provide an efficient means of regulating the Fund's exposure to the equity
markets, or as a hedge against changes in prevailing levels of currency exchange
rates. The Fund will not use futures contracts for leveraging purposes. Such
contracts may be traded on U.S. or foreign exchanges. The Fund may write covered
call options and purchase put and call options on foreign currencies,
securities, and stock indices. The aggregate market value of the Fund's
currencies or portfolio securities covering call or put options will not exceed
25% of the Fund's total assets. The Fund will not commit more than 5% of its
total assets to premiums when purchasing call or put options. For an additional
discussion of futures contracts and options and the risks involved therein, see
this Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods."
Hybrid Investments. The Fund may invest up to 10% of its total assets
in hybrid instruments. As part of its investment program and to maintain greater
flexibility, the Fund may invest in these instruments, which have the
characteristics of futures, options and securities. Such instruments may take a
variety of forms, such as debt instruments with interest or principal payments
determined by reference to the value of a currency, security index or commodity
at a future point in time. The risks of such investments would reflect both the
risks of investing in futures, options, currencies, and securities, including
volatility and illiquidity. Under certain conditions, the redemption value of a
hybrid instrument could be zero. For a discussion of hybrid investments and the
risks involved therein, see the Company's SAI under "Certain Risk Factors and
Investment Methods."
Passive Foreign Investment Companies. The Fund may purchase the
securities of certain foreign investment funds or trusts called passive foreign
investment companies. Such trusts have been the only or primary way to invest in
certain countries. In addition to bearing their proportionate share of the
Fund's expenses (management fees and operating expenses), shareholders will also
indirectly bear similar expenses of such trusts.
Illiquid Securities. Subject to guidelines promulgated by the Directors
of the Company, the Fund may acquire illiquid securities (no more than 15% of
net assets). The Fund will not invest more than 10% of its total assets in
restricted securities (other than securities eligible for resale under Rule 144A
of the Securities Act of 1933). For a discussion of illiquid and restricted
securities, and the risks involved therein, see this Prospectus under "Certain
Risk Factors and Investment Methods."
Lending of Portfolio Securities. For the purpose of realizing
additional income, the Fund may lend securities with a value of up to 33 1/3% of
its total assets to broker-dealers, institutional investors, or other persons.
Any such loan will be continuously secured by collateral at least equal to the
value of the security loaned. For an additional discussion of the Fund's
limitations on lending and certain risks involved in lending, see this
Prospectus under "Certain Risk Factors and Investment Methods" and the Company's
SAI under "Fundamental Investment Restrictions."
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements with a
well-established securities dealer or a bank which is a member of the Federal
Reserve System. For a discussion of repurchase agreements and certain risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Borrowing. For a discussion of the Fund's limitations on borrowing and
certain risks involved in borrowing, see this Prospectus under "Certain Risk
Factors and Investment Methods" and the Company's SAI under "Fundamental
Investment Restrictions."
ASAF FOUNDERS SMALL CAPITALIZATION FUND:
Investment Objective: The investment objective of the Fund is to seek capital
growth.
Investment Policies:
To achieve its objective, the Fund normally will invest at least 65% of
its total assets in common stocks of U.S. companies with market capitalizations
or annual revenues of $1.5 billion or less. Market capitalization is a measure
of the size of a company and is based upon the total market value of a company's
outstanding equity securities. Ordinarily, the common stocks of the U.S.
companies selected for this Fund will not be listed on a national securities
exchange but will be traded in the over-the-counter market.
Risks of Investments in Small and Medium-Sized Companies. The Fund
normally will invest a significant proportion of its assets in the securities of
small and medium-sized companies. As used with respect to this Fund, small and
medium-sized companies are those which are still in the developing stages of
their life cycles and are attempting to achieve rapid growth in both sales and
earnings. Capable management and fertile operating areas are two of the most
important characteristics of such companies. In addition, these companies should
employ sound financial and accounting policies; demonstrate effective research
and successful product development and marketing; provide efficient service; and
possess pricing flexibility.
Investments in small and medium-sized companies involve greater risk
than is customarily associated with more established companies. These companies
often have sales and earnings growth rates which exceed those of large
companies. Such growth rates may in turn be reflected in more rapid share price
appreciation. However, smaller companies often have limited operating histories,
product lines, markets, or financial resources, and they may be dependent upon
one-person management. These companies may be subject to intense competition
from larger entities, and the securities of such companies may have limited
marketability and may be subject to more abrupt or erratic movements in price
than securities of larger companies or the market averages in general.
Therefore, the net asset value of the Fund's shares may fluctuate more widely
than the popular market averages.
Fixed Income Securities. The Fund may invest in convertible securities,
preferred stocks, bonds, debentures, and other corporate obligations when the
Sub-advisor believes that these investments offer opportunities for capital
appreciation. Current income will not be a substantial factor in the selection
of these securities. Bonds, debentures, and corporate obligations (other than
convertible securities and preferred stock) purchased by the Fund will be rated
investment grade at the time of purchase (Baa or higher by Moody's Investors
Service, Inc. ("Moody's") or BBB or higher by Standard & Poor's ("S&P")). Bonds
in the lowest investment grade category (Baa or BBB) may have speculative
characteristics, with changes in the economy or other circumstances more likely
to lead to a weakened capacity of the bonds to make principal and interest
payments than would occur with bonds rated in higher categories. Convertible
securities and preferred stocks purchased by the Fund may be rated in medium and
lower categories by Moody's or S&P (Ba or lower by Moody's and BB or lower by
S&P), but will not be rated lower than B. The Fund may also invest in unrated
convertible securities and preferred stocks in instances in which the
Sub-advisor believes that the financial condition of the issuer or the
protection afforded by the terms of the securities limits risk to a level
similar to that of securities eligible for purchase by the Fund rated in
categories no lower than B. Securities rated B are referred to as "high risk"
securities, generally lack characteristics of a desirable investment, and are
deemed speculative with respect to the issuer's capacity to pay interest and
repay principal over a long period of time. At no time will the Fund have more
than 5% of its assets invested in any fixed-income securities (not including
convertible securities and preferred stock) which are unrated or are rated below
investment grade either at the time of purchase or as a result of a reduction in
rating after purchase. For a description of securities ratings, see the Appendix
to the Company's SAI. For a discussion of the special risks involved in
lower-rated debt securities, see this Prospectus and the Company's SAI under
"Certain Risk Factors and Investment Methods."
The fixed-income securities in which the Fund may invest are generally
subject to two kinds of risk: credit risk and market risk. Credit risk relates
to the ability of the issuer to meet interest or principal payments, or both, as
they come due. The ratings given a security by Moody's and S&P provide a
generally useful guide as to such credit risk. The lower the rating given a
security by such rating service, the greater the credit risk such rating service
perceives to exist with respect to such security. Increasing the amount of Fund
assets invested in unrated or lower-grade securities, while intended to increase
the yield produced by those assets, also will increase the credit risk to which
those assets are subject. Market risk relates to the fact that the market values
of securities in which the Fund may invest generally will be affected by changes
in the level of interest rates. An increase in interest rates will tend to
reduce the market values of such securities, whereas a decline in interest rates
will tend to increase their values. Medium- and lower-rated securities (Baa or
BBB and lower) and non-rated securities of comparable quality tend to be subject
to wider fluctuations in yields and market values than higher-rated securities.
Medium-rated securities (those rated Baa or BBB) have speculative
characteristics while lower-rated securities are predominantly speculative. The
Fund is not required to dispose of straight debt securities whose ratings are
downgraded below Baa or BBB subsequent to the Fund's purchase of the securities,
unless such a disposition is necessary to reduce the Fund's holdings of such
securities to less than 5% of its total assets. Relying in part on ratings
assigned by credit agencies in making investments will not protect the Fund from
the risk that fixed-income securities in which it invests will decline in value,
since credit ratings represent evaluations of the safety of principal, dividend
and interest payments on preferred stocks and debt securities, not the market
values of such securities, and such ratings may not be changed on a timely basis
to reflect subsequent events.
The Sub-advisor seeks to reduce overall risk associated with the
investments of the Fund through diversification and consideration of relevant
factors affecting the value of securities. No assurance can be given, however,
regarding the degree of success that will be achieved in this regard or in the
Fund achieving its investment objective.
Foreign Securities. The Fund may invest in dollar-denominated American
Depositary Receipts ("ADRs") which are traded on exchanges or over-the-counter
in the United States without limit, and in foreign securities. The term "foreign
securities" refers to securities of issuers, wherever organized, which, in the
judgment of the Sub-advisor, have their principal business activities outside of
the United States. The determination of whether an issuer's principal activities
are outside of the United States will be based on the location of the issuer's
assets, personnel, sales, and earnings, and specifically on whether more than
50% of the issuer's assets are located, or more than 50% of the issuer's gross
income is earned, outside of the United States, or on whether the issuer's sole
or principal stock exchange listing is outside of the United States. Foreign
securities typically will be traded on the applicable country's principal stock
exchange but may also be traded on regional exchanges or over-the-counter. For a
discussion of ADRs, see this Prospectus under "Certain Risk Factors and
Investment Methods."
Foreign investments of the Fund may include securities issued by
companies located in countries not considered to be major industrialized
nations. Such countries are subject to more economic, political and business
risk than major industrialized nations, and the securities they issue are
expected to be more volatile and more uncertain as to payment of interest and
principal. The secondary market for such securities is expected to be less
liquid than for securities of major industrialized nations. Such countries may
include (but are not limited to): Argentina, Australia, Austria, Belgium,
Bolivia, Brazil, Chile, China, Colombia, Costa Rica, Croatia, Czech Republic,
Denmark, Ecuador, Egypt, Finland, Greece, Hong Kong, Hungary, India, Indonesia,
Ireland, Italy, Israel, Jordan, Malaysia, Mexico, Netherlands, New Zealand,
Nigeria, North Korea, Norway, Pakistan, Paraguay, Peru, Philippines, Poland,
Portugal, Singapore, Slovak Republic, South Africa, South Korea, Spain, Sri
Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, Uruguay, Venezuela,
Vietnam and the countries of the former Soviet Union. Investments may include
securities created through the Brady Plan, a program under which heavily
indebted countries have restructured their bank debt into bonds. Since the Fund
will pay dividends in dollars, it may incur currency conversion costs. The Fund
will not invest more than 25% of its total assets in any one foreign country.
Investments in foreign securities involve certain risks which are not
typically associated with U.S. investments. For a discussion of the special
risks involved in investing in developing countries and certain risks involved
in investing in foreign securities, in general, including the risk of currency
fluctuations, see this Prospectus and the Company's SAI under "Certain Risk
Factors and Investment Methods."
Foreign Currency Exchange Contracts. The Fund is permitted to use
forward foreign currency contracts in connection with the purchase or sale of a
specific security. The Fund may conduct its foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign exchange currency market, or on a forward basis to "lock in" the U.S.
dollar price of the security. By entering into a forward contract for the
purchase or sale, for a fixed amount of U.S. dollars, of the amount of foreign
currency involved in the underlying transactions, the Fund attempts to protect
itself against possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the applicable foreign currency during
the period between the date on which the security is purchased or sold and the
date on which such payments are made or received.
In addition, the Fund may enter into forward contracts for hedging
purposes. When the Sub-advisor believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar (or
sometimes against another currency), the Fund may enter into forward contracts
to sell, for a fixed dollar or other currency amount, foreign currency
approximating the value of some or all of the Fund's securities denominated in
that currency. The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible. The future
value of such securities in foreign currencies changes as a consequence of
market movements in the value of those securities between the date on which the
contract is entered into and the date it expires.
The Fund generally will not enter into forward contracts with a term
greater than one year. In addition, the Fund generally will not enter into
forward contracts or maintain a net exposure to such contracts where the
fulfillment of the contracts would require the Fund to deliver an amount of
foreign currency in excess of the value of the Fund's securities or other assets
denominated in that currency. Under normal circumstances, consideration of the
possibility of changes in currency exchange rates will be incorporated into the
Fund's long-term investment strategies. In the event that forward contracts are
considered to be illiquid, the securities would be subject to the Fund's
limitation on investing in illiquid securities. For an additional discussion of
foreign currency contracts and the risks involved therein, see this Prospectus
and the Company's SAI under "Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Directors
of the Company, the Fund may invest up to 15% of the market value of its net
assets, measured at the time of purchase, in securities which are not readily
marketable, including repurchase agreements maturing in more than seven days.
Securities which are not readily marketable are those that, for whatever reason,
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the investment.
The Fund may invest in Rule 144A securities (securities issued in
offerings made pursuant to Rule 144A under the Securities Act of 1933). Rule
144A securities may be resold to qualified institutional buyers as defined under
Rule 144A and may or may not be deemed to be readily marketable. Factors
considered in evaluating whether such a security is readily marketable include
eligibility for trading, trading activity, dealer interest, purchase interest,
and ownership transfer requirements. The Sub-advisor is required to monitor the
readily marketable nature of each Rule 144A security no less frequently than
quarterly. For an additional discussion of Rule 144A securities and illiquid and
restricted securities, and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Borrowing. The Fund may borrow money from banks in amounts up to 33
1/3% of the Fund's total assets. If the Fund borrows money, its share price may
be subject to greater fluctuation until the borrowing is repaid. The Fund will
attempt to minimize such fluctuations by not purchasing securities when
borrowings are greater than 5% of the value of the Fund's total assets. For an
additional discussion of the Fund's limitations on borrowing and certain risks
involved in borrowing, see this Prospectus under "Certain Risk Factors and
Investment Methods" and the Company's SAI under "Fundamental Investment
Restrictions."
Futures Contracts and Options. The Fund may enter into futures
contracts (or options thereon) for hedging purposes. The acquisition or sale of
a futures contract could occur, for example, if the Fund held or considered
purchasing equity securities and sought to protect itself from fluctuations in
prices without buying or selling those securities. The Fund may also enter into
interest rate and foreign currency futures contracts. Interest rate futures
contracts currently are traded on a variety of fixed-income securities. Foreign
currency futures contracts currently are traded on the British pound, Canadian
dollar, Japanese yen, Swiss franc, German mark and on Eurodollar deposits.
An option is a right to buy or sell a security at a specified price
within a limited period of time. The Fund may write ("sell") covered call
options on any or all of its portfolio securities from time to time as the
Sub-advisor shall deem appropriate. The extent of the Fund's option writing
activities will vary from time to time depending upon the Sub-advisor's
evaluation of market, economic and monetary conditions.
The Fund may purchase options on securities and stock indices. Options
on stock indices are similar to options on securities. However, because options
on stock indices do not involve the delivery of an underlying security, the
option represents the holder's right to obtain from the writer in cash a fixed
multiple of the amount by which the exercise price exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the underlying
index on the exercise date. The purpose of these transactions is not to generate
gain, but to "hedge" against possible loss. Therefore, successful hedging
activity will not produce net gain to the Fund. The Fund may also purchase put
and call options on futures contracts. An option on a futures contract provides
the holder with the right to enter into a "long" position in the underlying
futures contract, in the case of a call option, or a "short" position in the
underlying futures contract, in the case of a put option, at a fixed exercise
price to a stated expiration date. Upon exercise of the option by the holder, a
contract market clearing house establishes a corresponding short position for
the writer of the option, in the case of a call option, or a corresponding long
position, in the case of a put option.
The Fund will not, as to any positions, whether long, short or a
combination thereof, enter into futures and options thereon for which the
aggregate initial margins and premiums exceed 5% of the fair market value of its
total assets after taking into account unrealized profits and losses on options
entered into. The Fund may buy and sell options on foreign currencies for
hedging purposes in a manner similar to that in which futures on foreign
currencies would be utilized. For an additional discussion of futures contracts
and options and the risks involved therein, see this Prospectus and the
Company's SAI under "Certain Risk Factors and Investment Methods."
Temporary Investments. Up to 100% of the assets of the Fund may be
invested temporarily in U.S. government obligations, commercial paper, bank
obligations, repurchase agreements, negotiable U.S. dollar-denominated
obligations of domestic and foreign branches of U.S. depository institutions,
U.S. branches of foreign depository institutions, and foreign depository
institutions, cash, or in other cash equivalents, if the Sub-advisor determines
it to be appropriate for purposes of enhancing liquidity or preserving capital
in light of prevailing market or economic conditions. While the Fund is in a
defensive position, the opportunity to achieve capital growth will be limited,
and, to the extent that this assessment of market conditions is incorrect, the
Fund will be foregoing the opportunity to benefit from capital growth resulting
from increases in the value of equity investments.
U.S. government obligations include Treasury bills, notes and bonds,
and issues of United States agencies, authorities and instrumentalities. Some
government obligations, such as Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
United States Treasury. Other obligations, such as securities of the Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
United States Treasury; and others, such as bonds issued by Federal National
Mortgage Association (a private corporation), are supported only by the credit
of the agency, authority or instrumentality. The Fund also may invest in
obligations issued by the International Bank for Reconstruction and Development
(IBRD or "World Bank").
The Fund may also acquire certificates of deposit and bankers'
acceptances of banks which meet criteria established by the Directors of the
Company, if any. A certificate of deposit is a short-term obligation of a bank.
A bankers' acceptance is a time draft drawn by a borrower on a bank, usually
relating to an international commercial transaction.
The obligations of foreign branches of U.S. depository institutions may
be general obligations of the parent depository institution in addition to being
an obligation of the issuing branch. These obligations, and those of foreign
depository institutions, may be limited by the terms of the specific obligation
and by governmental regulation. The payment of these obligations, both interest
and principal, also may be affected by governmental action in the country of
domicile of the institution or branch, such as imposition of currency controls
and interest limitations. In connection with these investments, the Fund will be
subject to the risks associated with the holding of portfolio securities
overseas, such as possible changes in investment or exchange control
regulations, expropriation, confiscatory taxation, or political or financial
instability.
Obligations of U.S. branches of foreign depository institutions may be
general obligations of the parent depository institution in addition to being an
obligation of the issuing branch, or may be limited by the terms of a specific
foreign regulation applicable to the depository institutions and by government
regulation (both domestic and foreign).
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements with
banks or well-established securities dealers. All repurchase agreements entered
into by the Fund will be fully collateralized and marked to market daily. The
Fund has not adopted any limits on the amount of its total assets that may be
invested in repurchase agreements which mature in less than seven days. For a
discussion of repurchase agreements and certain risks involved therein, see this
Prospectus under "Certain Risk Factors and Investment Methods."
Portfolio Turnover. The Fund reserves the right to sell its securities,
regardless of the length of time that they have been held, when it is determined
by the Sub-advisor that those securities have attained or are unable to meet the
investment objective of the Fund. The Fund may engage in short-term trading and
therefore normally will have annual portfolio turnover rates which are
considered to be high and may be greater than those of other investment
companies seeking capital appreciation. Portfolio turnover rates may also
increase as a result of the need for the Fund to effect significant amounts of
purchases or redemptions of portfolio securities due to economic, market, or
other factors that are not within the Sub-advisor's control. For a discussion of
portfolio turnover and its effects, see this Prospectus and the Company's SAI
under "Portfolio Transactions."
ASAF T. ROWE PRICE SMALL COMPANY VALUE FUND:
Investment Objective: The investment objective of the Fund is to provide
long-term capital growth by investing primarily in small-capitalization stocks
that appear to be undervalued.
Investment Policies:
Reflecting a value approach to investing, the Fund will seek the stocks
of companies whose current stock prices do not appear to adequately reflect
their underlying value as measured by assets, earnings, cash flow, or business
franchises. The Fund will invest at least 65% of its total assets in companies
with a market capitalization of $1 billion or less that appear undervalued by
various measures, such as price/earnings or price/book value ratios.
Although the Fund will invest primarily in U.S. common stocks, it may
also purchase other types of securities, for example, foreign securities,
convertible stocks and bonds, and warrants when considered consistent with the
Fund's investment objective and policies. The Fund may also engage in a variety
of investment management practices, such as buying and selling futures and
options.
In managing the Fund, the Sub-advisor will apply a value investment
approach. Value investors seek to buy a stock (or other security) when its price
is low relative to its perceived worth. They hope to identify companies whose
stocks are currently out of favor or are not followed closely by stock analysts.
Often these stocks have above-average yields and offer the potential for capital
appreciation as other investors recognize their intrinsic value and drive up
their prices. Some of the principal measures used to identify such stocks are:
(i) Price/Earnings Ratio. Dividing a stock's price by its earnings per
share generates a price/earnings or P/E ratio. A stock with a P/E that is
significantly below that of its peers, the market as a whole, or its own
historical norm may represent an attractive opportunity.
(ii) Price/Book Value Ratio. This ratio, calculated by dividing a
stock's price by its book value per share, indicates how a stock is priced
relative to the accounting (i.e., book) value of the company's assets. A ratio
below the market, that of its competitors, or its own historic norm could
indicate an undervalued situation.
(iii) Dividend Yield. Value investors look for undervalued assets. A
stock's dividend yield is found by dividing its annual dividend by its share
price. A yield significantly above a stock's own historic norm or that of its
peers may suggest an investment opportunity.
(iv) Price/Cash Flow. Dividing a stock's price by the company's cash
flow per share, rather than its earnings or book value, provides a more useful
measure of value in some cases. A ratio below that of the market or of its peers
suggests the market may be incorrectly valuing the company's cash flow for
reasons that may be temporary.
(v) Undervalued Assets. This analysis compares a company's stock price
with its underlying asset values, its projected value in the private (as opposed
to public) market, or its expected value if the company or parts of it were sold
or liquidated.
(vi) Restructuring Opportunities. The market can react favorably to the
announcement or the successful implementation of a corporate restructuring,
financial reengineering, or asset redeployment. Such events can result in an
increase in a company's stock price. A value investor may try to anticipate
these actions and invest before the market places an appropriate value on any
actual or expected changes.
Risks of a Value Approach to Small-Cap Investing. Small companies --
those with a capitalization (market value) of $1 billion or less -- may offer
greater potential for capital appreciation since they are often overlooked or
undervalued by investors. Small-capitalization stocks are less actively followed
by stock analysts than are larger-capitalization stocks, and less information is
available to evaluate small-cap stock prices. As a result, compared with
larger-capitalization stocks, there may be greater variations between the
current stock price and the estimated underlying value, which could represent
greater opportunity for appreciation.
Investing in small companies involves greater risk as well as greater
opportunity than is customarily associated with more established companies.
Stocks of small companies may be subject to more abrupt or erratic price
movements than larger company securities. Small companies often have limited
product lines, markets, or financial resources, and their management may lack
depth and experience. In addition, a value approach to investing includes the
risks that 1) the market will not recognize a security's intrinsic value for an
unexpectedly long time, and 2) a stock that is judged to be undervalued is
actually appropriately priced due to intractable or fundamental problems that
are not yet apparent.
Common and Preferred Stocks. Stocks represent shares of ownership in a
company. Generally, preferred stock has a specified dividend and ranks after
bonds and before common stocks in its claim on income for dividend payments and
on assets should the company be liquidated. After other claims are satisfied,
common stockholders participate in company profits on a pro rata basis; profits
may be paid out in dividends or reinvested in the company to help it grow.
Increases and decreases in earnings are usually reflected in a company's stock
price, so common stocks generally have the greatest appreciation and
depreciation potential of all corporate securities. While most preferred stocks
pay a dividend, the Fund may purchase preferred stock where the issuer has
omitted, or is in danger of omitting, payment of its dividend.
Such investments would be made primarily for their capital appreciation
potential.
Convertible Securities and Warrants. The Fund may invest in debt or
preferred equity securities convertible into or exchangeable for equity
securities. Traditionally, convertible securities have paid dividends or
interest at rates higher than common stocks but lower than nonconvertible
securities. They generally participate in the appreciation or depreciation of
the underlying stock into which they are convertible, but to a lesser degree. In
recent years, convertibles have been developed which combine higher or lower
current income with options and other features. Warrants are options to buy a
stated number of shares of common stock at a specified price anytime during the
life of the warrants (generally, two or more years).
Foreign Securities. The Fund may invest up to 20% of its total assets
(excluding reserves) in foreign securities. These include nondollar-denominated
securities traded outside of the U.S. and dollar-denominated securities of
foreign issuers traded in the U.S. (such as ADRs). Some of the countries in
which the Fund may invest may be considered to be developing and may involve
special risks. For a discussion of these risks as well as the risks involved in
investing in foreign securities, in general, see this Prospectus and the
Company's SAI under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. Investors in foreign securities may
"hedge" their exposure to potentially unfavorable currency changes by purchasing
a contract to exchange one currency for another on some future date at a
specified exchange rate. In certain circumstances, a "proxy currency" may be
substituted for the currency in which the investment is denominated, a strategy
known as "proxy hedging." For a discussion of foreign currency contracts,
certain risks involved therein, and the risks of currency fluctuations
generally, see this Prospectus and the Company's SAI under "Certain Risks
Factors and Investment Methods."
Fixed Income Securities. The Fund may invest in debt securities of any
type without regard to quality or rating. Such securities would be purchased in
companies that meet the investment criteria for the Fund. The price of a bond
fluctuates with changes in interest rates, rising when interest rates fall and
falling when interest rates rise.
High-Yield/High-Risk Investing. The Fund will not purchase a
noninvestment-grade debt security (or junk bond) if immediately after such
purchase the Fund would have more than 5% of its total assets invested in such
securities. For a discussion of the risks involved in investing in high-yield
lower-rated debt securities, see this Prospectus and the Company's SAI under
"Certain Risk Factors and Investment Methods."
Hybrid Instruments. The Fund may invest up to 10% of its total assets
in hybrid instruments. Hybrids can have volatile prices and limited liquidity
and their use by the Fund may not be successful. These instruments (a type of
potentially high-risk derivative) can combine the characteristics of securities,
futures, and options. For example, the principal amount, redemption, or
conversion terms of a security could be related to the market price of some
commodity, currency, or securities index. Such securities may bear interest or
pay dividends at below market (or even relatively nominal) rates. Under certain
conditions, the redemption value of such an investment could be zero. For a
discussion of hybrid investments, see the Company's SAI under "Certain Risk
Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Directors
of the Company, the Fund may acquire illiquid securities (no more than 15% of
net assets). For a discussion of illiquid securities and the risks involved
therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Private Placements (Restricted Securities). These securities are sold
directly to a small number of investors usually institutions. Unlike public
offerings, such securities are not registered with the Commission. Although
certain of these securities may be readily sold, for example under Rule 144A,
the sale of others may involve substantial delays and additional costs. Subject
to guidelines promulgated by the Directors of the Company, the Fund will not
invest more than 15% of its net assets in illiquid securities, but not more than
10% of its total assets in restricted securities (other than Rule 144A
securities). For a discussion of illiquid and restricted securities, and the
risks involved therein, see this Prospectus and the Company's SAI under "Certain
Risk Factors and Investment Methods."
Cash Position. The Fund will hold a certain portion of its assets in
U.S. and foreign dollar-denominated money market securities, including
repurchase agreements, in the two highest rating categories, maturing in one
year or less. For temporary, defensive purposes, the Fund may invest without
limitation in such securities. This reserve position provides flexibility in
meeting redemptions, expenses, and the timing of new investments and serves as a
short-term defense during periods of unusual market volatility.
Borrowing. The Fund can borrow money from banks as a temporary measure
for emergency purposes, to facilitate redemption requests, or for other purposes
consistent with the Fund's investment objective and program. Such borrowings may
be collateralized with Fund assets, subject to restrictions. For an additional
discussion of the Fund's limitations on borrowing and certain risks involved in
borrowing, see this Prospectus under "Certain Risk Factors and Investment
Methods" and the Company's SAI under "Fundamental Investment Restrictions."
Futures and Options. The Fund may enter into futures contracts (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or currency exchange rates, or as
an efficient means of adjusting its exposure to the bond, stock, and currency
markets. The Fund will not use futures contracts for leveraging purposes. The
Fund may also write call and put options and purchase put and call options on
securities, financial indices, and currencies. The aggregate market value of the
Fund's securities or currencies covering call or put options will not exceed 25%
of the Fund's net assets. For an additional discussion of futures contracts and
options and the risks involved therein, see this Prospectus under "Certain Risk
Factors and Investment Methods."
Lending of Portfolio Securities. For the purpose of realizing
additional income, the Fund may lend securities with a value of up to 33 1/3% of
its total assets to broker-dealers, institutional investors, or other persons.
Any such loan will be continuously secured by collateral at least equal to the
value of the security loaned. For an additional discussion of the Fund's
limitations on lending and certain risks involved in lending, see this
Prospectus under "Certain Risk Factors and Investment Methods" and the Company's
SAI under "Fundamental Investment Restrictions."
ASAF JANUS CAPITAL GROWTH FUND:
Investment Objective: The investment objective of the Fund is to seek growth of
capital. Realization of income is not a significant investment consideration and
any income realized on the Fund's investments, therefore, will be incidental to
the Fund's objective.
Investment Policies:
The Fund will pursue its objective by investing primarily in common
stocks. Common stock investments will be in industries and companies that the
Sub-advisor believes are experiencing favorable demand for their products and
services, and which operate in a favorable competitive and regulatory
environment. Although the Sub-advisor expects to invest primarily in equity
securities, the Sub-advisor may increase the Fund's cash position without
limitation when the Sub-advisor is of the opinion that appropriate investment
opportunities for capital growth with desirable risk/reward characteristics are
unavailable. The Fund may also invest to a lesser degree in preferred stocks,
convertible securities, warrants, and debt securities when the Fund perceives an
opportunity for capital growth from such securities or so that the Fund may
receive a return on its idle cash. Debt securities that the Fund may purchase
include corporate bonds and debentures (not to exceed 5% of net assets in bonds
rated below investment grade), government securities, mortgage- and asset-backed
securities, zero-coupon bonds, indexed/structured notes, high-grade commercial
paper, certificates of deposit and repurchase agreements. For a discussion of
risks involved in lower-rated securities, mortgage-backed and asset-backed
securities and zero coupon bonds, see this Prospectus and the Company's SAI
under "Certain Risk Factors and Investment Methods."
Although it is the general policy of the Fund to purchase and hold
securities for capital growth, changes in the Fund will be made as the
Sub-advisor deems advisable. For example, portfolio changes may result from
liquidity needs, securities having reached a price objective, or by reason of
developments not foreseen at the time of the original investment decision.
Portfolio changes may be effected for other reasons. In such circumstances,
investment income will increase and may constitute a large portion of the return
on the Fund and the Fund will not participate in the market advances or declines
to the extent that it would if it were fully invested.
Because investment changes usually will be made without reference to
the length of time a security has been held, a significant number of short-term
transactions may result. To a limited extent, the Fund may also purchase
individual securities in anticipation of relatively short-term price gains, and
the rate of portfolio turnover will not be a determining factor in the sale of
such securities. However, certain tax rules may restrict the Fund's ability to
sell securities in some circumstances when the security has been held for less
than three months. Increased portfolio turnover necessarily results in
correspondingly higher brokerage costs for the Fund.
The Fund may invest in "special situations" from time to time. A
"special situation" arises when, in the opinion of the Sub-advisor, the
securities of a particular company will be recognized and appreciate in value
due to a specific development, such as a technological breakthrough, management
change or new product at that company. Investment in "special situations"
carries an additional risk of loss in the event that the anticipated development
does not occur or does not attract the expected attention.
Foreign Securities. The Fund may also purchase securities of foreign
issuers, including foreign equity and debt securities and depositary receipts.
Foreign securities are selected on a stock-by-stock basis without regard to any
defined allocation among countries or geographic regions. However, certain
factors such as expected levels of inflation, government policies influencing
business conditions, the outlook for currency relationships, and prospects for
economic growth among countries, regions or geographic areas may warrant greater
consideration in selecting foreign stocks. No more than 25% of the Fund's assets
may be invested in foreign securities denominated in foreign currency and not
publicly traded in the United States. For a discussion of depositary receipts
and the risks involved in investing in foreign securities, including the risk of
currency fluctuations, see this Prospectus and the Company's SAI under "Certain
Risk Factors and Investment Methods."
Futures, Options and Other Derivative Instruments. Subject to certain
limitations, the Fund may purchase and write options on securities, financial
indices, and foreign currencies, and may invest in futures contracts on
securities, financial indices, and foreign currencies ("futures contracts"),
options on futures contracts, forward contracts and swaps and swap-related
products. These instruments will be used primarily to hedge the Fund's positions
against potential adverse movements in securities prices, foreign currency
markets or interest rates. To a limited extent, the Fund may also use derivative
instruments for non-hedging purposes such as increasing the Fund's income or
otherwise enhancing return. The Fund will not use futures contracts and options
for leveraging purposes. There can be no assurance, however, that the use of
these instruments by the Fund will assist it in achieving its investment
objective. The use of futures, options, forward contracts and swaps involves
investment risks and transaction costs to which the Fund would not be subject
absent the use of these strategies. The Sub-advisor may, from time to time, at
its own expense, call upon the experience of experts to assist it in
implementing these strategies. The Fund may also use a variety of currency
hedging techniques, including forward currency contracts, to manage exchange
rate risk with respect to investments exposed to foreign currency fluctuations.
For an additional discussion of futures and options transactions and the risks
involved therein, see this Prospectus and the Company's SAI under "Certain Risk
Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements, which
involve the purchase of a security by the Fund and a simultaneous agreement
(generally with a bank or dealer) to repurchase the security from the Fund at a
specified date or upon demand. The Fund's repurchase agreements will at all
times be fully collateralized. Pursuant to an exemptive order granted by the
Commission, the Fund and other funds advised by the Sub-advisor may invest in
repurchase agreements and other money market instruments through a joint trading
account. For a discussion of repurchase agreements and the risks involved
therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Reverse Repurchase Agreements. The Fund is permitted to enter into
reverse repurchase agreements. In a reverse repurchase agreement, the Fund sells
a security and agrees to repurchase it at a mutually agreed upon date and price.
For a discussion of reverse repurchase agreements and the risks involved
therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
When-Issued, Delayed Delivery and Forward Transactions. The Fund may
purchase securities on a when-issued or delayed delivery basis, which generally
involves the purchase of a security with payment and delivery due at some time
in the future. The Fund does not earn interest on such securities until
settlement and bears the risk of market value fluctuations in between the
purchase and settlement dates. For an additional discussion of when-issued
securities and certain risks involved therein, see the Company's SAI under
"Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Directors
of the Company, the Fund may also invest up to 15% of its net assets in
securities that are considered illiquid because of the absence of a readily
available market or due to legal or contractual restrictions. Securities
eligible for resale under Rule 144A of the Securities Act of 1933, and
commercial paper issued under Section 4(2) of the Securities Act of 1933, could
be deemed "liquid" when saleable in a readily available market. For a discussion
of illiquid securities and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Lower-Rated High-Yield Bonds. The Fund may invest no more than 5% of
its net assets (at the time of investment) in lower-rated high-yield bonds. For
a discussion of these instruments and the risks involved therein, see this
Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods."
Borrowing. Subject to the Fund's restrictions on borrowing, the Fund
may also borrow money from banks. For a discussion of the Fund's limitations on
borrowing and certain risks involved in borrowing, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Company's SAI under
"Fundamental Investment Restrictions."
Portfolio Turnover. The Fund may have higher portfolio turnover than
other mutual funds with similar investment objectives. For a discussion of
portfolio turnover and its effects, see this Prospectus and the Company's SAI
under "Portfolio Transactions."
ASAF INVESCO EQUITY INCOME FUND:
Investment Objective: The investment objective of the Fund is to seek high
current income while following sound investment practices. Capital growth
potential is an additional, but secondary, consideration in the selection of
portfolio securities.
Investment Policies:
The Fund seeks to achieve its objective by investing in securities
which will provide a relatively high yield and stable return and which, over a
period of years, may also provide capital appreciation. The Fund normally will
invest at least 65% of its assets in dividend-paying, marketable common stocks
of domestic and foreign issuers. Up to 10% of the Fund's assets may be invested
in equity securities that do not pay regular dividends. The Fund also will
invest in convertible bonds, preferred stocks and debt securities. In periods of
uncertain market and economic conditions, as determined by the Directors of the
Company, the Fund may depart from the basic investment objective and assume a
defensive position with up to 50% of its assets temporarily invested in high
quality corporate bonds, or notes and government issues, or held in cash.
The Fund's investments in common stocks may, of course, decline in
value. To minimize the risk this presents, the Sub-advisor only invests in
common stocks and equity securities of domestic and foreign issuers which are
marketable; and will not invest more than 5% of the Fund's assets in the
securities of any one company or more than 25% of the Fund's assets in any one
industry.
Debt Securities. The Fund's investments in debt securities will
generally be subject to both credit risk and market risk. Credit risk relates to
the ability of the issuer to meet interest or principal payments, or both, as
they come due. Market risk relates to the fact that the market values of debt
securities in which the Fund invests generally will be affected by changes in
the level of interest rates. An increase in interest rates will tend to reduce
the market values of debt securities, whereas a decline in interest rates will
tend to increase their values. Although the Sub-advisor will limit the Fund's
debt security investments to securities it believes are not highly speculative,
both kinds of risk are increased by investing in debt securities rated below the
top four grades by Standard & Poor's Corporation ("Standard & Poor's) or Moody's
Investors Services, Inc. ("Moody's") and unrated debt securities, other than
Government National Mortgage Association modified pass-through certificates.
In order to decrease its risk in investing in debt securities, the Fund
will invest no more than 15% of its assets in debt securities rated below AAA,
AA, A or BBB by Standard & Poor's, or Aaa, Aa, A or Baa by Moody's, and in no
event will the Fund ever invest in a debt security rated below Caa by Moody's or
CCC by Standard & Poor's. Lower rated bonds by Moody's (categories Ba, B, Caa)
are of poorer quality and may have speculative characteristics. Bonds rated Caa
may be in default or there may be present elements of danger with respect to
principal or interest. Lower rated bonds by Standard & Poor's (categories BB, B,
CCC) include those which are regarded, on balance, as predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with their terms; BB indicates the lowest degree of speculation and
CCC a high degree of speculation. While such bonds will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
For a description securities ratings, see the Appendix to the Company's SAI.
While the Sub-advisor will monitor all of the debt securities in the
Fund for the issuers' ability to make required principal and interest payments
and other quality factors, the Sub-advisor may retain in the Fund a debt
security whose rating is changed to one below the minimum rating required for
purchase of such a security. For a discussion of the special risks involved in
lower-rated bonds, see this Prospectus and the Company's SAI under "Certain Risk
Factors and Investment Methods."
Portfolio Turnover. There are no fixed limitations regarding portfolio
turnover. The rate of portfolio turnover may fluctuate as a result of constantly
changing economic conditions and market circumstances. Securities initially
satisfying the Fund's basic objectives and policies may be disposed of when they
are no longer suitable. As a result, the Fund's annual portfolio turnover rate
may be higher than that of other investment companies seeking current income
with capital growth as a secondary consideration. For a discussion of portfolio
turnover and its effects, see this Prospectus and the Company's SAI under
"Portfolio Transactions."
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements with
respect to debt instruments eligible for investment by the Fund. These
agreements are entered into with member banks of the Federal Reserve System,
registered broker-dealers, and registered government securities dealers which
are deemed creditworthy. A repurchase agreement is a means of investing moneys
for a short period. In a repurchase agreement, the Fund acquires a debt
instrument (generally a security issued by the U.S. Government or an agency
thereof, a banker's acceptance or a certificate of deposit) subject to resale to
the seller at an agreed upon price and date (normally, the next business day).
In the event that the original seller defaults on its obligation to repurchase
the security, the Fund could incur costs or delays in seeking to sell such
security. To minimize risk, the securities underlying each repurchase agreement
will be maintained with the Fund's custodian in an amount at least equal to the
repurchase price under the agreement (including accrued interest), and such
agreements will be effected only with parties that meet certain creditworthiness
standards established by the Directors of the Company. The Fund will not enter
into a repurchase agreement maturing in more than seven days if as a result more
than 15% of the Fund's net assets would be invested in such repurchase
agreements and other illiquid securities. The Fund has not adopted any limit on
the amount of its total assets that may be invested in repurchase agreements
maturing in seven days or less.
Lending Portfolio Securities. The Fund also may lend its securities to
qualified brokers, dealers, banks, or other financial institutions. This
practice permits the Fund to earn income, which, in turn, can be invested in
additional securities to pursue the Fund's investment objective. Loans of
securities by the Fund will be collateralized by cash, letters of credit, or
securities issued or guaranteed by the U.S. Government or its agencies, equal to
at least 100% of the current market value of the loaned securities, determined
on a daily basis. Lending securities involves certain risks, the most
significant of which is the risk that a borrower may fail to return a portfolio
security. The Sub-advisor monitors the creditworthiness of borrowers in order to
minimize such risks. The Fund will not lend any security if, as a result of such
loan, the aggregate value of securities then on loan would exceed 33 1/3% of the
Fund's total net assets (taken at market value). For an additional discussion of
the Fund's limitations on lending and certain risks involved in lending, see
this Prospectus under "Certain Risk Factors and Investment Methods" and the
Company's SAI under "Fundamental Investment Restrictions."
Foreign Securities. The Fund may invest up to 25% of its total assets
in foreign securities. Investments in securities of foreign companies and in
foreign markets involve certain additional risks not associated with investments
in domestic companies and markets. The Fund may invest in countries considered
to be developing which may involve special risks. For a discussion of these
risks and the risks of investing in foreign securities, in general, see this
Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods."
Illiquid Securities. Subject to guidelines promulgated by the Directors
of the Company, the Fund may invest up to 15% of its net assets in securities
that are illiquid by virtue of legal or contractual restrictions on resale or
the absence of a readily available market. The Directors, or the Investment
Manager or the Sub-advisor acting pursuant to authority delegated by the
Directors, may determine that a readily available market exists for securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, or
any successor to that rule, and therefore that such securities are not subject
to the foregoing limitation. For a discussion of restricted securities and the
risks involved therein, see this Prospectus under "Certain Risk Factors and
Investment Methods."
Borrowing. For a discussion of the Fund's limitations on borrowing and
certain risks involved in borrowing, see this Prospectus under "Certain Risk
Factors and Investment Methods" and the Company's SAI under "Fundamental
Investment Restrictions."
ASAF AMERICAN CENTURY STRATEGIC BALANCED FUND:
Investment Objective: The investment objective of the Fund is to seek capital
growth and current income.
Investment Policies:
It is the Sub-advisor's intention to maintain approximately 60% of the
Fund's assets in common stocks that are considered by the Sub-advisor to have
better-than-average prospects for appreciation and the remainder in bonds and
other fixed income securities.
Equity Investments. With the equity portion of the Fund, the
Sub-advisor seeks capital growth by investing in securities, primarily common
stocks, that meet certain fundamental and technical standards of selection
(relating primarily to earnings and revenue acceleration) and have, in the
opinion of the Sub-advisor, better-than-average potential for appreciation. So
long as a sufficient number of such securities are available, the Sub-advisor
intends to keep the equity portion of the Fund fully invested in these
securities regardless of the movement of stock prices generally. The Fund may
purchase securities only of companies that have a record of at least three years
continuous operation.
The Sub-advisor selects, for the equity portion of the Fund, securities
of companies whose earnings and revenue trends meet the Sub-advisor's standards
of selection. The size of the companies in which the Fund invests tends to give
it its own characteristics of volatility and risk. These differences come about
because developments such as new or improved products or methods, which would be
relatively insignificant to a large company, may have a substantial impact on
the earnings and revenues of a small company and create a greater demand and a
higher value for its shares. However, a new product failure which could readily
be absorbed by a large company can cause a rapid decline in the value of the
shares of a smaller company. Hence, it could be expected that the volatility of
the Fund will be impacted by the size of companies in which it invests.
Fixed Income Investments. The Sub-advisor intends to maintain
approximately 40% of the Fund's assets in fixed income securities, approximately
80% of which will be invested in domestic fixed income securities and
approximately 20% of which will be invested in foreign fixed income securities.
This percentage will fluctuate from time to time and may be higher or lower
depending on the mix the Sub-advisor believes will provide the most favorable
outlook for achieving the Fund's objectives. A minimum of 25% of the Fund's
assets will be invested in fixed income senior securities.
The fixed income portion of the Fund will include U.S. Treasury
securities, securities issued or guaranteed by the U.S. government or a foreign
government, or an agency or instrumentality of the U.S. or a foreign government,
and non-convertible debt obligations issued by U.S. or foreign corporations. The
Fund may also invest in mortgage-related and other asset-backed securities. As
with the equity portion of the Fund, the bond portion of the Fund will be
diversified among the various types of fixed income investment categories
described above. The Sub-advisor's strategy is to actively manage the Fund by
investing the Fund's assets in sectors it believes are undervalued (relative to
the other sectors) and which represent better relative long-term investment
opportunities.
The value of fixed income securities fluctuates based on changes in
interest rates, currency values and the credit quality of the issuer. The
Sub-advisor will actively manage the Fund, adjusting the weighted average
portfolio maturity as necessary in response to expected changes in interest
rates. During periods of rising interest rates, the weighted average maturity of
the Fund may be moved to the shorter end of its maturity range in order to
reduce the effect of bond price declines on the Fund's net asset value. When
interest rates are falling and bond prices are rising, the weighted average
portfolio maturity may be moved toward the longer end of its maturity range.
Debt securities that comprise part of the Fund's fixed income portfolio
will primarily be limited to "investment grade" obligations. However, the Fund
may invest up to 10% of its fixed income assets in "high yield" securities.
"Investment grade" means that at the time of purchase, such obligations are
rated within the four highest categories by a nationally recognized statistical
rating organization for example, at least Baa by Moody's Investors Service, Inc.
("Moody's") or BBB by Standard & Poor's Corporation ("S&P"), or, if not rated,
are of equivalent investment quality as determined by the Sub-advisor. According
to Moody's, bonds rated Baa are medium-grade and possess some speculative
characteristics. A BBB rating by S&P indicates S&P's belief that a security
exhibits a satisfactory degree of safety and capacity for repayment, but is more
vulnerable to adverse economic conditions and changing circumstances. "High
yield" securities, sometimes referred to as "junk bonds," are higher risk,
non-convertible debt obligations that are rated below investment grade
securities, or are unrated, but with similar credit quality. For a description
of securities ratings, see the Appendix to the Company's SAI.
There are no credit or maturity restrictions on the fixed income
securities in which the high yield portion of the Fund may be invested. Debt
securities rated lower than Baa by Moody's or BBB by S&P or their equivalent are
considered by many to be predominantly speculative. Changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments on such securities than is the case with
higher quality debt securities. Regardless of rating levels, all debt securities
considered for purchase by the Fund are analyzed by the Sub-advisor to
determine, to the extent reasonably possible, that the planned investment is
sound, given the investment objective of the Fund. For an additional discussion
of lower-rated securities and certain risks involved therein, see this
Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods."
Under normal market conditions, the maturities of fixed-income
securities in which the Fund invests will range from 2 to 30 years.
In determining the allocation of assets among U.S. and foreign capital
markets, the Sub-advisor considers the condition and growth potential of the
various economies; the relative valuations of the markets; and social,
political, and economic factors that may affect the markets. In selecting
securities in foreign currencies, the Sub-advisor considers, among other
factors, the impact of foreign exchange rates relative to the U.S. dollar value
of such securities. The Sub-advisor may seek to hedge all or a part of the
Fund's foreign currency exposure through the use of forward foreign currency
contracts or options thereon.
Foreign Securities. The Fund may invest up to 25% of its assets in the
securities of foreign issuers, including debt securities of foreign governments
and their agencies primarily from developed markets, when these securities meet
its standards of selection. The Fund may make such investments either directly
in foreign securities, or by purchasing depositary receipts ("DRs") for foreign
securities. DRs are securities listed on exchanges or quoted in the
over-the-counter market in one country but represent the shares of issuers
domiciled in other countries. DRs may be sponsored or unsponsored. Direct
investments in foreign securities may be made either on foreign securities
exchanges or in the over-the-counter markets.
The Fund may invest in common stocks, convertible securities, preferred
stocks, bonds, notes and other debt securities of foreign issuers, and debt
securities of foreign governments and their agencies. The credit quality
standards applicable to domestic securities purchased by the Fund are also
applicable to its foreign securities investments. For a discussion of certain
risks involved in investing in foreign securities, see this Prospectus and the
Company's SAI under "Certain Risk Factors and Investment Methods."
Forward Currency Exchange Contracts. Some of the foreign securities
held by the Fund may be denominated in foreign currencies. Other securities,
such as DRs, may be denominated in U.S. dollars, but have a value that is
dependent on the performance of a foreign security, as valued in the currency of
its home country. As a result, the value of the Fund may be affected by changes
in the exchange rates between foreign currencies and the U.S. dollar, as well as
by changes in the market values of the securities themselves. The performance of
foreign currencies relative to the U.S. dollar may be a factor in the overall
performance of the Fund.
To protect against adverse movements in exchange rates between
currencies, the Fund may, for hedging purposes only, enter into forward currency
exchange contracts and buy put and call options relating to currency futures
contracts. A forward currency exchange contract obligates the Fund to purchase
or sell a specific currency at a future date at a specific price. An option is a
contractual right to acquire a financial asset, such as a security, the
securities of a market index, a foreign currency or a foreign currency exchange
contract, at a specified price at the end of a specified term. The Fund may
elect to enter into a forward currency exchange contract with respect to a
specific purchase or sale of a security, or with respect to the Fund's positions
generally. By entering into a forward currency exchange contract with respect to
the specific purchase or sale of a security denominated in a foreign currency,
the Fund can "lock in" an exchange rate between the trade and settlement dates
for that purchase or sale. This practice is sometimes referred to as
"transaction hedging." The Fund may enter into transaction hedging contracts
with respect to all or a substantial portion of its foreign securities trades.
When the Sub-advisor believes that a particular currency may decline in
value compared to the U.S. dollar, the Fund may enter into forward currency
exchange contracts to sell the value of some or all of the Fund's securities
either denominated in, or whose value is tied to, that currency. This practice
is sometimes referred to as "portfolio hedging." The Fund may not enter into a
portfolio hedging transaction where it would be obligated to deliver an amount
of foreign currency in excess of the aggregate value of its portfolio securities
or other assets denominated in, or whose value is tied to, that currency. The
Fund will make use of the portfolio hedging to the extent deemed appropriate by
the Sub-advisor. However, it is anticipated that the Fund will enter into
portfolio hedges much less frequently than transaction hedges.
If the Fund enters into a forward contract, the Fund, when required,
will instruct its custodian bank to segregate cash or other liquid assets in a
separate account in an amount sufficient to cover its obligation under the
contract. Those assets will be valued at market daily, and if the value of the
segregated securities declines, additional cash or securities will be added so
that the value of the account is not less than the amount of the Fund's
commitment. At any given time, no more than 10% of the Fund's assets will be
committed to a segregated account in connection with portfolio hedging
transactions.
Predicting the relative future values of currencies is very difficult,
and there is no assurance that any attempt to protect the Fund against adverse
currency movements through the use of forward currency exchange contracts will
be successful. In addition, the use of forward currency exchange contracts tends
to limit the potential gains that might result from a positive change in the
relationships between the foreign currency and the U.S. dollar. For an
additional discussion of foreign currency exchange contracts, certain risks
involved therein and the risks of currency fluctuations generally, see this
Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods."
Mortgage-Related and Other Asset-Backed Securities. The Fund may
purchase mortgage-related and other asset-backed securities. 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 that underlie the
securities (net of fees paid to the issuer or guarantor of the securities).
Payment of principal and interest on some mortgage pass-through
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 the Government National Mortgage Association (GNMA), or
guaranteed by agencies or instrumentalities of the U.S. government in the case
of securities guaranteed by the Federal National Mortgage Association (FNMA) or
the Federal Home Loan Mortgage Corporation (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 nongovernmental 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.
The Fund may also invest in collateralized mortgage obligations (CMOs).
CMOs are mortgage-backed securities issued by government agencies;
single-purpose, stand-alone financial subsidiaries; trusts established by
financial institutions; or similar institutions. The Fund may buy CMOs that are:
(i) collateralized by pools of mortgages in which payment of principal and
interest of each mortgage is guaranteed by an agency or instrumentality of the
U.S. government; (ii) collateralized by pools of mortgages in which payment of
principal and interest are guaranteed by the issuer, and the guarantee is
collateralized by U.S. government securities; or (iii) securities in which the
proceeds of the issue are invested in mortgage securities and payments of
principal and interest are supported by the credit of an agency or
instrumentality of the U.S. government. For a discussion of certain risks
involved in mortgage related and other asset-back securities, see this
Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods."
Portfolio Turnover. Investment decisions to purchase and sell
securities are based on the anticipated contribution of the security in question
to the Fund's objectives. The rate of portfolio turnover is irrelevant when the
Sub-advisor believes a change is in order to achieve those objectives and
accordingly, the annual portfolio turnover rate cannot be anticipated. The
portfolio turnover of the Fund may be higher than other mutual funds with
similar investment objectives. For a discussion of portfolio turnover and its
effects, see this Prospectus and the Company's SAI under "Portfolio
Transactions."
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may invest in repurchase agreements when such
transactions present an attractive short-term return on cash that is not
otherwise committed to the purchase of securities pursuant to the investment
policies of the Fund.
The Fund will limit repurchase agreement transactions to securities
issued by the U.S. government, its agencies and instrumentalities, and will
enter into such transactions with those banks and securities dealers who are
deemed creditworthy pursuant to criteria adopted by the Directors of the
Company. The Fund will invest no more than 15% of its assets in repurchase
agreements maturing in more than seven days. For a discussion of repurchase
agreements and certain risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Derivative Securities. To the extent permitted by its investment
objectives and policies, the Fund may invest in securities that are commonly
referred to as "derivative" securities. Generally, a derivative is a financial
arrangement the value of which is based on, or "derived" from, a traditional
security, asset, or market index. Certain derivative securities are more
accurately described as "index/structured" securities. Index/structured
securities are derivative securities whose value or performance is linked to
other equity securities (such as depositary receipts), currencies, interest
rates, indices or other financial indicators ("reference indices").
Some "derivatives" such as mortgage-related and other asset-backed
securities are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities.
There are many different types of derivatives and many different ways
to use them. Futures and options are commonly used for traditional hedging
purposes to attempt to protect a fund from exposure to changing interest rates,
securities prices, or currency exchange rates and for cash management purposes
as a low-cost method of gaining exposure to a particular securities market
without investing directly in those securities.
The Fund may not invest in a derivative security unless the reference
index or the instrument to which it relates is an eligible investment for the
Fund. For example, a security whose underlying value is linked to the price of
oil would not be a permissible investment since the Fund may not invest in oil
and gas leases or futures. The return on a derivative security may increase or
decrease, depending upon changes in the reference index or instrument to which
it relates.
There are a range of risks associated with derivative investments,
including: the risk that the underlying security, interest rate, market index or
other financial asset will not move in the direction the Sub-advisor
anticipates; the possibility that there may be no liquid secondary market, or
the possibility that price fluctuation limits may be imposed by the exchange,
either of which may make it difficult or impossible to close out a position when
desired; the risk that adverse price movements in an instrument can result in a
loss substantially greater than the Fund's initial investment; and the risk that
the counterparty will fail to perform its obligations. For a discussion of
certain risks involved in investing in derivative securities, including futures
and options contracts, see this Prospectus and the Company's SAI under "Certain
Risk Factors and Investment Methods."
Portfolio Securities Lending. In order to realize additional income,
the Fund may lend its portfolio securities to persons not affiliated with it and
who are deemed to be creditworthy. Such loans must be secured continuously by
cash collateral maintained on a current basis in an amount at least equal to the
market value of the securities loaned, or by irrevocable letters of credit.
During the existence of the loan, the Fund must continue to receive the
equivalent of the interest and dividends paid by the issuer on the securities
loaned and interest on the investment of the collateral. The Fund must have the
right to call the loan and obtain the securities loaned at any time on five
days' notice, including the right to call the loan to enable the Fund to vote
the securities. Such loans may not exceed one-third of the Fund's total assets
taken at market. Interest on loaned securities may not exceed 10% of the annual
gross income of the Fund (without offset for realized capital gains).
When-Issued Transactions. The Fund may sometimes purchase new issues of
securities on a when-issued basis without limit when, in the opinion of the
Sub-advisor, such purchases will further the investment objectives of the Fund.
For a discussion of when-issued securities and certain risks involved therein,
see the Company's SAI under "Certain Risk Factors and Investment Methods."
Short Sales. The Fund may engage in short sales if, at the time of the
short sale, the Fund owns or has the right to acquire an equal amount of the
security being sold short at no additional cost. These transactions allow the
Fund to hedge against price fluctuations by locking in a sale price for
securities it does not wish to sell immediately.
The Fund may make a short sale when it wants to sell the security it
owns at a current attractive price but also wishes to defer recognition of gain
or loss for federal income tax purposes, and for purposes of satisfying certain
tests applicable to regulated investment companies under the Internal Revenue
Code and Regulations.
Rule 144A Securities. The Fund may, from time to time, purchase Rule
144A securities when they present attractive investment opportunities that
otherwise meet the Fund's criteria for selection. Rule 144A securities are
securities that are privately placed with and traded among qualified
institutional buyers rather than the general public. Although Rule 144A
securities are considered "restricted securities," they are not necessarily
illiquid.
With respect to securities eligible for resale under Rule 144A, the
Staff of the Commission has taken the position that the liquidity of such
securities in the portfolio of a fund offering redeemable securities is a
question of fact for the board of directors to determine, such determination to
be based upon a consideration of the readily available trading markets and the
review of any contractual restrictions. Accordingly, the Directors of the
Company are responsible for developing and establishing the guidelines and
procedures for determining the liquidity of Rule 144A securities. As allowed by
Rule 144A, the Directors of the Company have delegated the day-to-day function
of determining the liquidity of Rule 144A securities to the Sub-advisor. The
Directors retain the responsibility to monitor the implementation of the
guidelines and procedures they have adopted.
Since the secondary market for such securities is limited to certain
qualified institutional investors, the liquidity of such securities may be
limited accordingly and the Fund may, from time to time, hold a Rule 144A
security that is illiquid. In such an event, the Sub-advisor will consider
appropriate remedies to minimize the effect on the Fund's liquidity. The Fund
may not invest more than 15% of its assets in illiquid securities (securities
that may not be sold within seven days at approximately the price used in
determining the net asset value of Fund shares). For an additional discussion of
Rule 144A securities and illiquid and restricted securities, and the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Borrowing. For a discussion of the Fund's limitations on borrowing and
certain risks involved in borrowing, see this Prospectus under "Certain Risk
Factors and Investment Methods" and the Company's SAI under "Fundamental
Investment Restrictions."
ASAF FEDERATED HIGH YIELD BOND FUND:
Investment Objective: The investment objective of the Fund is to seek high
current income by investing primarily in fixed income securities. The fixed
income securities in which the Fund intends to invest are lower-rated corporate
debt obligations. Lower-rated debt obligations are generally considered to be
high risk investments.
Investment Policies:
The Fund will invest at least 65% of its assets in lower-rated (BBB or
lower) corporate debt obligations. Under normal circumstances, the Fund will not
invest more than 10% of the value of its total assets in equity securities. The
fixed income securities in which the Fund may invest include, but are not
limited to: preferred stocks, convertible securities, bonds, debentures, notes,
equipment lease certificates and equipment trust certificates.
Other permitted investments for the Fund currently include, but are not
limited to, the following: commercial paper; obligations of the United States;
notes, bonds, and discount notes of the following U.S. government agencies or
instrumentalities: Federal Home Loan Banks, Federal National Mortgage
Association, Government National Mortgage Association, Federal Farm Credit
Banks, Tennessee Valley Authority, Export-Import Bank of the United States,
Commodity Credit Corporation, Federal Financing Bank, Student Loan Marketing
Association, Federal Home Loan Mortgage Corporation, or National Credit Union
Administration; time and savings deposits (including certificates of deposit) in
commercial or savings banks whose deposits are insured by the Bank Insurance
Fund ("BIF"), or the Savings Association Insurance Fund ("SAIF"), including
certificates of deposit issued by and other time deposits in foreign branches of
BIF-insured banks; bankers' acceptances issued by a BIF-insured bank, or issued
by the bank's Edge Act subsidiary and guaranteed by the bank, with remaining
maturities of nine months or less. The total acceptances of any bank held by the
Fund cannot exceed 0.25 of 1% of such bank's total deposits according to the
bank's last published statement of condition preceding the date of acceptance;
and general obligations of any state, territory, or possession of the United
States, or their political subdivisions, so long as they are either (1) rated in
one of the four highest grades by nationally recognized statistical rating
organizations or (2) issued by a public housing agency and backed by the full
faith and credit of the United States.
The corporate debt obligations in which the Fund may invest are
generally rated BBB or lower by Standard & Poor's Corporation ("Standard &
Poor's") or Baa or lower by Moody's Investors Service, Inc. ("Moody's"), or are
not rated but are determined by the Sub-advisor to be of comparable quality. For
a description of securities ratings, see the Appendix to the Company's SAI.
There is no lower limit with respect to rating categories for securities in
which the Fund may invest.
Special Risks of Lower-Rated Debt Obligations or "Junk Bonds." The
corporate debt obligations in which the Fund invests are usually not in the
three highest rating categories of a nationally recognized rating organization
(AAA, AA, or A for Standard & Poor's and Aaa, Aa or A for Moody's) but are in
the lower rating categories or are unrated but are of comparable quality and
have speculative characteristics or are speculative. Lower-rated or unrated
bonds are commonly referred to as "junk bonds." There is no minimal acceptable
rating for a security to be purchased or held in the Fund, and the Fund may,
from time to time, purchase or hold securities rated in the lowest rating
category or securities in default.
Lower-rated securities will usually offer higher yields than
higher-rated securities. However, there is more risk of loss of principal and
interest associated with these investments. This is because of reduced
creditworthiness and increased risk of default. Lower-rated securities generally
tend to reflect short-term corporate and market developments to a greater extent
than higher-rated securities which react primarily to fluctuations in the
general level of interest rates. Short-term corporate and market developments
affecting the prices or liquidity of lower-rated securities could include
adverse news affecting major issuers, underwriters, or dealers in lower-rated
securities. In addition, since there are fewer investors in lower-rated
securities, it may be harder to sell the securities at an optimum time.
As a result of these factors, lower-rated securities tend to have more
price volatility and carry more risk to principal and income than higher-rated
securities. An economic downturn may adversely affect the value of some
lower-rated bonds. Such a downturn may especially affect highly leveraged
companies or companies in cyclically sensitive industries, where deterioration
in a company's cash flow may impair its ability to meet its obligation to pay
principal and interest to bondholders in a timely fashion. From time to time, as
a result of changing conditions, issuers of lower-rated bonds may seek or may be
required to restructure the terms and conditions of the securities they have
issued. As a result of these restructurings, holders of lower-rated securities
may receive less principal and interest than they had bargained for at the time
such bonds were purchased. In the event of a restructuring, the Fund may bear
additional legal or administrative expenses in order to maximize recovery from
an issuer.
The secondary trading market for lower-rated bonds is generally less
liquid than the secondary trading market for higher-rated bonds. Certain
institutions, including federally insured savings and loan associations, may not
legally purchase and hold lower-rated bonds, which could have an adverse impact
on the overall liquidity of the market. Adverse publicity and the perception of
investors relating to issuers, underwriters, dealers or underlying business
conditions, whether or not warranted by fundamental analysis, may also affect
the price or liquidity of lower-rated bonds. On occasion, therefore, it may
become difficult to price or dispose of a particular security in the Fund. For
an additional discussion of the risks involved in lower-rated securities, see
this Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods."
Illiquid and Restricted Securities. Subject to guidelines promulgated
by the Directors of the Company, the Fund may acquire securities which are
subject to legal or contractual delays, restrictions and costs on resale. As a
matter of investment policy which can be changed without shareholder approval,
the Fund will not invest more than 15% of its net assets in illiquid securities,
which include certain private placements not determined to be liquid under
criteria established by the Directors of the Company and repurchase agreements
providing for settlement in more than seven days after notice. Securities
eligible for resale under Rule 144A of the Securities Act of 1933, and
commercial paper issued under Section 4(2) of the Securities Act of 1933, could
be deemed "liquid" when saleable in a readily available market. For an
additional discussion of illiquid and restricted securities, and the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
When-Issued and Delayed Delivery Transactions. The Fund may purchase
securities on a when-issued or delayed delivery basis. In when-issued and
delayed delivery transactions, the Fund relies on the seller to complete the
transaction. The seller's failure to complete the transaction may cause the Fund
to miss a price or yield considered to be advantageous. For an additional
discussion of these transactions and certain risks involved therein, see the
Company's SAI under "Certain Risk Factors and Investment Methods."
Temporary Investments. The Fund may also invest all or a part of its
assets temporarily in cash or cash items during time of unusual market
conditions for defensive purposes or to maintain liquidity. Cash items may
include, but are not limited to: certificates of deposit; commercial paper
(generally lower-rated); short-term notes; obligations issued or guaranteed as
to principal and interest by the U.S. government or any of its agencies or
instrumentalities; and repurchase agreements.
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements and
certain securities in which the Fund invests may be purchased pursuant to
repurchase agreements. For an additional discussion of repurchase agreements and
the risks involved therein, see this Prospectus under "Certain Risk Factors and
Investment Methods."
Lending Portfolio Securities. In order to generate additional income,
the Fund may lend portfolio securities on a short-term or long-term basis to
broker/dealers, banks, or other institutional borrowers of securities. The Fund
will only enter into loan arrangements with broker/dealers, banks, or other
institutions which the Sub-advisor has determined are creditworthy under
guidelines established by the Directors of the Company and will receive
collateral in the form of cash or U.S. government securities equal to at least
100% of the value of the securities loaned. For an additional discussion of the
Fund's limitations on lending and certain risks involved in lending, see this
Prospectus under "Certain Risk Factors and Investment Methods" and the Company's
SAI under "Fundamental Investment Restrictions."
Borrowing. For a discussion of the Fund's limitations on borrowing and
certain risks involved in borrowing, see this Prospectus under "Certain Risk
Factors and Investment Methods" and the Company's SAI under "Fundamental
Investment Restrictions."
Zero Coupon Bonds. The Fund may, from time to time, own zero coupon
bonds or pay-in-kind securities. A zero coupon bond makes no periodic interest
payments and the entire obligation becomes due only upon maturity. Pay-in-kind
securities make periodic payments in the form of additional securities (as
opposed to cash). The price of zero coupon bonds and pay-in-kind securities are
generally more sensitive to fluctuations in interest rates than are conventional
bonds. Additionally, federal tax law requires that interest on zero coupon bonds
and pay-in-kind securities be reported as income to the Fund even though the
Fund received no cash interest until the maturity or payment date of such
securities.
Many corporate debt obligations, including many lower-rated bonds,
permit the issuers to call the security and thereby redeem their obligations
earlier than the stated maturity dates. Issuers are more likely to call bonds
during periods of declining interest rates. In these cases, if the Fund owns a
bond which is called, the Fund will receive its return of principal earlier than
expected and would likely be required to reinvest the proceeds at lower interest
rates, thus reducing income to the Fund. For an additional discussion of zero
coupon bonds, see the Company's SAI under "Certain Risk Factors and Investment
Methods."
Foreign Securities. The Fund may invest up to 10% of its total assets
in foreign securities which are not publicly traded in the United States. For a
discussion of the risks involved in investing in foreign securities, see this
Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods."
Reducing Risks of Lower-Rated Securities. The Sub-advisor believes that
the risks of investing in lower-rated securities may be reduced. There can,
however, be no assurances that such risks will actually be reduced by the
following methods. The professional portfolio management techniques used by the
Sub-advisor to attempt to reduce these risks include:
Credit Research. The Sub-advisor will perform its own credit
analysis in addition to using nationally recognized rating organizations and
other sources, including discussions with the issuer's management, the judgment
of other investment analysts, and its own informed judgment. The Sub-advisor's
credit analysis will consider the issuer's financial soundness, its
responsiveness to changes in interest rates and business conditions, and its
anticipated cash flow, interest, or dividend coverage and earnings. In
evaluating an issuer, the Sub-advisor places special emphasis on the estimated
current value of the issuer's assets rather than historical cost.
Diversification. The Sub-advisor invests in securities of many
different issuers, industries, and economic sectors to reduce portfolio risk.
Economic Analysis. The Sub-advisor will analyze current
developments and trends in the economy and in the financial markets. When
investing in lower-rated securities, timing and selection are critical, and
analysis of the business cycle can be important.
ASAF TOTAL RETURN BOND FUND:
Investment Objective: The investment objective of the Fund is to maximize total
return, consistent with preservation of capital. The Sub-advisor will seek to
employ prudent investment management techniques, especially in light of the
broad range of investment instruments in which the Fund may invest.
Investment Policies:
In selecting securities for the Fund, the Sub-advisor will utilize
economic forecasting, interest rate anticipation, credit and call risk analysis,
foreign currency exchange rate forecasting, and other security selection
techniques. The proportion of the Fund's assets committed to investment in
securities with particular characteristics (such as maturity, type and coupon
rate) will vary based on the Sub-advisor's outlook for the U.S. and foreign
economies, the financial markets and other factors. The Fund will invest at
least 65% of its assets in the following types of securities which may be issued
by domestic or foreign entities and denominated in U.S. dollars or foreign
currencies: securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities; corporate debt securities, including convertible
securities and commercial paper; mortgage and other asset-backed securities;
inflation-indexed bonds issued by both governments and corporations; variable
and floating rate debt securities; bank certificates of deposit, fixed time
deposits and bankers' acceptances; repurchase agreements and reverse repurchase
agreements; obligations of foreign governments or their subdivisions, agencies
and instrumentalities, international agencies or supranational entities; and
foreign currency exchange-related securities, including foreign currency
warrants.
The Fund will invest in fixed-income securities of varying maturities
with a portfolio duration from three to six years. The average portfolio
duration of the Fund will normally vary within a three- to six-year time frame
based upon the Sub-advisor's forecast for interest rates. The Sub-advisor bases
its analysis of the average duration of the bond market on bond market indices
which it believes to be representative, and other factors. The Fund may invest
up to 10% of its assets in fixed income securities that are rated below
investment grade but rated B or higher by Moody's Investors Services, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P") (or, if unrated, determined
by the Sub-advisor to be of comparable quality). The Fund will maintain an
overall dollar-weighted average quality of at least A (as rated by Moody's or
S&P). In the event that ratings services assign different ratings to the same
security, the Sub-advisor will determine which rating it believes best reflects
the security's quality and risk at that time, which may be the higher of the
several assigned ratings. Securities rated B are judged to be predominantly
speculative with respect to their capacity to pay interest and repay principal
in accordance with the terms of the obligations. The Sub-advisor will seek to
reduce the risks associated with investing in such securities by limiting the
Fund's holdings in such securities and by the depth of its own credit analysis.
For a discussion of the risks involved in lower-rated high-yield bonds, see this
Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods." For a description of securities ratings, see the Appendix to the
Company's SAI.
The Fund may invest up to 20% of its assets in securities denominated
in foreign currencies, and may invest beyond this limit in U.S.
dollar-denominated securities of foreign issuers. Fund holdings will be
concentrated in areas of the bond market (based on quality, sector, coupon or
maturity) which the Sub-advisor believes to be relatively undervalued.
The Fund 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 the Fund owns or
anticipates purchasing due to anticipated changes in interest rates. The Fund
may engage in foreign currency transactions. Foreign currency exchange
transactions may be entered into the purpose of hedging against foreign currency
exchange risk arising from the Fund's investment or anticipated investment in
securities denominated in foreign currencies.
The Fund may enter into swap agreements for the purposes of attempting
to obtain a particular investment return at a lower cost to the Fund than if the
Fund had invested directly in an instrument that provided that desired return.
In addition, the Fund may purchase and sell securities on a when-issued and
delayed delivery basis and enter into forward commitments to purchase
securities; lend its securities to brokers, dealers and other financial
institutions to earn income; and borrow money for investment purposes.
The "total return" sought by the Fund will consist of interest and
dividends from underlying securities, capital appreciation reflected in
unrealized increases in value of portfolio securities or realized from the
purchase and sale of securities, and use of futures and options or gains from
favorable changes in foreign currency exchange rates. Generally, over the long
term, the total return obtained by a portfolio investing primarily in fixed
income securities is not expected to be as great as that obtained by a portfolio
investing in equity securities. At the same time, the market risk and volatility
of a fixed income portfolio is expected to be less than that of an equity
portfolio, so that a fixed income portfolio is generally considered to be a more
conservative investment. The change in the market value of fixed income
securities (and therefore their capital appreciation or depreciation) is largely
a function of changes in the current level of interest rates. When interest
rates are falling, a portfolio with a shorter duration generally will not
generate as high a level of total return as a portfolio with a longer duration.
Conversely, when interest rates are rising, a portfolio with a shorter duration
will generally outperform longer duration portfolios. When interest rates are
flat, shorter duration portfolios generally will not achieve as high a level of
return as longer duration portfolios (assuming that long-term interest rates are
higher than short-term interest rates, which is commonly the case). With respect
to the composition of any fixed-income portfolio, the longer the duration of the
portfolio, the greater the potential for total return, with, however, greater
attendant market risk and price volatility than for a portfolio with a shorter
duration. The market value of securities denominated in currencies other than
U.S. dollars also may be affected by movements in foreign currency exchange
rates.
The Fund's investments include, but are not limited to, the following:
U.S. Government Securities. U.S. Government securities are obligations
of, or guaranteed by, the U.S. Government, its agencies or instrumentalities.
Some U.S. Government securities, such as Treasury bills, notes and bonds, and
securities guaranteed by the Government National Mortgage Association ("GNMA"),
are supported by the full faith and credit of the United States; others, such as
those of the Federal Home Loan Banks, are supported by the right of the issuer
to borrow from the U.S. Treasury; others, such as those of the Federal National
Mortgage Association ("FNMA"), are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; and still others, such
as the Student Loan Marketing Association, are supported only by the credit of
the instrumentality.
Corporate Debt Securities. Corporate debt securities include corporate
bonds, debentures, notes and other similar corporate debt instruments, including
convertible securities. Debt securities may be acquired with warrants attached.
Corporate income-producing securities may also include forms of preferred or
preference stock. The rate of return or return of principal on some debt
obligations may be linked or indexed to the level of exchange rates between the
U.S. dollar and a foreign currency or currencies. Investment in corporate debt
securities that are below investment grade (rated below Baa (Moody's) or BBB
(S&P)) are described as "speculative" both by Moody's and S&P. For a description
of the special risks involved with lower-rated high-yield bonds, see this
Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods." For a description of securities ratings, see the Appendix to the
Company's SAI.
Variable and Floating Rate Securities. Variable and floating rate
securities provide for a periodic adjustment in the interest rate paid on the
obligations. The terms of such obligations must provide that interest rates are
adjusted periodically based upon an interest rate adjustment index as provided
in the respective obligations. The adjustment intervals may be regular, and
range from daily up to annually, or may be event based, such as based on a
change in the prime rate.
The Fund may invest in floating rate debt instruments ("floaters"). The
interest rate on a floater is a variable rate which is tied to another interest
rate, such as a money-market index or Treasury bill rate. The interest rate on a
floater resets periodically, typically every six months. While, because of the
interest rate reset feature, floaters provide the Fund with a certain degree of
protection against rises in interest rates, the Fund will participate in any
declines in interest rates as well.
The Fund may also invest in inverse floating rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. An inverse floating rate security may exhibit greater price
volatility than a fixed rate obligation of similar credit quality. The Fund will
not invest more than 5% of its net assets in any combination of inverse floater,
interest only, or principal only securities.
Inflation-Indexed Bonds. Inflation-indexed bonds are fixed income
securities whose principal value is periodically adjusted according to the rate
of inflation. The interest rate on these bonds is generally fixed at issuance at
a rate lower than typical bonds. Over the life of an inflation-indexed bond,
however, interest will be paid based on a principal value which is adjusted for
inflation. For example, if the Fund purchased an inflation-indexed bond with a
par value of $1,000 and a 3% real rate of return coupon (payable 1.5%
semi-annually), and inflation over the first six months was 1%, the mid-year par
value of the bond would be $1,010 and the first semi-annual interest payment
would be $15.15 ($1,010 times 1.5%).
Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed, and will fluctuate. The Fund may also invest in other
inflation related bonds which may or may not provide a similar guarantee. If a
guarantee of principal is not provided, the adjusted principal value of the bond
repaid at maturity may be less than the original principal.
The value of inflation-indexed bonds is expected to change in response
to changes in real interest rates (which are nominal interest rates adjusted for
inflation). If inflation were to rise at a faster rate than nominal interest
rates, real interest rates would decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates would rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed
bonds. As such, there is no trading history of these securities, and there can
be no assurance that a liquid market in these instruments will develop, although
one is expected. There also can be no assurance that the U.S. Treasury will
issue any particular amount of inflation-indexed bonds. Certain foreign
governments, such as the United Kingdom, Canada and Australia, have a longer
history of issuing inflation-indexed bonds, and there may be a more liquid
market in certain of these countries for these securities.
Any increase in the principal amount of an inflation-indexed bond will
be considered taxable ordinary income, even though investors do not receive
their principal until maturity. For information about the possible tax
consequences of investing in inflation-indexed bonds, see this Prospectus under
"Dividends, Capital Gains and Taxes."
Mortgage-Related and Other Asset-Backed Securities. The Fund may invest
all of its assets in mortgage-related and other asset-backed securities,
including mortgage pass-through securities and collateralized mortgage
obligations. The value of some mortgage- or asset-backed securities in which the
Fund invests may be particularly sensitive to changes in prevailing interest
rates, and, like the other investments of the Fund, the ability of the Fund to
successfully utilize these instruments may depend in part upon the ability of
the Sub-advisor to forecast interest rates and other economic factors correctly.
For a description of these securities and the special risks involved therein,
see this Prospectus and the Company's SAI under "Certain Risk Factors and
Investment Methods" and the Company's SAI under "Investment Programs of the
Funds: ASAF Total Return Bond Fund."
Repurchase Agreements. For the purpose of achieving income, the Fund
may enter into repurchase agreements, subject to guidelines promulgated by the
Directors of the Company. The Fund will not invest more than 15% of its net
assets (taken at current market value) in repurchase agreements maturing in more
than seven days. For a discussion of repurchase agreements and the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Reverse Repurchase Agreements, Dollar Rolls and Other Borrowings. A
reverse repurchase agreement may for some purposes be considered borrowing that
involves the sale of a security by the Fund and its agreement to repurchase the
instrument at a specified time and price. The Fund may also enter into dollar
rolls, in which the Fund sells mortgage-backed or other securities for delivery
in the current month and simultaneously contracts to purchase substantially
similar securities on a specified future date. In the case of dollar rolls
involving mortgage-backed securities, the mortgage-backed securities that are
purchased will be of the same type and will have the same interest rate as those
sold, but will be supported by different pools of mortgages. The Fund forgoes
principal and interest paid during the roll period on the securities sold in a
dollar roll, but the Fund is compensated by the difference between the current
sales price and the lower price for the future purchase as well as by any
interest earned on the proceeds of the securities sold. The Fund also could be
compensated through the receipt of fee income equivalent to a lower forward
price. The Fund will maintain a segregated account consisting of cash or other
liquid assets to cover its obligations under reverse repurchase agreements and
dollar rolls.
Reverse repurchase agreements and dollar rolls will be subject to the
Fund's limitations on borrowings, which will restrict the aggregate of such
transactions (plus any other borrowings) to 33 1/3% of the Fund's total assets.
Such practices will tend to exaggerate the effect on net asset value of any
increase or decrease in the value of the Fund and may cause the Fund to
liquidate portfolio positions when it would not be advantageous to do so. Apart
from transactions involving reverse repurchase agreements and dollar rolls, the
Fund will not borrow money, except for temporary administrative purposes. For an
additional discussion of reverse repurchase agreements and the risks involved
therein, see this Prospectus under "Certain Risk Factors and Investment
Methods." For an additional discussion of the Fund's limitations on borrowing
and certain risks involved in borrowing, see this Prospectus under "Certain Risk
Factors and Investment Methods" and the Company's SAI under "Fundamental
Investment Restrictions."
Lending Portfolio Securities. For the purpose of achieving income, the
Fund may lend its portfolio securities, provided (1) the loan is secured
continuously by collateral consisting of U.S. Government securities or cash or
cash equivalents (cash, U.S. Government securities, negotiable certificates of
deposit, bankers' acceptances or letters of credit) maintained on a daily
mark-to-market basis in an amount at least equal to the current market value of
the securities loaned, (2) the Fund may at any time call the loan and obtain the
return of securities loaned, (3) the Fund will receive any interest or dividends
received on the loaned securities, and (4) the aggregate value of the securities
loaned will not at any time exceed one-third of the total assets of the Fund.
