As filed with the Securities and Exchange Commission on March 7, 1997
Registration No. _______________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
Registration Statement Under The Securities Act of 1933
and
Registration Statement Under The Investment Company Act of 1940
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:
Upon this Registration Statement being declared effective.
Registrant hereby elects to register an indefinite number of shares under
Rule 24f-2.
<PAGE>
<TABLE>
<CAPTION>
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
<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
[INSERT], 1997
---------------------------------
INTERNATIONAL SMALL CAPITALIZATION FUND: Founders Asset Management, Inc.
INTERNATIONAL EQUITY FUND: Rowe Price-Fleming International, Inc.
SMALL CAPITALIZATION FUND: Founders Asset Management, Inc.
SMALL COMPANY VALUE FUND: T. Rowe Price Associates, Inc.
GROWTH FUND: Janus Capital Corporation
EQUITY INCOME FUND: INVESCO Trust Company
STRATEGIC BALANCED FUND: American Century Investment Management, Inc.
HIGH YIELD BOND FUND: Federated Investment Counseling
TOTAL RETURN BOND FUND: Pacific Investment Management Company
MONEY MARKET FUND: J.P. Morgan Investment Management, Inc.
- ------------------------------------------------------------------------
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 the American Skandia Master Trust. 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 [INSERT],
1997, which is incorporated by reference into this Prospectus. To obtain a copy
of the SAI without charge, call [INSERT] or write to "American Skandia Advisor
Funds, Inc." at [INSERT]. The Commission maintains a Web site (http:/ /
www.sec.gov) that contains the SAI, material incorporated by reference, and
other information regarding registrants that file electronically with the
Commission.
An investment in the Money Market Fund is neither insured nor guaranteed by the
U.S. Government. While the 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 -- the International
Equity, Growth, Equity Income, Total Return Bond and Money Market (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 the 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 Portfolio:
<TABLE>
<CAPTION>
Fund/Portfolio: Sub-Advisor: Investment Goal: Investment Style:
<S> <C> <C> <C>
Int'l Small Founders Asset Capital appreciation 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 appreciation Invests primarily in common stocks of U.S.
Management, Inc. companies with market capitalizations of
$1.5 billion or less.
Small Company Value T. Rowe Price Long-term capital Invests primarily in common stocks of U.S.
Associates, Inc. appreciation companies with market capitalizations of $1
billion or less that appear to be
undervalued.
Growth Janus Capital Capital growth Invests primarily in common stocks.
Corporation
Equity Income INVESCO Trust Company High current income Invests in securities which will provide a
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 a diversified
Counseling portfolio of lower-rated fixed income
securities.
Total Return Bond Pacific Investment Maximize total return, Invests in a diversified portfolio of
Management Company consistent with fixed-income securities of varying
preservation of capital maturities with an expected average
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
International Small Capitalization Fund
International Equity Fund
Small Capitalization Fund
Small Company Value Fund
Growth Fund
Equity Income Fund Strategic Balanced Fund
High Yield Bond Fund
Total Return Fund
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:
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
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) 6.00%(2) 1.00%(2)
price or redemption proceeds)
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):
<S> <C> <C> <C>
Total Expenses
Management Fee 12b-1 Distribution Other Expenses (after any waiver or
(after any waiver)(4) Fees(5) (after any reimbursement)(4)(6)
reimbursement)(6)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Int'l Small Capitalization
Class A
Class B & X
Class C
International Equity
Class A
Class B & X
Class C
Small Capitalization
Class A
Class B & X
Class C
Small Company Value
Class A
Class B & X
Class C
Growth
Class A
Class B & X
Class C
Equity Income
Class A
Class B & X
Class C
Strategic Balanced
Class A
Class B & X
Class C
High Yield Bond
Class A
Class B & X
Class C
Total Return Bond
Class A
Class B & X
Class C
Money Market
Class A
Class B & X
Class C
(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)
[INSERT Voluntary Fee Waivers, if applicable]. Absent these waivers, the
"management fee" for [INSERT] would be [INSERT]. For an additional discussion of
investment management fees, as well as any applicable voluntary fee waiver
arrangements, see this Prospectus under "Management of the Funds." (5) 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. (6) Expenses shown
are based on estimated amounts for the current fiscal year. The Investment
Manager has voluntarily agreed to reimburse the Non-Feeder Funds until [INSERT]
for their respective operating expenses (exclusive of taxes, interest, brokerage
commissions, certain distribution fees and extraordinary expenses) which in the
aggregate exceed specified percentages of the Funds' average net assets as
follows: [INSERT]. The Investment Manager has also voluntarily agreed to
reimburse the Feeder Funds until [INSERT] for their respective operating
expenses and pro rata share of operating expenses of the Funds' corresponding
Portfolios (exclusive of taxes, interest, brokerage commissions, certain
distribution fees and extraordinary expenses) which in the aggregate exceed
specified percentages of the Funds' average net assets as follows: [INSERT].
Absent these reimbursements, the estimated "other expenses" for the Funds would
be: [INSERT]. 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 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
<S> <C> <C> <C> <C> <C> <C> <C>
Class A Class B Class C Class X Class A Class B Class C Class X
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
Int'l Small Capitalization
International Equity
Small Capitalization
Small Company Value
Growth
Equity Income
Strategic Balanced
High Yield Bond
Total Return Bond
Money Market
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
<S> <C> <C> <C> <C> <C> <C> <C>
Class A Class B Class C Class X Class A Class B Class C Class X
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
Int'l Small Capitalization
International Equity
Small Capitalization
Small Company Value
Growth
Equity Income
Strategic Balanced
High Yield Bond
Total Return Bond
Money Market
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. 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.
INTERNATIONAL SMALL CAPITALIZATION FUND:
Investment Objective: The investment objective of the International Small
Capitalization Fund is to seek capital appreciation.
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 payments 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 is permitted to 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 is permitted to 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 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. Restricted
securities are securities which cannot be resold or distributed to the public
without an effective registration statement under the Securities Act of 1933.
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. Rule 144A securities are restricted securities which 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. The
liquidity of the Fund's investments in Rule 144A securities could be impaired if
institutional investors become disinterested in purchasing such securities. 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. There
can be no assurance that the Fund will be able to achieve its investment
objective. 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. A certificate of deposit is a short-term obligation of a bank. A
banker's 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 amounts 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."
INTERNATIONAL EQUITY FUND:
Investment Objective: The investment objective of the International Equity 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 and the Trustees of the Trust, 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 and the Trustees of the Trust, 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."
SMALL CAPITALIZATION FUND:
Investment Objective: The investment objective of the Small Capitalization Fund
is capital appreciation.
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
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.
Companies selected for investment generally will be small corporations
still in the developing stages of their life cycles that 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;
provide efficient services; and possess pricing flexibility.
Risks of Small Cap Investing. Investments in such companies may involve
greater risk than is associated with more established companies. Smaller
companies often have limited product lines, markets or financial resources, and
may be dependent upon one-person management. Securities of smaller companies may
have limited marketability and may be subject to more abrupt or erratic
movements in prices than securities of larger companies or the market averages
in general. Therefore, the net asset value of the Fund 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 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 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.
Foreign investments 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. Examples of such countries 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 its 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, or 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 its
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. Restricted
securities are securities which cannot be resold or distributed to the public
without an effective registration statement under the Securities Act of 1933.
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. Rule 144A securities are restricted securities which 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. The
liquidity of the Fund's investments in Rule 144A securities could be impaired if
institutional investors become disinterested in purchasing such securities. 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. The Fund may invest up to 100% of its assets for
temporary defensive purposes 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. There can be no assurance
that the Fund will be able to achieve its investment objective; however, while
it is in a defensive position, the opportunity to achieve capital growth will be
limited; moreover, 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. A certificate of deposit is a short-term obligation of a bank. A
banker's 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, may also 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 the 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."
SMALL COMPANY VALUE FUND:
Investment Objective: The investment objective of the Small Company Value Fund
is to provide long-term capital appreciation 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."
GROWTH FUND:
Investment Objective: The investment objective of the Growth 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 and the Trustees of the Trust, 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 and the Trustees of the Trust, 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."
EQUITY INCOME FUND:
Investment Objective: The investment objective of the Equity Income 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 industrial 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 or the Trustees of the Trust, where applicable, 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 industrial 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 and the Trustees of the Trust, 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 and the
Trustees of the Trust. 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 and the Trustees of the Trust, 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 and the Trustees, or the Investment Manager or the Sub-advisor, acting
pursuant to authority delegated by the Directors and the Trustees, 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."
STRATEGIC BALANCED FUND:
Investment Objective: The investment objective of the Strategic Balanced 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."
HIGH YIELD BOND FUND:
Investment Objective: The investment objective of the High Yield Bond Fund is to
seek high current income by investing primarily in a diversified portfolio of
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, bonds, debentures, notes, equipment lease
certificates and equipment trust certificates. The corporate debt obligations in
which the Fund intends to invest are expected to be lower rated.
Other permitted investments for the Fund currently include, but are not
limited to, the following: corporate debt obligations having floating rates of
interest which are rated BBB or lower by recognized rating agencies; 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.
The Sub-advisor believes that lower-rated securities will usually offer
higher yields than higher-rated securities. However, there is more risk
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 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.
TOTAL RETURN BOND FUND:
Investment Objective: The investment objective of the Total Return Bond 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; corporate commercial paper;
mortgage and other asset-backed securities; 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 a diversified portfolio of fixed-income
securities of varying maturities with a portfolio duration from three to six
years. The duration of the Fund will vary within the 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."
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."
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 and the Trustees of the Trust. 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. A reverse repurchase agreement is a form
of leverage 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 will
maintain a segregated account consisting of cash or other liquid assets to cover
its obligations under reverse repurchase agreements. The Fund may also borrow
money for investment purposes. Such a practice will result in leveraging of the
Fund's assets. Leverage 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. For a
discussion of reverse repurchase agreements and the risks involved therein, see
this Prospectus under "Certain Risk Factors and Investment Methods."
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, such as Taiwan, South Korea and
Mexico). 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."
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."
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."
MONEY MARKET FUND:
Investment Objective: The investment objective of the Money Market 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 and the
Trustees of the Trust, 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 and the
Trustees of the Trust, 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 and the Trustees of the Trust, 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 and the Trustees of the Trust. 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 and Trustees 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 and the Trustees of the Trust, 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 investment methods
used by the Funds apply equally to those used by the Feeder Funds' corresponding
Portfolios.
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 and
the Trustees of the Trust 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 and the Trustees of
the Trust 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 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
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 gain 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
[INSERT] or by calling [INSERT].
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 for 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:
You can purchase shares of the Funds in the following ways: (1) through
any broker-dealer or financial institution that has a sales agreement with
American Skandia Marketing, Incorporated (the "Distributor"); (2) directly
through the Company; or (3) automatically through an electronic transfer. 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.
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.
Buying Shares By Wire. Call [INSERT] to obtain the account number to
which you can wire or electronically transfer funds. You will then be requested
to provide (i) your name, (ii) your address, (iii) your tax identification
number, (iv) your dividend distribution election, (v) the dollar amount being
wired, and (vi) the bank from which amount is being wired. You should then
instruct your bank to transfer funds by wire to: [INSERT].
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
broker-dealer, your broker 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 broker-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 amt. offering offering amt. offering
- ------------------ --------- --------- --------- --------
price) invested) price) price) invested) 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
broker-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) plan; or
o Purchases of shares by a defined contribution plan under Section
401(a) of 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 be
equal to 1.0% of the lesser of (1) the value of the redeemed shares at the time
of redemption (not including shares purchased by reinvestment of dividends or
capital gain distributions) or (2) the original cost of the redeemed 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 Class A
CDSC is waived in certain cases described below under "Waiver of Class A CDSC."
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.
Reduced 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 or
eliminations 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 (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 or eliminated 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 or eliminate 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. For additional information
regarding LOIs, see the account application and the Company's SAI under
"Additional Information on the Purchase and Redemption of Shares."
You must let the Transfer Agent know if you qualify for a reduction or
elimination of your initial sales charge using one or more of the programs
described above.
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, (2) present or former
officers, directors, trustees and employees (and their parents, spouses and
dependent children) of the Company, the Investment Manager or the Sub-advisors,
and any retirement plans established by such entities for their employees; (3)
dealers that have a sales agreement with the Distributor, if they purchase
shares for their own accounts or for retirement plans for their employees; (4)
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); or (5) 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; or (6) 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 waivers to be effective, the
Transfer Agent must be notified of the waiver request when the purchase order is
placed. The Transfer Agent may require evidence of your qualification for the
waiver.