For an additional discussion of the Fund's limitations on lending and certain
risks involved in lending, see this Prospectus under "Certain Risk Factors and
Investment Methods" and the Company's SAI under "Fundamental Investment
Restrictions."
When-Issued or Delayed-Delivery Transactions. The Fund may purchase or
sell securities on a when-issued or delayed delivery basis. These transactions
involve a commitment by the Fund to purchase or sell securities for a
predetermined price or yield, with payment and delivery taking place more than
seven days in the future, or after a period longer than the customary settlement
period for that type of security. When delayed delivery purchases are
outstanding, the Fund will set aside and maintain until the settlement date, in
a segregated account, cash or other liquid assets in an amount sufficient to
meet the purchase price. Typically, no income accrues on securities purchased on
a delayed delivery basis prior to the time delivery of the securities is made,
although the Fund may earn income on securities it has deposited in a segregated
account. When purchasing a security on a delayed delivery basis, the Fund
assumes the rights and risks of ownership of the security, including the risk of
price and yield fluctuations, and takes such fluctuations into account when
determining its net asset value. Because the Fund is not required to pay for the
security until the delivery date, these risks are in addition to the risks
associated with the Fund's other investments. If the Fund remains substantially
fully invested at a time when delayed delivery purchases are outstanding, the
delayed delivery purchases may result in a form of leverage. When the Fund has
sold a security on a delayed delivery basis, the Fund does not participate in
future gains or losses with respect to the security. If the other party to a
delayed delivery transaction fails to deliver or pay for the security, the Fund
could miss a favorable price or yield opportunity or could suffer a loss. The
Fund may dispose of or renegotiate a delayed delivery transaction after it is
entered into, and may sell when-issued securities before they are delivered,
which may result in a capital gain or loss. There is no percentage limitation on
the extent to which the Fund may purchase or sell securities on a delayed
delivery basis.
Foreign Securities. The Fund may invest directly in U.S. dollar- or
foreign currency-denominated fixed income securities. The Fund will limit its
foreign investments to securities of issuers based in developed countries
(including newly industrialized countries ("NICs"), such as Taiwan, South Korea
and Mexico). The Fund will limit its investment in securities of issuers based
in NICs to 10% of its assets. For purposes of this restriction, the term "NIC"
is not meant to include a defined set of countries selected according to
specific criteria, but rather is a broadly defined term which includes countries
which are considered by the Sub-advisor to have sound economies and the
potential for positive growth. Investing in the securities of issuers in any
foreign country involves special risks and considerations not typically
associated with investing in U.S. companies. For a discussion of the risks
involved in investing in foreign securities, including the risk of currency
fluctuations, see this Prospectus and the Company's SAI under "Certain Risk
Factors and Investment Methods."
Brady Bonds. The Fund may invest in Brady Bonds. Brady Bonds are
securities created through the exchange of existing commercial bank loans to
sovereign entities for new obligations in connection with debt restructurings
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady. Brady Bonds have been issued only recently, and for
that reason do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar), and are actively traded in the over-the-counter
secondary market. Brady Bonds are not considered to be U.S. Government
Securities. In light of the residual risk of Brady Bonds and, among other
factors, the history of defaults with respect to commercial bank loans by public
and private entities in countries issuing Brady Bonds, investments in Brady
Bonds may be viewed as speculative. There can be no assurance that Brady Bonds
acquired by the Fund will not be subject to restructuring arrangements or to
requests for new credit, which may cause the Fund to suffer a loss of interest
or principal on any of its holdings.
Foreign Currency Transactions. The Fund may buy and sell foreign
currency futures contracts and options on foreign currencies and foreign
currency futures contracts, enter into forward foreign currency exchange
contracts to reduce the risks of adverse changes in foreign exchange rates. The
Fund may enter into these contracts for the purpose of hedging against foreign
exchange risk arising from the Fund's investment or anticipated investment in
securities denominated in foreign currencies. For a discussion of foreign
currency transactions and the risks involved therein, see this Prospectus and
the Company's SAI under "Certain Risk Factors and Investment Methods."
Options on Securities, Securities Indexes and Currencies. The Fund may
purchase and write call and put options on securities, securities indexes and on
foreign currencies, and enter into futures contracts and use options on futures
contracts as further described below. The Fund may also enter into swap
agreements with respect to foreign currencies, interest rates and securities
indexes. The Fund may use these techniques to hedge against changes in interest
rates, foreign currency, exchange rates or securities prices or as part of its
overall investment strategy.
The Fund may purchase options on securities to protect holdings in an
underlying or related security against a substantial decline in market value. A
fund may purchase call options on securities to protect against substantial
increases in prices of securities the Fund intends to purchase pending its
ability to invest in such securities in an orderly manner. The Fund may sell put
or call options it has previously purchased, which could result in a net gain or
loss depending on whether the amount realized on the sale is more or less than
the premium and other transaction costs paid on the put or call option which is
sold. A fund may write a call or put option only if it is "covered" by the Fund
holding a position in the underlying securities or by other means which would
permit immediate satisfaction of the Fund's obligation as writer of the option.
Prior to exercise or expiration, an option may be closed out by an offsetting
purchase or sale of an option of the same series.
The Fund may also invest in foreign-denominated securities and may buy
or sell put and call options on foreign currencies. Currency options traded on
U.S. or other exchanges may be subject to position limits which may limit the
ability of the Fund to reduce foreign currency risk using such options. For a
discussion of options and the risks involved therein, as well as the risks
involved in investing in foreign currency, see this Prospectus and the Company's
SAI under "Certain Risk Factors and Investment Methods."
Swap Agreements. The Fund may enter into interest rate, index and
currency exchange rate swap agreements for the purposes of attempting to obtain
a particular desired return at a lower cost to the Fund than if the Fund had
invested directly in an instrument that yielded the desired return. Swap
agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a "notional amount," i.e.,
the return on or increase in value of a particular dollar amount invested at a
particular interest rate, in a particular foreign currency, or in a "basket" of
securities representing a particular index. Commonly used swap agreements
include interest rate caps, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates exceed a
specified rate or "cap"; interest floors, under which, in return for a premium,
one party agrees to make payments to the other to the extent that interest rates
fall below a specified level or "floor"; and interest rate collars, under which
a party sells a cap and purchases a floor or vice versa in an attempt to protect
itself against interest rate movements exceeding given minimum or maximum
levels.
The "notional amount" of a swap agreement is only a fictive basis on
which to calculate the obligations which the parties to a swap agreement have
agreed to exchange. Most swap agreements entered into by the Fund would
calculate the obligations of the parties to the agreement on a "net basis."
Consequently, the Fund's obligations (or rights) under a swap agreement will
generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement ("net amount"). The Fund's obligations under a swap agreement will
be accrued daily (offset against amounts owed to the Fund) and any accrued
unpaid net amounts owed to a swap counterparty will be covered by the
maintenance of a segregated account consisting of cash or other liquid assets to
avoid any potential leveraging of the Fund. The 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 total assets.
Risks of Swaps. Whether the Fund's use of swap agreements will be
successful in furthering its investment objective will depend on the Fund's
ability to predict correctly whether certain types of investment are likely to
produce greater returns than other investments. Because they are two-party
contracts and because they have terms of greater than seven days, swap
agreements may be considered illiquid. Moreover, the Fund bears the risk of loss
of the amount expected to be received under a swap agreement in the event of a
default or bankruptcy of a swap agreement counterparty. The Sub-advisor will
cause the Fund to enter into swap agreements only with counterparties that would
be eligible for consideration as repurchase agreement counterparties under the
Fund's repurchase agreement guidelines. Certain restrictions imposed on the Fund
by the Internal Revenue Code may limit the Fund's ability to use swap
agreements. The swaps market is relatively new and is largely unregulated. It is
possible that developments in the swaps market, including potential governmental
regulation, could adversely affect the Fund's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
Futures Contracts and Options on Futures Contracts. The Fund may invest
in interest rate futures contracts, stock index futures contracts and foreign
currency futures contracts and options thereon that are traded on a U.S. or
foreign exchange or board of trade. The Fund will only enter into futures
contracts or futures options which are standardized and traded on a U.S. or
foreign exchange or board of trade, or similar entity, or quoted on an automated
quotation system. The Fund will use financial futures contracts and related
options only for "bona fide" hedging purposes, as such term is defined in the
applicable regulations of the Commodity Futures Trading Commission, or, with
respect to positions in financial futures and related options that do not
qualify as "bona fide hedging" positions, will enter such non-hedging positions
only to the extent that aggregate initial margin deposit plus premiums paid by
it for the open futures options position, less the amount by which any such
positions are "in-the-money," would not exceed 5% of the Fund's total assets.
For an additional discussion of futures contracts and related options, and the
risks involved therein, see this Prospectus and the Company's SAI under "Certain
Risk Factors and Investment Methods."
Portfolio Turnover. The Fund may have higher portfolio turnover than
other mutual funds with similar investment objectives. For a discussion of
portfolio turnover and its effects, see this Prospectus and the Company's SAI
under "Portfolio Transactions."
ASAF JPM MONEY MARKET FUND:
Investment Objective: The investment objective of the Fund is to seek high
current income and maintain high levels of liquidity.
Investment Policies:
The Fund attempts to accomplish its objectives by maintaining a
dollar-weighted average portfolio maturity of not more than 90 days and by
investing in the types of high quality U.S. dollar-denominated securities
described below which have effective maturities of not more than 397 days. The
Fund will invest in one or more of the types of investments described below.
United States Government Obligations. The Fund may invest in
obligations of the U.S. Government and its agencies ("U.S. Government
Obligations") and instrumentalities ("U.S. Government Instrumentalities")
maturing 397 days or less from the date of acquisition or purchased pursuant to
repurchase agreements that provide for repurchase by the seller within 397 days
from the date of acquisition. U.S. Government Obligations, for purposes of this
Fund, include: (i) direct obligations issued by the United States Treasury such
as Treasury bills, notes and bonds; and (ii) instruments issued or guaranteed by
government-sponsored agencies acting under authority of Congress, such as, but
not limited to, obligations of the Bank for Cooperatives, Federal Financing
Bank, Federal Intermediate Credit Banks, Federal Land Banks, and Tennessee
Valley Authority, Federal Home Loan Bank and Federal Farm Credit Bureau. U.S.
Government Instrumentalities are government agencies organized by Congress under
a Federal Charter and supervised and regulated by the U.S. Government, such as
the Federal National Mortgage Association and the Student Loan Mortgage
Association. Some of these U.S. Government Obligations are supported by the full
faith and credit of the U.S. Treasury; others are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Mortgage Association, are supported only by the credit
of the instrumentality. No assurance can be given that the U.S. Government would
provide financial support to the U.S. Government-sponsored instrumentalities if
it is not obligated to do so by law.
Bank Obligations. The Fund may invest in high quality United States
dollar-denominated negotiable certificates of deposit, time deposits and
bankers' acceptances of (i) banks, savings and loan associations and savings
banks which have more than $2 billion in total assets and are organized under
United States federal or state law, (ii) foreign branches of these banks or
foreign banks of equivalent size (Euros), and (iii) United States branches of
foreign banks of equivalent size (Yankees). The Fund may also invest in
obligations of international banking institutions designated or supported by
national governments to promote economic reconstruction, development or trade
between nations (e.g., the European Investment Bank, the Inter-American
Development Bank, or the World Bank). These obligations may be supported by
appropriated but unpaid commitments of their member countries, and there is no
assurance these commitments will be undertaken or met in the future.
Commercial Paper; Bonds. The Fund may invest in high quality commercial
paper and corporate bonds issued by United States corporations. The Fund may
also invest in bonds and commercial paper of foreign issuers if the obligation
is United States dollar-denominated and is not subject to foreign withholding
tax. For a discussion of the risks involved in foreign investments, see this
Prospectus and the Company's SAI under "Certain Risk Factors and Investment
Methods."
Asset-Backed Securities. As may be permitted by current laws and
regulations and if expressly permitted by the Directors of the Company, the Fund
may invest in securities generally referred to as asset-backed securities, which
directly or indirectly represent a participation interest in, or are secured by
and payable from, a stream of payments generated by particular assets such as
motor vehicle or credit card receivables. Asset-backed securities provide
periodic payments that generally consist of both interest and principal
payments. Consequently, the life of an asset-backed security varies with the
prepayment experience of the underlying debt instruments. For more information
about these instruments and the risks involved therein, see this Prospectus and
the Company's SAI under "Certain Risk Factors and Investment Methods."
Synthetic Instruments. As may be permitted by current laws and
regulations and if expressly permitted by the Directors of the Company, the Fund
may invest in certain synthetic instruments. Such instruments generally involve
the deposit of asset-backed securities in a trust arrangement and the issuance
of certificates evidencing interests in the trust. The certificates are
generally sold in private placements in reliance on Rule 144A of the Securities
Act of 1933. The Sub-advisor will review the structure of synthetic instruments
to identify credit and liquidity risks and will monitor such risks.
Quality Information. The Fund will limit its investments to those
securities which, in accordance with guidelines adopted by the Directors of the
Company, present minimal credit risks. In addition, the Fund will not purchase
any security (other than a United States Government security) unless: (i) if
rated by only one nationally recognized rating organization (such as Moody's and
Standard & Poor's), then such organization has rated it with the highest rating
assigned to short-term debt securities; (ii) if rated by more than one
nationally recognized rating organization, then at least two such rating
organizations have rated it with the highest rating assigned to short-term debt
securities; or (iii) it is not rated and is determined to be of comparable
quality. Determinations of comparable quality shall be made in accordance with
procedures established by the Directors of the Company. These standards must be
satisfied at the time an investment is made. If the quality of the investment
later declines, the Fund may continue to hold the investment, subject in certain
circumstances to a finding by the Directors that disposing of the investment
would not be in the Fund's best interest. For a description of securities
ratings, see the Appendix to the Company's SAI.
When-Issued and Delayed Delivery Securities. The Fund may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities may take as long as a month or more after the date of the
purchase commitment. The value of these securities is subject to market
fluctuation during this period and no interest or income accrues to the Fund
until settlement. The Fund maintains with the custodian a separate account with
a segregated portfolio of securities in an amount at least equal to these
commitments. When entering into a when-issued or delayed delivery transaction,
the Fund will rely on the other party to consummate the transaction; if the
other party fails to do so, the Fund may be disadvantaged. It is the current
policy of the Fund not to enter into when-issued commitments exceeding in the
aggregate 15% of the market value of the Fund's total assets less liabilities
other than the obligations created by these commitments. For an additional
discussion of when-issued securities and certain risks involved therein, see the
Company's SAI under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund is permitted to enter into repurchase
agreements. For a discussion of repurchase agreements and the risks involved
therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Reverse Repurchase Agreements. The Fund is permitted to enter into
reverse repurchase agreements. In a reverse repurchase agreement, the Fund sells
a security and agrees to repurchase it at a mutually agreed upon date and price,
reflecting the interest rate effective for the term of the agreement. It may
also be viewed as the borrowing of money by the Fund. If interest rates rise
during the term of a reverse repurchase agreement, entering into the reverse
repurchase agreement may have a negative impact on the Fund's ability to
maintain a net asset value of $1.00 per share. For a discussion of reverse
repurchase agreements and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Foreign Securities. The Fund may invest in U.S. dollar-denominated
foreign securities. Any foreign commercial paper must not be subject to foreign
withholding tax at the time of purchase. Foreign investments may be made
directly in securities of foreign issuers or in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Generally, ADRs and
EDRs are receipts issued by a bank or trust company that evidence ownership of
underlying securities issued by a foreign corporation and that are designed for
use in the domestic, in the case of ADRs, or European, in the case of EDRs,
securities markets. For a discussion of depositary receipts and the risks
involved in investing in foreign securities, in general, see this Prospectus and
the Company's SAI under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. Subject to the Fund's restriction on
lending, the Fund is permitted to lend its securities. These loans must be
secured continuously by cash or equivalent collateral or by a letter of credit
at least equal to the market value of the securities loaned plus accrued
interest or income. For an additional discussion of the Fund's limitations on
lending and certain risks involved in lending, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Company's SAI under
"Fundamental Investment Restrictions."
Borrowing. The Fund may borrow money from banks for non-leveraging,
temporary or emergency purposes in amounts up to 33 1/3% of its total assets.
The Fund will not purchase securities while borrowings exceed 5% of the Fund's
total assets. For an additional discussion of the Fund's limitations on
borrowing and certain risks involved in borrowing, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Company's SAI under
"Fundamental Investment Restrictions."
CERTAIN RISK FACTORS AND INVESTMENT METHODS
The following is a description of certain securities and investment methods
that the Funds and Portfolios may invest in or use, and certain of the risks
associated with such securities and investment methods. Whether a particular
Fund or Portfolio may invest in a specific security or use a type of investment
method, as well as other risk factors associated with the Fund or Portfolio's
investment program, are described in this Prospectus and the Company's SAI under
"Investment Programs of the Funds" and in the Company's SAI under "Fundamental
Investment Restrictions." The risk factors and investment methods described
below only apply to those Funds or Portfolios that may invest in such securities
or use such investment methods. Because the investment objective, policies and
limitations of each Feeder Fund are identical to those of its corresponding
Portfolio, the references below to the Feeder Funds and the Directors of the
Company apply equally to the Funds' corresponding Portfolios and the Trustees of
the Trust, respectively.
Derivative Instruments. To the extent permitted by the investment
objectives and policies of a Fund, a Fund may invest in securities and other
instruments that are commonly referred to as "derivatives." For instance, a Fund
may purchase and write call and put options on securities, securities indexes
and foreign currencies, enter into futures contracts and use options on futures
contracts, and enter into swap agreements with respect to foreign currencies,
interest rates, and securities indexes. A Fund 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.
In general, derivative instruments are those securities or other
instruments whose value is derived from or related to the value of some other
instrument or asset, but not those securities whose payment of principal and/or
interest depend upon cash flows from underlying assets, such as mortgage or
asset-backed securities. The value of some derivative instruments in which a
Fund invests may be particularly sensitive to changes in prevailing interest
rates, and, like the other investments of a Fund, the ability of the Fund to
successfully utilize these instruments may depend in part upon the ability of
the Sub-advisor to forecast interest rates and other economic factors correctly.
If the Sub-advisor incorrectly forecasts such factors and has taken positions in
derivative instruments contrary to prevailing market trends, the Fund could be
exposed to the risk of a loss.
A Fund might not employ any of the derivative strategies described
below, and no assurance can be given that any strategy used will succeed. If a
Sub-advisor incorrectly forecasts interest rates, market values or other
economic factors in utilizing a derivatives strategy for a Fund, the Fund might
have been in a better position if it had not entered into the transaction at
all. The use of these strategies involves certain special risks, including a
possible imperfect correlation, or even no correlation, between price movements
of derivative instruments and price movements of related investments. In
addition, while some strategies involving derivative instruments can reduce the
risk of loss, they can also reduce the opportunity for gain, or even result in
losses, by offsetting favorable price movements in related investments.
Furthermore, a Fund may be unable to purchase or sell a portfolio security at a
time that otherwise would be favorable for it to do so, or may need to sell a
portfolio security at a disadvantageous time, due to the need to maintain asset
coverage or offsetting positions in connection with transactions in derivative
instruments. A Fund may also be unable to close out or to liquidate its
derivatives positions.
Options:
Call Options. A call option on a security gives the purchaser
of the option, in return for a premium paid to the writer (seller), the right to
buy the underlying security at the exercise price at any time during the option
period. Upon exercise by the purchaser, the writer (seller) of a call option has
the obligation to sell the underlying security at the exercise price. When a
Fund purchases a call option, it will pay a premium to the party writing the
option and a commission to the broker selling the option. If the option is
exercised by such Fund, the amount of the premium and the commission paid may be
greater than the amount of the brokerage commission that would be charged if the
security were to be purchased directly. By writing a call option, a Fund assumes
the risk that it may be required to deliver the security having a market value
higher than its market value at the time the option was written. The Fund will
write call options in order to obtain a return on its investments from the
premiums received and will retain the premiums whether or not the options are
exercised. Any decline in the market value of portfolio securities will be
offset to the extent of the premiums received (net of transaction costs). If an
option is exercised, the premium received on the option will effectively
increase the exercise price.
If a Fund writes a call option on a security it already owns,
it gives up the opportunity for capital appreciation above the exercise price
should market price of the underlying security increase, but retains the risk of
loss should the price of the underlying security decline. Writing call options
also involves the risk relating to a Fund's ability to close out options it has
written.
A call option on a securities index is similar to a call
option on an individual security, except that the value of the option depends on
the weighted value of the group of securities comprising the index, and all
settlements are made in cash. A call option may be terminated by the writer
(seller) by entering into a closing purchase transaction in which it purchases
an option of the same series as the option previously written.
Put Options. A put option on a security gives the purchaser of
the option, in return for premium paid to the writer (seller), the right to sell
the underlying security at the exercise price at any time during the option
period. Upon exercise by the purchaser, the writer of a put option has the
obligation to purchase the underlying security at the exercise price. By writing
a put option, a Fund assumes the risk that it may be required to purchase the
underlying security at a price in excess of its current market value.
A put option on a securities index is similar to a put option
on an individual security, except that the value of the option depends on the
weighted value of the group of securities comprising the index, and all
settlements are made in cash.
A Fund may sell a call option or a put option which it has
previously purchased prior to the purchase (in the case of a call) or the sale
(in the case of a put) of the underlying security. Any such sale would result in
a net gain or loss depending on whether the amount received on the sale is more
or less than the premium and other transaction costs paid on the call or put
which is sold.
Futures Contracts and Related Options. A financial futures contract
calls for delivery of a particular security at a specified price at a certain
time in the future. The seller of the contract agrees to make delivery of the
type of security called for in the contract and the buyer agrees to take
delivery at a specified future time. A Fund may also write call options and
purchase put options on financial futures contracts as a hedge to attempt to
protect the Fund's securities from a decrease in value. When a Fund writes a
call option on a futures contract, it is undertaking the obligation of selling a
futures contract at a fixed price at any time during a specified period if the
option is exercised. Conversely, the purchaser of a put option on a futures
contract is entitled (but not obligated) to sell a futures contract at a fixed
price during the life of the option.
Financial futures contracts consist of interest rate futures contracts
and securities index futures contracts. An interest rate futures contract
obligates the seller of the contract to deliver, and the purchaser to take
delivery of, interest rate securities called for in a contract at a specified
future time at a specified price. A stock index assigns relative values to
common stocks included in the index and the index fluctuates with changes in the
market values of the common stocks included. A stock index futures contract is a
bilateral contract pursuant to which two parties agree to take or make delivery
of an amount of cash equal to a specified dollar amount times the difference
between the stock index value at the close of the last trading day of the
contract and the price at which the futures contract is originally struck. An
option on a financial futures contract gives the purchaser the right to assume a
position in the contract (a long position if the option is a call and a short
position if the option is a put) at a specified exercise price at any time
during the period of the option.
Futures contracts and options can be highly volatile and could result
in reduction of a Fund's total return, and a Fund's attempt to use such
investments for hedging purposes may not be successful. Successful futures
strategies require the ability to predict future movements in securities prices,
interest rates and other economic factors. A Fund's potential losses from the
use of futures extends beyond its initial investment in such contracts. Also,
losses from options and futures could be significant if a Fund is unable to
close out its position due to distortions in the market or lack of liquidity.
The use of futures and options involves investment risks and
transaction costs to which a Fund would not be subject absent the use of these
strategies. If a Sub-advisor seeks to protect a Fund against potential adverse
movements in the securities, foreign currency or interest rate markets using
these instruments, and such markets do not move in a direction adverse to the
Fund, the Fund could be left in a less favorable position than if such
strategies had not been used. The successful use of these strategies therefore
may depend on the ability of the Sub-advisor to correctly forecast interest rate
movements and general stock market price movements. Risks inherent in the use of
futures and options include: (a) the risk that interest rates, securities prices
and currency markets will not move in the directions anticipated; (b) imperfect
correlation between the price of futures, options and forward contracts and
movements in the prices of the securities or currencies being hedged; (c) the
fact that skills needed to use these strategies are different from those needed
to select portfolio securities; (d) the possible absence of a liquid secondary
market for any particular instrument at any time; and (e) the possible need to
defer closing out certain hedged positions to avoid adverse tax consequences. A
Fund's ability to terminate option positions established in the over-the-counter
market may be more limited than in the case of exchange-traded options and may
also involve the risk that securities dealers participating in such transactions
would fail to meet their obligations to such Fund.
In addition, the use of futures and options involves the risk of
imperfect correlation between movements in futures and options prices and
movements in the price of securities that are the subject of a hedge.
Particularly with respect to options on stock indices and stock index futures,
the risk of such imperfect correlation increases as the composition of the Fund
diverges from the composition of the relevant index.
Pursuant to regulations of the Commodity Futures Trading Commission
("CFTC"), the Company has represented that:
(i) it will not purchase or sell futures or options on futures
contracts or stock indices for purposes other than bona fide hedging
transactions (as defined by the CFTC) if as a result the sum of the initial
margin deposits and premiums required to establish positions in futures
contracts and related options that do not fall within the definition of bona
fide hedging transactions would exceed 5% of the fair market value of each
Fund's net assets; and
(ii) a Fund will not enter into any futures contracts if the aggregate
amount of that Fund's commitments under outstanding futures contracts positions
would exceed the market value of its total assets.
Asset-Backed Securities. Asset-backed securities represent a
participation in, or are secured by and payable from, a stream of payments
generated by particular assets, for example, credit card, automobile or trade
receivables. Asset-backed commercial paper, one type of asset-backed security,
is issued by a special purpose entity, organized solely to issue the commercial
paper and to purchase interests in the assets. The credit quality of these
securities depends primarily upon the quality of the underlying assets and the
level of credit support and/or enhancement provided.
The underlying assets (e.g., loans) are subject to prepayments which
shorten the securities' weighted average life and may lower their return. If the
credit support or enhancement is exhausted, losses or delays in payment may
result if the required payments of principal and interest are not made. The
value of these securities also may change because of changes in the market's
perception of the creditworthiness of the servicing agent for the pool, the
originator of the pool, or the financial institution providing the credit
support or enhancement.
Mortgage Pass-Through Securities. Mortgage pass-through securities are
securities representing interests in "pools" of mortgage loans secured by
residential or commercial real property 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 mortgage loans
which underlie the securities (net of fees paid to the issuer or guarantor of
the securities). Early repayment of principal on some mortgage-related
securities (arising from prepayments of principal due to sale of the underlying
property, refinancing, or foreclosure, net of fees and costs which may be
incurred) expose a Fund to a lower rate of return upon reinvestment of
principal. Also, if a security subject to prepayment has been purchased at a
premium, in the event of prepayment the value of the premium would be lost. Like
other fixed-income securities, when interest rates rise, the value of a
mortgage-related security will generally decline; however, when interest rates
are declining, the value of mortgage-related securities with prepayment features
may not increase as much as other fixed-income securities. The value of these
securities also may change because of changes in the market's perception of the
creditworthiness of the federal agency or private institution that issued them.
In addition, the mortgage securities market in general may be adversely affected
by changes in governmental regulation or tax policies.
Collateralized Mortgage Obligations (CMOs). CMOs are
obligations fully collateralized by a portfolio of mortgages or mortgage-related
securities. Payments of principal and interest on the mortgages are passed
through to the holders of the CMOs on the same schedule as they are received,
although certain classes of CMOs have priority over others with respect to the
receipt of prepayments on the mortgages. Therefore, depending on the type of
CMOs in which a Fund invests, the investment may be subject to a greater or
lesser risk of prepayment than other types of mortgage-related securities. CMOs
may also be less marketable than other securities.
Stripped Agency Mortgage-Backed Securities. Stripped agency
mortgage-backed securities represent interests in a pool of mortgages, the cash
flow of which has been separated into its interest and principal components.
"IOs" (interest only securities) receive the interest portion of the cash flow
while "POs" (principal only securities) receive the principal portion. Stripped
Agency Mortgage-Backed Securities may be issued by U.S. Government Agencies or
by private issuers. Unlike other debt instruments and other mortgage-backed
securities, the value of IOs tends to move in the same direction as interest
rates.
The cash flows and yields on IO and PO classes are extremely sensitive
to the rate of principal payments (including prepayments) on the related
underlying mortgage assets. For example, a rapid or slow rate of principal
payments may have a material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to recoup fully its
initial investment in an IO class of a stripped mortgage-backed security, even
if the IO class is rated AAA or Aaa or is derived from a full faith and credit
obligation. Conversely, if the underlying mortgage assets experience slower than
anticipated prepayments of principal, the price on a PO class will be affected
more severely than would be the case with a traditional mortgage-backed
security.
Foreign Securities. Investments in securities of foreign issuers may
involve risks that are not present with domestic investments. While investments
in foreign securities are intended to reduce risk by providing further
diversification, such investments involve sovereign risk in addition to credit
and market risks. Sovereign risk includes local political or economic
developments, potential nationalization, withholding taxes on dividend or
interest payments, and currency blockage (which would prevent cash from being
brought back to the United States). Compared to United States issuers, there is
generally less publicly available information about foreign issuers and there
may be less governmental regulation and supervision of foreign stock exchanges,
brokers and listed companies. Brokerage commissions on foreign securities
exchanges, which may be fixed, are generally higher than in the United States.
Foreign issuers are not generally subject to uniform accounting and auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic issuers. Securities of some foreign issuers are less
liquid and their prices are more volatile than securities of comparable domestic
issuers. In some countries, there may also be the possibility of expropriation
or confiscatory taxation, limitations on the removal of funds or other assets,
difficulty in enforcing contractual and other obligations, political or social
instability or revolution, or diplomatic developments which could affect
investments in those countries. Settlement of transactions in some foreign
markets may be delayed or less frequent than in the United States, which could
affect the liquidity of investments. For example, securities which are listed on
foreign exchanges or traded in foreign markets may trade on days (such as
Saturday or Holidays) when a Fund does not compute its price or accept orders
for the purchase, redemption or exchange of its shares. As a result, the net
asset value of a Fund may be significantly affected by trading on days when
shareholders cannot make transactions. Further, it may be more difficult for the
Company's agents to keep currently informed about corporate actions which may
affect the price of portfolio securities. Communications between the U.S. and
foreign countries may be less reliable than within the U.S., increasing the risk
of delayed settlements or loss of certificates for portfolio securities.
Currency Fluctuations. Investments in foreign securities may
be denominated in foreign currencies. The value of Fund investments denominated
in foreign currencies may be affected, favorably or unfavorably, by the relative
strength of the U.S. dollar, changes in foreign currency and U.S. dollar
exchange rates and exchange control regulations. A Fund's net asset value per
share may, therefore, be affected by changes in currency exchange rates. Changes
in foreign currency exchange rates may also affect the value of dividends and
interest earned, gains and losses realized on the sale of securities and net
investment income and gains, if any, to be distributed to shareholders by a
Fund. Foreign currency exchange rates generally are determined by the forces of
supply and demand in foreign exchange markets and the relative merits of
investment in different countries, actual or perceived changes in interest rates
or other complex factors, as seen from an international perspective. Currency
exchange rates also can be affected unpredictably by intervention by U.S. or
foreign governments or central banks or the failure to intervene, or by currency
controls or political developments in the U.S. or abroad. In addition, a Fund
may incur costs in connection with conversions between various currencies.
Investors should understand and consider carefully the special risks involved in
foreign investing. These risks are often heightened for investments in emerging
or developing countries.
Developing Countries. Investing in developing countries
involves certain risks not typically associated with investing in U.S.
securities, and imposes risks greater than, or in addition to, risks of
investing in foreign, developed countries. These risks include: the risk of
nationalization or expropriation of assets or confiscatory taxation; currency
devaluations and other currency exchange rate fluctuations; social, economic and
political uncertainty and instability (including the risk of war); more
substantial government involvement in the economy; higher rates of inflation;
less government supervision and regulation of the securities markets and
participants in those markets; 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; unavailability of currency hedging techniques in
certain developing countries; the fact that companies in developing countries
may be smaller, less seasoned and newly organized companies; the difference in,
or lack of, auditing and financial reporting standards, which may result in
unavailability of material information about issuers; the risk that it may be
more difficult to obtain and/or enforce a judgment in a court outside the United
States; and greater price volatility, substantially less liquidity and
significantly smaller market capitalization of securities markets.
American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs") and Global Depositary Receipts ("GDRs"). ADRs are dollar-denominated
receipts generally issued by a domestic bank that represents the deposit of a
security of a foreign issuer. ADRs may be publicly traded on exchanges or
over-the-counter in the United States. EDRs are receipts similar to ADRs and are
issued and traded in Europe. GDRs may be offered privately in the United States
and also trade in public or private markets in other countries. Depositary
receipts may be issued as sponsored or unsponsored programs. In sponsored
programs, the issuer makes arrangements to have its securities traded in the
form of a depositary receipt. In unsponsored programs, the issuer may not be
directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, the issuers of unsponsored depositary receipts are not obligated to
disclose material information in the United States and, therefore, the import of
such information may not be reflected in the market value of such securities.
Forward Foreign Currency Exchange Contracts. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specified
currency at a future date, which may be any fixed number of days from the date
the contract is agreed upon by the parties, at a price set at the time of the
contract. By entering into a forward foreign currency contract, a Fund "locks
in" the exchange rate between the currency it will deliver and the currency it
will receive for the duration of the contract. As a result, a Fund reduces its
exposure to changes in the value of the currency it will deliver and increases
its exposure to changes in the value of the currency into which it will
exchange. The effect on the value of a Fund is similar to selling securities
denominated in one currency and purchasing securities denominated in another.
The Funds may enter into these contracts for the purposes of hedging against
foreign exchange risk arising from such Fund's investment or anticipated
investment in securities denominated in or exposed to foreign currencies.
Although a Sub-advisor may, from time to time, seek to protect a Fund by using
forward contracts, anticipated currency movements may not be accurately
predicted and the Fund may incur a gain or a loss on a forward contract. A
forward contract may reduce a Fund's losses on securities denominated in foreign
currency, but it may also reduce the potential gain on the securities depending
on changes in the currency's value relative to the U.S. dollar or other
currencies.
Lower-Rated High-Yield Bonds. Lower-rated high-yield bonds (commonly
known as "junk bonds") are generally considered to be high risk investments as
they are subject to a higher risk of default than higher-rated bonds. In
addition, the market for lower-rated high-yield bonds generally is more limited
than the market for higher-rated bonds, and because their markets may be thinner
and less active, the market prices of lower-rated high-yield bonds may fluctuate
more than the prices of higher-rated bonds, particularly in times of market
stress. In addition, while the market for high-yield corporate debt securities
has been in existence for many years, the market in recent years has experienced
a dramatic increase in the large-scale use of such securities to fund highly
leveraged corporate acquisitions and restructurings. Accordingly, past
experience may not provide an accurate indication of future performance of the
high-yield bond market, especially during periods of economic recession. Other
risks which may be associated with lower-rated high-yield bonds include: the
exercise of any redemption or call provisions in a declining market may result
in their replacement by lower yielding bonds; and legislation, from time to
time, may adversely affect their market. Since the risk of default is higher
among lower-rated high-yield bonds, a Sub-advisor's research and analysis are an
important ingredient in the selection of lower-rated high-yield bonds. Through
portfolio diversification, good credit analysis and attention to current
developments and trends in interest rates and economic conditions, investment
risk may be reduced, although there is no assurance that losses will not occur.
Illiquid and Restricted Securities. The Directors of the Company have
promulgated guidelines with respect to illiquid securities. Illiquid securities
are deemed as such because they are subject to restrictions on their resale
("restricted securities") or because, based upon their nature or the market for
such securities, they are not readily marketable. Restricted securities are
acquired through private placement transactions, directly from the issuer or
from security holders, generally at higher yields or on terms more favorable to
investors than comparable publicly traded securities. However, the restrictions
on resale may make it difficult for a Fund to dispose of such securities at the
time considered most advantageous by its Sub-advisor, and/or may involve
expenses that would not be incurred in the sale of securities that were freely
marketable. A Fund that may purchase restricted securities may qualify for and
trade restricted securities in the "institutional trading market" pursuant to
Rule 144A of the Securities Act of 1933. Trading in the institutional trading
market may enable a Sub-advisor to dispose of restricted securities at a time
the Sub-advisor considers advantageous and/or at a more favorable price than
would be available if such securities were not traded in such market. However,
the institutional trading market is relatively new and liquidity of a Fund's
investments in such market could be impaired if trading does not develop or
declines. Risks associated with restricted securities include the potential
obligation to pay all or part of the registration expenses in order to sell
certain restricted securities. A considerable period of time may elapse between
the time of the decision to sell a security and the time a Fund may be permitted
to sell it under an effective registration statement. If, during such a period,
adverse conditions were to develop, a Fund might obtain a less favorable price
than prevailing when it decided to sell.
Repurchase Agreements. The Directors of the Company have promulgated
guidelines with respect to repurchase agreements. Repurchase agreements are
agreements by which a Fund purchases a security and obtains a simultaneous
commitment from the seller to repurchase the security at an agreed upon price
and date. The resale price is in excess of the purchase price and reflects an
agreed upon market rate unrelated to the coupon rate on the purchased security.
A repurchase transaction is usually accomplished either by crediting the amount
of securities purchased to the account of a Fund's custodian maintained in a
central depository or book-entry system or by physical delivery of the
securities to a Fund's custodian in return for delivery of the purchase price to
the seller. Repurchase transactions are intended to be short-term transactions
with the seller repurchasing the securities, usually within seven days.
A Fund which enters into a repurchase agreement bears a risk of loss in
the event that the other party to such an agreement defaults on its obligation
and such Fund is delayed or prevented from exercising its rights to dispose of
the collateral securities, including the risk of a possible decline in value of
the underlying securities during the period such Fund seeks to assert these
rights, as well as the risk of incurring expenses in asserting these rights and
the risk of losing all or part of the income from such an agreement. If the
seller institution defaults, a Fund might incur a loss or delay in the
realization of proceeds if the value of the collateral securing the repurchase
agreement declines and it might incur disposition costs in liquidating the
collateral. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by a Fund might be delayed
pending court action.
Reverse Repurchase Agreements. In a reverse repurchase agreement, a
Fund transfers possession of a portfolio instrument to another person, such as a
broker-dealer or financial institution in return for a percentage of the
instrument's market value in cash and agrees that on a stipulated date in the
future such Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. When effecting
reverse repurchase agreements, assets of a Fund, in a dollar amount sufficient
to make payment for the obligations to be repurchased, are segregated on such
Fund's records at the trade date and are maintained until the transaction is
settled. Reverse repurchase agreements involve the risk that the market value of
the securities retained by the Fund may decline below the repurchase price of
the securities which it is obligated to repurchase.
Borrowing. Each Fund's borrowings are limited so that immediately after
such borrowing the value of the Fund's assets (including borrowings) less its
liabilities (not including borrowings) is at least three times the amount of the
borrowings. Should a Fund, for any reason, have borrowings that do not meet the
above test then, within three business days, such Fund must reduce such
borrowings so as to meet the necessary test. Under such a circumstance, such
Fund may have to liquidate securities at a time when it is disadvantageous to do
so. Gains made with additional funds borrowed will generally cause the net asset
value of such Fund's shares to rise faster than could be the case without
borrowings. Conversely, if investment results fail to cover the cost of
borrowings, the net asset value of such Fund could decrease faster than if there
had been no borrowings.
Convertible Securities and Warrants. Convertible securities generally
participate in the appreciation or depreciation of the underlying stock into
which they are convertible, but to a lesser degree. Warrants are options to buy
a stated number of shares of common stock at a specified price any time during
the life of the warrants. The value of warrants may fluctuate more than the
value of the securities underlying such warrants. The value of a warrant
detached from its underlying security will expire without value if the rights
under such warrant are not exercised prior to its expiration date.
Lending. With respect to the lending of securities, there is the risk
of delays in receiving additional collateral or in the recovery of securities
and possible loss of rights in collateral in the event that a borrower fails
financially.
PERFORMANCE OF THE FUNDS
From time to time, a Fund's yield and total return may be included in
advertisements, sales literature, or shareholder reports. In addition, the
Company may advertise the effective yield of the ASAF JPM Money Market Fund. All
figures are based upon historical earnings and are not intended to indicate
future performance.
The "yield" of a Fund refers to the annualized net income generated by
an investment in that Fund over a specified 30-day period (7-day period for the
ASAF JPM Money Market Fund). The effective yield is calculated similarly, but,
when annualized, the income earned by an investment in that Fund is assumed to
be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The "total return" of a Fund refers to the average annual rate of
return of an investment in the Fund. This figure is computed by calculating the
percentage change in the value of an investment of $1,000, assuming reinvestment
of all income dividends and capital gains distributions, to the end of a
specified period. "Total return" quotations reflect the performance of the Fund
and include the effect of capital changes.
Additional information about the performance of the Funds is contained
in the Company's SAI under "Additional Performance Information," and is also
contained in the Funds' annual reports to shareholders, both of which you may
obtain without charge by writing to "American Skandia Advisor Funds, Inc." at
P.O. Box 8012, Boston, Massachusetts 02266-8012 or by calling 1-800-SKANDIA.
HOW TO BUY SHARES
MINIMUM INVESTMENTS:
You can open a Fund account with a minimum initial investment of $1,000 in
a particular Fund and make additional investments to such account at any time
with as little as $50. The initial investment minimum is reduced to $50 per Fund
through "Automatic Investment Plans" as discussed more fully in this Prospectus
under "Special Investment Programs and Privileges." Lower minimum initial and
additional investments may also be applicable in certain other circumstances,
including purchases by certain tax deferred retirement programs. There is no
minimum investment requirement when you are buying shares by reinvesting
dividends and distributions from a Fund.
METHODS OF BUYING SHARES:
Each Fund offers investors four different classes of shares -- Class A
shares, Class B shares, Class C shares and Class X shares. The different classes
of shares represent investments in the same portfolio of securities but are
subject to different sales charges, expenses and, likely, different share
prices. When you purchase shares of the Funds, be sure to specify the class of
shares of the Fund(s) you wish to purchase. If you do not choose, your
investment will be made in Class A shares. See below for a detailed description
of the purchase of Class A, B, C and X shares of the Funds.
If you are a new investor to the Company, you can purchase shares of
the Funds through any dealer or financial institution that has a sales agreement
with American Skandia Marketing, Incorporated (the "Distributor"), or directly
through the Company. If you are currently an investor with the Company, you may
also purchase shares of the Funds automatically through an electronic transfer.
Buying Shares Through Your Dealer. Your dealer will place your order
with the Company on your behalf.
Buying Shares Through the Company. Make your check payable to "American
Skandia Advisor Funds, Inc." and mail your investment, along with your completed
account application, to the address indicated on the application. Please include
an investment dealer on the application. If a dealer is not listed, the
Distributor will act as your agent in buying the Shares.
Buying Shares Through Electronic Transfer. You should instruct your
bank to transfer funds by wire to:
ABA # 011000028
State Street Bank & Trust Company
Boston, Massachusetts
DDA # 99052995
FBO: American Skandia Advisor Funds, Inc.
Fund Name and Class of Shares
Shareholder Name and Account Number
PURCHASE ORDERS:
Purchase orders for all Funds are accepted only on a day on which the
New York Stock Exchange ("NYSE") is open for business (a "business day"). Orders
for shares received by Boston Financial Data Services, Inc. (the "Transfer
Agent") on any business day prior to the close of trading on the NYSE (normally
4:00 p.m. Eastern Time) will receive the offering price calculated at the close
of trading that day. Orders received by the Transfer Agent after such time but
prior to the close of business on the next business day will receive the
offering price calculated at the close of trading on that next business day. The
offering price is the net asset value ("NAV") plus any initial sales charge that
applies. For a discussion of how NAV is determined, see this Prospectus under
"Determination of Net Asset Value." If you purchase shares through a dealer,
your dealer is responsible for forwarding payment promptly to the Transfer
Agent. It is anticipated that the NYSE will be closed Saturdays and Sundays and
on days on which the NYSE observes New Year's Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Each Fund and the Distributor or the Transfer Agent reserves the right
to reject any order for the purchase of a Fund's shares. The Company reserves
the right to cancel any purchase order for which payment has not been received
by the fifth business day following the placement of the order. Additionally, if
the purchase payment does not clear, your purchase will be canceled and you
could be liable for any losses or fees the Fund or the Transfer Agent have
incurred. If the Transfer Agent deems it appropriate, additional documentation
or verification of authority may be required and an order will not be deemed
received unless and until such additional documentation or verification is
received by the Transfer Agent.
PURCHASE OF CLASS A SHARES:
Class A shares are sold at their offering price, which is normally NAV
plus an initial sales charge that varies depending on the amount of your
investment. In certain instances described below, however, purchases are either
not subject to an initial sales charge (and the offering price will be at NAV)
or will be eligible for reduced initial sales charges. The Fund receives an
amount equal to the NAV to invest for your account. A portion of the sales
charge may be retained by the Distributor or allocated to your dealer. The
current sales charge rates and commissions paid to dealers and brokers are as
follows:
<TABLE>
<CAPTION>
High Yield Bond & Total Return Bond Funds: All Other Funds:
Front-end Front-end Front-end Front-end
Sales Charge Sales Charge Commission Sales Charge Sales Charge Commission
(as % of (as % of (as % of (as % of (as % of (as % of
Amount of Purchase: offering price) amt. invested) offering offering amt.invested) offering
- ------------------ price) price) price)
------ --------- ------ ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Less than $50,000 4.25% 4.44% 3.50% 5.00% 5.26% 4.25%
$50,000 up to $100,000 3.75% 3.90% 3.00% 4.25% 4.44% 3.50%
$100,000 up to $250,000 3.25% 3.36% 2.50% 3.25% 3.36% 2.50%
$250,000 up to $500,000 2.25% 2.30% 1.75% 2.25% 2.30% 1.75%
$500,000 up to $1 million 1.50% 1.52% 1.25% 1.50% 1.52% 1.25%
</TABLE>
The Distributor reserves the right to allocate up to the entire amount
of the initial sales charge to dealers for all sales with respect to orders
which are placed during a particular period. Dealers to whom substantially the
entire sales charge is allocated may be deemed to be "underwriters" as that term
is defined under the Securities Act of 1933 (the "1933 Act"). In addition to
amounts paid to dealers as a commission out of the front-end sales charge, the
Distributor may, at its own expense, provide promotional incentives, including
cash compensation in excess of the applicable sales charge to certain dealers
whose representatives have sold or are expected to sell significant amounts of
shares of one or more of the Funds.
Purchases Subject to a Contingent Deferred Sales Charge ("CDSC"). There
is no initial sales charge on purchases of Class A shares of any one or more of
the Funds in the following cases:
o Purchases aggregating $1 million or more;
o Purchases by an employer sponsored 403(b)(7) plan; or
o Purchases of shares by a defined contribution plan under Section
401(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), including a 401(k) plan with at least 25 eligible
employees.
However, if such Class A shares are redeemed within 12 months of the
first business day of the calendar month of their purchase, a CDSC ("Class A
CDSC") will be deducted from the redemption proceeds. The Class A CDSC will not
apply to redemptions of shares purchased by the reinvestment of dividends or
capital gains distributions and may be waived under certain circumstances
described below under "Waiver of Class A CDSC." The Class A CDSC will be equal
to 1.0% of the lesser of the shares' NAV at the time of redemption or the
original amount invested. The Class A CDSC is not imposed on the amount of any
increase in your account value over the initial amount invested. The Class A
CDSC is paid to the Distributor to reimburse expenses incurred in providing
distribution-related services to the Fund in connection with the sale of Class A
shares. To determine whether the Class A CDSC applies to a redemption, the Fund
will first redeem shares acquired by reinvestment of dividends and capital gains
distributions, and then will redeem shares in the order in which they were
purchased (such that shares held the longest are redeemed first).
The Distributor will pay the dealer of record a sales commission on
these purchases in an amount equal to 0.50% of the amount invested.
Reduction of Initial Sales Charges for Class A Shares. You may be
eligible to buy Class A shares at reduced initial sales charge rates in one or
more of the following ways:
Combined Purchases. Initial sales charge reductions are
available by combining into a single transaction the purchase of Class A shares
with the purchase of any other class of shares. Qualifying purchases include:
(1) those by you, your spouse and your children under the age of 21, if all
parties are purchasing shares for their own account(s), which may include tax
qualified plans such as an IRA, SIMPLE IRA, individual type 403(b)(7) plan, a
single participant Keogh type plan, or by a company controlled by such
individuals as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"); (2) individual purchases by a trustee (or other fiduciary) if the
investment is for a single trust estate or single fiduciary account, including a
employee benefit plan other than those described above; and (3) purchases by
qualified employee benefit plans, other than those described above, of a single
employer, or of affiliated employers as defined in the 1940 Act. Purchases made
for nominee or street name accounts (securities held in the name of an
investment dealer or another nominee such as a bank trust department instead of
the customer) may not be aggregated with purchases made for other accounts and
may not be aggregated with other nominee or street name accounts unless
otherwise qualified as described above.
Rights of Accumulation. The initial sales charge for your
investment in Fund shares may also be reduced by aggregating the amount of such
investment with the current value of all Fund shares currently owned by you at
the time of your current purchase. The rules described above under "Combined
Purchases" may apply.
Letter of Intent ("LOI"). You may reduce the initial sales
charge rate that applies to your purchases of Class A shares by meeting the
terms of an LOI -- a non-binding commitment to invest a certain amount within a
thirteen-month period from your initial purchase. The total amount of your
intended purchases of Class A, B, C and X shares will determine the reduced
sales charge rate for Class A shares purchased during that period. This can
include purchases made up to 90 days before the date of the LOI. Up to 5% of the
LOI amount will be held in escrow to cover additional sales charges which may be
due if your total investments over the LOI period are not sufficient to qualify
for a sales charge reduction. The rules described above under "Combined
Purchases" may apply. For additional information regarding LOIs, see the account
application and the Company's SAI under "Additional Information on the Purchase
and Redemption of Shares."
Waiver of All Class A Sales Charges. No sales charge is imposed on
sales of Class A shares for the following investors: (1) the Investment Manager,
its parent company, or any affiliate or subsidiary of the parent company; (2)
present or former officers, directors, trustees and employees (and their
parents, spouses and dependent children) of the Company, the Investment Manager
(including, its parent company or any affiliate or subsidiary of the parent
company) or the Sub-advisors, and any retirement plans established by such
entities for their employees; (3) present partners and employees (and their
parents, spouses and dependent children) of the Transfer Agent and the Company's
or the Trust's legal counsel and administrator; (4) dealers that have a sales
agreement with the Distributor, if they purchase shares for their own accounts
or for retirement plans for their employees; (5) employees and registered
representatives (and their parents, spouses and dependent children) of dealers
or financial institutions that have entered into sales arrangements with such
dealers (and are identified to the Distributor) or with the Distributor; the
purchaser must certify to the Distributor at the time of purchase that the
purchase is for the purchaser's own account (or for the benefit of such
employee's parents, spouse, parents of spouse, or minor children); and (6)
dealers, brokers, registered investment advisers or third-party administrators
or consultants that have entered into an agreement with the Distributor
providing specifically for the use of Fund shares in investment products or
services made available to their clients (those clients may be charged a
transaction fee by their dealer, broker or adviser for the purchase or sale of
Fund shares).
Additionally, no sales charge is imposed on the following transactions:
(1) shares issued in plans of reorganization, such as mergers, asset
acquisitions and exchange offers, to which a Fund is a party; (2) shares
purchased by the reinvestment of loan repayments by a participant in a
retirement plan; (3) shares purchased by the reinvestment of distributions
received from a Fund; (4) shares purchased and paid for with the proceeds of
shares redeemed in the prior 180 days from a mutual fund on which an initial
sales charge or CDSC was paid (other than a mutual fund managed by the
Investment Manager or any of its affiliates); (5) purchases by former
participants in a qualified retirement plan, where a portion of the plan was
invested in the Company; (6) purchases by non-qualified deferred compensation
plans; and (7) sponsored arrangements with organizations which make
recommendations to or permit group solicitations of its employees, members or
participants.
In order for the above sales charge reductions or waivers to be
effective, the Transfer Agent must be notified of the reduction or waiver
request when the purchase order is placed. The Transfer Agent may require
evidence of your qualification for such reductions or waivers. Additional
information about the above sales charge reductions or waivers can be obtained
from the Transfer Agent by calling 1-800-SKANDIA.
Waiver of Class A CDSC. The Class A CDSC is waived in the following cases
if shares are redeemed and the Transfer Agent is notified: (1) redemptions under
a Systematic Withdrawal Plan as described in this Prospectus under "Special
Investment Programs and Privileges"; (2) redemptions to pay premiums for
optional insurance coverage described in this Prospectus under "Special
Investment Programs and Privileges"; (3) redemptions following death or
post-purchase disability (as defined by Section 72(m)(7) of the Code); (4)
distributions or loans to participants of qualified retirement plans and other
employee benefit plans; (5) mandated minimum distributions from an IRA, SIMPLE
IRA or 403(b)(7) plan; (6) substantially equal periodic payments (as described
in Section 72(t) of the Code); and (7) the return of excess contributions made
to your IRA, SIMPLE IRA, 403(b)(7) plan or 401(k) plan.
Class A Distribution and Service Plan. The Company has adopted a
Distribution and Service plan (commonly known as a "12b-1 Plan") for Class A
shares to compensate the Distributor for its services and costs in distributing
Class A shares and servicing Class A shareholder accounts (the "Class A Plan").
Under the Class A Plan, the Fund pays the Distributor 0.50% of the Fund's
average daily net assets attributable to Class A shares, half of which is
intended as a fee for services provided to existing shareholders. The
Distributor uses distribution and service fees received under the Class A Plan
to compensate qualified dealers, brokers, banks and other financial institutions
for services provided in connection with the sale of Class A shares and the
maintenance of shareholders accounts. Such compensation is paid by the
Distributor quarterly at an annual rate not to exceed 0.50% of the Fund's
average daily net assets attributable to Class A shares held in accounts of the
dealer or its customers. The calculation of such payment excludes, until one
year after purchase, shares purchased at NAV with a CDSC. NAV shares are not
subject to the one-year exclusion in cases where certain shareholders who
invested $1 million or more have made arrangements with the Company and the
dealer of record waives the sales commission.
PURCHASE OF CLASS B SHARES:
Class B shares are not available for "Qualified" purchases (including,
but not limited to, purchases by IRAs, SIMPLE IRAs, 401(k) plans and 403(b)(7)
plans). Any request for "Qualified" purchases of Class B shares will normally be
considered as a purchase request for Class X shares or declined. Because in most
cases it is more advantageous for an investor to purchase Class A shares for
amounts in excess of $250,000, a request to purchase Class B shares for $250,000
or more will normally be considered as a purchase request for Class A shares or
declined.
Class B shares are sold at NAV per share without an initial sales charge.
However, if Class B shares are redeemed within 7 years of their purchase, a CDSC
("Class B CDSC") will be deducted from the redemption proceeds. The Class B CDSC
will not apply to redemptions of shares purchased by the reinvestment of
dividends or capital gains distributions and may be waived under certain
circumstances described below. The charge will be assessed on the lesser of the
shares' NAV at the time of redemption or the original amount invested. The Class
B CDSC is not imposed on the amount of any increase in your account value over
the initial amount invested. The Class B CDSC is paid to the Distributor to
reimburse expenses incurred in providing distribution-related services to the
Fund in connection with the sale of Class B shares. Although Class B shares are
sold without an initial sales charge, the Distributor normally pays a sales
commission of 5.50% (and may pay up to 6.00%) of the purchase price of Class B
shares to the dealer from its own resources at the time of the sale. During the
initial offering period of the Class B shares, the Distributor intends to pay a
6.00% up-front sales commission to the dealer. The Distributor has assigned its
right to receive any Class B CDSC, as well as any distribution and service fee
discussed below under "Class B Distribution and Service Plan," to an
unaffiliated third party that provides funding for up-front sales commission
payments.
To determine whether the Class B CDSC applies to a redemption, the Fund
will first redeem shares acquired by reinvestment of dividends and capital gains
distributions, and then will redeem shares in the order in which they were
purchased (such that shares held the longest are redeemed first). The amount of
the Class B CDSC will depend on the number of years since the time you invested
and the dollar amount being redeemed, according to the following schedule:
<TABLE>
<CAPTION>
Redemption During: Class B CDSC (as % of amount subject to charge):
<S> <C>
1st year after purchase 6.0%
2nd year after purchase 5.0%
3rd year after purchase 4.0%
4th year after purchase 3.0%
5th year after purchase 2.0%
6th year after purchase 2.0%
7th year after purchase 1.0%
8th year after purchase None
</TABLE>
In the table, a "year" is a 12-month period. All purchases are
considered to have been made on the first business day of the month in which the
purchase was made.
Waiver of Class B CDSC. The Class B CDSC will be waived in the following
cases if shares are redeemed and the Transfer Agent is notified: (1) redemptions
under a Systematic Withdrawal Plan as described in this Prospectus under
"Special Investment Programs and Privileges"; (2) redemptions to pay premiums
for optional insurance coverage described in this Prospectus under "Special
Investment Programs and Privileges"; and (3) redemptions following death or
post-purchase disability (as defined by Section 72(m)(7) of the Code).
Automatic Conversion of Class B Shares. Eight years after you purchase
Class B shares of a Fund, those shares will automatically convert to Class A
shares of that Fund. This conversion feature relieves Class B shareholders of
the higher asset-based distribution charge that applies to Class B shares under
the Class B Distribution and Service Plan described below. The conversion is
based on the relative NAV of the two classes, and no sales load or other charge
is imposed. At the time of conversion, a portion of the Class B shares purchased
through the reinvestment of dividends or capital gains ("Dividend Shares") will
also convert to Class A shares. The portion of Dividend Shares that will convert
is determined by the ratio of your converting Class B non-Dividend Shares to
your total Class B non-Dividend Shares. Under Section 1036 of the Code, the
automatic conversion of Class B shares will not result in a gain or loss to the
Fund or to affected shareholders.
Class B Distribution and Service Plan. The Company has adopted a
Distribution and Service plan (commonly known as a "12b-1 Plan") for Class B
shares to compensate the Distributor for its services and costs in distributing
Class B shares and servicing Class B shareholder accounts (the "Class B Plan").
Under the Class B Plan, the Fund pays the Distributor 1.00% of the Fund's
average daily net assets attributable to Class B shares that are outstanding for
8 years or less, a quarter of which is intended as a fee for services provided
to existing shareholders. The Distributor uses distribution and service fees
received under the Class B Plan to compensate qualified dealers, brokers, banks
and other financial institutions for services provided in connection with the
sale of Class B shares and the maintenance of shareholder accounts. Such
compensation is paid by the Distributor quarterly at an annual rate not to
exceed 0.50% of the Fund's average daily net assets attributable to Class B
shares (and any shares purchased by the reinvestment of dividends or capital
gains) held for over seven years.
PURCHASE OF CLASS X SHARES:
Class X shares are currently only available for certain "Qualified"
purchases (including, but not limited to, purchases by IRAs and SIMPLE IRAs).
Any request for "Non-Qualified" purchases of Class X shares up to $250,000 will
normally be considered as a purchase request for Class B shares or declined. Any
request for "Non-Qualified" purchases of Class X shares above $250,000 will be
considered as a purchase request for Class A shares or declined. Because it is
more advantageous for an investor to purchase Class A shares for amounts in
excess of $1,000,000, a request to purchase Class X shares for $1,000,000 or
more will normally be considered as a purchase request for Class A shares or
declined.
Class X shares are sold at NAV per share without an initial sales charge.
In addition, investors purchasing Class X shares will receive, as a bonus,
additional shares having a value equal to 2.50% of the amount invested ("Bonus
Shares"). The Distributor has undertaken to pay for Bonus Shares as part of its
services to the Funds. The Distributor expects to recover costs associated with
its purchases of Bonus Shares through fees received under the Class X
Distribution and Service Plan discussed below. Shares purchased by the
reinvestment of dividends or capital gains distributions are not eligible for
Bonus Shares.
Although Class X shares are sold without an initial sales charge, if Class
X shares are redeemed within 7 years of their purchase, a CDSC ("Class X CDSC")
will be deducted from the redemption proceeds. The Class X CDSC will not apply
to redemptions of Bonus Shares or shares purchased by the reinvestment of
dividends or capital gains distributions and may be waived under certain
circumstances described below. The Class X CDSC will be assessed on the lesser
of the NAV of the shares at the time of redemption or the original amount
invested. The Class X CDSC is not imposed on the amount of any increase in your
account value over the initial amount invested. The Class X CDSC is paid to the
Distributor to reimburse expenses incurred in providing distribution-related
services to the Fund in connection with the sale of Class X shares. Although
Class X shares are sold without an initial sales charge, the Distributor
normally pays a sales commission of 3.00% (and may pay up to 3.50%) of the
purchase price of Class X shares to the dealer from its own resources at the
time of the sale. During the initial offering period of the Class X shares, the
Distributor intends to pay a 3.50% up-front sales commission to the dealer. The
Distributor has assigned its right to receive any Class X CDSC, as well as any
distribution and service fee discussed below under "Class X Distribution and
Service Plan," to an unaffiliated third party that provides funding for up-front
sales commission payments.
To determine whether the Class X CDSC applies to a redemption, the Fund
redeems shares in the following order: (1) shares acquired by reinvestment of
dividends and capital gains distributions; (2) shares (including Bonus Shares)
held for over 7 years; (3) shares (not including Bonus Shares) in the order they
were purchased (such that shares held the longest are redeemed first); and (4)
Bonus Shares in the order they were acquired (such that Bonus Shares held the
longest are redeemed first). The amount of the Class X CDSC will depend on the
number of years since the time you invested and the dollar amount being
redeemed, according to the following schedule:
<TABLE>
<CAPTION>
Redemption During: Class X CDSC (as % of amount subject to charge):
<S> <C>
1st year after purchase 6.0%
2nd year after purchase 5.0%
3rd year after purchase 4.0%
4th year after purchase 3.0%
5th year after purchase 2.0%
6th year after purchase 2.0%
7th year after purchase 1.0%
8th year after purchase None
</TABLE>
In the table, a "year" is a 12-month period. All purchases are
considered to have been made on the first business day of the month in which the
purchase was made.
Waiver of Class X CDSC. The Class X CDSC will be waived in the following
cases if shares are redeemed, and the Transfer Agent is notified: (1)
redemptions under a Systematic Withdrawal Plan as described in this Prospectus
under "Special Investment Programs and Privileges"; (2) redemptions to pay
premiums for optional insurance coverage described in this Prospectus under
"Special Investment Programs and Privileges"; (3) redemptions following death or
post-purchase disability (as defined by Section 72(m)(7) of the Code); (4)
mandated minimum distributions from an IRA, SIMPLE IRA or an individual type
403(b)(7) plan; (5) substantially equal periodic payments (as described in
Section 72(t) of the Code); and (6) the return of excess contributions from an
IRA or SIMPLE IRA.
Automatic Conversion of Class X Shares. Eight years after you purchase
Class X shares of a Fund, those shares will automatically convert to Class A
shares of that Fund. This conversion feature relieves Class X shareholders of
the higher asset-based distribution charge that applies to Class X shares under
the Class X Distribution and Service Plan described below. The conversion is
based on the relative NAV of the two classes, and no sales load or other charge
is imposed. At the time of conversion, a portion of the Class X shares purchased
through the reinvestment of dividends or capital gains ("Dividend Shares") will
also convert to Class A shares. The portion of Dividend Shares that will convert
is determined by the ratio of your converting Class X non-Dividend Shares to
your total Class X non-Dividend Shares. Under Section 1036 of the Code, the
automatic conversion of Class X shares will not result in a gain or loss to the
Fund or to affected shareholders.
Class X Distribution and Service Plan. The Company has adopted a
Distribution and Service plan (commonly known as a "12b-1 Plan") for Class X
shares to compensate the Distributor for its services and costs in distributing
Class X shares and servicing Class X shareholder accounts (the "Class X Plan").
Under the Class X Plan, the Fund pays the Distributor 1.00% of the Fund's
average daily net assets attributable to Class X shares that are outstanding for
8 years or less, a quarter of which is intended as a fee for services provided
to existing shareholders. The Distributor uses distribution and service fees
received under the Class X Plan as reimbursement for its purchases of Bonus
Shares, as well as to compensate qualified dealers, brokers, banks and other
financial institutions for services provided in connection with the sale of
Class X shares and the maintenance of shareholder accounts. Such latter
compensation is paid by the Distributor quarterly at an annual rate not to
exceed 0.50% of the Fund's average daily net assets attributable to Class X
shares (and any shares purchased by the reinvestment of dividends or capital
gains as such shares) held for over seven years.
PURCHASE OF CLASS C SHARES:
Because it is more advantageous for an investor to purchase Class A
shares for amounts in excess of $1,000,000, a request to purchase Class C shares
for $1,000,000 or more will be considered as a purchase request for Class A
shares or declined.
Class C shares are sold at NAV per share without an initial sales
charge. However, if Class C shares are redeemed within 12 months of the first
business day of the calendar month of their purchase, a CDSC ("Class C CDSC") of
1.0% will be deducted from the redemption proceeds. The Class C CDSC will not
apply to redemptions of shares purchased by the reinvestment of dividends or
capital gains distributions and may be waived under certain circumstances
described below. The charge will be assessed on the lesser of the NAV of the
shares at the time of redemption or the original amount invested. The Class C
CDSC is not imposed on the amount of any increase in your account value over the
initial amount invested. The Class C CDSC is paid to the Distributor to
reimburse its expenses of providing distribution-related services to the Fund in
connection with the sale of Class C shares.
To determine whether the Class C CDSC applies to a redemption, the Fund
will first redeem shares acquired by reinvestment of dividends and capital gains
distributions, and then will redeem shares in the order in which they were
purchased (such that shares held the longest are redeemed first).
Waiver of Class C CDSC. The Class C CDSC will be waived in the following
cases if shares are redeemed and the Transfer Agent is notified: (1) redemptions
under a Systematic Withdrawal Plan as described in this Prospectus under
"Special Investment Programs and Privileges"; (2) redemptions to pay premiums
for optional insurance coverage described in this Prospectus under "Special
Investment Programs and Privileges"; (3) redemptions following death or
post-purchase disability (as defined by Section 72(m)(7) of the Code); (4)
distributions or loans to participants of qualified retirement plans and other
employee benefit plans; (5) mandated minimum distributions from an IRA, SIMPLE
IRA or an individual type 403(b)(7) plan; (6) substantially equal periodic
payments (as described in Section 72(f) of the Code); and (7) the return of
excess contributions from an IRA, SIMPLE IRA or 401(k) plan.
Class C Distribution and Service Plan. The Company has adopted a
Distribution and Service plan (commonly known as a "12b-1 Plan") for Class C
shares to compensate the Distributor for its services and costs in distributing
Class C shares and servicing Class C shareholder accounts (the "Class C Plan").
Under the Class C Plan, the Fund pays the Distributor 1.00% of the Fund's
average daily net assets attributable to Class C shares, a quarter of which is
intended as a fee for services provided to existing shareholders. The
Distributor uses distribution and service fees received under the Class C Plan
to compensate qualified dealers, brokers, banks and other financial institutions
for services provided in connection with the sale of Class C shares and the
maintenance of shareholder accounts. The Distributor currently pays a 1.00% fee
to dealers in advance upon sale of Class C shares and retains the fee paid by
the Fund in the first year. After the shares have been held for a year, the
Distributor pays the fee to dealers on a quarterly basis.
SPECIAL INVESTMENT PROGRAMS AND PRIVILEGES
Electronic Transfers. You can initiate a purchase or redemption of Fund
shares for as little as $50, or a redemption of Fund shares for as much as
$50,000, between your bank account and Fund account using the Automated Clearing
House ("ACH") network. Initial purchase minimums and sales charges will apply.
Automatic Investment Plans ("AIP"). You may make regular monthly
investments through an automatic withdrawal from your bank account ($50 minimum
per Fund). Sales charges will apply.
Automatic Dividend Reinvestment. Unless you indicate otherwise on your
account application, your dividend and capital gains distributions will
automatically be reinvested in additional shares at no sales charge.
Automatic Dividend Diversification ("ADD"). You may automatically
reinvest dividends and capital gains distributions paid by one Fund into shares
of the same class of another Fund, provided that you have already met that
Fund's minimum initial purchase requirement. No initial sales charge or CDSC
will apply to the purchased shares. The number of shares purchased through an
ADD investment program will be determined by using the NAV of the Fund in which
dividends will be reinvested next computed after the dividend payment is made.
All shareholder accounts involved in an ADD investment program must have
identical registrations.
Dollar Cost Averaging ("DCA"). You can set up monthly or quarterly
exchanges in amounts of $50 or more from one Fund to the same class of shares of
another Fund, provided that the latter is currently available for sale. You may
set up more than one of these programs simultaneously. You should consider the
investment objectives and policies of a Fund before electing to exchange money
into such Fund through the DCA investment program. All shareholder accounts
involved in a DCA investment program must have identical registrations.
Systematic Withdrawal Plan ("SWP"). You may set up monthly, quarterly,
semi-annual or annual redemptions from any account with a value of $5,000 or
more. You may direct a Fund to make regular payments in fixed dollar amounts of
$50 or more, in an amount equal to the value of a fixed number of shares (5
shares or more) at the time of withdrawal, or in an amount equal to a fixed
percentage of your account value at the time of withdrawal. Any applicable CDSC
will be waived for shares redeemed under a SWP where: (i) in the case of SWPs
based on a fixed dollar amount or number of shares, SWP redemptions are limited
to no more than 10% annually of your account value or number of shares,
respectively, measured from the date the Transfer Agent receives your SWP
request; or (ii) in the case of SWPs based on a fixed percentage amount, each
SWP redemption is limited to a percentage amount that would not exceed 10% on an
annualized basis of your account value at the time of withdrawal.
Payments under a SWP can be directed to you or to someone other than
the registered owner(s) of the account subject to the Fund's approval. If this
privilege is requested when the account is established, no signature guarantee
is needed. If this privilege is added to an existing account and payments are
directed to someone other than the registered owners(s) of the account, a
signature guarantee is required on the SWP application. The Company reserves the
right to institute a charge for this service.
Exchange Privilege. You may exchange your shares of a Fund for shares
of the same class of any other Fund. You should consider the differences in
investment objectives and expenses of a Fund before making an exchange. For
complete policies and restrictions governing exchanges, including circumstances
under which a shareholder's exchange privilege may be suspended or revoked, see
this Prospectus under "How to Exchange Shares."
Reinvestment Privilege. If you redeem some or all of your Class A, B or
X Fund shares, you have up to 180 days to reinvest all or part of the redemption
proceeds in Class A shares of the Fund without paying a sales charge. This
privilege applies to redemptions of Class A shares on which an initial or
deferred sales charge was paid and to redemptions of Class B and Class X shares
on which you paid a CDSC when you redeemed them. You must ask the Transfer Agent
for this privilege when you send your payment.
Retirement Plans. Certain classes of Fund shares are available as an
investment option for your retirement plans. If you participate in a plan
sponsored by your employer, the plan trustee or administrator must make the
purchase of shares for your retirement plan account. A number of different
retirement plans can be used by individuals and employers including IRAs, SIMPLE
IRAs, 403(b)(7) plans and 401(k) plans. Please call 1-800-SKANDIA for the
applicable plan documents, which contain important information and applications.
The above programs and privileges may be selected at the time of your
initial investment or at a later date.
Optional Benefits. American Skandia Life Assurance Corporation
("ASLAC") -- an "affiliated person" of the Company, the Trust, the Investment
Manager and the Distributor within the meaning of the 1940 Act -- intends to
make certain life insurance coverage available to certain persons on whose
behalf shares of the Funds are purchased. The benefits of this coverage payable
at death will be related to the amounts paid to purchase shares and to the value
of the shares held for the benefit of the insured persons. Therefore, coverage
will terminate if all shares are redeemed.
Purchasers of the life insurance coverage are required to authorize
periodic redemptions of Fund shares to pay the premiums for such coverage. Such
redemptions will not be subject to contingent deferred sales charges, but will
have the same tax consequences as any other Fund redemptions.
The above life insurance coverage will be available to eligible persons
who enroll for the coverage within a limited time period after shares in any
Fund are initially purchased or transferred. In addition, coverage cannot be
made available unless ASLAC knows for whose benefit shares are purchased. For
instance, coverage cannot be made available for shares registered in the name of
your broker unless the broker provides ASLAC with information regarding the
beneficial owners of such shares. Other restrictions on the coverage will apply,
such as the age of the persons upon whose life the coverage is issued. This
insurance coverage may not be available in all states and may be subject to
additional restrictions or limitations on coverage. Purchasers of shares should
also make themselves familiar with the impact on the life coverage of purchasing
additional shares, reinvestment of dividends and capital gains distributions and
redemptions.
Please call 1-800-SKANDIA for more information and application forms
for any of the above programs and privileges.
HOW TO REDEEM SHARES
You can arrange to take money out of your Fund account on any business
day by redeeming some or all of your shares. Your shares will be sold at the
next NAV calculated after your order is received in good order and accepted by
the Transfer Agent. The Company offers you a number of ways to sell your shares:
in writing, by telephone, by ACH bank transfer, by wire transfer or other means
acceptable to the Company. You can also set up a Systematic Withdrawal Plan to
redeem shares on a regular basis (as described in this Prospectus under "Special
Investment Programs and Privileges").
If you hold Fund shares through a retirement account, call the Transfer
Agent in advance for additional information and any necessary forms. There are
special income tax withholding requirements for distributions from retirement
plans and you must submit a withholding form with your request to avoid delay.
If your retirement plan account is held for you by your employer, you must
arrange for the distribution request to be sent by the plan administrator or
trustee.
REDEEMING SHARES BY MAIL:
If you want to redeem your shares by mail, write a "letter of
instruction" that includes the following information:
o Your name
o Fund's name
o Your Fund account number (from your account statement) o Dollar
amount or number of shares to be redeemed o Any special payment
instructions o Signatures of all registered owners exactly as the
account is registered
o Any special requirements or documents requested by the Transfer
Agent to assure proper authorization of the person requesting the
redemption
<TABLE>
<CAPTION>
<S> <C>
Send Requests by Regular Mail to: Send Requests by Courier or Express Mail to:
American Skandia Advisor Funds, Inc. American Skandia Advisor Funds, Inc.
P.O. Box 8012 Two Heritage Drive
Boston, Massachusetts 02266-8012 North Quincy, Massachusetts 02171-2138
</TABLE>
REDEEMING SHARES BY TELEPHONE:
You may also redeem shares by telephone by calling 1-800-SKANDIA. To
receive the redemption price calculated on the business day that you call, your
call must be received by the Transfer Agent before the close of the NYSE that
day, which is normally 4:00 P.M. Eastern Time. Shares held in tax-qualified
retirement plans may not be redeemed by telephone. You may have a check sent to
the address on the account statement, or, if you have linked your Fund account
to your bank account, you may have the proceeds transferred to that bank
account.
Telephone Redemptions Paid By Check. You may make one redemption
request by telephone in any 7-day period for any amount up to $50,000. The check
must be payable to all owners of record of the shares and must be sent to the
address on the account. This service is not available within 30 days after
changing the address on an account.
Telephone Redemptions Through Bank-Linked Accounts. If you have
selected this option on your account application, you may link your Fund account
to your designated bank account. There are no dollar limits on telephone
redemption proceeds sent to a bank-linked account. Normally the Automated
Clearing House ("ACH") transfer to your bank is initiated on the business day
after the redemption.
REDEEMING SHARES THROUGH YOUR BROKER:
The Distributor has made arrangements to redeem Fund shares for brokers
on behalf of their customers. Brokers may charge for this service. The
Distributor, acting as agent for the Funds, stands ready to redeem each Fund's
shares upon orders from brokers at the offering price next determined after
receipt of the order.
ADDITIONAL INFORMATION:
To protect you and the Fund from fraud, redemption requests under the
following situations must be in writing and must include a signature guarantee
(there may be other situations also requiring a signature guarantee at the
discretion of the Company or the Transfer Agent):
o You wish to redeem more than $50,000 worth of shares and receive a
check o A redemption check is not payable to all shareholders listed on
the account statement o A redemption check is not sent to the address
of record on your statement o Shares are being transferred to a Fund
account with a different owner or name o Shares are redeemed by someone
other than the owners (such as an Executor)
The Transfer Agent may delay forwarding a check or processing a payment
via bank-linked account for the sale of recently purchased shares, but only
until the purchase payment has cleared. Such delay may be as long as 15 calendar
days from the date the shares were purchased, and may be avoided if you purchase
shares by certified check. You may be charged a fee of up to $10 for wire
transfers of redemption proceeds, which will be deducted from such proceeds.
There is no fee for ACH wire transfers.
If you have any questions about any of the above procedures, and
especially if you are redeeming shares in a special situation, such as due to
the death of the owner, or from a retirement plan, please call 1-800-SKANDIA for
assistance.
HOW TO EXCHANGE SHARES
In most cases, shares of a Fund may be exchanged for shares of the same
class of other Funds at NAV per share at the time of exchange. Exchanges of
shares involve a redemption of the shares of the Fund you own and a purchase of
shares of another Fund. Shares are normally redeemed from one Fund and purchased
from the other Fund in the exchange transaction on the same business day on
which the Transfer Agent receives an exchange request that is in proper form by
the close of the NYSE that day. Exchanges may be taxable transactions and may be
subject to special tax rules about which you should consult your own tax
adviser.
You may exchange your Fund shares for shares of the same class of any
other Fund without the imposition of a sales charge. If you exchange such shares
for shares of another Fund, any applicable CDSC will be calculated based on the
date on which you acquired the original shares. Investors will not receive Bonus
Shares where Class X shares are obtained through an exchange.
Exchanges may be requested in writing, by telephone or by other means
acceptable to the Company. For written exchange requests you should submit a
letter of instruction, signed by all owners of the account, to the Transfer
Agent at P.O. Box 8012, Boston, Massachusetts 02266-8012. To initiate a
telephone exchange, you should call 1-800-SKANDIA.
All exchanges are subject to the following restrictions:
o The Fund you are exchanging into must be registered for sale in your
state.
You may exchange only between Funds that are registered in the same
name, address and taxpayer identification number.
o You may only exchange for shares of the same class of another Fund.
o You must meet the minimum purchase requirements for the Fund you
purchase by exchange.
o You must hold the shares you purchase when you establish your Fund
account for at least 7 days before you can exchange them. There is no
holding period if you acquired the shares to be exchanged through
reinvestment of dividends or distributions.
Each Fund reserves the right to refuse or delay exchanges by any person
or group if, in the Investment Manager's judgment, a Fund would be unable to
invest the money effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected. Your exchanges
may also be restricted or refused if a Fund receives or anticipates simultaneous
orders affecting significant portions of the Fund's assets. In particular, a
pattern of exchanges that coincides with a "market timing" strategy may be
disruptive to the Fund.
Although a Fund will attempt to give you prior notice whenever it is
reasonably able to do so, it may impose the above restrictions at any time. Each
Fund reserves the right to terminate or modify the exchange privilege in the
future.
DETERMINATION OF NET ASSET VALUE
The net asset value ("NAV") per share is determined for each class of
shares for each Fund as of the close of the NYSE (normally 4:00 p.m. Eastern
Time) on each business day (as previously defined under "How to Buy Shares:
Purchase Orders") by dividing the value of the Fund or Portfolio's total assets
attributable to a class, less any liabilities, by the number of total shares of
that class outstanding. The total assets of each Non-Feeder Fund and Portfolio
is determined by the market value of securities the Fund or Portfolio holds plus
any cash and other assets maintained. The total assets of each Feeder Fund, in
comparison, is determined by the Fund's percentage interest in its corresponding
Portfolio, multiplied by the Portfolio's NAV, plus any other asset held by the
Fund.
The assets of each Non-Feeder Fund and Portfolio (except the ASMT JPM
Money Market Portfolio) are valued primarily on the basis of market quotations.
If quotations are not readily available, assets are valued by a method that the
Directors of the Company or Trustees of the Trust, where applicable, believe
accurately reflects fair value. Foreign securities are valued on the basis of
quotations from the primary market in which they are traded, and are translated
from the local currency into U.S. dollars using current exchange rates. The
assets of the ASMT JPM Money Market Portfolio are valued by the amortized cost
method pursuant to procedures established by the Directors of the Company and
the Trustees of the Trust. With respect to all Funds and Portfolios, short-term
investments that will mature in 60 days or less are valued at amortized cost,
which is intended to approximate market value.