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") that are limited to no more than
10% annually of the original amount invested; (2) redemptions following death or
post-purchase disability (as defined by Section 72(m)(7) of the Code); (3)
distributions or loans to participants of qualified retirement plans and other
employee benefit plans; (4) mandated minimum distributions from an IRA, SIMPLE
IRA or 403(b)(7) plan; (5) substantially equal periodic payments (as described
in Section 72(t) of the Code); (6) the return of excess contributions made to
your IRA, SIMPLE IRA, 403(b)(7) plan or 401(k) plan; and (7) involuntary
redemption due to the small size of the account.
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, 0.25% of which is
intended as a fee for services provided to existing shareholders. The
Distributor uses distribution and service fees 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.
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. Because in
most cases it is more advantageous for an investor to purchase Class A shares
for amounts in excess of $250,000, orders for amounts of $250,000 or more will
normally be considered as a purchase request for Class A shares or declined.
To determine whether the Class B CDSC applies to a redemption, the Fund
will first redeem shares acquired by reinvestment of dividends and capital gain
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") that are limited to no more
than 10% annually of the account value (measured from the date the Transfer
Agent receives the redemption request); (2) redemptions following death or
post-purchase disability (as defined by Section 72(m)(7) of the Code); and (3)
involuntary redemptions due to the small size of the account.
Automatic Conversion of Class B Shares. Eight years after you purchase
Class B shares, those shares will automatically convert to Class A shares. 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.
When Class B shares convert, any other Class B shares that were acquired by the
reinvestment of dividends and distributions on the converted shares will also
convert to Class A 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, 0.25% of which is intended as a fee for services provided to
existing shareholders. The Distributor uses distribution and service fees 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. Although Class B shares are sold without an initial sales charge, the
Distributor currently pays a sales commission of 5.50% of the purchase price of
Class B shares to the dealer from its own resources at the time of the sale.
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.
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 2.5% of the amount invested
("Bonus Shares"). Bonus Shares shall be paid for by the Distributor. Shares
purchased by the reinvestment of dividends or capital gain 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. Because it
is more advantageous for an investor to purchase Class A shares for amounts in
excess of $1,000,000, orders for amounts of $1,000,000 or more will normally be
considered as a purchase request for Class A shares or declined.
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 gain 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") that are limited to no more
than 10% annually of the account value (measured from the date the Transfer
Agent receives the redemption request); (2) redemptions following death or
post-purchase disability (as defined by Section 72(m)(7) of the Code); (3)
mandated minimum distributions from an IRA, SIMPLE IRA or an individual type
403(b)(7) plan; (4) substantially equal periodic payments (as described in
Section 72(t) of the Code); (5) the return of excess contributions from an IRA
or SIMPLE IRA; and (6) involuntary redemptions due to the small size of the
account.
Automatic Conversion of Class X Shares. Eight years after you purchase
Class X shares, those shares will automatically convert to Class A shares. 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.
When Class X shares convert, any other Class X shares that were acquired by the
reinvestment of dividends and distributions on the converted shares will also
convert to Class A 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, 0.25% of which is intended as a fee for services provided to
existing shareholders. The Distributor uses distribution and service fees 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. Although Class X shares are sold without an initial sales charge, the
Distributor currently pays a sales commission of 3.00% of the purchase price of
Class X shares to the dealer from its own resources at the time of the sale.
PURCHASE OF CLASS C SHARES:
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. Because it is more advantageous for
an investor to purchase Class A shares for amounts in excess of $1,000,000,
orders for amounts of $1,000,000 or more will be considered as a purchase
request for Class A shares or declined.
To determine whether the Class C CDSC applies to a redemption, the Fund
will first redeem shares acquired by reinvestment of dividends and capital gain
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") that are limited to no more
than 10% annually of the original amount invested; (2) redemptions following
death or post-purchase disability (as defined by Section 72(m)(7) of the Code);
(3) distributions or loans to participants of qualified retirement plans and
other employee benefit plans; (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(f) of the Code); (6) the return of
excess contributions from an IRA, SIMPLE IRA or 401(k) plan; and (7) involuntary
redemptions due to the small size of the account.
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, 0.25% of which is
intended as a fee for services provided to existing shareholders. The
Distributor uses distribution and service fees 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 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. 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 gain distributions will
automatically be reinvested in additional shares at no sales charge.
Automatic Dividend Diversification ("ADD"). You may automatically
reinvest dividends and capital gain 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.
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 as described in this Prospectus
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."
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 providing the latter is currently available for sale. You may set
up more than one of these programs simultaneously. A shareholder 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 Plans ("SWPs"). 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, or in an amount equal to the value of a fixed number of
shares (5 shares or more) at the time of withdrawal. SWP redemptions for Class A
and Class C shares are limited to no more than 10% annually of the original
amount invested. SWP redemption for Class B and Class X shares are limited to no
more than 10% annually of the account value measured from the date the Transfer
Agent receives the redemption request.
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.
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 [INSERT] at [INSERT] 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 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 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. 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 and
maintained. 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 [INSERT] 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> <C>
Send Requests by Regular Mail to: Send Requests by Courier or Express Mail to:
American Skandia Advisor Funds, Inc. Boston Financial Data Services
[INSERT] Attn: American Skandia Advisor Funds, Inc.
Two Heritage Drive
Quincy, Massachusetts 02171
</TABLE>
REDEEMING SHARES BY TELEPHONE:
You may also redeem shares by telephone by calling [INSERT]. 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 [INSERT] at
[INSERT] 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
Company exchange request form, signed by all owners of the account. Send the
form to the Transfer Agent at the addresses provided in this Prospectus under
"How to Redeem Shares." To obtain an exchange request form or to initiate a
telephone exchange, you should call [INSERT].
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, the 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) 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 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 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 Fund shares may be suspended during any period in
which the determination of NAV is suspended, and the offering may be suspended
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 may be liable for losses due to unauthorized
transactions, but otherwise the Company 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 broker-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.
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. Five of the Funds -- the
International Equity, Growth, Equity Income, Total Return Bond and Money Market
(the "Feeder Funds," as defined previously) -- 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 of the Company 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."
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 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. The Directors of the
Company are authorized to issue an unlimited number of full and fractional
shares of beneficial interest (par value $0.001 per share) and, from time to
time and without shareholder approval, to establish additional series or classes
of shares. 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 and transfer agency fees and related expenses,
different exchange privileges 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, conversion or similar rights.
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, only the Feeder Funds invest in the Portfolios and are
available for purchase by the general public in the United States. Information
regarding any other fund that may invest in a Portfolio in the future will be
available from [INSERT] by calling [INSERT].
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, a majority of the Directors of
the Company also serve as Trustees 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. 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. 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. 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 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 International Small Capitalization Fund and the 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 $[INSERT] billion as of [INSERT].
The portfolio manager responsible for the day-to-day management of the
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
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 International Equity Portfolio. Price-Fleming, located at
100 East Pratt Street, Baltimore, Maryland 21209, 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 $[INSERT] billion under management as of
[INSERT] in its offices in Baltimore, London, Tokyo and Hong Kong.
An investment advisory group has responsibility for the day-to-day
management of the International Equity Portfolio. The advisory group for the
Portfolio consists of Martin G. Wade, Christopher Alderson, Peter Askew, Richard
J. Bruce, Mark J.T. Edwards, John R. Ford, Robert C. Howe, 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, including assignments in
the Far East and the United States. Christopher Alderson joined Price-Fleming in
1988, and has 9 years of experience with the Fleming Group in research and
portfolio management, including an assignment in Hong Kong. Peter Askew joined
Price-Fleming in 1988 and has 21 years of experience managing multicurrency
fixed income portfolios. Richard J. Bruce joined Price-Fleming in 1991 and has 7
years of experience in investment management with the Fleming Group in Tokyo.
Mark J.T. Edwards joined Price-Fleming in 1986 and has 15 years of experience in
financial analysis, including 4 years in Fleming European research. John R. Ford
joined Price-Fleming in 1982 and has 16 years of experience with Fleming Group
in research and portfolio management, including assignments in the Far East and
the United States. Robert C. Howe joined Price-Fleming in 1986 and has 16 years
of experience in economic research in Japan. James B.M. Seddon joined
Price-Fleming in 1987 and has 9 years of experience in investment management.
Benedict R.F. Thomas joined Price-Fleming in 1988 and has 7 years of portfolio
management experience, including assignments in London and Baltimore. David J.L.
Warren joined Price-Fleming in 1984 and has 16 years experience in equity
research, fixed income research and portfolio management, including an
assignment in Japan.
T. Rowe Price Associates, Inc. ("T. Rowe Price") serves as Sub-advisor
for the Small Company Value Fund. T. Rowe Price, located at 100 East Pratt
Street, Baltimore, Maryland 21209, was founded in 1937 by the late Thomas Rowe
Price, Jr. As of [INSERT], T. Rowe Price and its affiliates managed
approximately $[INSERT] billion for approximately 4.5 million individual and
institutional accounts.
The 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
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 [INSERT], Janus managed assets worth
over $[INSERT] 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
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 Equity
Income Fund. 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., and INVESCO Variable
Investment Funds, Inc. INVESCO Funds Group, Inc. and INVESCO are part of a
global financial services firm that managed approximately $[INSERT] billion of
assets as of [INSERT]. The parent company, INVESCO PLC, was organized in 1935
and is based in London, with money managers located in Europe, North America and
the Far East. INVESCO PLC recently merged with AIM Management Group, a large
United States mutual fund manager.
The portfolio managers responsible for the day-to-day management of the
Equity Income Fund are Charles P. Mayer, Portfolio Co-Manager, and Donovan J.
(Jerry) Paul, Portfolio Co-Manager. Mr. Mayer has served as Co-Portfolio Manager
of the INVESCO Industrial Income Fund since 1993 and also has served as
Portfolio Manager and Senior Vice President of INVESCO since 1993. Mr. Paul has
served since 1994 as Co-Portfolio Manager of the INVESCO Industrial Income Fund
and as Senior Vice President of INVESCO.
American Century Investment Management, Inc. ("American Century,"
formally known as, "Investors Research Corporation") serves as Sub-advisor for
the 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 [INSERT],
American Century and its affiliates managed assets totaling approximately
$[INSERT] billion.
American Century utilizes a team of portfolio managers, assistant
portfolio managers and analysts acting together to manage the assets of the
Portfolio. The portfolio manager members of the portfolio team responsible for
the day-to-day management of the Strategic Balanced Fund are Casey Colton,
Norman E. Hoops, Brian Howell, Jeffrey L. Houston, David Schroeder and Jeffrey
R. Tyler. Casey Colton jointed 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 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 [INSERT], total assets under management or
administration by these and other subsidiaries of Federated Investors was
approximately $[INSERT] billion.
The portfolio manager responsible for the day-to-day management of the
High Yield Bond Fund is Mark E. Durbiano. 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.
Pacific Investment Management Company ("PIMCO") serves as Sub-advisor
for the 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 [INSERT], PIMCO had over $[INSERT] billion of assets under
management.
The portfolio manager responsible for the day-to-day management of the
Total Return Bond Portfolio is William H. Gross. Mr. Gross is Managing Director
of PIMCO and has been associated with the firm for 24 years.
J.P. Morgan Investment Management, Inc. ("J.P. Morgan") serves as
Sub-advisor for the Money Market Portfolio. J.P. Morgan, located at 522 Fifth
Avenue, New York, New York, 10036, manages employee benefit funds of
corporations, labor unions and state and local governments and the accounts of
other institutional investors, including other investment companies. J.P. Morgan
is a wholly-owned subsidiary of J.P. Morgan & Co. Incorporated, which, as of
[INSERT], managed approximately $[INSERT] billion in assets.
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>
<S> <C> <C>
Net Asset Value: Annual Rate:
Int'l Small Capitalization Fund: [INSERT] [INSERT]
International Equity Portfolio: [INSERT] [INSERT]
Small Capitalization Fund: [INSERT] [INSERT]
Small Company Value Fund: [INSERT] [INSERT]
Growth Portfolio: [INSERT] [INSERT]
Equity Income Portfolio: [INSERT] [INSERT]
Strategic Balanced Fund: [INSERT] [INSERT]
High Yield Bond Fund: [INSERT] [INSERT]
Total Return Bond Portfolio: [INSERT] [INSERT]
Money Market Portfolio: [INSERT] [INSERT]
</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:
<TABLE>
<CAPTION>
<S> <C>
Founders Asset Management, Inc. for the International Small Capitalization Fund: An annual rate of [INSERT].