SHAREHOLDER ACCOUNT RULES AND POLICIES
o The offering of any class of Fund shares may be suspended during any
period in which the determination of NAV is suspended, and may be suspended or
terminated by the Directors of the Company at any time they believe it is in the
Fund's best interest to do so.
o Telephone transaction privileges or privileges using electronic means
for purchases, redemptions or exchanges may be modified, suspended or terminated
by a Fund at any time. If an account has more than one owner, the Fund and the
Transfer Agent may rely on the instructions of any one owner. Telephone
privileges apply to each owner of the account and the dealer representative of
record for the account unless and until the Transfer Agent receives instructions
from an owner of the account indicating otherwise. The Transfer Agent will
record any telephone calls to verify data concerning transactions and has
adopted other procedures to confirm that telephone instructions or instructions
received by electronic means are genuine. If the Company does not use reasonable
procedures the Company or its agents may be liable for losses due to
unauthorized transactions, but otherwise the Company or its agents will not be
liable for losses or expenses arising out of telephone instructions or other
electronic means that are reasonably believed to be genuine. If you are unable
to reach the Transfer Agent during periods of unusual market activity, you may
not be able to complete a telephone transaction and should consider placing your
order by mail.
o Purchase, redemption or exchange requests will not be honored until
the Transfer Agent receives all required documents in proper form.
o Share certificates will not be issued for the Company's shares.
o Brokers that can perform account transactions for their clients
through the National Securities Clearing Corporation are responsible for
obtaining their clients' permission to perform those transactions and are
responsible to their clients who are shareholders of a Fund if the dealer
performs any transaction erroneously or improperly.
o All purchases must be made in U.S. dollars and checks must be drawn
on U.S. banks. You may not purchase shares with a third-party check.
o Payment for redeemed shares is forwarded ordinarily by check or
through the bank-linked service (as elected by the shareholder) within 7
calendar days after the business day on which the Transfer Agent receives
redemption instructions in proper form. Payment will be forwarded within 3
business days for accounts registered in the name of a dealer. Redemptions may
be suspended or payment dates postponed when the NYSE is closed (other than
weekends or holidays), when trading is restricted or as permitted by the
Commission.
o Involuntary redemptions of small accounts may be made by a Fund if the
account value has fallen below $500 (for reasons other than a drop in market
value of shares) and at least 30 days notice has been given to the shareholder.
Any applicable CDSC will be waived for such redemptions.
o Under unusual circumstances shares of a Fund may be redeemed "in
kind," which means that the redemption proceeds will be paid with securities
from the Fund's portfolio of securities. For additional information regarding
such redemptions, see the Company's SAI under "Additional Information on the
Purchase and Redemption of Shares."
o "Backup withholding" of Federal income tax may be applied at the rate
of 31% from dividends, distributions and redemption proceeds (including
exchanges) if you fail to furnish the Fund a certified Social Security or
Employer Identification Number when you sign your application, or if you violate
Internal Revenue Service regulations on the reporting of income.
o The Company does not charge a transaction fee, but if your broker
handles your redemption, your broker may charge a fee. Such fee can be avoided
by redeeming your Fund shares directly through the Transfer Agent. You may be
subject to a CDSC under the circumstances described in this Prospectus under
"How To Buy Shares."
ORGANIZATION AND CAPITALIZATION OF THE COMPANY
The Funds are separate series of shares of the Company, a Maryland
Corporation established on March 5, 1997 and registered under the 1940 Act as an
open-end management investment company. Each Fund has its own investment
objective, policies and limitations, and operates as a diversified portfolio as
defined in the 1940 Act. The Funds each intend to be treated as a regulated
investment company for federal income tax purposes. For additional information
regarding the Funds' treatment as regulated investment companies, see this
Prospectus under "Dividends, Capital Gains and Taxes." Five of the Funds, the
Feeder Funds, currently invest all of their investable assets in a corresponding
Portfolio of the Trust, in each case receiving a beneficial interest in that
Portfolio. The Portfolios are separate series of shares of the Trust, a Delaware
business trust established on March 6, 1997, and intend to be treated as a
partnership for federal tax purposes. Those Funds which do not currently invest
all of their investable assets in a corresponding Portfolio of the Trust, the
Non-Feeder Funds, retain the right to do so in the future. Each Portfolio, as
well as the Trust, intends to comply with all applicable federal and state
securities laws. For additional information regarding the Feeder Funds'
investment in the Portfolios of the Trust, see this Prospectus under "Special
Information on the 'Master/Feeder' Fund Structure."
Capital Stock. The authorized capital stock of the Company consists of
the following shares (par value $.001 per share): ASAF Founders International
Small Capitalization Fund (1.575 million); ASAF T. Rowe Price International
Equity Fund (2.1 million); ASAF Founders Small Capitalization Fund (2.1
million); ASAF T. Rowe Price Small Company Value Fund (2.1 million); ASAF Janus
Capital Growth Fund (4.25 million); ASAF INVESCO Equity Income Fund (2.1
million); ASAF American Century Strategic Balanced Fund (1.575 million); ASAF
Federated High Yield Bond Fund (2.1 million); ASAF Total Return Bond Fund (2.1
million); and ASAF JPM Money Market Fund (20 million).
Description of Shares. The Company currently has ten separate series of
shares, each of which is divided into Class A, B, C and X shares. The Directors
of the Company are authorized to establish, from time to time and without
shareholder approval, additional series or classes of shares. The assets of each
series of shares belong only to that series, and the liabilities of each series
are borne solely by that series and no other. Shares of each Fund represent
equal proportionate interests in the assets of that Fund only and have identical
voting, dividend, redemption, liquidation, and other rights. Each class of
shares, however, bears different sales charges, distribution fees and related
expenses, and has exclusive voting rights with respect to its respective 12b-1
Distribution and Service Plan. All shares issued are fully paid, non-assessable
and freely transferable, and have no preference, preemptive or similar rights.
As of the date of this Prospectus, American Skandia Investment Services,
Incorporated, which contributed the initial capital of the Funds, owned 100% of
the Funds' outstanding shares.
Shareholder Voting and Meetings. Each shareholder is entitle to one
vote for each share (and to the appropriate fractional vote for each fractional
share) of the Funds held upon all matters submitted to the shareholders
generally. Shareholders of all Funds and classes will vote together as a single
class, except when otherwise required by applicable law or as determined by the
Directors of the Company; and provided that shareholders of a particular Fund or
class shall not be entitled to vote on any matter which does not affect any
interest of that Fund or class, except as otherwise required by applicable law.
The Directors of the Company do not intend to hold annual meetings of
shareholders of the Funds, and will call special meetings of shareholders of a
Fund only if required under the 1940 Act and other applicable law, in their
discretion or upon written request of holders of 10% or more of the outstanding
shares of that Fund entitled to vote.
Certain Provisions. Under the Maryland General Corporation Law, a
Director of the Company who is held liable for assenting to a distribution made
in violation of the Company's Articles of Incorporation is entitled to
contribution from each shareholder of the Company for the amount the shareholder
accepted knowing the distribution was made in violation of those provisions.
Absent such knowledge, a shareholder will not be obligated to the Company or its
creditors in respect of shares held in the Company except to the extent of any
unpaid portion of the subscription price or purchase price for such shares.
SPECIAL INFORMATION ON THE
"MASTER/FEEDER" FUND STRUCTURE
An investor in the Feeder Funds should be aware that these Funds,
unlike mutual funds which directly acquire and manage their own portfolios of
securities, seek to achieve their investment objectives by investing all of
their investable assets in a corresponding Portfolio of the Trust (although each
Feeder Fund may temporarily hold a de minimis amount of cash). The Portfolios of
the Trust, which have the same investment objective, policies and limitations as
their corresponding Feeder Fund, in turn invest their investable assets directly
in a portfolio of securities. Each of the Feeder Funds thus acquires an indirect
interest in the securities owned by its corresponding Portfolio.
Each Feeder Fund's investment in its corresponding Portfolio is in the
form of a non-transferable beneficial interest. Members of the general public
may not purchase a direct interest in a Portfolio of the Trust. However, in
addition to selling an interest to its corresponding Feeder Fund, each Portfolio
may sell interests to other affiliated and non-affiliated investment companies
and/or institutional investors. Such investors will invest in a Portfolio on the
same terms and conditions as its corresponding Feeder Fund and will pay a
proportionate share of the Portfolio's expenses. Other investors investing in a
Portfolio, however, are not required to sell their shares at the same public
offering price as the corresponding Feeder Fund due to variations in sales
commissions and other operating expenses. Therefore, investors in each of the
Feeder Funds should be aware that these differences may result in differences in
returns experienced by investors in other investment companies which may invest
exclusively in the Portfolios. Such differences in returns are also present in
other mutual fund structures, including funds that have multiple classes of
shares. Currently, of the investment companies which may invest in the
Portfolios, only shares of the Feeder Funds are available for purchase by the
general public in the United States. Information regarding the availability of
shares of any other fund that may invest in a Portfolio in the future can be
obtained by calling 1-800-SKANDIA.
The Directors of the Company believe that the "master/feeder" fund
structure offers opportunities for substantial growth in the assets of the
Portfolios that may enable the Portfolios to realize economies of scale that
could reduce the Portfolios' operating expenses, thereby producing higher
returns and benefiting the shareholders of the Feeder Funds. A Feeder Fund's
investment in its corresponding Portfolio may, however, be adversely affected by
the actions of other investors in the Portfolio, if any. For example, if a large
investor withdraws from a Portfolio, the remaining investors may experience
higher pro rata operating expenses, thereby producing lower returns.
Additionally, a Portfolio may become less diverse, resulting in increased
portfolio risk, and experience decreasing economies of scale. However, this
possibility exists as well for traditionally structured funds which have large
or institutional investors. Funds which invest all their assets in interests in
a separate investment company are a relatively new development in the mutual
fund industry and, therefore, may be subject to additional regulations than
traditionally structured mutual funds.
Each of the Feeder Funds may withdraw (completely redeem) all of its
assets from its corresponding Portfolio at any time if the Directors of the
Company determine that it is in the best interest of the Fund to do so. A Feeder
Fund might withdraw, for example, if other investors in the Fund's corresponding
Portfolio voted to, by a vote of all investors in the Portfolio (including the
Fund), change the investment objective, policies or limitations of the Portfolio
in a manner not acceptable to the Directors of the Company. The investment
performance of a Feeder Fund may be affected by a withdrawal of all its assets
from a corresponding Portfolio. A withdrawal could also result in a distribution
"in kind" of portfolio securities (as opposed to a cash distribution) by the
Portfolio to the Feeder Fund. If securities are distributed, the Feeder Fund
could incur brokerage, tax or other charges in converting the securities to cash
or purchasing other securities. In addition, a distribution "in kind" may result
in a less diversified portfolio of investments or adversely affect the liquidity
of the Feeder Fund's investment portfolio. In the event a Feeder Fund withdraws
all of its assets from its corresponding Portfolio, or the Directors of the
Company determines that the investment objective of a Portfolio is no longer
consistent with the investment objective of its corresponding Feeder Fund, such
Directors would consider what action might be taken, including investing all of
the Fund's investable assets in another pooled investment entity having
substantially the same investment objective as the Fund or retaining an
investment adviser to manage the Fund's assets directly in accordance with the
Fund's investment objective, policies and limitations.
The Trust's Agreement and Declaration of Trust provides that a
Portfolio will continue without limitation of time unless terminated by vote of
investors holding at least a majority of the interests of such Portfolio
entitled to vote or by the Trustees of the Trust by written notice to investors
of such Portfolio. This provision is consistent with treatment of each Portfolio
as a partnership for federal income tax purposes.
Investor Meetings and Voting. Each Portfolio normally will not hold
meetings of investors except as required by the 1940 Act. Each investor in a
Portfolio (including a Feeder Fund) will be entitled to vote in proportion to
its relative beneficial interest in the Portfolio. Whenever a Feeder Fund as an
investor in a Portfolio is requested to vote on matters pertaining to a
Portfolio (other than the termination of a Portfolio's business, which may be
determined by the Trustees of the Trust without investor approval), such Fund
will hold a meeting of Fund shareholders and will vote its interest in such
Portfolio for or against such matters proportionately to the instructions to
vote for or against such matters received from Fund shareholders. Other
investors in the Portfolio may alone or collectively acquire sufficient voting
interests in the Portfolio to control matters relating to the operation of the
Portfolio, which could cause or require the Fund to withdraw its investment in
the Portfolio or take other appropriate action.
Certain Provisions. The Trust's Agreement and Declaration of Trust
provides that the Feeder Funds and any other entities permitted to invest in a
Portfolio of the Trust (e.g., other U.S. and foreign investment companies, and
common and commingled trust funds) will each be liable for all obligations of
each such Portfolio in the event that the Trust fails to satisfy such
liabilities and obligations. However, the risk of an investor in a Portfolio
(including a Feeder Fund) incurring financial loss beyond the amount of its
investment on account of such liability is limited to circumstances in which the
Portfolio had inadequate insurance and was unable to meet its obligations out of
its assets. Accordingly, the Trustees of the Trust believe that neither a Feeder
Fund nor its shareholders will be adversely affected by reason of the Fund
investing in a corresponding Portfolio of the Trust.
MANAGEMENT OF THE FUNDS
THE DIRECTORS, TRUSTEES AND OFFICERS:
The Directors of the Company and the Trustees of the Trust have
oversight responsibility for the operations of each Fund and Portfolio,
respectively. As of the date of this Prospectus, each of the Directors of the
Company also serves as a Trustee of the Trust. The Directors of the Company and
the Trustees of the Trust, including a majority of the Directors and Trustees
who are not "interested persons" (as defined in the 1940 Act) of the Company or
the Trust, respectively, have adopted written procedures designed to identify
and reasonably address any potential conflicts of interest which might arise as
a result of an "overlap" of Directors and Trustees, including, if necessary, the
creation of a separate board of trustees of the Trust. For additional
information concerning the Directors and officers of the Company, see the
Company's SAI under "Management of the Company."
THE INVESTMENT MANAGER:
American Skandia Investment Services, Incorporated ("ASISI," as
previously defined), One Corporate Drive, Shelton, Connecticut 06484, acts as
investment manager to each of the Non-Feeder Funds and Portfolios pursuant to
separate investment management agreements with the Company and the Trust,
respectively (the "Management Agreements"). Unlike the Non-Feeder Funds, each of
the Feeder Funds invests all of its investable assets in a corresponding
Portfolio of the Trust and thus does not require an investment manager. ASISI, a
Connecticut corporation organized in 1991, is registered as an investment
adviser with the Commission and is a wholly-owned subsidiary of American Skandia
Investment Holding Corporation, whose indirect parent is Skandia Insurance
Company Ltd. ("Skandia"). Skandia is a Swedish company that owns, directly or
indirectly, a number of insurance companies in many countries.
In addition to serving as investment manager to the Company and the
Trust, ASISI currently serves as the investment manager to American Skandia
Trust, an open-end management investment company whose shares are made available
to life insurance companies writing variable annuity contracts and variable life
insurance policies. Shares of American Skandia Trust also may be offered
directly to qualified pension and retirement plans.
The Management Agreements provide that ASISI will furnish each
Non-Feeder Fund and Portfolio with investment advice and investment management
and administrative services subject to the supervision of the Directors of the
Company or the Trustees of the Trusts, where applicable, and in conformity with
the stated investment objectives, policies and limitations of the applicable
Fund or Portfolio. The Investment Manager is responsible for monitoring the
activities of the Sub-advisors it engages to manage the Non-Feeder Funds and
Portfolios and reporting on such activities to the Directors of the Company or
the Trustees of the Trust, where applicable. The Investment Manager must also
provide or obtain for the Non-Feeder Funds and the Portfolios, and thereafter
supervise, such executive, administrative, accounting custody, transfer agent
and shareholder servicing services as are deemed advisable by the Directors of
the Company or the Trustees of the Trust, where applicable.
THE SUB-ADVISORS:
ASISI currently engages the following Sub-advisors to conduct the
investment programs of each Non-Feeder Fund and Portfolio in accordance with the
Fund or Portfolio's investment objective, policies and limitations and any
investment guidelines established by the Investment Manager. Each Sub-advisor is
responsible for, subject to the supervision and control of the Investment
Manager, the purchase, retention and disposition of securities represented in
the Fund or Portfolio's investment portfolio.
Founders Asset Management, Inc. ("Founders") serves as Sub-advisor for
the ASAF Founders International Small Capitalization Fund and the ASAF Founders
Small Capitalization Fund. Founders, located at Founders Financial Center, 2930
East Third Avenue, Denver, Colorado 80206, has acted as an investment advisor
since 1938 and serves as investment advisor to Founders Discovery, Frontier,
Passport, Special, International Equity, Worldwide Growth, Growth, Blue Chip,
Balanced, Government Securities, and Money Market Funds. Founders, which is also
the investment advisor for a number of private accounts, managed assets
aggregating approximately $5.1 billion as of March 31, 1997.
The portfolio manager responsible for the day-to-day management of the
ASAF Founders International Small Capitalization Fund is Michael W. Gerding, a
Vice President of Investments of Founders. Mr. Gerding is a chartered financial
analyst who has been part of Founders' investment department since 1990. Prior
to joining Founders, Mr. Gerding served as a portfolio manager and research
analyst with NCNB Texas for several years.
The portfolio manager responsible for the day-to-day management of the
ASAF Founders Small Capitalization Fund is Michael K. Haines, a Senior Vice
President of Investments of Founders. Mr. Haines has been associated with
Founders since 1985, serving as a lead portfolio manager and an assistant
portfolio manager.
Rowe Price-Fleming International, Inc. ("Price-Fleming") serves as
Sub-advisor for the ASMT T. Rowe Price International Equity Portfolio.
Price-Fleming, located at 100 East Pratt Street, Baltimore, Maryland 21202, was
founded in 1979 as a joint venture between T. Rowe Price Associates, Inc. and
Robert Fleming Holdings Limited. Price-Fleming is one of the world's largest
international mutual fund asset managers with approximately $25 billion under
management as of March 31, 1997 in its offices in Baltimore, London, Tokyo, Hong
Kong and Singapore.
An investment advisory group has responsibility for the day-to-day
management of the ASMT T. Rowe Price International Equity Portfolio. The
advisory group for the Portfolio consists of Martin G. Wade, Christopher D.
Alderson, Peter B. Askew, Mark J.T. Edwards, John R. Ford, James B.M. Seddon,
Benedict R.F. Thomas, and David J.L. Warren. Martin Wade joined Price-Fleming in
1979 and has 27 years of experience with Fleming Group (Fleming Group includes
Robert Fleming Holdings Ltd. and/or Jardine Fleming International Holdings Ltd.)
in research, client service and investment management. Christopher Alderson
joined Price-Fleming in 1988, and has 10 years of experience with the Fleming
Group in research and portfolio management. Peter Askew joined Price-Fleming in
1988 and has 21 years of experience managing multicurrency fixed income
portfolios. Mark J.T. Edwards joined Price-Fleming in 1986 and has 15 years of
experience in financial analysis. John R. Ford joined Price-Fleming in 1982 and
has 16 years of experience with Fleming Group in research and portfolio
management. James B.M. Seddon joined Price-Fleming in 1987 and has 11 years of
experience in investment management. Benedict R.F. Thomas joined Price-Fleming
in 1988 and has 7 years of portfolio management experience. David J.L. Warren
joined Price-Fleming in 1984 and has 16 years experience in equity research,
fixed income research and portfolio management.
T. Rowe Price Associates, Inc. ("T. Rowe Price") serves as Sub-advisor
for the ASAF T. Rowe Price Small Company Value Fund. T. Rowe Price, located at
100 East Pratt Street, Baltimore, Maryland 21202, was founded in 1937 by the
late Thomas Rowe Price, Jr. As of March 31, 1997, T. Rowe Price and its
affiliates managed over $100 billion for approximately 4.5 million individual
and institutional accounts.
The ASAF T. Rowe Price Small Company Value Fund is managed by an
Investment Advisory Committee composed of the following members: Preston G.
Athey, Chairman, Hugh M. Evans III and Gregory A. McCrickard. The Committee
Chairman has day-to-day responsibility for managing the Portfolio and works with
the Committee in developing and executing the Portfolio's investment program.
Mr. Athey joined T. Rowe Price in 1978 and has been managing investments since
1982.
Janus Capital Corporation ("Janus") serves as Sub-advisor for the ASMT
Janus Capital Growth Portfolio. Janus, located at 100 Fillmore Street, Denver,
Colorado 80206-4923, serves as the investment advisor to the Janus Funds, as
well as advisor or sub-advisor to several other mutual funds and individual,
corporate, charitable and retirement accounts. As of March 31, 1997, Janus
managed assets worth approximately $50 billion. Kansas City Southern Industries,
Inc. ("KCSI") owns approximately 83% of the outstanding voting stock of Janus,
most of which it acquired in 1984. KCSI is a publicly-traded holding company
whose primary subsidiaries are engaged in transportation and financial services.
The portfolio manager responsible for day-to-day management of the ASMT
Janus Capital Growth Portfolio is Thomas F. Marsico. Mr. Marsico has managed
Janus Growth and Income Fund since its inception in May 1991 and Janus Twenty
Fund since April 1985.
INVESCO Trust Company ("INVESCO") serves as Sub-advisor for the ASMT
INVESCO Equity Income Portfolio. INVESCO, a trust company founded in 1969 and
located at 7800 East Union Avenue, P.O. Box 173706, Denver, Colorado 80217-3706,
is a wholly-owned subsidiary of INVESCO Funds Group, Inc., which was established
in 1932. INVESCO serves as sub-advisor to INVESCO Growth Fund, Inc., INVESCO
Dynamics Fund, Inc., INVESCO Money Market Funds, Inc., INVESCO Income Funds,
Inc., INVESCO Tax-Free Income Funds, Inc., INVESCO Strategic Portfolios, Inc.,
INVESCO Emerging Opportunity Funds, Inc., INVESCO Industrial Income Fund, Inc.,
INVESCO Multiple Asset Funds, Inc., INVESCO Specialty Funds, Inc., INVESCO
Strategic Portfolios, Inc. and INVESCO Variable Investment Funds, Inc. INVESCO
Funds Group, Inc. and INVESCO are part of a global financial services firm that
managed approximately $160 billion of assets as of March 31, 1997. AMVESCAP PLC
(formerly, "INVESCO PLC"), the parent of INVESCO Funds Group, Inc. and INVESCO,
is one of the largest independent investment management businesses in the world.
The portfolio managers responsible for the day-to-day management of the
ASMT INVESCO Equity Income Portfolio are Charles P. Mayer, Portfolio Co-Manager,
and Donovan J. (Jerry) Paul, Portfolio Co-Manager. Mr. Mayer began his
investment career in 1969 and is now a senior vice president of INVESCO. From
1993 to 1994, he was vice president of INVESCO, and from 1984 to 1993, he was a
portfolio manager with Westinghouse Pension. Mr. Paul entered the investment
management industry in 1976 and has been a senior vice president of INVESCO
since 1994. From 1993 to 1994, he was president of Quixote Investment
Management, Inc. From 1987 to 1992, Mr. Paul was a portfolio manager, and from
1989 to 1992 he was senior vice president and director of fixed-income research
with Stein, Roe & Farnham, Inc.
American Century Investment Management, Inc. ("American Century,"
formally known as, "Investors Research Corporation") serves as Sub-advisor for
the ASAF American Century Strategic Balanced Fund. American Century, located at
American Century Towers, 4500 Main Street, Kansas City, Missouri 64111, has been
providing investment advisory services to investment companies and institutional
clients since 1958. In June 1995, American Century Companies, Inc. ("ACC"), the
parent of American Century, acquired Benham Management International, Inc. In
the acquisition, Benham Management Corporation ("BMC"), the investment adviser
to The Benham Group of mutual funds, became a wholly owned subsidiary of ACC.
Certain employees of BMC will be providing investment management services to
American Century funds, while certain American Century employees will be
providing investment management services to Benham funds. As of March 31, 1997,
American Century and its affiliates managed assets totaling approximately $51.2
billion.
American Century utilizes a team of portfolio managers, assistant
portfolio managers and analysts acting together to manage the assets of the ASAF
American Century Strategic Balanced Fund. The portfolio manager members of the
portfolio team responsible for the day-to-day management of the equity portion
of the Fund are James E. Stowers III and Bruce A. Wimberly. Mr. Stowers,
President and Portfolio Manager, joined American Century in 1981. Mr. Wimberly,
Portfolio Manager, joined American Century in September 1994 as an Investment
Analyst. Prior to joining American Century, Mr. Wimberly attended Kellogg
Graduate School of Management, Northwestern University, from August 1992 to
August 1994, where he obtained his MBA degree. Prior to that, he served as a
Research Analyst for Frontier Capital Management Company, Boston, Massachusetts.
The portfolio manager members of the portfolio team responsible for the
day-to-day management of the fixed income portion of the Fund are Casey Colton,
Norman E. Hoops, Brian Howell, Jeffrey L. Houston, David Schroeder and Jeffrey
R. Tyler. Casey Colton joined BMC in 1990 as a Municipal Analyst. Norman Hoops
joined American Century in November 1989 as Vice President and Portfolio Manager
and became Senior Vice President and Fixed Income Portfolio Manager in April
1993. Brian Howell joined BMC in 1987 as a research analyst and was promoted to
his current position in January 1994. Jeffrey Houston has worked for American
Century as a Portfolio Manager since November, 1990. David Schroeder joined BMC
in 1990. Jeffrey Tyler, Senior Vice President and Portfolio Manager, joined BMC
in January, 1988 as a Portfolio Manager.
Federated Investment Counseling ("Federated Investment") serves as
Sub-advisor for the ASAF Federated High Yield Bond Fund. Federated Investment,
located at Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779, was
organized as a Delaware business trust in 1989 and is a registered investment
advisor under the Investment Advisers Act of 1940. Federated Investment is a
wholly owned subsidiary of Federated Investors. Federated Investment and other
subsidiaries of Federated Investors serve as investment advisors to a number of
investment companies and private accounts. As of March 31, 1997, total assets
under management or administration by these and other subsidiaries of Federated
Investors was over $110 billion.
The portfolio managers responsible for the day-to-day management of the
ASAF Federated High Yield Bond Fund are Mark E. Durbiano and Stephanie L.
Bachhuber. Mr. Durbiano joined Federated Investors in 1982 and has been a Senior
Vice President of an affiliate of Federated Investment since January, 1996. From
1988 through 1995, Mr. Durbiano was a Vice President of an affiliate of
Federated Investment. Mr. Durbiano is a Chartered Financial Analyst and received
his M.B.A. in finance from the University of Pittsburgh. Ms. Bachhuber joined
Federated Investors in 1993 as an Investment Analyst and has been an Assistant
Vice President of an affiliate of Federated Investment since 1996. From 1990 to
1993, Ms. Bachhuber served as an Operations Analyst at Lehman Brothers. Ms
Bachhuber earned her M.B.A., with a concentration in finance, from Duke
University in 1993.
Pacific Investment Management Company ("PIMCO") serves as Sub-advisor
for the ASMT PIMCO Total Return Bond Portfolio. PIMCO, located at 840 Newport
Center Drive, Suite 360, Newport Beach, California 92660, is an investment
counseling firm founded in 1971. PIMCO is a subsidiary general partnership of
PIMCO Advisors L.P. ("PIMCO Advisors"). A majority interest in PIMCO Advisors is
held by PIMCO Partners, G.P., a general partnership between Pacific Financial
Asset Management Corporation, an indirect wholly owned subsidiary of Pacific
Mutual Life Insurance Company, and PIMCO Partners, LLC, a California limited
liability company controlled by the managing directors of PIMCO. PIMCO is a
registered investment advisor with the Commission and a commodity trading
advisor with the CFTC. As of March 31, 1997, PIMCO had over $91.5 billion of
assets under management.
The portfolio manager responsible for the day-to-day management of the
ASMT PIMCO Total Return Bond Portfolio is William H. Gross. Mr. Gross is
Managing Director of PIMCO and has been associated with the firm since 1971.
J.P. Morgan Investment Management, Inc. ("J.P. Morgan") serves as
Sub-advisor for the ASMT JPM Money Market Portfolio. J.P. Morgan, with principal
offices at 522 Fifth Avenue, New York, New York 10036, is a wholly owned
subsidiary of J.P. Morgan & Co. Incorporated ("J.P. Morgan & Co."), a bank
holding company organized under the laws of Delaware which is located at 60 Wall
Street, New York, New York 10260. J.P. Morgan & Co., through J.P. Morgan and
other subsidiaries, offers a wide range of services to governmental,
institutional, corporate and individual customers, and acts as investment
adviser to individual and institutional clients with combined assets under
management of approximately $213 billion as of March 31, 1997. J.P. Morgan has
managed investments for clients for almost a century, since 1913. In addition,
J.P. Morgan has managed short-term fixed income assets for clients since 1969.
As of March 31, 1997, these short-term fixed assets under J.P. Morgan's
management totaled over $25 billion.
FEES AND EXPENSES:
Investment Management Fees. ASISI receives a monthly fee from each
Non-Feeder Fund and Portfolio for the performance of its services. ASISI pays
each Sub-advisor a portion of such fee for the performance of the sub-advisory
services at no additional cost to any Fund or Portfolio. The investment
management fee with respect to each Non-Feeder Fund and Portfolio may differ,
reflecting the investment objective, policies and limitations of each Fund or
Portfolio and the nature of each Management Agreement and Sub-advisory
Agreement. Each Non-Feeder Fund and Portfolio's investment management fee is
accrued daily for the purposes of determining the offering and redemption price
of the Fund's shares. The fees payable to ASISI, based on a stated percentage of
the Non-Feeder Fund or Portfolio's average daily net assets, are as follows:
<TABLE>
<CAPTION>
Fund/Portfolio: Annual Rate:
<S> <C> <C> <C>
ASAF Founders International Small Capitalization Fund: 1.10% of the first $100 million; plus 1.00
% of the amount over $100 million
ASMT T. Rowe Price International Equity Portfolio: 1.00%
ASAF Founders Small Capitalization Fund: 0.90%
ASAF T. Rowe Price Small Company Value Fund: 1.00%
ASMT Janus Capital Growth Portfolio: 1.00%
ASMT INVESCO Equity Income Portfolio: 0.75%
ASAF American Century Strategic Balanced Fund: 0.90%
ASAF Federated High Yield Bond Fund: 0.70%
ASMT PIMCO Total Return Bond Portfolio: 0.65%
ASMT JPM Money Market Portfolio: 0.50%
</TABLE>
Sub-Advisory Fees. ASISI pays each Sub-advisor on a monthly basis for
the performance of sub-advisory services. The fee payable to the Sub-advisors
with respect to each Non-Feeder Fund and Portfolio may differ, reflecting, among
other things, the investment objective, policies and limitations of each Fund or
Portfolio and the nature of each Sub-advisory Agreement. Each Sub-advisor's fee
is accrued daily for purposes of determining the amount payable by the
Investment Manager to the Sub-advisor. The fees payable to the Sub-advisors,
based on a stated percentage of the Non-Feeder Fund or Portfolio's average daily
net assets, are as follows:
Founders Asset Management, Inc. for the ASAF Founders International
Small Capitalization Fund: An annual rate of .60% of the portion of the average
daily net assets of the Fund not in excess of $100 million; plus .50% of the
portion over $100 million.
Rowe Price-Fleming International, Inc. for the ASMT T. Rowe Price
International Equity Portfolio: An annual rate of .75% of the portion of the
average daily net assets of the Portfolio not in excess of $20 million; plus
.60% of the portion over $20 million but not in excess of $50 million; plus .50%
of the portion over $50 million. When the average daily net assets of the
Portfolio equal or exceed $200 million, the annual rate will be .50% of the
average daily net assets of the Portfolio.
Founders Asset Management, Inc. for the ASAF Founders Small
Capitalization Fund: An annual rate of .50% of the portion of the average daily
net assets of the Fund not in excess of $250 million; plus .45% of the portion
over $250 million.
T. Rowe Price Associates, Inc. for the ASAF T. Rowe Price Small Company
Value Fund: An annual rate of .60% of the average daily net assets of the Fund.
Janus Capital Corporation for the ASMT Janus Capital Growth Portfolio:
An annual rate of .45% of the average daily net assets of the Portfolio.
INVESCO Trust Company for the ASMT INVESCO Equity Income Portfolio: An
annual rate of .35% of the average daily net assets of the Portfolio.
American Century Investment Management, Inc. for the ASAF American
Century Strategic Balanced Fund: An annual rate of .50% of the portion of the
average daily net assets of the Fund not in excess of $50 million; plus .45% of
the portion over $50 million.
Federated Investment Counseling for the ASAF Federated High Yield Bond
Fund: An annual rate of .25% of the portion of the average daily net assets of
the Fund not in excess of $200 million; plus .20% of the portion over $200
million.
Pacific Investment Management Company for the ASMT PIMCO Total Return
Bond Portfolio: An annual rate of .25% of the average daily net assets of the
Portfolio.
J.P. Morgan Investment Management, Inc. for the ASMT JPM Money Market
Portfolio: An annual rate of .15% of the portion of the average daily net assets
of the Portfolio not in excess of $500 million; plus .09% of the portion over
$500 million but not in excess of $1 billion; plus .06% of the portion over $1
billion..
Fee Waivers. In order to increase the return to investors, both the
Investment Manager and the Sub-advisors may from time to time agree to
voluntarily waive or reduce their respective fees, while retaining their ability
to be reimbursed for such fees prior to the end of each fiscal year. Such
voluntary fee waivers or reductions may be rescinded at any time and without
notice to investors.
Commencing June 1, 1997, Rowe Price Fleming International, Inc., the
Sub-advisor for the ASMT T. Rowe Price International Equity Portfolio, has
voluntarily agreed to waive a portion of its sub-advisory fee equal to .25% of
the portion of the average daily net assets of the Portfolio not in excess of
$20 million; plus .10% of the portion over $20 million but not in excess of $50
million. When the average daily net assets of the Portfolio equal or exceed $200
million, such voluntary fee waiver is no longer applicable, and the sub-advisory
annual fee rate of .50% of the average daily net assets of the Portfolio will be
applied.
Commencing June 1, 1997, J.P. Morgan Investment Management, Inc., the
Sub-advisor for the ASMT JPM Money Market Portfolio, has voluntarily agreed to
waive a portion of its sub-advisory fee equal to .06% of the portion of the
average daily net assets of the Portfolio not in excess of $500 million; plus
.03% of the portion over $500 million but not in excess of $1 billion.
Expenses. Each Fund and Portfolio pays all of its expenses, including,
but not limited to, the costs incurred in connection with the maintenance of its
registration, as applicable, under the 1933 Act and the 1940 Act, printing and
mailing prospectuses and SAIs to shareholders, certain office and financial
accounting services, taxes or governmental fees, brokerage commissions, Fund
share pricing, custodial, transfer and shareholder servicing agent costs,
expenses of outside counsel and independent accountants, preparation (including,
printing and mailing) of shareholder reports and expenses of director and
shareholder meetings. Expenses incurred by the Funds or Portfolios not directly
attributable to any specific Fund(s) or Portfolio(s) are allocated on the basis
of the net assets of the respective Fund or Portfolio. For additional
information regarding Fund and Portfolio expenses, as well as any voluntary
agreements by the Investment Manager to limit such expenses, see this Prospectus
under "Expense Information" and the Company's SAI under "Fund Expenses."
THE ADMINISTRATOR:
PFPC Inc. (the "Administrator"), 103 Bellevue Parkway, Wilmington,
Delaware 19809, a Delaware corporation which is an indirect wholly-owned
subsidiary of PNC Financial Corp., serves as the administrator for both the
Company and the Trust pursuant to separate administration agreements with the
Company and the Trust, respectively (the "Administration Agreements"). The
Administrator provides certain fund accounting and administrative services to
the Company and the Trust, including, among other services, accounting relating
to the Company and the Trust and the investment transactions of the foregoing
and computing daily NAVs. The Administrator does not have any responsibility or
authority for the management of the assets of the Funds or Portfolios, the
determination of their investment policies, or for any matter pertaining to the
distribution of securities issued by the Company.
As compensation for the services and facilities provided by the
Administrator to the Company, the Company has agreed to pay the Administrator
its "out-of-pocket" expenses, plus a monthly multi-class fee of $3,000 per Fund,
plus a monthly feeder fee of $2,000 per Feeder Fund, plus the greater of the
following monthly fee based on the average daily net assets of the Non-Feeder
Funds -- 0.10% (first $200 million), 0.06% (next $200 million), 0.0275% (next
$200 million) and 0.02% ($600+ million) -- or a minimum monthly fee of $6,250
per Non-Feeder Fund. The Administrator has agreed to waive the above monthly
multi-class fee, the monthly feeder fee and the minimum monthly fee for the
first two months of each year of its Administration Agreement, and thereafter
will decrease such waiver by 10% increments for each of the remaining ten months
of the contract year.
In addition, as compensation for the services and facilities provided
by the Administrator to the Trust, the Trust has agreed to pay the Administrator
its "out-of-pocket" expenses, plus the greater of the following monthly fee
based on the average daily net assets of the Portfolios -- 0.12% (first $200
million), 0.085% (next $200 million), 0.05% (next $200 million), 0.025% (next
$400 million) and 0.02% ($1+ billion) -- or a minimum monthly fee of $8,333 per
Portfolio. The Administrator has agreed to waive the above minimum monthly fee
for the first two months of each year of its Administration Agreement, and
thereafter will decrease such waiver by 10% increments for each of the remaining
ten months of the contract year. For an additional discussion of the services
provided by the Administrator under the Administration Agreements, and the
Administrator's "out-of-pocket" expenses, see the Company's SAI under
"Investment Advisory & Administration Services."
PORTFOLIO TRANSACTIONS
PORTFOLIO TURNOVER:
Each Non-Feeder Fund and Portfolio may sell its portfolio securities,
regardless of the length of time that they have been held, if the Sub-advisor
and/or the Investment Manager determines that such a disposition is in the
Fund's or Portfolio's best interest. Portfolio turnover rates may increase as a
result of the need for a Fund or Portfolio to effect significant amounts of
purchases or redemptions of portfolio securities due to economic, market, or
other factors that are not within the Sub-advisor's or Investment Manager's
control. Although it is not possible to predict future portfolio turnover rates
accurately, and such rates may vary from year to year, it is anticipated that
annual portfolio turnover rates for the ASMT T. Rowe Price International Equity
Portfolio, ASAF T. Rowe Price Small Company Value Fund, ASMT INVESCO Equity
Income Portfolio and ASAF Federated High Yield Bond Fund will not exceed 100%
under normal market conditions. The annual portfolio turnover rates for the ASAF
Founders International Small Capitalization Fund, ASAF Founders Small
Capitalization Fund, ASMT Janus Capital Growth Portfolio, ASAF American Century
Strategic Balanced Fund and ASMT PIMCO Total Return Bond Portfolio are not
anticipated to exceed 150%, 150%, 200%, 150% and 350%, respectively, under
normal market conditions.
A 100% portfolio turnover rate would occur if all of the securities in
a portfolio of investments were replaced during a given period. A high rate of
portfolio turnover (generally in excess of 100%) involves correspondingly higher
brokerage commission expenses and other transaction costs, which must be
ultimately borne by a Fund's shareholders. Trading in fixed income securities
does not generally involve the payment of brokerage commissions, but does
involve indirect transaction costs. High portfolio turnover rates may also
generate larger taxable income and taxable capital gains than would result from
lower portfolio turnover rates and may create higher tax liability for a Fund's
shareholders. For additional information regarding tax liability, see this
Prospectus under "Dividends, Capital Gains and Taxes" and the Company's SAI
under "Additional Tax Considerations." For additional information regarding
portfolio turnover, in general, see the Company's SAI under "Portfolio
Transactions."
BROKERAGE ALLOCATION:
Generally, the primary consideration in placing portfolio securities
transactions with broker-dealers for execution is to obtain, and maintain the
availability of, execution at the best net price available and in the most
effective manner possible. The Company's and the Trust's brokerage allocation
policy may permit a Fund or Portfolio, respectively, to pay a broker-dealer
which furnishes research services a higher commission than that which might be
charged by another broker-dealer which does not furnish research services,
provided that such commission is deemed reasonable in relation to the value of
the services provided by such broker-dealer. In addition, each Fund's or
Portfolio's Sub-advisor may consider the use of broker-dealers that are, or
might be deemed to be, their affiliates, and may consider sale of shares of the
Funds, or may consider or follow recommendations of the Investment Manager that
take such sales into account, as factors in the selection of broker-dealers to
effect transactions, subject to the requirements of best net price available and
most favorable execution. In this regard, the Investment Manager may direct
certain of the Sub-advisors to try to effect a portion of their Fund or
Portfolio's investment transactions through broker-dealers that sell shares of
the Fund (or corresponding Fund, in the case of the Portfolios), to the extent
consistent with best net price available and most favorable execution. For an
additional discussion of portfolio transactions and brokerage allocation, see
the Company's SAI under "Portfolio Transactions."
DIVIDENDS, CAPITAL GAINS AND TAXES
DIVIDENDS:
Each Fund intends to distribute substantially all of its net income and
capital gains to shareholders no less frequently than once a year. Normally,
dividends from net investment income of the ASAF Founders International Small
Capitalization Fund, ASAF T. Rowe Price International Equity Fund, ASAF Founders
Small Capitalization Fund, ASAF T. Rowe Price Small Company Value Fund and ASAF
Janus Capital Growth Fund will be declared and paid annually; dividends from the
net investment income of the ASAF INVESCO Equity Income Fund and ASAF American
Century Strategic Balanced Fund will be declared and paid semi-annually;
dividends from the net investment income of the ASAF Total Return Bond Fund will
be declared and paid quarterly; and dividends from net investment income of the
ASAF Federated High Yield Bond Fund and ASAF JPM Money Market Fund will be
declared daily and paid monthly. Dividends from the ASAF JPM Money Market Fund
are not paid on shares until the day following the date on which the shares are
issued.
DISTRIBUTION OPTIONS:
When you open your account, specify on your application how you want to
receive your distributions. Unless you specify otherwise, all dividends and
distributions will be automatically reinvested in additional full or fractional
shares of each Fund. You have the following five distribution options:
Reinvest All Distributions in the Fund. You can elect to reinvest all
dividends and long term capital gains distributions in additional shares of the
applicable Fund.
Reinvest Income Dividends Only. You can elect to reinvest investment
income dividends in a Fund while receiving capital gains distributions.
Reinvest Long-Term Capital Gains Only. You can elect to reinvest
long-term capital gains in the Fund while receiving dividends.
Receive All Distributions in Cash. You can elect to receive a check for
all dividends and long-term capital gains distributions.
Reinvest Distributions in Another Fund of the Company. You can reinvest
all distributions in another Fund of the Company. For additional information
about reinvesting your distributions, see this Prospectus under "Special
Investment Programs and Privileges."
TAXES:
Each Fund intends to qualify as a regulated investment company by
satisfying the requirements under Subchapter M of the Code, including
requirements with respect to diversification of assets, distribution of income
and sources of income. It is the Company's policy to have each Fund distribute
to shareholders all of its investment income (net of expenses) and any capital
gains (net of capital losses) in accordance with the timing requirements imposed
by the Code so that the Fund will satisfy the distribution requirement of
Subchapter M and not be subject to federal income taxes or the 4% excise tax.
So long as a Fund qualifies as a regulated investment company for federal
income tax purposes, the Fund, in computing its income subject to federal income
tax, is entitled to deduct all dividends other than "preferential" dividends
paid by it to its shareholders during the taxable year. "Preferential" dividends
are dividends other than dividends which have been distributed to shareholders
pro rata without preference to any share of stock as compared with other shares
of the same class and without preference to one class of stock as compared with
another, except in accordance with the former's dividend rights as a class. The
Company has received separate opinions of counsel (the "Opinions") from the law
firms of Caplin & Drysdale, Chartered and Rogers & Wells which, collectively,
conclude, that the multiple-class share structure of the Funds would not cause
dividends declared and paid by a Fund to be treated as "preferential" dividends
for this purpose. The Opinions are not binding on the Internal Revenue Service
(the "IRS") and no ruling has been obtained by the Company from the IRS on the
matter. The Company does not believe that a multiple-class structure having all
of the features of the multiple-class structure of each of the Funds has been
considered by the IRS in other rulings. Furthermore, the Opinions are based on
the application of current federal income tax law and relevant authorities, and
subsequent changes in federal tax law or judicial or administrative decisions or
pronouncements may supersede or affect the conclusions in the Opinions. If
dividends declared and paid by a Fund on any class of shares were to be treated
as "preferential," dividends paid by the Fund to shareholders on all classes of
shares during the taxable year would become non-deductible. In this event, the
Fund would not be treated as a regulated investment company and the Fund would
be taxed on its net income, without any deductions for dividends paid to its
shareholders. The resulting federal and state income tax liability, and any
related interest and penalties, would be payable from and to the extent of such
Fund's then available assets and ultimately would be borne by all current
shareholders. The treatment of dividends declared and paid during the taxable
year on any class of shares as preferential, and the resulting failure of a Fund
to be treated as a regulated investment company, could have additional personal
income tax consequences for shareholders of the Fund, including the taxation of
distributions as ordinary income that otherwise would have been classified as
net capital gains.
Upward adjustments in the principal value of inflation-indexed bonds will
be includable currently in a Fund's gross income notwithstanding the absence of
a corresponding cash payment. The Fund's need to distribute such income may
compel liquidation of investments under disadvantageous circumstances.
Distributions by each Fund of its net investment income and the excess,
if any, of its net short-term capital gain over its net long-term capital loss
are taxable to shareholders as ordinary income. These distributions are treated
as dividends for federal income tax purposes, but will qualify for the 70%
dividends-received deduction for corporate shareholders only to the extent
designated in a notice from the Fund to its shareholders as being attributable
to dividends received by the Fund. Distributions by a Fund of the excess, if
any, of its net long-term capital gain over its net short-term capital loss will
be designated as capital gain dividends that are taxable to shareholders as
long-term capital gains, regardless of the length of time shares are held by the
shareholder.
Portions of certain Funds' investment income may be subject to foreign
income taxes withheld at source. The Company may, but is not required to, elect
to "pass-through" to the shareholders of any such Funds these foreign taxes, in
which event each shareholder will be required to include his pro rata portion
thereof in his gross income, but will be able to deduct or (subject to various
limitations) claim a foreign tax credit for such amount.
Distributions to shareholders will be treated in the same manner for
federal income tax purposes whether received in cash or reinvested in additional
shares of the Funds. In general, distributions by the Funds are taken into
account by the shareholders in the year in which they are made. However, certain
distributions made during January will be treated as having been paid by the
Fund and received by the shareholders on December 31 of the preceding year. A
statement setting forth the federal income tax status of all distributions made
or deemed made during the year, including any amount of foreign taxes "passed
through," will be sent to shareholders promptly after the end of each year.
Notwithstanding the foregoing, distributions by the Funds to certain qualified
retirement plans may be exempt from federal income tax.
"Buying a Dividend." When a Fund pays a dividend, its share price is
reduced by the amount of the distribution. If you buy shares on or just before
the ex-dividend date (the date used for determining the record owners who will
receive the dividend), or just before a Fund declares a capital gains
distribution, you will pay the full price for the shares and then receive a
portion of the price back as a taxable dividend or capital gain.
Taxes on Transactions. Share redemptions, including redemptions for
exchanges, are subject to capital gains tax. A capital gain or loss is the
difference between the price you paid for the shares and the price you received
when you sold them.
Returns of Capital. In certain cases distributions made by the Fund may
be considered a non-taxable return of capital to shareholders. If that occurs,
it will be identified in notices to shareholders. A non-taxable return of
capital may reduce your tax basis in your Fund shares.
The above federal income tax information is based on tax laws and
regulations in effect as of the date of this Prospectus, and is subject to
change by legislative or administrative action. As the foregoing discussion is
for general information only, you should also review the more detailed
discussion of federal income tax considerations relevant to the Funds contained
in the Company's SAI under "Additional Tax Considerations." In addition, you
should consult with your own tax adviser as to the effect of an investment in
the Fund on your particular tax situation, including the application of state
and local taxes which may differ from the federal income tax consequences
described above.
OTHER INFORMATION
INVESTOR INFORMATION SERVICES:
The Company provides 24-hour information services via a toll-free
number on Fund yields and prices, dividends, account balances, and your latest
transaction as well as the ability to request prospectuses, account and tax
forms, and duplicate statements. In addition, telephone representatives are
available during normal business hours to provide the information and services
you need. Shareholder inquiries should be made by calling 1-800-SKANDIA or, if
in writing, to "American Skandia Advisor Funds, Inc." at P.O. Box 8012, Boston,
Massachusetts 02266-8012.
Statements and reports sent to you include the following: confirmation
statements (after every transaction, except reinvestments, automatic investments
and systematic withdrawals, that affect your account balance or your account
registration), quarterly consolidated account statements, and financial reports
(every six months). Call the above number if you need additional copies of
financial reports or historical account information. There may be a small charge
for historical account information for prior years.
DISTRIBUTOR:
Shares of the Company are distributed through American Skandia
Marketing, Incorporated, the principal underwriter and distributor for the
Company (the "Distributor," as previously defined). The Distributor, located at
One Corporate Drive, Shelton, Connecticut 06484, is registered as a
broker-dealer with the Commission and the National Association of Securities
Dealers, Inc. It is an "affiliated person" (within the meaning of the 1940 Act)
of the Investment Manager, the Company, the Trust, American Skandia Trust,
American Skandia Life Assurance Corporation and American Skandia Information
Services and Technology Corporation, being a wholly-owned subsidiary of American
Skandia Investment Holding Corporation. The Distributor may offer shares of the
Funds directly to potential purchasers.
TRANSFER AGENT:
Boston Financial Data Services, Inc. (the "Transfer Agent," as
previously defined), located at Two Heritage Drive, Quincy, Massachusetts 02171,
serves as the transfer agent and dividend paying agent for the Company.
DOMESTIC AND FOREIGN CUSTODIANS:
PNC Bank, located at Airport Business Center, International Court 2,
200 Stevens Drive, Philadelphia, Pennsylvania 19113, serves as custodian for all
domestic cash and securities holdings of the Funds and Portfolios investing
primarily in domestic securities. Morgan Stanley Trust Company, located at One
Pierrepont Plaza, Brooklyn, New York 11201, serves as custodian for all cash and
securities holdings of the ASAF Founders International Small Capitalization Fund
and the ASAF T. Rowe Price International Equity Fund (and corresponding
Portfolio), and co-custodian for all foreign securities holdings of the Funds
and Portfolios which invest primarily in domestic securities.
LEGAL COUNSEL AND INDEPENDENT ACCOUNTANTS:
Werner & Kennedy, located at 1633 Broadway, New York, New York 10019,
serves as counsel to the Company. Caplin & Drysdale, located at One Thomas
Circle, N.W., Washington, D.C. 20005, and Rogers & Wells, located at 200 Park
Avenue, New York, New York 10166, serve as special counsel to the Company on
certain tax matters. Coopers & Lybrand L.L.P., located at 2400 Eleven Penn
Center, Philadelphia, Pennsylvania 19103, has been selected as the independent
accountants of the Company.
REGISTRATION STATEMENT:
This Prospectus omits certain information contained in the Registration
Statement filed with the Commission. Copies of the Registration Statement,
including those items omitted herefrom, may be obtained from the Commission by
paying the charges prescribed under its rules and regulations.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND INFORMATION
OR REPRESENTATIONS NOT HEREIN CONTAINED, IF GIVEN OR MADE, MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE TRUST. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
July , 1997
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AMERICAN SKANDIA ADVISOR FUNDS, INC.
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Table of Contents Page
General Information and History
Investment Programs of the Funds
ASAF Founders International Small Capitalization Fund
ASAF T. Rowe Price International Equity Fund
ASAF Founders Small Capitalization Fund
ASAF T. Rowe Price Small Company Value Fund
ASAF Janus Capital Growth Fund
ASAF INVESCO Equity Income Fund
ASAF American Century Strategic Balanced Fund
ASAF Federated High Yield Bond Fund
ASAF Total Return Bond Fund
ASAF JPM Money Market Fund
Fundamental Investment Restrictions
Certain Risk Factors and Investment Methods
Additional Performance Information
Management of the Company
Investment Advisory & Administration Services
Fund Expenses
Distribution Arrangements
Determination of Net Asset Value
Additional Information on the Purchase and Redemption of Shares
Portfolio Transactions
Additional Tax Considerations
Capital Stock of the Company & Principal Holders of Securities
Other Information
Financial Statements
Appendix
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This Statement of Additional Information ("SAI") is not a prospectus and
should be read in conjunction with the Company's current Prospectus, dated July
, 1997. A copy of the Company's Prospectus may be obtained by writing to
"American Skandia Advisor Funds, Inc." at P.O. Box 8012, Boston, Massachusetts
02266-8012 or by calling 1-800-SKANDIA.
<PAGE>
GENERAL INFORMATION
American Skandia Advisor Funds, Inc. (the "Company") is an open-end
management investment company comprised of ten diversified investment portfolios
(each a "Fund" and together the "Funds"). The Company was established as a
Maryland corporation on March 5, 1997, and has no business history prior to the
date of this SAI. Five of the Funds -- ASAF T. Rowe Price International Equity
Fund, ASAF Janus Capital Growth Fund, ASAF INVESCO Equity Income Fund, ASAF
Total Return Bond Fund and ASAF JPM Money Market Fund (each a "Feeder Fund" and
together the "Feeder Funds") -- invest all of their investable assets in a
corresponding portfolio (each a "Portfolio" and together the "Portfolios") of
American Skandia Master Trust (the "Trust"), an open-end management investment
company comprised of five diversified investment portfolios. Each Portfolio of
the Trust invests in securities in accordance with an investment objective,
investment policies and limitations identical to those of its corresponding
Feeder Fund. This "master/feeder" fund structure differs from that of the other
Funds of the Company and many other investment companies which directly invest
and manage their own portfolio of securities. Those Funds of the Company which
currently are not organized under a "master/feeder" fund structure (the
"Non-Feeder Funds") retain the right to invest their assets in a corresponding
Portfolio of the Trust in the future. For additional information regarding the
"master/feeder" fund structure, see the Company's Prospectus under "Special
Information on the 'Master Feeder' Fund Structure."
American Skandia Investment Services, Incorporated ("ASISI" or the
"Investment Manager") acts as the investment manager for both the Non-Feeder
Funds and the Portfolios. Currently, ASISI engages the following sub-advisors
("Sub-advisor(s)") for the investment management of each Non-Feeder Fund and
Portfolio: (a) ASAF Founders International Small Capitalization Fund: Founders
Asset Management, Inc.; (b) ASMT T. Rowe Price International Equity Portfolio:
Rowe Price-Fleming International, Inc.; (c) ASAF Founders Small Capitalization
Fund: Founders Asset Management, Inc.; (d) ASAF T. Rowe Price Small Company
Value Fund: T. Rowe Price Associates, Inc.; (e) ASMT Janus Capital Growth
Portfolio: Janus Capital Corporation; (f) ASMT INVESCO Equity Income Portfolio:
INVESCO Trust Company; (g) ASAF American Century Strategic Balanced Fund:
American Century Investment Management, Inc.; (h) ASAF Federated High Yield Bond
Fund: Federated Investment Counseling; (i) ASMT PIMCO Total Return Bond
Portfolio: Pacific Investment Management Company; and (j) ASMT JPM Money Market
Portfolio: J.P. Morgan Investment Management, Inc.
INVESTMENT PROGRAMS OF THE FUNDS
The following information supplements, and should be read in
conjunction with, the discussion in the Prospectus of the investment objective
and policies of each Fund and Portfolio. The investment objective and, unless
otherwise specified, the investment policies and limitations of each Fund and
Portfolio are not "fundamental" policies and may be changed by the Directors of
the Company or the Trustees of the Trust, where applicable, without shareholder
approval. Those investment policies specifically labeled as "fundamental" may
not be changed without shareholder approval. Fundamental investment policies of
a Fund or Portfolio may be changed only with the approval of at least the lesser
of (1) 67% or more of the total units of beneficial interest ("shares") of the
Fund or Portfolio represented at a meeting at which more than 50% of the
outstanding shares of the Fund or Portfolio are represented, or (2) a majority
of the outstanding shares of the Fund or Portfolio.
Notwithstanding any other investment policy of a Fund, each Fund may
invest all of its investable assets (cash, securities, and receivables relating
to securities) in an open-end management investment company having substantially
the same investment objective, policies and limitations as the Fund. Those Funds
which currently invest all of their investable assets in such a manner, the
Feeder Funds, seek to meet their respective investment objectives by investing
all of their investable assets in a corresponding Portfolio of the Trust, which
in turn invests directly in a portfolio of securities in accordance with the
investment objective, policies and limitations of its Feeder Fund. The
investment objective, policies and limitations of each Feeder Fund are otherwise
identical to those of its corresponding Portfolio. As such, the following
discussion of the Feeder Funds, including references to the Directors of the
Company, apply equally to the Funds' corresponding Portfolios and the Trustees
of the Trust, respectively.
ASAF FOUNDERS INTERNATIONAL SMALL CAPITALIZATION FUND:
Investment Objective: The investment objective of the Fund is to seek
capital growth.
Investment Policies:
Options On Stock Indices and Stocks. An option is a right to buy or
sell a security at a specified price within a limited period of time. The Fund
may write ("sell") covered call options on any or all of its portfolio
securities. In addition, the Fund may purchase options on securities. The Fund
may also purchase put and call options on stock indices.
The Fund may write ("sell") options on any or all of its portfolio
securities and at such time and from time to time as the Sub-advisor shall
determine to be appropriate. No specified percentage of the Fund's assets is
invested in securities with respect to which options may be written. The extent
of the Fund's option writing activities will vary from time to time depending
upon the Sub-advisor's evaluation of market, economic and monetary conditions.
When the Fund purchases a security with respect to which it intends to
write an option, it is likely that the option will be written concurrently with
or shortly after purchase. The Fund will write an option on a particular
security only if the Sub-advisor believes that a liquid secondary market will
exist on an exchange for options of the same series, which will permit the Fund
to enter into a closing purchase transaction and close out its position. If the
Fund desires to sell a particular security on which it has written an option, it
will effect a closing purchase transaction prior to or concurrently with the
sale of the security.
The Fund may enter into closing purchase transactions to reduce the
percentage of its assets against which options are written, to realize a profit
on a previously written option, or to enable it to write another option on the
underlying security with either a different exercise price or expiration time or
both.
Options written by the Fund will normally have expiration dates between
three and nine months from the date written. The exercise prices of options may
be below, equal to or above the current market values of the underlying
securities at the times the options are written. From time to time for tax and
other reasons, the Fund may purchase an underlying security for delivery in
accordance with an exercise notice assigned to it, rather than delivering such
security from its portfolio.
A stock index measures the movement of a certain group of stocks by
assigning relative values to the stocks included in the index. The Fund
purchases put options on stock indices to protect the portfolio against decline
in value. The Fund purchases call options on stock indices to establish a
position in equities as a temporary substitute for purchasing individual stocks
that then may be acquired over the option period in a manner designed to
minimize adverse price movements. Purchasing put and call options on stock
indices also permits greater time for evaluation of investment alternatives.
When the Sub-advisor believes that the trend of stock prices may be downward,
particularly for a short period of time, the purchase of put options on stock
indices may eliminate the need to sell less liquid stocks and possibly
repurchase them later. The purpose of these transactions is not to generate
gain, but to "hedge" against possible loss. Therefore, successful hedging
activity will not produce net gain to the Fund. Any gain in the price of a call
option is likely to be offset by higher prices the Fund must pay in rising
markets, as cash reserves are invested. In declining markets, any increase in
the price of a put option is likely to be offset by lower prices of stocks owned
by the Fund.
The Fund may purchase only those put and call options that are listed
on a domestic exchange or quoted on the automatic quotation system of the
National Association of Securities Dealers, Inc. ("NASDAQ"). Options traded on
stock exchanges are either broadly based, such as the Standard & Poor's 500
Stock Index and 100 Stock Index, or involve stocks in a designated industry or
group of industries. The Fund may utilize either broadly based or market segment
indices in seeking a better correlation between the indices and the Fund.
Transactions in options are subject to limitations, established by each
of the exchanges upon which options are traded, governing the maximum number of
options which may be written or held by a single investor or group of investors
acting in concert, regardless of whether the options are held in one or more
accounts. Thus, the number of options the Fund may hold may be affected by
options held by other advisory clients of the Sub-advisor. As of the date of
this SAI, the Sub-advisor believes that these limitations will not affect the
purchase of stock index options by the Fund.
One risk of holding a put or a call option is that if the option is not
sold or exercised prior to its expiration, it becomes worthless. However, this
risk is limited to the premium paid by the Fund. Other risks of purchasing
options include the possibility that a liquid secondary market may not exist at
a time when the Fund may wish to close out an option position. It is also
possible that trading in options on stock indices might be halted at a time when
the securities markets generally were to remain open. In cases where the market
value of an issue supporting a covered call option exceeds the strike price plus
the premium on the call, the Fund will lose the right to appreciation of the
stock for the duration of the option. For an additional discussion of options on
stock indices and stocks and certain risks involved therein, see this SAI and
the Company's Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts. The Fund may enter into futures contracts (or
options thereon) for hedging purposes. U.S. futures contracts are traded on
exchanges which have been designated "contract markets" by the Commodity Futures
Trading Commission and must be executed through a futures commission merchant
(an "FCM") or brokerage firm which is a member of the relevant contract market.
Although futures contracts by their terms call for the delivery or acquisition
of the underlying commodities or a cash payment based on the value of the
underlying commodities, in most cases the contractual obligation is offset
before the delivery date of the contract by buying, in the case of a contractual
obligation to sell, or selling, in the case of a contractual obligation to buy,
an identical futures contract on a commodities exchange.
Such a transaction cancels the obligation to make or take delivery of the
commodities.
The acquisition or sale of a futures contract could occur, for example,
if the Fund held or considered purchasing equity securities and sought to
protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, the Fund could
sell equity index futures contracts, thereby hoping to offset a potential
decline in the value of equity securities in the portfolio by a corresponding
increase in the value of the futures contract position held by the Fund and
thereby prevent the Fund's net asset value from declining as much as it
otherwise would have. The Fund also could protect against potential price
declines by selling portfolio securities and investing in money market
instruments. However, since the futures market is more liquid than the cash
market, the use of futures contracts as an investment technique would allow the
Fund to maintain a defensive position without having to sell portfolio
securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts could be bought to attempt to hedge against the possibility of
having to buy equity securities at higher prices. This technique is sometimes
known as an anticipatory hedge. Since the fluctuations in the value of futures
contracts should be similar to those of equity securities, the Fund could take
advantage of the potential rise in the value of equity securities without buying
them until the market had stabilized. At that time, the futures contracts could
be liquidated and the Fund could buy equity securities on the cash market.
The Fund may also enter into interest rate and foreign currency futures
contracts. Interest rate futures contracts currently are traded on a variety of
fixed-income securities, including long-term U.S. Treasury Bonds, Treasury
Notes, Government National Mortgage Association modified pass-through
mortgage-backed securities, U.S. Treasury Bills, bank certificates of deposit
and commercial paper. Foreign currency futures contracts currently are traded on
the British pound, Canadian dollar, Japanese yen, Swiss franc, West German mark
and on Eurodollar deposits.
The Fund will not, as to any positions, whether long, short or a
combination thereof, enter into futures and options thereon for which the
aggregate initial margins and premiums exceed 5% of the fair market value of its
total assets after taking into account unrealized profits and losses on options
entered into. In the case of an option that is "in-the-money," the in-the-money
amount may be excluded in computing such 5%. In general a call option on a
future is "in-the-money" if the value of the future exceeds the exercise
("strike") price of the call; a put option on a future is "in-the-money" if the
value of the future which is the subject of the put is exceeded by the strike
price of the put. The Fund may use futures and options thereon solely for bona
fide hedging or for other non-speculative purposes. As to long positions which
are used as part of the Fund's strategies and are incidental to its activities
in the underlying cash market, the "underlying commodity value" of the Fund's
futures and options thereon must not exceed the sum of (i) cash set aside in an
identifiable manner, or short-term U.S. debt obligations or other
dollar-denominated high-quality, short-term money instruments so set aside, plus
sums deposited on margin; (ii) cash proceeds from existing investments due in 30
days; and (iii) accrued profits held at the futures commission merchant. The
"underlying commodity value" of a future is computed by multiplying the size of
the future by the daily settlement price of the future. For an option on a
future, that value is the underlying commodity value of the future underlying
the option.
Unlike the situation in which the Fund purchases or sells a security,
no price is paid or received by the Fund upon the purchase or sale of a futures
contract. Instead, the Fund is required to deposit in a segregated asset account
an amount of cash or qualifying securities (currently U.S. Treasury bills),
currently in a minimum amount of $15,000. This is called "initial margin." Such
initial margin is in the nature of a performance bond or good faith deposit on
the contract. However, since losses on open contracts are required to be
reflected in cash in the form of variation margin payments, the Fund may be
required to make additional payments during the term of a contract to its
broker. Such payments would be required, for example, where, during the term of
an interest rate futures contract purchased by the Fund, there was a general
increase in interest rates, thereby making the Fund's securities less valuable.
In all instances involving the purchase of financial futures contracts by the
Fund, an amount of cash together with such other securities as permitted by
applicable regulatory authorities to be utilized for such purpose, at least
equal to the market value of the future contracts, will be deposited in a
segregated account with the Fund's custodian to collateralize the position. At
any time prior to the expiration of a futures contract, the Fund may elect to
close its position by taking an opposite position which will operate to
terminate the Fund's position in the futures contract.
Because futures contracts are generally settled within a day from the
date they are closed out, compared with a settlement period of three business
days for most types of securities, the futures markets can provide superior
liquidity to the securities markets. Nevertheless, there is no assurance a
liquid secondary market will exist for any particular futures contract at any
particular time. In addition, futures exchanges may establish daily price
fluctuation limits for futures contracts and may halt trading if a contract's
price moves upward or downward more than the limit in a given day. On volatile
trading days when the price fluctuation limit is reached, it would be impossible
for the Fund to enter into new positions or close out existing positions. If the
secondary market for a futures contract were not liquid because of price
fluctuation limits or otherwise, the Fund would not promptly be able to
liquidate unfavorable futures positions and potentially could be required to
continue to hold a futures position until the delivery date, regardless of
changes in its value. As a result, the Fund's access to other assets held to
cover its futures positions also could be impaired. For an additional discussion
of futures contracts and certain risks involved therein, see this SAI and the
Company's Prospectus under "Certain Risk Factors and Investment Methods."
Options on Futures Contracts. The Fund may purchase put and call
options on futures contracts. An option on a futures contract provides the
holder with the right to enter into a "long" position in the underlying futures
contract, in the case of a call option, or a "short" position in the underlying
futures contract, in the case of a put option, at a fixed exercise price to a
stated expiration date. Upon exercise of the option by the holder, a contract
market clearing house establishes a corresponding short position for the writer
of the option, in the case of a call option, or a corresponding long position,
in the case of a put option. In the event that an option is exercised, the
parties will be subject to all the risks associated with the trading of futures
contracts, such as payment of variation margin deposits.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
An option, whether based on a futures contract, a stock index or a
security, becomes worthless to the holder when it expires. Upon exercise of an
option, the exchange or contract market clearing house assigns exercise notices
on a random basis to those of its members which have written options of the same
series and with the same expiration date. A brokerage firm receiving such
notices then assigns them on a random basis to those of its customers which have
written options of the same series and expiration date. A writer therefore has
no control over whether an option will be exercised against it, nor over the
time of such exercise.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. See
"Options on Foreign Currencies" below. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying instrument, ownership of the option may or may not
be less risky than ownership of the futures contract or the underlying
instrument. As with the purchase of futures contracts, when the Fund is not
fully invested it could buy a call option on a futures contract to hedge against
a market advance. The purchase of a put option on a futures contract is similar
in some respects to the purchase of protective put options on portfolio
securities. For example, the Fund would be able to buy a put option on a futures
contract to hedge the Fund against the risk of falling prices. For an additional
discussion of options on futures contracts and certain risks involved therein,
see this SAI and the Company's Prospectus under "Certain Risks Factors and
Investment Methods."
Options on Foreign Currencies. The Fund may buy and sell options on
foreign currencies for hedging purposes in a manner similar to that in which
futures on foreign currencies would be utilized. For example, a decline in the
U.S. dollar value of a foreign currency in which portfolio securities are
denominated would reduce the U.S. dollar value of such securities, even if their
value in the foreign currency remained constant. In order to protect against
such diminutions in the value of portfolio securities, the Fund could buy put
options on the foreign currency. If the value of the currency declines, the Fund
would have the right to sell such currency for a fixed amount in U.S. dollars
and would thereby offset, in whole or in part, the adverse effect on the Fund
which otherwise would have resulted. Conversely, when a rise is projected in the
U.S. dollar value of a currency in which securities to be acquired are
denominated, thereby increasing the cost of such securities, the Fund could buy
call options thereon. The purchase of such options could offset, at least
partially, the effects of the adverse movements in exchange rates.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the Securities and Exchange Commission, as are
other securities traded on such exchanges. As a result, many of the protections
provided to traders on organized exchanges will be available with respect to
such transactions. In particular, all foreign currency option positions entered
into on a national securities exchange are cleared and guaranteed by the Options
Clearing Corporation ("OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting the Fund to liquidate open positions at a profit prior to
exercise or expiration, or to limit losses in the event of adverse market
movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities, and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices, or prohibitions on exercise.
Risk Factors of Investing in Futures and Options. The successful use of
the investment practices described above with respect to futures contracts,
options on futures contracts, and options on securities indices, securities, and
foreign currencies draws upon skills and experience which are different from
those needed to select the other instruments in which the Fund invests. Should
interest or exchange rates or the prices of securities or financial indices move
in an unexpected manner, the Fund may not achieve the desired benefits of
futures and options or may realize losses and thus be in a worse position than
if such strategies had not been used. Unlike many exchange-traded futures
contracts and options on futures contracts, there are no daily price fluctuation
limits with respect to options on currencies and negotiated or over-the-counter
instruments, and adverse market movements could therefore continue to an
unlimited extent over a period of time. In addition, the correlation between
movements in the price of the securities and currencies hedged or used for cover
will not be perfect and could produce unanticipated losses.
The Fund's ability to dispose of its positions in the foregoing
instruments will depend on the availability of liquid markets in the
instruments. Markets in a number of the instruments are relatively new and still
developing and it is impossible to predict the amount of trading interest that
may exist in those instruments in the future. Particular risks exist with
respect to the use of each of the foregoing instruments and could result in such
adverse consequences to the Fund as the possible loss of the entire premium paid
for an option bought by the Fund and the possible need to defer closing out
positions in certain instruments to avoid adverse tax consequences. As a result,
no assurance can be given that the Fund will be able to use those instruments
effectively for the purposes set forth above.
In addition, options on U.S. Government securities, futures contracts,
options on futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges and over-the-counter in foreign
countries. Such transactions are subject to the risk of governmental actions
affecting trading in or the prices of foreign currencies or securities. The
value of such positions also could be affected adversely by (i) other complex
foreign political and economic factors, (ii) lesser availability than in the
United States of data on which to make trading decisions, (iii) delays in the
Fund's ability to act upon economic events occurring in foreign markets during
nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) low trading volume. For an additional discussion of
certain risks involved in investing in futures and options, see this SAI and the
Company's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Securities. Investments in foreign countries involve certain risks
which are not typically associated with U.S. investments. For a discussion of
certain risks involved in foreign investing, see this SAI and the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
Forward Contracts for Purchase or Sale of Foreign Currencies. The Fund
generally conducts its foreign currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange currency market.
When the Fund purchases or sells a security denominated in a foreign currency,
it may enter into a forward foreign currency contract ("forward contract") for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transaction. A forward contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. In this manner, the
Fund may obtain protection against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the foreign currency
during the period between the date the security is purchased or sold and the
date upon which payment is made or received. Although such contracts tend to
minimize the risk of loss due to the decline in the value of the hedged
currency, at the same time they tend to limit any potential gain which might
result should the value of such currency increase. The Fund will not speculate
in forward contracts.
Forward contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
Generally a forward contract has no deposit requirement, and no commissions are
charged at any stage for trades. Although foreign exchange dealers do not charge
a fee for conversion, they do realize a profit based on the difference between
the prices at which they buy and sell various currencies. When the Sub-advisor
believes that the currency of a particular foreign country may suffer a
substantial decline against the U.S. dollar (or sometimes against another
currency), the Fund may enter into a forward contract to sell, for a fixed
dollar or other currency amount, foreign currency approximating the value of
some or all of the Fund's securities denominated in that currency. The Fund will
not enter into such forward contracts or maintain a net exposure to such
contracts where the fulfillment of the contracts would require the Fund to
deliver an amount of foreign currency in excess of the value of its portfolio
securities or other assets denominated in that currency. Forward contracts may,
from time to time, be considered illiquid, in which case they would be subject
to the Fund's limitation on investing in illiquid securities.
At the consummation of a forward contract for delivery by the Fund of a
foreign currency, the Fund may either make delivery of the foreign currency or
terminate its contractual obligation to deliver the foreign currency by
purchasing an offsetting contract obligating it to purchase, at the same
maturity date, the same amount of the foreign currency. If the Fund chooses to
make delivery of the foreign currency, it may be required to obtain such
currency through the sale of portfolio securities denominated in such currency
or through conversion of other Fund assets into such currency.
Dealings in forward contracts by the Fund will be limited to the
transactions described above. Of course, the Fund is not required to enter into
such transactions with regard to its foreign currency-denominated securities and
will not do so unless deemed appropriate by the Sub-advisor. It also should be
realized that this method of protecting the value of the Fund's securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange which can be achieved at some future point in time. Additionally,
although such contracts tend to minimize the risk of loss due to the decline in
the value of the hedged currency, at the same time they tend to limit any
potential gain which might result should the value of such currency increase.
For an additional discussion of forward foreign currency contracts and certain
risks involved therein, see this SAI and the Company's Prospectus under "Certain
Risk Factors and Investment Methods."
Illiquid Securities. As discussed in the Company's Prospectus, the Fund
may invest up to 15% of the value of its net assets, measured at the time of
investment, in investments which are not readily marketable. Restricted
securities are securities that may not be resold to the public without
registration under the Securities Act of 1933 (the "1933 Act"). Restricted
securities (other than Rule 144A securities deemed to be liquid, discussed
below) and securities which, due to their market or the nature of the security,
have no readily available markets for their disposition are considered to be not
readily marketable or "illiquid." These limitations on resale and marketability
may have the effect of preventing the Fund from disposing of such a security at
the time desired or at a reasonable price. In addition, in order to resell a
restricted security, the Fund might have to bear the expense and incur the
delays associated with effecting registration. In purchasing illiquid
securities, the Fund does not intend to engage in underwriting activities,
except to the extent the Fund may be deemed to be a statutory underwriter under
the Securities Act in purchasing or selling such securities. Illiquid securities
will be purchased for investment purposes only and not for the purpose of
exercising control or management of other companies. For an additional
discussion of illiquid or restricted securities and certain risks involved
therein, see the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
The Directors of the Company have promulgated guidelines with respect
to illiquid securities.
Rule 144A Securities. In recent years, a large institutional market has
developed for certain securities that are not registered under the 1933 Act.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend on an efficient institutional
market in which such unregistered securities can readily be resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that there
are contractual or legal restrictions on resale to the general public or certain
institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. The Fund may invest in Rule 144A securities
which, as disclosed in the Company's Prospectus, are restricted securities which
may or may not be readily marketable. Rule 144A securities are readily
marketable if institutional markets for the securities develop pursuant to Rule
144A which provide both readily ascertainable values for the securities and the
ability to liquidate the securities when liquidation is deemed necessary or
advisable. However, an insufficient number of qualified institutional buyers
interested in purchasing a Rule 144A security held by the Fund could affect
adversely the marketability of the security. In such an instance, the Fund might
be unable to dispose of the security promptly or at reasonable prices.
The Sub-advisor will determine that a liquid market exists for
securities eligible for resale pursuant to Rule 144A under the 1933 Act, or any
successor to such rule, and that such securities are not subject to the Fund's
limitations on investing in securities that are not readily marketable. The
Sub-advisor will consider the following factors, among others, in making this
determination: (1) the unregistered nature of a Rule 144A security; (2) the
frequency of trades and quotes for the security; (3) the number of dealers
willing to purchase or sell the security and the number of additional potential
purchasers; (4) dealer undertakings to make a market in the security; and (5)
the nature of the security and the nature of market place trades (e.g., the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of transfers).
Lower-Rated or Unrated Fixed-Income Securities. The Fund may invest up
to 5% of its total assets in fixed-income securities which are unrated or are
rated below investment grade either at the time of purchase or as a result of
reduction in rating after purchase. (This limitation does not apply to
convertible securities and preferred stocks.) Investments in lower-rated or
unrated securities are generally considered to be of high risk. These debt
securities, commonly referred to as junk bonds, are generally subject to two
kinds of risk, credit risk and market risk. Credit risk relates to the ability
of the issuer to meet interest or principal payments, or both, as they come due.
The ratings given a security by Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's ("S&P") provide a generally useful guide as to such credit
risk. For a description of securities ratings, see the Appendix to this SAI. The
lower the rating given a security by a rating service, the greater the credit
risk such rating service perceives to exist with respect to the security.
Increasing the amount of the Fund's assets invested in unrated or lower grade
securities, while intended to increase the yield produced by those assets, will
also increase the risk to which those assets are subject.
Market risk relates to the fact that the market values of debt
securities in which the Fund invests generally will be affected by changes in
the level of interest rates. An increase in interest rates will tend to reduce
the market values of such securities, whereas a decline in interest rates will
tend to increase their values. Medium and lower-rated securities (Baa or BBB and
lower) and non-rated securities of comparable quality tend to be subject to
wider fluctuations in yields and market values than higher rated securities and
may have speculative characteristics. In order to decrease the risk in investing
in debt securities, in no event will the Fund ever invest in a debt security
rated below B by Moody's or by S&P. Of course, relying in part on ratings
assigned by credit agencies in making investments will not protect the Fund from
the risk that the securities in which they invest will decline in value, since
credit ratings represent evaluations of the safety of principal, dividend, and
interest payments on debt securities, and not the market values of such
securities, and such ratings may not be changed on a timely basis to reflect
subsequent events.
Because investment in medium and lower-rated securities involves
greater credit risk, achievement of the Fund's investment objective may be more
dependent on the Sub-advisor's own credit analysis than is the case for funds
that do not invest in such securities. In addition, the share price and yield of
the Fund may fluctuate more than in the case of funds investing in higher
quality, shorter term securities. Moreover, a significant economic downturn or
major increase in interest rates may result in issuers of lower-rated securities
experiencing increased financial stress, which would adversely affect their
ability to service their principal, dividend, and interest obligations, meet
projected business goals, and obtain additional financing. In this regard, it
should be noted that while the market for high yield debt securities has been in
existence for many years and from time to time has experienced economic
downturns in recent years, this market has involved a significant increase in
the use of high yield debt securities to fund highly leveraged corporate
acquisitions and restructurings. Past experience may not, therefore, provide an
accurate indication of future performance of the high yield debt securities
market, particularly during periods of economic recession. Furthermore, expenses
incurred in recovering an investment in a defaulted security may adversely
affect the Fund's net asset value. Finally, while the Sub-advisor attempts to
limit purchases of medium and lower-rated securities to securities having an
established secondary market, the secondary market for such securities may be
less liquid than the market for higher quality securities. The reduced liquidity
of the secondary market for such securities may adversely affect the market
price of, and ability of the Fund to value, particular securities at certain
times, thereby making it difficult to make specific valuation determinations.
The Fund does not invest in any medium and lower-rated securities which present
special tax consequences, such as zero-coupon bonds or pay-in-kind bonds. For an
additional discussion of certain risks involved in lower-rated securities, see
this SAI and the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
The Sub-advisor seeks to reduce the overall risks associated with the
Fund's investments through diversification and consideration of factors
affecting the value of securities it considers relevant. No assurance can be
given, however, regarding the degree of success that will be achieved in this
regard or that the Fund will achieve its investment objective.
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements with
respect to money market instruments eligible for investment by the Fund with
member banks of the Federal Reserve system, registered broker-dealers, and
registered government securities dealers. A repurchase agreement may be
considered a loan collateralized by securities. Repurchase agreements maturing
in more than seven days are considered illiquid and will be subject to the
Fund's limitation with respect to illiquid securities.
The Fund has not adopted any limits on the amounts of its total assets
that may be invested in repurchase agreements which mature in less than seven
days. The Fund may invest up to 15% of the market value of its net assets,
measured at the time of purchase, in securities which are not readily
marketable, including repurchase agreements maturing in more than seven days.