Rowe Price-Fleming International, Inc. for the International Equity Portfolio: An annual rate of [INSERT].
Founders Asset Management, Inc. for the Small Capitalization Fund: An annual rate of [INSERT].
T. Rowe Price Associates, Inc. for the Small Company Value Fund: An annual rate of [INSERT].
Janus Capital Corporation for the Growth Portfolio: An annual rate of [INSERT].
INVESCO Trust Company for the Equity Income Portfolio: An annual rate of [INSERT].
American Century Investment Management, Inc. for the Strategic Balanced Fund: An annual rate of [INSERT].
Federated Investment Counseling for the High Yield Bond Fund: An annual rate of [INSERT].
Pacific Investment Management Company for the Total Return Bond Portfolio: An annual rate of [INSERT].
J.P. Morgan Investment Management, Inc. for the Money Market Portfolio: An annual rate of [INSERT].
</TABLE>
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. [INSERT Fee
Waivers, if applicable]. Voluntary fee waivers or reductions may be rescinded at
any time and without notice to investors.
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;
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, semi-annual, and quarterly
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 requested by the Directors
of the Company and the Trustees of the Trust, respectively. 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, the Company and the Trust have each agreed to pay the
Administrator [INSERT]. For an additional discussion of the Administration
Agreements, 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 International Equity Portfolio, Small
Company Value Fund, Equity Income Portfolio and the High Yield Bond Fund will
not exceed 100% under normal market conditions. The annual portfolio turnover
rates for the International Small Capitalization Fund, Small Capitalization
Fund, Growth Portfolio, Strategic Balanced Fund and Total Return Bond Portfolio
are not anticipated to exceed 150%, 150%, 200%, 150% and 150%, 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 involves correspondingly higher brokerage commission expenses
and other transaction costs, which must be ultimately borne by a Fund's
shareholders. 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, as well as the recommendations or directions of the Investment Manager
that take into account, among other things, the sale of Fund shares, as factors
in the selection of broker-dealers to execute transactions, subject to the
requirements of best net price 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 International Small Capitalization
Fund, International Equity Fund, Small Capitalization Fund, Small Company Value
Fund and Growth Fund will be declared and paid annually; dividends from the net
investment income of the Equity Income Fund and the Strategic Balanced Fund will
be declared and paid semi-annually; dividends from the net investment income of
the Total Return Bond Fund will be declared and paid quarterly; and dividends
from net investment income of the High Yield Bond Fund and the Money Market Fund
will be declared daily and paid monthly. Dividends from the 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 gain 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:
If your account is not a tax-deferred retirement account, you should be
aware of the following tax implications of investing in the Funds. 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.
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 telephone to [INSERT] or, if
in writing, to "American Skandia Advisor Funds, Inc." at [INSERT].
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 affiliate 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 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
cash and securities holdings of the Funds of the Company 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 International Small Capitalization Fund and International Equity
Fund, and co-custodian for all foreign securities holdings of the Funds of the
Company 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. [INSERT], located at [INSERT], has been
selected as the independent accountants of the Company and the Trust.
USE OF JOINT PROSPECTUS AND SAI:
Each of the Feeder Funds and their corresponding Portfolios
acknowledges that it is solely responsible for all information or lack of
information about that Fund and Portfolio in this Prospectus or in the Company's
SAI, and no other Fund or Portfolio is responsible therefor. The Directors of
the Company and the Trustees of the Trust have considered this factor in
approving each Feeder Fund's use of a single combined Prospectus and combined
SAI.
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.
STATEMENT OF ADDITIONAL INFORMATION
[INSERT], 1997
- --------------------------------------------------------------------------------
AMERICAN SKANDIA ADVISOR FUNDS, INC.
[INSERT ADDRESS]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Table of Contents Page
<S> <C>
General Information and History
Investment Programs of the Funds
International Small Capitalization Fund International Equity Fund Small
Capitalization Fund Small Company Value Fund Growth Fund Equity Income Fund
Strategic Balanced Fund High Yield Bond Fund Total Return Bond Fund 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
</TABLE>
- -------------------------------------------------------------------------------
This Statement of Additional Information ("SAI") is not a prospectus and should
be read in conjunction with the Company's current Prospectus, dated [INSERT],
1997. A copy of the Company's Prospectus may be obtained by writing to "American
Skandia Advisor Funds, Inc." at [INSERT] or by calling [INSERT].
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 -the International Equity, Growth, Equity
Income, Total Return Bond and Money Market (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 the 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) International Small Capitalization Fund: Founders Asset
Management, Inc.; (b) International Equity Portfolio: Rowe Price-Fleming
International, Inc.; (c) Small Capitalization Fund: Founders Asset Management,
Inc.; (d) Small Company Value Fund: T. Rowe Price Associates, Inc.; (e) Growth
Portfolio: Janus Capital Corporation; (f) Equity Income Portfolio: INVESCO Trust
Company; (g) Strategic Balanced Fund: American Century Investment Management,
Inc.; (h) High Yield Bond Fund: Federated Investment Counseling; (i) Total
Return Bond Portfolio: Pacific Investment Management Company; and (j) 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.
INTERNATIONAL SMALL CAPITALIZATION FUND:
Investment Objective: The investment objective of the International Small
Capitalization Fund is to seek capital appreciation.
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 Fund 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
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, the Fund may enter into a forward
contract to sell, for a fixed amount of dollars, the amount of foreign currency
approximating the value of some or all of the Fund's securities denominated in
such foreign currency. The Fund will 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 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 should 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.
INTERNATIONAL EQUITY FUND:
Investment Objective: The investment objective of the International Equity 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.
Today, more investment opportunities may exist abroad than in the U.S.
In 1970, more than one-half of the world's equity capitalization (the total
market value of the world's equity securities traded on stock exchanges) was
attributable to U.S. securities. Now practically the opposite is true. And over
the last ten years, the EAFE Index, a widely accepted index of European,
Australian and Far Eastern equity securities, has outperformed the Standard &
Poor's 500 Index. Although the EAFE Index may not be representative of the Fund,
the Sub-advisor believes it may be a useful indicator of the opportunities in
foreign equity investing.
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. In order to comply with the
requirements of the securities or currencies laws in several states, 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. Should these state laws change
or should the Fund obtain a waiver of their application, the Fund reserves the
right to increase this percentage. 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.
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.
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. In
order to comply with the requirements of several states, 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. Should these state laws change or
should the Fund obtain a waiver of their application, the Fund reserves the
right to increase this percentage. 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. For a discussion of certain risks involved in options, see this
SAI and the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
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 and the Trustees of the Trust, 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 and the Trustees of the Trust. 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 and the Trustees of the Trust, 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 and the Trustees of the Trust 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 or the Trustees of the Trust, where applicable,
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 5% 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 and certain states 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.
SMALL CAPITALIZATION FUND:
Investment Objective: The investment objective of the Small Capitalization
Fund is capital appreciation.
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 its portfolio.
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
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 its
portfolio 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
the risks involved in foreign investments, see the Company's Prospectus and this
SAI under "Certain Risk Factors and Investment Methods."
Forward Contracts For Purchase or Sale of Foreign Currencies. The Fund
generally will conduct 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 the Fund may each enter into a
forward contract to sell, for a fixed amount of dollars, the amount of foreign
currency approximating the value of some or all of those portfolio securities
denominated in such foreign currency. The Fund will 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 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).
Low-Rated and 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.) Investment in lower-rated or
unrated securities is generally considered to be of high risk. These debt
securities 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 objectives 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, high risk 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 adopted 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 should 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.
SMALL COMPANY VALUE FUND:
Investment Objective: The investment objective of the Small Company Value Fund
is to provide long-term capital appreciation 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 interest 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 of 1986, as amended (the "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 and applicable state law.
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 5% 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.
GROWTH FUND:
Investment Objective: The investment objective of the Growth 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 and the Trustees of the
Trust, 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 or the Trustees of the Trust, where
applicable, 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 or the Trustees of the Trust,
where applicable, the Investment Manager or the Sub-advisor acting pursuant to
authority delegated by the Directors or Trustees, 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.
EQUITY INCOME FUND:
Investment Objective: The investment objective of the Equity Income 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 a secondary factor 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 will endeavor to select
and purchase securities providing reasonably secure dividend or interest income.
Up to 10% of the Fund's assets may be invested in equity securities that do not
pay regular dividends. 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 and the Trustees of the Trust 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 or the Trustees of the Trust, where applicable,
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 and the Trustees of the Trust, or the Investment
Manager or the Sub-advisor, acting pursuant to authority delegated by the
Directors and the Trustees, 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.
STRATEGIC BALANCED FUND:
Investment Objective: The investment objective of the Strategic Balanced
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 Fund intends to comply with guidelines of eligibility for exclusion
from the definition of the term "commodity pool operator" adopted by the
Commodity Futures Trading Commission and the National Futures Association, which
regulate trading in the futures markets. To do so, the aggregate intitial margin
required to establish such positions may not exceed 5% of the fair market value
of the Fund's net assets, after taking into account unrealized profits and
unrealized losses on any contracts it has entered into.
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.
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, 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.) Under the restrictions, the Fund also must, as to short positions, use
futures contracts and options thereon solely for bona fide hedging purposes
within the meaning and intent of the applicable provisions under the CEA. 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.
HIGH YIELD BOND FUND:
Investment Objective: The investment objective of the High Yield Bond 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.
TOTAL RETURN BOND FUND:
Investment Objective: The investment objective of the Total Return Bond 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 non-leveraging, temporary or
emergency purposes in an amount not exceeding 33 1/3% of the value of its total
assets. The Fund also may borrow for investment purposes. Such a practice will
result in leveraging of the Fund's assets and may cause the Fund to liquidate
portfolio positions when it would not be advantageous to do so. 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.
The Fund also may enter into "mortgage dollar rolls," which are similar
to reverse repurchase agreements in certain respects. 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.
Dollar roll transactions involve the risk that the market value of the
securities sold may decline below the repurchase price of those securities. The
securities that are repurchased will be collateralized with different pools of
mortgages with different prepayment histories, and as a result, the borrower is
subject to a greater degree of prepayment related uncertainty.
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. To the extent that
the Fund collateralized its obligations under a dollar roll agreement, the asset
coverage requirements of the Investment Company Act of 1940 will not apply to
such transactions. 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 or the Trustees of
the Trust, where applicable, 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.
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 or the Trustees of the Trust, where applicable,
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.
MONEY MARKET FUND:
Investment Objective: The investment objective of the Money Market 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 and the
Trustees of the Trust, 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 and the Trustees of the Trust, 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 the 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 or the Trustees of the Trust, where applicable,
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 International Small Capitalization Fund and
the 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 International Equity Fund and Portfolio and
the 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 Funds apply equally to the Feeder 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 intented 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 is pure speculation in that they 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
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.
<TABLE>
<CAPTION>
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:
<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
Lincoln R. Collins (36)* Director Senior Vice President, Product
Management: American Skandia Life
Assurance Corporation (October 1995 to
present)
Vice President, Product Management:
American Skandia Life Assurance
Corporation (May 1992 to October 1995)
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)
</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, with the
exception of Mr. Collins, 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. Collins also serves as a Director
of ASLAC; 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 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
Directors of the Company who are not "interested persons" within the meaning of
the 1940 Act are expected to receive [INSERT] in the current fiscal year. As of
[INSERT], 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.
The Company's Articles of Incorporation provide 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.
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. 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 and the Trust commenced operations in
[INSERT], 1997, neither the Funds nor the Portfolios have paid any advisory fees
to the Investment Manager as of the date of this SAI. 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 International Small
Capitalization Fund and the Small Capitalization Fund; (b) Rowe Price-Fleming
International, Inc. for the International Equity Portfolio; (c) T. Rowe Price
Associates, Inc. for the Small Company Value Fund; (d) Janus Capital Corporation
for the Growth Portfolio; (e) INVESCO Trust Company for the Equity Income
Portfolio; (f) American Century Investment Management, Inc. (formerly known as,
"Investors Research Corporation") for the Strategic Balanced Fund; (g) Federated
Investment Counseling for the High Yield Bond Fund; (h) Pacific Investment
Management Company for the Total Return Bond Portfolio; (i) J.P. Morgan
Investment Management, Inc. for the 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, dated [INSERT] (the
"Administration Agreements"), the Administrator has agreed to provide certain
fund accounting and administrative services to the Company and the Trust, as
described in the Company's Prospectus under "Management of the Funds."