For an additional discussion of repurchase agreements and certain risks involved
therein, see the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
Convertible Securities. The Fund may buy securities convertible into
common stock if, for example, the Sub-advisor believes that a company's
convertible securities are undervalued in the market. Convertible securities
eligible for purchase include convertible bonds, convertible preferred stocks,
and warrants. A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specific amount of the corporation's capital
stock at a set price for a specified period of time. Warrants do not represent
ownership of the securities, but only the right to buy the securities. The
prices of warrants do not necessarily move parallel to the prices of underlying
securities. Warrants may be considered speculative in that they have no voting
rights, pay no dividends, and have no rights with respect to the assets of a
corporation issuing them. Warrant positions will not be used to increase the
leverage of the Fund; consequently, warrant positions are generally accompanied
by cash positions equivalent to the required exercise amount.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1. Invest more than 15% of the market value of its net assets in securities
which are not readily marketable, including repurchase agreements maturing in
over seven days;
2. Purchase securities of other investment companies except in compliance
with the Investment Company Act of 1940;
3. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions (and, provided
that margin payments and other deposits in connection with transactions in
options, futures and forward contracts shall not be deemed to constitute
purchasing securities on margin); or
4. Sell securities short.
In addition, in periods of uncertain market and economic conditions, as
determined by the Sub-advisor, the Fund may depart from its basic investment
objective and assume a defensive position with up to 100% of its assets
temporarily invested in high quality corporate bonds or notes and government
issues, or held in cash.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage beyond the specified limit that results
from a change in values or net assets will not be considered a violation.
ASAF T. ROWE PRICE INTERNATIONAL EQUITY FUND:
Investment Objective: The investment objective of the Fund is to seek a total
return on its assets from long-term growth of capital and income principally
through investments in common stocks of established, non-U.S. companies.
Investments may be made solely for capital appreciation or solely for income or
any combination of both for the purpose of achieving a higher overall return.
Investment Policies:
The Sub-advisor regularly analyzes a broad range of international
equity and fixed-income markets in order to assess the degree of risk and level
of return that can be expected from each market. Based upon its current
assessment, the Sub-advisor believes long-term growth of capital may be achieved
by investing in marketable securities of non-U.S. companies which have the
potential for growth of capital. Of course, there can be no assurance that the
Sub-advisor's forecasts of expected return will be reflected in the actual
returns achieved by the Fund.
The Fund's share price will fluctuate with market, economic and foreign
exchange conditions, and your investment may be worth more or less when redeemed
than when purchased. The Fund should not be relied upon as a complete investment
program, nor used to play short-term swings in the stock or foreign exchange
markets. The Fund is subject to risks unique to international investing.
Further, there is no assurance that the favorable trends discussed below will
continue, and the Fund cannot guarantee it will achieve its objective.
It is the present intention of the Sub-advisor to invest in companies
based in (or governments of or within) the Far East (for example, Japan, Hong
Kong, Singapore, and Malaysia), Western Europe (for example, United Kingdom,
Germany, Netherlands, France, Spain, and Switzerland), South Africa, Australia,
Canada, and such other areas and countries as the Sub-advisor may determine from
time to time.
In determining the appropriate distribution of investments among
various countries and geographic regions, the Sub-advisor ordinarily considers
the following factors: prospects for relative economic growth between foreign
countries; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range of
individual investment opportunities available to international investors.
In analyzing companies for investment, the Sub-advisor ordinarily looks
for one or more of the following characteristics: an above-average earnings
growth per share; high return on invested capital; healthy balance sheet; sound
financial and accounting policies and overall financial strength; strong
competitive advantages; effective research and product development and
marketing; efficient service; pricing flexibility; strength of management; and
general operating characteristics which will enable the companies to compete
successfully in their market place. While current dividend income is not a
prerequisite in the selection of portfolio companies, the companies in which the
Fund invests normally will have a record of paying dividends, and will generally
be expected to increase the amounts of such dividends in future years as
earnings increase.
It is expected that the Fund's investments will ordinarily be traded on
exchanges located at least in the respective countries in which the various
issuers of such securities are principally based.
The Fund will invest in securities denominated in currencies specified
elsewhere herein.
It is contemplated that most foreign securities will be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market.
The Fund may invest in investment funds which have been authorized by
the governments of certain countries specifically to permit foreign investment
in securities of companies listed and traded on the stock exchanges in these
respective countries. The Fund's investment in these funds is subject to the
provisions of the Investment Company Act of 1940 discussed below. If the Fund
invests in such investment funds, the Fund's shareholders will bear not only
their proportionate share of the expenses of the Fund (including operating
expenses and the fees of the Investment Manager), but also will bear indirectly
similar expenses of the underlying investment funds. In addition, the securities
of these investment funds may trade at a premium over their net asset value.
Apart from the matters described herein, the Fund is not aware at this
time of the existence of any investment or exchange control regulations which
might substantially impair the operations of the Fund as described in the
Company's Prospectus and this SAI. It should be noted, however, that this
situation could change at any time.
The Fund may invest in companies located in Eastern Europe. The Fund
will only invest in a company located in, or a government of, Eastern Europe or
Russia, if the Sub-advisor believes the potential return justifies the risk. To
the extent any securities issued by companies in Eastern Europe and Russia are
considered illiquid, the Fund will be required to include such securities within
its 15% restriction on investing in illiquid securities.
Risk Factors of Foreign Investing. There are special risks in investing
in the Fund. Certain of these risks are inherent in any international mutual
fund; others relate more to the countries in which the Fund will invest. Many of
the risks are more pronounced for investments in developing or emerging
countries. Although there is no universally accepted definition, a developing
country is generally considered to be a country which is in the initial stages
of its industrialization cycle with a per capita gross national product of less
than $8,000.
Investors should understand that all investments have a risk factor.
There can be no guarantee against loss resulting from an investment in the Fund,
and there can be no assurance that the Fund's investment policies will be
successful, or that its investment objective will be attained. The Fund is
designed for individual and institutional investors seeking to diversify beyond
the United States in an actively researched and managed portfolio, and is
intended for long-term investors who can accept the risks entailed in investment
in foreign securities. For a discussion of certain risks involved in foreign
investing see this SAI and the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
In addition to the investments described in the Company's Prospectus,
the Fund may invest in the following:
Writing Covered Call Options. The Fund may write (sell) "covered" call
options and purchase options to close out options previously written by the
Fund. In writing covered call options, the Fund expects to generate additional
premium income which should serve to enhance the Fund's total return and reduce
the effect of any price decline of the security or currency involved in the
option. Covered call options will generally be written on securities or
currencies which, in the Sub-advisor's opinion, are not expected to have any
major price increases or moves in the near future but which, over the long term,
are deemed to be attractive investments for the Fund.
The Fund will write only covered call options. This means that the Fund
will own the security or currency subject to the option or an option to purchase
the same underlying security or currency, having an exercise price equal to or
less than the exercise price of the "covered" option, or will establish and
maintain with its custodian for the term of the option, an account consisting of
cash or other liquid assets having a value equal to the fluctuating market value
of the optioned securities or currencies.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Fund's investment objective. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk (in
contrast to the writing of naked or uncovered options, which the Fund will not
do), but capable of enhancing the Fund's total return. When writing a covered
call option, the Fund, in return for the premium, gives up the opportunity for
profit from a price increase in the underlying security or currency above the
exercise price, but conversely, retains the risk of loss should the price of the
security or currency decline. Unlike one who owns securities or currencies not
subject to an option, the Fund has no control over when it may be required to
sell the underlying securities or currencies, since it may be assigned an
exercise notice at any time prior to the expiration of its obligations as a
writer. If a call option which the Fund has written expires, the Fund will
realize a gain in the amount of the premium; however, such gain may be offset by
a decline in the market value of the underlying security or currency during the
option period. If the call option is exercised, the Fund will realize a gain or
loss from the sale of the underlying security or currency. The Fund does not
consider a security or currency covered by a call "pledged" as that term is used
in the Fund's policy which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the
Fund will receive from writing a call option will reflect, among other things,
the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, the Sub-advisor,
in determining whether a particular call option should be written on a
particular security or currency, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will exist
for those options. The premium received by the Fund for writing covered call
options will be recorded as a liability of the Fund. This liability will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Fund is
computed (close of the New York Stock Exchange), or, in the absence of such
sale, the average of the latest bid and asked price. The option will be
terminated upon expiration of the option, the purchase of an identical option in
a closing transaction, or delivery of the underlying security or currency upon
the exercise of the option.
Call options written by the Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities or currencies at the time the options are written. From time to time,
the Fund may purchase an underlying security or currency for delivery in
accordance with an exercise notice of a call option assigned to it, rather than
delivering such security or currency from its portfolio. In such cases,
additional costs may be incurred.
The Fund will effect closing transactions in order to realize a profit
on an outstanding call option, to prevent an underlying security or currency
from being called, or, to permit the sale of the underlying security or
currency. The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Fund.
The Fund will not write a covered call option if, as a result, the
aggregate market value of all portfolio securities or currencies covering call
or put options exceeds 25% of the market value of the Fund's net assets. In
calculating the 25% limit, the Fund will offset, against the value of assets
covering written calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.
Writing Covered Put Options. Although the Fund has no current intention
in the foreseeable future of writing American or European style covered put
options and purchasing put options to close out options previously written by
the Fund, the Fund reserves the right to do so.
The Fund would write put options only on a covered basis, which means
that the Fund would maintain in a segregated account cash, U.S. government
securities or other liquid high-grade debt obligations in an amount not less
than the exercise price or the Fund will own an option to sell the underlying
security or currency subject to the option having an exercise price equal to or
greater than the exercise price of the "covered" options at all times while the
put option is outstanding. (The rules of a clearing corporation currently
require that such assets be deposited in escrow to secure payment of the
exercise price.) The Fund would generally write covered put options in
circumstances where the Sub-advisor wishes to purchase the underlying security
or currency for the Fund's portfolio at a price lower than the current market
price of the security or currency. In such event the Fund would write a put
option at an exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the Fund would also
receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in such a transaction
would be that the market price of the underlying security or currency would
decline below the exercise price less the premiums received. Such a decline
could be substantial and result in a significant loss to the Fund. In addition,
the Fund, because it does not own the specific securities or currencies which it
may be required to purchase in exercise of the put, cannot benefit from
appreciation, if any, with respect to such specific securities or currencies.
The Fund will not write a covered put option if, as a result, the
aggregate market value of all portfolio securities or currencies covering put or
call options exceeds 25% of the market value of the Fund's net assets. In
calculating the 25% limit, the Fund will offset, against the value of assets
covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.
Purchasing Put Options. The Fund may purchase American or European
style put options. As the holder of a put option, the Fund has the right to sell
the underlying security or currency at the exercise price at any time during the
option period (American style) or at the expiration of the option (European
style). The Fund may enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. The Fund may purchase put
options for defensive purposes in order to protect against an anticipated
decline in the value of its securities or currencies. An example of such use of
put options is provided in this SAI under "Certain Risk Factors and Investment
Methods."
The premium paid by the Fund when purchasing a put option will be
recorded as an asset of the Fund. This asset will be adjusted daily to the
option's current market value, which will be the latest sale price at the time
at which the net asset value per share of the Fund is computed (close of New
York Stock Exchange), or, in the absence of such sale, the latest bid price.
This asset will be terminated upon expiration of the option, the selling
(writing) of an identical option in a closing transaction, or the delivery of
the underlying security or currency upon the exercise of the option.
Purchasing Call Options. The Fund may purchase American or European
style call options. As the holder of a call option, the Fund has the right to
purchase the underlying security or currency at the exercise price at any time
during the option period (American style) or at the expiration of the option
(European style). The Fund may enter into closing sale transactions with respect
to such options, exercise them or permit them to expire. The Fund may purchase
call options for the purpose of increasing its current return or avoiding tax
consequences which could reduce its current return. The Fund may also purchase
call options in order to acquire the underlying securities or currencies.
Examples of such uses of call options are provided in this SAI under "Certain
Risk Factors and Investment Methods."
The Fund may also purchase call options on underlying securities or
currencies it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for this purpose
where tax considerations make it inadvisable to realize such gains through a
closing purchase transaction. Call options may also be purchased at times to
avoid realizing losses.
Dealer Options. The Fund may engage in transactions involving dealer
options. Certain risks are specific to dealer options. While the Fund would look
to a clearing corporation to exercise exchange-traded options, if the Fund were
to purchase a dealer option, it would rely on the dealer from whom it purchased
the option to perform if the option were exercised. While the Fund will seek to
enter into dealer options only with dealers who will agree to and which are
expected to be capable of entering into closing transactions with the Fund,
there can be no assurance that the Fund will be able to liquidate a dealer
option at a favorable price at any time prior to expiration. Failure by the
dealer to perform would result in the loss of the premium paid by the Fund as
well as loss of the expected benefit of the transaction.
Futures Contracts:
Transactions in Futures. The Fund may enter into financial
futures contracts, including stock index, interest rate and currency futures
("futures or futures contracts"); however, the Fund has no current intention of
entering into interest rate futures. The Fund, however, reserves the right to
trade in financial futures of any kind.
Stock index futures contracts may be used to attempt to
provide a hedge for a portion of the Fund, as a cash management tool, or as an
efficient way for the Sub-advisor to implement either an increase or decrease in
portfolio market exposure in response to changing market conditions. Stock index
futures contracts are currently traded with respect to the S&P 500 Index and
other broad stock market indices, such as the New York Stock Exchange Composite
Stock Index and the Value Line Composite Stock Index. The Fund may, however,
purchase or sell futures contracts with respect to any stock index whose
movements will, in its judgment, have a significant correlation with movements
in the prices of all or portions of the Fund's portfolio securities.
Interest rate or currency futures contracts may be used to
attempt to hedge against changes in prevailing levels of interest rates or
currency exchange rates in order to establish more definitely the effective
return on securities or currencies held or intended to be acquired by the Fund.
In this regard, the Fund could sell interest rate or currency futures as an
offset against the effect of expected increases in interest rates or currency
exchange rates and purchase such futures as an offset against the effect of
expected declines in interest rates or currency exchange rates.
The Fund will enter into futures contracts which are traded on
national or foreign futures exchanges and are standardized as to maturity date
and underlying financial instrument. The principal financial futures exchanges
in the United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board of
Trade. Futures exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC").
Futures are traded in London at the London International Financial Futures
Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange.
Although techniques other than the sale and purchase of futures contracts could
be used for the above-referenced purposes, futures contracts offer an effective
and relatively low cost means of implementing the Fund's objectives in these
areas. For a discussion of futures transactions and certain risks involved
therein, see this SAI and the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
Regulatory Limitations. The Fund will engage in transactions
in futures contracts and options thereon only for bona fide hedging, yield
enhancement and risk management purposes, in each case in accordance with the
rules and regulations of the CFTC.
The Fund may not enter into futures contracts or options
thereon if, with respect to positions which do not qualify as bona fide hedging
under applicable CFTC rules, the sum of the amounts of initial margin deposits
on the Fund's existing futures and premiums paid for options on futures would
exceed 5% of the net asset value of the Fund after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into; provided however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in calculating the
5% limitation.
The Fund's use of futures contracts will not result in
leverage. Therefore, to the extent necessary, in instances involving the
purchase of futures contracts or call options thereon or the writing of put
options thereon by the Fund, an amount of cash, or other liquid assets, equal to
the market value of the futures contracts and options thereon (less any related
margin deposits), will be identified in an account with the Fund's custodian to
cover the position, or alternative cover will be employed.
In addition, CFTC regulations may impose limitations on the
Fund's ability to engage in certain yield enhancement and risk management
strategies. If the CFTC or other regulatory authorities adopt different
(including less stringent) or additional restrictions, the Fund would comply
with such new restrictions.
Options on Futures Contracts. As an alternative to writing or
purchasing call and put options on stock index futures, the Fund may write or
purchase call and put options on stock indices. Such options would be used in a
manner similar to the use of options on futures contracts. From time to time, a
single order to purchase or sell futures contracts (or options thereon) may be
made on behalf of the Fund and other mutual funds or portfolios of mutual funds
managed by the Sub-advisor or T. Rowe Price Associates, Inc. Such aggregated
orders would be allocated among the Fund and such other portfolios in a fair and
non-discriminatory manner. See this SAI and the Company's Prospectus under
"Certain Risk Factors and Investment Methods" for a description of certain risks
involved in options and futures contracts.
Additional Futures and Options Contracts. Although the Fund has no
current intention of engaging in financial futures or option transactions other
than those described above, it reserves the right to do so. Such futures or
options trading might involve risks which differ from those involved in the
futures and options described above.
Foreign Futures and Options. The Fund is permitted to invest in foreign
futures and options. For a description of foreign futures and options and
certain risks involved therein as well as certain risks involved in foreign
investing, see this SAI and the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
Foreign Currency Transactions. The Fund will generally enter into
forward foreign currency exchange contracts under two circumstances. First, when
the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security. Second, when the Sub-advisor believes that the currency
of a particular foreign country may suffer or enjoy a substantial movement
against another currency, including the U.S. dollar, it may enter into a forward
contract to sell or buy the amount of the former foreign currency, approximating
the value of some or all of the Fund's securities denominated in such foreign
currency. Alternatively, where appropriate, the Fund may hedge all or part of
its foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an effective proxy for
other currencies. In such a case, the Fund may enter into a forward contract
where the amount of the foreign currency to be sold exceeds the value of the
securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in the Fund. The precise matching of
the forward contract amounts and the value of the securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Other than as set forth above and immediately
below, the Fund will also not enter into such forward contracts or maintain a
net exposure to such contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's securities or other assets denominated in that currency. The
Fund, however, in order to avoid excess transactions and transaction costs, may
maintain a net exposure to forward contracts in excess of the value of the
Fund's securities or other assets to which the forward contracts relate
(including accrued interest to the maturity of the forward on such securities)
provided the excess amount is "covered" by liquid, high-grade debt securities,
denominated in any currency, at least equal at all times to the amount of such
excess. For these purposes "the securities or other assets to which the forward
contracts relate" may be securities or assets denominated in a single currency,
or where proxy forwards are used, securities denominated in more than one
currency. Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the longer term investment decisions made
with regard to overall diversification strategies. However, the Sub-advisor
believes that it is important to have the flexibility to enter into such forward
contracts when it determines that the best interests of the Fund will be served.
At the maturity of a forward contract, the Fund may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for the Fund to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the Fund is obligated to deliver and if a decision is made to sell the
security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Fund is obligated to deliver. However, as noted, in order
to avoid excessive transactions and transaction costs, the Fund may use liquid,
high-grade debt securities denominated in any currency, to cover the amount by
which the value of a forward contract exceeds the value of the securities to
which it relates.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent of the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is not
required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Sub-advisor. It also should be realized that this method of hedging against
a decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange at
a future date. Additionally, although such contracts tend to minimize the risk
of loss due to a decline in the value of the hedged currency, at the same time,
they tend to limit any potential gain which might result from an increase in the
value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. It will do so from time to time, and investors should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer. For an additional discussion of certain
risks involved in foreign investing, see this SAI and the Company's Prospectus
under "Certain Risk Factors and Investment Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts. The Fund may enter into certain option, futures, and forward
foreign exchange contracts, including options and futures on currencies, which
will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Fund's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains or
losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Fund will
be required to distribute net gains on such transactions to shareholders even
though it may not have closed the transaction and received cash to pay such
distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes in which
case a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of the
securities or currencies comprising the straddle will be deemed not to begin
until the straddle is terminated. For securities offsetting a purchased put,
this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity security
will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital loss, if the security covering the option was held for more
than twelve months prior to the writing of the option.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income, i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Pending tax regulations could limit the extent that
net gain realized from option, futures or foreign forward exchange contracts on
currencies is qualifying income for purposes of the 90% requirement. In
addition, gains realized on the sale or other disposition of securities,
including option, futures or foreign forward exchange contracts on securities or
securities indexes and, in some cases, currencies, held for less than three
months, must be limited to less than 30% of the Fund's annual gross income. In
order to avoid realizing excessive gains on securities or currencies held less
than three months, the Fund may be required to defer the closing out of option,
futures or foreign forward exchange contracts beyond the time when it would
otherwise be advantageous to do so. It is anticipated that unrealized gains on
Section 1256 option, futures and foreign forward exchange contracts, which have
been open for less than three months as of the end of the Fund's fiscal year and
which are recognized for tax purposes, will not be considered gains on
securities or currencies held less than three months for purposes of the 30%
test.
Hybrid Commodity and Security Instruments. Instruments have been
developed which combine the elements of futures contracts or options with those
of debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments"). Often these hybrid instruments are indexed to the price of a
commodity or particular currency or a domestic or foreign debt or equity
securities index. Hybrid instruments may take a variety of forms, including, but
not limited to, debt instruments with interest or principal payments or
redemption terms determined by reference to the value of a currency or commodity
at a future point in time, preferred stock with dividend rates determined by
reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity. For a discussion of certain
risks involved in hybrid instruments, see this SAI under "Certain Risk Factors
and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements through
which an investor (such as the Fund) purchases a security (known as the
"underlying security") from a well-established securities dealer or a bank that
is a member of the Federal Reserve System. Any such dealer or bank will be on T.
Rowe Price Associates, Inc. ("T. Rowe Price") approved list and have a credit
rating with respect to its short-term debt of at least A1 by Standard & Poor's
Corporation, P1 by Moody's Investors Service, Inc., or the equivalent rating by
T. Rowe Price. At that time, the bank or securities dealer agrees to repurchase
the underlying security at the same price, plus specified interest. Repurchase
agreements are generally for a short period of time, often less than a week.
Repurchase agreements which do not provide for payment within seven days will be
treated as illiquid securities. The Fund will only enter into repurchase
agreements where (i) the underlying securities are of the type (excluding
maturity limitations) which the Fund's investment guidelines would allow it to
purchase directly, (ii) the market value of the underlying security, including
interest accrued, will be at all times equal to or exceed the value of the
repurchase agreement, and (iii) payment for the underlying security is made only
upon physical delivery or evidence of book-entry transfer to the account of the
custodian or a bank acting as agent. In the event of a bankruptcy or other
default of a seller of a repurchase agreement, the Fund could experience both
delays in liquidating the underlying securities and losses, including: (a)
possible decline in the value of the underlying security during the period while
the Fund seeks to enforce its rights thereto; (b) possible subnormal levels of
income and lack of access to income during this period; and (c) expenses of
enforcing its rights.
Illiquid and Restricted Securities. The Fund may not invest in illiquid
securities including repurchase agreements which do not provide for payment
within seven days, if as a result, they would comprise more than 15% of the
value of the Fund's net assets.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933 (the "1933 Act"). Where
registration is required, the Fund may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to sell. Restricted securities will be priced at
fair value as determined in accordance with procedures prescribed by the
Directors of the Company. If through the appreciation of illiquid securities or
the depreciation of liquid securities, the Fund should be in a position where
more than 15% of the value of its net assets are invested in illiquid assets,
including restricted securities, the Fund will take appropriate steps to protect
liquidity.
Notwithstanding the above, the Fund may purchase securities which while
privately placed, are eligible for purchase and sale under Rule 144A under the
1933 Act. This rule permits certain qualified institutional buyers, such as the
Fund, to trade in privately placed securities even though such securities are
not registered under the 1933 Act. The Sub-advisor, under the supervision of the
Directors of the Company, will consider whether securities purchased under Rule
144A are illiquid and thus subject to the Fund's restriction of investing no
more than 15% of its assets in illiquid securities. A determination of whether a
Rule 144A security is liquid or not is a question of fact. In making this
determination, the Sub-advisor will consider the trading markets for the
specific security taking into account the unregistered nature of a Rule 144A
security. In addition, the Sub-advisor could consider the (1) frequency of
trades and quotes, (2) number of dealers and potential purchasers, (3) dealer
undertakings to make a market, (4) and the nature of the security and of market
place trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). The liquidity of Rule 144A
securities would be monitored and, if as a result of changed conditions, it is
determined that a Rule 144A security is no longer liquid, the Fund's holdings of
illiquid securities would be reviewed to determine what, if any, steps are
required to assure that the Fund does not invest more than 15% of its assets in
illiquid securities. Investing in Rule 144A securities could have the effect of
increasing the amount of a Fund's assets invested in illiquid securities if
qualified institutional buyers are unwilling to purchase such securities.
The Directors of the Company have promulgated guidelines with respect
to illiquid securities.
Lending of Portfolio Securities. For the purpose of realizing
additional income, the Fund may make secured loans of portfolio securities
amounting to not more than 33 1/3% of its total assets. Securities loans are
made to broker-dealers, institutional investors, or other persons pursuant to
agreements requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent marked to market on
a daily basis. The collateral received will consist of cash, U.S. government
securities, letters of credit or such other collateral as may be permitted under
its investment program. While the securities are being lent, the Fund will
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. The Fund has a right to call each loan
and obtain the securities on five business days' notice or, in connection with
securities trading on foreign markets, within such longer period of time which
coincides with the normal settlement period for purchases and sales of such
securities in such foreign markets. The Fund will not have the right to vote
securities while they are being lent, but it will call a loan in anticipation of
any important vote. The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delay in receiving additional
collateral or in the recovery of the securities or possible loss of rights in
the collateral should the borrower fail financially. Loans will only be made to
persons deemed by the Sub-advisor to be of good standing and will not be made
unless, in the judgment of the Sub-advisor, the consideration to be earned from
such loans would justify the risk.
Other Lending/Borrowing. Subject to approval by the Securities and
Exchange Commission, the Fund may make loans to, or borrow funds from, other
mutual funds sponsored or advised by the Sub-advisor or T. Rowe Price
Associates, Inc.
The Fund has no current intention of engaging in these practices at this time.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1. Purchase additional securities when money borrowed exceeds 5% of the
Fund's total assets;
2. Invest in companies for the purpose of exercising management or control;
3. Purchase illiquid securities if, as a result, more than 15% of its net
assets would be invested in such securities. Securities eligible for resale
under Rule 144A of the Securities Act of 1933 may be subject to this 15%
limitation;
4. Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940;
5. Invest in puts, calls, straddles, spreads, or any combination thereof,
except to the extent permitted by the Company's Prospectus and this SAI;
6. Purchase securities on margin, except (i) for use of short-term credit
necessary for clearance of purchases of portfolio securities and (ii) the Fund
may make margin deposits in connection with futures contracts and other
permissible investments;
7. Mortgage, pledge, hypothecate or, in any manner, transfer any security
owned by the Fund as a security for indebtedness except as may be necessary in
connection with permissible borrowings or investments and then such mortgaging,
pledging, or hypothecating may not exceed 33 1/3% of the Fund's total assets at
the time of borrowing or investment;
8. Effect short sales of securities;
9. Invest in warrants if, as a result thereof, more than 10% of the value
of the total assets of the Fund would be invested in warrants except that this
restriction does not apply to warrants acquired as a result of the purchase of
another security. For purposes of these percentage limitations, the warrants
will be valued at the lower of cost or market; or
10. Purchase a futures contract or an option thereon if, with respect to
positions in futures or options on futures which do not represent bona fide
hedging, the aggregate initial margin and premiums on such positions would
exceed 5% of the Fund's net assets.
In addition to the restrictions described above, some foreign countries
limit, or prohibit, all direct foreign investment in the securities of their
companies. However, the governments of some countries have authorized the
organization of investment portfolios to permit indirect foreign investment in
such securities. For tax purposes these portfolios may be known as Passive
Foreign Investment Companies. The Fund is subject to certain percentage
limitations under the Investment Company Act of 1940 relating to the purchase of
securities of investment companies, and may be subject to the limitation that no
more than 10% of the value of the Fund's total assets may be invested in such
securities.
ASAF FOUNDERS SMALL CAPITALIZATION FUND:
Investment Objective: The investment objective of the Fund is to seek
capital growth.
Investment Policies:
Options On Stock Indices and Stocks. An option is a right to buy or
sell a security at a specified price within a limited period of time. The Fund
may write ("sell") covered call options on any or all of its portfolio
securities. In addition, the Fund may purchase options on securities. The Fund
may also purchase put and call options on stock indices.
The Fund may write ("sell") options on any or all of its portfolio
securities and at such time and from time to time as the Sub-advisor shall
determine to be appropriate. No specified percentage of the Fund's assets is
invested in securities with respect to which options may be written. The extent
of the Fund's option writing activities will vary from time to time depending
upon the Sub-advisor's evaluation of market, economic and monetary conditions.
When the Fund purchases a security with respect to which it intends to
write an option, it is likely that the option will be written concurrently with
or shortly after purchase. The Fund will write an option on a particular
security only if the Sub-advisor believes that a liquid secondary market will
exist on an exchange for options of the same series, which will permit the Fund
to enter into a closing purchase transaction and close out its position. If the
Fund desires to sell a particular security on which it has written an option, it
will effect a closing purchase transaction prior to or concurrently with the
sale of the security.
The Fund may enter into closing purchase transactions to reduce the
percentage of its assets against which options are written, to realize a profit
on a previously written option, or to enable it to write another option on the
underlying security with either a different exercise price or expiration time or
both.
Options written by the Fund will normally have expiration dates between
three and nine months from the date written. The exercise prices of options may
be below, equal to or above the current market values of the underlying
securities at the times the options are written. From time to time for tax and
other reasons, the Fund may purchase an underlying security for delivery in
accordance with an exercise notice assigned to it, rather than delivering such
security from its portfolio.
A stock index measures the movement of a certain group of stocks by
assigning relative values to the stocks included in the index. The Fund
purchases put options on stock indices to protect the portfolio against decline
in value. The Fund purchases call options on stock indices to establish a
position in equities as a temporary substitute for purchasing individual stocks
that then may be acquired over the option period in a manner designed to
minimize adverse price movements. Purchasing put and call options on stock
indices also permits greater time for evaluation of investment alternatives.
When the Sub-advisor believes that the trend of stock prices may be downward,
particularly for a short period of time, the purchase of put options on stock
indices may eliminate the need to sell less liquid stocks and possibly
repurchase them later. The purpose of these transactions is not to generate
gain, but to "hedge" against possible loss. Therefore, successful hedging
activity will not produce net gain to the Fund. Any gain in the price of a call
option is likely to be offset by higher prices the Fund must pay in rising
markets, as cash reserves are invested. In declining markets, any increase in
the price of a put option is likely to be offset by lower prices of stocks owned
by the Fund.
The Fund may purchase only those put and call options that are listed
on a domestic exchange or quoted on the automatic quotation system of the
National Association of Securities Dealers, Inc. ("NASDAQ"). Options traded on
stock exchanges are either broadly based, such as the Standard & Poor's 500
Stock Index and 100 Stock Index, or involve stocks in a designated industry or
group of industries. The Fund may utilize either broadly based or market segment
indices in seeking a better correlation between the indices and the Fund.
Transactions in options are subject to limitations, established by each
of the exchanges upon which options are traded, governing the maximum number of
options which may be written or held by a single investor or group of investors
acting in concert, regardless of whether the options are held in one or more
accounts. Thus, the number of options the Fund may hold may be affected by
options held by other advisory clients of the Sub-advisor. As of the date of
this SAI, the Sub-advisor believes that these limitations will not affect the
purchase of stock index options by the Fund.
One risk of holding a put or a call option is that if the option is not
sold or exercised prior to its expiration, it becomes worthless. However, this
risk is limited to the premium paid by the Fund. Other risks of purchasing
options include the possibility that a liquid secondary market may not exist at
a time when the Fund may wish to close out an option position. It is also
possible that trading in options on stock indices might be halted at a time when
the securities markets generally were to remain open. In cases where the market
value of an issue supporting a covered call option exceeds the strike price plus
the premium on the call, the Fund will lose the right to appreciation of the
stock for the duration of the option. For an additional discussion of options on
stock indices and stocks and certain risks involved therein, see this SAI and
the Company's Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts. The Fund may enter into futures contracts (or
options thereon) for hedging purposes. U.S. futures contracts are traded on
exchanges which have been designated "contract markets" by the Commodity Futures
Trading Commission and must be executed through a futures commission merchant
(an "FCM") or brokerage firm which is a member of the relevant contract market.
Although futures contracts by their terms call for the delivery or acquisition
of the underlying commodities or a cash payment based on the value of the
underlying commodities, in most cases the contractual obligation is offset
before the delivery date of the contract by buying, in the case of a contractual
obligation to sell, or selling, in the case of a contractual obligation to buy,
an identical futures contract on a commodities exchange. Such a transaction
cancels the obligation to make or take delivery of the commodities.
The acquisition or sale of a futures contract could occur, for example,
if the Fund held or considered purchasing equity securities and sought to
protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, the Fund could
sell equity index futures contracts, thereby hoping to offset a potential
decline in the value of equity securities in the portfolio by a corresponding
increase in the value of the futures contract position held by the Fund and
thereby prevent the Fund's net asset value from declining as much as it
otherwise would have. The Fund also could protect against potential price
declines by selling portfolio securities and investing in money market
instruments. However, since the futures market is more liquid than the cash
market, the use of futures contracts as an investment technique would allow the
Fund to maintain a defensive position without having to sell portfolio
securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts could be bought to attempt to hedge against the possibility of
having to buy equity securities at higher prices. This technique is sometimes
known as an anticipatory hedge. Since the fluctuations in the value of futures
contracts should be similar to those of equity securities, the Fund could take
advantage of the potential rise in the value of equity securities without buying
them until the market had stabilized. At that time, the futures contracts could
be liquidated and the Fund could buy equity securities on the cash market.
The Fund may also enter into interest rate and foreign currency futures
contracts. Interest rate futures contracts currently are traded on a variety of
fixed-income securities, including long-term U.S. Treasury Bonds, Treasury
Notes, Government National Mortgage Association modified pass-through
mortgage-backed securities, U.S. Treasury Bills, bank certificates of deposit
and commercial paper. Foreign currency futures contracts currently are traded on
the British pound, Canadian dollar, Japanese yen, Swiss franc, West German mark
and on Eurodollar deposits.
The Fund will not, as to any positions, whether long, short or a
combination thereof, enter into futures and options thereon for which the
aggregate initial margins and premiums exceed 5% of the fair market value of its
total assets after taking into account unrealized profits and losses on options
entered into. In the case of an option that is "in-the-money," the in-the-money
amount may be excluded in computing such 5%. In general a call option on a
future is "in-the-money" if the value of the future exceeds the exercise
("strike") price of the call; a put option on a future is "in-the-money" if the
value of the future which is the subject of the put is exceeded by the strike
price of the put. The Fund may use futures and options thereon solely for bona
fide hedging or for other non-speculative purposes. As to long positions which
are used as part of the Fund's strategies and are incidental to its activities
in the underlying cash market, the "underlying commodity value" of the Fund's
futures and options thereon must not exceed the sum of (i) cash set aside in an
identifiable manner, or short-term U.S. debt obligations or other
dollar-denominated high-quality, short-term money instruments so set aside, plus
sums deposited on margin; (ii) cash proceeds from existing investments due in 30
days; and (iii) accrued profits held at the futures commission merchant. The
"underlying commodity value" of a future is computed by multiplying the size of
the future by the daily settlement price of the future. For an option on a
future, that value is the underlying commodity value of the future underlying
the option.
Unlike the situation in which the Fund purchases or sells a security,
no price is paid or received by the Fund upon the purchase or sale of a futures
contract. Instead, the Fund is required to deposit in a segregated asset account
an amount of cash or qualifying securities (currently U.S. Treasury bills),
currently in a minimum amount of $15,000. This is called "initial margin." Such
initial margin is in the nature of a performance bond or good faith deposit on
the contract. However, since losses on open contracts are required to be
reflected in cash in the form of variation margin payments, the Fund may be
required to make additional payments during the term of a contract to its
broker. Such payments would be required, for example, where, during the term of
an interest rate futures contract purchased by the Fund, there was a general
increase in interest rates, thereby making the Fund's securities less valuable.
In all instances involving the purchase of financial futures contracts by the
Fund, an amount of cash together with such other securities as permitted by
applicable regulatory authorities to be utilized for such purpose, at least
equal to the market value of the future contracts, will be deposited in a
segregated account with the Fund's custodian to collateralize the position. At
any time prior to the expiration of a futures contract, the Fund may elect to
close its position by taking an opposite position which will operate to
terminate the Fund's position in the futures contract.
Because futures contracts are generally settled within a day from the
date they are closed out, compared with a settlement period of three business
days for most types of securities, the futures markets can provide superior
liquidity to the securities markets. Nevertheless, there is no assurance a
liquid secondary market will exist for any particular futures contract at any
particular time. In addition, futures exchanges may establish daily price
fluctuation limits for futures contracts and may halt trading if a contract's
price moves upward or downward more than the limit in a given day. On volatile
trading days when the price fluctuation limit is reached, it would be impossible
for the Fund to enter into new positions or close out existing positions. If the
secondary market for a futures contract were not liquid because of price
fluctuation limits or otherwise, the Fund would not promptly be able to
liquidate unfavorable futures positions and potentially could be required to
continue to hold a futures position until the delivery date, regardless of
changes in its value. As a result, the Fund's access to other assets held to
cover its futures positions also could be impaired. For an additional discussion
of futures contracts and certain risks involved therein, see this SAI and the
Company's Prospectus under "Certain Risk Factors and Investment Methods."
Options on Futures Contracts. The Fund may purchase put and call
options on futures contracts. An option on a futures contract provides the
holder with the right to enter into a "long" position in the underlying futures
contract, in the case of a call option, or a "short" position in the underlying
futures contract, in the case of a put option, at a fixed exercise price to a
stated expiration date. Upon exercise of the option by the holder, a contract
market clearing house establishes a corresponding short position for the writer
of the option, in the case of a call option, or a corresponding long position,
in the case of a put option. In the event that an option is exercised, the
parties will be subject to all the risks associated with the trading of futures
contracts, such as payment of variation margin deposits.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
An option, whether based on a futures contract, a stock index or a
security, becomes worthless to the holder when it expires. Upon exercise of an
option, the exchange or contract market clearing house assigns exercise notices
on a random basis to those of its members which have written options of the same
series and with the same expiration date. A brokerage firm receiving such
notices then assigns them on a random basis to those of its customers which have
written options of the same series and expiration date. A writer therefore has
no control over whether an option will be exercised against it, nor over the
time of such exercise.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. See
"Options on Foreign Currencies" below. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying instrument, ownership of the option may or may not
be less risky than ownership of the futures contract or the underlying
instrument. As with the purchase of futures contracts, when the Fund is not
fully invested it could buy a call option on a futures contract to hedge against
a market advance. The purchase of a put option on a futures contract is similar
in some respects to the purchase of protective put options on portfolio
securities. For example, the Fund would be able to buy a put option on a futures
contract to hedge its portfolio against the risk of falling prices. For an
additional discussion of options on futures contracts and certain risks involved
therein, see this SAI and the Company's Prospectus under "Certain Risks Factors
and Investment Methods."
Options on Foreign Currencies. The Fund may buy and sell options on
foreign currencies for hedging purposes in a manner similar to that in which
futures on foreign currencies would be utilized. For example, a decline in the
U.S. dollar value of a foreign currency in which portfolio securities are
denominated would reduce the U.S. dollar value of such securities, even if their
value in the foreign currency remained constant. In order to protect against
such diminutions in the value of portfolio securities, the Fund could buy put
options on the foreign currency. If the value of the currency declines, the Fund
would have the right to sell such currency for a fixed amount in U.S. dollars
and would thereby offset, in whole or in part, the adverse effect on the Fund
which otherwise would have resulted. Conversely, when a rise is projected in the
U.S. dollar value of a currency in which securities to be acquired are
denominated, thereby increasing the cost of such securities, the Fund could buy
call options thereon. The purchase of such options could offset, at least
partially, the effects of the adverse movements in exchange rates.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the Securities and Exchange Commission, as are
other securities traded on such exchanges. As a result, many of the protections
provided to traders on organized exchanges will be available with respect to
such transactions. In particular, all foreign currency option positions entered
into on a national securities exchange are cleared and guaranteed by the Options
Clearing Corporation ("OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting the Fund to liquidate open positions at a profit prior to
exercise or expiration, or to limit losses in the event of adverse market
movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities, and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices, or prohibitions on exercise.
Risk Factors of Investing in Futures and Options. The successful use of
the investment practices described above with respect to futures contracts,
options on futures contracts, and options on securities indices, securities, and
foreign currencies draws upon skills and experience which are different from
those needed to select the other instruments in which the Fund invests. Should
interest or exchange rates or the prices of securities or financial indices move
in an unexpected manner, the Fund may not achieve the desired benefits of
futures and options or may realize losses and thus be in a worse position than
if such strategies had not been used. Unlike many exchange-traded futures
contracts and options on futures contracts, there are no daily price fluctuation
limits with respect to options on currencies and negotiated or over-the-counter
instruments, and adverse market movements could therefore continue to an
unlimited extent over a period of time. In addition, the correlation between
movements in the price of the securities and currencies hedged or used for cover
will not be perfect and could produce unanticipated losses.
The Fund's ability to dispose of its positions in the foregoing
instruments will depend on the availability of liquid markets in the
instruments. Markets in a number of the instruments are relatively new and still
developing and it is impossible to predict the amount of trading interest that
may exist in those instruments in the future. Particular risks exist with
respect to the use of each of the foregoing instruments and could result in such
adverse consequences to the Fund as the possible loss of the entire premium paid
for an option bought by the Fund and the possible need to defer closing out
positions in certain instruments to avoid adverse tax consequences. As a result,
no assurance can be given that the Fund will be able to use those instruments
effectively for the purposes set forth above.
In addition, options on U.S. Government securities, futures contracts,
options on futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges and over-the-counter in foreign
countries. Such transactions are subject to the risk of governmental actions
affecting trading in or the prices of foreign currencies or securities. The
value of such positions also could be affected adversely by (i) other complex
foreign political and economic factors, (ii) lesser availability than in the
United States of data on which to make trading decisions, (iii) delays in the
Fund's ability to act upon economic events occurring in foreign markets during
nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) low trading volume. For an additional discussion of
certain risks involved in investing in futures and options, see this SAI and the
Company's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Securities. Investments in foreign countries involve certain risks
which are not typically associated with U.S. investments. For a discussion of
certain risks involved in foreign investing, see this SAI and the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
Forward Contracts for Purchase or Sale of Foreign Currencies. The Fund
generally conducts its foreign currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange currency market.
When the Fund purchases or sells a security denominated in a foreign currency,
it may enter into a forward foreign currency contract ("forward contract") for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transaction. A forward contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. In this manner, the
Fund may obtain protection against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the foreign currency
during the period between the date the security is purchased or sold and the
date upon which payment is made or received. Although such contracts tend to
minimize the risk of loss due to the decline in the value of the hedged
currency, at the same time they tend to limit any potential gain which might
result should the value of such currency increase. The Fund will not speculate
in forward contracts.
Forward contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
Generally a forward contract has no deposit requirement, and no commissions are
charged at any stage for trades. Although foreign exchange dealers do not charge
a fee for conversion, they do realize a profit based on the difference between
the prices at which they buy and sell various currencies. When the Sub-advisor
believes that the currency of a particular foreign country may suffer a
substantial decline against the U.S. dollar (or sometimes against another
currency), the Fund may enter into a forward contract to sell, for a fixed
dollar or other currency amount, foreign currency approximating the value of
some or all of the Fund's securities denominated in that currency. The Fund will
not enter into such forward contracts or maintain a net exposure to such
contracts where the fulfillment of the contracts would require the Fund to
deliver an amount of foreign currency in excess of the value of its portfolio
securities or other assets denominated in that currency. Forward contracts may,
from time to time, be considered illiquid, in which case they would be subject
to the Fund's limitation on investing in illiquid securities.
At the consummation of a forward contract for delivery by the Fund of a
foreign currency, the Fund may either make delivery of the foreign currency or
terminate its contractual obligation to deliver the foreign currency by
purchasing an offsetting contract obligating it to purchase, at the same
maturity date, the same amount of the foreign currency. If the Fund chooses to
make delivery of the foreign currency, it may be required to obtain such
currency through the sale of portfolio securities denominated in such currency
or through conversion of other Fund assets into such currency.
Dealings in forward contracts by the Fund will be limited to the
transactions described above. Of course, the Fund is not required to enter into
such transactions with regard to its foreign currency-denominated securities and
will not do so unless deemed appropriate by the Sub-advisor. It also should be
realized that this method of protecting the value of the Fund's securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange which can be achieved at some future point in time. Additionally,
although such contracts tend to minimize the risk of loss due to the decline in
the value of the hedged currency, at the same time they tend to limit any
potential gain which might result should the value of such currency increase.
For an additional discussion of forward foreign currency contracts and certain
risks involved therein, see this SAI and the Company's Prospectus under "Certain
Risk Factors and Investment Methods."
Illiquid Securities. As discussed in the Company's Prospectus, the Fund
may invest up to 15% of the value of its net assets, measured at the time of
investment, in investments which are not readily marketable. Restricted
securities are securities that may not be resold to the public without
registration under the Securities Act of 1933 (the "1933 Act"). Restricted
securities (other than Rule 144A securities deemed to be liquid, discussed
below) and securities which, due to their market or the nature of the security,
have no readily available markets for their disposition are considered to be not
readily marketable or "illiquid." These limitations on resale and marketability
may have the effect of preventing the Fund from disposing of such a security at
the time desired or at a reasonable price. In addition, in order to resell a
restricted security, the Fund might have to bear the expense and incur the
delays associated with effecting registration. In purchasing illiquid
securities, the Fund does not intend to engage in underwriting activities,
except to the extent the Fund may be deemed to be a statutory underwriter under
the Securities Act in purchasing or selling such securities. Illiquid securities
will be purchased for investment purposes only and not for the purpose of
exercising control or management of other companies. For an additional
discussion of illiquid or restricted securities and certain risks involved
therein, see the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
The Directors of the Company have promulgated guidelines with respect
to illiquid securities.
Rule 144A Securities. In recent years, a large institutional market has
developed for certain securities that are not registered under the 1933 Act.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend on an efficient institutional
market in which such unregistered securities can readily be resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that there
are contractual or legal restrictions on resale to the general public or certain
institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. The Fund may invest in Rule 144A securities
which, as disclosed in the Company's Prospectus, are restricted securities which
may or may not be readily marketable. Rule 144A securities are readily
marketable if institutional markets for the securities develop pursuant to Rule
144A which provide both readily ascertainable values for the securities and the
ability to liquidate the securities when liquidation is deemed necessary or
advisable. However, an insufficient number of qualified institutional buyers
interested in purchasing a Rule 144A security held by the Fund could affect
adversely the marketability of the security. In such an instance, the Fund might
be unable to dispose of the security promptly or at reasonable prices.
The Sub-advisor will determine that a liquid market exists for
securities eligible for resale pursuant to Rule 144A under the 1933 Act, or any
successor to such rule, and that such securities are not subject to the Fund's
limitations on investing in securities that are not readily marketable. The
Sub-advisor will consider the following factors, among others, in making this
determination: (1) the unregistered nature of a Rule 144A security; (2) the
frequency of trades and quotes for the security; (3) the number of dealers
willing to purchase or sell the security and the number of additional potential
purchasers; (4) dealer undertakings to make a market in the security; and (5)
the nature of the security and the nature of market place trades (e.g., the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of transfers).
Lower-Rated or Unrated Fixed-Income Securities. The Fund may invest up
to 5% of its total assets in fixed-income securities which are unrated or are
rated below investment grade either at the time of purchase or as a result of
reduction in rating after purchase. (This limitation does not apply to
convertible securities and preferred stocks.) Investments in lower-rated or
unrated securities are generally considered to be of high risk. These debt
securities, commonly referred to as junk bonds, are generally subject to two
kinds of risk, credit risk and market risk. Credit risk relates to the ability
of the issuer to meet interest or principal payments, or both, as they come due.
The ratings given a security by Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's ("S&P") provide a generally useful guide as to such credit
risk. For a description of securities ratings, see the Appendix to this SAI. The
lower the rating given a security by a rating service, the greater the credit
risk such rating service perceives to exist with respect to the security.
Increasing the amount of the Fund's assets invested in unrated or lower grade
securities, while intended to increase the yield produced by those assets, will
also increase the risk to which those assets are subject.
Market risk relates to the fact that the market values of debt
securities in which the Fund invests generally will be affected by changes in
the level of interest rates. An increase in interest rates will tend to reduce
the market values of such securities, whereas a decline in interest rates will
tend to increase their values. Medium and lower-rated securities (Baa or BBB and
lower) and non-rated securities of comparable quality tend to be subject to
wider fluctuations in yields and market values than higher rated securities and
may have speculative characteristics. In order to decrease the risk in investing
in debt securities, in no event will the Fund ever invest in a debt security
rated below B by Moody's or by S&P. Of course, relying in part on ratings
assigned by credit agencies in making investments will not protect the Fund from
the risk that the securities in which they invest will decline in value, since
credit ratings represent evaluations of the safety of principal, dividend, and
interest payments on debt securities, and not the market values of such
securities, and such ratings may not be changed on a timely basis to reflect
subsequent events.
Because investment in medium and lower-rated securities involves
greater credit risk, achievement of the Fund's investment objective may be more
dependent on the Sub-advisor's own credit analysis than is the case for funds
that do not invest in such securities. In addition, the share price and yield of
the Fund may fluctuate more than in the case of funds investing in higher
quality, shorter term securities. Moreover, a significant economic downturn or
major increase in interest rates may result in issuers of lower-rated securities
experiencing increased financial stress, which would adversely affect their
ability to service their principal, dividend, and interest obligations, meet
projected business goals, and obtain additional financing. In this regard, it
should be noted that while the market for high yield debt securities has been in
existence for many years and from time to time has experienced economic
downturns in recent years, this market has involved a significant increase in
the use of high yield debt securities to fund highly leveraged corporate
acquisitions and restructurings. Past experience may not, therefore, provide an
accurate indication of future performance of the high yield debt securities
market, particularly during periods of economic recession. Furthermore, expenses
incurred in recovering an investment in a defaulted security may adversely
affect the Fund's net asset value. Finally, while the Sub-advisor attempts to
limit purchases of medium and lower-rated securities to securities having an
established secondary market, the secondary market for such securities may be
less liquid than the market for higher quality securities. The reduced liquidity
of the secondary market for such securities may adversely affect the market
price of, and ability of the Fund to value, particular securities at certain
times, thereby making it difficult to make specific valuation determinations.
The Fund does not invest in any medium and lower-rated securities which present
special tax consequences, such as zero-coupon bonds or pay-in-kind bonds. For an
additional discussion of certain risks involved in lower-rated securities, see
this SAI and the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
The Sub-advisor seeks to reduce the overall risks associated with the
Fund's investments through diversification and consideration of factors
affecting the value of securities it considers relevant. No assurance can be
given, however, regarding the degree of success that will be achieved in this
regard or that the Fund will achieve its investment objective.
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements with
respect to money market instruments eligible for investment by the Fund with
member banks of the Federal Reserve system, registered broker-dealers, and
registered government securities dealers. A repurchase agreement may be
considered a loan collateralized by securities. Repurchase agreements maturing
in more than seven days are considered illiquid and will be subject to the
Fund's limitation with respect to illiquid securities.
The Fund has not adopted any limits on the amounts of its total assets
that may be invested in repurchase agreements which mature in less than seven
days. The Fund may invest up to 15% of the market value of its net assets,
measured at the time of purchase, in securities which are not readily
marketable, including repurchase agreements maturing in more than seven days.
For an additional discussion of repurchase agreements and certain risks involved
therein, see the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
Convertible Securities. The Fund may buy securities convertible into
common stock if, for example, the Sub-advisor believes that a company's
convertible securities are undervalued in the market. Convertible securities
eligible for purchase include convertible bonds, convertible preferred stocks,
and warrants. A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specific amount of the corporation's capital
stock at a set price for a specified period of time. Warrants do not represent
ownership of the securities, but only the right to buy the securities. The
prices of warrants do not necessarily move parallel to the prices of underlying
securities. Warrants may be considered speculative in that they have no voting
rights, pay no dividends, and have no rights with respect to the assets of a
corporation issuing them. Warrant positions will not be used to increase the
leverage of the Fund; consequently, warrant positions are generally accompanied
by cash positions equivalent to the required exercise amount.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1. Invest more than 15% of the market value of its net assets in securities
which are not readily marketable, including repurchase agreements maturing in
over seven days;
2. Purchase securities of other investment companies except in compliance
with the Investment Company Act of 1940;
3. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions (and, provided
that margin payments and other deposits in connection with transactions in
options, futures and forward contracts shall not be deemed to constitute
purchasing securities on margin); or
4. Sell securities short.
In addition, in periods of uncertain market and economic conditions, as
determined by the Sub-advisor, the Fund may depart from its basic investment
objective and assume a defensive position with up to 100% of its assets
temporarily invested in high quality corporate bonds or notes and government
issues, or held in cash.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage beyond the specified limit that results
from a change in values or net assets will not be considered a violation.
ASAF T. ROWE PRICE SMALL COMPANY VALUE FUND:
Investment Objective: The investment objective of the Fund is to provide
long-term capital growth by investing primarily in small-capitalization stocks
that appear to be undervalued.
Investment Policies:
Although primarily all of the Fund's assets are invested in common
stocks, the Fund may invest in convertible securities, corporate debt securities
and preferred stocks. The fixed-income securities in which the Fund may invest
include, but are not limited to, those described below. See this SAI under
"Certain Risk Factors and Investment Methods," for an additional discussion of
debt obligations.
U.S. Government Obligations. Bills, notes, bonds and other debt securities
issued by the U.S. Treasury. These are direct obligations of the U.S. Government
and differ mainly in the length of their maturities.
U.S. Government Agency Securities. Issued or guaranteed by U.S.
Government sponsored enterprises and federal agencies. These include securities
issued by the Federal National Mortgage Association, Government National
Mortgage Association, Federal Home Loan Bank, Federal Land Banks, Farmers Home
Administration, Banks for Cooperatives, Federal Intermediate Credit Banks,
Federal Financing Bank, Farm Credit Banks, the Small Business Association, and
the Tennessee Valley Authority. Some of these securities are supported by the
full faith and credit of the U.S. Treasury; and the remainder are supported only
by the credit of the instrumentality, which may or may not include the right of
the issuer to borrow from the Treasury.
Bank Obligations. Certificates of deposit, bankers' acceptances, and other
short-term debt obligations. Certificates of deposit are short-term obligations
of commercial banks. A bankers' acceptance is a time draft drawn on a commercial
bank by a borrower, usually in connection with international commercial
transactions. Certificates of deposit may have fixed or variable rates. The Fund
may invest in U.S. banks, foreign branches of U.S. banks, U.S. branches of
foreign banks, and foreign branches of foreign banks.
Short-Term Corporate Debt Securities. Outstanding nonconvertible
corporate debt securities (e.g., bonds and debentures) which have one year or
less remaining to maturity. Corporate notes may have fixed, variable, or
floating rates.
Commercial Paper. Short-term promissory notes issued by corporations
primarily to finance short-term credit needs. Certain notes may have floating or
variable rates.
Foreign Government Securities. Issued or guaranteed by a foreign
government, province, instrumentality, political subdivision or similar unit
thereof.
Savings and Loan Obligations. Negotiable certificates of deposit and other
short-term debt obligations of savings and loan associations.
Supranational Entities. The Fund may also invest in the securities of
certain supranational entities, such as the International Development Bank.
Lower-Rated Debt Securities. The Fund's investment program permits it
to purchase below investment grade securities, commonly referred to as "junk
bonds." Since investors generally perceive that there are greater risks
associated with investment in lower quality securities, the yields from such
securities normally exceed those obtainable from higher quality securities.
However, the principal value of lower-rated securities generally will fluctuate
more widely than higher quality securities. Lower quality investments entail a
higher risk of default -- that is, the nonpayment of interest and principal by
the issuer than higher quality investments. Such securities are also subject to
special risks, discussed below. Although the Fund seeks to reduce risk by
portfolio diversification, credit analysis, and attention to trends in the
economy, industries and financial markets, such efforts will not eliminate all
risk. There can, of course, be no assurance that the Fund will achieve its
investment objective.
After purchase by the Fund, a debt security may cease to be rated or
its rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require a sale of such security by the Fund. However, the
Sub-advisor will consider such event in its determination of whether the Fund
should continue to hold the security. To the extent that the ratings given by
Moody's or S&P may change as a result of changes in such organizations or their
rating systems, the Fund will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained in the
Company's Prospectus.
Junk bonds are regarded as predominantly speculative with respect to
the issuer's continuing ability to meet principal and interest payments. Because
investment in low and lower-medium quality bonds involves greater investment
risk, to the extent the Fund invests in such bonds, achievement of its
investment objective will be more dependent on the Sub-advisor's credit analysis
than would be the case if the Fund was investing in higher quality bonds. For a
discussion of the special risks involved in low-rated bonds, see this SAI and
the Company's Prospectus under "Certain Risk Factors and Investment Methods."
Mortgage-Backed Securities. Mortgage-backed securities are securities
representing interests in a pool of mortgages. After purchase by the Fund, a
security may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Fund. Neither event will require a sale of such
security by the Fund. However, the Sub-advisor will consider such event in its
determination of whether the Fund should continue to hold the security. To the
extent that the ratings given by Moody's or S&P may change as a result of
changes in such organizations or their rating systems, the Fund will attempt to
use comparable ratings as standards for investments in accordance with the
investment policies contained in the Company's Prospectus. For a discussion of
mortgage-backed securities and certain risks involved therein, see this SAI and
the Company's Prospectus under "Certain Risk Factors and Investment Methods."
Collateralized Mortgage Obligations (CMOs). CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities.
Payments of principal and interest on the mortgages are passed through to the
holders of the CMOs on the same schedule as they are received, although certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
a fund invests, the investment may be subject to a greater or lesser risk of
prepayment than other types of mortgage-related securities. For an additional
discussion of CMOs and certain risks involved therein, see the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
Stripped Agency Mortgage-Backed Securities. Stripped Agency Mortgage-Backed
securities represent interests in a pool of mortgages, the cash flow of which
has been separated into its interest and principal components. "IOs" (interest
only securities) receive the interest portion of the cash flow while "POs"
(principal only securities) receive the principal portion. Stripped Agency
Mortgage-Backed Securities may be issued by U.S. Government Agencies or by
private issuers similar to those described above with respect to CMOs and
privately-issued mortgage-backed certificates. As interest rates rise and fall,
the value of IOs tends to move in the same direction as interest rates. The
value of the other mortgage-backed securities described herein, like other debt
instruments, will tend to move in the opposite direction compared to interest
rates. Under the Internal Revenue Code, POs may generate taxable income from the
current accrual of original issue discount, without a corresponding distribution
of cash to the Fund.
The cash flows and yields on IO and PO classes are extremely sensitive
to the rate of principal payments (including prepayments) on the related
underlying mortgage assets. For example, a rapid or slow rate of principal
payments may have a material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to recoup fully its
initial investment in an IO class of a stripped mortgage-backed security, even
if the IO class is rated AAA or Aaa or is derived from a full faith and credit
obligation. Conversely, if the underlying mortgage assets experience slower than
anticipated prepayments of principal, the price on a PO class will be affected
more severely than would be the case with a traditional mortgage-backed
security.
The Fund will treat IOs and POs, other than government-issued IOs or
POs backed by fixed rate mortgages, as illiquid securities and, accordingly,
limit its investments in such securities, together with all other illiquid
securities, to 15% of the Fund's net assets. The Sub-advisor will determine the
liquidity of these investments based on the following guidelines: the type of
issuer; type of collateral, including age and prepayment characteristics; rate
of interest on coupon relative to current market rates and the effect of the
rate on the potential for prepayments; complexity of the issue's structure,
including the number of tranches; size of the issue and the number of dealers
who make a market in the IO or PO. The Fund will treat non-government-issued IOs
and POs not backed by fixed or adjustable rate mortgages as illiquid unless and
until the Securities and Exchange Commission modifies its position.
Asset-Backed Securities. The Fund may invest a portion of its assets in
debt obligations known as asset-backed securities. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities and the amount and quality of any credit support provided to the
securities. The rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the underlying assets
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any asset-backed security is difficult to predict with
precision and actual yield to maturity may be more or less than the anticipated
yield to maturity.
Automobile Receivable Securities. The Fund may invest in
asset-backed securities which are backed by receivables from motor vehicle
installment sales contracts or installment loans secured by motor vehicles
("Automobile Receivable Securities").
Credit Card Receivable Securities. The Fund may invest in
asset-backed securities backed by receivables from revolving credit card
agreements ("Credit Card Receivable Securities").
Other Assets. The Sub-advisor anticipates that asset-backed
securities backed by assets other than those described above will be issued in
the future. The Fund may invest in such securities in the future if such
investment is otherwise consistent with its investment objective and policies.
For a discussion of these securities, see this SAI and the Company's Prospectus
under "Certain Risk Factors and Investment Methods."
Writing Covered Call Options. The Fund may write (sell) American or
European style "covered" call options and purchase options to close out options
previously written by the Fund. In writing covered call options, the Fund
expects to generate additional premium income which should serve to enhance the
Fund's total return and reduce the effect of any price decline of the security
or currency involved in the option. Covered call options will generally be
written on securities or currencies which, in the Sub-advisor's opinion, are not
expected to have any major price increases or moves in the near future but
which, over the long term, are deemed to be attractive investments for the Fund.
The Fund will write only covered call options. This means that the Fund
will own the security or currency subject to the option or an option to purchase
the same underlying security or currency, having an exercise price equal to or
less than the exercise price of the "covered" option, or will establish and
maintain with its custodian for the term of the option, an account consisting of
cash or other liquid assets having a value equal to the fluctuating market value
of the optioned securities or currencies.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Fund's investment objective. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk (in
contrast to the writing of naked or uncovered options, which the Fund will not
do), but capable of enhancing the Fund's total return. When writing a covered
call option, a fund, in return for the premium, gives up the opportunity for
profit from a price increase in the underlying security or currency above the
exercise price, but conversely retains the risk of loss should the price of the
security or currency decline. Unlike one who owns securities or currencies not
subject to an option, the Fund has no control over when it may be required to
sell the underlying securities or currencies, since it may be assigned an
exercise notice at any time prior to the expiration of its obligation as a
writer. If a call option which the Fund has written expires, the Fund will
realize a gain in the amount of the premium; however, such gain may be offset by
a decline in the market value of the underlying security or currency during the
option period. If the call option is exercised, the Fund will realize a gain or
loss from the sale of the underlying security or currency. The Fund does not
consider a security or currency covered by a call to be "pledged" as that term
is used in the Fund's policy which limits the pledging or mortgaging of its
assets.
Call options written by the Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities or currencies at the time the options are written. From time to time,
the Fund may purchase an underlying security or currency for delivery in
accordance with an exercise notice of a call option assigned to it, rather than
delivering such security or currency from its portfolio. In such cases,
additional costs may be incurred.
The premium received is the market value of an option. The premium the
Fund will receive from writing a call option will reflect, among other things,
the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, the Sub-advisor,
in determining whether a particular call option should be written on a
particular security or currency, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will exist
for those options. The premium received by the Fund for writing covered call
options will be recorded as a liability of the Fund. This liability will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Fund is
computed (close of the New York Stock Exchange), or, in the absence of such
sale, the latest asked price. The option will be terminated upon expiration of
the option, the purchase of an identical option in a closing transaction, or
delivery of the underlying security or currency upon the exercise of the option.
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Fund.
The Fund will not write a covered call option if, as a result, the
aggregate market value of all portfolio securities or currencies covering call
or put options exceeds 25% of the market value of the Fund's net assets. In
calculating the 25% limit, the Fund will offset, against the value of assets
covering written calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.
Writing Covered Put Options. The Fund may write American or European
style covered put options and purchase options to close out options previously
written by the Fund.
The Fund would write put options only on a covered basis, which means
that the Fund would maintain in a segregated account cash, U.S. government
securities or other liquid high-grade debt obligations in an amount not less
than the exercise price or the Fund will own an option to sell the underlying
security or currency subject to the option having an exercise price equal to or
greater than the exercise price of the "covered" option at all times while the
put option is outstanding. (The rules of a clearing corporation currently
require that such assets be deposited in escrow to secure payment of the
exercise price.) The Fund would generally write covered put options in
circumstances where the Sub-advisor wishes to purchase the underlying security
or currency for the Fund at a price lower than the current market price of the
security or currency. In such event the Fund would write a put option at an
exercise price which, reduced by the premium received on the option, reflects
the lower price it is willing to pay. Since the Fund would also receive interest
on debt securities or currencies maintained to cover the exercise price of the
option, this technique could be used to enhance current return during periods of
market uncertainty. The risk in such a transaction would be that the market
price of the underlying security or currency would decline below the exercise
price less the premiums received. Such a decline could be substantial and result
in a significant loss to the Fund. In addition, the Fund, because it does not
own the specific securities or currencies which it may be required to purchase
in exercise of the put, cannot benefit from appreciation, if any, with respect
to such specific securities or currencies.
The Fund will not write a covered put option if, as a result, the
aggregate market value of all portfolio securities or currencies covering put or
call options exceeds 25% of the market value of the Fund's net assets. In
calculating the 25% limit, the Fund will offset, against the value of assets
covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.
Purchasing Put Options. The Fund may purchase American or European
style put options. As the holder of a put option, the Fund has the right to sell
the underlying security or currency at the exercise price at any time during the
option period (American style) or at the expiration of the option (European
style). The Fund may enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. The Fund may purchase put
options for defensive purposes in order to protect against an anticipated
decline in the value of its securities or currencies. An example of such use of
put options is provided in this SAI under "Certain Risk Factors and Investment
Methods."
The premium paid by the Fund when purchasing a put option will be
recorded as an asset of the Fund. This asset will be adjusted daily to the
option's current market value, which will be the latest sale price at the time
at which the net asset value per share of the Fund is computed (close of New
York Stock Exchange), or, in the absence of such sale, the latest bid price.
This asset will be terminated upon expiration of the option, the selling
(writing) of an identical option in a closing transaction, or the delivery of
the underlying security or currency upon the exercise of the option.
Purchasing Call Options. The Fund may purchase American or European
style call options. As the holder of a call option, the Fund has the right to
purchase the underlying security or currency at the exercise price at any time
during the option period (American style) or at the expiration of the option
(European style). The Fund may enter into closing sale transactions with respect
to such options, exercise them or permit them to expire. The Fund may purchase
call options for the purpose of increasing its current return or avoiding tax
consequences which could reduce its current return. The Fund may also purchase
call options in order to acquire the underlying securities or currencies.
Examples of such uses of call options are provided in this SAI under "Certain
Risk Factors and Investment Methods."
The Fund may also purchase call options on underlying securities or
currencies it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for this purpose
where tax considerations make it inadvisable to realize such gains through a
closing purchase transaction. Call options may also be purchased at times to
avoid realizing losses.
Dealer (Over-the-Counter) Options. The Fund may engage in transactions
involving dealer options. Certain risks are specific to dealer options. While
the Fund would look to a clearing corporation to exercise exchange-traded
options, if the Fund were to purchase a dealer option, it would rely on the
dealer from whom it purchased the option to perform if the option were
exercised. Failure by the dealer to do so would result in the loss of the
premium paid by the Fund as well as loss of the expected benefit of the
transaction. For a discussion of dealer options, see this SAI under "Certain
Risk Factors and Investment Methods."
Futures Contracts:
Transactions in Futures. The Fund may enter into futures
contracts, including stock index, interest rate and currency futures ("futures
or futures contracts"). The Fund may also enter into futures on commodities
related to the types of companies in which it invests, such as oil and gold
futures. Otherwise the nature of such futures and the regulatory limitations and
risks to which they are subject are the same as those described below.
Stock index futures contracts may be used to attempt to hedge
a portion of the Fund, as a cash management tool, or as an efficient way for the
Sub-advisor to implement either an increase or decrease in portfolio market
exposure in response to changing market conditions. The Fund may purchase or
sell futures contracts with respect to any stock index. Nevertheless, to hedge
the Fund successfully, the Fund must sell futures contacts with respect to
indices or subindices whose movements will have a significant correlation with
movements in the prices of the Fund's securities.
Interest rate or currency futures contracts may be used to
attempt to hedge against changes in prevailing levels of interest rates or
currency exchange rates in order to establish more definitely the effective
return on securities or currencies held or intended to be acquired by the Fund.
In this regard, the Fund could sell interest rate or currency futures as an
offset against the effect of expected increases in interest rates or currency
exchange rates and purchase such futures as an offset against the effect of
expected declines in interest rates or currency exchange rates.
The Fund will enter into futures contracts which are traded on
national or foreign futures exchanges, and are standardized as to maturity date
and underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the CFTC. Futures are
traded in London, at the London International Financial Futures Exchange, in
Paris, at the MATIF, and in Tokyo, at the Tokyo Stock Exchange. Although
techniques other than the sale and purchase of futures contracts could be used
for the above-referenced purposes, futures contracts offer an effective and
relatively low cost means of implementing the Fund's objectives in these areas.
Regulatory Limitations. The Fund will engage in futures
contracts and options thereon only for bona fide hedging, yield enhancement, and
risk management purposes, in each case in accordance with rules and regulations
of the CFTC.
The Fund may not purchase or sell futures contracts or related
options if, with respect to positions which do not qualify as bona fide hedging
under applicable CFTC rules, the sum of the amounts of initial margin deposits
and premiums paid on those positions would exceed 5% of the net asset value of
the Fund after taking into account unrealized profits and unrealized losses on
any such contracts it has entered into; provided, however, that in the case of
an option that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in calculating the 5% limitation. For purposes of this policy
options on futures contracts and foreign currency options traded on a
commodities exchange will be considered "related options." This policy may be
modified by the Directors of the Company without a shareholder vote and does not
limit the percentage of the Fund's assets at risk to 5%.
The Fund's use of futures contracts will not result in
leverage. Therefore, to the extent necessary, in instances involving the
purchase of futures contracts or the writing of call or put options thereon by
the Fund, an amount of cash or other liquid assets equal to the market value of
the futures contracts and options thereon (less any related margin deposits),
will be identified in an account with the Fund's custodian to cover the
position, or alternative cover (such as owning an offsetting position) will be
employed. Assets used as cover or held in an identified account cannot be sold
while the position in the corresponding option or future is open, unless they
are replaced with similar assets. As a result, the commitment of a large portion
of the Fund's assets to cover or identified accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
If the CFTC or other regulatory authorities adopt different
(including less stringent) or additional restrictions, the Fund would comply
with such new restrictions.
Options on Futures Contracts. The Fund may purchase and sell options on
the same types of futures in which it may invest. As an alternative to writing
or purchasing call and put options on stock index futures, the Fund may write or
purchase call and put options on stock indices. Such options would be used in a
manner similar to the use of options on futures contracts. From time to time, a
single order to purchase or sell futures contracts (or options thereon) may be
made on behalf of the Fund and other mutual funds or portfolios of mutual funds
managed by the Sub-advisor or Rowe Price-Fleming International, Inc. Such
aggregated orders would be allocated among the Fund and such other portfolios
managed by the Sub-advisor in a fair and non-discriminatory manner. See this SAI
and Company's Prospectus under "Certain Risk Factors and Investment Methods" for
a description of certain risks in options and future contracts.
Additional Futures and Options Contracts. Although the Fund has no
current intention of engaging in futures or options transactions other than
those described above, it reserves the right to do so. Such futures and options
trading might involve risks which differ from those involved in the futures and
options described above.
Foreign Futures and Options. The Fund is permitted to invest in foreign
futures and options. For a description of foreign futures and options and
certain risks involved therein as well as certain risks involved in foreign
investing, see this SAI and the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
Foreign Securities. The Fund may invest in U.S. dollar-denominated and
non-U.S. dollar-denominated securities of foreign issuers. There are special
risks in foreign investing. Certain of these risks are inherent in any
international mutual fund while others relate more to the countries in which the
Fund will invest. Many of the risks are more pronounced for investments in
developing or emerging countries, such as many of the countries of Southeast
Asia, Latin America, Eastern Europe and the Middle East. For an additional
discussion of certain risks involved in investing in foreign securities, see
this SAI and the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
Foreign Currency Transactions. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are principally traded in the interbank market conducted directly
between currency traders (usually large, commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades.
The Fund may enter into forward contracts for a variety of purposes in
connection with the management of the foreign securities portion of its
portfolio. The Fund's use of such contracts would include, but not be limited
to, the following: First, when the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, it may desire to "lock
in" the U.S. dollar price of the security. Second, when the Sub-advisor believes
that one currency may experience a substantial movement against another
currency, including the U.S. dollar, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the value
of some or all of the Fund's securities denominated in such foreign currency.
Alternatively, where appropriate, the Fund may hedge all or part of its foreign
currency exposure through the use of a basket of currencies or a proxy currency
where such currency or currencies act as an effective proxy for other
currencies. In such a case, the Fund may enter into a forward contract where the
amount of the foreign currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging technique may be
more efficient and economical than entering into separate forward contracts for
each currency held in the Fund. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible
since the future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The
projection of short-term currency market movement is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
Under normal circumstances, consideration of the prospect for currency parities
will be incorporated into the longer term investment decisions made with regard
to overall diversification strategies. However, the Sub-advisor believes that it
is important to have the flexibility to enter into such forward contracts when
it determines that the best interests of the Fund will be served.
The Fund may enter into forward contracts for any other purpose
consistent with the Fund's investment objective and policies. However, the Fund
will not enter into a forward contract, or maintain exposure to any such
contract(s), if the amount of foreign currency required to be delivered
thereunder would exceed the Fund's holdings of liquid assets and currency
available for cover of the forward contract(s). In determining the amount to be
delivered under a contract, the Fund may net offsetting positions.
At the maturity of a forward contract, the Fund may sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and either extend the maturity of the forward contract (by "rolling"
that contract forward) or may initiate a new forward contract.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent of the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is not
required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Sub-advisor. It also should be realized that this method of hedging against
a decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange at
a future date. Additionally, although such contracts tend to minimize the risk
of loss due to a decline in the value of the hedged currency, at the same time,
they tend to limit any potential gain which might result from an increase in the
value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. It will do so from time to time, and investors should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer. For a discussion of certain risk factors
involved in foreign currency transactions, see this SAI and the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts. The Fund may enter into certain option, futures, and forward
foreign exchange contracts, including options and futures on currencies, which
will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Fund's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains or
losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Fund will
be required to distribute net gains on such transactions to shareholders even
though it may not have closed the transaction and received cash to pay such
distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes, in which
case a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of the
securities or currencies comprising the straddle will be deemed not to begin
until the straddle is terminated. For securities offsetting a purchased put,
this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity security
will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital loss, if the security covering the option was held for more
than twelve months prior to the writing of the option.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income, i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Pending tax regulations could limit the extent that
net gain realized from option, futures or foreign forward exchange contracts on
currencies is qualifying income for purposes of the 90% requirement. In
addition, gains realized on the sale or other disposition of securities,
including option, futures or foreign forward exchange contracts on securities or
securities indexes and, in some cases, currencies, held for less than three
months, must be limited to less than 30% of the Fund's annual gross income. In
order to avoid realizing excessive gains on securities or currencies held less
than three months, the Fund may be required to defer the closing out of option,
futures or foreign forward exchange contracts) beyond the time when it would
otherwise be advantageous to do so. It is anticipated that unrealized gains on
Section 1256 option, futures and foreign forward exchange contracts, which have
been open for less than three months as of the end of the Fund's fiscal year and
which are recognized for tax purposes, will not be considered gains on
securities or currencies held less than three months for purposes of the 30%
test.
Illiquid and Restricted Securities. If through the appreciation of
illiquid securities or the depreciation of liquid securities, the Fund should be
in a position where more than 15% of the value of its net assets is invested in
illiquid assets, including restricted securities, the Fund will take appropriate
steps to protect liquidity.
Notwithstanding the above, the Fund may purchase securities which,
while privately placed, are eligible for purchase and sale under Rule 144A under
the Securities Act of 1933 (the "1933 Act"). This rule permits certain qualified
institutional buyers, such as the Fund, to trade in privately placed securities
even though such securities are not registered under the 1933 Act. The
Sub-advisor, under the supervision of the Directors of the Company, will
consider whether securities purchased under Rule 144A are illiquid and thus
subject to the Fund's restriction of investing no more than 15% of its net
assets in illiquid securities. A determination of whether a Rule 144A security
is liquid or not is a question of fact. In making this determination, the
Sub-advisor will consider the trading markets for the specific security taking
into account the unregistered nature of a Rule 144A security. In addition, the
Sub-advisor could consider the (1) frequency of trades and quotes, (2) number of
dealers and potential purchasers, (3) dealer undertakings to make a market, and
(4) the nature of the security and of marketplace trades (e.g., the time needed
to dispose of the security, the method of soliciting offers and the mechanics of
transfer). The liquidity of Rule 144A securities would be monitored, and if as a
result of changed conditions it is determined that a Rule 144A security is no
longer liquid, the Fund's holdings of illiquid securities would be reviewed to
determine what, if any, steps are required to assure that the Fund does not
invest more than 15% of its net assets in illiquid securities. Investing in Rule
144A securities could have the effect of increasing the amount of the Fund's
assets invested in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities.
The Directors of the Company have promulgated guidelines with respect
to illiquid securities.
Hybrid Instruments. Hybrid Instruments have been developed and combine
the elements of futures contracts, options or other financial instruments with
those of debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments). Hybrid Instruments may take a variety of forms, including, but not
limited to, debt instruments with interest or principal payments or redemption
terms determined by reference to the value of a currency or commodity or
securities index at a future point in time, preferred stock with dividend rates
determined by reference to the value of a currency, or convertible securities
with the conversion terms related to a particular commodity. For a discussion of
certain risks involved in investing in hybrid instruments see this SAI under
"Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines adopted by the Directors
of the Company, the Fund may enter into a repurchase agreement through which an
investor (such as the Fund) purchases a security (known as the "underlying
security") from a well-established securities dealer or a bank that is a member
of the Federal Reserve System. Any such dealer or bank will be on the
Sub-advisor's approved list and have a credit rating with respect to its
short-term debt of at least A1 by Standard & Poor's Corporation, P1 by Moody's
Investors Service, Inc., or the equivalent rating by the Sub-advisor. At that
time, the bank or securities dealer agrees to repurchase the underlying security
at the same price, plus specified interest. Repurchase agreements are generally
for a short period of time, often less than a week. Repurchase agreements which
do not provide for payment within seven days will be treated as illiquid
securities. The Fund will only enter into repurchase agreements where (i) the
underlying securities are of the type (excluding maturity limitations) which the
Fund's investment guidelines would allow it to purchase directly, (ii) the
market value of the underlying security, including interest accrued, will be at
all times equal to or exceed the value of the repurchase agreement, and (iii)
payment for the underlying security is made only upon physical delivery or
evidence of book- entry transfer to the account of the custodian or a bank
acting as agent. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Fund could experience both delays in liquidating the
underlying security and losses, including: (a) possible decline in the value of
the underlying security during the period while the Fund seeks to enforce its
rights thereto; (b) possible subnormal levels of income and lack of access to
income during this period; and (c) expenses of enforcing its rights.
Reverse Repurchase Agreements. Although the Fund has no current
intention, in the foreseeable future, of engaging in reverse repurchase
agreements, the Fund reserves the right to do so. Reverse repurchase agreements
are ordinary repurchase agreements in which a fund is the seller of, rather than
the investor in, securities, and agrees to repurchase them at an agreed upon
time and price. Use of a reverse repurchase agreement may be preferable to a
regular sale and later repurchase of the securities because it avoids certain
market risks and transaction costs. A reverse repurchase agreement may be viewed
as a type of borrowing by the Fund.
Warrants. The Fund may acquire warrants. For a discussion of certain risks
involved therein, see this SAI under "Certain Risk Factor and Investment
Methods."
Lending of Portfolio Securities. Securities loans are made to
broker-dealers or institutional investors or other persons, pursuant to
agreements requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent marked to market on
a daily basis. The collateral received will consist of cash, U.S. government
securities, letters of credit or such other collateral as may be permitted under
its investment program. While the securities are being lent, the Fund will
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. The Fund has a right to call each loan
and obtain the securities on five business days' notice or, in connection with
securities trading on foreign markets, within such longer period of time which
coincides with the normal settlement period for purchases and sales of such
securities in such foreign markets. The Fund will not have the right to vote
securities while they are being lent, but it will call a loan in anticipation of
any important vote. The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delay in receiving additional
collateral or in the recovery of the securities or possible loss of rights in
the collateral should the borrower fail financially. Loans will only be made to
firms deemed by the Sub-advisor to be of good standing and will not be made
unless, in the judgment of the Sub-advisor, the consideration to be earned from
such loans would justify the risk.
Other Lending/Borrowing. Subject to approval by the Securities and
Exchange Commission, the Fund may make loans to, or borrow funds from, other
mutual funds sponsored or advised by the Sub-advisor or Rowe Price-Fleming
International, Inc. The Fund has no current intention of engaging in these
practices at this time.
When-Issued Securities and Forward Commitment Contracts. The Fund may
purchase securities on a "when-issued" or delayed delivery basis and may
purchase securities on a forward commitment basis. Any or all of the Fund's
investments in debt securities may be in the form of when-issueds and forwards.
The price of such securities, which may be expressed in yield terms, is fixed at
the time the commitment to purchase is made, but delivery and payment take place
at a later date. Normally, the settlement date occurs within 90 days of the
purchase for when-issueds, but may be substantially longer for forwards. The
Fund will cover these securities by maintaining cash and/or other liquid assets,
with its custodian bank equal in value to commitments for them during the time
between the purchase and the settlement. Such segregated securities either will
mature or, if necessary, be sold on or before the settlement date. For a
discussion of these securities and the risks involved therein, see this SAI
under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1. Purchase additional securities when money borrowed exceeds 5% of its
total assets;
2. Invest in companies for the purpose of exercising management or control;
3. Purchase a futures contract or an option thereon if, with respect to
positions in futures or options on futures which do not represent bona fide
hedging, the aggregate initial margin and premiums on such options would exceed
5% of the Fund's net asset value;
4. Purchase illiquid securities if, as a result, more than 15% of its net
assets would be invested in such securities. Securities eligible for resale
under Rule 144A of the 1933 Act may be subject to this 15% limitation;
5. Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940;
6. Purchase securities on margin, except (i) for use of short-term credit
necessary for clearance of purchases of portfolio securities and (ii) the Fund
may make margin deposits in connection with futures contracts or other
permissible investments;
7. Mortgage, pledge, hypothecate or, in any manner, transfer any security
owned by the Fund as security for indebtedness except as may be necessary in
connection with permissible borrowings or investments and then such mortgaging,
pledging or hypothecating may not exceed 33 1/3% of the Fund's total assets at
the time of borrowing or investment;
8. Invest in puts, calls, straddles, spreads, or any combination thereof,
except to the extent permitted by the Company's Prospectus and this SAI;
9. Effect short sales of securities; or
10. Invest in warrants if, as a result thereof, more than 10% of the value
of the net assets of the Fund would be invested in warrants, except that this
restriction does not apply to warrants acquired as a result of the purchase of
another security. For purposes of these percentage limitations, the warrants
will be valued at the lower of cost or market.
ASAF JANUS CAPITAL GROWTH FUND:
Investment Objective: The investment objective of the Fund is to seek growth of
capital. Realization of income is not a significant investment consideration and
any income realized on the Fund's investments, therefore, will be incidental to
the Fund's objective.
Investment Policies:
Futures, Options and Other Derivative Instruments. The Fund may enter
into futures contracts on securities, financial indices, and foreign currencies
and options on such contracts, and may invest in options on securities,
financial indices and foreign currencies, forward contracts and swaps. The Fund
will not enter into any futures contracts or options on futures contracts if the
aggregate amount of the Fund's commitments under outstanding futures contract
positions and options on futures contracts written by the Fund would exceed the
market value of the total assets of the Fund (i.e., no leveraging). The Fund may
invest in forward currency contracts with stated values of up to the value of
the Fund's assets.
The Fund may buy or write options in privately negotiated transactions
on the types of securities and indices based on the types of securities in which
the Fund is permitted to invest directly. The Fund will effect such transactions
only with investment dealers and other financial institutions (such as
commercial banks or savings and loan institutions) deemed creditworthy, and only
pursuant to procedures adopted, by the Sub-advisor for monitoring the
creditworthiness of those entities. To the extent that an option bought or
written by the Fund in a negotiated transaction is illiquid, the value of an
option bought or the amount of the Fund's obligations under an option written by
the Fund, as the case may be, will be subject to the Fund's limitation on
illiquid investments. In the case of illiquid options, it may not be possible
for the Fund to effect an offsetting transaction at a time when the Sub-advisor
believes it would be advantageous for the Fund to do so. For a description of
these strategies and instruments and certain risks involved therein, see this
SAI and the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
Interest Rate Swaps and Purchasing and Selling Interest Rate Caps and
Floors. In addition to the strategies noted above, the Fund, in order to attempt
to protect the value of its investments from interest rate or currency exchange
rate fluctuations, may enter into interest rate swaps and may buy or sell
interest rate caps and floors. The Fund expects to enter into these transactions
primarily to preserve a return or spread on a particular investment or portion
of its investments. The Fund also may enter into these transactions to protect
against any increase in the price of securities the Fund may consider buying at
a later date. The Fund does not intend to use these transactions as a
speculative investments. Interest rate swaps involve the exchange by the Fund
with another party of their respective commitments to pay or receive interest,
e.g., an exchange of floating rate payments for fixed rate payments. The
exchange commitments can involve payments to be made in the same currency or in
different currencies. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually based principal amount
from the party selling the interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a contractually
based principal amount from the party selling the interest rate floor.
The Fund may enter into interest rate swaps, caps and floors on either
an asset-based or liability-based basis, depending upon whether it is hedging
its assets or its liabilities, and will usually enter into interest rate swaps
on a net basis, i.e., the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each interest rate swap will be calculated on a
daily basis and an amount of cash or other liquid assets having an aggregate net
asset value at least equal to the accrued excess will be maintained in a
segregated account by the Fund's custodian. If the Fund enters into an interest
rate swap on other than a net basis, the Fund would maintain a segregated
account in the full amount accrued on a daily basis of the Fund's obligations
with respect to the swap. The Fund will not enter into any interest rate swap,
cap or floor transaction unless the unsecured senior debt or the claims-paying
ability of the other party thereto is rated in one of the three highest rating
categories of at least one nationally recognized statistical rating organization
at the time of entering into such transaction. The Sub-advisor will monitor the
creditworthiness of all counterparties on an ongoing basis. If there is a
default by the other party to such a transaction, the Fund will have contractual
remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. The Sub-advisor has determined
that, as a result, the swap market has become relatively liquid. Caps and floors
are more recent innovations for which standardized documentation has not yet
been developed and, accordingly, they are less liquid than swaps. To the extent
the Fund sells (i.e., writes) caps and floors, it will maintain in a segregated
account cash or other liquid assets having an aggregate net asset value at least
equal to the full amount, accrued on a daily basis, of the Fund's obligations
with respect to any caps or floors.
There is no limit on the amount of interest rate swap transactions that
may be entered into by the Fund. These transactions may in some instances
involve the delivery of securities or other underlying assets by the Fund or its
counterparty to collateralize obligations under the swap. Under the
documentation currently used in those markets, the risk of loss with respect to
interest rate swaps is limited to the net amount of the payments that the Fund
is contractually obligated to make. If the other party to an interest rate swap
that is not collateralized defaults, the Fund would risk the loss of the net
amount of the payments that the Fund contractually is entitled to receive. The
Fund may buy and sell (i.e., write) caps and floors without limitation, subject
to the segregated account requirement described above. For an additional
discussion of these strategies, see this SAI under "Certain Risk Factors and
Investment Methods."
Repurchase Agreements and Reverse Repurchase Agreements. Subject to
guidelines promulgated by the Directors of the Company, the Fund may enter into
repurchase agreements. The Fund may also enter into reverse repurchase
agreements. For a description of these investment techniques, see the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are not "fundamental" investment restrictions and may
be changed by the Directors of the Company without shareholder approval.
The Fund will not:
1. Purchase a security if as a result, more than 15% of its net assets in
the aggregate, at market value, would be invested in securities which cannot be
readily resold because of legal or contractual restrictions on resale or for
which there is no readily available market, or repurchase agreements maturing in
more than seven days or securities used as a cover for written over-the-counter
options, if any. The Directors of the Company, the Investment Manager or the
Sub-advisor acting pursuant to authority delegated by the Directors, may
determine that a readily available market exists for securities eligible for
resale pursuant to Rule 144A under the Securities Act of 1933, or any successor
to such rule, and therefore that such securities are not subject to the
foregoing limitation;
2. Enter into any futures contracts or options on futures contracts for
purposes other than bona fide hedging transactions (as defined by the CFTC) if
as a result the sum of the initial margin deposits and premium required to
establish positions in futures contracts and related options that do not fall
within the definition of bona fide hedging transactions would exceed 5% of the
fair market value of the Fund's net assets;
3. Enter into any futures contracts if the aggregate amount of the Fund's
commitments under outstanding futures contracts positions of the Fund would
exceed the market value of the total assets of the Fund;
4. Sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options, swaps and forward futures contracts are
not deemed to constitute selling securities short;
5. Mortgage or pledge any securities owned or held by the Fund in amounts
that exceed, in the aggregate, 15% of the Fund's net asset value, provided that
this limitation does not apply to reverse repurchase agreements or in the case
of assets deposited to margin or guarantee positions in futures, options, swaps
or forward contracts or placed in a segregated account in connection with such
contracts;
6. Invest in companies for the purpose of exercising management or control;
7. Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940; or
8. Purchase securities on margin, except (i) for use of short-term credit
necessary for clearance of purchases of portfolio securities and (ii) the Fund
may make margin deposits in connection with futures contracts or other
permissible investments.
ASAF INVESCO EQUITY INCOME FUND:
Investment Objective: The investment objective of the Fund is to seek high
current income while following sound investment practices.
Investment Policies:
The Fund will pursue its objective by investing its assets in
securities which will provide a relatively high-yield and stable return and
which, over a period of years, may also provide capital appreciation. Capital
growth potential is an additional consideration in the selection of portfolio
securities. The Fund invests in common stocks, as well as convertible bonds and
preferred stocks.
In pursuing its investment objective, the Fund normally invests at
least 65% of its total assets in dividend paying common stocks. Up to 10% of the
Fund's assets may be invested in equity securities that do not pay regular
dividends. The remaining assets are invested in other income producing
securities, such as corporate bonds. Sometimes warrants are acquired when
offered with income-producing securities, but the warrants are disposed of at
the first favorable opportunity. Acquiring warrants involves a risk that the
Fund will lose the premium it pays to acquire warrants if the Fund does not
exercise a warrant before it expires. The major portion of the investment
portfolio normally consists of common stocks, convertible bonds and debentures,
and preferred stocks; however, there may also be substantial holdings of debt
securities, including non-investment grade and unrated debt securities.
Debt Securities. The debt securities in which the Fund invests are
generally subject to two kinds of risk, credit risk and market risk. The ratings
given a debt security by Moody's and Standard & Poor's ("S&P") provide a
generally useful guide as to such credit risk. The lower the rating given a debt
security by such rating service, the greater the credit risk such rating service
perceives to exist with respect to such security. Increasing the amount of Fund
assets invested in unrated or lower grade (Ba or less by Moody's, BB or less by
S&P) debt securities, while intended to increase the yield produced by the
Fund's debt securities, will also increase the credit risk to which those debt
securities are subject.
Lower-rated debt securities and non-rated securities of comparable
quality tend to be subject to wider fluctuations in yields and market values
than higher rated debt securities and may have speculative characteristics.
Although the Fund may invest in debt securities assigned lower grade ratings by
S&P or Moody's, the Fund's investments have generally been limited to debt
securities rated B or higher by either S&P or Moody's. Debt securities rated
lower than B by either S&P or Moody's may be highly speculative. The Sub-advisor
intends to limit such portfolio investments to debt securities which are not
believed by the Sub-advisor to be highly speculative and which are rated at
least CCC or Caa, respectively, by S&P or Moody's. In addition, a significant
economic downturn or major increase in interest rates may well result in issuers
of lower-rated debt securities experiencing increased financial stress which
would adversely affect their ability to service their principal and interest
obligations, to meet projected business goals, and to obtain additional
financing. While the Sub-advisor attempts to limit purchases of lower-rated debt
securities to securities having an established retail secondary market, the
market for such securities may not be as liquid as the market for higher rated
debt securities. For an additional discussion of certain risks involved in
lower-rated or unrated securities, see this SAI and the Company's Prospectus
under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. As discussed in the Company's Prospectus, the
Fund may enter into repurchase agreements with respect to debt instruments
eligible for investment by the Fund, with member banks of the Federal Reserve
System, registered broker-dealers, and registered government securities dealers.
A repurchase agreement may be considered a loan collateralized by securities.
The resale price reflects an agreed upon interest rate effective for the period
the instrument is held by the Fund and is unrelated to the interest rate on the
underlying instrument. In these transactions, the securities acquired by the
Fund (including accrued interest earned thereon) must have a total value in
excess of the value of the repurchase agreement, and are held by the Fund's
Custodian Bank until repurchased. For an additional discussion of repurchase
agreements and certain risks involved therein, see this SAI under "Certain Risk
Factors and Investment Methods."
The Directors of the Company have promulgated guidelines with respect
to repurchase agreements.
Lending Portfolio Securities. The Fund may lend its securities to
qualified brokers, dealers, banks, or other financial institutions. While voting
rights may pass with the loaned securities, if a material event (e.g., proposed
merger, sale of assets, or liquidation) is to occur affecting an investment on
loan, the loan must be called and the securities voted. Loans of securities made
by the Fund will comply with all other applicable regulatory requirements,
including the rules of the New York Stock Exchange and the requirements of the
Investment Company Act of 1940 and the Rules of the Securities and Exchange
Commission thereunder.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1. Invest in companies for the purpose of exercising management or control;
2. Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940;
3. Purchase securities on margin, except (i) for use of short-term credit
necessary for clearance of purchases of portfolio securities and (ii) the Fund
may make margin deposits in connection with futures contracts or other
permissible investments;
4. Effect short sales of securities; or
5. Purchase any security or enter into a repurchase agreement, if as a
result, more than 15% of its net assets would be invested in repurchase
agreements not entitling the holder to payment of principal and interest within
seven days and in securities that are illiquid by virtue of legal or contractual
restrictions on resale or the absence of a readily available market. The
Directors of the Company, or the Investment Manager or the Sub-advisor acting
pursuant to authority delegated by the Directors, may determine that a readily
available market exists for securities eligible for resale pursuant to Rule 144A
under the Securities Act of 1933, or any successor to that rule, and therefore
that such securities are not subject to the foregoing limitation.
ASAF AMERICAN CENTURY STRATEGIC BALANCED FUND:
Investment Objective: The investment objective of the Fund is to seek
capital growth and current income.
Investment Policies:
In general, within the restrictions outlined herein, the Sub-advisor
has broad powers with respect to investing funds or holding them uninvested.
Investments are varied according to what is judged advantageous under changing
economic conditions. It will be the policy of the Sub-advisor to retain maximum
flexibility in management without restrictive provisions as to the proportion of
one or another class of securities that may be held subject to the investment
restrictions described below. However, the Sub-advisor may invest the assets of
the Fund in varying amounts in other instruments and in senior securities, such
as bonds, debentures, preferred stocks and convertible issues, when such a
course is deemed appropriate in order to attempt to attain its financial
objectives. Senior securities that, in the opinion of the Sub-advisor, are
high-grade issues may also be purchased for defensive purposes.
The above statement of investment policy gives the Sub-advisor
authority to invest in securities other than common stocks and traditional debt
and convertible issues. The Sub-advisor may invest in master limited
partnerships (other than real estate partnerships) and royalty trusts which are
traded on domestic stock exchanges when such investments are deemed appropriate
for the attainment of the Fund's investment objectives.
The Sub-advisor will invest approximately 60% of the Fund in common
stocks and the balance in fixed income securities. Common stock investments are
described above. The fixed income assets will be invested primarily in
investment grade securities. The Fund may invest in securities of the United
States government and its agencies and instrumentalities, corporate, sovereign
government, municipal, mortgage-backed, and other asset-backed securities. It
can be expected that the Sub-advisor will invest from time to time in bonds and
preferred stock convertible into common stock.
Forward Currency Exchange Contracts. The Fund conducts its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or through entering
into forward foreign currency exchange contracts to purchase or sell foreign
currencies.
The Fund expects to use forward contracts under two circumstances: (1)
when the Sub-advisor wishes to "lock in" the U.S. dollar price of a security
when the Fund is purchasing or selling a security denominated in a foreign
currency, the Fund would be able to enter into a forward contract to do so; (2)
when the Sub-advisor believes that the currency of a particular foreign country
may suffer a substantial decline against the U.S. dollar, the Fund would be able
to enter into a forward contract to sell foreign currency for a fixed U.S.
dollar amount approximating the value of some or all of the Fund's securities
either denominated in, or whose value is tied to, such foreign currency.
As to the first circumstance, when the Fund enters into a trade for the
purchase or sale of a security denominated in a foreign currency, it may be
desirable to establish (lock in) the U.S. dollar cost or proceeds. By entering
into forward contracts in U.S. dollars for the purchase or sale of a foreign
currency involved in an underlying security transaction, the Fund will be able
to protect itself against a possible loss between trade and settlement dates
resulting from the adverse change in the relationship between the U.S. dollar at
the subject foreign currency.
Under the second circumstance, when the Sub-advisor believes that the
currency of a particular country may suffer a substantial decline relative to
the U.S. dollar, the Fund could enter into a foreign contract to sell for a
fixed dollar amount the amount in foreign currencies approximating the value of
some or all of its portfolio securities either denominated in, or whose value is
tied to, such foreign currency. The Fund will place cash or high-grade liquid
securities in a separate account with its custodian in an amount sufficient to
cover its obligation under the contract. If the value of the securities placed
in the separate account declines, additional cash or securities will be placed
in the account on a daily basis so that the value of the account equals the
amount of the Fund's commitments with respect to such contracts.
The precise matching of forward contracts in the amounts and values of
securities involved would not generally be possible since the future values of
such foreign currencies will change as a consequence of market movements in the
values of those securities between the date the forward contract is entered into
and the date it matures. Predicting short-term currency market movements is
extremely difficult, and the successful execution of short-term hedging strategy
is highly uncertain. The Sub-advisor does not intend to enter into such
contracts on a regular basis. Normally, consideration of the prospect for
currency parities will be incorporated into the long-term investment decisions
made with respect to overall diversification strategies. However, the
Sub-advisor believes that it is important to have flexibility to enter into such
forward contracts when it determines that the Fund 's best interests may be
served.
Generally, the Fund will not enter into a forward contract with a term
of greater than one year. At the maturity of the forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate the obligation to deliver the foreign
currency by purchasing an "offsetting" forward contract with the same currency
trader obligating the Fund to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value
of the Fund's securities at the expiration of the forward contract. Accordingly,
it may be necessary for the Fund to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency the Fund is obligated to deliver. For an additional discussion
of forward currency exchange contracts and certain risks involved therein, see
this SAI and the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
Futures Contracts. As described in the Company's Prospectus, the Fund
may enter into futures contracts. Unlike when the Fund purchases securities, no
purchase price for the underlying securities is paid by the Fund at the time it
purchases a futures contract. When a futures contract is entered into, both the
buyer and seller of the contract are required to deposit with a futures
commission merchant ("FCM") cash or high-grade debt securities in an amount
equal to a percentage of the contract's value, as set by the exchange on which
the contract is traded. This amount is known as "initial margin" and is held by
the Fund's custodian for the benefit of the FCM in the event of any default by
the Fund in the payment of any future obligations.
The value of a futures contract is adjusted daily to reflect the
fluctuation of the value of the underlying securities. This is a process known
as marking the contract to market. If the value of a party's position declines,
that party is required to make additional "variation margin" payments to the FCM
to settle the change in value. The party that has a gain is generally entitled
to receive all or a portion of this amount.
The Fund maintains from time to time a percentage of its assets in cash
or high-grade liquid securities to provide for redemptions or to hold for future
investment in securities consistent with the Fund's investment objectives. The
Fund may enter into index futures contracts as an efficient means to expose the
Fund's cash position to the domestic equity market. The Sub-advisor believes
that the purchase of futures contracts is an efficient means to effectively be
fully invested in equity securities.
The principal risks generally associated with the use of futures
include: (i) the possible absence of a liquid secondary market for any
particular instrument may make it difficult or impossible to close out a
position when desired (liquidity risk); (ii) the risk that the counter party to
the contract may fail to perform its obligations or the risk of bankruptcy of
the FCM holding margin deposits (counter-party risk); (iii) the risk that the
securities to which the futures contract relates may go down in value (market
risk); and (iv) adverse price movements in the underlying securities can result
in losses substantially greater than the value of the Fund's investment in that
instrument because only a fraction of a contract's value is required to be
deposited as initial margin (leverage risk); provided, however, that the Fund
may not purchase leveraged futures, so there is no leverage risk involved in the
Fund's use of futures.
A liquid secondary market is necessary to close out a contract. The
Fund may seek to manage liquidity risk by investing in exchange-traded futures.
Exchange-traded futures pose less risk that there will not be a liquid secondary
market than privately negotiated instruments. Through their clearing
corporations, the futures exchanges guarantee the performance of the contracts.
Futures contracts are generally settled within a day from the date they
are closed out, as compared to three days for most types of equity securities.
As a result, futures contracts can provide more liquidity than an investment in
the actual underlying securities. Nevertheless, there is no assurance that a
liquid secondary market will exist for any particular futures contract at any
particular time. Liquidity may also be influenced by an exchange-imposed daily
price fluctuation limit, which halts trading if a contract's price moves up or
down more than the established limit on any given day. On volatile trading days
when the price fluctuation limit is reached, it may be impossible for the Fund
to enter into new positions or close out existing positions. If the secondary
market for a futures contract is not liquid because of price fluctuation limits
or otherwise, the Fund may not be able to promptly liquidate unfavorable futures
positions and potentially could be required to continue to hold a futures
position until liquidity in the market is re-established. As a result, the
Fund's access to other assets held to cover its futures positions also could be
impaired until liquidity in the market is re-established.
The Fund manages counter-party risk by investing in exchange-traded
index futures. In the event of the bankruptcy of the FCM that holds margin on
behalf of the Fund, the Fund may be entitled to the return of margin owed to the
Fund only in proportion to the amount received by the FCM's other customers. The
Sub-advisor will attempt to minimize the risk by monitoring the creditworthiness
of the FCMs with which the Fund does business.
Short Sales. The Fund may engage in short sales if, at the time of the
short sale, the Fund owns or has the right to acquire an equal amount of the
security being sold short at no additional cost.
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. To make delivery to the purchaser, the executing broker borrows the
securities being sold short on behalf of the seller. While the short position is
maintained, the seller collateralizes its obligation to deliver the securities
sold short in an amount equal to the proceeds of the short sale plus an
additional margin amount established by the Board of Governors of the Federal
Reserve. If the Fund engages in a short sale, the collateral account will be
maintained by the Fund's custodian. While the short sale is open, the Fund will
maintain in a segregated custodial account an amount of securities convertible
into, or exchangeable for, such equivalent securities at no additional cost.
These securities would constitute the Fund's long position.
The Fund may make a short sale, as described above, when it wants to
sell the security it owns at a current attractive price, but also wishes to
defer recognition of gain or loss for federal income tax purposes and for
purposes of satisfying certain tests applicable to regulated investment
companies under the Internal Revenue Code. In such a case, any future losses in
the Fund's long position should be reduced by a gain in the short position. The
extent to which such gains or losses are reduced would depend upon the amount of
the security sold short relative to the amount the Fund owns. There will be
certain additional transaction costs associated with short sales, but the Fund
will endeavor to offset these costs with income from the investment of the cash
proceeds of short sales.
Portfolio Turnover. The Sub-advisor will purchase and sell securities
without regard to the length of time the security has been held and,
accordingly, it can be expected that the rate of portfolio turnover may be
substantial.
The Sub-advisor intends to purchase a given security whenever the
Sub-advisor believes it will contribute to the stated objective of the Fund,
even if the same security has only recently been sold. The Fund will sell a
given security, no matter for how long or for how short a period it has been
held, and no matter whether the sale is at a gain or at a loss, if the
Sub-advisor believes that it is not fulfilling its purpose, either because,
among other things, it did not live up to the Sub-advisor's expectations, or
because it may be replaced with another security holding greater promise, or
because it has reached its optimum potential, or because of a change in the
circumstances of a particular company or industry or in general economic
conditions, or because of some combination of such reasons.
When a general decline in security prices is anticipated, the equity
portion of the Fund may decrease or eliminate entirely its equity position and
increase its cash position, and when a rise in price levels is anticipated, it
may increase its equity position and decrease its cash position. However, it
should be expected that the Fund will, under most circumstances, be essentially
fully invested in equity securities.
Since investment decisions are based on the anticipated contribution of
the security in question to the Fund's objectives, the rate of portfolio
turnover is irrelevant when the Sub-advisor believes a change is in order to
achieve those objectives, and the Fund's annual portfolio turnover rate cannot
be anticipated and may be comparatively high. Since the Sub-advisor does not
take portfolio turnover rate into account in making investment decisions, (1)
the Sub-advisor has no intention of accomplishing any particular rate of
portfolio turnover, whether high or low, and (2) the portfolio turnover rates in
the past should not be considered as a representation of the rates which will be
attained in the future. For an additional discussion of portfolio turnover, see
this SAI and the Company's Prospectus under "Portfolio Transactions."
Interest Rate Futures Contracts and Related Options. The Fund may buy
and sell interest rate futures contracts relating to debt securities ("debt
futures," i.e., futures relating to debt securities, and "bond index futures,"
i.e., futures relating to indexes on types or groups of bonds) and write and buy
put and call options relating to interest rate futures contracts.
The Fund will not purchase or sell futures contracts and options
thereon for speculative purposes but rather only for the purpose of hedging
against changes in the market value of its portfolio securities or changes in
the market value of securities that the Sub-advisor anticipates it may wish to
include in the Fund. The Fund may sell a future or write a call or purchase a
put on a future if the Sub-advisor anticipates that a general market or market
sector decline may adversely affect the market value of any or all of the Fund's
holdings. The Fund may buy a future or purchase a call or sell a put on a future
if the Sub-advisor anticipates a significant market advance in the type of
securities it intends to purchase for the Fund at a time when the Fund is not
invested in debt securities to the extent permitted by its investment policies.
The Fund may purchase a future or a call option thereon as a temporary
substitute for the purchase of individual securities which may then be purchased
in an orderly fashion. As securities are purchased, corresponding futures
positions would be terminated by offsetting sales.
The "sale" of a debt future means the acquisition by the Fund of an
obligation to deliver the related debt securities (i.e., those called for by the
contract) at a specified price on a specified date. The "purchase" of a debt
future means the acquisition by the Fund of an obligation to acquire the related
debt securities at a specified time on a specified date. The "sale" of a bond
index future means the acquisition by the Fund of an obligation to deliver an
amount of cash equal to a specified dollar amount times the difference between
the index value at the close of the last trading day of the future and the price
at which the future is originally struck. No physical delivery of the bonds
making up the index is expected to be made. The "purchase" of a bond index
future means the acquisition by the Fund of an obligation to take delivery of
such an amount of cash.
Unlike when the Fund purchases or sells a bond, no price is paid or
received by the Fund upon the purchase or sale of the future. Initially, the
Fund will be required to deposit an amount of cash or securities equal to a
varying specified percentage of the contract amount. This amount is known as
initial margin. Cash held in the margin account is not income producing.
Subsequent payments, called variation margin, to and from the broker, will be
made on a daily basis as the price of the underlying debt securities or index
fluctuates, making the future more or less valuable, a process known as mark to
the market. Changes in variation margin are recorded by the Fund as unrealized
gains or losses. At any time prior to expiration of the future, the Fund may
elect to close the position by taking an opposite position that will operate to
terminate its position in the future. A final determination of variation margin
is then made; additional cash is required to be paid by or released to the Fund
and the Fund realizes a loss or a gain.
When the Fund writes an option on a futures contract it becomes
obligated, in return for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time during the term of the
option. If the Fund has written a call, it becomes obligated to assume a "long"
position in a futures contract, which means that it is required to take delivery
of the underlying securities. If it has written a put, it is obligated to assume
a "short" position in a futures contract, which means that it is required to
deliver the underlying securities. When the Fund purchases an option on a
futures contract it acquires a right in return for the premium it pays to assume
a position in a futures contract.
If the Fund writes an option on a futures contract it will be required
to deposit initial and variation margin pursuant to requirements similar to
those applicable to futures contracts. Premiums received from the writing of an
option on a future are included in the initial margin deposit. For options sold,
the Fund will segregate cash or high-quality debt securities equal to the value
of securities underlying the option unless the option is otherwise covered. The
Fund will deposit in a segregated account with its custodian bank cash or other
liquid assets, in an amount equal to the fluctuating market value of long
futures contracts it has purchased less any margin deposited on its long
position. It may hold cash or acquire such other assets for the purpose of
making these deposits.
Changes in variation margin are recorded by the Fund as unrealized
gains or losses. Initial margin payments will be deposited in the Fund's
custodian bank in an account registered in the broker's name; access to the
assets in that account may be made by the broker only under specified
conditions. At any time prior to expiration of a futures contract or an option
thereon, the Fund may elect to close the position by taking an opposite position
that will operate to terminate its position in the futures contract or option. A
final determination of variation margin is made at that time; additional cash is
required to be paid by or released to it and it realizes a loss or gain.
Although futures contracts by their terms call for the actual delivery
or acquisition of the underlying securities or cash, in most cases the
contractual obligation is so fulfilled without having to make or take delivery.
The Sub-advisor does not intend to make or take delivery of the underlying
obligation. All transactions in futures contracts and options thereon are made,
offset or fulfilled through a clearinghouse associated with the exchange on
which the instruments are traded. Although the Sub-advisor intends to buy and
sell futures contracts only on exchanges where there appears to be an active
secondary market, there is no assurance that a liquid secondary market will
exist for any particular future at any particular time. In such event, it may
not be possible to close a futures contract position.
Similar market liquidity risks occur with respect to options.
The use of futures contracts and options thereon to attempt to protect
against the market risk of a decline in the value of portfolio securities is
referred to as having a "short futures position." The use of futures contracts
and options thereon to attempt to protect against the market risk that the Fund
might not be fully invested at a time when the value of the securities in which
it invests is increasing is referred to as having a "long futures position." The
Fund must operate within certain restrictions as to long and short positions in
futures contracts and options thereon under a rule (CFTC Rule) adopted by the
CFTC under the Commodity Exchange Act (CEA) to be eligible for the exclusion
provided by the CFTC Rule from registration by the Fund with the CFTC as a
"commodity pool operator" (as defined under the CEA), and must represent to the
CFTC that it will operate within such restrictions. Under these restrictions the
Fund will not, as to any positions that do not qualify as "bona fide hedging"
under the CFTC Rule, whether long, short or a combination thereof, enter into
futures contracts and options thereon for which the aggregate initial margins
and premiums exceed 5% of the fair market value of the Fund's assets after
taking into account unrealized profits and losses on options the Fund has
entered into; in the case of an option that is "in-the-money" (as defined under
the CEA), the in-the-money amount may be excluded in computing such 5%. (In
general, a call option on a futures contract is in-the-money if the value of the
future exceeds the strike, i.e., exercise, price of the call; a put option on a
futures contract is in-the-money if the value of the futures contract that is
the subject of the put is exceeded by the strike price of the put.) As to its
long positions that are used as part of the Fund's strategy and are incidental
to the Fund's activities in the underlying cash market, the "underlying
commodity value" (see below) of the Fund's futures contract and options thereon
must not exceed the sum of (i) cash set aside in an identifiable manner, or
short-term U.S. debt obligations or other U.S. dollar-denominated, high-quality,
short-term money market instruments so set aside, plus any funds deposited as
margin; (ii) cash proceeds from existing investments due in 30 days; and (iii)
accrued profits held at the futures commission merchant.
There are described above the segregated accounts that the Fund must
maintain with its custodian bank as to its options and futures contracts
activities due to Securities and Exchange Commission requirements. The Fund
will, as to its long positions, be required to abide by the more restrictive of
these SEC and CFTC requirements. The underlying commodity value of a futures
contract is computed by multiplying the size (dollar amount) of the futures
contract by the daily settlement price of the futures contract. For an option on
a futures contract, that value is the underlying commodity value of the future
underlying the option.
Since futures contracts and options thereon can replicate movements in
the cash markets for the securities in which the Fund invests without the large
cash investments required for dealing in such markets, they may subject the Fund
to greater and more volatile risks than might otherwise be the case. The
principal risks related to the use of such instruments are (i) the offsetting
correlation between movements in the market price of the portfolio investments
(held or intended) being hedged and in the price of the futures contract or
option may be imperfect; (ii) possible lack of a liquid secondary market for
closing out futures or options positions; (iii) the need for additional
portfolio management skills and techniques; (iv) losses due to unanticipated
market price movements; and (v) the bankruptcy or failure of a futures
commission merchant holding margin deposits made by the Fund and the Fund's
inability to obtain repayment of all or part of such deposits. For a hedge to be
completely effective, the price change of the hedging instrument should equal
the price change of the security being hedged. Such equal price changes are not
always possible because the investment underlying the hedging instrument may not
be the same investment that is being hedged. The Sub-advisor will attempt to
create a closely correlated hedge, but hedging activity may not be completely
successful in eliminating market value fluctuation. The ordinary spreads between
prices in the cash and futures markets, due to the differences in the natures of
those markets, are subject to the following factors which may create
distortions. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may cause temporary
price distortions. Due to the possibility of distortion, a correct forecast of
general interest trends by the Sub-advisor may still not result in a successful
transaction. The Sub-advisor may be incorrect in its expectations as to the
extent of various interest rate movements or the time span within which the
movements take place.
The risk of imperfect correlation between movements in the price of a
bond index future and movements in the price of the securities that are the
subject of the hedge increases as the composition of the Fund diverges from the
securities included in the applicable index. The price of the bond index future
may move more than or less than the price of the securities being hedged. If the
price of the bond index future moves less than the price of the securities that
are the subject of the hedge, the hedge will not be fully effective, but if the
price of the securities being hedged has moved in an unfavorable direction, the
Fund would be in a better position than if it had not hedged at all. If the
price of the securities being hedged has moved in a favorable direction, this
advantage will be partially offset by the futures contract. If the price of the
futures contract moves more than the price of the security, the Fund will
experience either a loss or a gain on the futures contract that will not be
completely offset by movements in the price of the securities that are the
subject of the hedge. To compensate for the imperfect correlation of movements
in the price of the securities being hedged and movements in the price of the
bond index futures, the Fund may buy or sell bond index futures in a greater
dollar amount than the dollar amount of securities being hedged if the
historical volatility of the prices of such securities being hedged is less than
the historical volatility of the bond index. It is also possible that, where the
Fund has sold futures contracts to hedge its securities against a decline in the
market, the market may advance and the value of securities held in the Fund may
decline. If this occurred, the Fund would lose money on the futures contract and
also experience a decline in value in its portfolio securities. However, while
this could occur for a brief period or to a very small degree, over time the
value of a portfolio of debt securities will tend to move in the same direction
as the market indexes upon which the futures contracts are based.
Where bond index futures are purchased to hedge against a possible
increase in the price of bonds before the Fund is able to invest in securities
in an orderly fashion, it is possible that the market may decline instead; if
the Fund then concludes not to invest in securities at that time because of
concern as to possible further market decline or for other reasons, it will
realize a loss on the futures contract that is not offset by a reduction in the
price of the securities it had anticipated purchasing.
The risks of investment in options on bond indexes may be greater than
options on securities. Because exercises of bond index options are settled in
cash, when the Fund writes a call on a bond index it cannot provide in advance
for its potential settlement obligations by acquiring and holding the underlying
securities. The Fund can offset some of the risk of its writing position by
holding a portfolio of bonds similar to those on which the underlying index is
based. However, the Fund cannot, as a practical matter, acquire and hold a
portfolio containing exactly the same securities as the underlying index and, as
a result, bears a risk that the value of the securities held will vary from the
value of the index. Even if the Fund could assemble a portfolio that exactly
reproduced the composition of the underlying index, it still would not be fully
covered from a risk standpoint because of the "timing risk" inherent in writing
index options. When an index option is exercised, the amount of cash that the
holder is entitled to receive is determined by the difference between the
exercise price and the closing index level on the date when the option is
exercised. As with other kinds of options, the Fund, as the call writer, will
not learn that it has been assigned until the next business day at the earliest.
The time lag between exercise and notice of assignment poses no risk for the
writer of a covered call on a specific underlying security because there, the
writer's obligation is to deliver the underlying security, not to pay its value
as of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the exercise
date is borne by the exercising holder. In contrast, even if the writer of an
index call holds securities that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those securities against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value of the
exercise date; and by the time it learns that it has been assigned, the index
may have declined with a corresponding decline in the value of its portfolio.
This "timing risk" is an inherent limitation on the ability of index call
writers to cover their risk exposure by holding securities positions.
If the Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund must pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1. Invest more than 15% of its assets in illiquid investments; or
2. Buy securities on margin or sell short (unless it owns, or by virtue of
its ownership of, other securities has the right to obtain securities equivalent
in kind and amount to the securities sold); however, the Fund may make margin
deposits in connection with the use of any financial instrument or any
transaction in securities permitted under its investment policies;
3. Invest for control or for management; or
4. Invest in the securities of other investment companies except in
compliance with the Investment Company Act of 1940. Duplicate fees may result
from such purchases.
ASAF FEDERATED HIGH YIELD BOND FUND:
Investment Objective: The investment objective of the Fund is to seek high
current income.
Investment Policies:
Corporate Debt Securities. The Fund invests primarily in corporate debt
securities. The corporate debt obligations in which the Fund intends to invest
are expected to be lower-rated. For a discussion of the special risks associated
with lower-rated securities, see the Company's Prospectus and this SAI under
"Certain Risk Factors and Investment Methods." Corporate debt obligations in
which the Fund invests may bear fixed, floating, floating and contingent, or
increasing rates of interest. They may involve equity features such as
conversion or exchange rights, warrants for the acquisition of common stock of
the same or a different issuer, participations based on revenues, sales or
profits, or the purchase of common stock in a unit transaction (where corporate
debt securities and common stock are offered as a unit).
U.S. Government Obligations. The types of U.S. government obligations in
which the Fund may invest include, but are not limited to, direct obligations of
the U.S. Treasury (such as U.S. Treasury bills, notes, and bonds) and
obligations issued or guaranteed by U.S. government agencies or
instrumentalities. These securities may be backed by: the full faith and credit
of the U.S. Treasury; the issuer's right to borrow from the U.S. Treasury; the
discretionary authority of the U.S. government to purchase certain obligations
of agencies or instrumentalities; or the credit of the agency or instrumentality
issuing the obligations. For an additional discussion of the types of U.S.
government obligations in which the Fund may invest, see the Company's
Prospectus under "Investment Objectives and Policies."
Restricted Securities. The Fund expects that any restricted securities
would be acquired either from institutional investors who originally acquired
the securities in private placements or directly from the issuers of the
securities in private placements. Restricted securities are generally subject to
legal or contractual delays on resale. Restricted securities and securities that
are not readily marketable may sell at a discount from the price they would
bring if freely marketable. For a discussion of illiquid and restricted
securities and certain risks involved therein, see the Company's Prospectus
under "Certain Risk Factors and Investment Methods."
The Directors of the Company have promulgated guidelines with respect
to illiquid securities.
When-Issued and Delayed Delivery Transactions. The Fund may purchase
fixed-income securities on a when-issued or delayed delivery basis. The Fund may
engage in when-issued and delayed delivery transactions only for the purpose of
acquiring portfolio securities consistent with the Fund's investment objective
and policies, not for investment leverage. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. Settlement dates may be a month or more after entering into these
transactions, and the market values of the securities purchased may vary from
the purchase prices. These transactions are made to secure what is considered to
be an advantageous price and yield for the Fund.
No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Fund sufficient to make payment for the
securities to be purchased are segregated at the trade date. These securities
are marked to market daily and will maintain until the transaction is settled.
For an additional discussion of when-issued securities and certain risks
involved therein, see this SAI under "Certain Risk Factors and Investment
Methods."
Repurchase Agreements. The Fund will require its custodian to take
possession of the securities subject to repurchase agreements, and these
securities will be marked to market daily. To the extent that the original
seller does not repurchase the securities from the Fund, the Fund could receive
less than the repurchase price on any sale of such securities. In the event that
such a defaulting seller filed for bankruptcy or became insolvent, disposition
of such securities by the Fund might be delayed pending court action. The Fund
believes that under the regular procedures normally in effect for custody of the
Fund's portfolio securities subject to repurchase agreements, a court of
competent jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions such as
broker/dealers which are deemed by the Sub-advisor to be creditworthy, pursuant
to guidelines established by the Directors of the Company. For an additional
discussion of repurchase agreements and certain risks involved therein, see the
Company's Prospectus under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. In order to generate additional income,
the Fund may lend its securities to brokers/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
Sub-advisor has determined are creditworthy under guidelines established by the
Directors of the Company. The collateral received when the Fund lends portfolio
securities must be valued daily and, should the market value of the loaned
securities increase, the borrower must furnish additional collateral to the
Fund. During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are subject to
termination at the option of the Fund or the borrower. The Fund may pay
reasonable administrative and custodial fees in connection with a loan and may
pay a negotiated portion of the interest earned on the cash or cash equivalent
collateral to the borrower or placing broker. The Fund does not have the right
to vote securities on loan, but would terminate the loan and regain the right to
vote if that were considered important with respect to the investment.
Reverse Repurchase Agreements. The Fund may also enter into reverse
repurchase agreements. When effecting reverse repurchase agreements, liquid
assets of the Fund, in a dollar amount sufficient to make payment for the
obligations to be purchased, are segregated at the trade date. These securities
are marked to market daily and are maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to ensure completion of the reverse repurchase agreements,
the Fund will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse repurchase
agreements. For a discussion of reverse repurchase agreements and certain risks
involved therein, see the Company's Prospectus under "Certain Risk Factors and
Investment Methods."
Portfolio Turnover. The Fund may experience greater portfolio turnover than
would be expected with a portfolio of higher-rated securities. For an additional
discussion of portfolio turnover, see this SAI and the Company's Prospectus
under "Portfolio Transactions."
Adverse Legislation. In 1989, legislation was enacted that required
federally insured savings and loan associations to divest their holdings of
lower-rated bonds by 1994. This legislation also created the Resolution Trust
Corporation (the "RTC"), which disposed of a substantial portion of lower-rated
bonds held by failed savings and loan associations. The reduction of the number
of institutions empowered to purchase and hold lower-rated bonds, and the
divestiture of bonds by these institutions and the RTC, have had an adverse
impact on the overall liquidity of the market for such bonds. Federal and state
legislatures and regulators have and may continue to propose new laws and
regulations designed to limit the number or type of institutions that may
purchase lower-rated bonds, reduce the tax benefits to issuers of such bonds, or
otherwise adversely impact the liquidity of such bonds. The Fund cannot predict
the likelihood that any of these proposals will be adopted, or their potential
impact on the liquidity of lower-rated bonds.
Foreign Securities. For a discussion of certain risks involved with
investing in foreign securities, including currency risks, see this SAI and the
Company's Prospectus under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restriction and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1. Invest more than 15% of the value of its net assets in securities that
are not readily marketable, including repurchase agreements providing for
settlement in more than seven days after notice. The Directors of the Company,
or the Investment Manager or the Sub-advisor acting pursuant to authority
delegated by the Directors, may determine that a readily available market exists
for certain securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933, or any successor to such rule, and therefore that such
securities are not subject to the foregoing limitation;
2. Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940;
3. Purchase any securities on margin but may obtain such short-term credits
as may be necessary for the clearance of transactions;
4. Invest more than 10% of the value of its total assets in foreign
securities which are not publicly traded in the United States;
5. Make short sales of securities or maintain short positions, unless:
during the time the short position is open, it owns an equal amount of the
securities sold or securities readily and freely convertible into or
exchangeable, without payment of additional consideration, for securities of the
same issue as, and equal in amount to, the securities sold short; and not more
than 10% of the Fund's net assets (taken at current value) is held as collateral
for such sales at any one time; or
6. Purchase securities of a company for the purpose of exercising control
or management. However, the Fund may invest in up to 10% of the voting
securities of any one issuer and may exercise its voting powers consistent with
the best interests of the Fund. From time to time, the Fund, together with other
investment companies advised by subsidiaries or affiliates of the Sub-advisor,
may together buy and hold substantial amounts of a company's voting stock. All
such stock may be voted together. In some such cases, the Fund and the other
investment companies might collectively be considered to be in control of the
company in which they have invested. In some cases, directors, agents,
employees, officers, or others affiliated with or acting for the Fund, the
Sub-advisor, or affiliated companies might possibly become directors of
companies in which the Fund holds stock.
ASAF TOTAL RETURN BOND FUND:
Investment Objective: The investment objective of the Fund is to maximize total
return, consistent with preservation of capital. The Sub-advisor will seek to
employ prudent investment management techniques, especially in light of the
broad range of investment instruments in which the Fund may invest.
Investment Policies:
Borrowing. The Fund may borrow for temporary administrative purposes.
This borrowing may be unsecured. The Investment Company Act of 1940 requires the
Fund to maintain continuous asset coverage (that is, total assets including
borrowings, less liabilities exclusive of borrowings) of 300% of the amount
borrowed. If the 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Fund may be required to sell some of its
holdings within three days to reduce the debt and restore the 300% asset
coverage, even though it may be disadvantageous from an investment standpoint to
sell securities at that time. Borrowing will tend to exaggerate the effect on
net asset value of any increase or decrease in the market value of the Fund.
Money borrowed will be subject to interest costs which may or may not be
recovered by appreciation of the securities purchased. The Fund also may be
required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate.
In addition to the above, the Fund may enter into reverse repurchase
agreements and mortgage dollar rolls. A reverse repurchase agreement involves
the sale of a portfolio-eligible security by the Fund, coupled with its
agreement to repurchase the instrument at a specified time and price. In a
"dollar roll" transaction the Fund sells a mortgage-related security (such as a
GNMA security) to a dealer and simultaneously agrees to repurchase a similar
security (but not the same security) in the future at a pre-determined price. A
"dollar roll" can be viewed, like a reverse repurchase agreement, as a
collateralized borrowing in which the Fund pledges a mortgage-related security
to a dealer to obtain cash. Unlike in the case of reverse repurchase agreements,
the dealer with which the Fund enters into a dollar roll transaction is not
obligated to return the same securities as those originally sold by the Fund,
but only securities which are "substantially identical." To be considered
"substantially identical," the securities returned to the Fund generally must:
(1) be collateralized by the same types of underlying mortgages; (2) be issued
by the same agency and be part of the same program; (3) have a similar original
stated maturity; (4) have identical net coupon rates; (5) have similar maturity:
(4) have identical net coupon rates; (5) have similar market yields (and
therefore price); and (6) satisfy "good delivery" requirements, meaning that the
aggregate principal amounts of the securities delivered and received back must
be within 2.5% of the initial amount delivered. The Fund's obligations under a
dollar roll agreement must be covered by cash or other liquid assets equal in
value to the securities subject to repurchase by the Fund, maintained in a
segregated account.
Both dollar roll and reverse repurchase agreements will be subject to
the Fund's limitations on borrowings, which will restrict the aggregate of such
transactions (plus any other borrowings) to 33 1/3% of the Fund's total assets.
Furthermore, because dollar roll transactions may be for terms ranging between
one and six months, dollar roll transactions may be deemed "illiquid" and
subject to the Fund's overall limitations on investments in illiquid securities.
Corporate Debt Securities. The Fund's investments in U.S. dollar- or
foreign currency-denominated corporate debt securities of domestic or foreign
issuers are limited to corporate debt securities (corporate bonds, debentures,
notes and other similar corporate debt instruments, including convertible
securities) which meet the minimum ratings criteria set forth for the Fund, or,
if unrated, are in the Sub-advisor's opinion comparable in quality to corporate
debt securities in which the Fund may invest. The rate of return or return of
principal on some debt obligations may be linked or indexed to the level of
exchange rates between the U.S. dollar and a foreign currency or currencies.
Among the corporate bonds in which the Fund may invest are convertible
securities. A convertible security is a bond, debenture, note, or other security
that entitles the holder to acquire common stock or other equity securities of
the same or a different issuer. A convertible security generally entitles the
holder to receive interest paid or accrued until the convertible security
matures or is redeemed, converted or exchanged. Before conversion, convertible
securities have characteristics similar to nonconvertible debt securities.
Convertible securities rank senior to common stock in a corporation's capital
structure and, therefore, generally entail less risk than the corporation's
common stock, although the extent to which such risk is reduced depends in large
measure upon the degree to which the convertible security sells above its value
as a fixed-income security.
A convertible security may be subject to redemption at the option of
the issuer at a predetermined price. If a convertible security held by the Fund
is called for redemption, the Fund will be required to permit the issuer to
redeem the security and convert it to underlying common stock, or will sell the
convertible security to a third party. The Fund generally would invest in
convertible securities for their favorable price characteristics and total
return potential and would normally not exercise an option to convert.
Investments in securities rated below investment grade that are
eligible for purchase by the Fund (i.e., rated B or better by Moody's or S&P)
are described as "speculative" by both Moody's and S&P. Investment in
lower-rated corporate debt securities ("high yield securities") generally
provides greater income and increased opportunity for capital appreciation than
investments in higher quality securities, but they also typically entail greater
price volatility and principal and income risk. These high yield securities are
regarded as high risk and predominantly speculative with respect to the issuer's
continuing ability to meet principal and interest payments. The market for these
securities is relatively new, and many of the outstanding high yield securities
have not endured a major business recession. A long-term track record on default
rates, such as that for investment grade corporate bonds, does not exist for
this market. Analysis of the creditworthiness of issuers of debt securities that
are high yield may be more complex than for issuers of higher quality debt
securities.
High yield, high risk securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions than investment
grade securities. The price of high yield securities have been found to be less
sensitive to interest-rate adverse economic downturns or individual corporate
developments. A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in high yield security prices
because the advent of a recession could lessen the ability of a highly leveraged
company to make principal and interest payments on its debt securities. If an
issuer of high yield securities defaults, in addition to risking payment of all
or a portion of interest and principal, the Fund may incur additional expenses
to seek recovery. In the case of high yield securities structured as zero-coupon
or pay-in-kind securities, their market prices are affected to a greater extent
by interest rate changes, and therefore tend to be more volatile than securities
which pay interest periodically and in cash.
The secondary market on which high yield, high risk securities are
traded may be less liquid than the market for higher grade securities. Less
liquidity in the secondary trading market could adversely affect the price at
which the Fund could sell a high yield security, and could adversely affect the
daily net asset value of the shares. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity of high yield securities especially in a thinly-traded market. When
secondary markets for high yield securities are less liquid than the market for
higher grade securities, it may be more difficult to value the securities
because such valuation may require more research, and elements of judgment may
play a greater role in the valuation because there is less reliable, objective
data available. The Sub-advisor seeks to minimize the risks of investing in all
securities through diversification, in-depth credit analysis and attention to
current developments in interest rates and market conditions. For an additional
discussion of certain risks involved in lower-rated debt securities, see this
SAI and the Company's Prospectus under "Certain Risk Factors and Investment
Objectives."
Participation on Creditors Committees. The Fund may from time to time
participate on committees formed by creditors to negotiate with the management
of financially troubled issuers of securities held by the Fund. Such
participation may subject the Fund to expenses such as legal fees and may make
the Fund an "insider" of the issuer for purposes of the federal securities laws,
and therefore may restrict the Fund's ability to trade in or acquire additional
positions in a particular security when it might otherwise desire to do so.
Participation by the Fund on such committees also may expose the Fund to
potential liabilities under the federal bankruptcy laws or other laws governing
the rights of creditors and debtors. The Fund will participate on such
committees only when the Sub-advisor believes that such participation is
necessary or desirable to enforce the Fund's rights as a creditor or to protect
the value of securities held by the Fund.
Mortgage-Related Securities. The Fund may invest in mortgage-backed
securities. Mortgage-related securities are interests in pools of mortgage loans
made to residential home buyers, including mortgage loans made by savings and
loan institutions, mortgage bankers, commercial banks and others. Pools of
mortgage loans are assembled as securities for sale to investors by various
governmental, government-related and private organizations (see "Mortgage
Pass-Through Securities"). The Fund may also invest in debt securities which are
secured with collateral consisting of mortgage-related securities (see
"Collateralized Mortgage Obligations"), and in other types of mortgage-related
securities.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential or commercial mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some mortgage-related
securities (such as securities issued by the Government National Mortgage
Association) are described as "modified pass-through." These securities entitle
the holder to receive all interest and principal payments owned on the mortgage
pool, net of certain fees, at the scheduled payment dates regardless of whether
or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
United States Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the United States Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of
FHA-insured or VA-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Pass-though securities issued by FNMA are guaranteed as to
timely payment of principal and interest by FNMA but are not backed by the full
faith and credit of the United States Government.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a
government-sponsored corporation formerly owned by the twelve Federal Home Loan
Banks and now owned entirely by private stockholders. FHLMC issues Participation
Certificates ("PC's") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PCs are not backed by the full faith and
credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-though pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such nongovernmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Company's and the Trust's investment quality standards. There
can be no assurance that the private insurers or guarantors can meet their
obligations under the insurance policies or guarantee arrangements. The Fund may
buy mortgage-related securities without insurance or guarantees if, through an
examination of the loan experience and practices of the originator/servicers and
poolers, the Sub-advisor determines that the securities meet the Company's and
the Trust's quality standards. Although the market for such securities is
becoming increasingly liquid, securities issued by certain private organizations
may not be readily marketable. The Fund will not purchase mortgage-related
securities or any other assets which in the Sub-advisor's opinion are illiquid
if, as a result, more than 15% of the value of the Fund's total assets will be
illiquid.
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the Fund's
industry concentration restrictions, set forth in this SAI under "Fundamental
Investment Restrictions," by virtue of the exclusion from that test available to
all U.S. Government securities. In the case of privately issued mortgage-related
securities, the Fund takes the position that mortgage-related securities do not
represent interests in any particular "industry" or group of industries. The
assets underlying such securities may be represented by a portfolio of first
lien residential mortgages (including both whole mortgage loans and mortgage
participation interests) or portfolios of mortgage pass-through securities
issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a
mortgage-related security may in turn be insured or guaranteed by the Federal
Housing Administration or the Department of Veterans Affairs. In the case of
private issue mortgage-related securities whose underlying assets are neither
U.S. Government securities nor U.S. Government-insured mortgages, to the extent
that real properties securing such assets may be located in the same
geographical region, the security may be subject to a greater risk of default
that other comparable securities in the event of adverse economic, political or
business developments that may affect such region and ultimately, the ability of
residential homeowners to make payments of principal and interest on the
underlying mortgages.
Collateralized Mortgage Obligations (CMOs). A CMO is a hybrid
between a mortgage-backed bond and a mortgage pass-through security. Similar to
a bond, interest and prepaid principal is paid, in most cases, semiannually.
CMOs may be collateralized by whole mortgage loans, but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a
different stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
or principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues
multiple series (e.g., A, B, C, Z) of the CMO bonds ("Bonds"). Proceeds of the
Bond offering are used to purchase mortgages or mortgage pass-through
certificates ("Collateral"). The Collateral is pledged to a third party trustee
as security for the Bonds. Principal and interest payments from the Collateral
are used to pay principal on the Bonds in the order A, B, C, Z. The Series A, B,
and C Bonds all bear current interest. Interest on the Series Z Bond is accrued
and added to principal and a like amount is paid as principal on the Series A,
B, or C Bond currently being paid off. When the Series A, B, and C Bonds are
paid in full, interest and principal on the Series Z Bond begins to be paid
currently. With some CMOs, the issuer serves as a conduit to allow loan
originators (primarily builders or savings and loan associations) to borrow
against their loan portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt
obligations of FHLMC issued in multiple classes having different maturity dates
which are secured by the pledge of a pool of conventional mortgage loans
purchased by FHLMC. Unlike FHLMC PCs, payments of principal and interest on the
CMOs are made semiannually, as opposed to monthly. The amount of principal
payable on each semiannual payment date is determined in accordance with FHLMC's
mandatory sinking fund schedule, which, in turn, is equal to approximately 100%
of FHA prepayment experience applied to the mortgage collateral pool. All
sinking fund payments in the CMOs are allocated to the retirement of the
individual classes of bonds in the order of their stated maturities. Payment of
principal on the mortgage loans in the collateral pool in excess of the amount
of FHLMC's minimum sinking fund obligation for any payment date are paid to the
holders of the CMOs as additional sinking fund payments. Because of the
"pass-through" nature of all principal payments received on the collateral pool
in excess of FHLMC's minimum sinking fund requirement, the rate at which
principal of the CMOs is actually repaid is likely to be such that each class of
bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the
mortgage loans during any semiannual payment period is not sufficient to meet
FHLMC's minimum sinking fund obligation on the next sinking fund payment date,
FHLMC agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC
CMOs are identical to those of FHLMC PCs. FHLMC has the right to substitute
collateral in the event of delinquencies and/or defaults.
For an additional discussion of mortgage-backed securities and
certain risks involved therein, see this SAI and the Company's Prospectus under
"Certain Risk Factors and Investment Methods."
Other Mortgage-Related Securities. Other mortgage-related
securities include securities other than those described above that directly or
indirectly represent a participation in, or are secured by and payable from,
mortgage loans on real property, including CMO residuals or stripped
mortgage-backed securities. Other mortgage-related securities may be equity or
debt securities issued by agencies or instrumentalities of the U.S. Government
or by private originators of, or investors in, mortgage loans, including savings
and loan associations, homebuilders, mortgage banks, commercial banks,
investment banks, partnerships, trusts and special purpose entities of the
foregoing.
CMO Residuals. CMO residuals are derivative mortgage
securities issued by agencies or instrumentalities of the U.S. Government or by
private originators of, or investors in, mortgage loans, including savings and
loan associations, homebuilders, mortgage banks, commercial banks, investment
banks and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a
series of CMOs is applied first to make required payments of principal and
interest on the CMOs and second to pay the related administrative expenses of
the issuer. The residual in a CMO structure generally represents the interest in
any excess cash flow remaining after making the foregoing payments. Each payment
of such excess cash flow to a holder of the related CMO residual represents
income and/or a return of capital. The amount of residual cash flow resulting
from a CMO will depend on, among other things, the characteristics of the
mortgage assets, the coupon rate of each class of CMO, prevailing interest
rates, the amount of administrative expenses and the prepayment experience on
the mortgage assets. In particular, the yield to maturity on CMO residuals is
extremely sensitive to prepayments on the related underlying mortgage assets, in
the same manner as an interest-only ("IO") class of stripped mortgage-backed
securities. See "Other Mortgage-Related Securities -- Stripped Mortgage-Backed
Securities." In addition, if a series of a CMO includes a class that bears
interest at an adjustable rate, the yield to maturity on the related CMO
residual will also be extremely sensitive to changes in the level of the index
upon which interest rate adjustments are based. As described below with respect
to stripped mortgage-backed securities, in certain circumstances the Fund may
fail to recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by
institutional investors through several investment banking firms acting as
brokers or dealers. The CMO residual market has only very recently developed and
CMO residuals currently may not have the liquidity of other more established
securities trading in other markets. Transactions in CMO residuals are generally
completed only after careful review of the characteristics of the securities in
question. In addition, CMO residuals may or, pursuant to an exemption therefrom,
may not have been registered under the Securities Act of 1933, as amended. CMO
residuals, whether or not registered under such Act, may be subject to certain
restrictions on transferability, and may be deemed "illiquid" and subject to the
Fund's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be
issued by agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
SMBS are usually structured with two classes that receive
different proportions of the interest and principal distributions on a pool of
mortgage assets. A common type of SMBS will have one class receiving some of the
interest and most of the principal from the mortgage assets, which the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the IO
class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on the Fund's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.
Although SMBS are purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers,
these securities were only recently developed. As a result, established trading
markets have not yet developed and, accordingly, these securities may be deemed
"illiquid" and subject to the Fund's limitations on investment in illiquid
securities.
Other Asset-Backed Securities. Similarly, the Sub-advisor
expects that other asset-backed securities (unrelated to mortgage loans) will be
offered to investors in the future. Several types of asset-backed securities may
be offered to investors, including Certificates for Automobile Receivables. For
a discussion of automobile receivables, see this SAI under "Certain Risk Factors
and Investment Methods." Consistent with the Fund's investment objectives and
policies, the Sub-advisor also may invest in other types of asset-backed
securities.
Foreign Securities. The Fund may invest in U.S. dollar- or foreign
currency-denominated corporate debt securities of foreign issuers (including
preferred or preference stock), certain foreign bank obligations (see "Bank
Obligations") and U.S. dollar- or foreign currency-denominated obligations of
foreign governments or their subdivisions, agencies and instrumentalities,
international agencies and supranational entities. The Fund may invest up to 20%
of its assets in securities denominated in foreign currencies, and may invest
beyond this limit in U.S. dollar-denominated securities of foreign issuers. The
Fund will limit its foreign investments to securities of issuers based in
developed countries (which include newly industrialized countries such as
Mexico, Taiwan and South Korea). Investing in the securities of foreign issuers
involves special risks and considerations not typically associated with
investing in U.S. companies. For a discussion of certain risks involved in
foreign investments, see the Company's Prospectus and this SAI under "Certain
Risk Factors and Investment Methods."
The Fund also may purchase and sell foreign currency options and
foreign currency futures contracts and related options (see ""Derivative
Instruments"), and enter into forward foreign currency exchange contracts in
order to protect against uncertainty in the level of future foreign exchange
rates in the purchase and sale of securities.
A forward foreign currency contract involves an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the tine of the contract. These contracts may be bought or sold to protect the
Fund against a possible loss resulting from an adverse change in the
relationship between foreign currencies and the U.S. dollar or, to increase
exposure to a particular foreign currency. Open positions in forward contracts
are covered by the segregation with the Fund's custodian of cash or liquid
assets and are marked to market daily. Although such contracts are intended to
minimize the risk of loss due to a decline on the value of the hedged
currencies, at the same time, they tend to limit any potential gain which might
result should the value of such currencies increase.
Brady Bonds. The Fund may invest in Brady Bonds. Brady Bonds are
securities created through the exchange of existing commercial bank loans to
sovereign entities for new obligations in connection with debt restructurings
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings
have been implemented in a number of countries, including in Argentina, Bolivia,
Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Jordan, Mexico, Niger,
Nigeria, the Philippines, Poland, Uruguay, and Venezuela. In addition, Brazil
has concluded a Brady-like plan. It is expected that other countries will
undertake a Brady Plan in the future, including Panama and Peru.
Brady Bonds have been issued only recently, and accordingly do not have
a long payment history. Brady Bonds may be collateralized or uncollateralized,
are issued in various currencies (primarily the U.S. dollar) and are actively
traded in the over-the-counter secondary market. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed rate par bonds or floating rate
discount bonds, are generally collateralized in full as to principal by U.S.
Treasury zero-coupon bonds having the same maturity as the Brady Bonds. Interest
payments on these Brady Bonds generally are collateralized on a one-year or
longer rolling-forward basis by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of interest payments or,
in the case of floating rate bonds, initially is equal to at least one year's
interest payments based on the applicable interest rate at that time and is
adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to
"value recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Brady Bonds
are often viewed as having three or four valuation components: (i) the
collateralized repayment of principal at final maturity; (ii) the collateralized
interest payments; (iii) the uncollateralized interest payments; and (iv) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk").
Most Mexican Brady Bonds issued to date have principal repayments at
final maturity fully collateralized by U.S. Treasury zero-coupon bonds (or
comparable collateral denominated in other currencies) and interest coupon
payments collateralized on an 18-month rolling-forward basis by funds held in
escrow by an agent for the bondholders. A significant portion of the Venezuelan
Brady Bonds and the Argentine Brady Bonds issued to date have principal
repayments at final maturity collateralized by U.S. Treasury zero-coupon bonds
(or comparable collateral denominated in other currencies) and/or interest
coupon payments collateralized on a 14-month (for Venezuela) or 12-month (for
Argentina) rolling-forward basis by securities held by the Federal Reserve Bank
of New York as collateral agent.
Brady Bonds involve various risk factors including residual risk and
the history of defaults with respect to commercial bank loans by public and
private entities of countries issuing Brady Bonds. There can be no assurance
that Brady Bonds in which the Fund may invest will not be subject to
restructuring arrangements or to requests for new credit, which may cause the
Fund to suffer a loss of interest or principal on any of its holdings.
Bank Obligations. Bank obligations in which the Funds invest include
certificates of deposit, bankers' acceptances, and fixed time deposits.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand
by the investor, but may be subject to early withdrawal penalties which vary
depending upon market conditions and the remaining maturity of the obligation.
There are no contractual restrictions on the right to transfer a beneficial
interest in a fixed time deposit to a third party, although there is no market
for such deposits. The Fund will not invest in fixed time deposits which (1) are
not subject to prepayment or (2) provide for withdrawal penalties upon
prepayment (other than overnight deposits) if, in the aggregate, more than 15%
of its assets would be invested in such deposits, repurchase agreements maturing
in more than seven days and other illiquid assets.
The Fund will limit its investments in United States bank obligations
to obligations of United States bank (including foreign branches) which have
more than $1 billion in total assets at the time of investment and are member of
the Federal Reserve System, are examined by the Comptroller of the Currency or
whose deposits are insured by the Federal Deposit Insurance Corporation. The
Fund also may invest in certificates of deposit of savings and loan associations
(federally or state chartered and federally insured) having total assets in
excess $1 billion.
The Fund will limit its investments in foreign bank obligations to
United States dollar- or foreign currency-denominated obligations of foreign
banks (including United States branches of foreign banks) which at the time of
investment (i) have more than $10 billion, or the equivalent in other
currencies, in total assets; (ii) in terms of assets are among the 75 largest
foreign banks in the world; (iii) have branches or agencies (limited purpose
offices which do not offer all banking services) in the United States; and (iv)
in the opinion of the Sub-advisor, are of an investment quality comparable to
obligations of United States banks in which the Fund may invest. Subject to the
Fund's limitation on concentration of no more than 25% of its assets in the
securities of issuers in particular industry, there is no limitation on the
amount of the Fund's assets which may be invested in obligations of foreign
banks which meet the conditions set forth herein.
Obligations of foreign banks involve somewhat different investment
risks than those affecting obligations of United States banks, including the
possibilities that their liquidity could be impaired because of future political
and economic developments, that their obligations may be less marketable than
comparable obligations of United States banks, that a foreign jurisdiction might
impose withholding taxes on interest income payable on those obligations, that
foreign deposits may be seized or nationalized, that foreign governmental
restrictions such as exchange controls may be adopted which might adversely
affect the payment of principal and interest on those obligations and that the
selection of those obligations may be more difficult because there may be less
publicly available information concerning foreign banks or the accounting,
auditing and financial reporting standards, practices and requirements
applicable to foreign banks may differ from those applicable to United States
banks. Foreign banks are not generally subject to examination by any United
States Government agency or instrumentality.
Derivative Instruments. In pursuing its individual objective, the Fund
may, as described in the Company's Prospectus, purchase and sell (write) both
put options and call options on securities, securities indexes, and foreign
currencies, and enter into interest rate, foreign currency and index futures
contracts and purchase and sell options on such futures contracts ("future
options") for hedging purposes. The Fund also may enter into swap agreements
with respect to foreign currencies, interest rates and indexes of securities. If
other types of financial instruments, including other types of options, futures
contracts, or futures options are traded in the future, the Fund may also use
those instruments, provided that the Directors of the Company determine that
their use is consistent with the Fund's investment objective, and provided that
their use is consistent with restrictions applicable to options and futures
contracts currently eligible for use by the Trust (i.e., that written call or
put options will be "covered" or "secured" and that futures and futures options
will be used only for hedging purposes).
Options on Securities and Indexes. The Fund may purchase and sell both
put and call options on debt or other securities or indexes in standardized
contracts traded on foreign or national securities exchanges, boards of trade,
or similar entities, or quoted on NASDAQ or on a regulated foreign
over-the-counter market, and agreements sometimes called cash puts, which may
accompany the purchase of a new issue of bonds from a dealer.
The Fund will write call options and put options only if they are
"covered." In the case of a call option on a security, the option is "covered"
if the Fund owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount are placed in a segregated account by its custodian) upon conversion
or exchange of other securities held by the Fund. For a call option on an index,
the option is covered if the Fund maintains with its custodian cash or cash
equivalents equal to the contract value. A call option is also covered if the
Fund holds a call on the same security or index as the call written where the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the exercise price of the call
written, provided the difference is maintained by the Fund in cash or cash
equivalents in a segregated account with its custodian. A put option on a
security or an index is "covered" if the Fund maintains cash or cash equivalents
equal to the exercise price in a segregated account with its custodian. A put
option is also covered if the Fund holds a put on the same security or index as
the put written where the exercise price of the put held is (i) equal to or
greater than the exercise price of the put written, or (ii) less than the
exercise price of the put written, provided the difference is maintained by the
Fund in cash or cash equivalents in a segregated account with its custodian.
If an option written by the Fund expires, the Fund realizes a capital
gain equal to the premium received at the time the option was written. If an
option purchased by the Fund expires unexercised, the Fund realizes a capital
loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed
out by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price, and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when the Fund desires.
The Fund will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the premium received
from writing the option, or if it is more, the Fund will realize a capital loss.
If the premium received from a closing sale transaction is more than the premium
paid to purchase the option, the Fund will realize a capital gain or, if it is
less, the Fund will realize a capital loss. The principal factors affecting the
market value of a put or a call option include supply and demand, interest
rates, the current market price of the underlying security or index in relation
to the exercise price of the option, the volatility of the underlying security
or index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by the Fund is an
asset of the Fund. The premium received for a option written by the Fund is
recorded as a deferred credit. The value of an option purchased or written is
marked to market daily and is valued at the closing price on the exchange on
which it is traded or, if not traded on an exchange or no closing price is
available, at the mean between the last bid and asked prices. For a discussion
of certain risks involved in options, see this SAI and the Company's Prospectus
under "Certain Risk Factors and Investment Methods."
Foreign Currency Options. The Fund may buy or sell put and call options
on foreign currencies either on exchanges or in the over-the-counter market. A
put option on a foreign currency gives the purchaser of the option the right to
sell a foreign currency at the exercise price until the option expires. Currency
options traded on U.S. or other exchanges may be subject to position limits
which may limit the ability of the Fund to reduce foreign currency risk using
such options. Over-the-counter options differ from traded options in that they
are two-party contracts with price and other terms negotiated between buyer and
seller, and generally do not have as much market liquidity as exchange-traded
options.
Futures Contracts and Options on Futures Contracts. The Fund may use
interest rate, foreign currency or index futures contracts, as specified for the
Fund in the Company's Prospectus. An interest rate, foreign currency or index
futures contract provides for the future sale by one party and purchase by
another party of a specified quantity of a financial instrument, foreign
currency or the cash value of an index at a specified price and time. A futures
contract on an index is an agreement pursuant to which two parties agree to take
or make delivery of an amount of cash equal to the difference between the value
of the index at the close of the last trading day of the contract and the price
at which the index contract was originally written. Although the value of an
index might be a function of the value of certain specified securities, no
physical delivery of these securities is made.
The Fund may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities and
indexes (discussed above). A futures option gives the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a futures contract at a specified exercise price at any time during the
period of the option. Upon exercise of a call option, the holder acquires a long
position in the futures contract and the writer is assigned the opposite short
position. In the case of a put option, the opposite is true.
To comply with applicable rules of the Commodity Futures Trading
Commission under which the Company and the Fund avoid being deemed a "commodity
pool" or a "commodity pool operator," the Fund intends generally to limit its
use of futures contracts and futures options to "bona fide hedging"
transactions, as such term is defined in applicable regulations, interpretations
and practice. For example, the Fund might use futures contracts to hedge against
anticipated changes in interest rates that might adversely affect either the
value of the Fund's securities or the price of the securities which the Fund
intends to purchase. The Fund's hedging activities may include sales of futures
contracts as an offset against the effect or expected increases in interest
rates, and purchases of futures contracts as an offset against the effect of
expected declines in interest rates. Although other techniques could be used to
reduce the Fund's exposure to interest rate fluctuations, the Fund may be able
to hedge its exposure more effectively and perhaps at a lower cost by using
futures contracts and futures options.
The Fund will only enter into futures contracts and futures options
which are standardized and traded on a U.S. or foreign exchange, board of trade,
or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by the Fund, the
Fund is required to deposit with its custodian (or broker, if legally permitted)
a specified amount of cash or U.S. Government securities ("initial margin"). The
margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. The Fund
expects to earn interest income on its initial margin deposits. A futures
contract held by the Fund is valued daily at the official settlement price of
the exchange on which it is traded. Each day the Fund pays or receives cash,
called "variation margin," equal to the daily change in value of the futures
contract. This process is known as "marking to market." Variation margin does
not represent a borrowing or loan by the Fund but is instead a settlement
between the Fund and the broker of the amount one would owe the other if the
futures contract expired. In computing daily net asset value, the Fund will mark
to market its open futures positions.
The Fund is also required to deposit and maintain margin with respect
to put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of
the underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund realizes a capital
gain, or if it is more, the Fund realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Fund
realizes a capital gain, or if it is less, the Fund realizes a capital loss. The
transaction costs must also be included in these calculations.
Limitations on Use of Futures and Futures Options. In general, the
Funds intend to enter into positions in futures contracts and related options
only for "bona fide hedging" purposes. With respect to positions in futures and
related options that do not constitute bona fide hedging positions, the Fund
will not enter into a futures contract or futures option contract if,
immediately thereafter, the aggregate initial margin deposits relating to such
positions plus premiums paid by it for open futures option positions, less the
amount by which any such options are "in-the-money," would exceed 5% of the
Fund's total assets. A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise price. A put
option is "in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.
When purchasing a futures contract, the Fund will maintain with its
custodian (and mark-to-market on a daily basis) cash or other liquid assets
that, when added to the amounts deposited with a futures commission merchant as
margin, are equal to the market value of the futures contract. Alternatively,
the Fund may "cover" its position by purchasing a put option on the same futures
contract with a strike price as high or higher than the price of the contract
held by the Fund.
When selling a futures contract, the Fund will maintain with its
custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amount deposited with a futures commission merchant as margin, are equal
to the market value of the instruments underlying the contract. Alternatively,
the Fund may "cover" its position by owning the instruments underlying the
contract (or, in the case of an index futures contract, a portfolio with a
volatility substantially similar to that of the index on which the futures
contract is based), or by holding a call option permitting the Fund to purchase
the same futures contract at a price no higher than the price of the contract
written by the Fund (or at a higher price if the difference is maintained in
liquid assets with the Fund's custodian).
When selling a call option on a futures contract, the Fund will
maintain with its custodian (and mark-to-market on a daily basis) cash or other
liquid assets that, when added to the amounts deposited with a futures
commission merchant as margin, equal the total market value of the futures
contract underlying the call option. Alternatively, the Fund may cover its
position by entering into a long position in the same futures contract at a
price no higher than the strike price of the call option, by owning the
instruments underlying the futures contract, or by holding a separate call
option permitting the Fund to purchase the same futures contract at a price not
higher than the strike price of the call option sold by the Fund.
When selling a put option on a futures contract, the Fund will maintain
with its custodian (and mark-to market on a daily basis) cash or other liquid
assets that equal the purchase price of the futures contract, less any margin on
deposit. Alternatively, the Fund may cover the position either by entering into
a short position in the same futures contract, or by owning a separate put
option permitting it to sell the same futures contract so long as the strike
price of the purchased put option is the same or higher than the strike price of
the put option sold by the Fund.
Swap Agreements. The Fund may enter into interest rate, index and
currency exchange rate swap agreements for purposes of attempting to obtain a
particular desired return at a lower cost to the Fund than if the Fund had
invested directly in an instrument that yielded that desired return. For a
discussion of swap agreements, see the Company's Prospectus under "Investment
Objectives and Policies." The Fund's obligations under a swap agreement will be
accrued daily (offset against any amounts owing to the Fund) and any accrued but
unpaid net amounts owed to a swap counterparty will be covered by the
maintenance of a segregated account consisting of cash or other liquid assets to
avoid any potential leveraging of the Fund's portfolio. The Fund will not enter
into a swap agreement with any single party if the net amount owned or to be
received under existing contracts with that party would exceed 5% of the Fund's
assets.
Whether the Fund's use of swap agreements will be successful in
furthering its investment objective of total return will depend on the
Sub-advisor's ability correctly to predict whether certain types of investments
are likely to produce greater returns than other investments. Because they are
two party contracts and because they may have terms of greater than seven days,
swap agreements may be considered to be illiquid. Moreover, the Fund bears the
risk of loss of the amount expected to be received under a swap agreement in the
event of the default or bankruptcy of a swap agreement counterpart. The
Sub-advisor will cause the Fund to enter into swap agreements only with
counterparties that would be eligible for consideration as repurchase agreement
counterparties under the Fund's repurchase agreement guidelines. Certain
restrictions imposed on the Funds by the Internal Revenue Code may limit the
Funds' ability to use swap agreements. The swaps market is a relatively new
market and is largely unregulated. It is possible that developments in the swaps
market, including potential government regulation, could adversely affect the
Fund's ability to terminate existing swap agreements or to realize amounts to be
received under such agreements.
Certain swap agreements are exempt from most provisions of the
Commodity Exchange Act ("CEA") and, therefore, are not regulated as futures or
commodity option transactions under the CEA, pursuant to regulations approved by
the Commodity Futures Trading Commission. To qualify for this exemption, a swap
agreement must be entered into by "eligible participants." To be eligible,
natural persons and most other entities must have total assets exceeding $10
million; commodity pools and employee benefit plans must have assets exceeding
$5 million. In addition, an eligible swap transaction must meet three
conditions. First, the swap agreement may not be part of a fungible class of
agreements that are standardized as to their material economic terms. Second,
the creditworthiness of parties with actual or potential obligations under the
swap agreement must be a material consideration in entering into or determining
the terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through a
multilateral transaction execution facility.
This exemption is not exclusive, and partnerships may continue to rely
on existing exclusions for swaps, such as the Policy Statement issued in July
1989 which recognized a safe harbor for swap transactions from regulation as
futures or commodity option transactions under the CEA or its regulations. The
Policy Statement applies to swap transactions settled in cash that (1) have
individual tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
Structured Notes. Structured notes are derivative debt securities, the
interest rate or principal of which is determined by an unrelated indicator.
Indexed securities include structured notes as well as securities other than
debt securities, the interest rate or principal of which is determined by an
unrelated indicator. Indexed securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent the Fund invests in these
securities, however, the Sub-advisor analyzes these securities in its overall
assessment of the effective duration of the Fund's portfolio in an effort to
monitor the Fund's interest rate risk.
Foreign Currency Exchange-Related Securities. The Fund may invest in
foreign currency warrants, principal exchange rate linked securities and
performance indexed paper. For a description of these instruments, see this SAI
under "Certain Risk Factor and Investment Methods."
Warrants to Purchase Securities. The Fund may invest in or acquire
warrants to purchase equity or fixed-income securities. Bonds with warrants
attached to purchase equity securities have many characteristics of convertible
bonds and their prices may, to some degree, reflect the performance of the
underlying stock. Bonds also may be issued with warrants attached to purchase
additional fixed-income securities at the same coupon rate. A decline in
interest rates would permit the Fund to buy additional bonds at the favorable
rate or to sell the warrants at a profit. If interest rates rise, the warrants
would generally expire with no value.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1. Invest more than 15% of the assets of the Fund (taken at market value at
the time of the investment) in "illiquid securities;" illiquid securities being
defined to include securities subject to legal or contractual restrictions on
resale (which may include private placements), repurchase agreements maturing in
more than seven days, certain options traded over the counter that the Fund has
purchased, securities being used to cover options the Fund has written,
securities for which market quotations are not readily available, or other
securities which legally or in the Sub-advisor's option may be deemed illiquid;
2. Purchase securities for the Fund from, or sell portfolio securities to,
any of the officers and directors or trustees of the Company, the Trust, the
Investment Manager or the Sub-advisor;
3. Invest more than 5% of the assets of the Fund (taken at market value at
the time of investment) in any combination of interest only, principal only, or
inverse floating rate securities;
4. Invest in companies for the purpose of exercising management or control;
5. Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940;
6. Purchase securities on margin, except (i) for use of short-term credit
necessary for clearance of purchases of portfolio securities and (ii) the Fund
may make margin deposits in connection with futures contracts or other
permissible investments;
7. Purchase or sell oil, gas or other mineral programs;
8. Maintain a short position, or purchase, write or sell puts, calls,
straddles, spreads or combinations thereof, except as set forth in the Company's
Prospectus and this SAI for transactions in options, futures, and options on
futures transactions arising under swap agreements or other derivative
instruments; or
9. Pledge, mortgage or hypothecate its assets, except as may be necessary
in connection with permissible borrowings or investments; and then such
pledging, mortgaging or hypothecating may not exceed 33 1/3% of the Fund's total
assets at the time of borrowing or investment. The deposit of assets in escrow
in connection with the writing of covered put and call options and the purchase
of securities on a when-issued or delayed delivery basis, collateral
arrangements with respect to initial or variation margin deposits for future
contracts and commitments entered into under swap agreements or other derivative
instruments, will not be deemed to be pledges of the Portfolio's assets.