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.
As compensation for the services and facilities provided by the
Administrator under the Administration Agreements, the Company and the Trust
have agreed to pay the Administrator [INSERT]. Because the Company and the Trust
commenced operations in [INSERT], 1997, neither the Company nor the Trust have
paid any fees to the Administrator as of the date of this SAI.
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 [INSERT] to
reimburse the Non-Feeder Funds for their respective operating expenses
(exclusive of taxes, interest, brokerage commissions, certain distribution fees
and extraordinary expenses, but inclusive of the management fee) which in the
aggregate exceed specified percentages of the Funds' average net assets as
follows:
International Small Capitalization Fund: [INSERT]
Small Capitalization Fund: [INSERT]
Small Company Value Fund: [INSERT]
Strategic Balanced Fund: [INSERT]
High Yield Bond Fund: [INSERT]
The Investment Manager has also voluntarily agreed until [INSERT] to
reimburse the Feeder Funds for their respective operating expenses and pro rata
share of operating expenses of the Funds' corresponding Portfolios (exclusive of
taxes, interest, brokerage commissions, certain distribution fees and
extraordinary expenses, but inclusive of the management fee) which in the
aggregate exceed specified percentages of the Funds' average net assets as
follows:
International Equity Fund: [INSERT]
Growth Fund: [INSERT]
Equity Income Fund: [INSERT]
Total Return Bond Fund: [INSERT]
Money Market Fund: [INSERT]
The Investment Manager may terminate the above voluntary agreements at
any time. 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
affiliate 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). 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. 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,
stimulating distribution activities and making available to shareholders
services provided by representatives who have knowledge of the shareholders'
particular circumstances and goals. 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 [INSERT], 1997, no
compensation has been paid to the Distributor in connection with the Plans as of
the date of this SAI. 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
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 or from the Transfer Agent by calling [INSERT].
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 Fund, as
well as the recommendations or directions of the Investment Manager that take
into account, among other things, the sale of Fund Shares, as factors in the
selection of brokers to execute portfolio transactions for a Fund or Portfolio,
subject to the requirements of best net price 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 execute 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 and the Trust commenced operations in [INSERT],
1997, no brokerage commissions have been paid on behalf of the Non-Feeder Funds
or the Portfolios as of the date of this SAI.
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 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. 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 International
Equity Portfolio, Small Company Value Fund, Equity Income Portfolio and the High
Yield Bond Fund will not exceed 100% under normal market conditions. The
portfolio turnover rates for the International Small Capitalization Fund, Small
Capitalization Fund, Growth Portfolio, Strategic Balanced Fund and Total Return
Bond Portfolio are not anticipated to exceed 150%, 150%, 200%, 150% and 150%,
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 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").
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 elect 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 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
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 forward
currency contracts, options and futures contracts or on the underlying
securities. Certain straddles treated as short sales for tax purposes may also
result in the loss of the holding period of underlying securities 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 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 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 not qualify for the 70%
dividends - received deduction for the Fund's corporate shareholders.
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,
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 gain distributions received on those shares.
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 issue
an unlimited number of full and fractional shares of beneficial interest (par
value $0.01 per share) and, from time to time and without shareholder approval,
to establish 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 and accountants. 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 are fully paid and
nonassessable and, when issued, have no preference, preemptive, conversion or
similar rights, and are freely transferable.
[INSERT], which contributed the initial capital of the Funds, owned 100% of
the Funds' outstanding shares as of the date of this SAI.
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 cash and securities holdings of the Funds of the Company
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 International Small
Capitalization Fund and International Equity Fund, and co-custodian for all
foreign securities holdings of the Funds of the Company 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:
[INSERT], located at [INSERT], has been selected as the independent
certified public accountants of the Company and the Trust, 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
The Company and each Fund's unaudited pro-forma financial statements as
of [INSERT], together with the notes thereto and the report of [INSERT], are
attached to this SAI.
<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:
To be filed by amendment.
<TABLE>
<CAPTION>
(b) Exhibits:
1. Articles of Incorporation of Registrant.
2. By-laws of Registrant.
3. None.
4. None.
<S> <C>
5. *(a) Form of Investment Management Agreement between Registrant and American Skandia
Investment Services, Incorporated for the International Small Capitalization Fund.
*(b) Form of Investment Management Agreement between American Skandia Master Trust and
American Skandia Investment Services, Incorporated for the International Equity
Portfolio.
*(c) Form of Investment Management Agreement between Registrant and American Skandia
Investment Services, Incorporated for the Small Capitalization Fund.
*(d) Form of Investment Management Agreement between Registrant and American Skandia
Investment Services, Incorporated for the Small Company Value Fund.
*(e) Form of Investment Management Agreement between American Skandia Master Trust and
American Skandia Investment Services, Incorporated for the Growth Portfolio.
*(f) Form of Investment Management Agreement between American Skandia Master Trust and
American Skandia Investment Services, Incorporated for the Equity Income Portfolio.
*(g) Form of Investment Management Agreement between Registrant and American Skandia
Investment Services, Incorporated for the Strategic Balanced Fund.
*(h) Form of Investment Management Agreement between Registrant and American Skandia
Investment Services, Incorporated for the High Yield Bond Fund.
*(i) Form of Investment Management Agreement between American Skandia Master Trust and
American Skandia Investment Services, Incorporated for the Total Return Bond Portfolio.
*(j) Form of Investment Management Agreement between American Skandia Master Trust and
American Skandia Investment Services, Incorporated for the Money Market Portfolio.
*(k) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Founders Asset Management, Inc. for the International Small
Capitalization Fund.
*(l) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Rowe Price-Fleming International, Inc. for the International Equity
Portfolio.
*(m) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Founders Asset Management, Inc. for the Small Capitalization Fund.
*(n) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and T. Rowe Price Associates, Inc. for the Small Company Value Fund.
*(o) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Janus Capital Corporation for the Growth Portfolio.
*(p) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and INVESCO Trust Company for the Equity Income Portfolio.
*(q) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and American Century Investment Management, Inc. for the Strategic
Balanced Fund.
*(r) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Federated Investment Counseling for the High Yield Bond Fund.
*(s) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Pacific Investment Management Company for the Total Return Bond
Portfolio.
*(t) Form of Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and J.P. Morgan Investment Management, Inc. for the Money Market
Portfolio.
6. *(a) Form of Underwriting Agreement between Registrant and American Skandia Marketing,
Incorporated.
*(b) Form of Dealer Agreement with the Distributor.
7. None.
8. *(a) Form of Custodian Agreement between Registrant and PNC Bank.
*(b) Form of Custodian Agreement between Registrant and Morgan Stanley Trust Company.
9. *(a) Form of Administration Agreement between Registrant and PFPC Inc.
*(b) Form of Transfer Agency Agreement between Registrant and Boston Financial Data
Services, Inc.
10. Opinion and Consent of Counsel.
11. *Consent of Independent Public Accountant.
12. None.
13. *Share Purchase Agreement.
14. None.
15. *(a) Form of Distribution and Service Plan for Class A Shares.
*(b) Form of Distribution and Service Plan for Class B Shares.
*(c) Form of Distribution and Service Plan for Class C Shares.
*(d) Form of Distribution and Service Plan for Class X Shares.
16. None.
17. None.
18. *Form of Rule 18f-3 Plan.
</TABLE>
- --------------------------------------
* To be filed by amendment.
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>
Number of Record Holders
Title of Class as of March 1, 1997
-------------- -------------------
International Small Capitalization Fund 0
International Equity Fund 0
Small Capitalization Fund 0
Small Company Value Fund 0
Growth Fund 0
Equity Income Fund 0
Strategic Balanced Fund 0
High Yield Bond Fund 0
Total Return Bond Fund 0
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, Section 5 of the
Registrant's Articles of Incorporation and Article V of the Registrant's
By-laws, both filed herewith.
Information as to indemnification of the underwriter or affiliated
persons of the Registrant against liability pursuant to contracts, including the
Underwriting and Distribution Agreement, the Investment Management Agreements
and the Sub-Advisory Agreements, will be provided by amendment.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended ("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
Securities and Exchange 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 Securities and Exchange Commission on 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 Securities and
Exchange Commission, and is incorporated herein by reference.
ITEM 29. Principal Underwriter
American Skandia Marketing, Incorporated (the "Distributor"), 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 affiliate 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 Accounts None
Manager
Jan R. Carendi Chief Executive Officer & Director President, Principal Executive Officer
& Director
Daniel R. Darst Senior Vice President & National None
Marketing Director
Paul DeSimone Vice President, Corporate Controller None
& Director
Wade A. Dokken President, Chief Marketing Officer & None
Director
Walter G. Kenyon Vice President & National Accounts None
Manager
Lawrence Kudlow Senior Vice President & Chief None
Economist
N. David Kuperstock Vice President & Director None
Daniel LaBonte Vice President & Associate Marketing None
Director
Thomas M. Mazzaferro Executive Vice President & Chief Treasurer & Director
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
Heidi Ann Richardson Vice President & Portfolio Marketing None
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
Tamara L. Wood Vice President & National Sales None
Director (Special Products)
</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, [INSERT]. 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 American Skandia Life Assurance Corporation, One
Corporate Drive, Shelton, Connecticut 06484. The Registrant's financial ledgers
and similar financial records are maintained at 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, MA 02171.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the Rules
promulgated thereunder with respect to American Skandia Master Trust (the
"Master Trust") are maintained at its 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 4th day of March, 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 Principal Executive Officer 3/4/97
Gordon C. Boronow & Director
/s/ Lincoln R. Collins Director 3/4/97
Lincoln R. Collins
/s/ Eric C. Freed Secretary 3/4/97
Eric C. Freed
/s/ Thomas M. Mazzaferro Chief Financial Officer 3/4/97
Thomas M. Mazzaferro & Director
</TABLE>
<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 City of Shelton, and State of Connecticut, on
the 4th day of March, 1997.
AMERICAN SKANDIA MASTER TRUST
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 Director 3/4/97
Gordon C. Boronow
/s/ Jan R. Carendi Principal Executive Officer 3/5/97
Jan R. Carendi & Director
/s/ Eric C. Freed Secretary 3/4/97
Eric C. Freed
/s/ Thomas M. Mazzaferro Chief Financial Officer 3/4/97
Thomas M. Mazzaferro & Director
</TABLE>
<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
1 Form of Articles of Incorporation of Registrant.
2 Form of By-laws of Registrant.
10 Opinion and Consent of Counsel.
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
ARTICLES OF INCORPORATION
FIRST: The undersigned, Rachel B. Mandell, whose address is 36
South Charles Street, Baltimore, Maryland 21201, being at least eighteen years
of age, acting as incorporator, does hereby form a corporation under the General
Laws of the State of Maryland.
SECOND: The name of the corporation (which is hereinafter called
the "Corporation") is:
AMERICAN SKANDIA ADVISOR FUNDS, INC.
THIRD: (a) The purposes for which the Corporation is formed and
the business and objects to be carried on and promoted by it are:
(1) To engage primarily in the business of investing,
reinvesting or trading in securities as an investment company
classified under the Investment Company Act of 1940 as an open-end,
management company.
(2) To engage in any one or more businesses or transactions,
or to acquire all or any portion of any entity engaged in any one or
more businesses or transactions, which the Board of Directors may from
time to time authorize or approve, whether or not related to the
business described elsewhere in this article or to any other business
at the time or theretofore engaged in by the Corporation.
(b) The foregoing enumerated purposes and objects shall be in no
way limited or restricted by reference to, or inference from, the terms of any
other clause of this or any other Article of the Charter of the Corporation, and
each shall be regarded as independent; and they are intended to be and shall be
construed as powers as well as purposes and objects of the Corporation and shall
be in addition to and not in limitation of the general powers of corporations
under the General Laws of the State of Maryland.
FOURTH: The present address of the principal office of the
Corporation in this State is c/o The Corporation Trust Incorporated, 32 South
Street, Baltimore, Maryland 21202.
FIFTH: The name and address of the resident agent of the
Corporation in this State are The Corporation Trust Incorporated, 32 South
Street, Baltimore, Maryland 21202. Said resident agent is a Maryland
corporation.