ASAF JPM MONEY MARKET FUND:
Investment Objective: The investment objective of the Fund is to seek high
current income and maintain high levels of liquidity.
Investment Policies:
Bank Obligations. The Fund will not invest in bank obligations for which
any affiliate of the Sub-advisor is the ultimate obligor or accepting bank.
Asset-Backed Securities. The asset-backed securities in which the Fund
may invest are subject to the Fund's overall credit requirements. However,
asset-backed securities, in general, are subject to certain risks. Most of these
risks are related to limited interests in applicable collateral. For example,
credit card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to set off certain amounts on credit card debt
thereby reducing the balance due. Additionally, if the letter of credit is
exhausted, holders of asset-backed securities may also experience delays in
payments or losses if the full amounts due on underlying sales contracts are not
realized. Because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested. For a
discussion of asset-backed securities and the risks involved therein see the
Company's Prospectus and this SAI under "Certain Risk Factors and Investment
Methods."
Synthetic Instruments. As may be permitted by current laws and
regulations and if expressly permitted by the Directors of the Company, the Fund
may invest in certain synthetic instruments. Such instruments generally involve
the deposit of asset-backed securities in a trust arrangement and the issuance
of certificates evidencing interests in the trust. The certificates are
generally sold in private placements in reliance on Rule 144A of the Securities
Act of 1933.
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements. The
repurchase agreements into which the Fund may enter will usually be short, from
overnight to one week, and at no time will the Fund invest in repurchase
agreements for more than thirteen months. The securities which are subject to
repurchase agreements, however, may have maturity dates in excess of thirteen
months from the effective date of the repurchase agreement. For a discussion of
repurchase agreements and certain risks involved therein, see the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements. The Fund invests the proceeds of
borrowings under reverse repurchase agreements. The Fund will enter into a
reverse repurchase agreement only when the interest income to be earned from the
investment of the proceeds is greater than the interest expense of the
transaction. The Fund will not invest the proceeds of a reverse repurchase
agreement for a period which exceeds the duration of the reverse repurchase
agreement. The Fund may not enter into reverse repurchase agreements exceeding
in the aggregate one-third of the market value of its total assets, less
liabilities other than the obligations created by reverse repurchase agreements.
The Fund will establish and maintain with its custodian a separate account with
a segregated portfolio of securities in an amount at least equal to its purchase
obligations under its reverse repurchase agreements. If interest rates rise
during the term of a reverse repurchase agreement, such reverse repurchase
agreement may have a negative impact on the Fund's ability to maintain a net
asset value of $1.00 per share.
Foreign Securities. The Fund may invest in U.S. dollar-denominated
foreign securities. Any foreign commercial paper must not be subject to foreign
withholding tax at the time of purchase. Foreign investments may be made
directly in securities of foreign issuers or in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Generally, ADRs and
EDRs are receipts issued by a bank or trust company that evidence ownership of
underlying securities issued by a foreign corporation and that are designed for
use in the domestic, in the case of ADRs, or European, in the case of EDRs,
securities markets. For a discussion of depositary receipts and the risks
involved in investing in foreign securities, see the Company's Prospectus under
"Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. Loans will be subject to termination by
the Fund in the normal settlement time, generally three business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. The Fund may pay reasonable finders' and
custodial fees in connection with a loan. In making a loan, the Fund will
consider all facts and circumstances surrounding the making of the loan,
including the creditworthiness of the borrowing financial institution. The Fund
will not make any loans in excess of one year. The Fund will not lend its
securities to any officer, employee, Director or Trustee of the Company, the
Trust, the Investment Manager, any Sub-advisor of the Company or the Trust, or
the Administrator unless otherwise permitted by applicable law.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1. Invest in companies for the purpose of exercising management or control;
2. Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940;
3. Purchase securities on margin, make short sales of securities, or
maintain a short position, provided that this restriction shall not be deemed to
be applicable to the purchase or sale of when-issued securities or of securities
for delivery at a future date;
4. Acquire any illiquid securities, such as repurchase agreements with more
than seven days to maturity or fixed time deposits with a duration of over seven
calendar days, if as a result thereof, more than 10% of the market value of the
Fund's total assets would be in investments which are illiquid;
5. Mortgage, pledge or hypothecate any assets, except as may be necessary
in connection with permissible borrowings or investments; and then such
mortgaging, pledging or hypothecating may not exceed 33 1/3% of the Fund's total
assets at the time of borrowing or investment;
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, except to the extent permitted by the Company's Prospectus and this
SAI; or
7. Purchase or sell interests in oil, gas or other mineral exploration or
development programs.
FUNDAMENTAL INVESTMENT RESTRICTIONS
Investment Restrictions. Each Fund and Portfolio has adopted the following
fundamental investment restrictions which may not be changed without shareholder
approval.
1. Senior Securities. No Fund or Portfolio may issue senior securities,
except as permitted under the Investment Company Act of 1940 (the "1940 Act").
2. Borrowing. No Fund or Portfolio may borrow money, except that a Fund or
Portfolio may (i) borrow money for non-leveraging, temporary or emergency
purposes, and (ii) engage in reverse repurchase agreements and make other
investments or engage in other transactions, which may involve a borrowing, in a
manner consistent with the Fund or Portfolio's investment objective and
policies; provided that the combination of (i) and (ii) shall not exceed 33 1/3%
of the value of the Fund or Portfolio's assets (including the amount borrowed)
less liabilities (other than borrowings) or such other percentage permitted by
law. Any borrowings which come to exceed this amount will be reduced in
accordance with applicable law. Subject to the above limitations, the Funds and
Portfolios may borrow from banks or other persons to the extent permitted by
applicable law.
3. Underwriting. No Fund or Portfolio may underwrite securities issued by
other persons, except to the extent that the Fund or Portfolio may be deemed to
be an underwriter (within the meaning of the Securities Act of 1933) in
connection with the purchase and sale of portfolio securities.
4. Real Estate. No Fund or Portfolio may purchase or sell real estate
unless acquired as a result of the ownership of securities or other instruments;
provided that this restriction shall not prohibit a Fund or Portfolio from
investing in securities or other instruments backed by real estate or in
securities of companies engaged in the real estate business.
5. Commodities. No Fund or Portfolio may purchase or sell physical
commodities unless acquired as a result of the ownership of securities or
instruments; provided that this restriction shall not prohibit a Fund or
Portfolio from (i) engaging in permissible options and futures transactions and
forward foreign currency contracts in accordance with the Fund's or Portfolio's
investment policies, or (ii) investing in securities of any kind.
6. Lending. No Fund or Portfolio may make loans, except that a Fund or
Portfolio may (i) lend portfolio securities in accordance with the Fund or
Portfolio's investment policies in amounts up to 33 1/3% of the total assets of
the Fund or Portfolio taken at market value, (ii) purchase money market
securities and enter into repurchase agreements, and (iii) acquire publicly
distributed or privately placed debt securities and purchase debt.
7. Industry Concentration. No Fund or Portfolio may purchase any security
if, as a result, more than 25% of the value of the Fund or Portfolio's assets
would be invested in the securities of issuers having their principal business
activities in the same industry; provided that this restriction does not apply
to investments in obligations issued or guaranteed by the U.S. Government or any
of its agencies or instrumentalities (or repurchase agreements with respect
thereto).
8. Diversification. No Fund or Portfolio may, with respect to 75% of the
value of its total assets, purchase the securities of any issuer (other than
securities issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities) if, as a result, (i) more than 5% of the value of the Fund's
or Portfolio's total assets would be invested in the securities of such issuer,
or (ii) more than 10% of the outstanding voting securities of such issuer would
be held by the Fund or Portfolio.
Notes to Investment Restrictions. The following notes should be read in
conjunction with the above fundamental investment restrictions. These notes are
not fundamental policies and may be changed without shareholder approval.
o Applicable to All Funds and Portfolios: If a restriction on a Fund's
or Portfolio's investments is adhered to at the time an investment is made, a
subsequent change in the percentage of Fund or Portfolio assets invested in
certain securities or other instruments, or change in average duration of the
Fund's or Portfolio's investment portfolio, resulting from changes in the value
of the Fund's or Portfolio's total assets, will not be considered a violation of
the restriction; provided, however, that the asset coverage requirement
applicable to borrowings shall be maintained in the manner contemplated by
applicable law.
o Applicable to All Funds and Portfolios: With respect to investment
restrictions (2) and (6), a Fund or Portfolio will not borrow or lend to any
other fund unless it applies for and receives an exemptive order from the
Securities and Exchange Commission (the "Commission"), if so required, or the
Commission issues rules permitting such transactions. There is no assurance the
Commission would grant any order requested by the Fund or Portfolio or
promulgate any rules allowing the transactions.
o Applicable Only to the ASAF Founders International Small
Capitalization Fund and the ASAF Founders Small Capitalization Fund: With
respect to investment restriction (7), the Funds use industry classifications
based, where applicable, on Bridge Information Systems, Reuters, the S&P Stock
Guide published by Standard & Poor's, information obtained from Bloomberg L.P.
and Moody's International, and/or the prospectus of the issuing company.
Selection of an appropriate industry classification resource will be made by the
Sub-advisor in the exercise of its reasonable discretion.
o Applicable Only to the ASAF T. Rowe Price International Equity Fund
(and corresponding Portfolio) and the ASAF T. Rowe Price Small Company Value
Fund: With respect to investment restrictions (2) and (6), the Fund and
Portfolio have no current intention of borrowing or lending to any other fund.
For purposes of investment restriction (6), the Fund and Portfolio will consider
the acquisition of a debt security to include the execution of a note or other
evidence of an extension of credit with a term of more than nine months.
CERTAIN RISK FACTORS AND INVESTMENT METHODS
Some of the investment instruments, techniques and methods which may be
used by one or more of the Funds and the risks attendant thereto are described
below. Other risk factors and investment methods may be described in the
Company's Prospectus under "Investment Programs of the Funds" and "Certain Risk
Factors and Investment Methods," and in this SAI under "Investment Objectives
and Policies." The risk factors and investment methods described below only
apply to those Funds or Portfolios that may invest in such securities or use
such investment methods. The below references to the investment methods used by
the Feeder Funds apply equally to the Funds' corresponding Portfolios.
Debt Obligations. Yields on short, intermediate, and long-term
securities are dependent on a variety of factors, including, the general
conditions of the money and bond markets, the size of a particular offering, the
maturity of the obligation, and the rating of the issue. Debt securities with
longer maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations with
shorter maturities and lower yields. The market prices of debt securities
usually vary, depending upon available yields. An increase in prevailing
interest rates will generally reduce the value of debt investments, and a
decline in interest rates will generally increase the value of debt investments.
The ability of a Fund to achieve its investment objective is also dependent on
the continuing ability of the issuers of the debt securities in which a Fund
invests to meet their obligations for the payment of interest and principal when
due.
Special Risks Associated with Low-Rated and Comparable Unrated
Securities. 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 predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal. The special risk considerations in
connection with such investments are discussed below. See the Appendix of this
Statement for a discussion of securities ratings.
Effect of Interest Rates and Economic Changes. The low-rated
and comparable unrated securities market is relatively new, and its growth
paralleled a long economic expansion. As a result, it is not clear how this
market may withstand a prolonged recession or economic downturn. Such a
prolonged economic downturn could severely disrupt the market for and adversely
affect the value of such securities.
All interest-bearing securities typically experience
appreciation when interest rates decline and depreciation when interest rates
rise. The market values of low-rated and comparable unrated securities tend to
reflect individual corporate developments to a greater extent than do
higher-rated securities, which react primarily to fluctuations in the general
level of interest rates. Low-rated and comparable unrated securities also tend
to be more sensitive to economic conditions than are higher-rated securities.
During an economic downturn or a sustained period of rising interest rates,
highly leveraged issuers of low-rated and comparable unrated securities may
experience financial stress and may not have sufficient revenues to meet their
payment obligations. The issuer's ability to service its debt obligations may
also be adversely affected by specific corporate developments, the issuer's
inability to meet specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by an issuer of
low-rated and comparable unrated securities is significantly greater than
issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the issuer
of a low-rated and comparable unrated security defaulted, a Fund might incur
additional expenses to seek recovery. Periods of economic uncertainty and
changes would also generally result in increased fluctuation in the market
prices of low-rated and comparable unrated securities and thus in a Fund's net
asset value.
As previously stated, the value of such a security will
decrease in a rising interest rate market and accordingly, so will a Fund's net
asset value. If a Fund experiences unexpected net redemptions in such a market,
it may be forced to liquidate a portion of its portfolio securities without
regard to their investment merits. Due to the limited liquidity of some
high-yield securities (discussed below), a Fund may be forced to liquidate these
securities at a substantial discount. Any such liquidation would reduce a Fund's
asset base over which expenses could be allocated and could result in a reduced
rate of return for a Fund.
Payment Expectations. Low-rated and comparable unrated
securities typically contain redemption, call, or prepayment provisions which
permit the issuer of securities containing such provisions to, at their
discretion, redeem the securities. During periods of falling interest rates,
issuers of high-yield securities are likely to redeem or prepay the securities
and refinance them with debt securities with a lower interest rate. To the
extent an issuer is able to refinance the securities, or otherwise redeem them,
a Fund may have to replace the securities with a lower-yielding security, which
would result in a lower return for a Fund.
Issuers of lower-rated securities are often highly leveraged,
so that their ability to service their debt obligations during an economic
downturn or during sustained periods of rising interest rates may be impaired.
Such issuers may not have more traditional methods of financing available to
them and may be unable to repay outstanding obligations at maturity by
refinancing. The risk of loss due to default in payment of interest or repayment
of principal by such issuers is significantly greater because such securities
frequently are unsecured and subordinated to the prior payment of senior
indebtedness.
Credit Ratings. Credit ratings issued by credit-rating
agencies attempt to evaluate the safety of principal and interest payments of
rated securities. They do not, however, evaluate the market value risk of
low-rated and comparable unrated securities and, therefore, may not fully
reflect the true risks of an investment. In addition, credit-rating agencies may
or may not make timely changes in a rating to reflect changes in the economy or
in the condition of the issuer that affect the market value of the security.
Consequently, credit ratings may be used only as a preliminary indicator of
investment quality. Investments in low-rated and comparable unrated securities
will be more dependent on the applicable Sub-advisor's credit analysis than
would be the case with investments in investment-grade debt securities. Such
Sub-advisor may employ its own credit research and analysis, which could include
a study of existing debt, capital structure, ability to service debt and to pay
dividends, the issuer's sensitivity to economic conditions, its operating
history, and the current trend of earnings. The Sub-advisor continually monitors
the investments in a Fund and evaluates whether to dispose of or to retain
low-rated and comparable unrated securities whose credit ratings or credit
quality may have changed.
Liquidity and Valuation. A Fund may have difficulty disposing
of certain low-rated and comparable unrated securities because there may be a
thin trading market for such securities. There is no established retail
secondary market for many of these securities. A Fund anticipates that such
securities could be sold only to a limited number of dealers or institutional
investors. To the extent a secondary trading market does exist, it is generally
not as liquid as the secondary market for higher-rated securities. The lack of a
liquid secondary market may have an adverse impact on the market price of the
security. As a result, a Fund's asset value and a Fund's ability to dispose of
particular securities, when necessary to meet a Fund's liquidity needs or in
response to a specific economic event, may be impacted. The lack of a liquid
secondary market for certain securities may also make it more difficult for a
Fund to obtain accurate market quotations for purposes of valuing a portfolio.
Market quotations are generally available on many low-rated and comparable
unrated issues only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales. During periods
of thin trading, the spread between bid and asked prices is likely to increase
significantly. In addition, adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may decrease the values and liquidity of
low-rated and comparable unrated securities, especially in a thinly-traded
market.
Put and Call Options:
Writing (Selling) Call Options. A call option gives the holder
(buyer) the "right to purchase" a security or currency at a specified price (the
exercise price), at expiration of the option (European style) or at any time
until a certain date (the expiration date) (American style). So long as the
obligation of the writer of a call option continues, he may be assigned an
exercise notice by the broker-dealer through whom such option was sold,
requiring him to deliver the underlying security or currency against payment of
the exercise price. This obligation terminates upon the expiration of the call
option, or such earlier time at which the writer effects a closing purchase
transaction by purchasing an option identical to that previously sold.
When writing a call option, a Fund, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely retains the risk
of loss should the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, a Fund has no control
over when it may be required to sell the underlying securities or currencies,
since it may be assigned an exercise notice at any time prior to the expiration
of its obligation as a writer. If a call option which a Fund has written
expires, the Fund will realize a gain in the amount of the premium; however,
such gain may be offset by a decline in the market value of the underlying
security or currency during the option period. If the call option is exercised,
a Fund will realize a gain or loss from the sale of the underlying security or
currency.
Writing (Selling) Put Options. A put option gives the
purchaser of the option the right to sell, and the writer (seller) has the
obligation to buy, the underlying security or currency at the exercise price
during the option period (American style) or at the expiration of the option
(European style). So long as the obligation of the writer continues, he may be
assigned an exercise notice by the broker-dealer through whom such option was
sold, requiring him to make payment of the exercise price against delivery of
the underlying security or currency. The operation of put options in other
respects, including their related risks and rewards, is substantially identical
to that of call options.
Premium Received from Writing Call or Put Options. A Fund will
receive a premium from writing a put or call option, which increases such Fund's
return in the event the option expires unexercised or is closed out at a profit.
The amount of the premium will reflect, among other things, the relationship of
the market price of the underlying security to the exercise price of the option,
the term of the option and the volatility of the market price of the underlying
security. By writing a call option, a Fund limits its opportunity to profit from
any increase in the market value of the underlying security above the exercise
price of the option. By writing a put option, a Fund assumes the risk that it
may be required to purchase the underlying security for an exercise price higher
than its then current market value, resulting in a potential capital loss if the
purchase price exceeds the market value plus the amount of the premium received,
unless the security subsequently appreciates in value.
Closing Transactions. A Fund may terminate an option that it
has written prior to its expiration by entering into a closing purchase
transaction in which it purchases an option having the same terms as the option
written. Closing transactions may be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security or currency from
being called, or, to permit the sale of the underlying security or currency. A
Fund will realize a profit or loss from such transaction if the cost of such
transaction is less or more than the premium received from the writing of the
option. In the case of a put option, any loss so incurred may be partially or
entirely offset by the premium received from a simultaneous or subsequent sale
of a different put option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option is likely to
be offset in whole or in part by unrealized appreciation of the underlying
security owned by such Fund.
Furthermore, effecting a closing transaction will permit a
Fund to write another call option on the underlying security or currency with
either a different exercise price or expiration date or both. If a Fund desires
to sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security or
currency. There is, of course, no assurance that a Fund will be able to effect
such closing transactions at a favorable price. If a Fund cannot enter into such
a transaction, it may be required to hold a security or currency that it might
otherwise have sold. When a Fund writes a covered call option, it runs the risk
of not being able to participate in the appreciation of the underlying
securities or currencies above the exercise price, as well as the risk of being
required to hold on to securities or currencies that are depreciating in value.
This could result in higher transaction costs. A Fund will pay transaction costs
in connection with the writing of options to close out previously written
options. Such transaction costs are normally higher than those applicable to
purchases and sales of portfolio securities.
Purchasing Call Options. Call options may be purchased by a
Fund for the purpose of acquiring the underlying securities or currencies for
its portfolio. Utilized in this fashion, the purchase of call options enables a
Fund to acquire the securities or currencies at the exercise price of the call
option plus the premium paid. At times the net cost of acquiring securities or
currencies in this manner may be less than the cost of acquiring the securities
or currencies directly. This technique may also be useful to a Fund in
purchasing a large block of securities or currencies that would be more
difficult to acquire by direct market purchases. So long as it holds such a call
option rather than the underlying security or currency itself, a Fund is
partially protected from any unexpected decline in the market price of the
underlying security or currency and in such event could allow the call option to
expire, incurring a loss only to the extent of the premium paid for the option.
Purchasing Put Options. A Fund may purchase a put option on an
underlying security or currency owned by the Fund (a "protective put") as a
defensive technique in order to protect against an anticipated decline in the
value of the security or currency. Such hedge protection is provided only during
the life of the put option when the Fund, as the holder of the put option, is
able to sell the underlying security or currency at the put exercise price
regardless of any decline in the underlying security's market price or
currency's exchange value. For example, a put option may be purchased in order
to protect unrealized appreciation of a security or currency where a Sub-advisor
deems it desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
If a Fund purchases put options at a time when the Fund does
not own the underlying security or currency, the Fund seeks to benefit from a
decline in the market price of the underlying security or currency. If the put
option is not sold when it has remaining value, and if the market price of the
underlying security or currency remains equal to or greater than the exercise
price during the life of the put option, a Fund will lose its entire investment
in the put option. In order for the purchase of a put option to be profitable,
the market price of the underlying security or currency must decline
sufficiently below the exercise price to cover the premium and transaction
costs.
Dealer Options. Exchange-traded options generally have a
continuous liquid market while dealer options have none. Consequently, a Fund
will generally be able to realize the value of a dealer option it has purchased
only by exercising it or reselling it to the dealer who issued it. Similarly,
when a Fund writes a dealer option, it generally will be able to close out the
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote the option. While
a Fund will seek to enter into dealer options only with dealers who will agree
to and which are expected to be capable of entering into closing transactions
with the Fund, there can be no assurance that the Fund will be able to liquidate
a dealer option at a favorable price at any time prior to expiration. Until a
Fund, as a covered dealer call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) used as cover until the option expires or is exercised. In the event of
insolvency of the other party, a Fund may be unable to liquidate a dealer
option. With respect to options written by a Fund, the inability to enter into a
closing transaction may result in material losses to a Fund. For example, since
a Fund must maintain a secured position with respect to any call option on a
security it writes, a Fund may not sell the assets which it has segregated to
secure the position while it is obligated under the option. This requirement may
impair a Fund's ability to sell portfolio securities at a time when such sale
might be advantageous.
The Staff of the Commission has taken the position that
purchased dealer options and the assets used to secure the written dealer
options are illiquid securities. A Fund may treat the cover used for written OTC
options as liquid if the dealer agrees that the Fund may repurchase the OTC
option it has written for a maximum price to be calculated by a predetermined
formula. In such cases, the OTC option would be considered illiquid only to the
extent the maximum repurchase price under the formula exceeds the intrinsic
value of the option. To this extent, a Fund will treat dealer options as subject
to a Fund's limitation on unmarketable or illiquid securities. If the Commission
changes its position on the liquidity of dealer options, a Fund will change its
treatment of such instrument accordingly.
Certain Risk Factors in Writing Call Options and in Purchasing Call and
Put Options. During the option period, a Fund, as writer of a call option has,
in return for the premium received on the option, given up the opportunity for
capital appreciation above the exercise price should the market price of the
underlying security increase, but has retained the risk of loss should the price
of the underlying security decline. The writer has no control over the time when
it may be required to fulfill its obligation as a writer of the option. The risk
of purchasing a call or put option is that a Fund may lose the premium it paid
plus transaction costs. If a Fund does not exercise the option and is unable to
close out the position prior to expiration of the option, it will lose its
entire investment.
An exchange-traded option position may be closed out only on an
exchange which provides a secondary market. There can be no assurance that a
liquid secondary market will exist for a particular option at a particular time
and that a Fund can close out its position by effecting a closing transaction.
If a Fund is unable to effect a closing purchase transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Accordingly, a Fund may not be able to sell the underlying security at a time
when it might otherwise be advantageous to do so. Possible reasons for the
absence of a liquid secondary market include the following: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions imposed
by an exchange; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) inadequacy of the facilities of an exchange or the clearing
corporation to handle trading volume; and (v) a decision by one or more
exchanges to discontinue the trading of options or impose restrictions on
orders. In addition, the hours of trading for options may not conform to the
hours during which the underlying securities are traded. To the extent that the
options markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets. The purchase of options is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
Each exchange has established limitations governing the maximum number
of call options, whether or not covered, which may be written by a single
investor acting alone or in concert with others (regardless of whether such
options are written on the same or different exchanges or are held or written on
one or more accounts or through one or more brokers). An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions.
Options on Stock Indices. Options on stock indices are similar to
options on specific securities except that, rather than the right to take or
make delivery of the specific security at a specific price, an option on a stock
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of that stock index is greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
option. This amount of cash is equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
multiplied by a specified multiple. The writer of the option is obligated, in
return for the premium received, to make delivery of this amount. Unlike options
on specific securities, all settlements of options on stock indices are in cash
and gain or loss depends on general movements in the stocks included in the
index rather than price movements in particular stocks.
Risk Factors of Options on Indices. Because the value of an index
option depends upon the movements in the level of the index rather than upon
movements in the price of a particular security, whether a Fund will realize a
gain or a loss on the purchase or sale of an option on an index depends upon the
movements in the level of prices in the market generally or in an industry or
market segment rather than upon movements in the price of the individual
security. Accordingly, successful use of positions will depend upon a
Sub-advisor's ability to predict correctly movements in the direction of the
market generally or in the direction of a particular industry. This requires
different skills and techniques than predicting changes in the prices of
individual securities.
Index prices may be distorted if trading of securities included in the
index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
securities in the index. If this occurred, a Fund would not be able to close out
options which it had written or purchased and, if restrictions on exercise were
imposed, might be unable to exercise an option it purchased, which would result
in substantial losses.
Price movements in portfolio securities will not correlate perfectly
with movements in the level of the index and therefore, a Fund bears the risk
that the price of the securities may not increase as much as the level of the
index. In this event, the Fund would bear a loss on the call which would not be
completely offset by movements in the prices of the securities. It is also
possible that the index may rise when the value of a Fund's securities does not.
If this occurred, a Fund would experience a loss on the call which would not be
offset by an increase in the value of its securities and might also experience a
loss in the market value of its securities.
Unless a Fund has other liquid assets which are sufficient to satisfy
the exercise of a call on the index, the Fund will be required to liquidate
securities in order to satisfy the exercise. When a Fund has written a call on
an index, there is also the risk that the market may decline between the time
the Fund has the call exercised against it, at a price which is fixed as of the
closing level of the index on the date of exercise, and the time the Fund is
able to sell securities. As with options on securities, the Sub-advisor will not
learn that a call has been exercised until the day following the exercise date,
but, unlike a call on securities where a Fund would be able to deliver the
underlying security in settlement, a Fund may have to sell part of its
securities in order to make settlement in cash, and the price of such securities
might decline before they could be sold.
If a Fund exercises a put option on an index which it has purchased
before final determination of the closing index value for the day, it runs the
risk that the level of the underlying index may change before closing. If this
change causes the exercised option to fall "out-of-the-money," the Fund will be
required to pay the difference between the closing index value and the exercise
price of the option (multiplied by the applicable multiplier) to the assigned
writer. Although a Fund may be able to minimize this risk by withholding
exercise instructions until just before the daily cutoff time or by selling
rather than exercising an option when the index level is close to the exercise
price, it may not be possible to eliminate this risk entirely because the cutoff
time for index options may be earlier than those fixed for other types of
options and may occur before definitive closing index values are announced.
Trading in Futures. A futures contract provides for the future sale by
one party and purchase by another party of a specified amount of a specific
financial instrument (e.g., units of a stock index) at a specified price, date,
time and place designated at the time the contract is made. Brokerage fees are
incurred when a futures contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred to as buying or
purchasing a contract or holding a long position. Entering into a contract to
sell is commonly referred to as selling a contract or holding a short position.
Unlike when a Fund purchases or sells a security, no price would be
paid or received by a Fund upon the purchase or sale of a futures contract. Upon
entering into a futures contract, and to maintain a Fund's open positions in
futures contracts, a Fund would be required to deposit with its custodian in a
segregated account in the name of the futures broker an amount of cash, U.S.
government securities, suitable money market instruments, or other liquid
securities, known as "initial margin." A margin deposit is intended to ensure a
Fund's performance of the futures contract. The initial margin required for a
particular futures contract is set by the exchange on which the contract is
traded, and may be significantly modified from time to time by the exchange
during the term of the contract. Futures contracts are customarily purchased and
sold on margins that may range upward from less than 5% of the value of the
contract being traded.
If the price of an open futures contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin. However,
if the value of a position increases because of favorable price changes in the
futures contract so that the margin deposit exceeds the required margin, the
broker will pay the excess to a Fund.
These subsequent payments, called "variation margin," to and from the
futures broker are made on a daily basis as the price of the underlying assets
fluctuate making the long and short positions in the futures contract more or
less valuable, a process known as "marking to the market." A Fund expects to
earn interest income on its margin deposits. Although certain futures contracts,
by their terms, require actual future delivery of and payment for the underlying
instruments, in practice most futures contracts are usually closed out before
the delivery date. Closing out an open futures contract purchase or sale is
effected by entering into an offsetting futures contract purchase or sale,
respectively, for the same aggregate amount of the identical securities and the
same delivery date. If the offsetting purchase price is less than the original
sale price, a Fund realizes a gain; if it is more, a Fund realizes a loss.
Conversely, if the offsetting sale price is more than the original purchase
price, a Fund realizes a gain; if it is less, a Fund realizes a loss. The
transaction costs must also be included in these calculations. There can be no
assurance, however, that a Fund will be able to enter into an offsetting
transaction with respect to a particular futures contract at a particular time.
If a Fund is not able to enter into an offsetting transaction, a Fund will
continue to be required to maintain the margin deposits on the futures contract.
A stock index futures contract is an agreement in which one party
agrees to deliver to the other an amount of cash equal to a specific amount
multiplied by the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made. For example, one
contract in the Financial Times Stock Exchange 100 Index future is a contract to
buy 25 pounds sterling multiplied by the level of the UK Financial Times 100
Share Index on a given future date. Settlement of a stock index futures contract
may or may not be in the underlying security. If not in the underlying security,
then settlement will be made in cash, equivalent over time to the difference
between the contract price and the actual price of the underlying asset at the
time the stock index futures contract expires.
Options on futures are similar to options on underlying instruments
except that options on futures give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), rather than to
purchase or sell the futures contract, at a specified exercise price at any time
during the period of the option. Upon exercise of the option, the delivery of
the futures position by the writer of the option to the holder of the option
will be accompanied by the delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price of
the futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the futures
contract. Alternatively, settlement may be made totally in cash. Purchasers of
options who fail to exercise their options prior to the exercise date suffer a
loss of the premium paid.
The writer of an option on a futures contract is required to deposit
margin pursuant to requirements similar to those applicable to futures
contracts. Upon exercise of an option on a futures contract, the delivery of the
futures position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's margin
account. This amount will be equal to the amount by which the market price of
the futures contract at the time of exercise exceeds, in the case of a call, or
is less than, in the case of a put, the exercise price of the option on the
futures contract.
Although financial futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery. Closing out
is accomplished by effecting an offsetting transaction. A futures contract sale
is closed out by effecting a futures contract purchase for the same aggregate
amount of securities and the same delivery date. If the sale price exceeds the
offsetting purchase price, the seller immediately would be paid the difference
and would realize a gain. If the offsetting purchase price exceeds the sale
price, the seller would immediately pay the difference and would realize a loss.
Similarly, a futures contract purchase is closed out by effecting a futures
contract sale for the same securities and the same delivery date. If the
offsetting sale price exceeds the purchase price, the purchaser would realize a
gain, whereas if the purchase price exceeds the offsetting sale price, the
purchaser would realize a loss. Commissions on financial futures contracts and
related options transactions may be higher than those which would apply to
purchases and sales of securities directly.
A public market exists in interest rate futures contracts covering
primarily the following financial instruments: U.S. Treasury bonds; U.S.
Treasury notes; Government National Mortgage Association ("GNMA") modified
pass-through mortgage-backed securities; three-month U.S. Treasury bills; 90-day
commercial paper; bank certificates of deposit; and Eurodollar certificates of
deposit. It is expected that futures contracts trading in additional financial
instruments will be authorized. The standard contract size is generally $100,000
for futures contracts in U.S. Treasury bonds, U.S. Treasury notes, and GNMA
pass-through securities and $1,000,000 for the other designated futures
contracts. A public market exists in futures contracts covering a number of
indexes, including, but not limited to, the Standard & Poor's 500 Index, the
Standard & Poor's 100 Index, the NASDAQ 100 Index, the Value Line Composite
Index and the New York Stock Exchange Composite Index.
Regulatory Matters Relating to Futures Contracts and Related Options.
The Staff of the Commission has taken the position that the purchase and sale of
futures contracts and the writing of related options may give rise to "senior
securities" for the purposes of the restrictions contained in Section 18 of the
1940 Act on investment companies' issuing senior securities. However, the Staff
has taken the position that no senior security will be created if a Fund
maintains in a segregated account an amount of cash or other liquid assets at
least equal to the amount of the Fund's obligation under the futures contract or
option. Each Fund will conduct its purchases and sales of any futures contracts
and writing of related options transactions in accordance with this requirement.
Certain Risks Relating to Futures Contracts and Related Options. There are
special risks involved in futures transactions.
Volatility and Leverage. The prices of futures contracts are
volatile and are influenced, among other things, by actual and anticipated
changes in the market and interest rates, which in turn are affected by fiscal
and monetary policies and national and international policies and economic
events.
Most United States futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
The daily limit establishes the maximum amount that the price of a futures
contract may vary either up or down from the previous day's settlement price at
the end of a trading session. Once the daily limit has been reached in a
particular type of futures contract, no trades may be made on that day at a
price beyond that limit. The daily limit governs only price movement during a
particular trading day and therefore does not limit potential losses, because
the limit may prevent the liquidation of unfavorable positions. Futures contract
prices have occasionally moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading
involves an extremely high degree of leverage. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss, as well as gain, to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the futures contract. However, a Fund would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying instrument and sold it after the decline. Furthermore, in the
case of a futures contract purchase, in order to be certain that a Fund has
sufficient assets to satisfy its obligations under a futures contract, a Fund
earmarks to the futures contract liquid assets equal in value to the current
value of the underlying instrument less the margin deposit.
Liquidity. A Fund may elect to close some or all of its
futures positions at any time prior to their expiration. A Fund would do so to
reduce exposure represented by long futures positions or increase exposure
represented by short futures positions. A Fund may close its positions by taking
opposite positions which would operate to terminate the Fund's position in the
futures contracts. Final determinations of variation margin would then be made,
additional cash would be required to be paid by or released to a Fund, and such
Fund would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or
board of trade where the contracts were initially traded. Although a Fund may
intend to purchase or sell futures contracts only on exchanges or boards of
trade where there appears to be an active market, there is no assurance that a
liquid market on an exchange or board of trade will exist for any particular
contract at any particular time. In such event, it might not be possible to
close a futures contract, and in the event of adverse price movements, a Fund
would continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge the underlying
instruments, a Fund would continue to hold the underlying instruments subject to
the hedge until the futures contracts could be terminated. In such
circumstances, an increase in the price of the underlying instruments, if any,
might partially or completely offset losses on the futures contract. However, as
described below, there is no guarantee that the price of the underlying
instruments will, in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Hedging Risk. A decision of whether, when, and how to hedge
involves skill and judgment, and even a well-conceived hedge may be unsuccessful
to some degree because of unexpected market behavior, market or interest rate
trends. There are several risks in connection with the use by a Fund of futures
contracts as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures contracts and
movements in the prices of the underlying instruments which are the subject of
the hedge. The Sub-advisor will, however, attempt to reduce this risk by
entering into futures contracts whose movements, in its judgment, will have a
significant correlation with movements in the prices of a Fund's underlying
instruments sought to be hedged.
Successful use of futures contracts by a Fund for hedging
purposes is also subject to a Sub-advisor's ability to correctly predict
movements in the direction of the market. It is possible that, when a Fund has
sold futures to hedge its portfolio against a decline in the market, the index,
indices, or underlying instruments on which the futures are written might
advance and the value of the underlying instruments held in the Fund's portfolio
might decline. If this were to occur, a Fund would lose money on the futures and
also would experience a decline in value in its underlying instruments. However,
while this might occur to a certain degree, the Sub-advisor may believe that
over time the value of a Fund's portfolio will tend to move in the same
direction as the market indices which are intended to correlate to the price
movements of the underlying instruments sought to be hedged. It is also possible
that if a Fund were to hedge against the possibility of a decline in the market
(adversely affecting the underlying instruments held in its portfolio) and
prices instead increased, the Fund would lose part or all of the benefit of
increased value of those underlying instruments that it has hedged, because it
would have offsetting losses in its futures positions. In addition, in such
situations, if a Fund had insufficient cash, it might have to sell underlying
instruments to meet daily variation margin requirements. Such sales of
underlying instruments might be, but would not necessarily be, at increased
prices (which would reflect the rising market). A Fund might have to sell
underlying instruments at a time when it would be disadvantageous to do so.
In addition to the possibility that there might be an
imperfect correlation, or no correlation at all, between price movements in the
futures contracts and the portion of the portfolio being hedged, the price
movements of futures contracts might not correlate perfectly with price
movements in the underlying instruments due to certain market distortions.
First, all participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions which could distort the normal relationship between the underlying
instruments and futures markets. Second, the margin requirements in the futures
market are less onerous than margin requirements in the securities markets, and
as a result the futures market might attract more speculators than the
securities markets do. Increased participation by speculators in the futures
market might also cause temporary price distortions. Due to the possibility of
price distortion in the futures market and also because of the imperfect
correlation between price movements in the underlying instruments and movements
in the prices of futures contracts, even a correct forecast of general market
trends by the Sub-advisor might not result in a successful hedging transaction
over a very short time period.
Certain Risks of Options on Futures Contracts. A Fund may seek to close
out an option position by writing or buying an offsetting option covering the
same index, underlying instruments, or contract and having the same exercise
price and expiration date. The ability to establish and close out positions on
such options will be subject to the maintenance of a liquid secondary market.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options, or underlying instruments; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on the exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders.
Foreign Futures and Options. Participation in foreign futures and
foreign options transactions involves the execution and clearing of trades on or
subject to the rules of a foreign board of trade. Neither the National Futures
Association nor any domestic exchange regulates activities of any foreign boards
of trade, including the execution, delivery and clearing of transactions, or has
the power to compel enforcement of the rules of a foreign board of trade or any
applicable foreign law. This is true even if the exchange is formally linked to
a domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or foreign options
transaction occurs. For these reasons, customers who trade foreign futures or
foreign options contracts may not be afforded certain of the protective measures
provided by the Commodity Exchange Act, the Commodity Futures Trading
Commission's ("CFTC") regulations and the rules of the National Futures
Association and any domestic exchange, including the right to use reparations
proceedings before the Commission and arbitration proceedings provided by the
National Futures Association or any domestic futures exchange. In particular,
funds received from customers for foreign futures or foreign options
transactions may not be provided the same protections as funds received in
respect of transactions on United States futures exchanges. In addition, the
price of any foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon may be affected by any variance in the foreign
exchange rate between the time an order is placed and the time it is liquidated,
offset or exercised.
Foreign Currency Futures Contracts and Related Options. A forward
foreign currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are principally traded in the interbank market
conducted directly between currency traders (usually large, commercial banks)
and their customers. A forward contract generally has no deposit requirement,
and no commissions are charged at any stage for trades.
Depending on the applicable investment policies and restrictions
applicable to a Fund, a Fund may generally enter into forward foreign currency
exchange contracts under two circumstances. First, when a Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security. By
entering into a forward contract for the purchase or sale, for a fixed amount of
dollars, of the amount of foreign currency involved in the underlying security
transactions, the Fund may be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date the security is
purchased or sold and the date on which payment is made or received.
Second, when a Sub-advisor believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, including the U.S. dollar, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the value
of some or all of a Fund's securities denominated in such foreign currency.
Alternatively, where appropriate, a Fund may hedge all or part of its foreign
currency exposure through the use of a basket of currencies or a proxy currency
where such currencies or currency act as an effective proxy for other
currencies. In such a case, a Fund may enter into a forward contract where the
amount of the foreign currency to be sold exceeds the value of the Fund's
securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in a Fund. The precise matching of the
forward contract amounts and the value of the securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for a Fund to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency a Fund is obligated to deliver and if a decision is made to sell the
security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency a Fund is obligated to deliver. However, as noted, in order to
avoid excessive transactions and transaction costs, a Fund may use liquid assets
denominated in any currency to cover the amount by which the value of a forward
contract exceeds the value of the securities to which it relates.
If a Fund retains the portfolio security to which the foreign currency
hedging transaction related and engages in an offsetting forward contract
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between a Fund's entering into a forward contract for the sale
of a foreign currency and the date it enters into an offsetting contract for the
purchase of the foreign currency, the Fund will realize a gain to the extent the
price of the currency it has agreed to sell exceeds the price of the currency it
has agreed to purchase. Should forward prices increase, a Fund will suffer a
loss to the extent of the price of the currency it has agreed to purchase
exceeds the price of the currency it has agreed to sell.
As noted above, a currency futures contract sale creates an obligation
by a Fund, as seller, to deliver the amount of currency called for in the
contract at a specified future time for a special price. A currency futures
contract purchase creates an obligation by a Fund, as purchaser, to take
delivery of an amount of currency at a specified future time at a specified
price. Although the terms of currency futures contracts specify actual delivery
or receipt, in most instances the contracts are closed out before the settlement
date without the making or taking of delivery of the currency. Closing out of a
currency futures contract is effected by entering into an offsetting purchase or
sale transaction. Unlike a currency futures contract, which requires the parties
to buy and sell currency on a set date, an option on a currency futures contract
entitles its holder to decide on or before a future date whether to enter into
such a contract. If the holder decides not to enter into the contract, the
premium paid for the option is fixed at the point of sale.
Interest Rate Swaps and Interest Rate Caps and Floors. Interest rate
swaps involve the exchange by the Fund with another party of their respective
commitments to pay or receive interest, e.g., an exchange of floating rate
payments for fixed rate payments. The exchange commitments can involve payments
to be made in the same currency or in different currencies. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
contractually based principal amount from the party selling the interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually based principal amount from the
party selling the interest rate floor.
Hybrid Instruments. Hybrid instruments combine the elements of futures
contracts or options with those of debt, preferred equity or a depository
instrument. The risks of investing in hybrid instruments reflect a combination
of the risks from investing in securities, futures and currencies, including
volatility and lack of liquidity. Reference is made to the discussion of futures
and forward contracts in this Statement for a discussion of these risks.
Further, the prices of the hybrid instrument and the related commodity or
currency may not move in the same direction or at the same time. Hybrid
instruments may bear interest or pay preferred dividends at below market (or
even relatively nominal) rates. In addition, because the purchase and sale of
hybrid instruments could take place in an over-the-counter market or in a
private transaction between a Fund and the seller of the hybrid instrument, the
creditworthiness of the other party to the transaction would be a risk factor
which a Fund would have to consider. Hybrid instruments also may not be subject
to the regulation of the CFTC, which generally regulates the trading of
commodity futures by U.S. persons, the Commission, which regulates the offer and
sale of securities by and to U.S. persons, or any other governmental regulatory
authority.
Foreign Currency Exchange-Related Securities. Certain Funds may invest
in foreign currency warrants, principal exchange rate linked securities and
performance indexed paper.
Foreign Currency Warrants. Foreign currency warrants are
warrants which entitle the holder to receive from their issuer an amount of cash
(generally, for warrants issued in the United States, in U.S. dollars) which is
calculated pursuant to a predetermined formula and based on the exchange rate
between a specified foreign currency and the U.S. dollar as of the exercise date
of the warrant. Foreign currency warrants generally are exercisable upon their
issuance and expire as of a specified date and time. Foreign currency warrants
have been issued in connection with U.S. dollar-denominated debt offerings by
major corporate issuers in an attempt to reduce the foreign currency exchange
risk which, from the point of view of prospective purchasers of the securities,
is inherent in the international fixed-income marketplace. Foreign currency
warrants may attempt to reduce the foreign exchange risk assumed by purchasers
of a security by, for example, providing for a supplemental payment in the event
that the U.S. dollar depreciates against the value of a major foreign currency
such as the Japanese Yen or German Deutschmark. The formula used to determine
the amount payable upon exercise of a foreign currency warrant may make the
warrant worthless unless the applicable foreign currency exchange rate moves in
a particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered, and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised. The expiration date of the warrants may
be accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants), and, in the case the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unsecured obligations of their issuers and are
not standardized foreign currency options issued by the Options Clearing
Corporation ("OCC"). Unlike foreign currency options issued by OCC, the terms of
foreign exchange warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of
the imposition of other regulatory controls affecting the international currency
markets. The initial public offering price of foreign currency warrants is
generally considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to significant foreign exchange risk, including risks arising from
complex political or economic factors.
Principal Exchange Rate Linked Securities. Principal exchange
rate linked securities are debt obligations the principal on which is payable at
maturity in an amount that may vary based on the exchange rate between the U.S.
dollar and a particular foreign currency at or about that time. The return on
"standard" principal exchange rate linked securities is enhanced if the foreign
currency to which the security is linked appreciates against the U.S. dollar,
and is adversely affected by increases in the foreign exchange value of the U.S.
dollar. "Reverse" principal exchange rate linked securities are like the
"standard" securities, except that their return is enhanced by increases in the
value of the U.S. dollar and adversely impacted by increases in the value of
foreign currency. Interest payments on the securities are generally made in U.S.
dollars at rates that reflect the degree of foreign currency risk assumed or
given up by the purchaser of the notes (i.e., at relatively higher interest
rates if the purchaser has assumed some of the foreign exchange risk, or
relatively lower interest rates if the issuer has assumed some of the foreign
exchange risk, based on the expectations of the current market). Principal
exchange rate linked securities may in limited cases be subject to acceleration
of maturity (generally, not without the consent of the holders of the
securities), which may have an adverse impact on the value of the principal
payment to be made at maturity.
Performance Indexed Paper. Performance indexed paper is U.S.
dollar-denominated commercial paper the yield of which is linked to certain
foreign exchange rate movements. The yield to the investor on performance
indexed paper is established at maturity as a function of spot exchange rates
between the U.S. dollar and a designated currency as of or about that time
(generally, the spot exchange rate two days prior to maturity). The yield to the
investor will be within a range stipulated at the time of purchase of the
obligation, generally with a guaranteed minimum rate of return that is below,
and a potential maximum rate of return that is above, market yields on U.S.
dollar-denominated commercial paper, with both the minimum and maximum rates of
return on the investment corresponding to the minimum and maximum values of the
spot exchange rate two business days prior to maturity.
Zero-Coupon Securities. Zero-coupon securities pay no cash income and
are sold at substantial discounts from their value at maturity. When held to
maturity, their entire income, which consists of accretion of discount, comes
from the difference between the issue price and their value at maturity.
Zero-coupon securities are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current distributions of interest (cash). Zero-coupon securities which are
convertible into common stock offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follows the
movements in the market value of the underlying common stock. Zero-coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks, as they usually are issued with maturities of 15 years
or less and are issued with options and/or redemption features exercisable by
the holder of the obligation entitling the holder to redeem the obligation and
receive a defined cash payment.
Zero-coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including Treasury
Income Growth Receipts ("TIGRSTM") and Certificate of Accrual on Treasuries
("CATSTM"). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities have stated that, for federal tax and securities purposes,
in their opinion purchasers of such certificates, such as a Fund, most likely
will be deemed the beneficial holder of the underlying U.S. Government
securities.
The U.S. Treasury has facilitated transfers of ownership of zero-coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program, a
Fund will be able to have its beneficial ownership of zero-coupon securities
recorded directly in the book-entry record-keeping system in lieu of having to
hold certificates or other evidences of ownership of the underlying U.S.
Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero-coupon securities that the Treasury sells
itself.
When-Issued Securities. The price of when-issued securities, which may
be expressed in yield terms, is fixed at the time the commitment to purchase is
made, but delivery and payment for the when-issued securities take place at a
later date. Normally, the settlement date occurs within 90 days of the purchase.
During the period between purchase and settlement, no payment is made by a Fund
to the issuer and no interest accrues to such Fund. Forward commitments involve
a risk of loss if the value of the security to be purchased declines prior to
the settlement date, which risk is in addition to the risk of decline in value
of a Fund's other assets. While when-issued securities may be sold prior to the
settlement date, a Fund intends to purchase such securities with the purpose of
actually acquiring them unless a sale appears desirable for investment reasons.
Mortgage-Backed Securities. Principal and interest payments made on the
mortgages in an underlying mortgage pool are passed through to a Fund.
Unscheduled prepayments of principal shorten the securities' weighted average
life and may lower their total return. (When a mortgage in the underlying
mortgage pool is prepaid, an unscheduled principal prepayment is passed through
to a Fund. This principal is returned to a Fund at par. As a result, if a
mortgage security were trading at a premium, its total return would be lowered
by prepayments, and if a mortgage security were trading at a discount, its total
return would be increased by prepayments.) The value of these securities also
may change because of changes in the market's perception of the creditworthiness
of the federal agency that issued them. In addition, the mortgage securities
market in general may be adversely affected by changes in governmental
regulation or tax policies.
Asset-Backed Securities. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables. Payments of principal and interest may be guaranteed up
to certain amounts and for a certain time period by a letter of credit issued by
a financial institution unaffiliated with the entities issuing the securities.
Asset-backed securities may be classified as pass-through certificates or
collateralized obligations.
Pass-through certificates are asset-backed securities which represent
an undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because
pass-through certificates represent an ownership interest in the underlying
assets, the holders thereof bear directly the risk of any defaults by the
obligors on the underlying assets not covered by any credit support. See "Types
of Credit Support" below.
Asset-backed securities issued in the form of debt instruments, also
known as collateralized obligations, are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. Such assets are most often trade, credit card or
automobile receivables. The assets collateralizing such asset-backed securities
are pledged to a trustee or custodian for the benefit of the holders thereof.
Such issuers generally hold no assets other than those underlying the
asset-backed securities and any credit support provided. As a result, although
payments on such asset-backed securities are obligations of the issuers, in the
event of defaults on the underlying assets not covered by any credit support
(see "Types of Credit Support"), the issuing entities are unlikely to have
sufficient assets to satisfy their obligations on the related asset-backed
securities.
Methods of Allocating Cash Flows. While many asset-backed
securities are issued with only one class of security, many asset-backed
securities are issued in more than one class, each with different payment terms.
Multiple class asset-backed securities are issued for two main reasons. First,
multiple classes may be used as a method of providing credit support. This is
accomplished typically through creation of one or more classes whose right to
payments on the asset-backed security is made subordinate to the right to such
payments of the remaining class or classes. See "Types of Credit Support."
Second, multiple classes may permit the issuance of securities with payment
terms, interest rates or other characteristics differing both from those of each
other and from those of the underlying assets. Examples include so-called
"strips" (asset-backed securities entitling the holder to disproportionate
interests with respect to the allocation of interest and principal of the assets
backing the security), and securities with a class or classes having
characteristics which mimic the characteristics of non-asset-backed securities,
such as floating interest rates (i.e., interest rates which adjust as a
specified benchmark changes) or scheduled amortization of principal.
Asset-backed securities in which the payment streams on the
underlying assets are allocated in a manner different than those described above
may be issued in the future. A Fund may invest in such asset-backed securities
if such investment is otherwise consistent with its investment objectives and
policies and with the investment restrictions of the Fund.
Types of Credit Support. Asset-backed securities are often
backed by a pool of assets representing the obligations of a number of different
parties. To lessen the effect of failures by obligors on underlying assets to
make payments, such securities may contain elements of credit support. Such
credit support falls into two classes: liquidity protection and protection
against ultimate default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that scheduled payments on the
underlying pool are made in a timely fashion. Protection against ultimate
default ensures ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained from third parties, through
various means of structuring the transaction or through a combination of such
approaches. Examples of asset-backed securities with credit support arising out
of the structure of the transaction include "senior-subordinated securities"
(multiple class asset-backed securities with certain classes subordinate to
other classes as to the payment of principal thereon, with the result that
defaults on the underlying assets are borne first by the holders of the
subordinated class) and asset-backed securities that have "reserve funds" (where
cash or investments, sometimes funded from a portion of the initial payments on
the underlying assets, are held in reserve against future losses) or that have
been "over collateralized" (where the scheduled payments on, or the principal
amount of, the underlying assets substantially exceeds that required to make
payment of the asset-backed securities and pay any servicing or other fees). The
degree of credit support provided on each issue is based generally on historical
information respecting the level of credit risk associated with such payments.
Delinquency or loss in excess of that anticipated could adversely affect the
return on an investment in an asset-backed security. Additionally, if a letter
of credit is exhausted, holders of asset-backed securities may also experience
delays in payments or losses if the full amounts due on underlying sales
contracts are not realized.
Automobile Receivable Securities. Asset-backed securities may
be backed by receivables from motor vehicle installment sales contracts or
installment loans secured by motor vehicles ("Automobile Receivable
Securities"). Since installment sales contracts for motor vehicles or
installment loans related thereto ("Automobile Contracts") typically have
shorter durations and lower incidences of prepayment, Automobile Receivable
Securities generally will exhibit a shorter average life and are less
susceptible to prepayment risk.
Most entities that issue Automobile Receivable Securities
create an enforceable interest in their respective Automobile Contracts only by
filing a financing statement and by having the servicer of the Automobile
Contracts, which is usually the originator of the Automobile Contracts, take
custody thereof. In such circumstances, if the servicer of the Automobile
Contracts were to sell the same Automobile Contracts to another party, in
violation of its obligation not to do so, there is a risk that such party could
acquire an interest in the Automobile Contracts superior to that of the holders
of Automobile Receivable Securities. Also although most Automobile Contracts
grant a security interest in the motor vehicle being financed, in most states
the security interest in a motor vehicle must be noted on the certificate of
title to create an enforceable security interest against competing claims of
other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the Automobile
Contracts underlying the Automobile Receivable Security, usually is not amended
to reflect the assignment of the seller's security interest for the benefit of
the holders of the Automobile Receivable Securities. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on the securities. In addition, various state and
federal securities laws give the motor vehicle owner the right to assert against
the holder of the owner's Automobile Contract certain defenses such owner would
have against the seller of the motor vehicle. The assertion of such defenses
could reduce payments on the Automobile Receivable Securities.
Credit Card Receivable Securities. Asset-backed securities may
be backed by receivables from revolving credit card agreements ("Credit Card
Receivable Securities"). Credit balances on revolving credit card agreements
("Accounts") are generally paid down more rapidly than are Automobile Contracts.
Most of the Credit Card Receivable Securities issued publicly to date have been
Pass-Through Certificates. In order to lengthen the maturity of Credit Card
Receivable Securities, most such securities provide for a fixed period during
which only interest payments on the underlying Accounts are passed through to
the security holder and principal payments received on such Accounts are used to
fund the transfer to the pool of assets supporting the related Credit Card
Receivable Securities of additional credit card charges made on an Account. The
initial fixed period usually may be shortened upon the occurrence of specified
events which signal a potential deterioration in the quality of the assets
backing the security, such as the imposition of a cap on interest rates. The
ability of the issuer to extend the life of an issue of Credit Card Receivable
Securities thus depends upon the continued generation of additional principal
amounts in the underlying accounts during the initial period and the
non-occurrence of specified events. An acceleration in cardholders' payment
rates or any other event which shortens the period during which additional
credit card charges on an Account may be transferred to the pool of assets
supporting the related Credit Card Receivable Security could shorten the
weighted average life and reduce the yield of the Credit Card Receivable
Security.
Credit card holders are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such holder the
right to set off certain amounts against balances owed on the credit card,
thereby reducing amounts paid on Accounts. In addition, unlike most other
asset-backed securities, Accounts are unsecured obligations of the cardholder.
Warrants. Warrants basically are options to purchase equity securities
at a specific price valid for a specific period of time. They do not represent
ownership of the securities but only the right to buy them. Investments in
warrants are speculative in that warrants have no voting rights, pay no
dividends, and have no rights with respect to the assets of the corporation
issuing them. Warrants differ from call options in that warrants are issued by
the issuer of the security which may be purchased on their exercise, whereas
call options may be written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying securities.
Certain Risks of Foreign Investing:
Currency Fluctuations. Investment in securities denominated in
foreign currencies involves certain risks. A change in the value of any such
currency against the U.S. dollar will result in a corresponding change in the
U.S. dollar value of a Fund's assets denominated in that currency. Such changes
will also affect a Fund's income. Generally, when a given currency appreciates
against the dollar (the dollar weakens) the value of a Fund's securities
denominated in that currency will rise. When a given currency depreciates
against the dollar (the dollar strengthens), the value of a Fund's securities
denominated in that currency would be expected to decline.
Investment and Repatriation Restrictions. Foreign investment
in the securities markets of certain foreign countries is restricted or
controlled in varying degrees. These restrictions may at times limit or preclude
investment in certain of such countries and may increase the cost and expenses
of a Fund. Investments by foreign investors are subject to a variety of
restrictions in many developing countries. These restrictions may take the form
of prior governmental approval, limits on the amount or type of securities held
by foreigners, and limits on the types of companies in which foreigners may
invest. Additional or different restrictions may be imposed at any time by these
or other countries in which a Fund invests. In addition, the repatriation of
both investment income and capital from several foreign countries is restricted
and controlled under certain regulations, including in some cases the need for
certain government consents.
Market Characteristics. Foreign securities may be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as, and may be more volatile than, those
in the United States. While growing in volume, they usually have substantially
less volume than U.S. markets and a Fund's securities may be less liquid and
more volatile than securities of comparable U.S. companies. Equity securities
may trade at price/earnings multiples higher than comparable U.S. securities and
such levels may not be sustainable. Commissions on foreign stock exchanges,
which may be fixed, may generally be higher than negotiated commissions on U.S.
exchanges, although a Fund will endeavor to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of foreign stock exchanges, brokers and listed
companies than in the United States. Moreover, settlement practices for
transactions in foreign markets may differ from those in U.S. markets, and may
include delays beyond periods customary in the United States.
Political and Economic Factors. Individual foreign economies
of certain countries may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. The internal politics of certain foreign countries are not as stable
as in the United States.
Governments in certain foreign countries continue to
participate to a significant degree, through ownership interest or regulation,
in their respective economies. Action by these governments could have a
significant effect on market prices of securities and payment of dividends. The
economies of many foreign countries are heavily dependent upon international
trade and are accordingly affected by protective trade barriers and economic
conditions of their trading partners. The enactment by these trading partners of
protectionist trade legislation could have a significant adverse effect upon the
securities markets of such countries.
Information and Supervision. There is generally less publicly
available information about foreign companies comparable to reports and ratings
that are published about companies in the United States. Foreign companies are
also generally not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies.
Taxes. The dividends and interest payable on certain of a
Fund's foreign securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Fund's
shareholders. A shareholder otherwise subject to U.S. federal income taxes may,
subject to certain limitations, be entitled to claim a credit or deduction for
U.S. federal income tax purposes for his or her proportionate share of such
foreign taxes paid by the Fund.
Costs. Investors should understand that the expense ratio of a
Fund investing primarily in foreign securities can be expected to be higher than
investment companies investing in domestic securities since the cost of
maintaining the custody of foreign securities and the rate of advisory fees paid
by a Fund are higher.
Other. With respect to certain foreign countries, especially
developing and emerging ones, there is the possibility of adverse changes in
investment or exchange control regulations, expropriation or confiscatory
taxation, limitations on the removal of funds or other assets of a Fund,
political or social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
Eastern Europe. Changes occurring in Eastern Europe and Russia
today could have long-term potential consequences. As restrictions fall, this
could result in rising standards of living, lower manufacturing costs, growing
consumer spending, and substantial economic growth. However, investment in the
countries of Eastern Europe and Russia is highly speculative at this time.
Political and economic reforms are too recent to establish a definite trend away
from centrally-planned economies and state owned industries. In many of the
countries of Eastern Europe and Russia, there is no stock exchange or formal
market for securities. Such countries may also have government exchange
controls, currencies with no recognizable market value relative to the
established currencies of western market economies, little or no experience in
trading in securities, no financial reporting standards, a lack of a banking and
securities infrastructure to handle such trading, and a legal tradition which
does not recognize rights in private property. In addition, these countries may
have national policies which restrict investments in companies deemed sensitive
to the country's national interest. Further, the governments in such countries
may require governmental or quasi-governmental authorities to act as custodian
of a Fund's assets invested in such countries and these authorities may not
qualify as a foreign custodian under the 1940 Act and exemptive relief from such
Act may be required. All of these considerations are among the factors which
could cause significant risks and uncertainties to investment in Eastern Europe
and Russia.
Latin America. The political history of certain Latin American
countries has been characterized by political uncertainty, intervention by the
military in civilian and economic spheres, and political corruption. Such
developments, if they were to reoccur, could reverse favorable trends toward
market and economic reform, privatization and removal of trade barriers and
result in significant disruption in securities markets. Persistent levels of
inflation or in some cases, hyperinflation, have led to high interest rates,
extreme measures by governments to keep inflation in check and a generally
debilitating effect on economic growth. Although inflation in many countries has
lessened, there is no guarantee it will remain at lower levels. In addition, of
developing countries, a number of Latin American countries are also among the
largest debtors. There have been moratoria on, and reschedulings of, repayment
with respect to these debts. Such events can restrict the flexibility of these
debtor nations in the international markets and result in the imposition of
onerous conditions on their economies.
Certain Latin American countries may have managed currencies
which are maintained at artificial levels to the U.S. dollar rather than at
levels determined by the market. This type of system can lead to sudden and
large adjustments in the currency which, in turn, can have a disruptive and
negative effect on foreign investors. Certain Latin American countries also may
restrict the free conversion of their currency into foreign currencies,
including the U.S. dollar. There is no significant foreign exchange market for
certain currencies and it would, as a result, be difficult for a Fund to engage
in foreign currency transactions designed to protect the value of the Fund's
interests in securities denominated in such currencies.
ADDITIONAL PERFORMANCE INFORMATION
ASAF JPM MONEY MARKET FUND (the "Money Market Fund"):
In accordance with regulations prescribed by the Commission, the
Company is required to compute the Money Market Fund's current annualized yield
for a seven-day period in accordance with a specified formula, which does not
take into consideration any realized or unrealized gains or losses on its
portfolio securities. This current annualized yield is computed by determining
the net change (exclusive of realized gains and losses on the sale of securities
and unrealized appreciation and depreciation) in the value of a hypothetical
account having a balance of one share of the Money Market Fund at the beginning
of such seven-day period, dividing such net change in account value by the value
of the account at the beginning of the period to determine the base period
return and annualizing this quotient on a 365-day basis.
The Commission also permits the Company to disclose the effective yield
of the Money Market Fund for the same seven-day period, which is the Fund's
yield determined on a compounded basis. The effective yield is calculated by
compounding the unannualized base period return by adding one to the base period
return, raising the sum to a power equal to 365 divided by 7, and subtracting
one from the result.
The yield on amounts held in the Money Market Fund normally will
fluctuate on a daily basis. Therefore, the disclosed yield for any given past
period is not an indication or representation of future yields or rates of
return. The Money Market Fund's actual yield is affected by changes in interest
rates on money market securities, the average portfolio maturity of the
corresponding Portfolio in which the Money Market Fund invests, the types and
quality of portfolio securities held by such Portfolio, and the Fund's and
Portfolio's operating expenses.
ALL OTHER FUNDS:
Standardized Average Annual Total Return Quotations. "Total return" is
one of the primary methods used to measure performance and represents the
percentage change in value of a class of a Fund, or of a hypothetical investment
in a class of a Fund, over any period up to the lifetime of the class. Average
annual total return quotations for Class A, B, C and X shares are computed by
finding the average annual compounded rates of return that would cause a
hypothetical investment made on the first day of a designated period to equal
the ending redeemable value of such hypothetical investment on the last day of
the designated period in accordance with the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of the hypothetical $1,000
initial payment made at the beginning of the designated period (or fractional
portion thereof)
The computation above assumes that the maximum sales charge applicable
to a class of Fund shares is deducted from the initial $1,000 payment, and that
all dividends and distributions made by a Fund are reinvested at net asset value
("NAV") during the designated period. The average annual total return quotation
is determined to the nearest 1/100 of 1%.
Total return percentages for periods longer than one year will usually
be accompanied by total return percentages for each year within the period
and/or by the average annual compounded total return for the period. The income
and capital components of a given return may be separated and portrayed in a
variety of ways in order to illustrate their relative significance. Performance
may also be portrayed in terms of cash or investment values, without
percentages. Past performance cannot guarantee any particular future result. In
determining the average annual total return (calculated as provided above),
recurring fees, if any, that are charged to all shareholder accounts are taken
into consideration. For any account fees that vary with the size of the account,
the account fee used for purposes of the above computation is assumed to be the
fee that would be charged to the mean account size of a class of the Fund.
In addition, with respect to the Class X shares, a standardized return
will reflect the impact of the 2.5% bonus shares. The impact of the bonus shares
on total return is particularly pronounced for shorter periods for which total
return is measured, such as one and three years. You should take this into
consideration in any comparison of total return between the Funds and other
mutual funds. For a discussion of the Class X bonus shares, see the Company's
Prospectus under "How to Buy Shares."
Standardized Yield Quotations. The yield of a class of Fund shares is
computed by dividing the class's net investment income per share during a base
period of 30 days, or one month, by the maximum offering price per share of the
class on the last day of such base period in accordance with the following
formula:
YIELD = 2 [ (a - b + 1)6 - 1 ]
cd
Where: a = net investment income earned during the period attributable to
the subject class
b = net expenses accrued for the period attributable to the subject class
c = the average daily number of shares of the subject class outstanding
during the period that were entitled to receive dividends
d = the maximum offering price per share of the subject class
Net investment income will be determined in accordance with rules
established by the Commission. The price per share of Class A shares will
include the maximum sales charge imposed on purchases of Class A shares which
decreases with the amount of shares purchased.
Non-Standardized Performance. In order to more completely represent a
Fund's performance or more accurately compare such performance to other measures
of investment return, a Fund also may include in advertisements, sales
literature and shareholder reports 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; it may
consist of an aggregate or average annual percentage rate of return, actual
year-by-year rates or any combination thereof. Non-Standardized Return may or
may not take sales charges into account; performance data calculated without
taking the effect of sales charges into account will be higher than data
including the effect of such charges. Non-standardized performance will be
advertised only if the standard performance data for the same period, as well as
for the required periods, is also presented.
Each Fund may also publish its distribution rate and/or its effective
distribution rate. A Fund's distribution rate is computed by dividing the most
recent monthly distribution per share annualized, by the current NAV per share.
A Fund's effective distribution rate is computed by dividing the distribution
rate by the ratio used to annualize the most recent monthly distribution and
reinvesting the resulting amount for a full year on the basis of such ratio. The
effective distribution rate will be higher than the distribution rate because of
the compounding effect of the assumed reinvestment. Unlike a Fund's yield, which
is computed from the yields to maturity of all debt obligations held by the
Fund, the distribution rate is based on a Fund's last monthly distribution. A
Fund's monthly distribution tends to be relatively stable and may be more or
less than the amount of net investment income and short-term capital gain
actually earned by the Fund during the month (see the Company's Prospectus under
"Dividends, Capital Gains and Taxes").
Other data that may be advertised or published about each Fund include
the average portfolio quality, the average portfolio maturity and the average
portfolio duration.
Comparative Information. From time to time, the Funds may advertise
their performance compared to similar funds using certain unmanaged indices,
reporting services and publications. Descriptions of some of the indices which
may be used are listed below:
o The Standard & Poor's 500 Composite Stock Price Index is a
well-diversified list of 500 large capitalization companies representing the
U.S. Stock Market.
o The Standard and Poor's Small Cap 600 index is designed to represent
price movements in the small cap U.S. equity market. It contains companies
chosen by the Standard & Poor's Index Committee for their size, industry
characteristics, and liquidity. None of the companies in the S&P 600 overlap
with the S&P 500 or the S&P 400 (MidCap Index). The S&P 600 is weighted by
market capitalization.
o The NASDAQ Composite OTC Price Index is a market value-weighted and
unmanaged index showing the changes in the aggregate market value of
approximately 3,500 stocks.
o The Lehman Government Bond Index is a measure of the market value of
all public obligations of the U.S. Treasury; all publicly issued debt of all
agencies of the U.S. Government and all quasi-federal corporations; and all
corporate debt guaranteed by the U.S. Government. Mortgage backed securities,
bonds and foreign targeted issues are not included in the Lehman Government
Index.
o The Lehman Government/Corporate Bond Index is a measure of the market
value of approximately 5,300 bonds with a face value currently in excess of $1.3
trillion. To be included in the Lehman Government/Corporate Index, an issue must
have amounts outstanding in excess of $1 million, have at least one year to
maturity and be rated "Baa" or its equivalent or higher ("investment grade") by
a nationally recognized rating agency.
o The Russell 2000 Index represents the bottom two thirds of the
largest 3000 publicly traded companies domiciled in the U.S. Russell uses total
market capitalization to determine the companies that are included in the Index.
Only common stocks are included in the Index.
o The Russell 2500 Index is a market value-weighted, unmanaged index
showing total return (i.e., principal changes with income) in the aggregate
market value of 2,500 stocks of publicly traded companies domiciled in the
United States. The Index includes stocks traded on the New York Stock Exchange
and the American Stock Exchange as well as in the over-the-counter market.
o The Morgan Stanley Capital International EAFE Index (the "EAFE
Index") is an unmanaged index, which includes over 1,000 companies representing
the stock markets of Europe, Australia, New Zealand and the Far East. The EAFE
Index is typically shown weighted by the market capitalization. However, EAFE is
also available weighted by Gross Domestic Product ("GDP"). These weights are
modified on July 1st of each year to reflect the prior year's GDP.
o The Lehman Brothers High Yield BB Index is a measure of the market
value of public debt issues with a minimum par value of $100 million and rated
Ba1-Ba3 by Moody's. All bonds within the index are U.S. dollar denominated,
non-convertible and have at least one year remaining to maturity.
Each Fund's investment performance may be advertised in various
financial publications, newspapers, magazines, including: Across the Board,
Advertising Age, Adviser's Magazine, Adweek, Agent, American Banker, American
Agent and Broker, Associated Press, Barron's, Best's Review, Bloomberg, Broker
World, Business Daily, Business Insurance, Business Marketing, Business Month,
Business News Features, Business Week, Business Wire, California Broker,
Changing Times, Consumer Reports, Consumer Digest, Crain's, Dow Jones News
Service, Economist, Entrepreneur, Entrepreneurial Woman, Financial Planning,
Financial Services Week, Financial Times, Financial World, Forbes, Fortune,
Hartford Courant, Inc., Independent Business, Institutional Investor, Insurance
Forum, Insurance Advocate Independent, Insurance Review Investor's, Insurance
Times, Insurance Week, Insurance Product News, Insurance Sales, Investment
Dealers Digest, Investment Advisor, Journal of Commerce, Journal of Accountancy,
Journal of the American Society of CLU & ChFC, Kiplinger's Personal Finance,
Knight-Ridder, Life Association News, Life Insurance Selling, Life Times,
LIMRA's MarketFacts, Lipper Analytical Services, Inc., MarketFacts, Medical
Economics, Money, Morningstar, Inc., Nation's Business, National Underwriter,
New Choices, New England Business, New York Times, Pension World, Pensions &
Investments, Professional Insurance Agents, Professional Agent, Registered
Representative, Reuter's, Rough Notes, Round the Table, Service, Success, The
Standard, The Boston Globe, The Washington Post, Tillinghast, Time, U.S. News &
World Report, U.S. Banker, United Press International, USA Today, Value Line,
The Wall Street Journal, Wiesenberger Investment and Working Woman.
From time to time the Company may publish the sales of shares of one or
more of the Funds on a gross or net basis and for various periods of time, and
compare such sales with sales similarly reported by other investment companies.
MANAGEMENT OF THE COMPANY
The following table sets forth information concerning the officers and
Directors of the Company, including their addresses and principal business
occupations for the last five years:
<TABLE>
<CAPTION>
<S> <C> <C>
Name, Age and Address:(1) Position Held with the Company:(2) Principal Occupation:(3)
Gordon C. Boronow (44)* Vice President & Director President & Chief Operating Officer:
American Skandia Life Assurance
Corporation
Jan R. Carendi (52)* President, Principal Executive Officer Senior Executive Vice President &
and Director Member of Corporate Management Group:
Skandia Insurance Company Ltd.
David E. A. Carson (62) Director President, Chairman & Chief Executive
People's Bank Officer: People's Bank
850 Main Street
Bridgeport, CT 06604
Richard G. Davy, Jr. (48) Controller Vice President, Operations: American
Skandia Investment Services,
Incorporated (January 1997 to present)
Controller: American Skandia
Investment Services, Incorporated
(September 1994 to January 1997)
Self-employed Consultant (December 1991
to September 1994)
Eric C. Freed (34) Secretary Securities Counsel: American Skandia
Investment Holding Corporation
(December 1996 to present)
Attorney, Senior Attorney and Special
Counsel: U.S. Securities and Exchange
Commission (March 1991 to November 1996)
Julian A. Lerner (72) Director Semi-retired since 1995; Senior Vice
12850 Spurling Road President & Portfolio Manager of AIM
Suite 208 Charter Fund and AIM Summit Fund from
Dallas, TX 75230 1986 to 1995
Thomas M. Mazzaferro (44)* Treasurer and Director Executive Vice President & Chief
Financial Officer: American Skandia
Life Assurance Corporation
Thomas M. O'Brien (46) Director Vice Chairman: North Fork Bank (January
North Fork Bank 1997 to present)
275 Broad Hollow Road
Melville, NY 11747 President & Chief Executive Officer:
North Side Savings Bank (December 1984
to December 1996)
F. Don Schwartz (61) Director Management Consultant
1101 Penn Grant Road (April 1985 to present)
Lancaster, PA 17602
</TABLE>
* Indicates a Director of the Company who is an "interested person" within
the meaning set forth in the 1940 Act.
(1) Unless otherwise indicated, the address of each officer and director listed
above is One Corporate Drive, Shelton, Connecticut 06484.
(2) All of the officers and Directors of the Company listed above serve in
similar capacities for the Trust and/or American Skandia Trust, both of which
are also investment companies managed by the Investment Manager.
(3) Unless otherwise indicated, each officer and director listed above has held
his principal occupation for at least the last five years. In addition to the
principal occupations noted above, the following officers and Directors of the
Company hold the following positions with American Skandia Life Assurance
Corporation ("ASLAC"), American Skandia Investment Services, Incorporated
("ASISI"), American Skandia Marketing, Incorporated ("ASM"), American Skandia
Information Services and Technology Corporation ("ASIST") or American Skandia
Investment Holding Corporation ("ASIHC"): Mr. Boronow also serves as Executive
Vice President, Chief Operating Officer and a Director of ASIHC, and a Director
of ASLAC, ASISI, ASM and ASIST; Mr. Carendi also serves as Chairman, President,
Chief Executive Officer and a Director of ASIHC, and Chief Executive Officer and
a Director of ASLAC, ASISI, ASM and ASIST; Mr. Davy also serves as a Director of
ASISI; Mr. Mazzaferro also serves as Executive Vice President, Chief Financial
Officer and a Director of ASIHC, a Director of ASLAC, President, Chief Financial
Officer and a Director of ASISI, and Executive Vice President and Chief
Financial Officer of ASM and ASIST.
The Company's Articles of Incorporation provides that the Directors,
officers and employees of the Company may be indemnified by the Company to the
fullest extent permitted by federal and state law, including Maryland law.
Neither the Articles of Incorporation nor the By-laws of the Company authorize
the Company to indemnify any director or officer against any liability to which
he or she would otherwise be subject by reason of or for willful misfeasance,
bad faith, gross negligence or reckless disregard of such person's duties.
The officers and Directors of the Company who are "interested persons"
within the meaning of the 1940 Act do not receive compensation directly from the
Company for serving in the capacities described above. Those officers and
Directors of the Company, however, who are affiliated with the Investment
Manager may receive remuneration indirectly from the Company for services
provided in their respective capacities with the Investment Manager. Each of the
non-interested Directors is expected to receive for his service on the Board of
Directors an annual and "per-meeting" fee, plus reimbursement for reasonable
out-of-pocket expenses incurred in connection with attendance at Board meetings.
The following table sets forth information concerning the compensation
anticipated to be paid by the Company to the Directors in the current fiscal
year. Neither the Company nor any investment company in the Fund Complex offers
any pension or retirement benefits to its directors or trustees.
<TABLE>
<CAPTION>
Aggregate Compensation Total Compensation from the
Name of Director: from the Company:(1) Company and Fund Complex:(2)
<S> <C> <C>
Gordon C. Boronow $ 0 $ 0
Jan R. Carendi $ 0 $ 0
David E.A. Carson $9,167 $39,500
Julian A. Lerner $9,167 $7,500
Thomas M. Mazzaferro $ 0 $ 0
Thomas M. O'Brien $9,167 $39,500
F. Don Schwartz $9,167 $39,500
</TABLE>
(1) Because the Company commenced operations in July, 1997, no compensation
has been paid to the Directors of the Company as of June 1, 1997. The amount
indicated estimates the compensation anticipated to be paid to the Directors of
the Company for the remaining period of the Company's fiscal year ending October
31, 1997.
(2) As of the date of this SAI, the "Fund Complex" consisted of the
Company, the Trust and American Skandia Trust. Because the Company commenced
operations in July, 1997 and the Trust commenced operations in June, 1997, the
amount indicated reflects the compensation paid to the Directors, to the extent
applicable, solely for their service on the Board of Trustees of American
Skandia Trust for the year ending December 31, 1996. Note that Mr. Lerner was
appointed as a Trustee of American Skandia Trust in November 1996.
As of July 1, 1997, the officers, Directors and Trustees of the Company and
the Trust, as a group, owned beneficially or of record less than 1% of the
outstanding shares of the Funds.
INVESTMENT ADVISORY & ADMINISTRATION SERVICES
THE INVESTMENT MANAGER:
American Skandia Investment Services, Incorporated ("ASISI," as
previously defined) acts as investment manager to each Non-Feeder Fund and
Portfolio pursuant to separate investment management agreements with the Company
and the Trust, respectively (the "Management Agreements"). Unlike the Non-Feeder
Funds, each of the Feeder Funds invests all of its respective investable assets
in a corresponding Portfolio of the Trust and thus does not require an
investment manager.
ASISI, a Connecticut corporation organized in 1991, is registered as an
investment adviser with the Commission and is a wholly-owned subsidiary of
American Skandia Investment Holding Corporation, whose indirect parent is
Skandia Insurance Company Ltd. ("Skandia"). Skandia is a Swedish company that
owns, directly or indirectly, a number of insurance companies in many countries.
The predecessor to Skandia commenced operations in 1855. In addition to serving
as investment manager to the Company and the Trust, ASISI currently serves as
the investment manager to American Skandia Trust, an open-end management
investment company whose shares are made available to life insurance companies
writing variable annuity contracts and variable life insurance policies. Shares
of American Skandia Trust also may be offered directly to qualified pension and
retirement plans. For a list of those officers and Directors of the Company who
also serve in similar capacities for the Investment Manager, see this SAI under
"Management of the Company."
The Management Agreements provide, in substance, that the Investment
Manager will furnish each Non-Feeder Fund and Portfolio with investment advice
and investment management and administrative services subject to the supervision
of the Directors of the Company or the Trustees of the Trust, where applicable,
and in conformity with the stated investment objective, policies and limitations
of the applicable Fund or Portfolio. The Investment Manager is responsible for
providing, at its expense, such personnel as is required by each Non-Feeder Fund
or Portfolio for the proper conduct of its affairs and may engage a sub-advisor
to conduct the investment program of the Fund or Portfolio pursuant to the
Investment Manager's obligations under the Management Agreements. The Investment
Manager, not the Funds or Portfolios, is responsible for the expenses of
conducting the investment programs of the Funds and Portfolios.
The Management Agreements provide further that neither the Investment
Manager nor its personnel shall be liable for any act or omission in the course
of, or connected with, rendering services under the agreements, or for any
losses that may be sustained in the purchase, holding or sale of any security on
behalf of the Funds or Portfolios, except for willful misfeasance, bad faith or
gross negligence in the performance of its or their duties or by reason of
reckless disregard of its or their obligations and duties under the agreements.
The Management Agreements also permit the Investment Manager to render services
to others.
Under the terms of the Management Agreements, each Non-Feeder Fund and
Portfolio has agreed to pay ASISI an investment management fee, which is accrued
daily and paid monthly, equal on an annual basis to a stated percentage of the
respective Fund or Portfolio's average daily NAV. The Investment Manager, not
any Fund or Portfolio, is responsible for the payment of the sub-advisory fees
to the Sub-advisors. Because the Company commenced operations in July, 1997 and
the Trust commenced operations in June, 1997, neither the Funds nor the
Portfolios have paid any advisory fees to the Investment Manager as of June 1,
1997. For a discussion of the fees payable to the Investment Manager and the
Sub-advisors, as well as any applicable voluntary fee waiver arrangements, see
the Company's Prospectus under "Expense Information" and "Management of the
Funds."
Each Management Agreement will continue in effect from year to year,
provided it is approved at least annually by a vote of the majority of the
Directors or Trustees, where applicable, who are not parties to the agreement or
interested persons of any such party, cast in person at a meeting specifically
called for the purpose of voting on such approval. Each Management Agreement may
be terminated without penalty on 60 days' written notice by vote of a majority
of the Directors or Trustees, where applicable, or by the Investment Manager, or
by holders of a majority of the applicable Fund or Portfolio's outstanding
shares, and will automatically terminate in the event of its "assignment" (as
that term is defined in the 1940 Act).
THE SUB-ADVISORS:
ASISI currently engages the following Sub-advisors to conduct the
investment programs of each Non-Feeder Fund and Portfolio pursuant to separate
sub-advisory agreements with the Investment Manager (the "Sub-Advisory
Agreements"): (a) Founders Asset Management, Inc. for the ASAF Founders
International Small Capitalization Fund and the ASAF Founders Small
Capitalization Fund; (b) Rowe Price-Fleming International, Inc. for the ASMT T.
Rowe Price International Equity Portfolio; (c) T. Rowe Price Associates, Inc.
for the ASAF T. Rowe Price Small Company Value Fund; (d) Janus Capital
Corporation for the ASMT Janus Capital Growth Portfolio; (e) INVESCO Trust
Company for the ASMT INVESCO Equity Income Portfolio; (f) American Century
Investment Management, Inc. (formerly known as, "Investors Research
Corporation") for the ASAF American Century Strategic Balanced Fund; (g)
Federated Investment Counseling for the ASAF Federated High Yield Bond Fund; (h)
Pacific Investment Management Company for the ASMT PIMCO Total Return Bond
Portfolio; (i) J.P. Morgan Investment Management, Inc. for the ASMT JPM Money
Market Portfolio.
The Sub-Advisory Agreements provide that the Sub-advisors will
formulate and implement a continuous investment program for each Non-Feeder Fund
or Portfolio in accordance with the Fund or Portfolio's investment objective,
policies and limitations and any investment guidelines established by the
Investment Manager. Each Sub-advisor will, subject to the supervision and
control of the Investment Manager, determine in its discretion which issuers and
securities will be purchased, held, sold or exchanged by the Fund or Portfolio,
and will place orders with and give instructions to brokers and dealers to cause
the execution of such transactions. The Sub-advisors are required to furnish the
Investment Manager with periodic reports concerning the transactions and
performance of the Fund or Portfolio. Each Sub-advisor is required to furnish at
its own expense all investment facilities necessary to perform its obligations
under the Sub-Advisory Agreement. Nothing in the Sub-advisory Agreements
prevents the Investment Manager from engaging other sub-advisors to provide
investment advice and other services to a Fund or Portfolio, or from providing
such services itself.
Each Sub-Advisory Agreement will continue in effect from year to year,
provided it is approved at least annually by a vote of the majority of the
Directors or Trustees, where applicable, who are not parties to the agreement or
interested persons of any such party, cast in person at a meeting specifically
called for the purpose of voting on such approval. Each Sub-Advisory Agreement
may be terminated without penalty at any time by the Investment Manager or the
Sub-advisor upon 60 days' written notice, and will automatically terminate in
the event of its "assignment" (as that term is defined in the 1940 Act) or upon
termination of the Management Agreement with respect to that particular Fund or
Portfolio (provided that the Sub-advisor has received notice of such
termination).
THE ADMINISTRATOR:
PFPC Inc. (the "Administrator"), 103 Bellevue Parkway, Wilmington,
Delaware 19809, a Delaware corporation which is an indirect wholly-owned
subsidiary of PNC Financial Corp., serves as the administrator for both the
Company and the Trust. Pursuant to administration agreements between the
Administrator and the Company and the Trust, respectively (the "Administration
Agreements"), the Administrator has agreed to provide certain fund accounting
and administrative services to the Company and the Trust, including, among other
services, accounting relating to the Company and the Trust and the investment
transactions of the foregoing; computing daily NAVs; monitoring the investments
and income of the Company and the Trust for compliance with applicable tax laws;
preparing for execution and filing federal and state tax returns, and annual and
semi-annual shareholder reports; preparing monthly financial statements
including a schedule of investments; assisting in the preparation of
registration statements and other filings related to the registration of shares;
coordinating contractual relationships and communications between the Investment
Manager and the Company's and the Trust's custodians; preparing and maintaining
the Company's and the Trust's books of account, records of securities
transactions, and all other books and records in accordance with applicable
laws, rules and regulations (including, but not limited to, those records
required to be kept pursuant to the 1940 Act); and performing such other duties
related to the administration of the Company and the Trust as may be agreed upon
in writing by the parties to the respective Administration Agreements.
Under the terms of the Administration Agreements, the Administrator
shall be obligated to exercise care and diligence in the performance of its
duties, to act in good faith and to use its best efforts, within reasonable
limits, in performing services to be provided for under the agreements. The
Administrator shall be liable for any damages arising out of its failure to
perform its duties under the Administration Agreements to the extent such
damages arise out of its willful misfeasance, bad faith, gross negligence or
reckless disregard of such duties. Any person, even though also an officer,
director, partner, employee or agent of the Administrator, who may be or become
an officer, director, trustee, employee or agent of the Company or the Trust,
shall be deemed when rendering services to the Company or the Trust or acting on
any business of the Company or the Trust (other than services or business in
connection with the Administrator's duties under the Administration Agreements)
to be rendering such services to or acting solely for the Company or the Trust
and not as an officer, director, partner, employee or agent or one under the
control or direction of the Administrator even though paid by them. The
Administration Agreements shall continue until terminated by either party on 60
days' prior written notice to the other party.
Compensation for the services and facilities provided by the
Administrator under the Administration Agreements includes payment of the
Administrator's "out-of-pocket" expenses. Such reimbursable "out-of-pocket"
expenses include, but are not limited to, postage and mailing, telephone, telex,
Federal Express, outside independent pricing service charges and record
retention/storage. Because the Company commenced operations in July, 1997 and
the Trust commenced operations in June, 1997, neither the Company nor the Trust
have paid any fees to the Administrator as of June 1, 1997.
FUND EXPENSES
Each Non-Feeder Fund and Portfolio pays its own expenses including,
without limitation: (i) expenses of maintaining the Fund or Portfolio and
continuing its existence; (ii) registration of the Fund or Portfolio under the
1940 Act; (iii) auditing, accounting and legal expenses; (iv) taxes and
interest; (v) governmental fees; (vi) expenses of issue, sale, repurchase and
redemption of Fund shares; (vii) expenses of registering and qualifying the Fund
or Portfolio and its shares under federal and state securities laws and of
preparing and printing prospectuses for such purposes and for distributing the
same to shareholders and investors; (viii) fees and expenses of registering and
maintaining registrations of the Fund or Portfolio and of the Fund's principal
underwriter as a broker-dealer or agent under state securities laws; (ix)
expenses of reports and notices to shareholders and of meetings of shareholders
and proxy solicitations therefor; (x) expenses of reports to governmental
officers and commissions; (xi) insurance expenses; (xii) association membership
dues; (xiii) fees, expenses and disbursements of custodians for all services to
the Fund or Portfolio; (xiv) fees, expenses and disbursements of transfer
agents, dividend disbursing agents, shareholder servicing agents and registrars
for all services to the Fund or Portfolio; (xv) expenses for servicing
shareholder accounts; (xvi) any direct charges to shareholders approved by the
Directors of the Company or the Trustees of the Trust, where applicable; (xvii)
compensation and expenses of Directors of the Company or the Trustees of the
Trust, where applicable, who are not "interested persons" of the Fund or
Portfolio, respectively; and (xviii) such nonrecurring items as may arise,
including expenses incurred in connection with litigation, proceedings and
claims and the obligation of the Company and the Trust to indemnify its
directors, trustees and officers with respect thereto. Expenses incurred by the
Company or the Trust not directly attributable to any specific Non-Feeder Fund
or Portfolio are allocated on the basis of the net assets of the respective
Non-Feeder Funds and Portfolios.
The Investment Manager has voluntarily agreed until October 31, 1998 to
reimburse each Fund for its respective operating expenses (and, in the case of
the Feeder Funds, the Feeder Fund's pro rata share of operating expenses of the
Fund's corresponding Portfolio), exclusive of taxes, interest, brokerage
commissions, distribution fees and extraordinary expenses, but inclusive of the
management fee, which in the aggregate exceed specified percentages of the
Fund's average net assets as follows:
ASAF Founders International Small Capitalization Fund: 1.60%
ASAF T. Rowe Price International Equity Fund: 1.60%
ASAF Founders Small Capitalization Fund: 1.20%
ASAF T. Rowe Price Small Company Value Fund: 1.25%
ASAF Janus Capital Growth Fund: 1.20%
ASAF INVESCO Equity Income Fund: 1.05%
ASAF American Century Strategic Balanced Fund: 1.10%
ASAF Federated High Yield Bond Fund: 1.00%
ASAF Total Return Bond Fund: 0.90%
ASAF JPM Money Market Fund: 1.00%
The Investment Manager may terminate the above voluntary agreements at
any time after October 31, 1998. Voluntary payments of Fund expenses by the
Investment Manager may be made subject to reimbursement by the Fund, at the
Investment Manager's discretion, within the two year period following such
payment to the extent permissible under applicable law and provided that the
Fund is able to effect such reimbursement and remain in compliance with
applicable expense limitations.
DISTRIBUTION ARRANGEMENTS
THE DISTRIBUTOR:
American Skandia Marketing, Incorporated ("ASM" or the "Distributor"),
located at One Corporate Drive, Shelton, Connecticut 06484, serves as the
principal underwriter and distributor for each Fund pursuant to an underwriting
agreement initially approved by the Directors of the Company (the "Underwriting
Agreement"). The Distributor is a registered broker-dealer and member of the
National Association of Securities Dealers, Inc. ("NASD"). The Distributor is an
"affiliated person" (within the meaning of the 1940 Act) of the Company, the
Trust and the Investment Manager, being a wholly-owned subsidiary of American
Skandia Investment Holding Corporation.
Shares of each Fund will be continuously offered and will be sold by
selected broker-dealers who have executed selling agreements with the
Distributor. The Distributor bears all the expenses of providing services
pursuant to the Underwriting Agreement. Each Fund bears the expenses of
registering its shares with the Commission and with applicable state regulatory
authorities. The Underwriting Agreement continues in effect for two years from
initial approval and for successive one-year periods thereafter, provided that
each such continuance is specifically approved (i) by the vote of a majority of
the Directors of the Company, including a majority of the Directors who are not
parties to the Underwriting Agreement or "interested persons" of any such party
(as defined in the 1940 Act); or (ii) by the vote of a "majority of the
outstanding voting securities" of a Fund (as defined in the 1940 Act). In the
event that the Underwriting Agreement terminates, all obligations of the
Distributor thereunder shall cease, including the Distributor's undertaking to
purchase Class X Bonus Shares. For information regarding Class X Bonus Shares
and the Distributor's undertaking, see the Company's Prospectus under "How to
Buy Shares: Purchase of Class X Shares." The Distributor is not obligated to
sell any specific amount of shares of any Fund.
THE DISTRIBUTION PLANS:
The Company has adopted separate Distribution and Service plans (commonly
referred to as "12b-1 Plans") for Class A, B, C and X shares of each Fund (the
"Class A Plan," "Class B Plan," "Class C Plan" and "Class X Plan," individually,
and collectively, the "Plans") pursuant to appropriate resolutions of the
Directors of the Company and in accordance with the requirements of Rule 12b-1
under the 1940 Act and the requirements of the applicable rules of the NASD
regarding asset based sales charges. The Plans permit the payment of certain
fees to the Distributor for its services and costs in distributing Fund shares
and providing for services to shareholder accounts. The Distributor has assigned
its right to receive any distribution and service fees under the Class B plan
and the Class X plan, as well as any contingent deferred sales charge for Class
B and Class X shares, to an unaffiliated third party that finances the sale of
Class B and Class X shares. Under the terms of the Plans, the Distributor
provides to each Fund, for review by the Directors of the Company, a quarterly
written report of the amounts expended under the respective Plans and the
purpose for which such expenditures were made. The Directors of the Company will
review such levels of compensation the Plans provide in considering the
continued appropriateness of the Plans.
The Plans were adopted by a majority vote of the Directors of the
Company, including at least a majority of Directors who are not "interested
persons" of the Funds (as defined in the 1940 Act) and who do not have any
direct or indirect financial interest in the operation of the Plans, cast in
person at a meeting called for the purpose of voting on the Plans. In approving
the Plans, the Directors of the Company identified and considered a number of
potential benefits which the Plans may provide, including, but not limited to,
the adequate provision for the costs of implementing effective distribution
activities in the competitive environment and the availability to shareholders
of services provided by representatives who have knowledge of the shareholders'
particular circumstances and goals. With respect to the Class X Plan, the
Directors considered the possible increase in investor interest and consequent
increase in portfolio assets resulting from the use of the fees payable under
such plan, in part, to facilitate the Distributor's purchase of additional
shares for Class X investors as a bonus. The Directors of the Company believe
that there is a reasonable likelihood that the Plans will benefit each Fund and
its current and future shareholders in the manner contemplated.
The Plans, pursuant to their terms, remain in effect from year to year
provided such continuance is approved annually by vote of the Directors in the
manner described above. The Plans may not be amended to increase materially the
amount to be spent for distribution without approval of the shareholders of each
class of a Fund affected thereby entitled to vote thereon under the 1940 Act,
and material amendments to the Plans must also be approved by the Directors of
the Company in the manner described above. A Plan may be terminated at any time,
without payment of a penalty, by vote of the majority of the Directors of the
Company who are not interested persons of the Fund and have no direct or
indirect financial interest in the operations of the Plan, or by a vote of a
"majority of the outstanding voting securities" (as defined in the 1940 Act) of
each class of a Fund affected thereby entitled to vote thereon under the 1940
Act. A Plan will automatically terminate in the event of its "assignment" (as
defined in the 1940 Act).
Because the Company commenced operations in July, 1997, no compensation has
been paid to the Distributor in connection with the Plans as of July 1, 1997.
For a discussion of the details of each Plan, see the Company's Prospectus under
"How to Buy Shares."
DETERMINATION OF NET ASSET VALUE
The net asset value ("NAV") per share of each Fund is determined in the
manner described in the Company's Prospectus. Each Fund will determine the NAV
of its shares on each day that the New York Stock Exchange (the "NYSE") is open
for business. The Directors of the Company and the Trustees of the Trust have
each established procedures for valuing the assets of the Funds and Portfolios,
respectively. In general, these valuations are based on market value with
special provisions for: securities not listed on an exchange or securities
market; securities for which recent market quotations are not readily available;
short-term obligations; and open short positions and options written on
securities.
Securities held by each Non-Feeder Fund and Portfolio, other than the
ASMT JPM Money Market Portfolio (the "Money Market Portfolio"), will be valued
as follows: portfolio securities which are traded on stock exchanges are valued
at the last sale price on the principal exchange as of the close of business on
the day the securities are being valued, or, lacking any sales on that day, at
the mean between the bid and asked prices. Securities traded in the
over-the-counter market that are included in the National Market System are
valued at the mean between the bid and asked prices which may be based on
valuations furnished by a pricing service or from independent securities
dealers. Otherwise, over-the-counter securities are valued at the mean between
the bid and asked prices or yield equivalent as obtained from one or more
dealers that make markets in the securities. Portfolio securities which are
traded both in the over-the-counter market and on an exchange are valued
according to the broadest and most representative market, and it is expected
that for debt securities this ordinarily will be the over-the-counter market.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under procedures or
guidelines established by the Directors of the Company and the Trustees of the
Trust, where applicable.
The NAV per share of the Money Market Portfolio is determined by using
the amortized cost method of valuing portfolio instruments. Under the amortized
cost method of valuation, an instrument is valued at cost and the interest
payable at maturity upon the instrument is accrued as income, on a daily basis,
over the remaining life of the instrument. Neither the amount of daily income
nor the NAV is affected by unrealized appreciation or depreciation of the
Portfolio's investments assuming the instrument's obligation is paid in full on
maturity. In periods of declining interest rates, the indicated daily yield on
shares of the Portfolio computed using amortized cost may tend to be higher than
a similar computation made using a method of valuation based upon market prices
and estimates. In periods of rising interest rates, the indicated daily yield on
shares of the Portfolio computed using amortized cost may tend to be lower than
a similar computation made using a method of valuation based upon market prices
and estimates. In addition, short-term obligations with remaining maturities of
less than 60 days that are held by any Fund or Portfolio are valued at amortized
cost.
The amortized method of valuation is intended to permit the Money
Market Portfolio to maintain a constant NAV per share of $1.00. No assurances
can be given that this can be attained. The Directors of the Company and the
Trustees of the Trust, where applicable, periodically review the extent of any
deviation from the $1.00 per share value that would occur if a method of
valuation based on market prices and estimates were used. In the event such a
deviation would exceed one-half of one percent, the Directors of the Company and
the Trustees of the Trust, where applicable, will promptly consider any action
that reasonably should be initiated to eliminate or reduce material dilution or
other unfair results to shareholders. Such action may include selling portfolio
securities prior to maturity, not declaring earned income dividends, valuing
portfolio securities on the basis of current market prices, if available, or, if
not available, at fair market value as determined in good faith by the Directors
of the Company or the Trustees of the Trust, where applicable, and (considered
highly unlikely by management of the Company and the Trust) redemption of shares
in kind (i.e., with portfolio securities).
A Fund's maximum offering price per Class A share is determined by
adding the maximum sales charge to the NAV per share. Class B, C and X shares
are offered at NAV without the imposition of an initial sales charge.
ADDITIONAL INFORMATION ON THE
PURCHASE AND REDEMPTION OF SHARES
RIGHTS OF ACCUMULATION:
Each Fund offers to all qualifying investors certain "rights of
accumulation" under which investors are permitted to purchase Class A shares of
any Fund at the price applicable to the total of (a) the then current purchase
amount plus (b) an amount equal to the then current NAV of the purchaser's
holdings of all shares of any Fund of the Company. Acceptance of the purchase
order is subject to confirmation of qualification. A qualifying investor's
rights of accumulation may be amended or terminated at any time as to subsequent
purchases.
LETTER OF INTENT:
Any person may qualify for a reduced sales charge on purchases of Class
A shares made within a thirteen-month period pursuant to a Letter of Intent
("LOI"). In computing the total amount purchased for purposes of determining the
applicable sales commission, the offering price of shares currently held in the
Funds which were purchased within 90 days from the date of acceptance of the LOI
may be used as a credit toward Fund shares to be purchased under the LOI. Class
A, B, C and X shares acquired through the reinvestment of distributions do not
constitute purchases for purposes of the LOI. During the term of an LOI, Boston
Financial Data Services, Inc., the Company's transfer agent (the "Transfer
Agent"), will hold shares in escrow to secure payment of the higher sales charge
applicable for shares actually purchased if the amount indicated on the LOI is
not purchased. Dividends and capital gains will be paid on all escrowed shares
and these shares will be released when the amount indicated on the LOI has been
purchased. An LOI does not obligate the investor to buy or the Fund to sell the
indicated amount of the LOI. If the specified amount of the LOI is not
purchased, the shareholder shall remit to the Transfer Agent an amount equal to
the difference between the sales charge paid and the sales charge that would
have been paid had the aggregate purchases been made at a single time. If the
Class A shareholder does (not within twenty days after a written request by the
Transfer Agent) pay such difference in sales charge, the Transfer Agent will
redeem an appropriate number of escrowed shares in order to realize such
difference. Additional information about the terms of the LOI are available from
your registered representative.
SPECIAL REDEMPTIONS:
Although it would not normally do so, each Fund has the right to pay
the redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Directors of the Company. When the shareholder
sells portfolio securities received in this fashion, he would incur a brokerage
charge. Any such securities would be valued for the purposes of making such
payment at the same value as used in determining NAV. The Funds have 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 from any one account during any 90-day
period up to the lesser of $250,000 or 1% of the NAV of the applicable Fund or
Portfolio at the beginning of such period.
SUSPENSION OF REDEMPTIONS:
A Fund may not suspend a shareholder's right of redemption or postpone
payment for a redemption for more than seven days, unless the New York Stock
Exchange ("NYSE") is closed for other than customary weekends or holidays, or
trading on the NYSE is restricted, or for any period during which an emergency
exists as a result of which (1) disposal by a Fund or Portfolio of securities
owned by it is not reasonably practicable, or (2) it is not reasonably
practicable for a Fund to fairly determine the value of its assets, or for such
other periods as the Commission may permit for the protection of investors.
For further information regarding the purchase and redemption of Fund
shares, see "How to Buy Shares" and "How to Redeem Shares," respectively, in the
Company's Prospectus.
PORTFOLIO TRANSACTIONS
BROKERAGE ALLOCATION:
Subject to the supervision of the Directors of the Company and the
Trustees of the Trust, where applicable, decisions to buy and sell securities
for the Company and the Trust are made for each Non-Feeder Fund and Portfolio by
its respective Sub-advisor. Each Sub-advisor is authorized to allocate the
orders placed by it on behalf of the applicable Fund or Portfolio to brokers who
also provide research or statistical material or other services to the
Sub-advisor or the Fund or Portfolio for the use of the applicable Fund or
Portfolio and other accounts as to which the Sub-advisor exercises investment
discretion. Such allocation shall be in such amounts and proportions as the
Sub-advisor shall determine. The Sub-advisor will report on allocations of
brokerage either to the Investment Manager, which will report on such
allocations to the Directors of the Company or the Trustees of the Trust, where
applicable, or, if requested, directly to the Directors or Trustees. These
reports will indicate the brokers to whom such allocations have been made and
the basis therefor. The Sub-advisor may consider sale of shares of the Funds, or
may consider or follow recommendations of the Investment Manager that take such
sales into account, as factors in the selection of brokers to effect portfolio
transactions for a Fund or Portfolio, subject to the requirements of best net
price available and most favorable execution. In this regard, the Investment
Manager may direct certain of the Sub-advisors to try to effect a portion of
their Fund or Portfolio's investment transactions through broker-dealers that
sell shares of the Fund (or corresponding Fund, in the case of the Portfolios),
to the extent consistent with best net price available and most favorable
execution.
Subject to the rules promulgated by the Commission, as well as other
regulatory requirements, a Sub-advisor also may allocate orders to brokers or
dealers affiliated with the Sub-advisor or the Investment Manager. Such
allocation shall be in amounts and proportions as the Sub-advisor shall
determine. The Sub-advisor will report on these allocations of brokerage either
to the Investment Manager, which will report on such allocations to the
Directors of the Company or the Trustees of the Trust, where applicable, or, if
requested, directly to the Directors or Trustees.
In selecting a broker to effect each particular transaction, each
Sub-advisor will take the following into consideration: the best net price
available; the reliability, integrity and financial condition of the broker; the
size and difficulty in executing the order; and the value of the expected
contribution of the broker to the investment performance of the Fund on a
continuing basis. Subject to such policies and procedures as the Directors of
the Company and the Trustees of the Trust may determine, a Sub-advisor shall not
be deemed to have acted unlawfully or to have breached any duty solely by reason
of its having caused a Fund or Portfolio to pay a broker that provides research
services to the Sub-advisor an amount of commission for effecting an investment
transaction in excess of the amount of commission another broker would have
charged for effecting that transaction, if the Sub-advisor determines in good
faith that such amount of commission was reasonable in relation to the value of
the research service provided by such broker viewed in terms of either that
particular transaction or the Sub-advisor's ongoing responsibilities with
respect to the Fund or Portfolio and other accounts as to which the Sub-advisor
exercises investment discretion. Accordingly, the amount of the brokerage
commission in any transaction may be greater than that available from other
brokers if the difference is reasonably justified by other aspects of the
services offered.
Because the Company commenced operations in July, 1997 and the Trust
commenced operations in June, 1997, no brokerage commissions have been paid on
behalf of the Non-Feeder Funds or the Portfolios as of June 1, 1997.
ALLOCATION OF INVESTMENTS:
The Sub-advisors of the Non-Feeder Funds and Portfolios have other
advisory clients, some of which have similar investment objectives to one or
more of the Funds or Portfolios for which advisory services are being provided.
In addition, a Sub-advisor may be engaged to provide advisory services for more
than one Fund or Portfolio. There will be times when a Sub-advisor may recommend
purchases and/or sales of the same securities for a Fund or Portfolio and the
Sub-advisor's other clients. In such circumstances, it will be the policy of
each Sub-advisor to allocate purchases and sales among a Fund or Portfolio and
its other clients, including other Funds or Portfolios for which the Sub-advisor
provides advisory services, in a manner which the Sub-advisor deems equitable,
taking into consideration such factors as size of account, concentration of
holdings, investment objectives, tax status, cash availability, purchase costs,
holding period and other pertinent factors relative to each account.
PORTFOLIO TURNOVER:
Each Non-Feeder Fund and Portfolio may sell its portfolio securities,
regardless of the length of time that they have been held, if the Sub-advisor
and/or the Investment Manager determines that such a disposition is in the
Fund's or Portfolio's best interest. Portfolio turnover rates may increase as a
result of the need for a Fund or Portfolio to effect significant amounts of
purchases or redemptions of portfolio securities due to economic, market, or
other factors that are not within the Sub-advisor's or Investment Manager's
control. A high rate of portfolio turnover (generally in excess of 100%)
involves correspondingly higher brokerage commission expenses and other
transaction costs, which must be ultimately borne by a Fund's shareholders.
Trading in fixed income securities does not generally involve the payment of
brokerage commissions, but does involve indirect transaction costs. High
portfolio turnover rates may also generate larger taxable income and taxable
capital gains than would result from lower portfolio turnover rates and may
create higher tax liability for a Fund's shareholders. Although it is not
possible to predict future portfolio turnover rates accurately, and such rates
may vary from year to year, it is anticipated that portfolio turnover rates for
the ASMT T. Rowe Price International Equity Portfolio, ASAF T. Rowe Price Small
Company Value Fund, ASMT INVESCO Equity Income Portfolio and the ASAF Federated
High Yield Bond Fund will not exceed 100% under normal market conditions. The
portfolio turnover rates for the ASAF Founders International Small
Capitalization Fund, ASAF Founders Small Capitalization Fund, ASMT Janus Capital
Growth Portfolio, ASAF American Century Strategic Balanced Fund and ASMT PIMCO
Total Return Bond Portfolio are not anticipated to exceed 150%, 150%, 200%, 150%
and 350%, respectively, under normal market conditions. A 100% portfolio
turnover rate would occur if all of the securities in a portfolio of investments
were replaced during a given period. For additional information regarding
portfolio turnover, see the Company's Prospectus under "Portfolio Transactions."
ADDITIONAL TAX CONSIDERATIONS
Federal Income Tax Consequences. Each Fund is treated as a separate entity
for federal income tax purposes. Each Fund has qualified and elected or intends
to qualify and elect to be treated as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
intends to continue to so qualify in the future. As a regulated investment
company, a Fund must, among other things, (a) derive at least 90% of its gross
income from dividends, interest, payments with respect to loans of stock and
securities, gains from the sale or other disposition of stock, securities or
foreign currency and other income (including but not limited to gains from
options, futures, and forward contracts) derived with respect to its business of
investing in such stock, securities or foreign currency; (b) derive less than
30% of its gross income from the sale or other disposition of stock, securities,
options, futures or forward contracts (other than options, futures or forward
contracts on foreign currencies) held less than three months, or foreign
currencies (or options, futures or forward contracts on foreign currencies), but
only if such currencies (or options, futures or forward contracts on foreign
currencies) are not directly related to a Fund's principal business of investing
in stocks or securities (or options and futures with respect to stocks or
securities); and (c) diversify its holdings so that, at the end of each quarter
of its taxable year, (i) at least 50% of the value of the Fund's total assets is
represented by cash, cash items, U.S. Government securities, securities of other
regulated investment companies, and other securities limited, in respect of any
one issuer, to an amount not greater than 5% of the Fund's total assets, and 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities or securities of other regulated
investment companies). As a regulated investment company, a Fund (as opposed to
its shareholders) will not be subject to federal income taxes on the net
investment income and capital gain that it distributes to its shareholders,
provided that at least 90% of its net investment income and realized net
short-term capital gain in excess of net long-term capital loss for the taxable
year is distributed in accordance with the Code's timing requirements (the
"Distribution Requirement"). For additional information regarding the Funds'
treatment as regulated investment companies under the Code, and certain
consequences if such treatment is not accorded any Fund, see the Company's
Prospectus under "Dividends, Capital Gains and Taxes."
Each Fund will be subject to a 4% non-deductible federal excise tax on
a portion of its undistributed taxable income and capital gains if it fails to
meet certain distribution requirements by the end of the calendar year. Each
Fund intends to avoid liability for such tax by satisfying such distribution
requirements.
Each of the Feeder Funds will invest all of its investable assets in a
corresponding Portfolio of the Trust. Each such Fund will be deemed to own a
proportionate share of its corresponding Portfolio's assets and income for the
purpose of determining whether the Fund qualifies as a regulated investment
company. Accordingly, each Portfolio intends to conduct its operations so that
its corresponding Fund will be able to satisfy applicable tax requirements.
If a Fund or Portfolio acquires stock in certain non-U.S. corporations
("passive foreign investment companies" or "PFICs") that receive at least 75% of
their annual gross income from passive sources (such as interest, dividends,
rents, royalties or capital gains) or at least 50% of whose average assets
produce or are held for the production of such passive income, that Fund (or, in
the case of a Portfolio, its corresponding Fund indirectly through its interest
in the Portfolio) could be subject to federal income tax and additional interest
charges on "excess distributions" received from such companies or gain from the
sale of stock in such companies, even if the Fund distributes its share of the
PFIC income as a taxable dividend to its shareholders. A certain election
(treating the PFIC as a "qualified electing fund") filed with the Fund's federal
income tax return may, if available, ameliorate these adverse tax consequences,
but any such election would require the applicable Fund to recognize ordinary
taxable income and net capital gain of the PFIC without the corresponding
receipt of cash which may need to be distributed by the Fund to satisfy the
Distribution Requirement.
Pursuant to proposed regulations, open-end regulated investment
companies such as the Funds would be entitled to avoid the tax consequences
described in the previous paragraph by electing to mark-to-market their stock in
certain PFICs. Marking to market in this context means recognizing as gain for
each taxable year the excess, as of the end of that year, of the fair market
value of each PFIC's stock over the owner's adjusted basis in that stock
(including mark to market gains of a prior year for which an election was in
effect).
Gains and losses realized by a Fund (directly, or through its interest
in a Portfolio) in connection with certain transactions involving foreign
currency-denominated debt securities, certain foreign currency futures and
options, foreign currency forward contracts, foreign currencies themselves, or
payables or receivables denominated in a foreign currency are generally treated
as ordinary income and loss.
Some Funds, or, in certain cases, the Portfolio in which a Fund may
invest its assets, may be subject to withholding and other taxes imposed by
foreign countries with respect to their investments in foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. A Fund, more than 50% of the value of whose total assets at the close of
a taxable year (held directly or indirectly through a corresponding Portfolio)
consists of stock or securities in foreign corporations, may elect to
"pass-through" these foreign taxes to its shareholders, in which case each
shareholder will be required to include its pro rata portion thereof in its
gross income but, if it itemizes deductions, will be able to deduct or (subject
to various limitations) will be able to claim a credit for its portion of such
taxes, in computing its federal income tax liability.
Each Fund or Portfolio that invests in zero coupon securities or in
other securities with original issue discount (or securities with market
discount, if the Fund or Portfolio elects to include market discount in income
currently) must accrue such discount income currently even if no corresponding
payment is received. However, because income subject to a Fund's Distribution
Requirement includes such accrued discount, to satisfy that requirement, a Fund
may have to dispose of its (or, as the case may be, its corresponding
Portfolio's) securities under disadvantageous circumstances, or borrow, to
generate the needed cash.
Forward currency contracts, options and futures contracts entered into
by a Fund or Portfolio may create "straddles" for federal income tax purposes
with other such contracts or with securities positions, and this may affect the
character and timing of gains or losses realized by the Fund (or, in the case of
a Portfolio, by its corresponding Fund) on such contracts, options or
securities. Certain straddles treated as short sales for tax purposes may also
result in the loss of the holding period of securities included in the straddles
for purposes of the 30% of gross income test described above, and therefore, a
Fund's or Portfolio's ability to enter into forward currency contracts, options
and futures contracts may be limited.
Certain options, futures and foreign currency contracts held by a Fund
or Portfolio at the end of each taxable year will be required to be
"marked-to-market" for federal income tax purposes -- i.e., treated as having
been sold at market value. For options and futures contracts, 60% of any gain or
loss recognized on these deemed sales and on actual dispositions will be treated
as long-term capital gain or loss, and the remainder will be treated as
short-term capital gain or loss regardless of how long the Fund or Portfolio has
held such options or futures. However, gain or loss recognized on certain
foreign currency contracts will be treated as ordinary income or loss.
If a Fund or Portfolio satisfies certain requirements, any increase in
value of a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the offsetting hedging position
during the period of the hedge for purposes of determining whether the Fund (or,
in the case of a Portfolio, its corresponding Fund) satisfies the 30% gross
income test above. Thus, only the net gain (if any) from the designated hedge
will be included in gross income for purposes of that limitation. Each Fund or
Portfolio will consider whether it should seek to satisfy those requirements to
enable the Fund (or, in the case of a Portfolio, its corresponding Fund) to
qualify for this treatment for hedging transactions.
To maintain a constant $1.00 per share NAV, the Directors of the ASAF
JPM Money Market Fund (the "Money Market Fund") may direct that the number of
outstanding shares be reduced pro rata. If this adjustment is made, it will
reflect the lower market value of portfolio securities and not realized losses.
The adjustment may result in a shareholder having more dividend income than net
income in his account for a period. When the number of outstanding shares of the
Money Market Fund is reduced, the shareholder's basis in the shares of the Fund
may be adjusted to reflect the difference between taxable income and net
dividends actually distributed. This difference may be realized as a capital
loss when the shares are liquidated.
Distributions from a Fund's current or accumulated earnings and profits
("E&P"), as computed for federal income tax purposes, will be taxable as
described in the Company's Prospectus whether taken in shares or in cash. These
distributions will be treated as dividends, but will qualify for the 70%
dividends-received deduction for the Fund's corporate shareholders only to the
extent designated in a notice to the Fund's shareholders as being attributable
to dividends received by the Fund. Distributions, if any, in excess of E&P will
constitute a return of capital, which will first reduce an investor's tax basis
in a Fund's shares and thereafter (after such basis is reduced to zero) will
generally give rise to capital gains. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the amount of
cash they would have received had they elected to receive the distributions in
cash, divided by the number of shares received.
At the time of an investor's purchase of shares of a Fund (other than
the Money Market Fund), a portion of the purchase price is often attributable to
realized or unrealized appreciation in the Fund's portfolio or undistributed
taxable income of the Fund. Consequently, subsequent distributions from such
appreciation or income may be taxable to such investor even if the NAV of the
investor's shares is, as a result of the distributions, reduced below the
investor's cost for such shares, and the distributions in reality represent a
return of a portion of the purchase price.
Upon a redemption of shares of a Fund, other than the Money Market Fund
(including an exchange for other Fund shares), a shareholder may realize a
taxable gain or loss. Such gain or loss will be capital if the shares are
capital assets in the shareholder's hands and will be long-term or short-term
capital gain or loss, depending upon the shareholder's holding period for the
shares. A sales charge paid in purchasing shares of a Fund ("load charge")
cannot be taken into account for purposes of determining gain or loss on the
redemption or exchange of such shares within 90 days after their purchase to the
extent shares of the same or another Fund are subsequently acquired without
payment of a load charge pursuant to a reinvestment or exchange privilege. Such
disregarded load charge will result in an increase in the shareholder's tax
basis in the Fund shares subsequently acquired. Also, any loss realized on a
redemption or exchange of shares of a Fund will be disallowed to the extent the
shares disposed of are replaced with shares of the same Fund within a period of
61 days beginning 30 days before and ending 30 days after such disposition. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. If Fund shares are redeemed or exchanged at a loss after being
held for six months or less, the loss will treated as long-term, instead of
short-term, capital loss to the extent of any capital gains distributions
received on those shares.
Each shareholder will be required to furnish its social security or
taxpayer identification number and certify that such number is correct and that
the shareholder is not subject to back-up withholding for failure to report
income to the Internal Revenue Service ("IRS"). Failure to comply with
applicable IRS regulations, including the certification procedures described
above, may result in the Fund being required to collect back-up withholding at a
31% rate on taxable distributions and redemptions to the shareholder.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to shareholder
accounts maintained as qualified retirement plans. Shareholders should consult
their tax advisers for more information.
The foregoing discussion relates solely to federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) generally. The discussion does
not address special tax rules applicable to certain classes of investors, such
as tax-exempt entities, insurance companies, and financial institutions.
A foreign shareholder (i.e., a nonresident alien individual, foreign
trust or estate, foreign corporation or foreign partnership) not engaged in a
U.S. trade or business with which its investment in a Fund is effectively
connected will be subject to federal income tax treatment that is different from
that described above. These investors may be subject to U.S. withholding tax at
the rate of 30% (or a lower rate under an applicable tax treaty) on amounts
treated as ordinary dividends from a Fund and, unless an effective IRS Form W-8
or authorized substitute is on file, to backup withholding at the rate of 31% on
certain other payments from the Fund. Distributions treated as long term capital
gains to foreign shareholders will not be subject to federal income tax unless
the distributions are effectively connected with the shareholder's U.S. trade or
business or, in the case of a non-resident alien individual, the shareholder is
present in the U.S. for more than 182 days during the taxable year and certain
other conditions are met. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in any Fund.
State and Local Tax Consequences. Each Fund may be subject to state or
local taxes in jurisdictions in which such Fund may be deemed to be doing
business. In addition, in those states or localities which have income tax laws,
the treatment of such Fund and its shareholders under such laws may differ from
their treatment under federal income tax laws, and investment in such Fund may
have different tax consequences for shareholders than would direct investment in
such Fund's (or, in the case of a Feeder Fund, its corresponding Portfolio's)
portfolio securities. Shareholders should consult their own tax advisers with
respect to any state or local taxes.
CAPITAL STOCK OF THE COMPANY &
PRINCIPAL HOLDERS OF SECURITIES
The Company is an open-end management investment company organized
under the laws of Maryland on March 5, 1997. The Company currently has ten
separate series of shares of beneficial interest, each of which is divided into
Class A, B, C and X shares. The Directors of the Company are authorized to
establish, from time to time and without shareholder approval, additional series
or classes of shares.
The shares of the Funds are entitled to vote separately to approve
investment advisory agreements or changes in investment restrictions, but
shareholders of all series vote together in the election and selection of
directors. Shares of a Fund vote together as a class on matters that affect the
Fund in substantially the same manner. Matters pertaining only to one or more
Funds will be voted upon only by those Funds. As to matters affecting a single
class, shares of such class will vote separately. Shares of the Funds do not
have cumulative voting rights. The Company and the Funds do not intend to hold
annual meetings of shareholders unless required to do so by the 1940 Act or the
Maryland statutes under which the Company is organized. Although Directors are
not elected annually by the shareholders, shareholders have under certain
circumstances the right to remove one or more Directors. If required by
applicable law, a meeting will be held to vote on the removal of a Director or
Directors of the Company if requested in writing by the holders of not less than
10% of the Company's outstanding shares. Each Fund's shares when issued are
fully paid, non-assessable and freely transferable, and have no preference,
preemptive or similar rights.
As of the date of this SAI, American Skandia Investment Services,
Incorporated, which contributed the initial capital of the Funds, owned 100% of
the Funds' outstanding shares.
OTHER INFORMATION
REPORTS TO SHAREHOLDERS:
Shareholders of each Fund are provided unaudited semi-annual financial
statements, as well as year-end financial statements audited by the Company's
independent public accountants. Each Fund's financial statements show the
investments owned by the Fund or its corresponding Portfolio, where applicable,
and the market values thereof. Additionally, each Fund's financial statements
provide other information about the Fund and its operations, including in the
case of the Feeder Funds, the Fund's beneficial interest in its corresponding
Portfolio.
DOMESTIC AND FOREIGN CUSTODIANS:
PNC Bank, located at Airport Business Center, International Court 2,
200 Stevens Drive, Philadelphia, Pennsylvania 19113, has been selected as
custodian for all domestic cash and securities holdings of the Funds and
Portfolios investing primarily in domestic securities. Morgan Stanley Trust
Company, located at One Pierrepont Plaza, Brooklyn, New York 11201, has been
selected as custodian for all cash and securities holdings of the ASAF Founders
International Small Capitalization Fund and the ASAF T. Rowe Price International
Equity Fund (and corresponding Portfolio), and co-custodian for all foreign
securities holdings of the Funds and Portfolios which invest primarily in
domestic securities.
TRANSFER AGENT:
Boston Financial Data Services, Inc. (the "Transfer Agent," as previously
defined), located at Two Heritage Drive, Quincy, Massachusetts 02171, has been
selected as the transfer agent for the Company.
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P., located at 2400 Eleven Penn Center,
Philadelphia, Pennsylvania 19103, has been selected as the independent certified
public accountants of the Company, providing audit services and assistance and
consultation with respect to the preparation of filings with the Commission.
REGISTRATION STATEMENT:
This SAI and the Company's Prospectus do not contain all the
information included in the Company's Registration Statement filed with the
Commission under the Securities Act of 1933 with respect to the securities
offered by the Prospectus. The Registration Statement, including the exhibits
filed therewith, may be examined at the Commission's offices in Washington, D.C.
The Commission maintains a Website (http: / / www.sec.gov) that contains this
SAI, material incorporated by reference, and other information regarding the
Funds and Portfolios.
FINANCIAL STATEMENTS
An audited statement of assets and liabilities of each Fund as of the
date of initial capital contribution, together with the notes thereto and the
report of Coopers & Lybrand L.L.P., are attached to this SAI.
<TABLE>
<CAPTION>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES
May 28, 1997
<S> <C> <C> <C> <C> <C>
ASAF Janus ASAF T. ASAF ASAF JPM ASAF Total
Capital Rowe INVESCO Money Market Return Bond
Growth Price Equity
International Income
Equity
------------------------------------------------------------------
ASSETS
Investment in ASMT Janus $10,000 - - - -
Capital Growth, at value
(cost $10,000)
Investment in ASMT T. Rowe - $10,000 - - -
Price International
Equity, at value (cost
$10,000)
Investment in ASMT INVESCO - - $10,000 - -
Equity Income, at value
(cost $10,000)
Investment in ASMT JPM - - - $10,000 -
Money Market, at value
(cost $10,000)
Investment in ASMT PIMCO - - - - $10,000
Total Return Bond, at
value (cost $10,000)
Prepaid State Registration 39,447 39,447 39,447 39,447 39,447
Expenses
Deferred organization 49,329 49,329 49,329 49,329 49,327
expenses
-------------------------- ----------- ------------- ------------
Total assets 98,776 98,776 98,776 98,776 98,774
-------------------------- ----------- ------------- ------------
LIABILITIES
Expenses payable to the 39,447 39,447 39,447 39,447 39,447
Distributor
Organization expenses 49,329 49,329 49,329 49,329 49,327
payable to the Investment
Advisor
-------------------------- ----------- ------------- ------------
Total liabilities 88,776 88,776 88,776 88,776 88,774
-------------------------- ----------- ------------- ------------
NET ASSETS $10,000 $10,000 $10,000 $10,000 $10,000
========================== =========== ============= ============
SHARES OUTSTANDING
(PAR VALUE .001) 1,000 1,000 1,000 10,000 1,000
========================== =========== ============= ============
NET ASSET VALUE AND
REDEMPTION PRICE PER SHARE $10.00 $10.00 $10.00 $1.00** $10.00
Offering Price Per Share (Class A Only):
* 100/95.0% x $10.00 $10.53 $10.53 $10.53
* 100/95.75% x $10.00 $10.44
** Also offering price per share.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
ASAF ASAF ASAF ASAF ASAF T.
Founders Founders Federated American Rowe Price
International Small High Yield Century Small
Small Capitalization Bond Strategic Company
Capitalization Balanced Value
------------------------------------------------------------------
ASSETS
Cash $10,000 $10,000 $10,000 $10,000 $10,000
Prepaid State Registration 39,446 39,446 39,446 39,446 39,446
Expenses
Deferred organization 52,491 52,491 52,491 52,489 52,489
expenses
-------------------------- ----------- ------------- ------------
Total assets 101,937 101,937 101,937 101,935 101,935
-------------------------- ----------- ------------- ------------
LIABILITIES
Expenses payable to the 39,446 39,446 39,446 39,446 39,446
Distributor
Organization expenses 52,491 52,491 52,491 52,489 52,489
payable to the Investment
Advisor
-------------------------- ----------- ------------- ------------
Total liabilities 91,937 91,937 91,937 91,935 91,935
-------------------------- ----------- ------------- ------------
NET ASSETS $10,000 $10,000 $10,000 $10,000 $10,000
========================== =========== ============= ============
SHARES OUTSTANDING
(PAR VALUE .001) 1,000 1,000 1,000 1,000 1,000
========================== =========== ============= ============
NET ASSET VALUE AND
REDEMPTION PRICE PER SHARE $10.00 $10.00 $10.00 $10.00 $10.00
Offering Price Per Share (Class A Only):
* 100/95.0% x $10.00 $10.53 $10.53 $10.53 $10.53
* 100/95.75% x $10.00 $10.44
* On sales of $50,000 or more, the offering price is reduced.
</TABLE>
See notes to the financial statements.
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
NOTES TO STATEMENTS OF ASSETS AND LIABILITIES
May 28, 1997
1. ORGANIZATION
American Skandia Advisor Funds, Inc. (the "Company"), a Maryland Corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified open-end management investment company currently offering ten
separate series: ASAF Janus Capital Growth, ASAF T. Rowe Price International
Equity, ASAF INVESCO Equity Income, ASAF JPM Money Market, ASAF Total Return
Bond, ASAF Founders International Small Capitalization, ASAF Founders Small
Capitalization, ASAF Federated High Yield, ASAF American Century Strategic
Balanced, ASAF T. Rowe Price Small Company Value (each a "Fund"). The Company
has not commenced operations except those relating to organizational matters and
the issuance of Class A shares of beneficial interest to American Skandia
Investment Services, Inc. (ASISI), the Funds' investment advisor, and the
investment of proceeds in ASMT Janus Capital Growth, ASMT T. Rowe Price
International Equity, ASMT INVESCO Equity Income, ASMT JPM Money Market, and
ASMT PIMCO Total Return Bond (each a "Portfolio" in American Skandia Master
Trust). The investment in each Portfolio is valued at the aggregate net asset
value of each Portfolio multiplied by each Fund's proportionate share of its
respective Portfolio.
2. SIGNIFICANT ACCOUNTING POLICIES
Organization expenses will be amortized on a straight line basis over a period
not to exceed five years from the date that operations commence. In the event
that ASISI redeems all or part of its initial investment in shares of a Fund,
the proceeds will be reduced by the product of any unamortized organization
expenses and the proportion of the number of shares redeemed to the initial
shares invested.
Initial state registration costs have been deferred and will be charged to
expense over the period that a benefit is expected to be realized.
3. INVESTMENT ADVISORY FEES, ADMINISTRATIVE FEES AND OTHER TRANSACTIONS
WITH AFFILIATES
The Company has entered into (1) a Management Agreement with ASISI, (2) a
Shareholder Servicing Agreement and a Distribution Agreement with American
Skandia Marketing, Inc. under which American Skandia Marketing, Inc. will
distribute shares of the Company's Funds and provide information and
administrative services for shareholders, and (3) an Administration and
Accounting Services Agreement with PFPC Inc. under which PFPC Inc. provides
administration and accounting services to the Company pursuant to such Agreement
and (4) a Transfer Agency Agreement with Boston Financial Data Services, Inc.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of American Skandia Advisor
Funds, Inc.:
We have audited the accompanying Statements of Assets and Liabilities of the
American Skandia Advisor Funds, Inc. (the "Fund") as of May 28, 1997. This
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of the American Skandia Advisor
Funds, Inc. as of May 28, 1997 in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
May 28, 1997
<PAGE>
<TABLE>
<CAPTION>
AMERICAN SKANDIA MASTER TRUST
STATEMENTS OF ASSETS AND LIABILITIES
May 28, 1997
ASMT ASMT T. ASMT ASMT JPM ASMT PIMCO Total
Janus Rowe Price INVESCO Money Return Bond
Capital InternationalEquity Market
Growth Equity Income
-----------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C>
Cash $20,000 $20,000 $20,000 $20,000 $20,000
Deferred organization 19,628 19,628 19,628 19,629 19,629
expenses
----------------------- -------------------- ------------
Total assets 39,628 39,628 39,628 39,629 39,629
----------------------- -------------------- ------------
LIABILITIES
Organization expenses 19,628 19,628 19,628 19,629 19,629
payable to the
Investment Advisor
----------------------- -------------------- ------------
NET ASSETS $20,000 $20,000 $20,000 $20,000 $20,000
======================= ==================== ============
See notes to the financial statements.
</TABLE>
AMERICAN SKANDIA MASTER TRUST
NOTES TO STATEMENTS OF ASSETS AND LIABILITIES
May 28, 1997
1. ORGANIZATION
American Skandia Master Trust (the "Trust"), a Delaware Business Trust, is
registered under the Investment Company Act of 1940, as amended, as a
diversified open-end management investment company currently offering five
portfolios: ASMT Janus Capital Growth, ASMT T. Rowe Price International Equity,
ASMT INVESCO Equity Income, ASMT JPM Money Market, ASMT PIMCO Total Return Bond
(each a "Portfolio"). The Trust has not commenced operations except those
relating to organizational matters and the sale of beneficial interest in the
amount of $10,000 each to ASAF Janus Capital Growth, ASAF T. Rowe Price
International Equity, ASAF INVESCO Equity Income, ASAF JPM Money Market, ASAF
Total Return Bond (collectively "American Skandia Advisor Funds"), Skandia Janus
Capital Growth, Skandia T. Rowe Price International Equity, Skandia INVESCO
Equity Income, Skandia J.P. Morgan Money Market, and Skandia PIMCO Total Return
Bond (collectively "Skandia Advisor Funds").
2. SIGNIFICANT ACCOUNTING POLICIES
Organization expenses will be amortized on a straight line basis over a period
not to exceed five years from the date that operations commence. The above
mentioned Funds will reimburse their respective portfolios for any unamortized
organization expenses upon the withdrawal of any initial beneficial interest.
The amount to be reimbursed will be determined by the proportion of the amount
of initial beneficial interest withdrawn to the initial beneficial interest of
all holders after taking into account any prior withdrawals of such initial
beneficial interest.
The value of an investor's beneficial interest in the Portfolio is equal to the
product of the aggregate net asset value of the Portfolio and the percentage
representing that investor's share of the aggregate beneficial interest in the
Portfolio effective for that day.
3. INVESTMENT ADVISORY FEES, ADMINISTRATIVE FEES AND OTHER TRANSACTIONS
WITH AFFILIATES
The Trust has entered into a Management Agreement with American Skandia
Investment Services, Inc. ("ASISI") and an Administration and Accounting
Services Agreement with PFPC International Ltd. ("PFPC") under which PFPC
provides administration and accounting services to the Trust pursuant to the
Agreements.
NB135463.10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of American Skandia Master Trust:
We have audited the accompanying Statements of Assets and Liabilities of
American Skandia Master Trust (the "Trust") as of May 28, 1997. This financial
statement is the responsibility of the Trust's management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of American Skandia Master Trust
as of May 28, 1997 in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand
Coopers & Lybrand
Dublin, Republic of Ireland
May 28, 1997
<PAGE>
APPENDIX
The rating information which follows describes how the rating services
mentioned presently rate the described securities. No reliance is made upon the
rating firms as "experts" as that term is defined for securities purposes.
Rather, reliance on this information is on the basis that such ratings have
become generally accepted in the investment business.
DESCRIPTION OF CERTAIN DEBT SECURITIES RATINGS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S"):
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 edge." Interest payments are protected by a large, or exceptionally
stable, margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered 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 a
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S"):
AAA -- Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a strong capacity to pay interest and repay
principal, and differs from the highest rated issues only in a 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 they normally exhibit 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.
BB, B, CCC, CC, C -- Debt rated BB, B, CCC, CC and C is regarded as
having predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating is also used for debt subordinated to senior debt that is assigned an
actual or implied BBB rating.
B -- Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB-rating.
CCC -- Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, economic or financial conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC -- The rating CC typically is applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C -- The C rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest
is being paid.
D -- Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of bankruptcy petition if debt service
payments are jeopardized.
Plus (+) or minus (-) -- Ratings from AA to CCC may be modified by the
addition of a plus of minus sign to show relative standing within the major
rating categories.
c -- The letter c indicates that the holder's option to tender the
security for purchase may be canceled under certain prestated conditions
enumerated in the tender option documents.
L -- The letter L indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit collateral is
federally insured and interest is adequately collateralized. In the case of
certificates of deposit, the letter L indicates that the deposit, combined with
other deposits being held in the same and right capacity, will be honored for
principal and accrued predefault interest up to the federal insurance limits
within 30 days after closing of the insured institution or, in the event that
the deposit is assumed by a successor insured institution, upon maturity.
p -- The letter p indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
* -- Continuance of the rating is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
r -- The r is attached to highlight derivative, hybrid, and certain
other obligations that Standard & Poor's believes may experience high volatility
or high variability in expected returns due to noncredit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities.
DESCRIPTION OF CERTAIN COMMERCIAL PAPER RATINGS
MOODY'S:
Prime-1 -- Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2 -- Issuers rated Prime-2 (or related supporting institutions)
have a strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Prime-3 -- Issuers rated Prime-3 (or related supporting institutions)
have an acceptable ability for repayment of senior short-term debt obligations.
The effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
Not Prime - Issuers rated Not Prime do not fall within any of the Prime
rating categories.
STANDARD & POOR'S:
A-1 -- This highest category indicates that the degree of safety
regarding time payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3 -- Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects of the
changes in circumstances than obligations carrying the higher designations.
B -- Issues rated B are regarded as having only speculative capacity
for timely payment.
C -- This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D - Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period.
<PAGE>
PART C: OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits
(a) Financial Statements contained in Part B:
1. Statement of Assets and Liabilities of each Fund of
Registrant, as of May 28, 1997, together with the notes thereto and the report
of Coopers & Lybrand L.L.P.
2. Statement of Assets and Liabilities of each Portfolio of
American Skandia Master Trust, as of May 28, 1997, together with the notes
thereto and the report of Coopers & Lybrand.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(b) Exhibits:
(i) 1. (a) Articles of Incorporation of Registrant.
(b) Amendment to Articles of Incorporation of Registrant.
(i) 2. By-laws of Registrant.
3. None.
4. None.
(ii) 5. (a) Form of Investment Management Agreement between Registrant and American Skandia
Investment Services, Incorporated for the ASAF Founders International Small
Capitalization Fund.
(ii) (b) Form of Investment Management Agreement between Registrant and American Skandia
Investment Services, Incorporated for the ASAF Founders Small Capitalization Fund.
(ii) (c) Form of Investment Management Agreement between Registrant and American Skandia
Investment Services, Incorporated for the ASAF T. Rowe Price Small Company Value Fund.
(ii) (d) Form of Investment Management Agreement between Registrant and American Skandia
Investment Services, Incorporated for the ASAF American Century Strategic Balanced
Fund.
(ii) (e) Form of Investment Management Agreement between Registrant and American Skandia
Investment Services, Incorporated for the ASAF Federated High Yield Bond Fund.
(ii) (f) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Founders Asset Management, Inc. for the ASAF Founders International
Small Capitalization Fund.
(ii) (g) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Founders Asset Management, Inc. for the ASAF Founders Small
Capitalization Fund.
(ii) (h) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and T. Rowe Price Associates, Inc. for the ASAF T. Rowe Price Small
Company Value Fund.
(i) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and American Century Investment Management, Inc. for the ASAF American
Century Strategic Balanced Fund.
(j) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Federated Investment Counseling for the ASAF Federated High Yield
Bond Fund.
(ii) 6. (a) Form of Underwriting and Distribution Agreement between Registrant and American
Skandia Marketing, Incorporated.
(b) Form of Sales Agreement with American Skandia Marketing, Incorporated.
7. None.
(ii) 8. (a) Form of Custody Agreement between Registrant and PNC Bank.
(ii) (b) Form of Custody Agreement between Registrant and Morgan Stanley Trust Company.
(ii) 9. (a) Form of Administration Agreement between Registrant and PFPC Inc.
(ii) (b) Form of Transfer Agency and Service Agreement between Registrant and State Street Bank
and Trust Company.
10. Opinion and Consent of Counsel to Registrant.
11. (a) Consent of Independent Public Accountants of Registrant.
(b) Consent of Independent Public Accountants of American Skandia Master Trust.
(c) Consent of Caplin & Drysdale, Chartered.
(d) Consent of Rogers & Wells.
12. None.
(ii) 13. Form of Share Purchase Agreement.
14. None.
(ii) 15. (a) Form of Distribution and Service Plan for Class A Shares.
(ii) (b) Form of Distribution and Service Plan for Class B Shares.
(ii) (c) Form of Distribution and Service Plan for Class C Shares.
(ii) (d) Form of Distribution and Service Plan for Class X Shares.
16. None.
17. None.
(ii) 18. Form of Rule 18f-3 Plan.
</TABLE>
- --------------------------------------
(i) Incorporated by reference to Registrant's Initial Registration
Statement on Form N-1A as filed with the Securities and Exchange
Commission (the "Commission") on March 10, 1997.
(ii) Incorporated by reference to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A as filed with the Commission on
June 4, 1997.
ITEM 25. Persons Controlled By or Under Common Control with Registrant
Five series of the Registrant currently are organized under a
"master/feeder" fund structure and may be considered to control the
corresponding master portfolios of American Skandia Master Trust in which they
invest. Registrant is not under common control with any person except to the
extent Registrant is deemed to be under the control of its Investment Manager.
<TABLE>
<CAPTION>
ITEM 26. Number of Holders of Securities
<S> <C> <C>
Number of Record Holders
Fund Name (All Four Classes) as of May 1, 1997
---------------------------- -----------------
ASAF Founders International Small Capitalization Fund 0
ASAF T. Rowe Price International Equity Fund 0
ASAF Founders Small Capitalization Fund 0
ASAF T. Rowe Price Small Company Value Fund 0
ASAF Janus Capital Growth Fund 0
ASAF INVESCO Equity Income Fund 0
ASAF American Century Strategic Balanced Fund 0
ASAF Federated High Yield Bond Fund 0
ASAF Total Return Bond Fund 0
ASAF JPM Money Market Fund 0
</TABLE>
ITEM 27. Indemnification
Section 2-418 of the General Corporation Law of the State of Maryland
provides for indemnification of officers, directors, employees and agents of a
Maryland corporation. With respect to indemnification of the officers and
directors of the Registrant, and of other employees and agents to such extent as
shall be authorized by the Board of Directors or the By-laws of the Registrant
and be permitted by law, reference is made to Article VIII, Paragraph (a)(5) of
the Registrant's Articles of Incorporation and Article V of the Registrant's
By-laws, both filed herewith.
With respect to liability of the Investment Manager to Registrant or to
shareholders of Registrant's Funds under the Investment Management Agreements,
reference is made to Section 13 of each form of Investment Management Agreement
filed herewith.
With respect to the Sub-Advisers' indemnification under the
Sub-Advisory Agreements of the Investment Manager, any affiliated person within
the meaning of Section 2(a)(3) of the Investment Company Act of 1940, as amended
(the "ICA"), of the Investment Manager and each person, if any, who controls the
Investment Manager within the meaning of Section 15 of the 1933 Act, as amended
(the "1933 Act"), reference is made to Section 14 of each form of Sub-Advisory
Agreement filed herewith.
With respect to Registrant's indemnification of American Skandia
Marketing, Incorporated (the "Distributor"), its officers and directors and any
person who controls the Distributor within the meaning of Section 15 of the 1933
Act, and the Distributor's indemnification of Registrant, its officers and
directors and any person who controls Registrant, if any, within the meaning of
the 1933 Act, reference is made to Section 10 of the form of Underwriting and
Distribution Agreement filed herewith.
Insofar as indemnification for liability arising under the 1933 Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the 1933 Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant or expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
ITEM 28. Business and Other Connections of Investment Adviser
American Skandia Investment Services, Incorporated ("ASISI"), One
Corporate Drive, Shelton, Connecticut 06484, serves as the investment manager to
the Registrant. Information as to the officers and directors of ASISI is
included in ASISI's Form ADV (File No. 801-40532), including the amendments to
such Form ADV filed with the Commission on April 11, 1997, October 22, 1996,
March 22, 1996 and April 11, 1995, and is incorporated herein by reference.
ASISI currently engages the following sub-advisors (the "Sub-advisors")
to conduct the investment programs of the funds of the Registrant or the master
portfolios in which certain of Registrant's funds invest: (a) Founders Asset
Management, Inc., Founders Financial Center, 2930 East Third Avenue, Denver,
Colorado 80206; (b) Rowe Price-Fleming International, Inc., 100 East Pratt
Street, Baltimore, Maryland 21209; (c) T. Rowe Price Associates, Inc., 100 East
Pratt Street, Baltimore, Maryland 21209; (d) Janus Capital Corporation, 100
Fillmore Street, Denver, Colorado 80206-4923; (e) INVESCO Trust Company, 7800
East Union Avenue, Denver, Colorado 80217-3706; American Century Investment
Management, Inc. (formally named, "Investors Research Corporation"), Twentieth
Century Tower, 4500 Main Street, Kansas City, Missouri 64111; (f) Federated
Investment Counseling, Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779; (g) Pacific Investment Management Company, 840 Newport Center Drive,
Suite 360, Newport Beach, California 92660; and (h) J.P. Morgan Investment
Management, Inc., 522 Fifth Avenue, New York, New York, 10036. Information as to
the officers and directors of each of the Sub-advisors is included in each
Sub-advisor's current Form ADV, as amended and filed with the Commission, and is
incorporated herein by reference.
ITEM 29. Principal Underwriter
American Skandia Marketing, Incorporated (the "Distributor," as
previously defined), One Corporate Drive, Shelton, Connecticut 06484, serves as
the principal underwriter and distributor for the Registrant. The Distributor is
a registered broker-dealer and member of the National Association of Securities
Dealers, Inc. The Distributor is an "affiliated person" (as defined under the
ICA) of the Registrant and ASISI, being a wholly-owned subsidiary of American
Skandia Investment Holding Corporation.
The following table sets forth information on the current officers and
directors of the Distributor, all of whom have as their principal business
address, One Corporate Drive, Shelton, Connecticut 06484:
<TABLE>
<CAPTION>
<S> <C> <C>
Name: Position Held with the Distributor: Position Held with the Registrant:
Gordon C. Boronow Director Vice President & Director
Kimberly A. Bradshaw Vice President & National None
Accounts Manager
Jan R. Carendi Chief Executive Officer & Director President, Principal Executive Officer
& Director
Daniel R. Darst Senior Vice President & None
National Marketing Director
Paul DeSimone Vice President, Corporate None
Controller & Director
Wade A. Dokken President, Chief Marketing None
Officer & Director
Walter G. Kenyon Vice President & None
National Accounts Manager
Lawrence Kudlow Senior Vice President & None
Chief Economist
N. David Kuperstock Vice President & Director None
Daniel LaBonte Vice President & Associate Marketing None
Director
Thomas M. Mazzaferro Executive Vice President & Treasurer & Director
Chief Financial Officer
Kristen E. Newall Assistant Corporate Secretary None
Brian O'Connor Vice President & National Sales None
Manager (Internal Wholesaling)
M. Priscilla Pannell Corporate Secretary None
Don Thomas Peck Senior Vice President, National None
Sales Manager & Director
Hayward Sawyer Senior Vice President, National None
Sales Manager & Director
Christian Thwaites Vice President, Qualified Plans None
Bayard F. Tracy Senior Vice President, National None
Sales Manager & Director
</TABLE>
ITEM 30. Location of Accounts and Records
Records regarding the Registrant's securities holdings are maintained
at Registrant's Custodians, PNC Bank, Airport Business Center, International
Court 2, 200 Stevens Drive, Philadelphia, Pennsylvania 19113, and Morgan Stanley
Trust Company, One Pierrepont Plaza, Brooklyn, New York 11201. Certain records
with respect to the Registrant's securities transactions are maintained at the
offices of the various sub-advisors to the Registrant. The Registrant's
corporate records are maintained at its offices at One Corporate Drive, Shelton,
Connecticut 06484. The Registrant's financial ledgers and similar financial
records are maintained at the offices of its Administrator, PFPC Inc., 103
Bellevue Parkway, Wilmington, DE 19809. Certain records regarding the
shareholders of the Registrant are maintained at the offices of the Registrant's
transfer agent, Boston Financial Data Services, Inc., Two Heritage Drive,
Quincy, Massachusetts 02171.
All accounts, books and other documents required to be maintained by
Section 31(a) of the ICA, and the Rules promulgated thereunder with respect to
American Skandia Master Trust (the "Master Trust") are maintained at the Master
Trust's offices at One Corporate Drive, Shelton, Connecticut 06484, at the
offices of the various sub-advisors, and at the offices of the above-mentioned
Custodians and Administrator.
ITEM 31. Management Services
None.
ITEM 32. Undertakings
(a) None.
(b) The Registrant undertakes to file a post-effective amendment to
this Registration Statement, using financial statements which need not be
certified, within four to six months from the effective of this Registration
Statement.
(c) The Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual report to
shareholders upon request and without charge if the Registrant includes the
information called for by Item 5A of Form N-1A in such annual report.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, American Skandia Advisor Funds,
Inc., has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Shelton, and State of
Connecticut, on the 9th day of July, 1997.
AMERICAN SKANDIA ADVISOR FUNDS, INC.
By: /s/ Eric C. Freed
Eric C. Freed
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
/s/ Gordon C. Boronow Vice President & Director 07/09/97
Gordon C. Boronow
/s/ Jan R. Carendi* President, Principal Executive 07/09/97
Jan R. Carendi Officer & Director
/s/ David E.A. Carson* Director 07/09/97
David E.A. Carson
/s/ Richard G. Davy, Jr.* Controller 07/09/97
Richard G. Davy, Jr.
/s/ Julian A. Lerner* Director 07/09/97
Julian A. Lerner
/s/ Thomas M. Mazzaferro* Treasurer & Director 07/09/97
Thomas M. Mazzaferro
/s/ Thomas M. O'Brien* Director 07/09/97
Thomas M. O'Brien
/s/ F. Don Schwartz* Director 07/09/97
F. Don Schwartz
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*By: /s/ Eric C. Freed
Eric C. Freed
*Pursuant to Powers of Attorney previously filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, American Skandia Master Trust has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the County of Dublin, Country of Ireland, on the
8th day of July, 1997.
AMERICAN SKANDIA MASTER TRUST
By: /s/ J. Fergus McKeon
J. Fergus McKeon
Assistant Controller &
Assistant Corporate Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
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Signature Title Date
/s/ Gordon C. Boronow* Vice President & Trustee 07/08/97
Gordon C. Boronow
/s/ Jan R. Carendi* Trustee 07/08/97
Jan R. Carendi
/s/ David E.A. Carson* Trustee 07/08/97
David E.A. Carson
/s/ Richard G. Davy, Jr.* Controller 07/08/97
Richard G. Davy, Jr.
/s/ Julian A. Lerner* Trustee 07/08/97
Julian A. Lerner
/s/ Thomas M. Mazzaferro* President, Principal Executive 07/08/97
Thomas M. Mazzaferro Officer & Trustee
/s/ Thomas M. O'Brien* Trustee 07/08/97
Thomas M. O'Brien
/s/ F. Don Schwartz* Trustee 07/08/97
F. Don Schwartz
/s/ C. Ake Svensson* Treasurer 07/08/97
C. Ake Svensson
</TABLE>
*By: /s/ J. Fergus McKeon
J. Fergus McKeon
*Pursuant to Powers of Attorney previously filed.
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
Registration Statement Under
The Securities Act of 1933 and
The Investment Company Act of 1940
INDEX TO EXHIBITS
Exhibit Number Description
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1(b) Amendment to Articles of Incorporation of Registrant.
5(i) Form of Sub-advisory Agreement between American Skandia
Investment Services, Incorporated and American Century
Investment Management, Inc. for the ASAF American Century
Strategic Balanced Fund.
5(j) Form of Sub-advisory Agreement between American Skandia
Investment Services, Incorporated and Federated Investment
Counseling for the ASAF Federated High Yield Bond Fund.
6(b) Form of Sales Agreement with American Skandia Marketing,
Incorporated.
10 Opinion and Consent of Counsel to Registrant.
11(a) Consent of Independent Public Accountants of Registrant.
11(b) Consent of Independent Public Accountants of American
Skandia Master Trust.
11(c) Consent of Caplin & Drysdale, Chartered.
11(d) Consent of Rogers & Wells.
</TABLE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
ARTICLES OF AMENDMENT
AMERICAN SKANDIA ADVISOR FUNDS, INC., a Maryland corporation,
having its principal office in Baltimore City, Maryland (which is hereinafter
called the "Corporation"), hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The Charter of the Corporation is hereby amended as follows:
(1) Article SIXTH subsection (a) of the Charter is amended
in its entirety to read as follows:
(a) The total number of shares of stock of all classes and
series which the Corporation has authority to issue is forty
million (40,000,000) shares of capital stock (par value $.001 per
share), amounting in aggregate par value to forty thousand
$40,000. All of the authorized shares of capital stock of the
Corporation are initially classified as "Common Stock" of which
one million, five hundred seventy-five thousand (1,575,000) shares
are further initially classified as a series of Common Stock
designated the "ASAF Founders International Small Capitalization
Fund," two million one hundred thousand (2,100,000) shares are
further initially classified as a series of Common Stock
designated the "ASAF T. Rowe Price International Equity Fund," two
million one hundred thousand (2,100,000) shares are further
initially classified as a series of Common Stock designated the
"ASAF Founders Small Capitalization Fund," two million one hundred
thousand (2,100,000) shares are further initially classified as a
series of Common Stock designated the "ASAF T. Rowe Price Small
Company Value Fund," four million two hundred fifty thousand
(4,250,000) shares are further initially classified as a series of
Common Stock designated the "ASAF Janus Capital Growth Fund," two
million one hundred thousand (2,100,000) shares are further
initially classified as a series of Common Stock designated the
"ASAF INVESCO Equity Income Fund," one million five hundred
seventy-five thousand (1,575,000) shares are further initially
classified as a series of Common Stock designated the "ASAF
American Century Strategic Balanced Fund," two million one hundred
thousand (2,100,000) shares are further initially classified as a
series of Common Stock designated the "ASAF Federated High Yield
Bond Fund," two million one hundred thousand (2,100,000) shares
are further initially classified as a series of Common Stock
designated the "ASAF Total Return Bond Fund," and twenty million
(20,000,000) shares are further initially classified as a series
of Common Stock designated the "ASAF JPM Money Market Fund." The
ASAF Founders International Small Capitalization Fund, ASAF T.
Rowe Price International Equity Fund, ASAF Founders Small
Capitalization Fund, ASAF T. Rowe Price Small Company Value Fund,
ASAF Janus Capital Growth Fund, ASAF INVESCO Equity Income Fund,
ASAF American Century Strategic Balanced Fund, ASAF Federated High
Yield Bond Fund, ASAF Total Return Bond Fund and ASAF JPM Money
Market Fund and any other series of Common Stock which is
preferred over all other series in respect of the assets belonging
to that series as hereinafter provided are referred to
individually as a "Fund" and collectively as the "Funds." Each
Fund shall initially have four classes of shares, designated Class
A, Class B, Class C and Class X Shares. The number of authorized
shares of each such class of a particular Fund shall consist at
any time of the sum of (x) the outstanding shares of that class of
that fund and (y) one fourth of the authorized but unissued shares
of all classes of that Fund; provided, however, that in the event
application of the above formula would result, at the time, in
fractional shares of one or more classes, the number of authorized
shares of each such class shall be rounded down to the nearest
whole number of shares; and provided, further, that at all times
the aggregate number of authorized Class A, Class B, Class C and
Class X shares of any Fund shall not exceed the authorized number
of shares of the Fund. The Board of Directors may classify and
reclassify any unissued shares of capital stock by setting or
changing in any one or more respect the preferences, conversion or
other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption of
such shares of stock.
(2) Article SIXTH subsection (c)(7) is amended in its
entirety to provide as follows:
(7) To the extent and in the manner permitted by the
Investment Company Act of 1940 and the Maryland General
Corporation Law, the Board of Directors may cause the Corporation
to redeem, at their current net asset value, the shares of any
Fund held in the account of any stockholder having an aggregate
net asset value which is less than the minimum initial investment
in that Fund or such other amount, both as specified by the Board
of Directors from time to time in its sole discretion.
(3) Article SIXTH subsections (c)(10)(iii)(A) and (B) are
amended in their entirety to provide as follows:
(A) on the eighth anniversary of the day on which Class B
shares were purchased by a holder thereof, such shares (including
that number of Class B shares purchased through the reinvestment
of dividends or other distributions or capital gains paid on all
Class B shares ("Class B Dividend Shares") held by such holder
multiplied by a fraction, the numerator of which is the number of
Class B shares other than Class B Dividend Shares to be converted
on the conversion date and the denominator of which is the
aggregate number of Class B shares other than Class B Dividend
Shares held by such holder) shall automatically convert to Class A
shares of the same Fund on the basis of the respective net asset
values of the Class B shares and the Class A shares of that Fund
on the conversion date; and
(B) on the eighth anniversary of the day on which Class X
shares were purchased by a holder thereof, such shares (including
that number of Class X shares purchased through the reinvestment
of dividends or other distributions or capital gains paid on all
Class X shares ("Class X Dividend Shares") held by such holder
multiplied by a fraction, the numerator of which is the number of
Class X shares other than Class X Dividend Shares to be converted
on the conversion date and the denominator of which is the
aggregate number of Class X shares other than Class X Dividend
Shares held by such holder) shall automatically convert to Class A
shares of the same Fund on the basis of the respective net asset
values of the Class X shares and the Class A shares of that Fund
on the conversion date;
SECOND: (a) As of immediately before the amendment the total number
of shares of stock of all classes which the Corporation has authority to issue
is 120 shares, all of which are Common Stock (par value $.01 per share).
(b) As amended the total number of shares of stock of all
classes which the Corporation has authority to issue is forty million
(40,000,000) shares, all of which are Common Stock (par value $.001 per share).
(c) The aggregate par value of all shares having a par value
is $1.20 before the amendment and $40,000 as amended.
(d) The shares of stock of the Corporation are divided into
classes, and the following is a description, as amended, of each class,
including the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption.
(1) All consideration received by the Corporation from the issue
or sale of shares of a particular Fund, together with all assets in which
such consideration is invested or reinvested, all income, earnings,
profits and proceeds thereof, including any proceeds derived from the
sale, exchange or liquidation of such assets, and any funds or payments
derived from any investment or reinvestment of such proceeds in whatever
form the same may be, shall irrevocably belong to that Fund for all
purposes and shall be so recorded upon the books of account of the
Corporation. Such consideration, assets, income, earnings, profits and
proceeds, together with any items allocated as provided in the following
sentence, are hereinafter referred to collectively as the "assets
belonging to" that Fund. In the event that there are any assets, income,
earnings, profits or proceeds which are not identifiable as belonging to
a particular Fund, such items shall be allocated by or under the
supervision of the Board of Directors to and among one or more of the
Funds from time to time classified or reclassified, in such manner and on
such basis as the Board of Directors, in its sole discretion, deems fair
and equitable. Each such allocation shall be conclusive and binding for
all purposes. No holder of a particular Fund shall have any right or
claim against the assets belonging to any other Fund, except as a holder
of the shares of such other Fund.
(2) The assets belonging to each Fund shall be charged with the
liabilities of the Corporation in respect of that Fund and all expenses,
costs, charges and reserves attributable to that Fund. Any liabilities,
expenses, costs, charges or reserves of the Corporation which are
attributable to more than one Fund, or are not identifiable as pertaining
to any Fund, shall be allocated and charged by or under the supervision
of the Board of Directors to and among one or more of the Funds from time
to time classified or reclassified, in such manner and on such basis as
the Board of Directors, in its sole discretion, deems fair and equitable.
Each such allocation shall be conclusive and binding for all purposes.
The liabilities, expenses, costs, charges and reserves charged to a
series of Common Stock are hereinafter referred to collectively as the
"liabilities of" that Fund.
(3) The net asset value per share of a particular Fund shall be
the quotient obtained by dividing the value of the net assets of that
Fund (being the value of the assets belonging to that Fund less the
liabilities of that Fund) by the total number of shares of that Fund
outstanding, all as determined by or under the direction of the Board of
Directors in accordance with generally accepted accounting principles and
the Investment Company Act of 1940. Subject to the applicable provisions
of the Investment Company Act of 1940, the Board of Directors, in its
sole discretion, may prescribe and shall set forth in the By-Laws of the
Corporation, or in a duly adopted resolution of the Board of Directors,
such bases and times for determining the current net asset value per
share of each Fund, and the net income attributable to such Fund, as the
Board of Directors deems necessary or desirable. The Board of Directors
shall have full discretion, to the extent not inconsistent with the
Maryland General Corporation Law and the Investment Company Act of 1940,
to determine whether any moneys or other assets received by the
Corporation shall be treated as income or capital and whether any item of
expense shall be charged to income or capital, and each such
determination shall be conclusive and binding for all purposes.
(4) Subject to the provisions of law and any preferences of any
class or series of stock from time to time classified or reclassified,
dividends, including dividends payable in shares of another Fund, may be
paid on the shares of any class of a particular Fund at such time and in
such amounts as the Board of Directors may deem advisable. Dividends and
other distributions on the shares of a particular Fund shall be paid only
out of the assets belonging to that Fund after providing for the
liabilities of that Fund.
(5) Each share of Common Stock shall have one vote, irrespective
of the Fund or class thereof, and the exclusive voting power for all
purposes shall be vested in the holders of the Common Stock. The holders
of shares of all Funds and classes shall vote together as a single class;
provided, however, that as to any matter with respect to which a separate
vote of a particular Fund or class is required by the Investment Company
Act of 1940 or the Maryland General Corporation Law, such requirement
shall apply and, in that event, the other Funds and classes entitled to
vote on the matter shall vote together as a single class; and provided,
further, that the holders of a particular Fund or class shall not be
entitled to vote on any matter which does not affect any interest of that
Fund or class, including liquidation of another Fund or class, except as
otherwise required by the Investment Company Act of 1940 or the Maryland
General Corporation Law.
(6) Each holder of shares of a Fund of any class shall have the
right to require the Corporation to redeem all or any part of his shares
at a redemption price equal to the current net asset value per share of
that Fund and class which is next computed after receipt of a tender of
such shares for redemption, less such redemption fee or deferred sales
charge, if any, as the Board of Directors may from time to time establish
in accordance with the Investment Company Act of 1940 and the Conduct
Rules adopted by the National Association of Securities Dealers, Inc.
Payment of the redemption price shall be made by the Corporation only
from the assets belonging to the Fund whose shares are being redeemed.
The redemption price shall be paid in cash; provided, however, that if
the Board of Directors determines, which determination shall be
conclusive, that conditions exist which make payment wholly in cash
unwise or undesirable, the Corporation may, to the extent and in the
manner permitted by law, make payment wholly or partly in securities or
other assets, at the value of such securities or other assets used in
such determination of current net asset value. Notwithstanding the
foregoing, the Corporation may suspend the right of holders of any Fund
to require the Corporation to redeem their shares, or postpone the date
of payment or satisfaction upon such redemption for more than seven days
after tender of such shares for redemption, during any period or at any
time when and to the extent permitted under the Investment Company Act of
1940 and any other applicable law.