SIXTH: (a) The total number of shares of stock of all classes
and series which the Corporation initially has authority to issue is one hundred
twenty (120) shares of capital stock (par value $.01 per share), amounting in
aggregate par value to one dollar ($1.20). All of the authorized shares of
capital stock of the Corporation are initially classified as "Common Stock" of
which twelve (12) shares are further initially classified as a series of Common
Stock designated the "International Small Capitalization Fund," twelve (12)
shares are further initially classified as a series of Common Stock designated
the "International Equity Fund, twelve (12) shares are further initially
classified as a series of Common Stock designated the "Small Capitalization
Fund," twelve (12) shares are further initially classified as a series of Common
Stock designated the "Small Company Value Fund," twelve (12) shares are further
initially classified as a series of Common Stock designated the "Growth Fund,"
twelve (12) shares are further initially classified as a series of Common Stock
designated the "Value Growth and Income Fund," twelve (12) shares are further
initially classified as a series of Common Stock designated the "Strategic
Balanced Fund," twelve (12) shares are further initially classified as a series
of Common Stock designated the "High Yield Bond Fund," twelve (12) shares are
further initially classified as a series of Common Stock designated the "Total
Return Bond Fund," and twelve (12) shares as a series of Common Stock designated
the "Money Market Fund." The International Small Capitalization Fund,
International Equity Fund, Small Capitalization Fund, Small Company Value Fund,
Growth Fund, Value Growth and Income Fund, Strategic Balanced Fund, High Yield
Bond Fund, Total Return Bond Fund and 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,
consisting, until further changed, of three (3) Class A shares, three (3) Class
B shares, three (3) Class C shares and three (3) Class X shares. The number of
authorized shares of each such class of a particular Fund shall consist of the
sum of (x) the outstanding shares of that class 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 that Fund. The Board of Directors may classify and
reclassify any unissued shares of capital stock by setting or changing in any
one or more respects 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.
(b) Unless otherwise prohibited by law, so long as the
Corporation is registered as an open-end company under the Investment Company
Act of 1940, the Board of Directors shall have the power and authority, without
the approval of the holders of any outstanding shares, to increase or decrease
the number of shares of capital stock, or the number of shares of capital stock
of any class or series, that the Corporation has authority to issue.
(c) The following is a description of the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption of the
International Small Capitalization Fund, International Equity Fund, Small
Capitalization Fund, Small Company Value Fund, Growth Fund, Value Growth and
Income Fund, Strategic Balanced Fund, High Yield Bond Fund, Total Return Bond
Fund and Money Market Fund and any additional series of Common Stock (unless
otherwise provided in the articles supplementary or other charter document
classifying or reclassifying the shares of such series):
(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, because of redemptions or exchanges, an aggregate net
asset value which is less than the minimum initial investment in that
Fund 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 first business day
of the month following the month in which Class B shares were
purchased by a holder thereof, such shares (as well as any Class
B shares purchased through the reinvestment of dividends or
other distributions paid on all Class B 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 first business day
of the month following the month in which Class X shares were
purchased by a holder thereof, such shares (as well as a pro
rata portion of any Class X shares purchased through the
reinvestment of dividends or other distributions paid on all
Class X 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.
(d) Subject to the foregoing and to the Investment Company Act
of 1940, the power of the Board of Directors to classify and reclassify any of
the shares of capital stock shall include, without limitation, subject to the
provisions of the charter of the Corporation, authority to classify or
reclassify any unissued shares of such stock into one or more classes or series
of preferred stock, preference stock, special stock or other stock, and to
divide and classify shares of any class or series into one or more classes or
series of such class or series, by determining, fixing or altering one or more
of the following:
(1) The distinctive designation of such class or series and the
number of shares to constitute such class or series; provided that,
unless otherwise prohibited by the terms of such or any other class or
series, the number of shares of any class or series may be decreased by
the Board of Directors in connection with any classification or
reclassification of unissued shares and the number of shares of such
class or series may be increased by the Board of Directors in
connection with any such classification or reclassification, and any
shares of any class or series which have been redeemed, purchased,
otherwise acquired or converted into shares of any other class or
series shall become part of the authorized capital stock and be subject
to classification and reclassification as herein provided.
(2) Whether or not and, if so, the rates, amounts and times at
which, and the conditions under which, dividends shall be payable on
shares of such class or series, whether any such dividends shall rank
senior or junior to or on a parity with the dividends payable on any
other class or series of stock, and the status of any such dividends as
cumulative, cumulative to a limited extent or non-cumulative and as
participating or non-participating.
(3) Whether or not shares of such class or series shall have
voting rights, in addition to any voting rights provided by law and, if
so, the terms of such voting rights.
(4) Whether or not shares of such class or series shall have
conversion or exchange privileges and, if so, the terms and conditions
thereof, including provision for adjustment of the conversion or
exchange rate in such events or at such times as the Board of Directors
shall determine.
(5) Whether or not shares of such class or series shall be
subject to redemption and, if so, the terms and conditions of such
redemption, including the date or dates upon or after which they shall
be redeemable and the amount per share payable in case of redemption,
which amount may vary under different conditions and at different
redemption dates; and whether or not there shall be any sinking fund or
purchase account in respect thereof and, if so, the terms thereof.
(6) The rights of the holders of shares of such class or series
upon the liquidation, dissolution or winding up of the affairs of, or
upon any distribution of the assets of, the Corporation, which rights
may vary depending upon whether such liquidation, dissolution or
winding up is voluntary or involuntary and, if voluntary, may vary at
different dates, and whether such rights shall rank senior or junior to
or on a parity with such rights of any other class or series of stock.
(7) Whether or not there shall be any limitations applicable,
while shares of such class or series are outstanding, upon the payment
of dividends or making of distributions on, or the acquisition of, or
the use of monies for purchase or redemption of, any stock of the
Corporation, or upon any other action of the Corporation, including
action under this paragraph and, if so, the terms and conditions
thereof.
(8) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of such
class or series, not inconsistent with law and the charter of the
Corporation.
(e) For the purposes hereof and of any articles supplementary to
the charter providing for the classification or reclassification of any shares
of capital stock or of any other charter document of the Corporation (unless
otherwise provided in any such articles or document), any class or series of
stock of the Corporation shall be deemed to rank:
(1) prior to another class or series either as to dividends or
upon liquidation, if the holders of such class or series shall be
entitled to the receipt of dividends or of amounts distributable on
liquidation, dissolution or winding up, as the case may be, in
preference or priority to holders of such other class or series;
(2) on a parity with another class or series either as to
dividends or upon liquidation, whether or not the dividend rates,
dividend payment dates or redemption or liquidation price per share
thereof be different from those of such others, if the holders of such
class or series of stock shall be entitled to receipt of dividends or
amounts distributable upon liquidation, dissolution or winding up, as
the case may be, in proportion to their respective dividend rates or
redemption or liquidation prices, without preference or priority over
the holders of such other class or series; and
(3) junior to another class or series either as to dividends or
upon liquidation, if the rights of the holders of such class or series
shall be subject or subordinate to the rights of the holders of such
other class or series in respect of the receipt of dividends or the
amounts distributable upon liquidation, dissolution or winding up, as
the case may be.
(f) The Corporation may issue and sell fractions of shares of
capital stock having pro rata all the rights of full shares, including, without
limitation, the right to vote and to receive dividends, and wherever the words
"share" or "shares" are used in the charter or By-Laws of the Corporation, they
shall be deemed to include fractions of shares where the context does not
clearly indicate that only full shares are intended.
(g) The Corporation shall not be obligated to issue certificates
representing shares of capital stock of any class or series. At the time of
issue or transfer of shares without certificates, the Corporation shall provide
the stockholder with such information as may be required under the Maryland
General Corporation Law.
SEVENTH: The number of directors of the Corporation shall be
three, which number may be increased or decreased pursuant to the By-Laws of the
Corporation, but shall never be less than the minimum number permitted by the
General Laws of the State of Maryland now or hereafter in force. The names of
the directors who will serve until the first annual meeting and until their
successors are elected and qualified are as follows:
Gordon C. Boronow
Thomas M. Mazzaferro
Lincoln R. Collins
EIGHTH: (a) The following provisions are hereby adopted for the
purpose of defining, limiting and regulating the powers of the Corporation and
of the directors and stockholders:
(1) The Board of Directors is hereby empowered to authorize the
issuance from time to time of shares of its stock of any class or series,
whether now or hereafter authorized, or securities convertible into
shares of its stock of any class or series, whether now or hereafter
authorized, for such consideration as may be deemed advisable by the
Board of Directors and without any action by the stockholders.
(2) No holder of any stock or any other securities of the
Corporation, whether now or hereafter authorized, shall have any
preemptive right to subscribe for or purchase any stock or any other
securities of the Corporation other than such, if any, as the Board of
Directors, in its sole discretion, may determine and at such price or
prices and upon such other terms as the Board of Directors, in its sole
discretion, may fix; and any stock or other securities which the Board of
Directors may determine to offer for subscription may, as the Board of
Directors in its sole discretion shall determine, be offered to the
holders of any class, series or type of stock or other securities at the
time outstanding to the exclusion of the holders of any or all other
classes, series or types of stock or other securities at the time
outstanding.
(3) The Board of Directors of the Corporation shall, consistent
with applicable law, have power in its sole discretion to determine from
time to time in accordance with sound accounting practice or other
reasonable valuation methods what constitutes annual or other net
profits, earnings, surplus or net assets in excess of capital; to
determine that retained earnings or surplus shall remain in the hands of
the Corporation; to set apart out of any funds of the Corporation such
reserve or reserves in such amount or amounts and for such proper purpose
or purposes as it shall determine and to abolish any such reserve or any
part thereof; to distribute and pay distributions or dividends in stock,
cash or other securities or property, out of surplus or any other funds
or amounts legally available therefor, at such times and to the
stockholders of record on such dates as it may, from time to time,
determine; and to determine whether and to what extent and at what times
and places and under what conditions and regulations the books, accounts
and documents of the Corporation, or any of them, shall be open to the
inspection of stockholders, except as otherwise provided by statute or
the By-Laws of the Corporation, and, except as so provided, no
stockholder shall have any right to inspect any book, account or document
of the Corporation unless authorized to do so by resolution of the Board
of Directors.
(4) Notwithstanding any provision of law requiring the
authorization of any action by a greater proportion than a majority of
the total number of shares of capital stock or of any class or series of
capital stock, such action shall be valid and effective if authorized by
the affirmative vote of the holders of a majority of the total number of
shares of capital stock or of such class or series, as the case may be,
outstanding and entitled to vote thereon, except as otherwise provided in
the charter of the Corporation. At a meeting of stockholders the presence
in person or by proxy of stockholders entitled to cast a majority of all
the votes entitled to be cast on any matter with respect to which one or
more classes or series of capital stock are entitled to vote as a
separate class shall constitute a quorum of such separate class for
action on that matter. Whether or not a quorum of such a separate class
for action on any such matter is present, a meeting of stockholders
convened on the date for which it was called may be adjourned as to that
matter from time to time without further notice by a majority vote of the
stockholders of the separate class present in person or by proxy to a
date not more than 120 days after the original record date.
(5) The Corporation shall indemnify (i) its directors and
officers, whether serving the Corporation or at its request any other
entity, to the full extent required or permitted by the General Laws of
the State of Maryland now or hereafter in force, including the advance of
expenses under the procedures and to the full extent permitted by law,
and (ii) other employees and agents to such extent as shall be authorized
by the Board of Directors or the By-Laws of the Corporation and be
permitted by law. The foregoing rights of indemnification shall not be
exclusive of any other rights to which those seeking indemnification may
be entitled. The Board of Directors may take such action as is necessary
to carry out these indemnification provisions and is expressly empowered
to adopt, approve and amend from time to time such by-laws, resolutions
or contracts implementing such provisions or such further indemnification
arrangements as may be permitted by law. No amendment, modification or
repeal of this provision shall adversely affect any right or protection
provided hereunder that exists at the time of such amendment,
modification or repeal.
(6) To the fullest extent permitted by Maryland statutory or
decisional law, as amended or interpreted, no director or officer of the
Corporation shall be personally liable to the Corporation or its
stockholders for money damages. No amendment, modification or repeal of
this provision shall adversely affect any right or protection provided
hereunder that exists at the time of such amendment, modification or
repeal.
(7) The Corporation reserves the right from time to time to make
any amendments of its charter which may now or hereafter be authorized by
law, including any amendments changing the terms or contract rights, as
expressly set forth in its charter, of any of its outstanding capital
stock by classification, reclassification or otherwise.
(8) For any stockholder proposal to be presented in connection
with an annual meeting of stockholders of the Corporation, including any
proposal relating to the nomination of a director to be elected to the
Board of Directors of the Corporation, the stockholders must have given
timely written notice thereof in writing to the Secretary of the
Corporation in the manner and containing the information required by the
By-Laws. Stockholder proposals to be presented in connection with a
special meeting of stockholders will be presented by the Corporation only
to the extent required by the Investment Company Act of 1940, Maryland
General Corporation Law and the By-Laws of the Corporation.
(b) The enumeration and definition of particular powers of the
Board of Directors included in the foregoing shall in no way be limited or
restricted by reference to or inference from the terms of any other clause of
this or any other article of the charter of the Corporation, or construed as or
deemed by inference or otherwise in any manner to exclude or limit any powers
conferred upon the Board of Directors under the General Laws of the State of
Maryland now or hereafter in force.
NINTH: The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, I have signed these Articles of
Incorporation, acknowledging the same to be my act, on this 5th day of March,
1997.
Witness:
- ------------------------------- --------------------------------
Rachel Mandell,
Incorporator
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
BY-LAWS
ARTICLE I
STOCKHOLDERS
1.01. Annual Meetings. The Corporation is not required to hold
an annual meeting of its stockholders in any year in which the election of
directors is not required to be acted upon under the Investment Company Act of
1940. If the Corporation is required by the Investment Company Act of 1940 to
hold a meeting of stockholders to elect directors, such meeting shall be held at
a date and time set by the Board of Directors in accordance with the Investment
Company Act of 1940 and no later than 120 days after the occurrence of the event
requiring the meeting. Any stockholders' meeting held in accordance with the
preceding sentence shall for all purposes constitute the annual meeting of
stockholders for the fiscal year of the Corporation in which the meeting is
held. Except as the charter or statute provides otherwise, any business may be
considered at an annual meeting without the purpose of the meeting having been
specified in the notice. Failure to hold an annual meeting does not invalidate
the Corporation's existence or affect any otherwise valid corporate acts.
1.02. Special Meetings. At any time in the interval between
annual meetings, a special meeting of stockholders may be called by the Chairman
of the Board or the Chief Executive Officer or by a majority of the Board of
Directors by vote at a meeting or in writing (addressed to the Secretary of the
Corporation) with or without a meeting. Special meetings of the stockholders
shall be called as may be required by law. The Board of Directors of the
Corporation shall call a special meeting of stockholders, in its discretion, on
the written request of stockholders holding at least 10 percent of outstanding
shares of a Fund. A request for a special meeting shall state the purpose of the
meeting and the matters proposed to be acted on at it. The Secretary shall
inform the stockholders who make the request of the reasonably estimated costs
of preparing and mailing a notice of the meeting and, on payment of these costs
to the Corporation, notify each stockholder entitled to notice of the meeting.
1.03. Place of Meetings. Meetings of stockholders shall be
held at such place in the United States as is set from time to time by the Board
of Directors.
1.04. Notice of Meetings; Waiver of Notice. Not less than ten
nor more than 90 days before each stockholders' meeting, the Secretary shall
give written notice of the meeting to each stockholder entitled to vote at the
meeting and each other stockholder entitled to notice of the meeting. The notice
shall state the time and place of the meeting and, if the meeting is a special
meeting or notice of the purpose is required by statute, the purpose of the
meeting. Notice is given to a stockholder when it is personally delivered to
him, left at his residence or usual place of business, or mailed to him at his
address as it appears on the records of the Corporation. Notwithstanding the
foregoing provisions, each person who is entitled to notice waives notice if he
before or after the meeting signs a waiver of the notice which is filed with the
records of stockholders' meetings, or is present at the meeting in person or by
proxy.
1.05. Quorum; Voting. Unless statute or the charter provides
otherwise, at a meeting of stockholders the presence in person or by proxy of
stockholders entitled to cast a majority of all the votes entitled to be cast at
the meeting constitutes a quorum, except that where the holders of any Fund or
class of shares are entitled to vote as a separate class (such Fund or class
being referred to as a "Separate Class") or where holders of two or more (but
not all) Funds or classes of shares are required to vote as a single class (such
Funds or classes being referred to as a "Combined Class"), the presence in
person or by proxy of the holders of a majority of the shares of that Separate
Class or Combined Class, as the case may be, entitled to vote thereat shall
constitute a quorum for such vote. A majority of all the votes cast at a meeting
at which a quorum is present is sufficient to approve any matter which properly
comes before the meeting, except that a plurality of all the votes cast at a
meeting at which a quorum is present is sufficient to elect a director.
1.06. Adjournments. Whether or not a quorum is present, a
meeting of stockholders convened on the date for which it was called may be
adjourned from time to time without further notice by a majority vote of the
stockholders present in person or by proxy to a date not more than 120 days
after the original record date. If a quorum with respect to a Separate Class or
a Combined Class, as the case may be, shall not be present or represented at any
meeting of stockholders, the holders of a majority of the shares of such
Separate Class or such Combined Class, as the case may be, present in person or
by proxy and entitled to vote shall have power to adjourn the meeting from time
to time as to such Separate Class or such Combined Class, as the case may be,
without notice other than announcement at the meeting, until the requisite
number of shares entitled to vote at such meeting shall be present. Any business
which might have been transacted at the meeting as originally notified may be
deferred and transacted at any such adjourned meeting at which a quorum shall be
present.
1.07. General Right to Vote; Proxies. Unless the charter
provides for a greater or lesser number of votes per share or limits or denies
voting rights, each outstanding share of stock, regardless of the Fund or class,
is entitled to one vote on each matter submitted to a vote at a meeting of
stockholders. In all elections for directors, each share of stock may be voted
for as many individuals as there are directors to be elected and for whose
election the share is entitled to be voted. A stockholder may vote the stock he
owns of record either in person or by proxy as provided by statute. Unless a
proxy provides otherwise, it shall not be valid for more than eleven months
after its date.
1.08. List of Stockholders. At each meeting of stockholders, a
full, true and complete list of all stockholders entitled to vote at such
meeting, showing the number and class of shares held by each and certified by
the transfer agent for such Fund or class or by the Secretary, shall be
furnished by the Secretary.
1.09. Conduct of Business and Voting. At all meetings of
stockholders, unless the voting is conducted by inspectors, the proxies and
ballots shall be received, and all questions touching the qualification of
voters and the validity of proxies, the acceptance or rejection of votes and
procedures for the conduct of business not otherwise specified by these By-Laws,
the charter or law, shall be decided or determined by the chairman of the
meeting. If demanded by stockholders, present in person or by proxy, entitled to
cast 10 percent in number of votes entitled to be cast, or if ordered by the
chairman, the vote upon any election or question shall be taken by ballot and,
upon like demand or order, the voting shall be conducted by one or more
inspectors, in which event the proxies and ballots shall be received, and all
questions touching the qualification of voters and the validity of proxies and
the acceptance or rejection of votes shall be decided, by such inspectors.
Unless so demanded or ordered, no vote need be by ballot and voting need not be
conducted by inspectors. The stockholders at any meeting may choose an inspector
or inspectors to act at such meeting, and in default of such election the
chairman of the meeting may appoint an inspector or inspectors. No candidate for
election as a director at a meeting shall serve as an inspector thereat.
1.10. Action by Written Consent. Any action required or
permitted to be taken at a meeting of stockholders may be taken without a
meeting if there is filed with the records of stockholders' meetings an
unanimous written consent which sets forth the action and is signed by each
stockholder entitled to vote on the matter and a written waiver of any right to
dissent signed by each stockholder entitled to notice of the meeting but not
entitled to vote at it.
ARTICLE II
BOARD OF DIRECTORS
2.01. Function of Directors. The business and affairs of the
Corporation shall be managed under the direction of its Board of Directors. All
powers of the Corporation may be exercised by or under authority of the Board of
Directors, except as conferred on or reserved to the stockholders by statute or
by the charter or By-Laws. The Board may delegate the duty of management of the
assets and the administration of the day-to-day operations of the Corporation to
one or more entities or individuals pursuant to a written contract or contracts
which have obtained the approvals, including the approval of renewals thereof,
required by the Investment Company Act of 1940.
2.02. Number of Directors. The Corporation shall have at least
three directors; provided that, if there is no stock outstanding, the number of
directors may be less than three but not less than one, and, if there is stock
outstanding and so long as there are fewer than three stockholders, unless
provided otherwise by the charter, the number of directors may be less than
three but not less than the number of stockholders. The Corporation shall have
the number of directors provided in its charter until changed as herein
provided. Unless statute or the charter provides otherwise, a majority of the
entire Board of Directors may alter the number of directors set by the charter
to a number not exceeding 25 nor less than the minimum number then permitted
herein, but the action may not affect the tenure of office of any director.
2.03. Election and Tenure of Directors. At each annual
meeting, the stockholders shall elect directors to hold office until the next
annual meeting and until their successors are elected and qualify.
2.04. Removal of Directors. Unless the charter of the
Corporation provides otherwise, the stockholders of the Corporation may remove
any director, with or without cause, by the affirmative vote of a majority of
all the votes entitled to be cast for the election of directors.
2.05. Vacancy on Board. The stockholders may elect a successor
to fill a vacancy on the Board of Directors which results from the removal of a
director by the stockholders. A director elected by the stockholders to fill a
vacancy which results from the removal of a director serves for the balance of
the term of the removed director. Unless otherwise provided by statute or the
charter, a majority of the remaining directors, whether or not sufficient to
constitute a quorum, may fill a vacancy on the Board of Directors which results
from any cause except an increase in the number of directors and a majority of
the entire Board of Directors may fill a vacancy which results from an increase
in the number of directors. A director elected by the Board of Directors to fill
a vacancy serves until the next annual meeting of stockholders and until his
successor is elected and qualifies.
2.06. Regular Meetings. After each meeting of stockholders at
which directors shall have been elected, the Board of Directors shall meet as
soon as practicable for the purpose of organization and the transaction of other
business. In the event that no other time and place are specified by resolution
of the Board, the Chief Executive Officer or Chairman with notice in accordance
with Section 2.08, the Board of Directors shall meet immediately following the
close of, and at the place of, such stockholders' meeting. Any other regular
meeting of the Board of Directors shall be held on such date and at any place as
may be designated from time to time by the Board of Directors.
2.07. Special Meetings. Special meetings of the Board of
Directors may be called at any time by the Chairman of the Board or the Chief
Executive Officer or by the Board of Directors by vote at a meeting, or in
writing with or without a meeting. A special meeting of the Board of Directors
shall be held on such date and at any place as may be designated from time to
time by the Board of Directors. In the absence of designation such meeting shall
be held at such place as may be designated in the call.
2.08. Notice of Meetings; Waiver of Notice. Except as provided
in Section 2.06, the Secretary shall give notice to each director of each
regular and special meeting of the Board of Directors. The notice shall state
the time and place of the meeting. Notice is given to a director when it is
delivered personally to him, left at his residence or usual place of business,
or sent by telegraph, facsimile transmission or telephone, at least 24 hours
before the time of the meeting or, in the alternative, by mail to his address as
it shall appear on the records of the Corporation at least 72 hours before the
time of the meeting. Unless statute, the By-Laws or a resolution of the Board of
Directors provides otherwise, the notice need not state the business to be
transacted at or the purposes of any regular or special meeting of the Board of
Directors. No notice of any meeting of the Board of Directors need be given to
any director who attends, or to any director who, in a writing executed and
filed with the records of the meeting either before or after the holding
thereof, waives such notice. Any meeting of the Board of Directors, regular or
special, may adjourn from time to time to reconvene at the same or some other
place, and no notice need be given of any such adjourned meeting other than by
announcement.
2.09. Action by Directors. Unless statute or the charter or
the By-Laws requires a greater proportion, the action of a majority of the
directors present at a meeting at which a quorum is present is action of the
Board of Directors. A majority of the entire Board of Directors shall constitute
a quorum for the transaction of business. In the absence of a quorum, the
directors present by majority vote and without notice other than by announcement
may adjourn the meeting from time to time until a quorum shall attend. At any
such adjourned meeting at which a quorum shall be present, any business may be
transacted which might have been transacted at the meeting as originally
notified. Unless otherwise provided by statute or regulation, any action
required or permitted to be taken at a meeting of the Board of Directors may be
taken without a meeting, if an unanimous written consent which sets forth the
action is signed by each member of the Board and filed with the minutes of
proceedings of the Board.