(7) To the extent and in the manner permitted by the Investment
Company Act of 1940 and the Maryland General Corporation Law, the Board
of Directors may cause the Corporation to redeem, at their current net
asset value, the shares of any Fund held in the account of any
stockholder having an aggregate net asset value which is less than the
minimum initial investment in that Fund or such other amount, both as
specified by the Board of Directors from time to time in its sole
discretion.
(8) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, or of the
liquidation of a particular Fund, the holders of each Fund that is being
liquidated shall be entitled, after payment or provision for payment of
the liabilities of that Fund and the amount to which the holders of any
class of that Fund shall be entitled, as a class, to share ratably in the
remaining assets belonging to the Fund. The holders of shares of any
particular Fund shall not be entitled thereby to any distribution upon
the liquidation of any other Fund.
(9) Subject to compliance with the Investment Company Act of
1940, the Board of Directors shall have authority to provide that holders
of any Fund shall have the right to exchange their shares for shares of
one or more other Fund in accordance with such requirements and
procedures as may be established by the Board of Directors.
(10) Except to the extent provided otherwise by the Charter of
the Corporation, the Class A, Class B, Class C and Class X shares of each
Fund shall represent an equal proportionate interest in the assets
belonging to that Fund (subject to the liabilities of that Fund) and each
share of a particular Fund shall have identical voting, dividend,
liquidation and other rights; provided, however, that notwithstanding
anything in the Charter of the Corporation to the contrary:
(i) The Class A, Class B, Class C and Class X shares
may be issued and sold subject to such different sales loads or charges,
whether initial, deferred or contingent, or any combination thereof, as
the Board of Directors may from time to time establish in accordance with
the Investment Company Act of 1940 and the Conduct Rules adopted by the
National Association of Securities Dealers, Inc.
(ii) Liabilities of a Fund which are determined by or
under the supervision of the Board of Directors to be attributable to a
particular class of that Fund may be charged to that class and
appropriately reflected in the net asset value of, or dividends payable
on, the shares of that class of the Fund.
(iii) Except as otherwise provided hereinafter,
(A) on the eighth anniversary of the day on which Class B
shares were purchased by a holder thereof, such shares (including
that number of Class B shares purchased through the reinvestment
of dividends or other distributions or capital gains paid on all
Class B shares ("Class B Dividend Shares") held by such holder
multiplied by a fraction, the numerator of which is the number of
Class B shares other than Class B Dividend Shares to be converted
on the conversion date and the denominator of which is the
aggregate number of Class B shares other than Class B Dividend
Shares held by such holder) shall automatically convert to Class A
shares of the same Fund on the basis of the respective net asset
values of the Class B shares and the Class A shares of that Fund
on the conversion date; and
(B) on the eighth anniversary of the day on which Class X
shares were purchased by a holder thereof, such shares (including
that number of Class X shares purchased through the reinvestment
of dividends or other distributions or capital gains paid on all
Class X shares ("Class X Dividend Shares") held by such holder
multiplied by a fraction, the numerator of which is the number of
Class X shares other than Class X Dividend Shares to be converted
on the conversion date and the denominator of which is the
aggregate number of Class X shares other than Class X Dividend
Shares held by such holder) shall automatically convert to Class A
shares of the same Fund on the basis of the respective net asset
values of the Class X shares and the Class A shares of that Fund
on the conversion date;
provided, however, that conversion of Class B shares or Class X shares
represented by stock certificates shall be subject to tender of such
certificates; and provided, further, that any conversion of Class B
shares or Class X shares shall be subject to the continuing availability
of an opinion of counsel to the effect that (i) the assessment of the
expenses referred to in sub-paragraph (ii) above with respect to the
Class B shares or the Class X shares, as the case may be, does not result
in the Corporation's dividends or distributions constituting
"preferential dividends" under the Internal Revenue Code of 1986, as
amended, and (ii) such conversion does not constitute a taxable event
under federal income tax law. The Board of Directors, in its sole
discretion, may suspend the conversion of Class B or Class C shares if
such opinion is no longer available.
(iv) The Class A, Class B, Class C and Class X shares
of a particular Fund may have such different exchange rights as the Board
of Directors shall provide in compliance with the Investment Company Act
of 1940.
THIRD: The foregoing amendment to the Charter of the Corporation
has been advised by the Board of Directors and approved by the stockholders of
the Corporation.
IN WITNESS WHEREOF, AMERICAN SKANDIA ADVISOR FUNDS, INC. has
caused these presents to be signed in its name and on its behalf by its Vice
President and witnessed by its Secretary on July 3, 1997.
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WITNESS: AMERICAN SKANDIA ADVISOR
FUNDS, INC.
/s/ Eric C. Freed By: /s/ Gordon C. Boronow
Secretary Vice President
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<PAGE>
THE UNDERSIGNED, Vice President of American Skandia Advisor Funds,
Inc., who executed on behalf of the Corporation the foregoing Articles of
Amendment of which this certificate is made a part, hereby acknowledges in the
name and on behalf of said Corporation the foregoing Articles of Amendment to be
the corporate act of said Corporation and hereby certifies that to the best of
his knowledge, information, and belief the matters and facts set forth therein
with respect to the authorization and approval thereof are true in all material
respects under the penalties of perjury.
----------------------------------------------
Vice President
AMERICAN SKANDIA ADVISOR FUNDS, INC.
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is between American Skandia Investment Services,
Incorporated (the "Investment Manager") and American Century Investment
Management, Inc. (the "Sub-Adviser").
W I T N E S S E T H
WHEREAS, American Skandia Advisor Funds, Inc. (the "Company") is a Maryland
corporation organized with one or more series of shares and is registered as an
open-end management investment company under the Investment Company Act of 1940,
as amended (the "ICA"); and
WHEREAS, the Investment Manager and the Sub-Adviser each is an investment
adviser registered under the Investment Advisers Act of 1940, as amended (the
"Advisers Act"); and
WHEREAS, the Board of Directors of the Company (the "Directors") have engaged
the Investment Manager to act as investment manager for the ASAF American
Century Strategic Balanced Fund (the "Fund"), one series of the Company, under
the terms of a management agreement, dated June 1, 1997, with the Company (the
"Management Agreement"); and
WHEREAS, the Investment Manager, acting pursuant to the Management Agreement,
wishes to engage the Sub-Adviser, and the Directors have approved the engagement
of the Sub-Adviser, to provide investment advice and other investment services
set forth below.
NOW, THEREFORE, the Investment Manager and the Sub-Adviser agree as follows:
1. Investment Services. The Sub-Adviser will formulate and implement a
continuous investment program for the Fund conforming to the investment
objective, investment policies and restrictions of the Fund as set forth in the
Prospectus and Statement of Additional Information of the Company as in effect
from time to time (together, the "Registration Statement"), the Articles of
Incorporation and By-laws of the Company, and any investment guidelines or other
instructions received by the Sub-Adviser in writing from the Investment Manager
from time to time. Any amendments to the foregoing documents will not be deemed
effective with respect to the Sub-Adviser until the Sub-Adviser's receipt
thereof. The appropriate officers and employees of the Sub-Adviser will be
available to consult with the Investment Manager, the Company and the Directors
at reasonable times and upon reasonable notice concerning the business of the
Company, including valuations of securities which are not registered for public
sale, not traded on any securities market or otherwise may be deemed illiquid
for purposes of the ICA; provided it is understood that the Sub-Adviser is not
responsible for daily pricing of the Fund's assets.
Subject to the supervision and control of the Investment Manager, which
in turn is subject to the supervision and control of the Directors, the
Sub-Adviser in its discretion will determine which issuers and securities will
be purchased, held, sold or exchanged by the Fund or otherwise represented in
the Fund's investment portfolio from time to time and, subject to the provisions
of paragraph 3 of this Agreement, will place orders with and give instructions
to brokers, dealers and others for all such transactions and cause such
transactions to be executed. Custody of the Fund will be maintained by a
custodian bank (the "Custodian") and the Investment Manager will authorize the
Custodian to honor orders and instructions by employees of the Sub-Adviser
designated by the Sub-Adviser to settle transactions in respect of the Fund. No
assets may be withdrawn from the Fund other than for settlement of transactions
on behalf of the Fund except upon the written authorization of appropriate
officers of the Company who shall have been certified as such by proper
authorities of the Company prior to the withdrawal.
The Sub-Adviser will not be responsible for the provision of
administrative, bookkeeping or accounting services to the Fund except as
specifically provided herein, as required by the ICA or the Advisers Act or as
may be necessary for the Sub-Adviser to supply to the Investment Manager, the
Fund or the Fund's shareholders the information required to be provided by the
Sub-Adviser hereunder. Any records maintained hereunder shall be the property of
the Fund and surrendered promptly upon request.
In furnishing the services under this Agreement, the Sub-Adviser will
comply with and use its best efforts to enable the Fund to conform to the
requirements of: (i) the ICA and the regulations promulgated thereunder; (ii)
Subchapter M of the Internal Revenue Code and the regulations promulgated
thereunder; (iii) other applicable provisions of state or federal law; (iv) the
Articles of Incorporation and By-laws of the Company; (v) policies and
determinations of the Company and the Investment Manager provided to the
Sub-Adviser in writing; (vi) the fundamental and non-fundamental investment
policies and restrictions applicable to the Fund, as set out in the Registration
Statement of the Company in effect, or as such investment policies and
restrictions from time to time may be amended by the Fund's shareholders or the
Directors and communicated to the Sub-Adviser in writing; (vii) the Registration
Statement; and (viii) investment guidelines or other instructions received in
writing from the Investment Manager. Notwithstanding the foregoing, the
Sub-Adviser shall have no responsibility to monitor compliance with limitations
or restrictions for which information from the Investment Manager or its
authorized agents is required to enable the Sub-Adviser to monitor compliance
with such limitations or restrictions unless such information is provided to the
Sub-adviser in writing. The Sub-Adviser shall supervise and monitor the
activities of its representatives, personnel and agents in connection with the
investment program of the Fund.
Nothing in this Agreement shall be implied to prevent the Investment
Manager from engaging other sub-advisers to provide investment advice and other
services to the Fund or to series or portfolios of the Company for which the
Sub-Adviser does not provide such services, or to prevent the Investment Manager
from providing such services itself in relation to the Fund or such other series
or portfolios.
The Sub-Adviser shall be responsible for the preparation and filing of
Schedule 13-G and Form 13-F reflecting the Fund's securities holdings. The
Sub-Adviser shall not be responsible for the preparation or filing of any other
reports required of the Fund by any governmental or regulatory agency, except as
expressly agreed in writing.
2. Investment Advisory Facilities. The Sub-Adviser, at its expense, will
furnish all necessary investment facilities, including salaries of personnel,
required for it to execute its duties hereunder.
3. Execution of Fund Transactions. In connection with the investment and
reinvestment of the assets of the Fund, the Sub-Adviser is responsible for the
selection of broker-dealers to execute purchase and sale transactions for the
Fund in conformity with the policy regarding brokerage as set forth in the
Registration Statement, or as the Directors may determine from time to time, as
well as the negotiation of brokerage commission rates with such executing
broker-dealers. Generally, the Sub-Adviser's primary consideration in placing
Fund investment transactions with broker-dealers for execution will be to
obtain, and maintain the availability of, best execution at the best available
price.
Consistent with this policy, the Sub-Adviser, in selecting
broker-dealers and negotiating brokerage commission rates, will take all
relevant factors into consideration, including, but not limited to: the best
price available; the reliability, integrity and financial condition of the
broker-dealer; the size of and difficulty in executing the order; and the value
of the expected contribution of the broker-dealer to the investment performance
of the Fund on a continuing basis. Subject to such policies and procedures as
the Directors may determine, the Sub-Adviser shall have discretion to effect
investment transactions for the Fund through broker-dealers (including, to the
extent permissible under applicable law, broker-dealers affiliated with the
Sub-Adviser) qualified to obtain best execution of such transactions who provide
brokerage and/or research services, as such services are defined in section
28(e) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and
to cause the Fund to pay any such broker-dealers an amount of commission for
effecting a portfolio investment transaction in excess of the amount of
commission another broker-dealer would have charged for effecting that
transaction, if the Sub-Adviser determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage or research
services provided by such broker-dealer, viewed in terms of either that
particular investment transaction or the Sub-Adviser's overall responsibilities
with respect to the Fund and other accounts as to which the Sub-Adviser
exercises investment discretion (as such term is defined in section 3(a)(35) of
the 1934 Act). Allocation of orders placed by the Sub-Adviser on behalf of the
Fund to such broker-dealers shall be in such amounts and proportions as the
Sub-Adviser shall determine in good faith in conformity with its
responsibilities under applicable laws, rules and regulations. The Sub-Adviser
will submit reports on such allocations to the Investment Manager regularly as
requested by the Investment Manager, in such form as may be mutually agreed to
by the parties hereto, indicating the broker-dealers to whom such allocations
have been made and the basis therefor.
Subject to the foregoing provisions of this paragraph 3, the
Sub-Adviser may also consider sales of shares in the Fund, or may consider or
follow recommendations of the Investment Manager that take such sales into
account, as factors in the selection of broker-dealers to effect the Fund's
investment transactions. Notwithstanding the above, nothing shall require the
Sub-Adviser to use a broker-dealer which provides research services or to use a
particular broker-dealer which the Investment Manager has recommended.
4. Reports by the Sub-Adviser. The Sub-Adviser shall furnish the Investment
Manager monthly, quarterly and annual reports, in such form as may be mutually
agreed to by the parties hereto, concerning transactions and performance of the
Fund, including information required in the Registration Statement or
information necessary for the Investment Manager to review the Fund or discuss
the management of it. The Sub-Adviser shall permit the books and records
maintained with respect to the Fund to be inspected and audited by the Company,
the Investment Manager or their respective agents at all reasonable times during
normal business hours upon reasonable notice. The Sub-Adviser shall immediately
notify both the Investment Manager and the Company of any legal process served
upon it in connection with its activities hereunder, including any legal process
served upon it on behalf of the Investment Manager, the Fund or the Company. The
Sub-Adviser shall promptly notify the Investment Manager of any changes in any
information regarding the Sub-Adviser or the investment program for the Fund as
described in Section 9 of this Agreement.
5. Compensation of the Sub-Adviser. The amount of the compensation to the
Sub-Adviser is computed at an annual rate. The fee shall be payable monthly in
arrears, based on the average daily net assets of the Fund for each month, at
the annual rate set forth in Exhibit A to this Agreement.
In computing the fee to be paid to the Sub-Adviser, the net asset value
of the Fund shall be valued as set forth in the Registration Statement. If this
Agreement is terminated, the payment described herein shall be prorated to the
date of termination.
The Investment Manager and the Sub-Adviser shall not be considered as
partners or participants in a joint venture. The Sub-Adviser will pay its own
expenses for the services to be provided pursuant to this Agreement and will not
be obligated to pay any expenses of the Investment Manager, the Fund or the
Company. Except as otherwise specifically provided herein, the Investment
Manager, the Fund and the Company will not be obligated to pay any expenses of
the Sub-Adviser.
6. Delivery of Documents to the Sub-Adviser. The Investment Manager has
furnished the Sub-Adviser with true, correct and complete copies of each of the
following documents:
(a) The Articles of Incorporation of the Company, as in effect on the date
hereof;
(b) The By-laws of the Company, as in effect on the date hereof;
(c) The resolutions of the Directors approving the engagement of the
Sub-Adviser as portfolio manager of the Fund and approving the form of this
Agreement;
(d) The resolutions of the Directors selecting the Investment Manager as
investment manager to the Fund and approving the form of the Management
Agreement;
(e) The Management Agreement;
(f) The Code of Ethics of the Company and of the Investment Manager, as in
effect on the date hereof; and
(g) A list of companies the securities of which are not to be bought or
sold for the Fund.
The Investment Manager will furnish the Sub-Adviser from time to time
with copies, properly certified or otherwise authenticated, of all amendments of
or supplements to the foregoing, if any. Such amendments or supplements as to
items (a) through (f) above will be provided within 30 days of the time such
materials become available to the Investment Manager. Such amendments or
supplements as to item (g) above will be provided not later than the end of the
business day next following the date such amendments or supplements become known
to the Investment Manager. Any amendments or supplements to the foregoing will
not be deemed effective with respect to the Sub-Adviser until the Sub-Adviser's
receipt thereof. The Investment Manager will provide such additional information
as the Sub-Adviser may reasonably request in connection with the performance of
its duties hereunder.
7. Delivery of Documents to the Investment Manager. The Sub-Adviser has
furnished the Investment Manager with true, correct and complete copies of each
of the following documents:
(a) The Sub-Adviser's Form ADV as filed with the Securities and Exchange
Commission as of the date hereof;
(b) The Sub-Adviser's most recent balance sheet;
(c) Separate lists of persons who the Sub-Adviser wishes to have authorized
to give written and/or oral instructions to Custodians of Company assets for the
Fund; and
(d) The Code of Ethics of the Sub-Adviser, as in effect on the date hereof.
The Sub-Adviser will thereafter furnish the Investment Manager with
copies, properly certified or otherwise authenticated, of all material
amendments of or supplements to items (a), (c) and (d) above within 30 days of
the time such materials become available to the Sub-Adviser. With respect to
item (b) above, the Sub-Adviser will thereafter timely furnish the Investment
Manager with a copy of the document, properly certified or otherwise
authenticated, upon request by the Investment Manager.
Any amendments or supplements to the above documents will not be deemed
effective with respect to the Investment Manager until the Investment Manager's
receipt thereof. The Sub-Adviser will provide additional information as the
Investment Manager may reasonably request in connection with the Sub-Adviser's
performance of its duties under this Agreement.
8. Confidential Treatment. The parties hereto understand that any information or
recommendation supplied by the Sub-Adviser in connection with the performance of
its obligations hereunder is to be regarded as confidential and for use only by
the Investment Manager, the Company or such persons the Investment Manager may
designate in connection with the Fund. The parties also understand that any
information supplied to the Sub-Adviser in connection with the performance of
its obligations hereunder, particularly, but not limited to, any list of
securities which may not be bought or sold for the Fund, is to be regarded as
confidential and for use only by the Sub-Adviser in connection with its
obligation to provide investment advice and other services to the Fund.
9. Representations of the Parties. Each party hereto hereby further represents
and warrants to the other that: (i) it is registered as an investment adviser
under the Advisers Act and is registered or licensed as an investment adviser
under the laws of all jurisdictions in which its activities require it to be so
registered or licensed; and (ii) it will use its reasonable best efforts to
maintain each such registration or license in effect at all times during the
term of this Agreement; and (iii) it will promptly notify the other if it ceases
to be so registered, if its registration is suspended for any reason, or if it
is notified by any regulatory organization or court of competent jurisdiction
that it should show cause why its registration should not be suspended or
terminated; and (iv) it is duly authorized to enter into this Agreement and to
perform its obligations hereunder.
The Sub-Adviser further represents that it has adopted a written Code
of Ethics in compliance with Rule 17j-1(b) of the ICA. The Sub-Adviser shall be
subject to such Code of Ethics and shall not be subject to any other Code of
Ethics, including the Investment Manager's Code of Ethics, unless specifically
adopted by the Sub-Adviser. The Investment Manager further represents and
warrants to the Sub-Adviser that (i) the appointment of the Sub-Adviser by the
Investment Manager has been duly authorized and (ii) it has acted and will
continue to act in connection with the transactions contemplated hereby, and the
transactions contemplated hereby are, in conformity with the ICA, the Company's
governing documents and other applicable law.
10. Liability. In the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard for its obligations hereunder, the Sub-Adviser
shall not be liable to the Company, the Fund, the Fund's shareholders or the
Investment Manager for any act or omission resulting in any loss suffered by the
Company, the Fund, the Fund's shareholders or the Investment Manager in
connection with any service to be provided herein. The Federal laws impose
responsibilities under certain circumstances on persons who act in good faith,
and therefore, nothing herein shall in any way constitute a waiver or limitation
of any rights which the Company, the Fund or the Investment Manager may have
under applicable law.
11. Other Activities of the Sub-Adviser. The Investment Manager agrees that the
Sub-Adviser and any of its partners or employees, and persons affiliated with
the Sub-Adviser or with any such partner or employee, may render investment
management or advisory services to other investors and institutions, and that
such investors and institutions may own, purchase or sell, securities or other
interests in property that are the same as, similar to, or different from those
which are selected for purchase, holding or sale for the Fund. The Investment
Manager further acknowledges that the Sub-Adviser shall be in all respects free
to take action with respect to investments in securities or other interests in
property that are the same as, similar to, or different from those selected for
purchase, holding or sale for the Fund. The Investment Manager understands that
the Sub-Adviser shall not favor or disfavor any of the Sub-Adviser's clients or
class of clients in the allocation of investment opportunities, so that to the
extent practical, such opportunities will be allocated among the Sub-Adviser's
clients over a period of time on a fair and equitable basis. Nothing in this
Agreement shall impose upon the Sub-Adviser any obligation (i) to purchase or
sell, or recommend for purchase or sale, for the Fund any security which the
Sub-Adviser, its partners, affiliates or employees may purchase or sell for the
Sub-Adviser or such partner's, affiliate's or employee's own accounts or for the
account of any other client of the Sub-Adviser, advisory or otherwise, or (ii)
to abstain from the purchase or sale of any security for the Sub-Adviser's other
clients, advisory or otherwise, which the Investment Manager has placed on the
list provided pursuant to paragraph 6(g) of this Agreement.
12. Continuance and Termination. This Agreement shall remain in full force and
effect for one year from the date hereof, and is renewable annually thereafter
by specific approval of the Directors or by vote of a majority of the
outstanding voting securities of the Fund. Any such renewal shall be approved by
the vote of a majority of the Directors who are not interested persons under the
ICA, cast in person at a meeting called for the purpose of voting on such
renewal. This Agreement may be terminated without penalty at any time by the
Investment Manager or the Sub-Adviser upon 60 days written notice, and will
automatically terminate in the event of (i) its "assignment" by either party to
this Agreement, as such term is defined in the ICA, subject to such exemptions
as may be granted by the Securities and Exchange Commission by rule, regulation
or order, or (ii) upon termination of the Management Agreement, provided the
Sub-Adviser has received prior written notice thereof.
13. Notification. The Sub-Adviser will notify the Investment Manager within a
reasonable time of any change in the personnel of the Sub-Adviser with
responsibility for making investment decisions in relation to the Fund (the
"Portfolio Manager(s)") or who have been authorized to give instructions to the
Custodian. The Sub-adviser shall be responsible for reasonable out-of-pocket
costs and expenses incurred by the Investment Manager, the Fund or the Company
to print a supplement to the Company's prospectus to reflect a change in
Portfolio Manager(s) or otherwise to comply with the ICA, the Securities Act of
1933, as amended (the "1933 Act") or any other applicable statute, law, rule or
regulation, as a result of such change, and to distribute such supplement to the
existing and prospective shareholders of the Fund; provided, however, that the
Sub-Adviser shall not be responsible for such costs and expenses where the
change in Portfolio Manager(s) reflects the termination of employment of the
Portfolio Manager(s) with the Sub-Adviser and its affiliates or is the result of
a request by the Investment Manager or is due to other circumstances beyond the
Sub-Adviser's control.
Any notice, instruction or other communication required or contemplated
by this Agreement shall be in writing. All such communications shall be
addressed to the recipient at the address set forth below, provided that either
party may, by notice, designate a different recipient and/or address for such
party.
Investment Manager: American Skandia Investment Services, Incorporated
One Corporate Drive
Shelton, Connecticut 06484
Attention: Thomas M. Mazzaferro
President & Chief Operating Officer
Sub-Adviser: American Century Investment Management, Inc.
4500 Main Street
Kansas City, Missouri 64111
Attention: General Counsel
Company: American Skandia Advisor Funds, Inc.
One Corporate Drive
Shelton, Connecticut 06484
Attention: Eric C. Freed, Esq.
14. Indemnification. The Sub-Adviser agrees to indemnify and hold harmless the
Investment Manager, any affiliated person within the meaning of Section 2(a)(3)
of the ICA ("affiliated person") of the Investment Manager and each person, if
any who, within the meaning of Section 15 of the 1933 Act, controls
("controlling person") the Investment Manager, against any and all losses,
claims, damages, liabilities or litigation (including reasonable legal and other
expenses), to which the Investment Manager or such affiliated person or
controlling person of the Investment Manager may become subject under the 1933
Act, the ICA, the Advisers Act, under any other statute, law, rule or regulation
at common law or otherwise, arising out of the Sub-Adviser's responsibilities
hereunder (1) to the extent of and as a result of the willful misconduct, bad
faith, or gross negligence by the Sub-Adviser, any of the Sub-Adviser's
employees or representatives or any affiliate of or any person acting on behalf
of the Sub-Adviser, or (2) as a result of any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, including
any amendment thereof or any supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement therein not misleading, if such a statement or
omission was made in reliance upon and in conformity with written information
furnished by the Sub-Adviser to the Investment Manager, the Fund, the Company or
any affiliated person of the Investment Manager, the Fund or the Company or upon
verbal information confirmed by the Sub-Adviser in writing, or (3) to the extent
of, and as a result of, the failure of the Sub-Adviser to execute, or cause to
be executed, portfolio investment transactions according to the requirements of
the ICA; provided, however, that in no case is the Sub-Adviser's indemnity in
favor of the Investment Manager or any affiliated person or controlling person
of the Investment Manager deemed to protect such person against any liability to
which any such person would otherwise be subject by reason of willful
misconduct, bad faith or gross negligence in the performance of its duties or by
reason of its reckless disregard of its obligations and duties under this
Agreement.
The Investment Manager agrees to indemnify and hold harmless the
Sub-Adviser, any affiliated person of the Sub-Adviser and each controlling
person of the Sub-Adviser, if any, against any and all losses, claims, damages,
liabilities or litigation (including reasonable legal and other expenses), to
which the Sub-Adviser or such affiliated person or controlling person of the
Sub-Adviser may become subject under the 1933 Act, the ICA, the Advisers Act,
under any other statute, law, rule or regulation, at common law or otherwise,
arising out of the Investment Manager's responsibilities as investment manager
of the Fund (1) to the extent of and as a result of the willful misconduct, bad
faith, or gross negligence by the Investment Manager, any of the Investment
Manager's employees or representatives or any affiliate of or any person acting
on behalf of the Investment Manager, or (2) as a result of any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement, including any amendment thereof or any supplement thereto or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statement therein not misleading, if
such a statement or omission was made other than in reliance upon and in
conformity with written information furnished by the Sub-Adviser, or any
affiliated person of the Sub-Adviser or other than upon verbal information
confirmed by the Sub-Adviser in writing; provided, however, that in no case is
the Investment Manager's indemnity in favor of the Sub-Adviser or any affiliated
person or controlling person of the Sub-Adviser deemed to protect such person
against any liability to which any such person would otherwise be subject by
reason of willful misconduct, bad faith or gross negligence in the performance
of its duties or by reason of its reckless disregard of its obligations and
duties under this Agreement. It is agreed that the Investment Manager's
indemnification obligations under this Section 14 will extend to expenses and
costs (including reasonable attorneys fees) incurred by the Sub-Adviser as a
result of any litigation brought by the Investment Manager alleging the
Sub-Adviser's failure to perform its obligations and duties in the manner
required under this Agreement unless judgment is rendered for the Investment
Manager.
15. Conflict of Laws. The provisions of this Agreement shall be subject to all
applicable statutes, laws, rules and regulations, including, without limitation,
the applicable provisions of the ICA and rules and regulations promulgated
thereunder. To the extent that any provision contained herein conflicts with any
such applicable provision of law or regulation, the latter shall control. The
terms and provisions of this Agreement shall be interpreted and defined in a
manner consistent with the provisions and definitions of the ICA. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall continue in
full force and effect and shall not be affected by such invalidity.
16. Amendments, Waivers, etc. Provisions of this Agreement may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of the change, waiver, discharge or termination
is sought. This Agreement (including Exhibit A hereto) may be amended at any
time by written mutual consent of the parties, subject to the requirements of
the ICA and rules and regulations promulgated and orders granted thereunder.
17. Governing State Law. This Agreement is made under, and shall be
governed by and construed in accordance with, the laws of the State of
Connecticut.
18. Severability. Each provision of this Agreement is intended to be
severable. If any provision of this Agreement is held to be illegal or made
invalid by court decision, statute, rule or otherwise, such illegality or
invalidity will not affect the validity or enforceability of the remainder of
this Agreement.
The effective date of this agreement is July 15, 1997.
FOR THE INVESTMENT MANAGER: FOR THE SUB-ADVISER:
- ----------------------------------- -----------------------------------
Date: ____________________________ Date: ____________________________
Attest: ____________________________ Attest: ____________________________
18615-1 (07/97)
<PAGE>
American Skandia Advisor Funds, Inc.
ASAF American Century Strategic Balanced Fund
Sub-Advisory Agreement
EXHIBIT A
An annual rate of .50% of the portion of the average daily net assets
of the Fund not in excess of $50 million; plus .45% of the portion over $50
million.
AMERICAN SKANDIA ADVISOR FUNDS, INC.
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is between American Skandia Investment Services, Incorporated
(the "Investment Manager"), a Connecticut corporation, and Federated Investment
Counseling (the "Sub-Adviser"), a Delaware business trust.
W I T N E S S E T H
WHEREAS, American Skandia Advisor Funds, Inc. (the "Company") is a Maryland
corporation organized with one or more series of shares and is registered as an
open-end management investment company under the Investment Company Act of 1940,
as amended (the "ICA"); and
WHEREAS, the Investment Manager and the Sub-Adviser each is an investment
adviser registered under the Investment Advisers Act of 1940, as amended (the
"Advisers Act"); and
WHEREAS, the Board of Directors of the Company (the "Directors") have engaged
the Investment Manager to act as investment manager for the ASAF Federated High
Yield Bond Fund (the "Fund"), one series of the Company, under the terms of a
management agreement, dated June 1, 1997, with the Company (the "Management
Agreement"); and
WHEREAS, the Investment Manager, acting pursuant to the Management Agreement,
wishes to engage the Sub-Adviser, and the Directors have approved the engagement
of the Sub-Adviser, to provide investment advice and other investment services
set forth below.
NOW, THEREFORE, the Investment Manager and the Sub-Adviser agree as follows:
1. Investment Services. The Sub-Adviser will formulate and implement a
continuous investment program for the Fund conforming to the investment
objective, investment policies and restrictions of the Fund as set forth in the
Prospectus and Statement of Additional Information of the Company as in effect
from time to time (together, the "Registration Statement"), the Articles of
Incorporation and By-laws of the Company, and any investment guidelines or other
instructions received by the Sub-Adviser in writing from the Investment Manager
from time to time. Any amendments to the foregoing documents will not be deemed
effective with respect to the Sub-Adviser until the Sub-Adviser's receipt
thereof. The appropriate officers and employees of the Sub-Adviser will be
available to consult with the Investment Manager, the Company and the Directors
at reasonable times and upon reasonable notice concerning the business of the
Company, including valuations of securities for which prices are not readily
available; provided it is understood that the Sub-Adviser is not responsible for
daily pricing of the Fund's assets and that the Sub-Adviser and the Investment
Manager will rely on the pricing service selected by the Investment Manager and
the Fund's Administrator for the pricing of Fund assets.
Subject to the supervision and control of the Investment Manager, which
in turn is subject to the supervision and control of the Directors, the
Sub-Adviser in its discretion will determine which issuers and securities will
be purchased, held, sold or exchanged by the Fund or otherwise represented in
the Fund's investment portfolio from time to time and, subject to the provisions
of paragraph 3 of this Agreement, will place orders with and give instructions
to brokers, dealers and others for all such transactions and cause such
transactions to be executed. Custody of the Fund will be maintained by a
custodian bank (the "Custodian") and the Investment Manager will authorize the
Custodian to honor orders and instructions by employees of the Sub-Adviser
designated by the Sub-Adviser to settle transactions in respect of the Fund. No
assets may be withdrawn from the Fund other than for settlement of transactions
on behalf of the Fund except upon the written authorization of appropriate
officers of the Company who shall have been certified as such by proper
authorities of the Company prior to the withdrawal.
The Sub-Adviser will not be responsible for the provision of
administrative, bookkeeping or accounting services to the Fund except as
specifically provided herein, as required by the ICA or the Advisers Act or as
may be necessary for the Sub-Adviser to supply to the Investment Manager, the
Fund or the Fund's shareholders the information required to be provided by the
Sub-Adviser hereunder. Any records maintained hereunder shall be the property of
the Fund and surrendered promptly upon request.
In furnishing the services under this Agreement, the Sub-Adviser will
comply with and use its best efforts to enable the Fund to conform to the
requirements of: (i) the ICA and the regulations promulgated thereunder; (ii)
Subchapter M of the Internal Revenue Code and the regulations promulgated
thereunder; (iii) other applicable provisions of state or federal law; (iv) the
Articles of Incorporation and By-laws of the Company; (v) policies and
determinations of the Company and the Investment Manager provided to the
Sub-Adviser in writing; (vi) the fundamental and non-fundamental investment
policies and restrictions applicable to the Fund, as set out in the Registration
Statement of the Company in effect, or as such investment policies and
restrictions from time to time may be amended by the Fund's shareholders or the
Directors and communicated to the Sub-Adviser in writing; (vii) the Registration
Statement; and (viii) investment guidelines or other instructions received in
writing from the Investment Manager. Notwithstanding the foregoing, the
Sub-Adviser shall have no responsibility to monitor compliance with limitations
or restrictions for which information from the Investment Manager or its
authorized agents is required to enable the Sub-Adviser to monitor compliance
with such limitations or restrictions unless such information is provided to the
Sub-adviser in writing. The Sub-Adviser shall supervise and monitor the
activities of its representatives, personnel and agents in connection with the
investment program of the Fund.
Nothing in this Agreement shall be implied to prevent the Investment
Manager from engaging other sub-advisers to provide investment advice and other
services to the Fund or to series or portfolios of the Company for which the
Sub-Adviser does not provide such services, or to prevent the Investment Manager
from providing such services itself in relation to the Fund or such other series
or portfolios.
The Sub-Adviser shall be responsible for the preparation and filing of
Schedule 13-G and Form 13-F reflecting the Fund's securities holdings. The
Sub-Adviser shall not be responsible for the preparation or filing of any other
reports required of the Fund by any governmental or regulatory agency, except as
expressly agreed in writing.
2. Investment Advisory Facilities. The Sub-Adviser, at its expense, will
furnish all necessary investment facilities, including salaries of personnel,
required for it to execute its duties hereunder.
3. Execution of Fund Transactions. In connection with the investment and
reinvestment of the assets of the Fund, the Sub-Adviser is responsible for the
selection of broker-dealers to execute purchase and sale transactions for the
Fund in conformity with the policy regarding brokerage as set forth in the
Registration Statement, or as the Directors may determine from time to time, as
well as the negotiation of brokerage commission rates with such executing
broker-dealers. Generally, the Sub-Adviser's primary consideration in placing
Fund investment transactions with broker-dealers for execution will be to
obtain, and maintain the availability of, best execution at the best available
price.
Consistent with this policy, the Sub-Adviser, in selecting
broker-dealers and negotiating brokerage commission rates, will take all
relevant factors into consideration, including, but not limited to: the best
price available; the reliability, integrity and financial condition of the
broker-dealer; the size of and difficulty in executing the order; and the value
of the expected contribution of the broker-dealer to the investment performance
of the Fund on a continuing basis. Subject to such policies and procedures as
the Directors may determine, the Sub-Adviser shall have discretion to effect
investment transactions for the Fund through broker-dealers (including, to the
extent permissible under applicable law, broker-dealers affiliated with the
Sub-Adviser) qualified to obtain best execution of such transactions who provide
brokerage and/or research services, as such services are defined in section
28(e) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and
to cause the Fund to pay any such broker-dealers an amount of commission for
effecting a portfolio investment transaction in excess of the amount of
commission another broker-dealer would have charged for effecting that
transaction, if the Sub-Adviser determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage or research
services provided by such broker-dealer, viewed in terms of either that
particular investment transaction or the Sub-Adviser's overall responsibilities
with respect to the Fund and other accounts as to which the Sub-Adviser
exercises investment discretion (as such term is defined in section 3(a)(35) of
the 1934 Act). Allocation of orders placed by the Sub-Adviser on behalf of the
Fund to such broker-dealers shall be in such amounts and proportions as the
Sub-Adviser shall determine in good faith in conformity with its
responsibilities under applicable laws, rules and regulations. The Sub-Adviser
will submit reports on such allocations to the Investment Manager regularly as
requested by the Investment Manager, in such form as may be mutually agreed to
by the parties hereto, indicating the broker-dealers to whom such allocations
have been made and the basis therefor.
Subject to the foregoing provisions of this paragraph 3, the
Sub-Adviser may also consider sales of shares in the Fund, or may consider or
follow recommendations of the Investment Manager that take such sales into
account, as factors in the selection of broker-dealers to effect the Fund's
investment transactions. Notwithstanding the above, nothing shall require the
Sub-Adviser to use a broker-dealer which provides research services or to use a
particular broker-dealer which the Investment Manager has recommended.
4. Reports by the Sub-Adviser. The Sub-Adviser shall furnish the Investment
Manager monthly, quarterly and annual reports, in such form as may be mutually
agreed to by the parties hereto, concerning transactions and performance of the
Fund, including information required in the Registration Statement or
information necessary for the Investment Manager to review the Fund or discuss
the management of it. The Sub-Adviser shall permit the books and records
maintained with respect to the Fund to be inspected and audited by the Company,
the Investment Manager or their respective agents at all reasonable times during
normal business hours upon reasonable notice. The Sub-Adviser shall immediately
notify both the Investment Manager and the Company of any legal process served
upon it in connection with its activities hereunder, including any legal process
served upon it on behalf of the Investment Manager, the Fund or the Company. The
Sub-Adviser shall promptly notify the Investment Manager of any changes in any
information regarding the Sub-Adviser or the investment program for the Fund as
described in Section 9 of this Agreement.
5. Compensation of the Sub-Adviser. The amount of the compensation to the
Sub-Adviser is computed at an annual rate. The fee shall be payable monthly in
arrears, based on the average daily net assets of the Fund for each month, at
the annual rate set forth in Exhibit A to this Agreement.
In computing the fee to be paid to the Sub-Adviser, the net asset value
of the Fund shall be valued as set forth in the Registration Statement. If this
Agreement is terminated, the payment described herein shall be prorated to the
date of termination.
The Investment Manager and the Sub-Adviser shall not be considered as
partners or participants in a joint venture. The Sub-Adviser will pay its own
expenses for the services to be provided pursuant to this Agreement and will not
be obligated to pay any expenses of the Investment Manager, the Fund or the
Company. Except as otherwise specifically provided herein, the Investment
Manager, the Fund and the Company will not be obligated to pay any expenses of
the Sub-Adviser.
6. Delivery of Documents to the Sub-Adviser. The Investment Manager has
furnished the Sub-Adviser with true, correct and complete copies of each of the
following documents:
(a) The Articles of Incorporation of the Company, as in effect on the date
hereof;
(b) The By-laws of the Company, as in effect on the date hereof;
(c) The resolutions of the Directors approving the engagement of the
Sub-Adviser as portfolio manager of the Fund and approving the form of this
Agreement;
(d) The resolutions of the Directors selecting the Investment Manager as
investment manager to the Fund and approving the form of the Management
Agreement;
(e) The Management Agreement;
(f) The Code of Ethics of the Company and of the Investment Manager, as in
effect on the date hereof; and
(g) A list of companies the securities of which are not to be bought or
sold for the Fund.
The Investment Manager will furnish the Sub-Adviser from time to time
with copies, properly certified or otherwise authenticated, of all amendments of
or supplements to the foregoing, if any. Such amendments or supplements as to
items (a) through (f) above will be provided within 30 days of the time such
materials become available to the Investment Manager. Such amendments or
supplements as to item (g) above will be provided not later than the end of the
business day next following the date such amendments or supplements become known
to the Investment Manager. Any amendments or supplements to the foregoing will
not be deemed effective with respect to the Sub-Adviser until the Sub-Adviser's
receipt thereof. The Investment Manager will provide such additional information
as the Sub-Adviser may reasonably request in connection with the performance of
its duties hereunder.
7. Delivery of Documents to the Investment Manager. The Sub-Adviser has
furnished the Investment Manager with true, correct and complete copies of each
of the following documents:
(a) The Sub-Adviser's Form ADV as filed with the Securities and Exchange
Commission as of the date hereof;
(b) The Sub-Adviser's most recent balance sheet;
(c) Separate lists of persons who the Sub-Adviser wishes to have authorized
to give written and/or oral instructions to Custodians of Company assets for the
Fund; and
(d) The Code of Ethics of the Sub-Adviser, as in effect on the date hereof.
The Sub-Adviser will furnish the Investment Manager from time to time
with copies, properly certified or otherwise authenticated, of all amendments of
or supplements to the foregoing, if any. Such amendments or supplements will be
provided within 30 days of the time such materials become available to the
Sub-Adviser. Any amendments or supplements to the foregoing will not be deemed
effective with respect to the Investment Manager until the Investment Manager's
receipt thereof. The Sub-Adviser will provide additional information as the
Investment Manager may reasonably request in connection with the Sub-Adviser's
performance of its duties under this Agreement.
8. Confidential Treatment. The parties hereto understand that any information or
recommendation supplied by the Sub-Adviser in connection with the performance of
its obligations hereunder is to be regarded as confidential and for use only by
the Investment Manager, the Company or such persons the Investment Manager may
designate in connection with the Fund. The parties also understand that any
information supplied to the Sub-Adviser in connection with the performance of
its obligations hereunder, particularly, but not limited to, any list of
securities which may not be bought or sold for the Fund, is to be regarded as
confidential and for use only by the Sub-Adviser in connection with its
obligation to provide investment advice and other services to the Fund.
9. Representations of the Parties. Each party hereto hereby further represents
and warrants to the other that: (i) it is registered as an investment adviser
under the Advisers Act and is registered or licensed as an investment adviser
under the laws of all jurisdictions in which its activities require it to be so
registered or licensed; and (ii) it will use its reasonable best efforts to
maintain each such registration or license in effect at all times during the
term of this Agreement; and (iii) it will promptly notify the other if it ceases
to be so registered, if its registration is suspended for any reason, or if it
is notified by any regulatory organization or court of competent jurisdiction
that it should show cause why its registration should not be suspended or
terminated; and (iv) it is duly authorized to enter into this Agreement and to
perform its obligations hereunder.
The Sub-Adviser further represents that it has adopted a written Code
of Ethics in compliance with Rule 17j-1(b) of the ICA. The Sub-Adviser shall be
subject to such Code of Ethics and shall not be subject to any other Code of
Ethics, including the Investment Manager's Code of Ethics, unless specifically
adopted by the Sub-Adviser. The Investment Manager further represents and
warrants to the Sub-Adviser that (i) the appointment of the Sub-Adviser by the
Investment Manager has been duly authorized and (ii) it has acted and will
continue to act in connection with the transactions contemplated hereby, and the
transactions contemplated hereby are, in conformity with the ICA, the Company's
governing documents and other applicable law.
10. Liability. In the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard for its obligations hereunder, the Sub-Adviser
shall not be liable to the Company, the Fund, the Fund's shareholders or the
Investment Manager for any act or omission resulting in any loss suffered by the
Company, the Fund, the Fund's shareholders or the Investment Manager in
connection with any service to be provided herein. The Federal laws impose
responsibilities under certain circumstances on persons who act in good faith,
and therefore, nothing herein shall in any way constitute a waiver or limitation
of any rights which the Company, the Fund or the Investment Manager may have
under applicable law.
The Investment Manager is hereby expressly put on notice of the
provisions in the Declaration of Trust of the Sub-Adviser providing that neither
the shareholders nor the trustees, officers or other agents of the Sub-Adviser
shall be liable under any written agreement made on behalf of the Sub-Adviser,
and that other parties to any such agreement shall look solely to the assets of
the Sub-Adviser for the payment of any claim thereunder or for the performance
thereof, except that the trustees and officers of the Sub-Adviser shall be
personally liable for their willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of the office of
trustee or officer, as the case may be, and for nothing else.
11. Other Activities of the Sub-Adviser. The Investment Manager agrees that the
Sub-Adviser and any of its partners or employees, and persons affiliated with
the Sub-Adviser or with any such partner or employee, may render investment
management or advisory services to other investors and institutions, and that
such investors and institutions may own, purchase or sell, securities or other
interests in property that are the same as, similar to, or different from those
which are selected for purchase, holding or sale for the Fund. The Investment
Manager further acknowledges that the Sub-Adviser shall be in all respects free
to take action with respect to investments in securities or other interests in
property that are the same as, similar to, or different from those selected for
purchase, holding or sale for the Fund. The Investment Manager understands that
the Sub-Adviser shall not favor or disfavor any of the Sub-Adviser's clients or
class of clients in the allocation of investment opportunities, so that to the
extent practical, such opportunities will be allocated among the Sub-Adviser's
clients over a period of time on a fair and equitable basis. Nothing in this
Agreement shall impose upon the Sub-Adviser any obligation (i) to purchase or
sell, or recommend for purchase or sale, for the Fund any security which the
Sub-Adviser, its partners, affiliates or employees may purchase or sell for the
Sub-Adviser or such partner's, affiliate's or employee's own accounts or for the
account of any other client of the Sub-Adviser, advisory or otherwise, or (ii)
to abstain from the purchase or sale of any security for the Sub-Adviser's other
clients, advisory or otherwise, which the Investment Manager has placed on the
list provided pursuant to paragraph 6(g) of this Agreement.
12. Continuance and Termination. This Agreement shall remain in full force and
effect for one year from the date hereof, and is renewable annually thereafter
by specific approval of the Directors or by vote of a majority of the
outstanding voting securities of the Fund. Any such renewal shall be approved by
the vote of a majority of the Directors who are not interested persons under the
ICA, cast in person at a meeting called for the purpose of voting on such
renewal. This Agreement may be terminated without penalty at any time by the
Investment Manager or the Sub-Adviser upon 60 days written notice, and will
automatically terminate in the event of (i) its "assignment" by either party to
this Agreement, as such term is defined in the ICA, subject to such exemptions
as may be granted by the Securities and Exchange Commission by rule, regulation
or order, or (ii) upon termination of the Management Agreement, provided the
Sub-Adviser has received prior written notice thereof.
13. Notification. The Sub-Adviser will notify the Investment Manager within a
reasonable time of any change in the personnel of the Sub-Adviser with
responsibility for making investment decisions in relation to the Fund (the
"Portfolio Manager(s)") or who have been authorized to give instructions to the
Custodian. The Sub-adviser shall be responsible for reasonable out-of-pocket
costs and expenses incurred by the Investment Manager, the Fund or the Company
to amend or supplement the Company's prospectus to reflect a change in Portfolio
Manager(s) or otherwise to comply with the ICA, the Securities Act of 1933, as
amended (the "1933 Act") or any other applicable statute, law, rule or
regulation, as a result of such change; provided, however, that the Sub-Adviser
shall not be responsible for such costs and expenses where the change in
Portfolio Manager(s) reflects the termination of employment of the Portfolio
Manager(s) with the Sub-Adviser and its affiliates or is the result of a request
by the Investment Manager or is due to other circumstances beyond the
Sub-Adviser's control.
Any notice, instruction or other communication required or contemplated
by this Agreement shall be in writing. All such communications shall be
addressed to the recipient at the address set forth below, provided that either
party may, by notice, designate a different recipient and/or address for such
party.
Investment Manager: American Skandia Investment Services, Incorporated
One Corporate Drive
Shelton, Connecticut 06484
Attention: Thomas M. Mazzaferro
President & Chief Operating Officer
<PAGE>
Sub-Adviser: Federated Investment Counseling
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
Attention: Tammy Edwards
Company: American Skandia Advisor Funds, Inc.
One Corporate Drive
Shelton, Connecticut 06484
Attention: Eric C. Freed, Esq.
14. Indemnification. The Sub-Adviser agrees to indemnify and hold harmless the
Investment Manager, any affiliated person within the meaning of Section 2(a)(3)
of the ICA ("affiliated person") of the Investment Manager and each person, if
any who, within the meaning of Section 15 of the 1933 Act, controls
("controlling person") the Investment Manager, against any and all losses,
claims, damages, liabilities or litigation (including reasonable legal and other
expenses), to which the Investment Manager or such affiliated person or
controlling person of the Investment Manager may become subject under the 1933
Act, the ICA, the Advisers Act, under any other statute, law, rule or regulation
at common law or otherwise, arising out of the Sub-Adviser's responsibilities
hereunder (1) to the extent of and as a result of the willful misconduct, bad
faith, or gross negligence by the Sub-Adviser, any of the Sub-Adviser's
employees or representatives or any affiliate of or any person acting on behalf
of the Sub-Adviser, or (2) as a result of any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, including
any amendment thereof or any supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement therein not misleading, if such a statement or
omission was made in reliance upon and in conformity with written information
furnished by the Sub-Adviser to the Investment Manager, the Fund, the Company or
any affiliated person of the Investment Manager, the Fund or the Company or upon
verbal information confirmed by the Sub-Adviser in writing, or (3) to the extent
of, and as a result of, the failure of the Sub-Adviser to execute, or cause to
be executed, portfolio investment transactions according to the requirements of
the ICA; provided, however, that in no case is the Sub-Adviser's indemnity in
favor of the Investment Manager or any affiliated person or controlling person
of the Investment Manager deemed to protect such person against any liability to
which any such person would otherwise be subject by reason of willful
misconduct, bad faith or gross negligence in the performance of its duties or by
reason of its reckless disregard of its obligations and duties under this
Agreement.
The Investment Manager agrees to indemnify and hold harmless the
Sub-Adviser, any affiliated person of the Sub-Adviser and each controlling
person of the Sub-Adviser, if any, against any and all losses, claims, damages,
liabilities or litigation (including reasonable legal and other expenses), to
which the Sub-Adviser or such affiliated person or controlling person of the
Sub-Adviser may become subject under the 1933 Act, the ICA, the Advisers Act,
under any other statute, law, rule or regulation, at common law or otherwise,
arising out of the Investment Manager's responsibilities as investment manager
of the Fund (1) to the extent of and as a result of the willful misconduct, bad
faith, or gross negligence by the Investment Manager, any of the Investment
Manager's employees or representatives or any affiliate of or any person acting
on behalf of the Investment Manager, or (2) as a result of any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement, including any amendment thereof or any supplement thereto or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statement therein not misleading, if
such a statement or omission was made other than in reliance upon and in
conformity with written information furnished by the Sub-Adviser, or any
affiliated person of the Sub-Adviser or other than upon verbal information
confirmed by the Sub-Adviser in writing; provided, however, that in no case is
the Investment Manager's indemnity in favor of the Sub-Adviser or any affiliated
person or controlling person of the Sub-Adviser deemed to protect such person
against any liability to which any such person would otherwise be subject by
reason of willful misconduct, bad faith or gross negligence in the performance
of its duties or by reason of its reckless disregard of its obligations and
duties under this Agreement. It is agreed that the Investment Manager's
indemnification obligations under this Section 14 will extend to expenses and
costs (including reasonable attorneys fees) incurred by the Sub-Adviser as a
result of any litigation brought by the Investment Manager alleging the
Sub-Adviser's failure to perform its obligations and duties in the manner
required under this Agreement unless judgment is rendered for the Investment
Manager.
15. Conflict of Laws. The provisions of this Agreement shall be subject to all
applicable statutes, laws, rules and regulations, including, without limitation,
the applicable provisions of the ICA and rules and regulations promulgated
thereunder. To the extent that any provision contained herein conflicts with any
such applicable provision of law or regulation, the latter shall control. The
terms and provisions of this Agreement shall be interpreted and defined in a
manner consistent with the provisions and definitions of the ICA. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall continue in
full force and effect and shall not be affected by such invalidity.
16. Amendments, Waivers, etc. Provisions of this Agreement may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of the change, waiver, discharge or termination
is sought. This Agreement (including Exhibit A hereto) may be amended at any
time by written mutual consent of the parties, subject to the requirements of
the ICA and rules and regulations promulgated and orders granted thereunder.
17. Governing State Law. This Agreement is made under, and shall be
governed by and construed in accordance with, the laws of the State of
Connecticut.
18. Severability. Each provision of this Agreement is intended to be
severable. If any provision of this Agreement is held to be illegal or made
invalid by court decision, statute, rule or otherwise, such illegality or
invalidity will not affect the validity or enforceability of the remainder of
this Agreement.
The effective date of this agreement is July 15, 1997.
FOR THE INVESTMENT MANAGER: FOR THE SUB-ADVISER:
- ----------------------------------- -----------------------------------
Date: ____________________________ Date: ____________________________
Attest: ____________________________ Attest:____________________________
18617-1 (07/97)
<PAGE>
American Skandia Advisor Funds, Inc.
ASAF Federated High Yield Bond Fund
Sub-Advisory Agreement
EXHIBIT A
An annual rate of .25% of the portion of the average daily net assets
of the Fund not in excess of $200 million; plus .20% of the portion over $200
million.
American Skandia
Mutual Fund Sales Agreement
This Mutual Fund Sales Agreement ("Agreement") is made by and between American
Skandia Marketing, Incorporated ("ASM, Inc.", "Principal Underwriter", "us" or
"we"), a broker-dealer registered with the Securities and Exchange Commission
("SEC") under the Securities and Exchange Act of 1934, as amended (the "1934
Act") and a member of the National Association of Securities Dealers, Inc.
("NASD") and ________________________, who is also a broker-dealer registered
with the SEC under the 1934 Act and a member of the NASD or is a "bank" as
defined in Section 3(a)(6) of the 1934 Act ("Bank"), and at the time of each
transaction subject to this Agreement, is not required to register as a
broker-dealer under the 1934 Act (both referred to herein as a "Broker-Dealer").
WHEREAS, each company, as listed in a schedule hereto (each a "Company"): is
registered as an investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"); is comprised of the separate classes and portfolios
listed on a schedule hereto (as the same may be amended from time to time by us
to add or delete portfolios and/or classes of shares) and referred to
collectively as the "Funds" or individually as the "Fund"; and has entered into
an agreement naming ASM, Inc. as the Principal Underwriter and general
distributor for the shares; and
WHEREAS, ASM, Inc. wishes to enter into agreements with Broker-Dealers whereby
registered representatives who are associated with Broker-Dealer, and who are
NASD registered, or are exempt from such registration, and are duly licensed
under applicable state law, solicit sales of shares of the Funds; and
WHEREAS, Broker-Dealer, which is a member in good standing of the NASD or is not
eligible or required to be a member, wishes to enter into an agreement to
distribute shares of the Funds; and
WHEREAS, ASM, Inc. acknowledges and Broker-Dealer agrees to provide certain
supervisory and administrative services to registered representatives who are
associated with the Broker-Dealer in connection with the solicitation, service
and sale of the Funds.
NOW THEREFORE, in consideration of the mutual covenants contained in this
Agreement, the parties agree to the following:
1. Regulation: You agree to comply with all applicable provisions of the
1940 Act, the Securities Act of 1933, as amended (the "1933 Act"), the
1934 Act, and all the rules and regulations of the SEC, NASD, state
securities laws, applicable banking laws, rules and regulations and
fiduciary obligations under state law, each as applicable. To the
extent that a Broker-Dealer is a member of the NASD, the NASD Rules of
Fair Practice are incorporated herein as if set forth in full.
2. Orders: An order for shares of any class and any Fund received from
you will be confirmed only at the appropriate offering price
applicable to that order, as described in each Company's then current
Prospectus. The procedure relating to orders and the handling thereof
will be subject to instructions released by us from time to time.
Orders should be transmitted to the Fund's shareholder servicing agent
("Transfer Agent"). Broker-Dealer or his customer may, however, mail a
completed application with a check payable to the Fund directly to the
Transfer Agent as listed in a schedule attached hereto or by such
other method as may be described in each Company's then current
Prospectus. All orders are subject to acceptance at the Transfer
Agent's office. We, as agent for the Funds, reserve the right in our
sole discretion to reject any order. The minimum investment for each
Fund is set forth in each Company's then current Prospectus.
You shall not purchase any Shares as agent for any customer, unless you
deliver or cause to be delivered to such customer, at or prior to the
time of such purchase, a copy of the Prospectus or unless such customer
has acknowledged receipt of the Prospectus. You hereby represent that
you understand your obligation to deliver the Prospectus to customers
who purchase Shares pursuant to federal securities laws and you have
taken all necessary steps to comply with such Prospectus delivery
requirements. The minimum initial investment for each Fund is set forth
in each Company's then current Prospectus.
If you are a Bank, with respect to any and all transactions in Shares
of the Funds pursuant to this Agreement, it is understood and agreed in
each case that unless otherwise agreed to by us in writing: (a) you
shall be acting solely as agent for the account of your customer; (b)
each transaction shall be initiated solely upon the order of your
customer; (c) we shall execute transactions only upon receiving
instructions from you acting as agent for your customer; (d) as between
you and your customer, your customer will have full beneficial
ownership of all Shares; (e) each transaction shall be for the account
of your customer and not for your account; and (f) we will serve as a
clearing broker for you on a fully disclosed basis, and you shall serve
as the introducing agent for your customers' accounts.
3. Suitability and Multiple Classes of Shares: The Funds may be offered
in more than one class of shares in accordance with the Prospectus.
Purchases of a class of shares or Funds are subject to our compliance
standards. You are responsible for determining whether a Fund, and
which class of the Fund's shares, is suitable for your client. Certain
investors that are affiliated with us and with you (and their
families) may have special purchase rights. Certain classes of Fund
shares may be available only in connection with purchases for or by
specific types of qualified retirement plans, or may be available only
to groups of purchasers, or to retirement plans purchasing on behalf
of a group of retirement plan participants that meet each Company's
requirements as to the size of such groups or the number of retirement
plan participants. Refer to the currently effective Prospectus for
each Company. Additional portfolios and/or classes of shares may be
added at a later date.
If you are a Bank, you further represent and warrant to us that with
respect to any sales in the United States, you will use your best
efforts to ensure that any purchase of Shares by our customers
constitutes a suitable investment for such customers. You shall not
effect any transaction in, or induce any purchase or sale of, any
Shares by means of any manipulative, deceptive or other fraudulent
device or contrivance and shall otherwise deal equitably and fairly
with your customers with respect to transactions in Shares.
4. Sales/Agency Commissions
(a) Any sales charges and commissions (sales and/or agency
commissions) will be as set forth in the current Prospectus of
each Company and on a schedule attached hereto or as might
otherwise be agreed to in writing by the parties.
(b) Where payment is due hereunder, we agree to send payment for
commissions and payments made in accordance with a Fund's Plan
of Distribution pursuant to Rule 12b-1 under the 1940 Act, as
amended, to your address as it appears on our records. You
must notify us of address changes and promptly negotiate such
payments. Any such payments that remain outstanding for 12
months shall be void and the obligation represented thereby
shall be extinguished.
(c) With respect to shares of Funds which impose a Contingent
Deferred Sales Charge ("CDSC"), we agree to compensate selling
firms at a specified rate as disclosed in the applicable
schedule only on purchase payments for those shares which are
subject to a CDSC at the time of investment. You understand
that any CDSC deducted from redemption proceeds shall be the
property of ASM, Inc.
(d) We reserve the right to reclaim any commission payment from a
Broker-Dealer if we later determine a CDSC waiver applied at
the time of investment.
(e) We reserve the right to modify all CDSC waivers at any
time. ASM, Inc. will promptly notify Broker-Dealer of any
modification thereto.
(f) You are responsible for applying the correct sales charge to
your customers, as detailed in the current Prospectus and in
the applicable schedule hereto or as might otherwise be agreed
to in writing by the parties.
(g) There are no sales charges or commissions payable on the
reinvestment of dividends and distributions.
5. Service Fee: ASM, Inc. will also pay you, if and to the extent
paid by each Company, an account service fee with respect to a
class of Shares, as set forth in the Prospectus and in a schedule
attached hereto, subject to your compliance with this Agreement
and to your providing the following services to Fund accounts,
including but not limited to: (1) maintaining regular contact
with customers and assist in answering routine inquiries
concerning the Funds; (2) assisting in distributing sales and
service literature provided by us, particularly to the beneficial
owners of street name accounts; (3) assisting us and our agents
in establishment and maintenance of shareholder accounts and
records; (4) assisting shareholders in effecting administrative
changes, such as changing account designations and addresses; (5)
assisting in processing purchase and redemption transactions; and
(6) providing any other information or services as the customers
or we may reasonably request. Any such account service fees shall
be subject to and in accordance with applicable laws, rules and
regulations and the guidelines and rules of the NASD. We reserve
the right to increase, decrease or terminate any such fees
without prior notice to you.
6. Remittance: Remittance of funds by Broker-Dealers should be made
by check or wire, payable to the appropriate Fund (not to ASM,
Inc.) and sent to the Company's Transfer Agent. Payments must be
received promptly pursuant to Rule 2830(m) of the NASD Rules of
Fair Practice (formerly Article III, Section 26(m)), otherwise
the Company and ASM, Inc. reserves the right, without notice, to
cancel the sale. In such event, Broker-Dealer will be responsible
for any loss to the Fund, or to ASM, Inc., including the loss of
profit resulting from your failure to make payment.
7. Selling Group Activities
(a) Shares of any Fund may be liquidated by sale thereof to such
Fund or to us as Agent for such Fund at the applicable net
asset value, less any applicable CDSC, determined in the
manner described in the then current Prospectus and Statement
of Additional Information of the Company. If delivery is not
made within ten (10) days from the date of the transaction,
the Company and ASM, Inc. reserves the right, without notice,
to cancel the transaction, in which event Broker-Dealer will
be held responsible for any loss to the Fund, or to ASM, Inc.,
including loss of profit resulting from your failure to make
payment.
(b) In no event shall you withhold placing orders so as to
profit from such withholding by a change in the net asset
value from that used in determining the price to your
customer, or otherwise. You shall make no purchases except
for the purpose of covering orders received by you and then
such purchases must be made only at the applicable public
offering price described in each Company's then current
Prospectus (less your sales concession); provided, however,
that the foregoing does not prevent the purchase of shares
of a Fund by you for your own bona fide investment. All
sales to your customers shall be at the applicable public
offering prices determined in accordance with each Company's
then current Prospectus and Statement of Additional
Information.
(c) In addition to purchasing shares of any Fund through us as
Selling Agent, you may purchase such shares from your
customers to the extent permissible by law, in which case you
shall pay the applicable net asset value determined in
accordance with each Company's then current Prospectus and
Statement of Additional Information, less any applicable CDSC,
if such class of Fund imposes a CDSC.
8. Shareholder Communication: You agree to furnish the following
shareholder communications material to your customers after receipt
from us of sufficient quantities to allow mailing thereof to all of
your customers who are beneficial owners of any Fund's shares:
(a) All proxy or information statements prepared for circulation
to shareholders of record,
(b) Annual reports of the Funds,
(c) Semi-annual reports of the Funds, and
(d) All updated prospectuses, supplements, and amendments thereto.
It shall be your obligation to ensure that all such information and
materials are distributed to your customers who purchase or own Shares,
in accordance with securities and/or if applicable, banking laws, rules
and regulations and any other applicable regulations.
9. Refund of Sales Charge: If the shares of any Fund confirmed to you
hereunder are repurchased by such Fund, or by us as Agent for such Fund, or
are tendered for liquidation to such Fund, within ten (10) business days
after such confirmation of your original order, then you shall forthwith
repay to such Fund the full dealer sales concession allowed to you on the
sale of such Fund shares. We shall notify you of such repurchase or
redemption within ten (10) days from the day on which the redemption order
is delivered to us or to such Fund.
10. Statements/Representations: No person is authorized to make any
statements or representations relating to the shares of any Fund, except
those contained in its then current Prospectus and Statement of Additional
Information which you agree to deliver to investors in accordance with
applicable SEC and NASD regulations and in such additional information as
we may supply or authorize as Supplemental Information to such Prospectus
and Statement of Additional Information (i.e., advertisements and
supplemental sales literature).
You shall not allow unauthorized statements or information designated
by us as "Not For Use With The Public" or "For Broker-Dealer Use Only"
to be distributed directly or indirectly to an investor. You shall
deliver to us for prior approval any Supplemental Information prepared
by you related to the Funds for use with the public.
In ordering shares of any Fund you shall rely solely and conclusively
on the representations contained in its then current Prospectus,
Statement of Additional Information, and Supplemental Information, if
any, additional copies of which are and will be available on request.
In no transaction shall you have any authority whatever to act as agent
for any Fund, or for us, or for any other distributor. Nothing in this
Agreement shall constitute either of us as an agent of the other, or
shall constitute you or any Fund the agent of the other.
No person is authorized to make any statement or representation
regarding benefits or services offered by any affiliate of an
applicable Fund or any other benefit or service provider to investors
or to persons for whom investments are made in a Fund that states,
indicates or implies that such benefits are offered or endorsed by the
Fund and any directors, trustees or officers of the Fund, or by ASM,
Inc., its officers or directors. This excludes those benefits or
services provided to shareholders by the Fund or on behalf of the Fund
in its normal course of business.
<PAGE>
11. Warranties: You represent and warrant that:
(a) you are either (1) registered as a broker-dealer under the 1934
Act, and are licensed and qualified as a broker-dealer or
otherwise authorized to offer and sell shares of the Funds under
the laws of the jurisdictions in which the shares of the Funds
will be offered and sold by you or (2) you are a Bank;
(b) if you are registered as a broker-dealer under the 1934 Act, you
are a member in good standing with the NASD and agree to maintain
such membership in good standing;
(c) in selling shares of the Funds you will comply with all
applicable laws, rules and regulations, including the applicable
provisions of the 1933 Act, 1934 Act and 1940 Act, as amended,
the applicable rules and regulations of the NASD, banking laws,
rules and regulations, and the applicable rules and regulations
of the jurisdictions in which you sell, directly or indirectly,
any shares of the Funds;
(d) you will offer to sell shares of the Funds only to purchasers
meeting the applicable eligibility requirements set forth in the
Prospectus;
(e) you agree not to offer for sale or sell shares of the Funds in
any jurisdictions in which shares of the Funds are not qualified
for sale or in which you are not qualified as a broker-dealer (we
will, upon request, inform you as to the states in which shares
of the Funds have been qualified for sale under, or are exempt
from the requirements of, applicable state securities laws);
(f) if you are a Bank, you are not in violation of any banking law,
rule or regulations as to which you are subject and that the
transactions contemplated by this Agreement will not result in
any violations of any banking law, rule or regulation; and
(g) if you are a Bank, you will not make shares of any Fund available
to your customers, including your fiduciary customers, or accept
any fees or compensation hereunder except in compliance with all
federal and state laws, rules and regulations of regulatory
agencies or authorities applicable to you, or any of your
affiliates engaging in such activity, including without
limitation ERISA and related rules, regulations and
interpretations, which may affect your business practices.
You agree to indemnify and hold ASM, Inc. and each Company harmless
against every loss, cost, damage or expense (including reasonable
attorney's fees and expenses) incurred by us as a result of your breach
of the foregoing representations and warranties if we notify you
promptly after commencement of any action brought against us for which
we may seek indemnity.
12. Pricing Errors: With respect to any pricing errors relating to
transactions entered into by you on behalf of your customers, you
agree to use your best efforts in cooperating with us to resolve
and remedy such errors upon receipt of notice from us. We will
adjust transactions in accordance with procedures established by
each Company and we will notify you of such adjustments.
13. Modification and Termination: We reserve the right, in our
discretion and without notice to you or to any distributor, to
suspend sales, to withdraw any offering, to change the offering
prices or to modify or cancel this Agreement for any reason
(including the termination of Plan payments pursuant to a Plan of
Distribution described in Section 4). This Agreement may be
canceled at any time by you upon thirty (30) days written notice.
We may terminate this Agreement for failure to comply with its
terms upon mailing notice to you. In addition, this Agreement may
be terminated with respect to any Fund or class of shares of a
Company by the directors of such Company and by the holders of
the outstanding voting securities entitled to vote on such
termination as provided in Rule 12b-1 under the 1940 Act. This
Agreement shall terminate automatically if you are expelled or
suspended from the NASD, or there is an assignment of this
Agreement or ASM Inc. otherwise ceases to be the general
distributor for the Company (the term "assignment" shall have the
meaning specified in the 1940 Act and the rules and regulations
thereunder, subject to such exemptions as my be granted by the
Securities and Exchange Commission).
14. Investors Account Instructions: If any investor's account is
established without the investor signing the application form,
the Broker-Dealer represents that the instructions relating to
the registration (including the investor's tax identification
number) and selected options furnished to the Fund (whether on
the application form, or in some other document) are in
accordance with the investor's instructions. Broker-Dealer agrees
to indemnify the Company and/or the Fund(s), its Transfer Agent,
and ASM, Inc. for any loss or liability resulting from acting
upon such instructions. We agree to hold harmless and indemnify
you for any loss or liability arising out of our negligence in
processing such instructions.
15. Liability: Nothing contained herein shall be deemed to protect
you against any liability to us, the Company or the Company's
shareholders to which you would otherwise be subject by reason of
negligence, willful misfeasance, or bad faith in the performance
of your duties hereunder, or by reason of your reckless disregard
of your obligations and duties hereunder.
16. Non-Waiver Provision: Failure of any party to terminate the
Agreement for any of the causes set forth in this Agreement will
not constitute a waiver of that party's right to terminate this
Agreement at a later time for any of these causes.
17. Severability: Should any provision of this Agreement be held
unenforceable, those provisions not affected by the determination
of unenforceability shall remain in full force and effect.
18. Governing Law: This Agreement will be construed in accordance
with the laws of the State of Connecticut.
If the foregoing completely expresses the terms of the Agreement between us,
please so signify by executing, in the space provided, the annexed duplicate of
this Agreement and return it to us, retaining the original copy for your own
files. This Agreement shall become effective upon the earliest of our receipt of
a signed copy hereof or the first order placed by you for any of the Funds'
shares after the date below, which order shall constitute acceptance of this
Agreement. This Agreement shall supersede all prior Mutual Fund Sales Agreements
relating to the shares of any of the Funds. All amendments to this Agreement,
including any changes made pursuant to schedules to the Agreement, shall take
effect as of the date of the first order placed by you for any of the Fund's
shares after the date set forth in the notice of amendment sent to you by the
undersigned.
<PAGE>
IN WITNESS WHEREOF, the undersigned parties have executed this Agreement to be
effective as set forth above, upon the Effective Date below.
AMERICAN SKANDIA MARKETING, INCORPORATED
BY: __________________________________
Name: __________________________________
Title: __________________________________
Date: __________________________________
Please execute this Selling Group Agreement below and return it to us at the
address set forth above.
- ---------------------------------------
(Broker-Dealer's Name)
- ----------------------------------------
(Street Address)
- ------------------------------------------------------------------------
(City) (State) (Zip Code)
- ------------------------------
(Telephone No.)
BY: ___________________________________________
(Authorized Signature)
-------------------------------------------
(Name and Title)
<PAGE>
SCHEDULE: PORTFOLIOS
AMERICAN SKANDIA ADVISOR FUNDS, INC.
Date: July 1, 1997
The following portfolios of American Skandia Advisor Funds, Inc. are subject to
this Agreement:
ASAF Founders International Small Capitalization Fund
ASAF T. Rowe Price International Equity Fund
ASAF Founders Small Capitalization Fund
ASAF T. Rowe Price Small Company Value Fund
ASAF Janus Capital Growth Fund
ASAF INVESCO Equity Income Fund
ASAF American Century Strategic Balanced Fund
ASAF Federated High Yield Bond Fund
ASAF Total Return Bond Fund
ASAF JPM Money Market Fund
The Company may add additional portfolios and/or classes of
portfolios from time to time.
Transfer Agent
American Skandia Advisor Funds, Inc. Mail Address:
P.O. Box 8012
Boston, Massachusetts 02266-8012
Overnight Address:
American Skandia Advisor Funds, Inc.
Two Heritage Drive
North Quincy, Massachusetts 02171-2138
Electronic Transfer:
State Street Bank & Trust Company
Boston, Massachusetts
DDA #99052995
FBO: American Skandia Advisor Funds, Inc.
[Fund name and Class of Shares]
Shareholder Name and Account Number
<PAGE>
SCHEDULE: SALES/AGENCY COMMISSIONS
AMERICAN SKANDIA ADVISOR FUNDS, INC.
Date: July 1, 1997
Class A Shares
<TABLE>
<CAPTION>
All Portfolios except ASAF Total Return Bond Fund and ASAF Federated High Yield Bond Fund
Amount of Purchase Standard Sales Commission Promotional Sales Commission*
<S> <C> <C> <C>
less than $50,000 4.25% 5.00%
$50,000 - $100,000 3.50% 4.25%
$100,000 - $250,000 2.50% 3.25%
$250,000 - $500,000 1.75% 2.25%
$500,000 - $1,000,000 1.25% 1.50%
>$1,000,000 and other Class A Purchases
subject to a CDSC as set forth in the
current Prospectus .50% .50%
</TABLE>
<TABLE>
<CAPTION>
ASAF Total Return Bond Fund and ASAF Federated High Yield Bond Fund Only
Amount of Purchase Standard Sales Commission Promotional Sales Commission*
<S> <C> <C> <C>
less than $50,000 3.50% 4.25%
$50,000 - $100,000 3.00% 3.75%
$100,000 - $250,000 2.50% 3.25%
$250,000 - $500,000 1.75% 2.25%
$500,000 - $1,000,000 1.25% 1.50%
>$1,000,000 and other Class A Purchases
subject to a CDSC as set forth in the
current Prospectus .50% .50%
</TABLE>
<TABLE>
<CAPTION>
For Purchases less than $1,000,000 and other Class A Purchases subject
to a CDSC:
<S> <C> <C>
Service Fees: 0.25% per annum based on the daily net assets of such shares
beginning in the first quarter of year 2 after such share purchase.
Trail Commissions: 0.25% per annum based on the daily net assets of such
shares beginning in the first quarter of year 2 after such share purchase.
For all other Purchases:
Service Fees: 0.25% per annum based on the daily net assets of such shares
beginning in the first quarter of year 1 after such share purchase.
Trail Commissions: 0.25% per annum based on the daily net assets of such shares
beginning in the first quarter of year 1 after such share purchase.
</TABLE>
Class B Shares
<TABLE>
<CAPTION>
Standard Sales Commission Promotional Sales Commission*
5.50% of the Amount of Purchase 6.00% of the Amount of Purchase
<S> <C>
Service Fees: 0.25% per annum based on the daily net assets of such shares
beginning in the first quarter of year 8 after such share purchase.
Trail Commissions: 0.25% per annum based on the daily net assets of such shares
beginning in the first quarter of year 8 after such share purchase.
</TABLE>
<TABLE>
<CAPTION>
Class X Shares
Standard Sales Commission Promotional Sales Commission*
3.00% of the Amount of Purchase 3.50% of the Amount of Purchase
<S> <C>
Service Fees: 0.25% per annum based on the daily net assets of such shares
beginning in the first quarter of year 8 after such share purchase.
Trail Commissions: 0.25% per annum based on the daily net assets of such shares
beginning in the first quarter of year 8 after such share purchase.
</TABLE>
* The Promotional Sales Commission will be payable instead of the Standard Sales
Commission for purchases placed on or before December 31, 1998. The Promotional
Sales Commission may be eliminated at the sole discretion of ASM, Inc. at any
time prior to December 31, 1998. For purchases received after December 31, 1998,
(unless the Promotional Sales Commission has been previously eliminated) the
Standard Sales Commission will apply.
<TABLE>
<CAPTION>
Class C Shares
1.00% of the Amount of Purchase
<S> <C>
Service Fees: 0.25% per annum based on the daily net assets of such shares
beginning in the first quarter of year 2 after such share purchase.
Trail Commissions: 0.75% per annum based on the daily net assets of such shares beginning in the
first quarter of year 2 after such share purchase.
</TABLE>
WERNER & KENNEDY
1633 Broadway
New York, NY 10019
---------
EMAIL: [email protected]
TELEPHONE (212) 408-6900
FACSIMILE (212) 408-6950
WRITER'S DIRECT DIAL NUMBER
(212) 408-6900
July 10, 1997
American Skandia Advisor Funds, Inc.
One Corporate Drive
Shelton, Connecticut 06484
Re: Pre-Effective Amendment No. 3 to the Registration Statement
of American Skandia Advisor Funds, Inc. filed on Form N-1A
Securities Act Registration No: 333-23017
Investment Company Act No: 811-08085
Our File No. 74876-00-114.
Dear Mesdames and Messrs.:
You have requested us, as counsel to American Skandia Advisor Funds,
Inc. (the "Company"), to furnish you with this opinion in connection with the
above-referenced registration statement (the "Registration Statement") filed by
the Company under the Securities Act of 1933, as amended (the "1933 Act"), and
the Investment Company Act of 1940, as amended (the "1940 Act").
We have made such examination of the statutes, authorities, and records
of the Company and other documents as in our judgment are necessary to form a
basis for opinions hereinafter expressed. In our examination, we have assumed
the genuineness of all signatures on, and authenticity of, and the conformity to
original documents of all copies submitted to us. As to various questions of
fact material to our opinion, we have relied upon statements and certificates of
officers and representatives of the Company and others.
Based upon the foregoing, we are of the opinion that the Company is a
Maryland corporation organized with one or more series of shares and is
registered as an open-end management investment company under the 1940 Act, and
that the shares, when issued and sold in accordance with the laws of applicable
jurisdictions, and with the terms of the Prospectus and Statement of Additional
Information included as part of the Registration Statement, will be valid,
legally issued, fully paid, and non-assessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement on Form N-1A under the 1933 Act and the 1940 Act, and to
the reference to our name under the heading "Legal Counsel and Independent
Accountants" included in the Registration Statement.
Very truly yours,
/s/ Werner & Kennedy
Werner & Kennedy
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion of our report dated May 28, 1997 on our audit of the
Statements of Assets and Liabilities of the American Skandia Advisor Funds, Inc.
as of May 28, 1997 with respect to this Pre-Effective Amendment No. 3 to the
Registration Statement (No. 333-23017) under the Securities Act of 1933 on Form
N-1A. We also consent to the reference to our Firm under the heading "Legal
Counsel and Independent Accountants" in the Prospectus and under the headings
"Independent Accountants" and "Financial Statements" in the Statement of
Additional Information.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
July 9, 1997
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion of our report dated May 28, 1997 on our audit
of the Statement of Assets and Liabilities of American Skandia Master Trust as
of May 28, 1997 with respect to this Pre-Effective Amendment No. 3 to the
Registration Statement (No. 333-23017) under the Securities Act of 1933 on Form
N-1A.
/s/ Coopers & Lybrand
Coopers & Lybrand
Dublin, Republic of Ireland
July 9, 1997
LAW OFFICES
CAPLIN & DRYSDALE
CHARTERED
ONE THOMAS CIRCLE, N.W.
WASHINGTON, D.C. 20005-5802
-----
(202 ) 862-5000
FACSIMILE (202) 429-3301
WRITER'S DIRECT DIAL NUMBER
202/862-5000
July 9, 1997
American Skandia Advisor Funds, Inc.
One Corporate Drive
Shelton, Connecticut 06484
Re: Pre-Effective Amendment No. 3 to the
Registration Statement of American Skandia
Advisor Funds, Inc. filed on Form N-1A
Securities Act Registration No: 333-23017
Investment Company Act No: 811-08085 .
Dear Mesdames and Messrs.:
We hereby consent to the reference to our firm and legal opinion, as
special tax counsel to American Skandia Advisor Funds, Inc., included in the
Prospectus of the above-referenced Registration Statement under the headings
"Dividends, Capital Gains and Taxes: Taxes" and "Legal Counsel and Independent
Accountants."
Very truly yours,
/s/ Caplin & Drysdale, Chartered
Caplin & Drysdale, Chartered
ROGERS & WELLS
Two Hundred Park Avenue
New York, N.Y. 10166-0153
TELEPHONE (212) 878-8000
FACSIMILE (212) 878-8375
July 10, 1997
American Skandia Advisor Funds, Inc.
One Corporate Drive
Shelton, Connecticut 06484
Re: Registration Statement for
American Skandia Advisor Funds, Inc.
Dear Sirs:
We have acted as special tax counsel to American Skandia Advisor Funds,
Inc. (the "Fund") in connection with the Fund's Registration Statement on Form
N-1A (File Nos. 333-23017, 811-08085) (the "Registration Statement") filed with
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended, and the Investment Company Act of 1940, as amended.
We hereby consent to the reference to us in the prospectus included in
the Fund's Registration Statement.
Very truly yours,
/s/ Roger & Wells
Rogers & Wells