2.10. Participation by Telephone. Members of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment allowing all persons participating in the
meeting to hear each other at the same time. Unless provided otherwise by
statute or regulation, participation in a meeting by these means constitutes
presence in person at the meeting[, but shall not constitute attendance for the
purpose of compensation pursuant to Section 2.11].
2.11. Compensation. By resolution of the Board of Directors a
fixed sum and expenses, if any, for attendance at each regular or special
meeting of the Board of Directors or of committees thereof, and other
compensation for their services as such or on committees of the Board of
Directors, may be paid to directors. A director who serves the Corporation in
any other capacity also may receive compensation for such other services,
pursuant to a resolution of the Board of Directors.
ARTICLE III
COMMITTEES
3.01. Committees. The Board of Directors may appoint from
among its members an Executive Committee and other committees comprised of two
or more directors and delegate to these committees any of the powers of the
Board of Directors, except the power to declare dividends or other distributions
on stock, elect directors, issue stock other than as provided in the next
sentence, recommend to the stockholders any action which requires stockholder
approval, amend the By-Laws, or approve any merger or share exchange which does
not require stockholder approval. If the Board of Directors has given general
authorization for the issuance of stock, a committee of the Board, in accordance
with a general formula or method specified by the Board by resolution or by
adoption of a stock option or other plan, may fix the terms of stock subject to
classification or reclassification and the terms on which any stock may be
issued, including all terms and conditions required or permitted to be
established or authorized by the Board of Directors.
3.02. Committee Procedure. Each committee may fix rules of
procedure for its business. A majority of the members of a committee shall
constitute a quorum for the transaction of business and the action of a majority
of those present at a meeting at which a quorum is present shall be action of
the committee. The members of a committee present at any meeting, whether or not
they constitute a quorum, may appoint a director to act in the place of an
absent member. Any action required or permitted to be taken at a meeting of a
committee may be taken without a meeting, if an unanimous written consent which
sets forth the action is signed by each member of the committee and filed with
the minutes of the committee. The members of a committee may conduct any meeting
thereof by telephone in accordance with the provisions of Section 2.10.
3.03. Emergency. In the event of a state of disaster of
sufficient severity to prevent the conduct and management of the affairs and
business of the Corporation by its directors and officers as contemplated by the
charter and these By-Laws, any two or more available members of the then
incumbent Executive Committee shall constitute a quorum of that Committee for
the full conduct and management of the affairs and business of the Corporation
in accordance with the provisions of Section 3.01. In the event of the
unavailability, at such time, of a minimum of two members of the then incumbent
Executive Committee, the available directors shall elect an Executive Committee
comprised of any two members of the Board of Directors, whether or not they be
officers of the Corporation, which two members shall constitute the Executive
Committee for the full conduct and management of the affairs of the Corporation
in accordance with the foregoing provisions of this Section 3.03. This Section
3.03 shall be subject to implementation by resolution of the Board of Directors
passed from time to time for that purpose, and any provisions of the By-Laws
(other than this Section) and any resolutions which are contrary to the
provisions of this Section or to the provisions of any such implementing
resolutions shall be suspended until it shall be determined by any interim
Executive Committee acting under this Section that it shall be to the advantage
of the Corporation to resume the conduct and management of its affairs and
business under all the other provisions of these By-Laws.
ARTICLE IV
OFFICERS
4.01. Executive and Other Officers. The Corporation shall have
a Chief Executive Officer, a Secretary and a Chief Financial Officer. It may
also have a Chairman of the Board. The Board of Directors shall designate who
shall serve as chief executive officer, who shall have general supervision of
the business and affairs of the Corporation, and may designate a chief operating
officer, who shall have supervision of the operations of the Corporation. In the
absence of any designation the Chairman of the Board, if there be one, shall
serve as chief executive officer. The same person may hold the office of
Chairman of the Board and Chief Executive Officer. The Corporation may also have
one or more Vice-Presidents, assistant officers and subordinate officers as may
be established by the Board of Directors. A person may hold more than one office
in the Corporation except that no person may serve concurrently as both Chief
Executive Officer and Vice-President of the Corporation. The Chairman of the
Board shall be a director. The other officers may be directors.
4.02. Chairman of the Board. The Chairman of the Board, if one
be elected, shall preside at all meetings of the Board of Directors and of the
stockholders at which he shall be present. Unless otherwise specified by the
Board of Directors, he shall be the chief executive officer of the Corporation
and perform the duties customarily performed by chief executive officers, and
may perform any duties of the Chief Executive Officer. In general, he shall
perform all such duties as are from time to time assigned to him by the Board of
Directors.
4.03. Chief Executive Officer. Unless otherwise provided by
resolution of the Board of Directors, the Chief Executive Officer, in the
absence of the Chairman of the Board, shall preside at all meetings of the Board
of Directors and of the stockholders at which he shall be present. Unless
otherwise specified by the Board of Directors, the Chief Executive Officer shall
be the chief operating officer of the Corporation and perform the duties
customarily performed by chief operating officers. He or she may sign and
execute, in the name of the Corporation, all authorized deeds, mortgages, bonds,
contracts or other instruments, except in cases in which the signing and
execution thereof shall have been expressly delegated to some other officer or
agent of the Corporation. In general, he or she shall perform all duties usually
performed by a president of a corporation and such other duties as are from time
to time assigned to him or her by the Board of Directors or the Chairman of the
Board of the Corporation.
4.04. Vice-Presidents. The Vice-President or Vice-Presidents,
at the request of the Chief Executive Officer, or in the Chief Executive
Officer's absence or during his inability to act, shall perform the duties and
exercise the functions of the Chief Executive Officer, and when so acting shall
have the powers of the Chief Executive Officer. If there be more than one
Vice-President, the Board of Directors may determine which one or more of the
Vice-Presidents shall perform any of such duties or exercise any of such
functions, or if such determination is not made by the Board of Directors, the
Chief Executive Officer may make such determination; otherwise any of the
Vice-Presidents may perform any of such duties or exercise any of such
functions. The Vice-President or Vice-Presidents shall have such other powers
and perform such other duties, and have such additional descriptive designations
in their titles (if any), as are from time to time assigned to them by the Board
of Directors or the Chief Executive Officer.
4.05. Secretary. The Secretary shall keep the minutes of the
meetings of the stockholders, of the Board of Directors and of any committees,
in books provided for that purpose; he shall see that all notices are duly given
in accordance with the provisions of the By-Laws or as required by law; he shall
be custodian of the records of the Corporation; he may witness any document on
behalf of the Corporation, the execution of which is duly authorized, see that
the corporate seal is affixed where such document is required or desired to be
under its seal, and, when so affixed, may attest the same; and, in general, he
shall perform all duties incident to the office of a secretary of a corporation,
and such other duties as are from time to time assigned to him by the Board of
Directors or the Chief Executive Officer.
4.06. Chief Financial Officer. The Chief Financial Officer
shall have charge of and be responsible for all funds, securities, receipts and
disbursements of the Corporation, and shall deposit, or cause to be deposited,
in the name of the Corporation, all moneys or other valuable effects in such
banks, trust companies or other depositories as shall, from time to time, be
selected by the Board of Directors; he or she shall render to the Chief
Executive Officer and to the Board of Directors, whenever requested, an account
of the financial condition of the Corporation; and, in general, he shall perform
all the duties incident to the office of a treasurer of a corporation, and such
other duties as are from time to time assigned to him or her by the Board of
Directors or the Chief Executive Officer.
4.07. Assistant and Subordinate Officers. The assistant and
subordinate officers of the Corporation are all officers below the office of
Vice-President, Secretary or Chief Financial Officer. The assistant or
subordinate officers shall have such duties as are from time to time assigned to
them by the Board of Directors or the Chief Executive Officer.
4.08. Election, Tenure and Removal of Officers. The Board of
Directors shall elect the officers of the Corporation. The Board of Directors
may from time to time authorize any committee or officer to appoint assistant
and subordinate officers. Election or appointment of an officer, employee or
agent shall not of itself create contract rights. All officers shall be elected
or appointed to hold their respective offices during the pleasure of the Board.
The Board of Directors (or, as to any assistant or subordinate officer, any
committee or officer authorized by the Board) may remove an officer at any time.
The removal of an officer does not prejudice any of his contract rights. The
Board of Directors (or, as to any assistant or subordinate officer, any
committee or officer authorized by the Board) may fill a vacancy which occurs in
any office.
4.09. Compensation. The Board of Directors shall have power to
fix the salaries and other compensation and remuneration, of whatever kind, of
all officers of the Corporation. It may authorize any committee or officer, upon
whom the power of appointing assistant and subordinate officers may have been
conferred, to fix the salaries, compensation and remuneration of such assistant
and subordinate officers.
ARTICLE V
INDEMNIFICATION
5.01. Indemnification. Any indemnification by the Corporation
for a specific action, suit or proceeding shall (unless ordered by a court) be
made by the Corporation only upon (a) a final decision on the merits by a court
or other body before whom the action, suit or proceeding was brought that a
person permitted by the charter to seek indemnification (the "Covered Person")
was not liable by reason of Disabling Conduct (hereafter defined), (b) dismissal
of the proceeding against the Covered Person for insufficiency of evidence of
any Disabling Conduct, or (c) a reasonable determination, based upon a review of
the facts, by a majority of a quorum of the directors who are neither
"interested persons" of the Corporation as defined in the Investment Company Act
of 1940 nor parties to the proceeding ("Disinterested, Non-Party Directors"), or
an independent legal counsel in a written opinion, that the Covered Person was
not liable by reason of Disabling Conduct. Disabling Conduct includes (a)
liability in connection with any proceeding in which it is determined that (i)
the act or omission of the Covered Person was material to the matter giving rise
to the proceeding, and was committed in bad faith or was the result of active
and deliberate dishonesty, or (ii) the Covered Person actually received an
improper personal benefit in money, property or services, or (iii) in the case
of any criminal proceeding, the Covered Person had reasonable cause to believe
that the act or omission was unlawful, and (b) liability to the Corporation or
its stockholders to which the Covered Person would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office. The termination of
any proceeding by judgment, order or settlement shall not create a presumption
that the Covered Person did not meet the required standard of conduct; the
termination of any proceeding by conviction, or a plea of nolo contendere or its
equivalent, or an entry of an order of probation prior to judgment, shall create
a rebuttable presumption that the Covered Person did not meet the required
standard of conduct. Any determination pursuant to this Section 7.01 shall not
prevent recovery from any Covered Person of any amount paid to him in accordance
with this By-Law as indemnification if such Covered Person is subsequently
adjudicated by a court of competent jurisdiction to be liable by reason of
Disabling Conduct.
5.02. Enforcement of Indemnification Right. Any
indemnification, or payment of expenses in advance of the final disposition of
any action, suit or proceeding, shall be made promptly, and in any event within
60 days, upon the written request of the Covered Person. The right to
indemnification and advances hereunder shall be enforceable by the Covered
Person in any court of competent jurisdiction, if (i) the Corporation denies
such request, in whole or in part, or (ii) no disposition thereof is made within
60 days. The Covered Person's costs and expenses incurred in connection with
successfully establishing his right to indemnification, in whole or in part, in
any such action shall also be reimbursed by the Corporation. It shall be a
defense to any action for advance for expenses that (a) a determination has been
made that the facts then known to those making the determination would preclude
indemnification or (b) the Corporation has not received both (i) an undertaking
as required by law to repay such advances in the event it shall ultimately be
determined that the standard of conduct has not been met and (ii) a written
affirmation by the Covered Person of such Covered Person's good faith belief
that the standard of conduct necessary for indemnification by the Corporation
has been met.
5.03. Advance Payment of Expenses. Reasonable expenses
(including attorney's fees) incurred by a Covered Person may be paid or
reimbursed by the Corporation in advance of the final disposition of an action,
suit or proceeding upon receipt by the Corporation of (i) a written affirmation
by the Covered Person of his good faith belief that the standard of conduct
necessary for indemnification under this By-Law has been met and (ii) a written
undertaking by or on behalf of the Covered Person to repay the amount if it is
ultimately determined that such standard of conduct has not been met, so long as
either (A) the Covered Person has provided a security for his undertaking, (B)
the Corporation is insured against losses arising by reason of any lawful
advances, or (C) a majority of a quorum of the Disinterested, Non-Party
Directors, or an independent legal counsel in a written opinion, has determined,
based on a review of readily available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the Covered Person ultimately
will be found entitled to indemnification.
5.04. Exclusivity, Etc. The indemnification and advance of
expenses provided by this By-Law shall not be deemed exclusive of any other
rights to which a Covered Person seeking indemnification or advance of expenses
may be entitled under any law (common or statutory), or any agreement, vote of
stockholders or disinterested directors, or other provision that is consistent
with law, both as to action in an official capacity and as to action in another
capacity while holding office or while employed by or acting as agent for the
Corporation, shall continue in respect of all events occurring while the Covered
Person was a director or officer after such Covered Person has ceased to be a
director or officer, and shall inure to the benefit of the estate, heirs,
executors and administrators of such Covered Person. The Corporation shall not
be liable for any payment under this By-Law in connection with a claim made by a
director or officer to the extent such director or office has otherwise actually
received payment under an insurance policy, agreement, vote or otherwise. All
rights to indemnification and advance of expenses under the charter and
hereunder shall be deemed to be a contract between the Corporation and each
director or officer of the Corporation who serves or served in such capacity at
any time while this By-Law is in effect. Nothing herein shall prevent the
amendment of this By-Law, provided that no such amendment shall diminish the
rights of any Covered Person hereunder with respect to events occurring or
claims made before its adoption or as to claims made after its adoption in
respect of events occurring before its adoption. Any repeal or modification of
this By-Law shall not in any way diminish any rights to indemnification or
advance of expenses of a Covered Person or the obligations of the Corporation
arising hereunder with respect to events occurring, or claims made, while this
By-Law or any provision hereof is in force.
5.05. Insurance. The Corporation may purchase and maintain
insurance on behalf of any Covered Person against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such; provided, however, that the Corporation shall not purchase insurance to
indemnify any Covered Person against liability for Disabling Conduct.
5.06. Severability: Definitions. The invalidity or
unenforceability of any provision of this Article V shall not affect the
validity or enforceability of any other provision hereof. The phrase "this
By-Law" in this Article V means this Article V in its entirety.
ARTICLE VI
STOCK
6.01. Certificates for Stock. The Board of Directors may
determine to issue certificated or uncertificated shares of capital stock and
other securities of the Corporation. For certificated stock, each stockholder is
entitled to certificates which represent and certify the shares of stock he
holds in the Corporation. Each stock certificate shall include on its face the
name of the Corporation, the name of the stockholder or other person to whom it
is issued, and the class or series of stock and number of shares it represents.
It shall also include a statement which provides in substance that: the
Corporation will furnish to any stockholder on request and without charge a full
statement of the designations and any preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption of the stock of each class which the
Corporation is authorized to issue, of the differences in the relative rights
and preferences between the shares of each series of a preferred or special
class in series which the Corporation is authorized to issue, to the extent they
have been set, and of the authority of the Board of Directors to set the
relative rights and preferences of subsequent series of a preferred or special
class of stock and any restrictions on transferability. Such request may be made
to the Secretary or to its transfer agent. Upon the issuance of uncertificated
shares of capital stock, the Corporation shall send the stockholder a written
statement of the same information required on the certificate. It shall be in
such form, not inconsistent with law or with the charter, as shall be approved
by the Board of Directors or any officer or officers designated for such purpose
by resolution of the Board of Directors. Each stock certificate shall be signed
by the Chairman of the Board, the Chief Executive Officer, or a Vice-President,
and countersigned by the Secretary, an Assistant Secretary, the Chief Financial
Officer, or an Assistant Financial Officer. Each certificate may be sealed with
the actual corporate seal or a facsimile of it or in any other form and the
signatures may be either manual or facsimile signatures. A certificate is valid
and may be issued whether or not an officer who signed it is still an officer
when it is issued.
6.02. Transfers. The Board of Directors shall have power and
authority to make such rules and regulations as it may deem expedient concerning
the issue, transfer and registration of shares of stock; and may appoint
transfer agents and registrars thereof. The duties of transfer agent and
registrar may be combined.
6.03. Record Date and Closing of Transfer Books. The Board of
Directors may set a record date or direct that the stock transfer books be
closed for a stated period for the purpose of making any proper determination
with respect to stockholders, including which stockholders are entitled to
notice of a meeting, vote at a meeting, receive a dividend, or be allotted other
rights. The record date may not be prior to the close of business on the day the
record date is fixed nor, subject to Section 1.06, more than 90 days before the
date on which the action requiring the determination will be taken; the transfer
books may not be closed for a period longer than 20 days; and, in the case of a
meeting of stockholders, the record date or the closing of the transfer books
shall be at least 10 days before the date of the meeting.
6.04. Stock Ledger. The Corporation shall maintain a stock
ledger which contains the name and address of each stockholder and the number of
shares of stock of each Fund or class which the stockholder holds. The stock
ledger may be in written form or in any other form which can be converted within
a reasonable time into written form for visual inspection. The original or a
duplicate of the stock ledger shall be kept at the offices of the transfer
agent, or, if none, at the principal office in the State of Maryland or the
principal executive office of the Corporation.
6.05. Certification of Beneficial Owners. The Board of
Directors may adopt by resolution a procedure by which a stockholder of the
Corporation may certify in writing to the Corporation that any shares of stock
registered in the name of the stockholder are held for the account of a
specified person other than the stockholder. The resolution shall set forth the
class of stockholders who may certify, the purpose for which the certification
may be made, the form of certification and the information to be contained in
it, if the certification is with respect to a record date or closing of the
stock transfer books, the time after the record date or closing of the stock
transfer books within which the certification must be received by the
Corporation, and any other provisions with respect to the procedure which the
Board considers necessary or desirable. On receipt of a certification which
complies with the procedure adopted by the Board in accordance with this
Section, the person specified in the certification is, for the purpose set forth
in the certification, the holder of record of the specified stock in place of
the stockholder who makes the certification.
6.06. Lost Stock Certificates. The Board of Directors of the
Corporation may determine the conditions for issuing a new stock certificate in
place of one which is alleged to have been lost, stolen or destroyed, including
the requirement that the owner furnish a bond as indemnity against any claim
that may be made against the Corporation in respect of the lost, stolen or
destroyed certificate, or the Board of Directors may delegate such power to any
officer or officers of the Corporation. In their discretion, the Board of
Directors or such officer or officers may refuse to issue such new certificate
save upon the order of some court having jurisdiction in the premises.
ARTICLE VII
FINANCE
7.01. Checks, Drafts, Etc. All checks, drafts and orders for
the payment of money, notes and other evidences of indebtedness, issued in the
name of the Corporation, shall, unless otherwise provided by resolution of the
Board of Directors, be signed by the Chief Executive Officer, a Vice-President
or an Assistant Vice-President and countersigned by the Chief Financial Officer,
an Assistant Financial Officer, the Secretary or an Assistant Secretary. The
Chief Executive Officer or Chief Financial Officer shall prepare annually a full
and correct statement of the affairs of the Corporation, to include a statement
of net assets and a financial statement of operations for the preceding fiscal
year. The statement of affairs shall be placed on file at the Corporation's
principal office within 120 days after the end of the fiscal year.
7.03. Fiscal Year. The fiscal year of the Corporation shall be
the 12-calendar-month period ending October 31 in each year, unless otherwise
provided by the Board of Directors.
7.04. Dividends. If declared by the Board of Directors at any
meeting thereof, the Corporation may pay dividends on its shares in cash,
property, or in shares of the capital stock of the Corporation, unless such
dividend is contrary to law or to a restriction contained in the charter of the
Corporation.
7.05. Net Asset Value. Except in the event of emergency
conditions or as otherwise permitted by the Investment Company Act of 1940, the
net asset value per share of each Fund or class of stock shall be determined no
less frequently than once daily, Monday through Friday, at such time or times as
the Board of Directors sets. In valuing portfolio investments for the
determination of the current net asset value per share of any Fund or class of
shares, securities for which market quotations are readily available shall be
valued at prices which, in the opinion of the Board of Directors or the person
designated by the Board of Directors to make the determination, most nearly
represent the current market value of such securities, and other securities and
assets shall be valued on the basis of their fair value as determined by or
under the direction of the Board of Directors. Notwithstanding the foregoing,
the Board of Directors may determine that it is in the best interests of a
particular Fund and its shareholders to utilize the amortized cost valuation in
order to maintain a stable net asset value per share for the Fund and may adopt
procedures in accordance with Rule 2a-7 promulgated under the Investment Company
Act of 1940 which are reasonably designed to stabilize the Fund's net asset
value per share at a single value.
7.06. Employment of Custodian. The Corporation shall place and
maintain its securities and similar investments in the custody of one or more
custodians meeting the requirements of the Investment Company Act of 1940, or
may serve as its own custodian in accordance with such rules and regulations or
orders as the Securities and Exchange Commission may from time to time prescribe
for the protection of investors. Securities held by a custodian may be
registered in the name of the Corporation, including the designation of the
particular Fund to which such assets belong, or any such custodian, or the
nominee of either of them. Subject to such rules, regulations, and orders as the
Commission may adopt as necessary or appropriate for the protection of
investors, the Corporation or any custodian, with the consent of the
Corporation, may deposit all or any part of the securities owned by the
Corporation in a system for the central handling of securities, pursuant to
which system all securities of a particular class or series of any issuer
deposited within the system are treated as fungible and may be transferred or
pledged by bookkeeping entry without physical delivery of such securities.
ARTICLE VIII
SUNDRY PROVISIONS
8.01. Books and Records. The Corporation shall keep correct
and complete books and records of its accounts and transactions and minutes of
the proceedings of its stockholders and Board of Directors and of any executive
or other committee when exercising any of the powers of the Board of Directors.
The books and records of the Corporation may be in written form or in any other
form which can be converted within a reasonable time into written form for
visual inspection. Minutes shall be recorded in written form but may be
maintained in the form of a reproduction. The original or a certified copy of
these By-Laws shall be kept at the principal office of the Corporation.
8.02. Corporate Seal. The Board of Directors shall provide a
suitable seal, bearing the name of the Corporation, which shall be in the charge
of the Secretary. The Board of Directors may authorize one or more duplicate
seals and provide for the custody thereof. If the Corporation is required to
place its corporate seal to a document, it is sufficient to meet the requirement
of any law, rule or regulation relating to a corporate seal to place the word
"Seal" adjacent to the signature of the person authorized to sign the document
on behalf of the Corporation.
8.03. Bonds. The Board of Directors may require any officer,
agent or employee of the Corporation to give a bond to the Corporation,
conditioned upon the faithful discharge of his duties, with one or more sureties
and in such amount as may be satisfactory to the Board of Directors.
8.04. Voting Shares in Other Corporations. Shares of other
corporations or associations, registered in the name of the Corporation, may be
voted by the Chief Executive Officer, a Vice-President, or a proxy appointed by
either of them. The Board of Directors, however, may by resolution appoint some
other person to vote such shares, in which case such person shall be entitled to
vote such shares upon the production of a certified copy of such resolution.
8.05. Mail. Any notice or other document which is required by
these By-Laws to be mailed shall be deposited in the United States mails,
postage prepaid.
8.06. Execution of Documents. A person who holds more than one
office in the Corporation may not act in more than one capacity to execute,
acknowledge or verify an instrument required by law to be executed, acknowledged
or verified by more than one officer.
8.07. Amendments. Subject to the special provisions of Section
2.02, (i) any and all provisions of these By-Laws may be altered or repealed and
new by-laws may be adopted at any annual meeting of the stockholders, or at any
special meeting called for that purpose, and (ii) the Board of Directors shall
have the power, at any regular or special meeting thereof, to make and adopt new
by-laws, or to amend, alter or repeal any of the By-Laws of the Corporation.
<PAGE>
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
March 7, 1997
American Skandia Advisor Funds, Inc.
One Corporate Drive
Shelton, Connecticut 06484
Re: Registration Statement on Form N-1A filed by
American Skandia Advisor Funds, Inc.
Our File No.74877-00-129
__________________________________________________
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, upon
formal receipt by the Securities and Exchange Commission of the filing on this
date of the Notification of Registration on Form N-8A pursuant to Section 8(a)
of the 1940 Act in respect of the Company, will be 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